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
EUROPE
Why the Olympics might let Draghi stay at the beach – alphaville
/ 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 failure – New
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.
EUROPE: PIIGS
For Italy, It Is Game Theory
Over – ZH
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 Italy – Testosterone
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 likely – UBS
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' plan – The
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.
ECONOMICS
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 Response – IMF
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 Psychology – big
think
Eight of the World’s Top Young Economists
Discuss Where Their Field Is Going
Risk-on/risk-off, capital flows, leverage and safe assets – BIS
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 macro – Free
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.
REGULATION
A Beekeeper's Perspective on Risk – HBR
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
TRADING
'Micro' Equity Focus Is Shifting To 'Macro' Bond Reality – ZH
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 Murder – Minyanville
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)
MARKETS
Cult Figures
– Bill
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 Derecho – Macronomics
/ MoreLiver’s