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Friday, May 11

11th May - Best of The Week

Here are the best links from the past week. Sections this time: Euro Crisis: General / Euro Crisis: Greece / Euro Crisis: Spain / Central Banks / Views: Stock Markets / Other / Off-Topic

Usual Weekender posts coming up later. Don't forget, it will be Mother's Day on Sunday. Follow ‘MoreLiver’ on Twitter or Facebook

Why the Eurozone Crisis is Not OverPIIE
Martin Wolf, Financial Times on May 3: Wolf believes that the euro area crisis in fact has barely begun and requires a process of adjustment that could take a full decade and posed the question of whether the member countries have the political will to make that process work and resolve the crisis successfully. Audio (mp3), Video (youtube), Presentation (pdf), Transcript (pdf)

The European debate on bank capital is not just about
Europe’s finance ministers are currently deciding on the legislation intended to implement the Basel III international agreement on bank capital, leverage, liquidity, and risk management. This column argues that many officials, within Europe and beyond, severely underestimate the importance of this debate for reaching a global standard for financial regulation.

Election Special PostMoreLiver’s

Are Europeans Turning Against Austerity?PIIE
By focusing on tight spending rules at the national level, the Fiscal Compact leaves only centralized euro area level stimulus options available for European leaders. But such a development will help strengthen the “European center” and expand the availability of jointly guaranteed European debt.

Europe’s Misguided Search for GrowthProject Syndicate
Daniel Gros: The real bargain should not be austerity plus a Marshall Plan for the south, but rather continued austerity plus labor-market reforms in the south, combined with more infrastructure investment in Germany and other AAA-rated countries like the Netherlands.

Lies, Damned Lies And StatisticsMark Grant / ZH
What I find particularly difficult is what they are doing in Europe and continue to do because they are formulating systemic lies and they are doing it knowingly, purposefully; with the single motivation being to fool people. It can no longer be said that it is not systemic as the European Union does not object, has not objected, so that even Germany and the Netherlands and Finland have become accomplices to the schemes.

Are there any alternatives to austerity? Six ideas for fixing EuropeWonkblog / WP
1) More inflation from the ECB 2) More stimulus from euro zone countries that are in sound budget shape 3) Open the bailout fund for bigger countries 4) Eurobonds 5) More fiscal integration 6) Countries could just start leaving the euro zone

Operation Self-Deceit New Documents Shine Light on Euro Birth DefectsSpiegel
Newly revealed German government documents reveal that many in Helmut Kohl's Chancellery had deep doubts about a European common currency when it was introduced in 1998. First and foremost, experts pointed to Italy as being the euro's weak link. The early shortcomings have yet to be corrected.

A tipping point in eurozone crisis talkalphaville / FT
“Greece must be clear that it agreed to this rehabilitation program is no alternative, if it wants to remain a member of the Euro-zone,” As today’s FT notes, this was the first time the ECB had acknowledged in public the possibility of such an event.

Hope lies on the far side of a European Summer of DiscontentSaxo Bank
Steen Jakobsen: Denial, Protest, Mandate for change. Austerity was the denial that led to protests.

Europe edges closer to the endgame Credit Writedowns
Probably the most clear-headed article of the week: My belief all along has been that each nation in the euro zone is committed to its success. The European body politic has grown to support it as indispensible. Moreover, unravelling the euro is a very difficult task. And so, I believe political inertia alone will help see the euro through for most countries unless we see a catastrophic banking system collapse…Greece can’t make it. Greece will exit the euro zone. France has a mandate to redesign the institutional framework to include growth.

The Euro-Zone Becomes the Twilight ZoneRobert Brusca / ZH
You can impose austerity for a year or two… But not for a generation. In that sense Europe has no plan for Greece, or Spain or for Portugal. Its attempt to bully Greece by withholding funds it already agreed to advance them is act of desperation. It is an admission I think of how dangerous dissolution of the euro would be. Since there are no rules no one knows how it would go. You can be sure that given the risks, the remaining EMU members would make things as hard as possible on Greece to make them an example that would keep others from leaving.

Martin Wolf: What Hollande must tell Germany FT

German Central Banks Signals Willingness for Higher Inflation; Catastrophic Uncertainty vs. Catastrophic CertaintyMish’s
The irony is attempts to prevent what is certain (a eurozone breakup), unleashes the very “catastrophic uncertainty” they seek to prevent.

Europe’s problems multiplyMacro Business
Very nice overview. Overnight the EFSF board agreed to make an additional payment to Greece in order to keep it technically solvent for a few more weeks

The Comity of Europe: Ten PointsMarc to Market
With increased talk of a country leaving the euro zone, or even of the end of the whole project, it is worth sketching out our view. Here are the main points of our view of Europe.

