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Friday, March 23

23rd Mar - Best of The Week

Here are the best links from my ending week's posts, in case you missed them. The top themses were the higher bond yields in US, in Europe the worsening outlook for Spain and Portugal and the diminishing sparkle of  Merkozy and ECB's recent actions.

 The Weekly Support and Weekender posts are coming up next. I’m on Twitter, Facebook, email,

My views

It’s Mostly Fiscal (Transfer)alphaville / FT
What the (IMF) is — rather openly — talking about here is official sector involvement from the eurozone creditors. No
OSI to plug a future financing gap — the IMF walks.

Captured Europe – Simon Johnson, Daron Acemoglu / Project Syndicate
Perhaps the risk that a Greek debt restructuring would cause a financial meltdown was always minimal, and quiescent markets were to be expected. But, in that case, why all the fuss?  The answer should be clear by now: interest-group politics and policy elites’ worldview.

Migration of sovereign debt from private hands to public institutions Sober Look
The hope is that this shift will provide enough time and flexibility for these nations to eventually tap the private markets again. But given these GDP trends and the "cheating" that's going on with respect to these debt to GDP ratios, the public institutions (and therefore the Eurozone taxpayer) will have to wait a long time and take losses along the way before this becomes a reality.

An eerie euro zone calmMacroScope / Reuters
Very nice short review of the coming issues

The Euro’s Imagined Community – Robert Shiller / Project Syndicate
The point is that if Europe can keep these symbols alive, even a eurozone breakup would not have the dire political consequences for Europe that so many predict.

The Eurozone in Crisis: Origins and ProspectsLa Follette (pdf)
1) the common currency and its monetary policy were applied to a set of economies that were very different one from the other 2) investors interpreted the creation of the union as an implicit guarantee of member countries’ government debt.

The “France-Germany-Greece-Portugal” Disconnect in 2012Q3Place du Luxembourg
a dysfunctional Franco-German relationship in the early days of the Hollande presidency is likely to lead to European political deadlock. This is likely to coincide with Greek elections and a second bailout request from Portugal. Clearly, any ensuing political crisis or financial turbulence will be transitory, as either the ECB or the EFSF will, most likely, intervene.

France’s election: You can’t keep him downThe Economist
Nicolas Sarkozy closes the gap

When will the euro split asunder? When Germans feel it in their pocketsThe Telegraph
Now back to the real world. It's most unlikely the euro will survive in its present form to see this moment of doom, but you get the picture. The whole thing is essentially a house of cards

Why Germans should support the EuroPlace du Luxembourg
Germans should care about the EU, not due to some sort historical guilt, but rather out of their own self interest. Off the top of my head there are at least 11 good reasons why Germans should support the Euro

Reflections on Buying Time: Did the ECB Buy Time? Time For What?Mish’s
I must point out that for a time, Trichet appeared successful in containing Greece. However, time is fleeting. History will show that the ECB did not buy time for anything but a bigger disaster, just as happened with Greece.

ECB old boys speak their mindsMacroScope / Reuters
It is often said that once people leave an organisation, they find it easier to speak their minds.

LTROsophy 101alphaville / FT
…if such an improvement does not materialise, the ECB may get under renewed criticism for having addressed a solvency problem with a liquidity solution. Indeed, it may actually reduce the chances of a third LTRO, forcing the ECB to rethink its unconventional policy strategy.

On Spain, Spanish banks and Spanish local electionsCredit Writedowns
the private sector debt seems more intractable than the public sector. Private sector debt appears 3-4 times the public sector debt. De-leveraging by both the public and private sector simultaneously is a recipe for an economic recession. It is also a recipe for social instability with unemployment finishing last year just below 23%.

