Here are the best reads from my this week's posts. Weekender-summary and preview coming later today. Imminent failures on the Greece (PSI, next tranche, meeting budget limits, having enough aspirine - you name it, they did it), ECB's ever-crazier collaterals and the show in the Middle East were the main events. The euro downgrades came late on Friday and the final word on them has not been written yet. Expect more on the topic in my next postWorth watching was also what will happen to the Swiss Central Bank's policy under the next Great Leader. Interventions and exchange rate limits are fun, but the stuff on their balance sheet will come back to haunt them for a long, long time. Remember when French central bank governor said the Swiss decision to peg to euro was a sign of trust? What a bunch of great comedians these people are..
- MoreLiver
EURO CRISIS
From last December, but if you missed it: In this edition of the Foreign Policy/Brookings Institution Deep Dive, we delve into the dimensions of the European debt crisis, the potential solutions, and the future of the eurozone and global financial system
Just as Margaret Thatcher favoured “sado monetarism” (a term coined by Denis Healey), the German plan for Europe is “fiscal B&D” (bondage and discipline).
Spain and Italy: only just begun – alphaville / FT
Credit Suisse has an epic-length report on European public finances that includes useful summaries of the financing needs of both countries.
Credit Suisse has an epic-length report on European public finances that includes useful summaries of the financing needs of both countries.
I Remember When The Dynamic Duo Was Batman And Robin – TF Market Advisors
What can Merkozy give? commitment to budget discipline, creating a junk bank, a sermon to disbelivers or QE: QE implies some ability to get paid back or to stop easing by selling assets back to the market. Quantitative Gift Giving is simply throwing money at assets that will never be repaid. How did Greece come up with €1 billion to buy preferred shares of NBG?
If no trade reversal now, then when? – mpettis.com
Europe’s underlying problem is not budget deficits or even unsustainable debt. These are mainly symptoms. The real problem with Europe is the huge divergence in costs between the core and the periphery
Here’s Why Downgrades of European Nations are Still Important – MarketBeat / WSJ
JPM, Citi, Capital Economics and Barcalys quick comments.
ECB
ECB Preview by Goldman Sacs – ZH (posted previously)
No rate change or further non-standard measures, for now · More monetary stimulus wanted, but we don’t think it will come through further rate cuts · Which rate reflects the appropriate monetary policy stance? · What to do about the interest rate corridor? · Monetary policy in times of a broken transmission mechanism and why non-standard measures are the preferred instrument
No rate change or further non-standard measures, for now · More monetary stimulus wanted, but we don’t think it will come through further rate cuts · Which rate reflects the appropriate monetary policy stance? · What to do about the interest rate corridor? · Monetary policy in times of a broken transmission mechanism and why non-standard measures are the preferred instrument
The curious case of ECB deposits – alphaville / FT
Bank of America Merrill Lynch analysts have taken objection to everyone interpreting high use of the ECB’s overnight deposit facility as an indicator of ‘bank hoarding’. It is just not so, they say.
Unlisted in euroland – alphaville / FT
On the crazy-collateral placed to ECB.
European Central Bank in Graphics – Reuters
Collection of charts – hat tip to The Trader.
Barclays Estimates ECB Losses On Bond Purchases At €30 Billion, Or Nearly Half Of Eurosystem Capital – ZH
A quick reminder that the ECB is joint and several: i.e., losses are socialized. Germany will be delighted.
Would A Ponzi By Any Other Name Smell As Bad? – Peter Tchir / ZH
This program seems to ensure the destruction of the entire banking system and the sovereign if any reasonably large participant fails. We have gone for “sovereign ceiling” to “weakest link” in terms of credit. If this program become common and larger, we have effectively linked all the banks in the system, and the sovereign, to the WEAKEST bank.
GREECE
To ring-fence the ECB in Greece… or not – alphaville / FT
If ECB does not participate in PSI and get their bonds converted to English law, they will keep the old ones, just as Greece is changing its laws to make it easier to default on Greek law.
If ECB does not participate in PSI and get their bonds converted to English law, they will keep the old ones, just as Greece is changing its laws to make it easier to default on Greek law.
Buiter on odds of German vs Greek euro exits – alphaville / FT
Citi’s 2012 outlook believes ECB rescues, perhaps after some auction failures, ring-fencing troubled countries by LOLR or via lending to IMF. Banks are recapitalized nationally or through EU institutions.
Without PSI, the Troika will not make the second bailout payment. Some investors are not agreeing, as they expect payments from CDS contracts, and this could push Greece to default next March. Also a summary by Zero Hedge.
Disappearing Ink – Peter Tchir / ZH
Collective Action Clauses will ensure a Credit Event, and will cause investors to pull away from sovereign debt markets as the willingness to treat certain holders preferentially and the willingness to change the laws arbitrarily are risks they aren’t getting paid sufficiently to take.
Collective Action Clauses will ensure a Credit Event, and will cause investors to pull away from sovereign debt markets as the willingness to treat certain holders preferentially and the willingness to change the laws arbitrarily are risks they aren’t getting paid sufficiently to take.