Greece: Next Steps ZH
A key event over the next two weeks, during a time when Greece will most likely not have an active government in place is the May 15th maturity of €430 million in international-law bonds whose holders have not agreed to the terms of the
PSI and thus demand full payment... of money that Greece does not have…An actual default on these could lead us right back to the “disorderly” default scenario that so many people were afraid of.

‘Loosening’ the memorandum alphaville / FT
You can see how renegotiating the bailout would have come up at some point, as we reached 2015 without (in all likelihood) consistent primary surpluses from

European elections: The Greece questionFree exchange / The Economist
It's quite possible that the ECB will prove unwilling to accommodate a weaker commitment to short-term austerity…The irony, of course, is that it is the ECB's failure to aggressively ease in the face of continent-wide budget cuts that allowed those cuts to translate into a painful recession, which in turn fueled an austerity backlash.

Hope lies on the far side of a European Summer of DiscontentSaxo Bank
Steen Jakobsen: Denial, Protest, Mandate for change. Austerity was the denial that led to protests.

Europe edges closer to the endgame Credit Writedowns
Probably the most clear-headed article of the week: My belief all along has been that each nation in the euro zone is committed to its success. The European body politic has grown to support it as indispensible. Moreover, unravelling the euro is a very difficult task. And so, I believe political inertia alone will help see the euro through for most countries unless we see a catastrophic banking system collapse…Greece can’t make it. Greece will exit the euro zone. France has a mandate to redesign the institutional framework to include growth.

Greece is the WordTF Market Advisors
In spite of all the rhetoric, Greece will make the May payments. Whoever is in charge will get calls from Merkel, Lagarde, and Draghi warning them of the global carnage that would ensue if they miss those payments. I think in this case they are right. Missing €450 million of private sector debt and €3 billion owned by the ECB would likely cause a global stock market route of 5%

Perfect Storm: Part 2Macro Man
a) 70% of Greece's debt is now made up of official loans already disbursed: EUR 140bn. b) The ECB owns EUR 40bn of Greek bonds. c) Greek banks currently repo EUR 140bn with the ECB.

Greece’s Election: Tough Choices and a Sense of Déjà vuPIIE
Ahead of Greece’s new elections, the euro area and the Troika (the EU, the ECB and the IMF) will thus employ the Irish referendum strategy by rejecting Tsipras’s bluff and declaring the IMF program non-negotiable – and adding that a failure by Greece to adhere to it will cancel financial support and drive Greece from the euro area. We are already seeing this strategy put in motion

The Spanish Bank Bailout Begins ZH
"Spain may pump public funds into its banking system to revive lending and its recessionary economy, Prime Minister Mariano Rajoy said Monday, signalling a policy U-turn. The government had pledged to not give money to the banking industry that is struggling in the wake of a collapsed, decade-long, housing boom. "If it was necessary to reactivate credit, to save the Spanish financial system, I wouldn't rule out injecting public funds, like all European countries have done"

Bankia in the coalmine, looking like a dodoalphaville / FT
As with Spain’s other banks, there are serious doubts as to whether anything like the appropriate level of provisioning has been done for problem loans.

Get Ready for the Spanish BailoutEconoMonitor
Moreover, with economic indicators showing Spain sinking further into recession, a turnround in the country’s economic performance would require a significant shift in policy: monetary easing by the ECB, a weaker euro, fiscal stimulus in the core, less front-loaded austerity in the periphery, more international firewalls and debt mutualisation.

Spain nationalises Bankia as euro crisis escalatesThe Telegraph
Spain has nationalised crippled lender Bankia in a dramatic move to contain the esalating crisis and restore faith in the country's management.

Draghi Departs the Solar Systemnaked capitalism
I felt he sounded quite desperate about these points. In fact, his answers to additional questions made it clear he is fighting against a political machine that he may not have too much faith in. He is absolutely correct on this aspect of the matter, but his words sounded more like a plea than a policy statement...With economic delusion at one end and political ineptitude at the other, it is becoming increasingly difficult to be optimistic about the Eurozone’s future, even though I dearly wish it could work.

Is LTRO QE in disguise?
The ECB has managed a massive expansion of its balance sheet with long-term refinancing operations. This has been called the equivalent of quantitative easing, as done by the Fed and the Bank of England. This column thus argues that the main obstacle for the ECB is not tight limits on the purchase of government bonds. Rather, it is the absence of a banking and fiscal union and the heterogeneity within the Eurozone that reduces the effectiveness of the ECB instruments.

Buiter says bring out the helicopteralphaville / FT
Willem Buiter and Ebrahim Rahbari at Citi. Essentially, they want central banks to do more…. much, much more. (Full pdf, registration required)

On the Odds of an EaseBruce Krasting
I’m going to go against the consensus opinion. The Fed is on hold until December. We will not see another LTRO operation this year. If I'm right, what does it mean for those lines on that chart? Nothing good.

