A combined post on multiple topics. Also check last night’s US Close: Bragging Rights for my narcissistic, childish joy
of calling the markets correctly. I will post my updated views later this weekend.
Previously on MoreLiver's:
Weekender: Weekly Support - weekly review and previews
Best of The Week - for the
good articles you might have missed
EUROPE
The Italian Conundrum – Re-Define
After Spain, it’s Italy’s turn in the
Eurocrisis spotlight. …The single biggest factor weighing on the Italian
economy at present is the uncertainty about whether or not the Eurocrisis will
be resolved.
The Eurozone crisis and exchange controls – Clifford
Chance
Contingency planning around the Eurozone crisis
inevitably turns to the possibility of
exchange controls, whether in the context of a default by a Eurozone
member state or a departure from the Eurozone. (hat tip Alea)
All in all Portugal may be in the invidious
position of finding that while it complies with most of its immediate programme
objectives the road to sustainable debt and growth levels to be fraught – as
the IMF itself notes in its April programme review – with almost insurmountable
difficulty. (presentation
here)
The Beginning of the Endgame – John
Mauldin / The Big Picture
While the problems in the US, Japan, the United Kingdom, and Europe all stem from too much sovereign (government) debt, there are very real
differences in how the Endgame plays out…If, somehow, some magic is found to
deal with the sovereign-debt and banking crisis, the trade imbalances will
still be there. And the only realistic way to deal with them is for wages to
come down in peripheral Europe. And that will not happen overnight.
Weaponization of Economic Theory – Michael
Hudson
Europe’s three needs: a debt write-down, a real
central bank, and a more efficient tax system...The U.S. Government as well as
European governments have taken bad bank debts onto the public balance sheet.
This is not a problem for the United States, whose Federal Reserve can simply create the credit to roll over its
debt. But for Europe, public debts simply cannot be paid under current central bank
constraints. Instead of changing the central bank rules, the European Union is
willing to plunge the continent into depression and economic shrinkage.
Catch-22: the craziness of saving the euro – Opinion
/ FT
It is a European Catch-22. To believe the
eurozone can be saved, you must be crazy. But if you don’t try to save it, you
are no less crazy – which means you must keep believing something mad.
Armageddon is looming - The Eurozone crisis is
entirely self-inflicted and policy-driven Presentation
slides pdf
A massive drop in the ECB Deposit Facility
balance is due to zero rate – Sober
Look
Decline in Spanish banks' contribution to the
ECB Deposit Facility –
Sober
Look
Devaluation and internal adjustment of the real
exchange rate – bruegel
3 reasons Eurozone's investors love Danish bonds
– Sober
Look
Lack of FX
risk, fundamentals (low debt & deficit), outside Eurozone
What next for European MMFs? – alphaville
/ FT
Fee waivers and duration extension, according
to Fitch’s Fund & Asset Manager rating group.
The effects of fiscal shocks on the exchange
rate in the EMU and differences with the US – Bank
of Spain (pdf)
Assessing the anchoring of longer-term
inflation expectations – ECB
(pdf)
Monetary and fiscal policy interactions in a
monetary union – ECB
(pdf)
The effectiveness of monetary policy in
steering money market rates during the financial crisis – Bundesbank
(pdf)
Revisiting the effective exchange rates of the
Euro – ECB (pdf)
The PHF: a comprehensive panel survey on
household finances and wealth in Germany – Bundesbank
(pdf)
USA
Bernanke should end this uncertainty about the
Fed – Gavyn
Davies / FT
Either of these conditions was sufficient for additional easing, but both have now been met…It does not follow that the chosen path will necessarily involve an increase in the balance sheet, but it is likely to do so if the Fed follows the thinking of several of the doves and buys mortgage securities. Another round of forward guidance about rates is also very likely…The next FOMC meeting starts on 31 July.
Either of these conditions was sufficient for additional easing, but both have now been met…It does not follow that the chosen path will necessarily involve an increase in the balance sheet, but it is likely to do so if the Fed follows the thinking of several of the doves and buys mortgage securities. Another round of forward guidance about rates is also very likely…The next FOMC meeting starts on 31 July.
