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| End of the week. End of many things. |
Massive linkfest to end the week. Sorry about that. 'Weekender' and 'Best of' coming tomorrow.
- MoreLiver
EURO CRISIS
Death of a currency as eurogeddon approaches – The Telegraph
This has made it impossible to hedge against eurozone sovereign debt purchases, and thereby destroyed the market. Worse, it's made investors believe that the euro cannot be trusted, that it'll repeatedly find ways of reneging on contract. That's the point of no return. This is no longer a serious currency.
Worry About Narrowing European Spreads – The Source / WSJ
If, on the other hand, a euro bond is agreed, in effect it means Germany and the rest of the core have agreed to pick up the bill. Oh sure, countries at the periphery will agree to structural changes in their economy and to strict rules on debt and deficits. But those rules will be broken. Investors know that and German debt will consequently suffer. Already there are signs of this shift in sentiment.
Playing With Fire – The Capital Spectator
The only thing worse than an economy headed for a recession is an economy headed for recession with rising interest rates... we're at a point where the debt-deflation risk dominates. Germany will bend to reality eventually.
Steen's Chronicle: 50 ways to leave (save?) the EU – Saxo Bank
Trying to find the best bargain position or is it really the “dogmatic German” way of thinking. If it is the latter then this is the end of Europe as we know it, but more likely, the Germans through EU history have caved in on the last day, at the last minute. The market will force Germany to show its hand soon
The euro crisis: No picnic for anyone – Free exchange / The Economist
a suboptimal currency union is a very bad idea, especially with a below-2%-inflation target that forces adjusting countries into severe disinflation if not deflation. And worst of all, the central bank is not even expected to reach its 2% target over the next five years.
The Eurozone could come to tatters temporarily. But the European ideal is so powerful that crisis and division will not permanently prevail. European leaders absorbed previous crises and bounced back to drive the European project forward. The same may happen again. This column discusses how the political and economic underpinning of the Eurozone must change to avoid future crises.
EFSF, We Hardly Knew You… –TF Market Advisors
Peter Tchir: The EFSF should announce bonds sales to the Fed…The Fed has been dying to do some quantitative easing and has been looking for a liquidity crisis in need of some liquidity. It has also been looking (quietly) for ways to keep the dollar weaker.
Boom-year debts could bust us – Robert Peston / BBC
It's not completely bonkers that the German government does not wish to - in effect - finance the lifestyles of Italians and Spanish people, without checking whether German voters think that's tickety-boo. But if Germany won't lend to its eurozone partners, who should? Here's the thing: in a crisis the liabilities of banks and the liabilities of governments are broadly the same thing, as the poor beleaguered Irish government has found to its cost.
Maybe the markets are endorsing the fact that the Bank of England is willing to engage in radical measures like quantitative easing to boost the economy, unlike the euro zone’s central bank. Or maybe markets are freaked out about the fact that Germany is lashed to the euro and will likely have to bear the costs of bailing out its neighbors. Or both!
Reforming social-welfare benefits is the only permanent solution to Europe’s crisis.
Is the end near? – Marginal Revolution
Maybe these markets simply will shut down soon. There is so much talk about what the Germans should do, but I don’t see the viable options.
EUROPEAN CENTRAL BANK
Sovereign contagion in Europe – ECB
Speech by González-Páramo, Member of the Executive Board of the ECB, Distinguished Speaker Seminar of the European Economics and Financial Centre, 25-Nov
Sovereign contagion in Europe – ECB
Speech by González-Páramo, Member of the Executive Board of the ECB, Distinguished Speaker Seminar of the European Economics and Financial Centre, 25-Nov
ECB interventions – what lies ahead – Crédit Agricole
Investors' hopes lie in the ECB fixing the Eurozone bond market, but a QE-style unlimited purchase programme is a very distant prospect, in our view. Still, the ECB can and should do more to ease monetary conditions further in the near term. On the broad bank-funding side, the ECB is likely to cut rates further below 1.00% while placing growing emphasis on money and credit developments. Our central case is now for the Refi rate to be lowered to 0.50% by March 2012.
Brinkmanship, reform pressure and the endgame – voxeu.org
Germany’s central bank had to buy its government’s bond this week after a failed bond auction. This shows that i) the economic devastation from a meltdown would engulf every EZ member and ii) avoiding a meltdown will require central bank action. This column argues that German politicians and the ECB are engaging in brinkmanship to force reforms. Eventually, however, they will relent and embrace a solution involving ECB bond purchases, Eurobonds, Eurozone rule changes, and stronger reforms at the national level.
(from Thu) Like it or not, the ECB is the one institution that can act quickly. To be sure, arguably it is now too late to act "quickly." Now quick action is needed to just limit the damage as financial conditions across Europe freeze solid as a block of ice.
From Bad to Worse – Tim Duy’s Fed Watch
(from Fri) Europe is quickly moving from bad to worse. To be sure, we should anticipate a rally will follow the eventual ECB capitulation on quantitative easing, but that will only be half the battle. The ECB will only capitulate in return for massive, sustained austerity. It is too late for an easy end to this story.
From The Mess Of Headlines Today – TF Market Advisors
Peter Tchir: There is enough bad news out there without people like Mersch taking the time to speak. Would it be that hard to say Draghi is only one allowed to comment on ECB at this stage?