Watchful WaitingPIMCO
Today, the Federal Reserve itself faces an “unusually uncertain” period because it lacks a complete understanding of the potential side effects of its unconventional policy actions; in particular the elongated timeline of its zero interest rate policy and its massive money printing. What matters in shaping market expectations about inflation and deflation are the credibility of fiscal policy, the prospect for real economic growth and the central bank’s commitment to step back from the punch bowl.

Nine Takeaways From Earnings SeasonZH
Goldman Sachs: Despite the positive surprises, full-year 2012 EPS estimates are unchanged relative to the start of earnings season, and currently stand at $105 vs. our top-down forecast of $100. Over half of consensus 2012 earnings growth is attributed to 4Q. Margins at 8.8% have hovered near peak levels for a year, but consensus expects a sudden jump in 4Q to a new peak of 9.1%. We forecast a further decline to 8.7%.

“Sell in May” Debunked?MarketSci Blog
I’ve assumed that each year the investor only looked at the data available from 1930 up to that point in time, and invested in whatever 6 months of the year had been the best for stocks. This is called “walking the test forward”, and (to some degree) removes the benefit of hindsight.

The Evolution of “Sell in May”MarketSci Blog
I show how the stock market’s best 6 months of the year has evolved over the last 80+ years…

The Future of CapitalismMilken Institute / Global Macro Monitor
1h video: Niall Ferguson / Harvard, Ana Palacio / Spanish Council of State; former Minister of Foreign Affairs, Peter Passell / Milken Institute, Raghuram Rajan / Chicago Booth School of Business

Some genuine uncertainties Buttonwood’s / The Economist
I am sure that many people will assign some ideological bias to these questions but they seem to me to be reasonable issues with which policymakers, investors and voters must grapple, let alone the humble trade of columnists.  The absolute certainty with which some people proclaim on either side of these issues fills me with unease.

ETFs – The Next Accident Waiting to Happen? Golem XIV
I think that in a couple of years, unless something alters the current trends in money flows, we will come to know ETFs the way we already know the securitization and packaging of  sub-prime mortgages into CDOs

ETFs – Part 2 Golem XIV
Now lets look at how, as the ETF market has grown, the clever boys and girls of finance have found ‘innovative’ ways of pumping those ETFs up a bit, just like they did to Securities.

Fundamental review of trading book capital requirements BIS
Press release about the Basel Committee consulting on the fundamental review of trading book capital requirements: This consultative document presents the initial policy proposals emerging from the Basel Committee’s fundamental review of trading book capital requirements. These proposals will strengthen capital standards for market risk, and thereby contribute to a more resilient banking sector.  Full document: BIS (pdf)

Sympathy for the Flash Crash Aaron Brown / Minyanville
The entire modern world has become too complex for anyone to understand, and therefore, too complex for anyone to fix with top-down rulemaking.

Correlating Risky Assets The Aleph Blog
So as new asset or sub-asset classes are introduced, in the short-run they are uncorrelated, and likely rally, because few own them.  But after the rally, many now own it, and the future correlations are high because so many own it.  The correlations ultimately depend on two things: the underlying economics, and investor behavior.  Investor behavior is the dominant aspect of pricing.

JP Morgan Losses Special PostMoreLiver’s

People Are Losing Trust In All Institutions The Big Picture
Lack of Trust – Caused by Institutional Corruption – Is Killing the Economy

How Chicago house got its groove backChicago Reader
Chicago house music is the sound of global pop today. In the 90s, though, it was on life support—until a new wave of producers, including Cajmere and DJ Sneak, got the city doing the Percolator.

Update: Scale of the UniverseChart Porn
Cary and Michael Huang have updated their zoomable scale of everything (first seen in 2010). The graphics are nicer and smoother, they’ve replaced the annotations with a scale in the corner, and everything can be clicked on for popup detail.

The Purpose of Spectacular Wealth, According to a Spectacularly Wealthy GuyNYT
Unlike his former colleagues, Conard wants to have an open conversation about wealth. He has spent the last four years writing a book that he hopes will forever change the way we view the superrich’s role in our society.

Mindless With MoneyThe Psy-Fi Blog
We all know the feeling of mindlessness. You get it when you drive the same roads as usual and get out at the end not remembering anything about the journey, or when you eat a meal without tasting it, or leave a meeting without the faintest idea what just happened. Yet to everyone around us we’ve behaved just the same way we always do.

Two Years After The Flash Crash, Are Markets Any Safer?Forbes
…a cataclysmic plunge that seemed to defy all reason and pulled back the curtain on high-frequency trading for millions of investors who had no idea that computer-driven strategies account for the lion’s share of daily market volume.