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| US vs. the rest |
Last week saw some concentrated and coordinated action from the central banks, which is good, but unless the politicians follow up, nothing has been solved. If the French would not have an upcoming presidential election and "values" (being even more socialistic than the Swedes but a lot more corrupt), things could be much smoother. I have a massive déjà vu as this is the umpteenth time we are waiting for a final solution and trying to decipher from between the lines what our great leaders actually want - and what they are prepared to compromise. Whatever follows, my gut feeling is that the European leadership does not have the poker face required to keep things under wraps.
In the early nineties during the ERM breakup, when Finland was defending the currency peg with astronomical interest rates, a friend of mine called me and said he had seen the finance minister Mr. Viinanen walking on the street. The minister's facial expression and physical posture gave the situation away - the game was lost.
The one I would be paying close attention to is Sarkozy's face. If the EU-leaders cannot agree on a proper fiscal union and thus save the PIIGS refunding, the French banks will be bankrupt and Sarkozy will not only lose the presidential elections, but also France will be downgraded in all possible forums - credit rating, world politics and economically.
Then to this weekend's summarized link fest:
PAST
News (Fri evening) – BTH
European Close – Zero Hedge
Recap 2-Dec – Global Macro Trading
Politics this week – The Economist
Business this week – The Economist
Macro summary – Calculated Risk
Week in review – DealBook / NYT
Weekly Bull/Bear Recap – Rational Capitalist Speculator
Pros and cons, extensively linked to further reading.
Succinct Summation of week’s events – The Big Picture
Market week wrap-up – Trade the News
Hope once again triumphed over experience
U.S. macro schedule – Calculated Risk
This week in EU – euobserver.com
meetings and statements ahead of the EU summit
Weekly Focus – Danske Bank (pdf)
market buoyed by monetary easing
EMEA Weekly – Danske Bank (pdf)
Russian parliamentary elections, November inflation figures
Weekly Preview – BNY Mellon
on the stability/fiscal union
Credit: Weekly Update – Danske Bank (pdf)
volatility to persist while we wait for EU, ECB.
US Weekly Kickstart – Goldman Sachs
Emerging markets week ahead – beyondbrics / alphaville
CALENDARS
Economic Calendar – fxstreet.com
Monthly Economic Calendar – fxstreet.com
Economic Calendar – BB
EU calendar – europa.eu
EM Week ahead – beyondbrics / FT
EURO CRISIS
Euro doomed from start, says Jacques Delors – The 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.
Years ago, Henry Kissinger famously said there was no phone number to call, if you wanted to “ring Europe”. Maybe so. But it’s increasingly clear, that you should place the call to Berlin – and not to Brussels.
A happy ending for the euro? – BBC
Will we see the ECB play a bigger role in "saving" the euro? I think it's inevitable. And I think Draghi is very carefully preparing the way. But governments will need to do a lot, too. And even then, don't expect him to ride in on a white charger labelled "lender of last resort to governments".
How to Forge a Common European Identity – Spiegel
Many feel that if the EU is to survive, residents of its 27 member countries need to develop a stronger sense of a common European identity. But is it even possible to forge a European nation? The continent's leading thinkers have plenty of ideas, but national governments are reluctant to give up power.
Yet, for the euro to survive, politically fiscal consolidation is a must. It is the only quid pro quo that German and Dutch voters will accept for what they perceive as yet another bailout for the periphery. Now clearly, these bailouts are about protecting creditor country banks too but the bottom line is that there is zero political appetite for any sort of union that doesn’t have serious penalties for so-called free riders and their fiscal profligacy.
How can the euro zone prevent the next fiscal crisis? – Free exchange / The Economist
The German constitutional debt brake (modelled after the Swiss example) takes a simple national business cycle into account and is therefore an improvement compared to the static and economically questionable Stability and Growth Pact.
EU Contagion charts – Cumberland Advisors (pdf)
‘MERKOZY’ & ECB
Merkel and Draghi play 'Let's Make a Deal!' – Wonkblog / WP
Resolving the immediate crisis could be quick. Merkel, however, believes that if she acts to end the crisis, she loses her leverage to force a fiscal union. So she's withholding the cure from a very, very sick patient here. And though it's true that the patient needs to commit to a healthier life, he first needs to survive this disease.
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.
Merkel calls for rapid EU treaty change – Kiron Sarkar / The Big Picture
I will repeat, when Germany gets it and pursues a policy (with it effectively in charge), believe you me, it has a very good chance of success. I remain bullish.
The Draghi Deal – Greg Mankiw’s Blog
If I understand the news coming out of Europe correctly, the new head of the European Central Bank is offering a simple deal: If fiscal policy becomes hawkish, monetary policy will be dovish.
Germans Remain Unflappable During Euro Crisis – Spiegel
The euro is teetering, neighboring countries are complaining about pressure from Berlin, and the German chancellor is rushing from one crisis summit to another. Typically more anxious, the Germans appear to be strangely unperturbed amid the furor. What is the root of this new serenity?
