Here are my Best of The Week-links. Please notice that I earlier posted a Weekender, listing all the possible analysis and thinking on the European end game and Wednesday’s summit + week ahead/week in review-links. Follow “MoreLiver” on Twitter, Facebook or email me.
EURO CRISIS
A framework for assessing a eurozone rescue – Humble Student of The Markets
Excellent post. What needs to be done, what is credible and what is possible.
Wolfgang Münchau: “The many failures of the eurozone’s crisis response policy have a common cause: the eurozone is a large closed economy. Each of its 17 members is small and open. The political leaders who run the eurozone have a small open economy mindset – every one of them, without exception. The economists they employ mostly use small, open economy models.”
Peter Tchir: “what do they hope to get by banning naked shorts? They expect CDS to tighten. That will likely be the initial reaction. They expect a tightening in CDS to lead to improved purchases for bonds. That is unlikely to occur.”
UBS' George Magnus On The Eurozone As Monty Python Scouring For The Hollywood Ending Holy Grail – ZH
Full 13-page report published on 17th Oct
A framework for assessing a eurozone rescue – Humble Student of The Markets
Excellent post. This was featured yesterday, but I know you have not read it. Read it.
Morgan Stanley sees New Fiscal Rules Imposed on European Countries – HistorySquared
Link to full scribd MS: Crisis Credibility and institutional change 12th Oct
There is no sunlit future for the euro – FT
Martin Wolf’s excellent piece. If you cannot access this, a key excerpt and short comment can be found here: Wolf nails the euro crisis.
If Spain and Italy want a backstop – that realistically only the ECB can provide – it is their burden of proof to show that German taxpayer money, that does not grow on trees either, is worth risking in this operation.
The IMF should pull the plug on the euro – MarketWatch
The euro zone is in the midst of this crisis because it created a completely dysfunctional monetary system, ignored the imbalances building up within it, and allowed everyone to break the rules. It is a completely self-inflicted wound. There is no reason why taxpayers in Korea or Brazil or the U.S. should have to help fix it.
IMF Involvement Likely to Expand, Create Larger Debt Problem, as Social Unrest Goes Global – HistorySquared
The “solution” failed before, contributors have their own debt problems, moral hazard for Italy and Spain, social unrest.
There are better ways forward for the EU – voxeu.org
EU policy response should explicitly target improvements to trade and income balances, and address high external debt through debt restructuring.
Building a Complete Crisis Management Framework for the EU – Re-Define
Excerpt from the report to the European Parliament, includes a link to the full 40-page document. Very good discussion – the eurocrats should order more thinking from outsiders.
Yet more chaos and confusion in the Euro Zone – The Big Picture
Very good review and speculation on the situation. If you read only one this week, read this. There will be no resolution of this crisis by the EU heads of State meeting on 23rd October – virtual certainty. The earliest date for any solution will be the G20 Heads of State meeting on 3rd/4th November, though a comprehensive fix by that date is also unlikely. Without IMF involvement, this is going to be a fiasco and very bad for markets, given that the Euro Zone will not deliver as much as was/still is expected – however, I believe the IMF will get involved.
There are lots of ways to attack this crisis. It could be solved easily enough if the ECB began behaving as a national central bank would. It could be solved through a move to a true fiscal union. It could be solved through Rube Goldberg plans that approximate one solution or the other. It could be solved through massive external support.
Expectations and the EU – alphaville / FT
Citi: Greek haircut 50% (should be 60-80%), bank recap of €70-90bn (should be €200bn), first-loss guarantee from EFSF of 200-300bn (only a relatively small haircut of 20-33% would be guaranteed, which is not enough given the obvious systemic risk, also a two-tiered bond market would be the result)
Full 34-page report published on 14th Oct
EFSF & ‘DEATH STAR’
There Is No Bailout Spoon: The Math Behind The Re-Revised EFSF Reveals A "Pea Shooter" Not A "Bazooka" – ZH
Partial research note from Citigroup’s chief economist Buiter: “that would likely not fund the Spanish and Italian sovereigns until the end of 2012.”
Peter Tchir: “it is quite possible they didn't realize what they had agreed to. If some new EFSF is created, all of the future bargaining power in Europe will be shifted from France and Germany to PIIS… Forcing banks to take a big realized hit on Greece and not being able to execute CDS, will be another excuse for investors to trade banks further below "book value" as "book value" will be an even bigger joke than it already is, and will cause more concerns about capital ratios at banks.”
