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Wednesday, October 12

12th Oct - Brother, can you spare a yield?

 Summary: Middle East getting interesting, Slovakia said no but will vote again and say yes, and even if it says no the EFSF will still go ahead. Democracy at its finest! I stopped including OWS links and will later post a dedicated, continually updated page for that, similar to the Steve Jobs post. Feed me with a comment, follow me on Twitter, Facebook or email me. 

Notice the two pictures here - some of my analysis work from the past. Would you like to see more?
Edit: It is an almost established fact that yield curve inversions precede recessions and thus bear markets. Usually the yield curve is upward-sloping - short interest rates are lower than long interest rates. During inversion, it's the opposite. The inversion could come from diminished inflation expectations and the monetary policy's tightening cycle being near the end. Both events are usually good predictors that lower growth and inflation are ahead. In the first image I show the spread between the 10 year U.S. Treasury bond yield and the three month Treasury bill yield below the S&P 500 stock index. Every time the spread between the two rates has dropped around zero or negative levels, a bear market has followed.

In the second graph I show the S&P return histogram and have moved it backward by 12 months. This should hopefully make it easier to see what kind of returns one would get later, given the yield curve. For more information, you can google for "yield curve inversion" and check Estrella's research on the topic.

News (Tue evening) – BTH
News  (Wed morning) – BTH
FX options – Saxo
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT

Coco for EuropeProject Syndicate
“When a bank’s capital falls below a pre-specified limit, its cocos automatically convert from debt to equity at a fraction of their previous price. This bails in the bondholders and helps to recapitalize the financial institution in question...not adding them is a recipe for more delay, more bailouts, and more chaos the next time the debts of a sovereign like Greece become unsustainable.”

Can we have euro bonds without cross-country subsidisation? Yes, we

Time for euro bonds – but with

EZ crisis: Here's What's NextBusiness Insider
10 key dates (these are already in calendat, but an ok road map)

Hearing on the ESRB before Committee on EcoMonESRB
Introductory statement by Trichet 11th Oct.

ECB president Trichet interview on Die Welt 7th OctECB

The Evolution Of The EFSF, And Its €726 Billion In Max LossesZH
Peter Tchir has so many good points and his post is concise, so just read this.

Italy Votes, IMF Gives, And EFSF Yields IncreaseZH
Peter Tchir: “Italy rejected the budget today.  I can't imagine that it is because the opposition wanted more austerity.  That must make the Slovakians even more eager to provide the EFSF with money to buy Italian bonds.”

The Latest Incarnation Of The European CDO Cubed Bailout "Swiss Army Knife": A Multi-Trillion Insurance PolicyZH
Allianz plan to insure €3 trillion of bonds without increasing EFSF.

BratislavaThe Big Picture
“If Slovakia becomes an obstacle to the EFSF and then Germany, France, and others have to do a small-country carve-out in order to prevail, then Germany and France will have opened a Pandora’s Box that cannot be closed… Moral hazard is costly. Systemic banking failure is costly, too.”

Ty kokos! Slovakia rejects EFSF expansionalphaville / FT
Eurasia Group: Likely yes on later this week, and if no, Slovakia would just be left out of the EFSF increase and the pact would be passed. “Given the EU budget financing envelope (2013-20) is currently being negotiated, and Slovakia has historically been a net recipient of structural funds, it is unlikely that Slovakia will come off well in these negotiations”

Can tiny Slovakia doom the euro?The Curious Capitalist / TIME
“So Slovakia proves once again that the euro can only be as strong as its weakest link – whether economic (Greece) or political. And at the same time, the case shows the difficulties of achieving the sort of political integration that may be necessary to ensure the euro's survival.”

Slovakia Rejects Euro BailoutNYT
“European officials in Brussels were counting on a political solution, but also weighing the possibility of some kind of messy workaround if Slovakia failed to pass the measure.”

Slovak Parties Seek Talks on EFSF Vote RepeatBB

Slovakia Votes No on Expanding EFSF, But Will Vote AgainMarketBeat / WSJ
“Of course, this bailout expansion is already obsolete, with most agreeing Europe needs a still-bigger bailout.”

Slovak Prime Minister Threatened to Resign if EFSF Failed to Pass; It Failed to Pass, What's Next?Mish’s
Summaries of FT and BBC reports, view: “suspect this is the end of the line for Eurozone bailout increases, at least bailouts that require a vote. There is simply too much opposition everywhere to do any more.”

The Wicked
How Greece is being beaten into a pulp to force Europe’s banks to accept capital while keeping Italy et al in awe.

Will internal devaluation work?naked capitalism
“I do not believe this private sector balance sheet recession can be successfully tackled via collective public sector deficit spending balanced by a private sector deleveraging. The sovereign debt crisis in Greece tells you that.”

Greece may Run Out of Gas in 3 Days in Refinery Strikes; Garbage Piles Up in Street of AthensMish’s

Iran and Saudi Arabia Square Off Foreign Affairs

Casus Belli? US Accuses Iran Of Plotting Assassination, Attempt To Blow Up Saudi, Israel EmbassiesZH

And Now Back To The Real News: Saudi Arabia Blasts Iran, Verbally For NowZH

U.S. accuses Iran of plot to kill Saudi ambassadorMarketWatch

U.S. Accuses Iran in PlotWSJ

Iran agents 'planned US terror attacks'BBC

Geopolitical Journey: Riots in CairoStratfor

The Volcker Rule As Price-SettingDealbreaker
With plenty of links. “Much of the meat of the rule is a bunch of qualitative and quantitative information that banks must collect and hand over to regulators, each piece of which tends to indicate whether a trading desk is more prop-y or flow-y.”

Volcker Rule Gaps May Leave Banks Uncertain About Trading BansBusinessWeek
“Within the rule’s 298 pages, regulators seek feedback instead of offering precise definitions for many of the banned activities, which may leave financial firms unsure about how to prepare for the final adoption of the rule next year.”

With Volcker Rule, Wall Street Braces for ChangeDealBook / NYT

Wall Street and Washington React to Volcker RuleDealBook / NYT
Plenty of comments

Benford’s Law and the Decreasing Reliability of Accounting DataInfectious Greed
“Unsurprising but interesting results from a Benford’s time-series analysis of U.S. public company financial accounting data. Things are, in short, getting worse.”

China's debt spree returns to hauntThe Telegraph
“Bail-outs are coming thick and fast in China. In less than a week the authorities have had to step in to prop up the banks, rescue the insolvent railway system and save the near bankrupt city of Wenzhou from a spectacular debt crash.”

Unhedged Commodities Fall Short in
Long-short portfolios of commodities help to avoid issues like rolling of long-only portfolios, and seem to increase risk-adjusted returns, according to research from EDHEC.

Turnkey Research DigestTurnkey Analyst

'There's a Huge Amount of Anger'Foreign Policy
Interview with Nouriel Roubini and Ian Bremmer on OWS, cynical economic strategies and China