Spain – The Next Domino Is Getting Ready to TumbleActing Man
Very nice article on why Spain is rotten, h/t the trader

Risk-Off As Buiter Reminds World About EuropeZH
Citi's Willem Buiter, in a scathing Bloomberg Radio interview that pulled no punches with regard to US and European fiscal and monetary policy, noted Spain is 'at greater risk than ever before' of debt restructuring. Also: Citigroup’s Buiter Says Spain Default Risk Has RisenBB (mp3)

Spanish Yield Curve – A loud whisper?TF Market Advisors
Expect talk of PSI and debt restructuring to increase.  There is only one way for sovereigns to get their debt down quickly.  That is to pull a PSI and make banks and insurance companies take the hit.  I would avoid European bank shares here, as their equity market cap and ability to absorb losses will be a tempting target for politicians who want to reduce debt and don’t want to waste a year making things worse, like Greece did.  This is especially true with LTRO reducing funding concerns.

Transmission ChannelsPIMCO
A disorderly Greek default, if it occurs, would likely shock the eurozone and the globe via at least four transmission channels: the European banking system, European sovereign debt markets, corporate financing markets and regional trade.

Pimco chief Mohamed El-Erian expects 'second Greece’ in PortugalThe Telegraph
The giant bond fund Pimco said Europe has not yet tamed its debt crisis and will soon face a “second Greece” in Portugal as the country’s economy spirals downwards.

BONDS: Yield Forecast Update - Curve steepening has begunDanske Bank (pdf)

BONDS: Is the bond market tightening for the Fed?Humble Student of The Markets
If the markets are tightening when the Fed doesn't want to tighten, how will it respond? In the past, the Federal Reserve has used interviews and leaks after significant announcements to "clarify" its statements. Watch for further statements in the days to come to see the Fed's reaction to the backup in bond yields.

ENERGY: Here Are 17 Charts Summarizing The US Energy SituationZH
From Goldman Sachs

Things that make you go hmmm… – Grant Williams via The Trader (pdf)
Again a very good long text, oil being the main theme

Potential output: Risking permanent damageFree exchange / The Economist
Two spectacular failures stain 20th century macroeconomic policy in America: the Great Depression and the Great Inflation. They share an important ingredient: in both, policy makers could not properly gauge the economy’s potential output, i.e. its productive capacity.

Weeks When Decades Happen – John Mauldin / The Big Picture
Instead of lamenting over the past, investors should be coming to grips with the trends of the future: the internationalization of the RMB, the rise of cheaper and more flexible automation, and dramatically cheaper energy in the US.

Tail Risk Hedging 101: CreditZH
 Puts and Calls on credit risk - known as Payers and Receivers…have been actively quoted since 2006 but the last 2-3 years has seen their popularity increase as a 'cheap' way to protect (or take on) credit risk - most specifically tail risk scenarios. Morgan Stanley recently published another useful primer on these instruments.

Federal Reserve Stress Tests Make Us All MuppetsSimon Johnson / BB
The Fed has an imperfect view of the future, as do we all. It has repeatedly demonstrated a limited ability to control economic outcomes. In light of this, the Fed could have required banks to build up shareholder capital on their balance sheets in case their aggressive risk-taking again becomes reckless and creates enormous losses.

Hedge Fund Market WizardsAmazon 
Jack D. Schwager, the author of the classic Market Wizards-books, is coming out with a new book, other books by Schwager here. The book is out in May, preorder now.

The NSA Is Building the Country’s Biggest Spy Center (Watch What You Say)Wired
Its purpose: to intercept, decipher, analyze, and store vast swaths of the world’s communications as they zap down from satellites and zip through the underground and undersea cables of international, foreign, and domestic networks. The heavily fortified $2 billion center should be up and running in September 2013.

How one man escaped from a North Korean prison campThe Guardian
There was torture, starvation, betrayals and executions, but to Shin In Geun, Camp 14 – a prison for the political enemies of North Korea – was home. Then one day came the chance to flee…

The Family Hour: An Oral History of The SopranosVanity Fair
Sopranos insiders talk about their years as a family, the trauma when someone got whacked, and making their peace with the finale.