SchnittsKrieg in Europa! – EconoMonitor
But Germany actions (and German inaction in some cases) have made the situation worse, imposing radical austerity that destroyed any chance for growth in these economies.
A Euro Crisis Deal Emerges – WSJ
Head of ECB signals bigger role if nations tighten fiscal union
PIIGS
Perhaps the best way to see this is to note, as Matt Yglesias in Slate does Friday morning, that “if you went back to the halcyon days of 2005 and 2006, nothing the governments of Ireland and Spain and Italy were doing would violate” German Chancellor Angela Merkel’s proposed budget rules. And it’s not as if Ireland’s moral character weakened in 2007. Rather, a massive, international credit bubble collapsed -- a bubble fueled in part by German banks
Comments an IMF paper from 2010 that pretty much nailed the European issue: “Larger EU transfers may well be necessary to induce reforms. This means going beyond the current EU budget, which is strictly limited by the Treaty, to a system that uses more transparent EU-wide instruments.”
So long as the TROIKA keeps making the payments, the banks have no reason to reach a settlement, particularly on their shorter dated paper…We argued right from the start that banks would shift their “basis” packages to hedge funds or other investors who wouldn’t be subject to the negotiations.
No: So the euro-zone continues to face the prospect that one of its member states will leave the currency union–whatever the technocrats in Brussels and Athens would like to believe… likely to be followed pretty quickly after by Portugal’s exit. And then there might be one of the big dominoes.
Greece could make good on what it owes if it chose to. If the problem boils down to an unwillingness rather than an inability to pay, the problem becomes more deeply ingrained.
Quotes Stratfor, Bruce Krasting and BB and concludes no, as IMF is super-senior thus closing a bailout recipient from the loan markets and Italy’s debt is just too large to be serviceable
Profligate Zombies – Krugman / NYT
Before the crisis Spain had low and declining debt. Italy had high debt inherited from the past, but it was steadily working that debt down relative to GDP. Neither country was being profligate — that’s just not what happened. Since the crisis debt has been rising relative to GDP, but that’s what happens when you have an economic crisis.
ECONOMY
Unemployment Rate Dips to 8.6% as 487,000 Drop Out of Labor Force
The current state of the global manufacturing sector leaves global central bankers no other choice but to act aggressively to stop the rot.
OTHER
Billionaire Prokhorov Touts Gold as Trump Embraces Foreclosures – BB
Roundup of investment advice from billionaires around the world.
Roundup of investment advice from billionaires around the world.
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.
Tomorrow, And Tomorrow, And Tomorrow – TF Market Advisors
Bernanke saw the impact of swap rate cut, and may be tempted to follow up. The regulators could also push the banks to reduce derivative notionals to calm fears of systemic risk.
Outtakes from a panel discussion - the one-hour video on Youtube
Mortgage QE? – TF Market Advisors
I think Bernanke is trying to lay the groundwork of why it is so important to buy mortgages… I think Draghi is 100% likely to cut rates, probably the day after we get another hand holding moment stating that some agreement in principle has been reached on treaty changes. I think he is only about 50% likely to start printing, but the sterilization is getting more difficult to manage and frankly may be draining liquidity from other parts of the system that could use it.
Certainly there is no reason simply to assume that, given the conditions that have encouraged capital misallocation for over a decade, calling the investment “social housing” will change anything.
Central counterparties are too big to fail – alphaville / FT
Having all trades face a CCP allows for efficient multilateral netting, and tear-up processes. This can reduce the overall gross notional out there (for derivatives) and the amount of collateral tied up across the financial system (for cash and derivatives). The point on collateral is a question of efficiency rather that systemic risk, though arguably the collateral shortage of late is moving this into the systemic category.
Man Versus Machine – HFT Review
An Interview with Professor Dave Cliff, Director of the UK Large-Scale Complex IT Systems Research Initiative, and a member of the Lead Expert Group of the UK Government’s Foresight Project on The Future of Computer Trading in Financial Markets.
A Secret Scandal –Eliot Spitzer / Slate
The government and the big banks deceived the public about their $7 trillion secret loan program. They should be punished.
DIVERSION
Starting Over – Bigger Capital If he would start in the business now, what would he do.
One-line charts and the inevitable failure of financial models – Interloper
Any line in isolation is meaningless.
The new cyber-industrial complex spying on us – The Guardian
WikiLeaks' Spy Files reveal the frightening scale and ambition of the industry now devoted to surveillance of all our daily lives
The invisible hand meets the invisible gorilla: The economics and psychology of scarce attention – voxeu.org
Have economists been asleep at the wheel? This column reports from a conference on the psychology and economics of ‘scarce attention’. Among the ideas discussed is whether too much information can blind decision-making and whether this can explain why so many economists missed the warning signs of a crisis.
Air Fail – Slate
Blame Jimmy Carter for all the airline bankruptcies. Or better yet, thank him…Cumulative earnings across the history of American passenger aviation are negative $33 billion.