Markets are not interested in any of that stability-stuff or treaty changes. We already had those, but they were ignored and circumvented. The only thing that markets want to know is are the Italian and Spanish debt backstopped by the ECB or not. Markets were somewhat fooled to believe that ECB would take this role when the new budget-constraining measures would be in place. We got none of that, but the Cardinal (van Rompuy) announced that the PSI measures are dropped. No investor money will be burned! Taxpayers to pay banks’ bad investments! Heads I win, tails you lose! |
| They are talking about it. |
Starting from the obvious Mr. Krugman, most of the commentators think that the whole idea of a currency union without a real fiscal union, i.e. measures to address current account imbalances and to provide some countercyclical oomph was really, really stupid. All they can offer at the moment is more austerity and deflation to PIIGS. Whatever keeps the euro alive, but does not solve any of the problems, eh?
We already got the rift between EU and UK, and given the amount of parliamentary voting ahead, we either face diluting changes to the treaty or a very segmented union. On top of the current x-axis of euro/non-euro countries, we are about to get an y-axis of deeply integrating and old school countries. As the real solutions are avoided again in the future, we will probably get an z-axis as well in 2012, but I am not sure what it would be.
The first rule of the Fight Club…
Everyone probably had a minor laugh at the expense of Mr. Corzine of MF Global fame. In the hearings he was sorry that he really did not know where the lost money was. Americans know something about interrogations and hearings – plead the fifth, don’t recall, don’t know and don’t understand the question. Why are they having these hearings? Is there even a single case where any new information, anything incriminating has ever been found? Or is this just political theatre?
Europe has played this game horribly either on purpose or by accident. Every player has a different story and wants to comment everyone else’s statements immediately and without thinking. Last week some guy from the Bundesbank commented the latest stress tests (oops, they are not called stress tests anymore) that EBA’s credibility is zero. These Beagle Boys are wonderful, they are singing like canary birds and the cop has to ask them to speak slower as the tape recorders can’t keep up to speed and the ballpoint pens are melting. This crossfire has been evident during the whole crisis, and is the best indicator that they simply cannot agree on what to do.
Have a good weekend, notice there were a lot of summit material on EU Summit aftermath and Merkozy's gambit not working while the ECB was discussed in Dude, where's my QE?.You can follow me on Twitter and Facebook and email me for suggestions and requests.
– MoreLiver
P.S. To adapt Nigel Farage's famous apology, I would like to apologize my tasteless photo choice as it was an insult to all the crap in the world.
PAST
Recap 9-Dec – GMT
Politics this week – The Economist
Business this week – The Economist
US Macro Summary – Calculated Risk
Week in review – DealBook / NYT
Weekly Bull/Bear Recap – Rational Capitalist Speculator
Succint Summation of week’s events – The Big Picture
Market Week Wrap-Up – Pragmatic Capitalism
FUTURE
US macro schedule – Calculated Risk
Next Week: EU summit – euobserver.com
EMEA Weekly – Danske Bank (pdf)
Next Week’s Tape – MarketBeat / WSJ
Equity Week Ahead – Saxo Bank
Credit Weekly – Danske Bank (pdf)
Weekly Kickstart - Goldman Sachs via ZH
EM Week ahead – beyondbrics / FT
Weighing the week ahead – A Dash of Insight
CALENDARS
Economic Calendar – fxstreet.com
Monthly Economic Calendar – fxstreet.com
Economic Calendar – BB
EU calendar – europa.eu
EURO CRISIS
We cannot predict what happens next as the 11th meeting of Europe’s leaders winds to yet another disappointing conclusion. We can only seek to understand how Europe got here, and what’s happening now. Only this way can we learn, and so prepare for the choices ahead for America. This is a summary of the 20 previous posts about Europe (listed at the end).
ESM – A Primer: Not So Big, And Not So “Paid-In” – TF Market Advisors
…EU is big fan of providing guarantees rather than cash because the vigilantes have trouble tracking all the guarantees (once again, I ask how much has France guaranteed to the IMF, EFSF, EMS, EIB, EU, Dexia?)…Every step of the way, the headline numbers have never matched effective capacity. Also, if France is downgraded, then ESM’s effective capacity is DOA unless they go for actual paid in capital. I am not sure that countries will ratify a proposal that really makes them commit capital.
EU SUMMIT AFTERMATH
Open issues: who audits, how to force others to obey, what if someone leaves the euro, the deal adds a new layer lessening integration and increasing tensions, austerity only solves Italy’s and Greece’s credibility – nothing else.
The EU’s Camouflaged Bazooka – Global Macro Monitor
By explicitly stating PSI is over, the EU is implying the big bazooka will be there to fund any shortfalls in rolling over bond maturities…The structural problems are far from solved and the markets will be back to challenge the Eurozone’s resolve, but it does appear the fiscal pact has provided the fig leaf for some short-term relief, and, ironically may have camouflaged the bazooka, if you don’t look carefully.
Rather than creating an inter-regional insurance mechanism involving counter-cyclical transfers, the version on offer would constitutionalize pro-cyclical adjustment in recession-hit countries, with no countervailing measures to boost demand elsewhere in the eurozone. Describing this as a “fiscal union,” as some have done, constitutes a near-Orwellian abuse of language. (also Krugman recommends this.)