The key is to find a path for expenditures and
revenues that avoids the so-called “fiscal cliff” in the near term but that
firmly reduces the trajectory of the debt over the medium to long run. Without
such a solution, we leave ourselves vulnerable to the vagaries of sentiment in
the bond market, thus opening the door to an unwelcome set of severe financial
risks.
Very nice
charts, includes downloadable data
Is QE3 coming? – Econbrowser
Conditions have changed since January, and we
might expect some additional stimulus from the Fed at the next FOMC meeting.
Fed's Lockhart on Monetary Policy – Calculated
Risk
On Friday afternoon, one of the undecided FOMC
members, Atlanta Fed President Dennis Lockhart appeared to move closer to voting for QE3
now.
ASIA
FT podcast: Left behind in Japan and China – The World / FT
World
Weekly with Gideon Rachman: The economic challenges and changes facing the
young "ice age generation" in Japan, and the "post-1990"
generation of Chinese youth. (16 min)
we see very few signs that points to
recovery. The consensus of a second half
rebound is, in our view, based entirely on the faith on the government’s
ability and willingness to stimulate the economy.
STOCK MARKET
Earnings Get a Little Better – Bespoke
But over the past two days the reports have
gotten better. Of the last fourteen
companies that have reported, ten have beaten estimates. So while the total beat rate for the entire
week remains low (11 out of 30), things look a lot better now than they did
mid-week. The market appears to have
noticed this as well.
Impossible Earnings Season Stepfunction – ZH
Goldman
Sachs: Our 2012 investment thesis for the
US equity market has three pillars: a stagnating economy, static P/E
multiple, and minimal earnings growth.
Beware of your residuals – macrofugue
Increasing correlation amongst markets is
likely a reality given a more synchronised business & policy cycle. But that doesn't mean the outcomes in their
stock markets will even be remotely similar.
OTHER ASSETS
A look at forecasts for peak oil – and the end
of civilization – Fabius Maximus
A common concern in the comments expresses fear
of resource exhaustion, perhaps even leading to collapse of civilization. Here
we examine the theory, evaluate the risks, and point to sources of more
information.
Pricing nature's freebies – Babbage
/ The Economist
All these are “ecosystem services”, provided by
nature to mankind at no cost. Push nature too hard, though, and this generosity
may end.
Combating Widespread Currency Manipulation – PIIE
China is not that different from many
others. A quick & easy summary in WP’s article.
Currency Outlook and Positioning – Marc
to Market
Global growth and the European debt crisis
continue to be the two main factors shaping the investment climate…More
important than the economic data and bond auction are the political
developments around the debt crisis. Two stand out. On Thursday, the German
Bundestag debate aid for Spain. Chancellor Merkel
will attend and Finance Minister Schaeuble will speak. The euro area finance
ministers will meet on Friday and will likely approve the funds for Spain.
Housing Bubbles and Interest Rates – Swiss
National Bank (pdf)
PORTFOLIO
The Cross-Sectional Profitability of Technical
Analysis – Turnkey Analyst
Unlike existing studies that apply technical
analysis to either market indices or individual stocks, this paper apply it to
volatility decile portfolios, i.e., portfolios of stocks that are sorted by
their standard deviation of daily returns.
Major Asset Classes: Ex Ante Risk Premia | June
2012 – The
Capital Spectator
With the history lesson out of the way, let’s
take a stab at estimating ex ante risk premia for the major asset classes and
GMI.
