Picks from my ending week's posts (previous Best of The Week here).
Previously on MoreLiver’s:
Dr Thomas Mayer is Senior Fellow at the Center of Financial Studies at Goethe University Frankfurt and Senior Advisor to Deutsche Bank’s management and key clients. From 2010 to 2012 he was Chief Economist of Deutsche Bank Group and Head of Deutsche Bank Research. He has previously held positions at Goldman Sachs and the International Monetary Fund. (audio mp3, presentation pdf
A systemic Eurozone breakup would be the mother of all financial crises. This column – a rejoinder to Hans-Werner Sinn’s recent column – agrees that Germany would lose massively from a breakup, but argues that the ultimate source is the €600 billion current account surpluses it ran with other EZ nations during the good years, not the TARGET2 system. German banks lent vast amounts to peripheral countries without doing a proper credit analysis. No-one other than Germany itself is responsible for taking on these risks.
The rough conclusion is that even in the event of a catastrophic Eurozone meltdown, the Bundesbank would be just fine (at least in accounting terms) because it would end up as the de facto sole owner of the ECB. The German people would be less so, since the value of domestic and external assets would take a pummeling, but that’s not the fault of Target2.
Cyprus could soon seek aid from the European Union's bailout fund. But according to a secret report by Germany's BND intelligence service, the aid might mainly benefit Russian oligarchs who have parked illegal money in bank accounts in Cyprus, SPIEGEL has learned. Russian deposits there total $26 billion.
Greece: exit still on its way, only write down reduces debt sufficiently Ireland: No growth, debt on unsustainable path Spain: probably pushed into a full troika programme, when bailout cash runs out, Spain could lose market access and restructure.
Jens Nordvig: Conversations about the breakup of the Eurozone are changing. This column argues that an 'avoid breakup at all costs' dogmatism may not be a prudent view. Getting good data may well be difficult, but any arguments about the cost of a Eurozone breakup must be compared to the ongoing cost of the status quo.
"Of course the European Commission will one day become a government, the EU council a second chamber and the European Parliament will have more powers. But for now, we have to focus on the euro and give people a little bit of time to come along," she said.
Spain’s fiscal management seems to increasingly be a case of plugging holes, watching new ones appear, ignoring them, then relenting and also plugging those… all while delaying a clearly inevitable request for assistance from Brussels.
Yes, I remain a Euroskeptic. Maybe it is just in my blood. Europe still looks ugly, and will continue to be so for the next year at least (I tend to think wave after wave of austerity will push the Eurozone into a multi-year malaise, but let's just take it one year at a time for now).
Upholding euro membership has by now become an act of cruelty. It is not being done in the interests of Greeks. It is being done for the Project, by enforcers of the Project.
James Hamilton: The most likely eventual outcome seems to me to be much more modest tax increases and spending cuts than implied by the full “fiscal cliff” scenario. A key question is then whether political brinksmanship, particularly the strategy of first going off the cliff before trying to find a way back up, could in and of itself exert significant costs.
GS: Capital gains and dividend taxes have garnered less attention than other parts of the Fiscal Cliff. However, with those taxes scheduled to rise at year-end based on current law, our conversations with clients show a renewed sense of urgency as the deadline approaches.
First, let us discuss the Cliff that no one else seems to want to acknowledge - The Earnings Cliff! This is a very real phenomenon that is very dangerous for both stocks and the economy as a whole - corporations facing a deceleration in earnings growth or an outright drop in year-over-year profits DO NOT INCREASE SPENDING AND HIRING.
The US fiscal cliff is clearly on people's minds and is quickly becoming the dominant concern in the financial community. If this survey were conducted today, the percentage of participants who would view the upcoming budget cuts and tax increases as the main risk to their portfolios would increase sharply. In fact, based on Google Trends, the public's concerns about the US fiscal cliff have spiked recently.
UBS believes that if the US economy dips into recession next year, operating earnings—which are near peak levels—could easily plunge by a fifth.
Goldman’s longer notes
GS: The rapid rise of corporate leverage to 130% of GDP in 2011 - one of the highest corporate leverage ratios in the world - is concerning.
ECONOMICS / BANKING
SocGen’s client note.
Forty years of crises across 36 EU and OECD countries. They found that while house and share price falls offer a ‘late” early warning of the onset of a crisis, the best leading crisis indicator is “growth in domestic credit to the private sector”.