The Coercive Greek Restructuring Is Now Imminent: UBS Explains What It Means For Europe (Hint: Nothing Good) – ZH
UBS: In a coercive restructuring (=default), the consequences of the treatment of euro area central banks could be negative either way. ECB loses money: fiscal transfer and political trouble – ECB doesn’t lose: seniority and havoc in Spain and Italy.
Goldman Unveils The Script In The Greek Haircut Kabuki – ZH
Euro area policy makers have been very outspoken in making the point that Greece is a completely different case from other Euro area countries. However, in the absence of a credible commitment to no restructuring in the Euro area outside Greece, markets will continue to price spreads in Euro area bonds in a risk-averse way, factoring in the remote possibility of extreme outcomes occurring elsewhere too.
If you didn’t believe us that the ECB will do everything it can to achieve seniority for its Greek bonds in the country’s debt restructuring, hopefully Thursday’s ECB press conference convinced you.
MIDDLE EAST
SocGen Lays It Out: "EU Iran Embargo: Brent $125-150. Straits Of Hormuz Shut: $150-200" – ZH
If the US was attacked by a criminal empire: an analogy to confront US-Iran history – Washington’s Blog
In 1953, the CIA (China Intelligence Agency) overthrew the Eisenhower administration, installing a vicious dictator, Dick Tator, who lorded over us until we deposed him in 1979…
OTHER
Morgan Stanley On Why The Gig Is Up – ZH
"What we have on our hands is a good old fashioned quagmire" is how Morgan Stanley's Mike Wilson sets up his surprisingly non-sheep-like perspective on the troubles that US equity investors may be about to face.
Bank Of America On US Decoupling: Enjoy It While It Lasts – ZH
Historically, economic activity in Europe lags the US by roughly 2 to 3 quarters… However, this cycle should be different. This time the shock is not global or US in origin, it is coming from Europe. Hence, it should take time first for Europe to slide into recession and then for the US economy to contract. We expect the consensus to ultimately come around to our second-half growth view for the US economy.
Historically, economic activity in Europe lags the US by roughly 2 to 3 quarters… However, this cycle should be different. This time the shock is not global or US in origin, it is coming from Europe. Hence, it should take time first for Europe to slide into recession and then for the US economy to contract. We expect the consensus to ultimately come around to our second-half growth view for the US economy.
Bonds Versus Stocks In Three Charts – ZH
Morgan Stanley’s research. Adjusted for volatility and draw-down stocks are simply not as attractive from a relative-value perspective currently. Cyclically adjusted, credit markets are also priced for more concern than stock markets and thus either suggest being market-neutral in stocks (if forced to hold) or buying high-yield bonds (if bullish as they are priced 'cheaper' than stocks).
Monthly Chart Book – Goldman Sachs / ZH The 94-page research piece is embedded at the bottom of the page, after the Weekly Kickstart.
Markets update - Credit - The Hungarian dances – Macronomics
Correlation Nation (let’s go to the charts) – The Reformed Broker
Very nice correlation charts from Factor Advisors.
2012: A Year of Choices – John Mauldin / The Big Picture
The problem is that there is another type of path, one that we cannot retrace. After we choose that sort of path, the way back is blocked, and we must go on dealing with the consequences of our chosen path. We may come to forks in the road and vary our directions on the path, but we can’t turn back, no matter how much we would like to. We can choose other paths into the future, but the past will always be there.
Population: The Elephant in the Room; Peak Oil Implications on Population Growth; What Level of Human Population is Sustainable? – Mish’s
Very nasty speculation of what might have happened. It seems someone from inside the SNB finally woke up and skillfully played the Swiss media to work on Hildebrand’s expulsion. There is only one problem for the SNB: how to get out of the hole before the Euro blows up?
[Credit event auctions] Mechanics – alphaville / FT
Since 2009 credit event auctions that determine credit default swap payouts have been hardwired into the operations of the market. Previously, auctions were arranged on a more ad hoc, voluntary basis. Potentially billions hinge on the outcomes of this automatic mechanism. (MoreLiver: Time to read this now, as there are credit events coming)
Getting up to Speed on the Financial Crisis: A One-Weekend-Reader's Guide – SSRN
All economists should be conversant with “what happened?” during the financial crisis of 2007-2009. We select and summarize 16 documents, including academic papers and reports from regulatory and international agencies. This reading list covers the key facts and mechanisms in the build-up of risk, the panics in short-term-debt markets, the policy reactions, and the real effects of the financial crisis.
Annual Forecast 2012 – Stratfor
There are periods when the international system undergoes radical shifts in a short time. The last such period was 1989-1991 (and now again – M)
DIVERSION
Solitude and Leadership – The American Scholar
If you want others to follow, learn to be alone with your thoughts. This lecture was delivered to the plebe class at West Point in Oct 2009.
This true story is movie material. Article from 2007.
Reminiscences of a Stock Operator – trading-naked.com (pdf)
Full book in pdf format.