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Sunday, December 4

Best of the Week

Here are the top picks from this week's posts.  

- MoreLiver

Goldman: "As The Endgame Approaches, The Rally In AAA-Euro Area Sovereign Bonds No Longer Seems Sustainable"ZH
In a ‘break-up’ scenario, the creditor ‘core’ countries will be confronted with a wave of insolvencies, which would also worsen their fiscal position. And in the middle ground between these two outcomes, where we currently stand, the ECB will be intermediating growing intra-Eurosystem imbalances. Through this monetary channel at the heart of EMU, the ‘shadow’ credit risk of the core countries is already rising, and at an increasingly rapid pace.

The Euro CurseKrugman / NYT
Sweden vs. Finland explains whole euro crisis: Finnish yields diverged from Swedish yields last April, when ECB begun to raise rates. This October the spread exploded. The ECB’s mistake was not a big issue, but maybe it signaled how mad the central bank is. P.K: If that’s what happened, then the ECB’s hard-money madness may have destroyed the euro.

The Euro Area Is Coming to an EndView / BB
Peter Boone and Simon Johnson: Tragedy awaits. European politicians are likely to stall until markets force a chaotic end upon them. Let’s hope they are planning quietly to keep disorder from turning into chaos.

Euro Zone on the BrinkSpiegel
Fear is spreading through the financial markets as investors pull their money out of the crisis-stricken euro-zone countries. With Chancellor Angela Merkel opposed to using the ECB's firepower to solve the crisis, the monetary union appears increasingly in danger of breaking apart. Some economists are even arguing for Germany to reintroduce the deutsche mark. Part 2 and Part 3.

A Minsky moment in the eurozone? alphaville / FT
Nomura: Financial institutions sometimes have to sell their stronger assets rather than their lower-quality assets since these can provide greater liquidity and may enable the booking of a profit. (The full report “Endgame - Absent a policy response, a euro break-up looks probable not possible” is worth the read and available on FT’s long room.)

The Euro area has just days to avoid collapseWolfgang Münchau / FT

Citi: "Forget Decoupling" - Here Is How To Trade During The Sovereign TraumaZH
Despite Strong Corporate Balance Sheets...Don't Expect Decoupling...Trade The Phases of The Crisis Again In 2012! – Full research note on scribd

Europe’s grand bargainalphaville / FT
Published in September, the authors of this Occasional Paper, who include Jurgen Stark, spell out their ideas for the future of widely abused Stability and Growth Pact. Article includes comments from J.P. Morgan’s Mr. Barr.

Nomura on European bank deleveraging and US loansalphaville / FT

More EuropessimismTim Duy’s Fed Watch
We are setting the stage for a massive counter-example to the US reaction to its financial crisis…if you think the US would have been better off shrinking the deficit while letting the banking system collapse, it is time for you to go long on Europe. 

Austan Goolsbee on why the euro zone won’t surviveWonkblog / WP
Former director of Obama’s Council of Economic Advisers and an economics professor at Chicago University’s Booth School of Business opens up in an interview.

Sovereign Subjects: Europe in the BalanceMorgan Stanley
Europe's Hamiltonian moment has come: One year ago, we wrote that Europe was heading fast towards a crossroads where it would have to choose between a debt jubilee (wide-scale debt repudiation) and debt assumption (a form of fiscal federalism with enhanced control over national budgets accompanied by centralised funding of governments). We think this bifurcation point has now been reached.

Euro doomed from start, says Jacques DelorsThe Telegraph
The euro project was flawed from the start and the current generation of European leaders has failed to address its fundamental problems, Jacques Delors, the architect of the single currency, declares today.

French Presidential Election: Coup De Grâce For The Euro? Testosterone Pit
Hollande: "Allow the ECB to do what all central banks in the world are doing: buying debt. The moment has come to confront Germany politically and to defend our values.” Which values? After a series of devaluations since 1945, the French franc was "revalued" in 1960 at 100 old francs for 1 new franc. New notes were printed and confidence was restored. However, from 1960 through 1999, when it was replaced by the euro, the franc lost another 88% of its value—due to France's habit of monetizing its debt. A fate Germany has assiduously avoided.

Last Days Of Pompeii?A Fistful of Euros
Very long, extensively linked blog post Cutting through all the foam and wrapping here, the key question is who is going to sign the cheques and who is going to pay?

