Huge evening post, but interesting developments. The yesterday’s bear was killed in mid-flight by rumors of “sterilized QE” in U.S. After LTRO2 and Japan’s latest policy shift, U.S. was indeed kind of falling behind in the money printing race. This competitive “who prints most”-stuff would be getting a bit comical, if the situation were not grave. The macro picture is bad and positive surprises are not around the corner, so I stick to my earlier views that we will have weeks or even more of risk-off.
During this risk-off period, there will be some bull sessions - I expect one quickie when the Greek situation is finally solved – and it does not matter much what the outcome is. By now the markets would not care if the country just fell to the Mediterranean Sea. All the required debt has already been placed on the European tax payers. IFF’s pathetic talk of a total cost of one trillion in case of a hard, unplanned and uncontrolled default is just politics at this stage. For someone to make 1 billion, someone else must spend 10 billion – and the only way to get someone to do that is by threatening with a loss of 1000 billion. Just like when I was a broker. Tomorrow is the scheduled big day and we will know if there are enough participants to the Greek PSI. You might want to have a look at my Greek Exit Collection.
The LTRO shine is definitely wearing off. People are starting to realize that there is variation margin on the loans! LTRO solved nothing, banks are still exposed to sovereign yield movements! For more LTRO-readings, please refer to my LTRO: The Ultimate Collection. I am on Twitter, Facebook, email and paper.li
Quote of the Day: This is not a crisis but a negotiation over who shall own the remaining productive assets of Europe. – Asia Times
News – Between The Hedges
Euro Crisis Press Summary – Open Europe
Markets – Between The Hedges
Recap – Global Macro Trading
Debt crisis: live – The Telegraph
Europe Crisis Tracker – WSJ
EURO CRISIS: GENERAL
Monetary blanks in the Eurozone – alphaville / FT
Nomura: additional liquidity in Europe is currently translating into additional government bond buying rather than real-world lending For recovery to take hold, Koo says, capital rules would either have to be relaxed or public funds would have to be injected into banks. Lacking that sort of action, liquidity will otherwise continue to head into government bond markets. In fact, as long as private borrowers remain scarce, Koo believes government bond yields will continue to stay compressed.
The European central securities depository liveth! – alphaville / FT
The key objective, of course, is to make Europe’s settlment processes fungible, ensuring that settlement fines and deadlines — such as two-day settlement periods — are standardised across the region, and not exploited by arbitrage hunting traders… European Commission issued its first official proposal for a depository in November 2011 — about a month after the UBS trading scandal, which featured settlment abuse, hit international headlines.
The key objective, of course, is to make Europe’s settlment processes fungible, ensuring that settlement fines and deadlines — such as two-day settlement periods — are standardised across the region, and not exploited by arbitrage hunting traders… European Commission issued its first official proposal for a depository in November 2011 — about a month after the UBS trading scandal, which featured settlment abuse, hit international headlines.
Will Merkel's fiscal treaty become a hostage of the FTT? – Open Europe
Vote on 25-May: Nonetheless it looks as if Merkel will have to offer the opposition some concessions (e.g. the FDP have indicated they could stomach a watered-down FTT along the lines of the UK’s stamp duty). The extent of these could have a big impact on the power base of the current government and the outcome of the next election.
On the Dutch leaving the euro zone – Credit Writedowns
Remember, I am a eurosceptic who thinks the euro will eventually break up but I am telling you this Dutch story is a non-issue.
EURO CRISIS: ECONOMY
The Death of The PIIGS Illustrated – ZH
Morgan Stanley’s research excerpts: M1 deposits, manufacturing PMI’s, corporate loans
Eurozone consumer enters double-dip territory – Sober Look
The Eurozone consumer recession is now in full swing.
As The EUR Jumped In January, German Non-Eurozone Factory Orders Plunged – ZH
Goldman Sachs: new orders deteriorate more within the Euro area than outside.
Goldman Sachs: new orders deteriorate more within the Euro area than outside.
The growth problem – Free exchange / The Economist
Someone in Europe needs to be buying a lot more stuff. If that doesn't occur, then the periphery has to reduce the amount of stuff it buys faster than the core is reducing the amount of stuff it buys in order to have any hope of escaping from crisis. Why the ECB thinks the latter is easier to manage than the former is beyond me
EURO CRISIS: GREECE
Nouriel Roubini: The reality is that most of the gains in good times – and until the PSI – were privatised while most of the losses have been now socialised. Taxpayers of Greece’s official creditors, not private bondholders, will end up paying for most of the losses deriving from Greece’s past, current and future insolvency.
