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Friday, August 3

3rd Aug - Weekender: Best of The Week

Surprisingly strong Friday, even though there was general disappointment over the inaction of the central banks. Anyway, here are the best picks from the ending week’s posts. Notice that the central bank articles can be found in dedicated posts Special: ECB WATCH and Special: FED WATCH. The ECB is more important to understand right now.

My own commentary:

main events of the week

Why the Olympics might let Draghi stay at the beachalphaville / FT
UBS notes that while the calendar seems empty, there are plenty of sources for surprises. Full doc: Long Room / alphaville / FT (pdf), registration required.

Spiking Skywards? Tackling rising yields in the Eurozone re-define
The discussion in this policy brief has focussed on what can be done in the near-term. The fundamental problems we face are two-fold. First, whatever is economically workable does not seem politically feasible and second, that without a broader more comprehensive solution to the Eurocrisis any steps to address spiking yield would only have a temporary impact.

Europe: another round of failureNew Economics
A solution to the ongoing crisis looks increasingly beyond the powers of the eurozone's creaking authorities… Finland is a plausible candidate for its own euro-exit. Elsewhere, the balance of costs and benefits turns against membership. Disintegration looms large.

The euro is coming to an end Die Welt / presseurop
Draghi, Merkel, Hollande and Juncker may be fond of standing behind the euro in a demonstrative display of unity. It no longer makes sense, writes the Die Welt am Sonntag. Europe's differences are too big for a single currency.

Banking Union Is Last Gambit to Save Euro Dream View / BB
The vision of a Europe without nations, with nothing to kill or die for, is very valuable. Although imagining it isn’t hard to do, building it is. By stating the vision, the euro’s fathers claimed all the glory. The difficult details were left to their successors, who must now either make good on Europe’s promise or recognize that this wonderful project was premature and try to unwind it in the least costly way.

For Italy, It Is Game Theory OverZH
Bank of America’s excellent piece, full pdf here.

Italian Euro Exit: why it might come in 2-3 years and why it will help the Eurozone and ItalyTestosterone Pit
We think that Italy, as opposed to Argentina in 2001 and Spain today, would survive a euro exit without big problems…If Italy, however, does not leave the euro zone, both Italy and Germany run the risk of long-lasting balance sheet recession, in which both consumers and firms try to reduce debt and consume less, Germans in the fear of future German liabilities via the ESM, Italians in response to more and more austerity measures. Hence an Italian Euro exit would really help the euro zone.

Ray Dalio Issues Stark Warning: Spanish Collateral Is Running Out ZH
The attempt to manage the imbalances among the Euroland economies is an extremely dangerous highwire act, and to the extent that monetary policies diverge to serve individual countries' needs, the further capital flows will likely go in the opposite direction.

Greek euro exit: near-term risk, medium-term likelyUBS
Global Risk Watch latest edition: see a 20-25% of probability that Greece will leave the euro in 2012, and a greater than 50% probability that it will leave within the next 12 months (link omitted)

ECB could take haircut on Greek bonds in 'last chance' planThe Telegraph
Central banks across Europe are facing more huge losses under the terms of last-ditch efforts being made by EU authorities to keep Greece in the eurozone by slashing the country’s debt exposure.

Monetary policy transmission in the euro area, a decade after the introduction of the euro (May 2010) – ECB (pdf)
Highly topical, notice the date (two years old)

IMF Tracks Fiscal Rules Used in Crisis ResponseIMF
Growing number of countries now have fiscal rules in place - "Next generation" fiscal rules better account for economic shocks - New IMF dataset covers fiscal rules in 81 countries

Empirics and Psychologybig think
Eight of the World’s Top Young Economists Discuss Where Their Field Is Going

Risk-on/risk-off, capital flows, leverage and safe assetsBIS
Thus, calm periods, marked by leveraged investing in emerging markets, lead to an asymmetric asset swap (risky emerging market assets against safe reserve currency assets) and leveraging up by emerging market central banks. In declining and volatile global equity markets, these flows reverse, and, contrary to some claims, emerging market central banks draw down reserves substantially. In effect emerging market central banks then release safe assets from their reserves, supplying safe havens to global investors.

Rethinking macroFree exchange / The Economist
We learned a hugely important lesson from the Depression—that central banks could influence the economy and prevent demand-side macroeconomic disasters. But we took a wrong turn in thinking that the way they did this was by moderating inflation. It was as if we discovered a magical sword in the woods and then went about confronting enemies by whacking them with the sheath. We can move past this intellectual limitation. Monetary policy can influence demand, plain and simple.

A Beekeeper's Perspective on RiskHBR
The honeybee colonies I was cultivating were structured for consistent long-term growth and the prevention of severe loss due to unpredictable environmental surprises. Bees are masters at risk management.

Rating agency worker: 'I am genuinely frightened'The Guardian
The global meltdown terrified the City. But many are more worried that no controls have been introduced since 2008. This monologue is part of a series in which people in the financial sector speak about their working lives

Internal auditor at a major bank: 'In the US they can be very uncooperative'The Guardian
Joris talks to an auditor about long hours – and how seniority and levels of job security affect levels of co-operation

'Micro' Equity Focus Is Shifting To 'Macro' Bond RealityZH
Goldman Sachs measures and comments market impacts of different economic indicators: The equity market shows about twice as much sensitivity to macro data as it did in the years before the financial crisis. We suspect this will remain the case until the US and global economic outlook becomes considerably clearer.
Things Investors Should Hate – The Psy-Fi Blog

Checklist of Errors The Big Picture
Many high-quality, experienced advisors tend not to do a great deal of mentoring (though there are exceptions) because the turnover among new advisors is so high it isn’t a good investment of time.  Given that dynamic, I thought I would try to set down some advice to a new advisor to try to spare them, and their clients, some of that learning curve.

Whodunit? Part III: The MurderMinyanville
Regulations led to creation of huge risk management bureaucracies in banks, staffed mostly by people with no experience in taking risks. These organizations encouraged undercapitalized risk taking—overreaction to short-term gains and losses. They insisted on an equity cushion for losses that was going to disappear any time it was needed. If there is a quant culprit to the financial crisis, this is the quantitative misunderstanding that killed us. (Part 1 and Part 2)
Cult FiguresBill Gross / PIMCO
​The long-term history of inflation adjusted returns from stocks shows a persistent but recently fading 6.6% real return since 1912. The legitimate question that market analysts, government forecasters and pension consultants should answer is how that return can be duplicated in the future. Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades.

Credit Guest: European DerechoMacronomics / MoreLiver’s