Assessing the probable eurozone Grand Plan – Humble Student of The Markets
“Is a 50% haircut enough? Could the debt crisis spread to Portugal? These are all good questions to which I have no answer, but I believe that the market will assign a high risk premium to compensate for those events. In such a case, the ring-fence will have failed.”
There is no such thing as EFSF leverage without the ECB – Bruegel
“The entire proposal rests on the premise that financial markets are now shunning these debts because of marginal doubts about their recovery value in the case of a credit event and that therefore by guaranteeing a small portion of this debt, the credit enhancement will comfort doubtful investors. This is an inadequate assessment.”
Peter Tchir puts the players in their proper places. ECB and Germany are prudent and want to save ammunition and credibility, while France and Belgium are “all-in” – as they have no choice. Austria and Netherlands are standing on the fence, while Italy and Spain are either happy or very happy with anything, as they are the major beneficiaries. The fact that the country with the biggest problems at the bank level is the biggest proponent of turning the EFSF into a bank is also somewhat ironic, if not ludicrous.
BANKS
The continuing mystery of US banks’ European exposure – alphaville / FT
Citi’s quarterly report shows $4.3bn drop in net exposure to GIIPS banks. Who is taking the other side of these bets?
Mirabile Dictu! Eurozone to Impose Penalties on Banks That Get Bailouts – naked capitalism
Banks’ threats to resist recapitalization by shrinking their loan books is blackmail, but the upside to this is that the banking sector is too large relative to the real economy. EU treaty bans permanent public subsidies of any company, so either the EU breaks the laws (court room hell for a decade) or nationalizes most of the banking sector.
Struggling French Banks Fought to Avoid Oversight – WSJ
Text not limited to French banks. Instead of making painful decisions years ago to set aside more money to cover unexpected losses, some of Europe's leading banks and supervisors devoted themselves to fending off tougher international rules and thwarting more-intensive supervision.
OTHER
Excerpts from a classic article, scribd-link to the original
From the Armchair to the Computer – economicprincipals.com
Markets are rational even if they're irrational – The Physics of Finance
Very good review of behavioral vs. rational schools
The Quiet Coup (May 2009) – The Atlantic
Former IMF economist Simon Johnson rocks: One thing you learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card. The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear.
Banning naked sovereign CDS, gently – alphaville / FT
How big a market, do CDS’s influence bond prices, is the ban any good, why it is permanent but still allows later suspending of the ban. The probable intent was to try to stop the rotting of the core, with (still) low CDS prices.
First in a three part series trying to explain why the short-end of the curve of oil is high compared to long-end.
In the year 1000, Middle East was 9,5% of global GDP. What happened?
In 2007 Public Company Accounting Oversight Board was harshly critical of Deloitte & Touche for not checking assumptions and for being overly reliant on whatever the bank’s management said was proper. The board inspectors found problems in 27 of the 61 Deloitte audits.
Maybe markets need more principles and less regulation – Emanuel Derman / Reuters
Good discussion on absolute and relative-value models: All models are short volatility. When volatility changes a lot, the model is going to fail.
DIVERSION
Day One Trader – Amazon
Book by a veteran LIFFE trader John Sussex, video interview here.
Interesting points taken from the book by Ha-Joon Chang and a 32 min video lecture.
A Curated Linkfest For The Smartest People On The Web – Simoleon Sense
Another Twenty Ifs – Macro Man
20 funny multiple choices.
Applying Sentiment Analysis to the Bible – Openbible
Viralheat Sentiment API over several Bible translations shows a moving average of sentiment. Has links to raw data and API, so this is an interesting case study.
The illusion of attention – The Guardian
Focused attention can make you oblivious to sights and sounds that would otherwise be glaringly obvious
Is It Sometimes Rational to Select Leaders Randomly? A Cool Old Study – Bob Sutton
In team work assigning the leader randomly provides the best results, but participants view the leader more negatively compared to other selection methods.
The Secret of a Healthy, Wealthy Life – The Psy-Fi Blog
Being able to wait for the reward is the strongest single predictor of future “success”, even after controlling for intelligence and socio-economic background. One third of the tested population (1000) belong to this group of people with strong self-control.
How Friends Ruin Memory: The Social Conformity Effect – Wired
We remember what others remember.
The Mexican Mafia – Marginal Revolution
A prison gang of only 150-300 members can tax Southern Californian street gangs by 10-30%. Why? Because it provides a valuable service effectively. This is a good read for organizational- and core value proposal thinkers.