BANKS
European banks: Gone ECBing – alphaville / FT
for the periphery in particular, the distress of the sovereign, as measured by the spread over Bunds, correlates with the local banking sector’s increased dependence on the ECB. And of course the worrying and notable trendline is Italy’s, as it has busted out of the orbit of the core. Meanwhile Spain and Belgium appear to have bucked the trend of increased ECB reliance in the face of sovereign distress
for the periphery in particular, the distress of the sovereign, as measured by the spread over Bunds, correlates with the local banking sector’s increased dependence on the ECB. And of course the worrying and notable trendline is Italy’s, as it has busted out of the orbit of the core. Meanwhile Spain and Belgium appear to have bucked the trend of increased ECB reliance in the face of sovereign distress
European banks' asset sales face disastrous failure – IFR
People involved in asset sale talks say price is the major sticking point. Lenders want only to sell higher-quality assets near to par value so as to avoid huge write-downs, which would erode capital further. By contrast, potential buyers want high-yielding investments and are offering only knock-down prices.
One man’s haircut is another man’s unsecured risk – alphaville / FT
But what happens when a strategy that’s designed to protect the system backfires? Not because you don’t hold enough collateral to cover the counterparty risk, but — as it happens — because you’ve given too much of it away as haircut.
Manufacturing quality collateral – alphaville / FT
Regulators are demanding that banks set aside larger amounts of high-quality liquid assets to help them withstand periods of market stress. The problem is, despite large stimulus-motivated issuance by AAA governments, there’s still not enough of the quality stuff to go around. Stress in collateral markets is rising as quality collateral becomes impossible to find. The quality grab is not only forcing down yields in safe haven bonds, it’s seeing the rates charged for borrowing cash against the bonds fall to all-time lows.
Regulators are demanding that banks set aside larger amounts of high-quality liquid assets to help them withstand periods of market stress. The problem is, despite large stimulus-motivated issuance by AAA governments, there’s still not enough of the quality stuff to go around. Stress in collateral markets is rising as quality collateral becomes impossible to find. The quality grab is not only forcing down yields in safe haven bonds, it’s seeing the rates charged for borrowing cash against the bonds fall to all-time lows.
Regulatory outlook for EU banks and the implications for corporate lending – EBA (pdf)
Speech by Andrea Enria, Chairman of EBA on Standard & Poor’s Conference “The Future of Corporate Funding” on 23-Nov
PIIGS + BF (acronym ideas? NON-GER?)
The Hour of the Technocrats – Jeffrey Frankel / Project Syndicate
Both Papademos and Monti are certified European Union and eurozone elites, which will help them to obtain support for their countries abroad, but will leave them vulnerable to domestic charges that they are lackeys of foreign powers..
Italian Yields Jump After Poor Auction – WSJ
Italian two-year and five-year government-bond yields soared to euro-era highs Friday, the ECB resumed purchases of Italian bonds, but it wasn't enough to stem the rise in yields.
Italian bond watch/alert – alphaville / FT
So Italy is paying three times more to borrow for six months than Germany did for ten years at this week’s ‘failed auction‘. Nasty yield curve chart as well.
Italian 5 Year Bond Rises To Record 7.847% In Aftermath Of Catastrophic 6 Month Auction – ZH
This is not good for bank share prices. We saw have seen how bank liquidity has dried up even more after MF Global went under, and I have to admit I didn’t think it would impact the market as much as it did. I think fears of derivative losses cascading through the system are overblown, but I definitely have likely underestimated both the risk of that and the immediate hit to liquidity from those fears. This is another clear risk-off change in European policies, and a complete embarrassment to Merkozy.
EMERGING
Chinese Monetary Easing Has Started – The Short Side of Long
Barclays: The PBoC’s latest policy report confirmed that policy easing has started, although it may take months before the central bank adopts an overall loosening bias. This shift will probably take place in Q1 12, in our view.
OTHER
Large EUR/USD exotic one touch weighing on volatilities – Saxo Bank
Leads to lower volatilities and risk reversals and erratic spot action. Interesting topic that is not discussed much in the open. If you have any suggestions for readings, contact me – MoreLiver
A Few Notes on What Works on Wall Street – CXO Advisory
James O’Shaughnessy introduces his 2011 book, What Works on Wall Street: The Classic Guide to the Best-Performing Investment Strategies of All Time (4th ed):, by stating: “…investors seem programmed by nature to fail at investing, forever chasing the asset class that has turned in the best performance recently and heavily discounting anything that occurred more than three to five years ago.
Out-of-Sample Test of What Works on Wall Street – CXO Advisory
In the mid-1990s, J. O’S. identified “cornerstone value” and “cornerstone growth” as best-of-breed equity investment strategies. The strategies have after 1997 outperformed but not by much. Reasons (market adapting, data snooping etc) are briefly discussed.
HSBC: “It Is a Mistake” to Take Fully Risk Averse Stance to Equities – The Source / WSJ
Three main value drivers: the spread between return and cost of capital, the gap between real earnings growth and real bond yields and the equity risk premium.
DIVERSION
Actually, Mauldin just posts an article by George Friedman of Stratfor on the topic:
"The Paradox of Choice" – The European
We have never been this free—and this conflicted. Psychologist Barry Schwartz talks with Lars Mensel about the downside of choice, and the silver lining to the economic downturn.