Europe does not have this fiscal transfer mechanism. So, no FX to balance trade. And no fiscal transfer system to eliminate the solvency crisis as it inevitably appears over time as trade imbalances grow. So, the real fix to the EMU is rather simple. You have to create sovereign monetary states. This means reverting back to the old system or going full bore into a US of Europe.
Citigroup credit strategist Hans Lorenzen asks some difficult ones.
What remarkable petulance and stupidity. The leaders of France and Germany have more or less bulldozed Britain out of the European Union for the sake of a treaty that offers absolutely no solution to the crisis at hand, or indeed any future crisis.
What did the EU agree at its 'make-or-break' summit? – euobserver.com
..and also what not. Is it enough? Going into the summit, the prevailing theory was that if the ECB does not start printing money sooner or later, the euro will fall apart.
Newborn EU treaty deal faces threat from multiple referendums – euobserver.com
Serious obstacles are beginning to materialise in Ireland, the Netherlands, Austria, Romania and Denmark, while Finland, Latvia and the Czech Republic may also present the process with additional hurdles.
The gap between summit rhetoric and reality – alphaville / FT
The result does not address balance of payment-issues. Has the deal enough power to influence states’ behavior, can the deal survive the multiple votings?
SUMMIT AFTERMATH: UK & EU
The Failure of a Forced Marriage – Spiegel
European Politicians Slam British EU Veto – Spiegel
The European Union's New Face – Spiegel
Questioning the Legality of a Separate Euro Treaty – Spiegel
David Cameron makes his euro stand, in splendid isolation – The Telegraph
Britain is a naturally Eurosceptic country – and David Cameron knows it – The Telegraph
ECB & COLLATERAL
Nomura on Draghi’s failure to address the collateral problem – alphaville / FT
As we’ve noted before, there are many reasons to think that the trend towards ‘quality’ collateralised funding is having as much of an impact on the valuation of bonds in both private and central bank funding markets, as the perception that European sovereigns might be insolvent.
As we’ve noted before, there are many reasons to think that the trend towards ‘quality’ collateralised funding is having as much of an impact on the valuation of bonds in both private and central bank funding markets, as the perception that European sovereigns might be insolvent.
What can the ECB do? – Fatasmihov
ECB can use its future profits to stop the acceleration of these negative dynamics on the bonds market… “non-inflationary loss absorption capacity of … at least €2.4trn and more likely over €3.4trn.” In other words, the ECB can put credibly on the market a firewall of over €2.4 trillion.
The IMF and the Collateral Crunch – INET
In sum, what the system needs is someone to do some unsecured borrowing. If it isn't going to be the ECB, then maybe the IMF will do.
‘BANKS’
Where not to buy your sovereign CDS – alphaville / FT
Break out the sorting and look at how much protection Deutsche Bank has written on Italy. Or Societe Generale. What’s going to happen to SocGen’s counterparties if Italy defaults and SocGen can’t pay out?
The four most surprising things about the European bank stress tests – Credit Writedowns
1) not actually stress tests 2) did not look at how banks would weather a worsening economy, 3) capital need of €114.7 bn is lot less what others estimate 4) sovereign exposures marked to market as if Sep-30, will give the banks until June 2012 to raise the extra cash but will not recalculate the capital need, regardless of what happens between now and then.
Evidence for the Monetary View of the Eurozone Crisis – David Beckworth / EconoMonitor
The Eurozone crisis is a monetary crisis, a crisis catalyzed by the failure of the ECB to stabilize and restore nominal spending to its expected level. Again, though, there are longer-term structural and political problems with the Eurozone that arguably are behind the monetary crisis.
The Bull, Bear, And Secular Case From BofAML – ZH
Once again the bull case relies heavily on government printing presses and the bear case on the reality of debt saturation breaking through.
RESEARCH
Surviving The Rollercoaster – ZH
UBS’s “Fasten Your Seatbelt 2.0 - Cross Asset Class Overview” 75-page chart overview
BofA Macro Themes For 2012 – ZH
Valuation Thursday: a chart extravaganza – Abnormal Returns
Preventive Priorities Survey: 2012 – CFR
The top 30 global geopolitical hot spots for 2012.
Research Bulletin Dec-2011 – IMF (pdf)
OTHER
Planes not bridges – Deus Ex Macchiato
Risk management should be aircraft safety engineering (dynamic system with human errors), not like bridge engineering (static system with no human errors).
MF Global and the great Wall St re-hypothecation scandal – Thomson Reuters
A legal loophole in international brokerage regulations means that few, if any, clients of MF Global are likely to get their money back… A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet.
Warren Buffett's Evolution and his Three Investment Styles – Can Turtles Fly
Phase I: Classic Value Investor, Phase II: Buffett Prime, Phase III: Modern Buffett
The Studious trader: cognitive dissonance – Crosshairs Trader
An unpleasant emotion that results from holding two diametrically opposed views at the same time. This is a major culprit in irrational decision making.
Are You A Born Investor? – The Psy-Fi Blog
Is it hereditary? IQ and serotonin genes?
DIVERSION
Book Bits For Saturday – The Capital Spectator
Books of the Year – The Economist
Maze Generation: Algorithm Recap – the { buckblogs :here }