The EU's 'techno party' is hollowing out
Long opinion piece: It is time for all those who hold democracy dear to speak out against these moves without fear of being cast as eurosceptics. Indeed, if one believes in Europe, we must speak out all the more loudly.

MMT to the ECB – you can’t inflate even if you want toPragmatic Capitalism
Warren Mosler: If lower rates, quantitative easing or bank liquidity provision would be inflationary, where is that inflation in Japan, U.S. or Europe? So here we are, with the ECB demanding deflationary austerity from the member nations in return for the limited bond buying that has been sustaining some semblence of national govt. solvency, not seeming to realize it can’t inflate with its monetary policy tools, even if it wanted to.

ECB as Pawnbroker of Last Resort (POLR)alphaville / FT
The ECB’s less fussy nature when it comes to the type of collateral it accepts makes it, de facto, the dumping ground for all collateral that the public market has deemed unacceptable and is no longer prepared to fund against.

Draghi: “We are aware of the scarcity of eligible collateral” alphaville / FT
He’s trying to get a point across. Not only is the ECB arguably losing control, it’s trying to flag up that the chaos is the result of messed up transmission mechanisms in dealer markets more than the result of a changing view of Eurozone credibility… Even if the ECB broadens the criteria on the collateral it acccepts — and remember it already accepts some of the poorest quality collateral in central banking circles — that won’t necessarily solve the problem in the public bilateral markets where only top quality bonds will do.

What ECB QE could look likealphaville / FT
Credit Suisse:
Germany (“the paymaster”) has to urgently decide between two “evils” — “activating the ECB printing press more decisively or Eurobonds”… It would be far easier to announce large scale asset purchases along the lines of QE as long as it is announced as a monetary policy tool. This would not be against the treaty since under the latter, the ECB has a clear price stability objective of below but close to 2%. The backdrop is given to use QE as a monetary policy tool.

ECB Needs to Check Its Oil Leak Over Bond Purchase SterilizationThe Source / WSJ
In other words, the bank’s attempts to stabilize the fiscal crisis sweeping the euro zone will start to impair its ability to manage monetary policy. And, that is why the bank’s oil leak, as small as it might appear now, is providing ever more reason for serious concern.

EFSF "Guidelines"Peter Tchir / ZH
I think you are supposed to sell the news again, as there is nothing in this document that provides evidence that they get it, or that any scale can ever be achieved, and if anything, it makes you wonder if they will even get to the 440 billion of support the market thought they had back in July.

Credit Writedowns Weekly Report, Vol 1 Issue 2: Solutions in Europe?Credit Writedowns
Linked summaries of CW’s previous posts on the crisis. Some very good material, but most it has been featured here previously.

All eyes on the Marseilles summitHumble Student of the Markets
Current Grand Plan: ‘non-standard’ ECB methods to follow fiscal integration: If the eurocrats were to choose to go this route of fiscal integration with all of the 17 eurozone countries, then watch for some language in the proposal for exit from the eurozone to be used as a stick to beat the non-compliant countries…Given the obstacles involved, I am not optimistic.

Fiscal Federalism Or Bust! Morgan Stanley Sees Dec 9th As Real European D-DayZH
A summary and a scribd-link to the research doc, I linked the article earlier.

Grand Plan 2 Or Grasping At Straws?Peter Tchir / ZH
A big reason the market wants to rally on any positive noise is the firm conviction that default or break-up is the equivalent of Armageddon.  The belief is that without a bazooka or magic bullet, the markets and economies will basically cease to exist, so the only logical conclusion is that the bazooka or magic bullet will be given.  That is incredibly extremely, and for banks, incredibly self-serving.

Another European "Solution" Coming? Tim Duy’s Fed Watch
Bottom Line:  European policymakers understand they need faster and bolder action.  But the situation has many, many moving pieces.  It is increasingly difficult to pull the brakes on this runaway train.

Europe Scrambles for SolutionsTim Duy’s Fed Watch
Very good roundup on Italy, IMF, bank recap etc. One way or another, Europe will experience a massive credit shock.  Presumably, the ECB could help offset this by allowing governments to loosen spending to support demand and fund bank recapitalization.  But the path we are on appears to provide ECB help only in return for more austerity.  And it is that never-ending pursuit of austerity that leaves me bearish on Europe, regardless of the political news of the day.

Merkel to neuter the German Constitutional Court?The Big Picture
Even more intriguing – Draghi is being summoned to the Ecofin meeting and news reports suggest he will also attend the EU heads of State meeting on the 9th December. A deal where Germany forces through fiscal measures, followed by the “independent” ECB buying bonds/ embarking on QE, looks like the deal that is being attempted/ organised.