In the discussion of whether the largest US financial institutions have become too big, a sea change in opinion is underway. Indeed, the only people still arguing that these organizations can be managed in a way that generates sustainable value for shareholders and keeps taxpayers out of harm’s way tend to work for them.
This article takes a short critical look at the figures the banks use in order to say how vitally important they are. As we all know it has been, throughout the bank debacle, important to the Banks that they be able to say how central they are to the economy of every nation. It forms the first line of defence in arguments over the bail outs.
UBS: Stocks tend to experience very long periods (5-20 years) of either anemic or exceptional returns… Investment Regimes are defined by secular multiple expansion or contraction… Over the past two years, the key metric for valuing stocks has shifted from investment grade to non-investment grade yields. Given the fiscal situation in both the U.S. and Europe, we believe that this regime will likely persist until structural imbalances are meaningfully addressed by policymakers.
If markets go more into risk-off heading into the winter, long-term investors should be looking to switch more into risk-on trades.
QUANT / TRADING
Factor analysis, machine trading, most excellent magazine issue
We find the striking result that the average correlation among these stocks scales linearly with market stress reflected by normalized DJIA index returns on various time scales. Consequently, the diversification effect which should protect a portfolio melts away in times of market losses, just when it would most urgently be needed. Our empirical analysis is consistent with the interesting possibility that one could anticipate diversification breakdowns, guiding the design of protected portfolios.
Everyone worries about hedge funds all doing the same trades and being correlated with each other and this paper is sort of loose evidence of that: there are anomalies in market efficiency, and they are not “publicly known” to the academic literature, but they are correlated with each other, perhaps suggesting that enough people know about them to all be trading them together.
Founder and Former Chief Executive of the Vanguard Group and President of the Bogle Financial Markets Research Center Before the United States Senate Governmental Affairs Subcommittee on Financial Management, the Budget, and International Security 3-Nov-2012
How did the international drug control system arise, why has it proven so durable in the face of failure, and is there hope for reform? David Courtwright is professor of history at the University of North Florida. Nigel Inkster is the former director of operations and intelligence for MI6. William McAllister is special projects director at Office of the Historian, US Department of State. Ethan Nadelmann is founder and executive director of the Drug Policy Alliance. Slides: McAllister (pdf) and Courtwright (pdf)
The author of a history of MI6 tells us about the evolution of the secret intelligence services, their representation in fiction, and the man Fleming may have had in mind when he created James Bond
(1988) – City
Jotkut osaavat tulla näyttämölle oikeaan aikaan, toiset poistua sieltä maineensa kukkuloilla. Kuningas osasi molemmat.
City (1989) –
Arctosin osakesalkun ryöstöstä tuomittu nuori optiokauppias puhuu muun muassa ahneuden rajoista aikana, jolloin kaverille ei jätetä.
Suomalaisista työeläkejärjestelmää mainostetaan maailman parhaaksi. Sitä on jopa ehdotettu suomalaiseksi vientituotteeksi EU:ssa. Olen 30 vuoden aikana erilaisissa tehtävissä läheltäkin seurannut työeläkejärjestelmän tapahtumia ja epäilys näiden mainospuheiden paikkansapitävyydestä on suuri. Työeläkejärjestelmä onkin monella tapaa epäonnistunut, ajastaan jälkeen jäänyt rakennelma. Sen ongelmia ei vain uskalleta sanoa ääneen.
Näin Wahlroos ratkaisisi pankkikriisin kahdessa viikossa – IS
EKP:llä on keinot ja ehkä kiusaus painostaa Espanjaa anomaan muiden euromaiden tukiohjelmaa niin kuin kaksi vuotta sitten Irlannissa. Espanja ei kuitenkaan ole Irlanti – vaan niin suuri, että sillä on itselläänkin kiristyskeinoja käytössään. Kujanjuoksu on alkanut, mutta kumpi vie ja kumpi vikisee?
Politrukkien palkkiomatkoilla on pitkät ja kunniakkaat perinteet kepussa - aivan kuten ikävistä sotkuista annetuilla selityksilläkin. Silti jokin Las Palmasin -matkassa haisee, kirjoittaa Pekka Ervasti blogissaan.