…the general expectation is that enough investors will sign up for the Greek government to impose the deal on the rest by invoking the collective-action clauses (CACs) imposed by legislation passed last month. That in turn is likely to trigger a credit event as early as March 9th, which will lead to payouts on credit-default swaps. That will come as a blow to European leaders…
There is no door # 4 for the Foreign Law Greek bond holders – Sober Look
A second default that will occur when you don't get your coupon payment will have no incremental consequences for Greece. Thus a blocking position in the Foreign Law Greek bonds is of no value, since these investors have no negotiating leverage. There is nothing they can do to Greece that hasn't already been done.
Long article of 10 negatives for Greece and 9 negatives for EU, if Greece leaves.
Issues Facing Greek Debt Holdouts – MarketBeat / WSJ
Podcasts:
Commerzbank’s Dixon Says Greece Is Headed for Default – BB (mp3)
MIT’s Johnson Says ‘Spillover’ From Greece Is Key – BB (mp3)
EURO CRISIS: ECB, TARGET2, LTRO
European Banks Now Face Huge Margin Calls As ECB Collateral Crumbles – ZH
as of last Friday the ECB has started to make very sizable margin calls on its credit-extensions to counterparties… increase in margin calls can only further exacerbate the stigma attached to LTRO-facing banks
LTRO has variation margin and the banks have disproportionately large positions in the debt of their country. (What could go wrong?)
LTRO – Scratching The Surface – TF Market Advisors
If the collateral a bank has posted declines in value, the banks would have to post additional collateral. This is a big deal. Somehow the world seems to have an image that banks can borrow 3 year money at 1%, pledge an asset against it, and let the carry take effect with no other consequences. That is far from the truth if variation margins are being used.
STERILIZED QE
“Sterilised” – alphaville / FT
1: The repo factor – alphaville / FT
1: The repo factor – alphaville / FT
2: Bernanke 1997: Stay the course, Bernanke 2012 – alphaville / FT
3: Fed comms, who what where now – alphaville / FT
Stocks, Precious Metals Spike On Report Fed Considering "Sterilized" QE – ZH
WSJ: Fed Can Have Cake, Eat It Too on New QE – MarketBeat / WSJ
QE Trade Returns! Bond Geeks Weigh In – MarketBeat / WSJ
with a roundup of instant analyst comments
with a roundup of instant analyst comments
OTHER
Goldman Is "Bearish By A Thousand Cuts" – ZH
Goldman Sachs: Since February, growth views have retreated sharply, and the market continued to be buoyed by sentiment, and not macro fundamentals...imply an S&P level in the 1100 range… The gap between market growth views and the index itself reached “wides” reminiscent of 2011
Oil Implications And Fed Policy – ZH
Credit Suisse: …the chairman, and his many like-minded colleagues on the FOMC, are more concerned about the headwinds that higher gasoline prices might impose on economic growth than about gasoline’s potential influence on general price levels and inflation expectations.
Fed economists: Yes, TARP may have increased moral hazard – Wonkblog / WP
The Effect of TARP on Bank Risk-Taking – Federal Reserve Board
Fed economists slam TARP (LTRO?) in a paper – ZH
Interestingly, the TARP banks were less capitalized than the non-TARP banks prior to the infusions, but became relatively less capitalized after the infusions. This suggests that these banks suffered larger losses in the later period of the sample.
US: The 2012 election season – Danske Bank (pdf)
The Case for Treating Big Finance Like Big Pharma – The Atlantic
A pair of University of Chicago law professors say the federal government needs to regulate new financial products the same way it tests new drugs for safety
One year after IBM’s Watson defeated two of the greatest champions in Jeopardy history, the supercomputer is taking a “job” on Wall Street helping banking giant Citigroup analyze data.
Regulators Contemplate Slamming the Brakes on High-Frequency Trading – Advanced Trading
Regulators, including the SEC and the CFTC, are struggling to keep up with -- and keep a grip on -- the warp-speed world of high-frequency trading. Fearing that the markets are dangerously out of control, regulators are considering some severe measures to slow down high-speed traders.
OFF-TOPIC
The Exegete – L.A. Review of Books
On the career of Philip K. Dick, up to and including The Exegesis.
Is Valve Making a Console? – technology review
How Valve's "Steam Box" could be a game-changer
How Three Germans Are Cloning the Web – Businessweek
copying dotcoms and then selling them.