More Imaginative And Weird Solutions To The Euro Zone CrisisSeeking Alpha
Fed's euro zone QE, Gold backed bonds, Conditional euro bonds, Administrative Discipline, Administrative discipline via the IMF, Stability Union, Grand Bargain

UBS On "How Bad Might It Get"ZH
UBS: Steps toward fiscal union and a more proactive ECB, after all, will still not address the fundamental imbalances and competitiveness issues that bedevil the Euro zone. Nor will they tackle the inadequacy of structural growth drivers and the deep-seated demographic challenges that the region faces in the period ahead. Monetary initiatives designed to shore up confidence can give politicians more time to enact the necessary policies. But absent those policies and sooner or later intense instability will resume.

Chart of the day, Morgan Stanley bailout editionFelix Salmon / Reuters
In 2008 Morgan Stanley owed Federal Reserve at peak 107 bn dollars, something for the ECB to think about. The Fed’s argument against publishing the data was that it “would create a stigma”, and make it less likely that banks would tap similar facilities in future. But I can assure you that at the height of the crisis, the last thing on Morgan Stanley’s mind was the worry that its borrowings might be made public three years later. When you need the money, and the Fed is throwing its windows wide open, you don’t look that kind of gift horse in the mouth.

Financial Stability Report, Dec-2011BOE
Presentations, summaries, full text, charts etc. Sovereign and banking risks emanating from the euro area remain the most significant and immediate threat to UK financial stability.  These risks have intensified materially since the June 2011 Report. Commentaries: BoE charts, UK banks’ gloom, BoE charts, risk weights you can’t trust, Capital Confidence, Central counterparties are too big to fail

Examining the big lie: How the facts of the economic crisis stack upThe Big Picture
The lie that the crisis was government’s, not banks’ fault. The facts point otherwise.

Secret Fed Loans Gave Banks $13 Billion Undisclosed to CongressBB
The stuff Fed tried to keep secret, because otherwise in the future “those in need of bailouts would be embarrassed to ask for it”. Definitely something for the eurocrats to think about, as in the game it is now their turn.

Is Modern Capitalism Sustainable?Kenneth Rogoff / Project Syndicate
It is a curious question, because it seems to presume that there is a viable replacement waiting in the wings. The truth of the matter is that, for now at least, the only serious alternatives to today’s dominant Anglo-American paradigm are other forms of capitalism.

Kyle Bass Explains The New World Order - Panel PresentationZH
Outtakes from a panel discussion - the one-hour video on Youtube

An interview with Seth KlarmanInfectious Greed
Founder of Baupost Group (AUM 22bn) video interview, not much about investing though.

10 Market Conclusions Based On Recent Hedge Fund ExposureZH
Goldman Sachs US weekly kickstart has some data on hedge fund holdings. (I highlighted this on Weekender-post, but did you read this? – MoreLiver)

Goldman Turns Bearish: Squid Releases Top Trades For 2012... And It's Not PrettyZH
Discussion of the following trade ideas: 1) Buy protection on iTraxx Europe Xover, 2) short 10y German Bunds 3) Long EUR/CHF 4) Long Canadian equities vs. Japanese equities, FX unhedged 5) Long July 2012 ICE Brent

Maybe it really is different this timeGoldman Sachs & Nomura (pdf)
Quant meltdown presentation from June 2009

The PBoC and that RRR decisionalphaville / FT
Comments from Standard Chartered, UBS, looking at the recent PMI, euro crisis connection.

Billionaire Prokhorov Touts Gold as Trump Embraces ForeclosuresBB
Roundup of investment advice from billionaires around the world.

Things I Did Not Know About The CFA ExamDealbreaker
This is a world untroubled by rising correlations, undisclosed conflicts of interest in CDOs, 2+% S&P moves every day, algo trading, thirteen-trillion-dollar secret Fed bailouts. It’s sort of a 99% perspective for the 1%, success via hard work and playing by the rules rather than government favoritism or winning the tournament for global stardom.

Researcher’s Video Shows Secret Software on Millions of Phones Logging EverythingWired

A chess board for three players3manchess

The Psychology of NakednessWired
If you are naked, you will not be taken seriously.

On self-destructionEmanuel Derman / Reuters
Very well-written, subtly very depressing. Everyone is getting tired.