Editorial: Very interesting tug-of-war going on – everybody agrees that something has to be done, but agreeing on what to do seems to be difficult. Until ECB capitulates, I don’t think there will be a lasting solution. On that note it is interesting that Trichet already warned the French government not to take the role of the central bank on the Dexia’s bailout. Trichet knows that the French AAA credit rating is in danger. If the French rating is cut, the EFSF is in trouble before it has even properly started.
There are signs that the ECB is realizing its input in addition to the bond purchases is needed, but it is still in the negotiation phase – the Greek haircuts would hurt the Target-holdings of the Euro System and require additional capital. ECB is not willing to only give, it requires something in exchange, as they do not want to carry the full political burden of the bailouts alone.
The banks have to be and will be saved, and the only payers will be the taxpayers – either directly or indirectly through the central banks or “guarantees”. The only other choice is debt monetization, and it might be the only solution in the end – but ECB will fight against that solution to the end. Given the mandatory bank rescues, compression trades seem to be all the rage now. Idea is to sell short the credit default swap (CDS) of a financial firm under distress (Erste, SocGen, BNP, etc) and buy the CDS of the sovereign nation that will do the eventual bailing out. As the bank is bailed out, its CDS price will collapse, while the guarantors CDS will surge. The CDS compression trade is not that sensitive to the general very volatile level of anxiety in the markets. Dexia-Belgium compression is almost done, but Erste-Austria might still be a good idea. Keep the idea in mind as the crisis develops and new names come to play.
There is a saying in Finland that a very short-sighted solution that actually makes the problem bigger in the long term is like peeing in your pants in winter. I now launch a new saying – crapping in your pants in winter – it does not help you even in short term, but at least you have tried something. And on that note here's a youtube video of an old disco dancing lesson from Finland.
Then to the Weekender link fest. As before, first the review/preview links and then to the articles. I will post a “Best of the Week” later today. I’ve been collecting stuff for Benford’s Law-special post and hope to have it finished on Monday. If you have links to send me or ideas for other specials, it would be nice. Have a great weekend, leave a comment, follow me on Twitter, Facebook or email me.
Past
News (Fri evening) – BTH
This week on FT Alphaville
This week on beyondbrics / FT
Week in review on DealBook / NYT
Summary for Week (macro) – Calculated Risk
Weekly bull/bear recap – Rational Capitalist Speculator
Succint summation of week’s events – The Big Picture
Future
Weighing the week ahead – A Dash of Insight
Next Week’s Tape: Earnings Galore – MarketBeat / WSJ
Weekly Focus – Danske Research (pdf)
Economic Calendar – fxstreet.com
Monthly Economic Calendar – fxstreet.com
Economic Calendar – BB
EU calendar – europa.eu
EM Week ahead – beyondbrics / FT
EURO CRISIS
German Politicians Call for Changes to EU Treaties – Spiegel
“If Merkel is really serious about backing a fundamental reform of the EU, she has a lot of convincing to do.” Last October she stressed the importance of treaty changes and said the proposals should be submitted by March 2011.
ECB Tells Belgium Not To Backstop Dexia Interbank Deposits, Says Bailout Plan May Be Against The Euro Charter – ZH
“ECB is effectively telling national governments to not try and become their own central banks under the ECB's umbrella, which would likely result in not only in various sovereign downgrades (that is guaranteed) but in loss of conviction in the European Central Bank, something which the insolvent European continent and the insolvent hedge fund in its core, aka Jean-Claude Trichet Capital et Cie. which holds hundreds of billions of Greek bonds at par, can certainly not avoid.”
Cracks show in EU austerity doctrine – euobserver.com
“If the subtle change in emphasis in the EU’s discourse on austerity is to be believed, some in the bloc are beginning to be much more open to policy options beyond public-sector cutbacks.”
“The reaction on the street will be interesting. But even more hardship is coming down the pike: they're going to have to pay their taxes.”
French Government Bond Yields Widen to Record vs. Germany; Portugal Faces National Emergency; Trichet Says "ECB Will Not Be Lender of Last Resort" – Mish’s
EFSF / ‘DEATH STAR’
Full scribd version of the UBS Weekly Economic Focus
EU Said to Consider 50% Greek Writedown – BB
“officials are considering writedowns of as much as 50 percent on Greek bonds, a backstop for banks and continued central bank bond purchases as key planks in a revamped strategy to combat the debt crisis…Officials are considering seven ways of getting more firepower out of the temporary rescue fund. The options break down into two broad categories: enabling it to borrow from the European Central Bank or using it to provide bond insurance.”
Long live liquidity, cries the market. Should it? – tradingfloor.com
“Our view remains that an ECB printing press is the only monetary bazooka big enough in a truly stressful scenario (note how the new stress tests will include scenarios for sovereign debt haircuts, but not for stressful macro scenarios as if the two are entirely separable…)”
European Bonds Setup for More Losses as EFSF Creates More Problems Than it Solves – HistorySquared
“Sovereign debt and government finances are the problem. TARP would not have “worked” at delaying the onset of a bond market disaster if the US Government were viewed as being insolvent.”
“A brief look at the rumors about proposals coming out soon in Europe. Somehow these plans have to be ready and pre-sold by the G-20 conference at Cannes on November 3-4. This might be Europe’s last chance for an orderly solution. Let’s hope they take it. We can only guess how this will play out.”
OTHER
GSS General Social Survey – GSS
Free survey data from religious beliefs to trust in financial institutions, since 1972.
Principal Global Indicators - PGI
BIS, OECD, IMF, World Bank, ECB, EuroStat, UN data in one place, in comparable format. They also provide an iPad/iPhone application to query, view and analyze the data, here’s the iTunes link.
Who are the 1%, and what do they do for a living? – Rortybomb
“Are they all Wilt Chamberlains and Oprahs and other people taking part in the dynamism of the new economy? Nope. It’s same as it ever was — high-level management and the financial sector.”
Market Efficiency in Real-Time – Turnkey Analyst
Lessons: reports on CNBC are almost always positive–not surprising; you can’t sell negativity, prices react to commentators, there are some potential trading profits.
High correlations in the markets, presentation notes
Behavioral finance presentation notes
Short timeline, lessons: credit raters are late, but the downgrades precede additional weakness, violent short covering rallies before bailouts and the devaluation, but bear market continued after the news.
DIVERSION
The 1930s Sure Sound Familiar – NYT
Summary of a book “Since Yesterday” by Frederick Lewis Allen, published in 1940 on the thirties. Here is the Internet Archive link that has the book in multiple formats.
Secret No More: Spy Satellite Designer Reveals Life's Work – space.com
Psychopathic Killers: Computerized Text Analysis Uncovers the Word Patterns of a Predator – Science Daily
Wired: Steve Jobs, Revolutionary – The Big Picture
ebook anthology of the best Wired articles on Jobs, free for subscribers, $2.99 for others
In Weather Forecasting, Expect High Pressure – WSJ
The Iranian “Plot” – Counterpunch
“Even by the forgiving standards of American credulity, the supposed Iranian plot to assassinate the Saudi Ambassador to the US is spectacularly ludicrous.”
The Grand Map – The Paris Review
Ostalgia Trips – frieze blog