A Horse Race Between Tactical Asset Allocation
Models – Empiritrage
We conduct a horse race with various tactical
asset allocation (TAA) models. We present the performance of 8 different models
applied to the “IVY5” asset classes (Domestic equity, foreign equity, long
bonds, commodities, and REITs)… the top performing TAA model is the risk parity
with momentum model. This model starts with the risk parity benchmark weights
and then shifts weights across asset classes depending on relative momentum. (see also The King of Asset Allocation Models – Turnkey
Analyst)
Leon Cooperman on 14 Attributes That Make a
Good Portfolio Manager – market
folly
REGULATION
The Market Has Spoken, and It Is Rigged – Simon
Johnson / Baseline Scenario
Power corrupts, and financial market power has
completely corrupted financial markets. Barclays and the other global mega-banks
involved in fixing Libor have brought their own industry very low – completely
destroying the legitimacy on which sensible financial intermediation needs to
be based.
Always Ask a Banker to Put the Lie in Writing – View
/ BB
If we take Bob Diamond and Paul Tucker at their
word, part of the Libor scandal at Barclays Plc
can be chalked up to a series of comic misunderstandings, like a children’s
game of telephone. It’s a bit much to swallow, but the spectacle sure has been
fun to watch.
Only Government Intervention Can Stop Corrupt
Capitalism – The
Atlantic
After scandals at Barclays and GlaxoSmithKline,
it's clear that a no-regulation approach to markets won't work.
Will regulators get it right on the Volcker
Rule? – Wonkblog
/ WP
Bank regulation and the future of banking – BIS
(pdf)
Visa, MasterCard, banks in $7.25 billion retail
settlement – Reuters
Visa Inc, MasterCard Inc and banks that issue
their credit cards have agreed to a $7.25 billion settlement with U.S. retailers in a
lawsuit over the fixing of credit and debit card fees in what could be the
largest antitrust settlement in U.S. history. (nobody goes to jail)
The Spreading Scourge of Corporate Corruption – NYT
PSYCHOLOGY
Threaten a man's masculinity and he becomes a
short-sighted risk taker – The
British Psychological Society
A Tall Tale of Risk Aversion – The
Psy-Fi Blog
Bigger
things are deemed more valuable than smaller ones by our monkey brains. This
includes other people – and even our self-image.
HEDGE FUNDS
Market neutral vs. quant funds - recent trends – Sober
Look
It seems that institutional investors (and fund
of funds managers) continue to support the so-called "market neutral"
strategies… so-called "Quantitative" (Quant) directional strategies
(with Renaissance Technologies being the most famous) have been on a decline.
Mastered by the universe – Buttonwood
/ The Economist
It is turning into another difficult year for
the hedge fund industry. A survey by Globeop found that, in June, funds
suffered the largest withdrawals in assets since October 2009.
Are Hedge Funds Burning Investors? – Pension
Pulse
Hedge Funds Underperform The Stock Market – ZH
Citi's recent study on risk drivers shows the
high-beta momentum trade has become by far the most crowded trade around
OTHER
Aaron Brown: Much of the early success of quant traders was due to proper allocation of capital rather than finding exceptional edges…Quantitative analysis of optimal risk levels for traders did not kill the financial system. But it set events in motion that led to the murder.
Warren Buffett Discusses Just About Everything
– PragCap
The Best Investment Advice George Soros Ever
Gave – Williams
/ Seeking Alpha
Economic history is a never-ending series of
episodes based on falsehoods and lies, not truths. It represents the path to
big money. The object is to recognize the trend whose premise is false, ride
that trend and step off before it is discredited.
How This Journey Was Launched – Chicago
Sean
The story
of one trader’s beginnings.
Former investment banker: 'I saw many people
cry' – The
Guardian
An ex-investment banker at a major bank tells
Joris about redundancies, the recent crisis and Stockholm syndrome
The Machine and the Garden – NYT
Call it the “Machinebrain” picture of the
world: markets are perfectly efficient, humans perfectly rational, incentives
perfectly clear and outcomes perfectly appropriate. From this a series of other
truths necessarily follows: regulation and taxes are inherently regrettable
because they impede the machine’s optimal workings. Government fiscal stimulus
is wasteful. The rich by definition deserve to be so and the poor as well.
Capitalism’s Brave New World – Weekly
Standard
We have seen the future, and it microtasks
Book Bits – The
Capital Spectator