It is the last trading day of the year and no-one will miss the 2011. On the other hand, 2011 probably has been much kinder than 2012 - but how much of the coming real-world carnage has already been priced to EUR, European bonds and CDS-prices? My guess is 2012 will be very, very bad year for people in the real world and less so to people living ahead of the curve - i.e. the markets. I plan to post a special year in review (and preview) during the weekend.
Either the American way (states can default) or the socialist way (risk of all public debt is socialized)
Yes, the Market is Getting What it Wants. The ECB is Easing. – MarketBeat / WSJ
Of course, you can’t escape the cyclical nature of this solution. The ECB is propping up the banks, and the banks are keeping the euro zone governments afloat by buying their debt. If it doesn’t sound sustainable. And it might not be. But it seems that the markets at least see a path for muddling forward in Europe, which wasn’t clear just a few weeks ago.
European Fiscal Zombies – Krugman / NYT What we have now is the result of the crisis, not of fiscal profligacy before the crisis.
ITALIAN AUCTION
Italy Sells Long-Dated Bonds To Weak Demand, 10 Year Prices Just Inside Of 7%, Bids To Cover Miss – ZH
Goldman Says Good Riddance to 2011 – ZH Adverse shocks weighed on global growth in 2011…A fragile global growth picture for 2012, still vulnerable to shocks
In love as in equities, we are fooled by randomness – John Kay
I should have consulted the poet Wendy Cope, who wrote that: “Bloody men are like bloody buses – / You wait for about a year / And as soon as one approaches your stop / Two or three others appear”.
The protest movement, born from outrage over apparently manipulated parliamentary elections earlier this month, has gained both momentum and magnitude across Russia. The ruling tandem is taking note and, without admitting it, making concessions.
Predicting Recessions: A New Approach for Identifying Leading Indicators and Forecast Combinations · Predicting the Small Stock Premium Over Different Horizons: What Do We Learn About its Source? · Forecasting Bond Risk Premia Using Technical Indicators · Analysts’ Earnings Forecast, Recommendation and Target Price Revisions · Do Stock Prices Influence Analysts’ Earnings Forecasts? · How Does the FOMC Learn About Economic Revolutions? Evidence from the New Economy Era, 1994-2001 · The Wisdom of Competitive Crowds · Do Commodity Futures Help Forecast Spot Prices? · Forecasting the Price of Oil
Read the TF Market Advisors' second link. Something bad is about to happen. The LTRO fiasco is now plainly visible, with almost all the newly lent money parked right back to the ECB. Maybe, just maybe it is sitting there over the end of the year, but equally likely is that now the eurocrats and especially the ECB have lost the game. They have done everything short of full-blown backstop and still there is no appetite for bonds.
There is an Italian bond auction on Thursday. It will be very, very closely watched.
Quote of the day: When the water rises, so does the boat – Hagakure
Again very little material, as the holiday period rumbles on. Most blogs and major media outlets (alphaville, voxeu.org etc) are away and back after this sorry excuse of an year is over.
All indications point to 2012 being a turning point year of unrelenting economic crises spreading outward from Europe and the US to Asia and its dependencies in Africa and Latin America.
Václav Havel's Funeral: Why Truth Needs Love – Reason
Very little material, probably the whole week will be one big holiday. The main news are the numbers from the ECB – most of the LTRO funding went back to ECB, not towards credit expansion or buying the bonds so that the ECB could have taken a break from SMP..
LTRO money deposited back to ECB – Spiegel, ZeroHedge and ZeroHedge. LTRO money was almost all parked back to ECB. No wonder PIIGS bonds were again a case of “buy the rumor, sell the news”.
Hello, happy Mondays Tuesday! (I ate too much and can't think straight) Italy’s bond yields went above 7%, the show is still on and nobody is leaving the theater any time soon.
Christmas Day and even the manufacturers of quality collateral, eurocrats and domestic security agencies are on a holiday. Some very nice articles in this post, but also notice my earlier Holiday Readings and Best of The Week.
Here are my ideas for a headline on Barclays' rumored copper debacle:
Howdy-ho! Here are the selected links from this week's posts. A Weekender-post coming up later today.
EURO CRISIS
ECB exposure to struggling eurozone economies has surged by 50% in six months; ECB unlikely to act as lender of last resort – Open Europe
ECB should not, will not, cannot backstop. ECB’s balance sheet expansion has made banks reliant on it and a long-term threat has been created. Restructuring is needed. The article link is to a summary, full pdf here and Zero Hedge’s short summary here.
Here are my more laid-back holiday link suggestions I’ve come across during my blogging – only a few of these have been featured in my links. With this curated list I wish all my readers happy holidays and decency among humans. All feedback is much appreciated, it is always nice to hear what I am doing right or wrong with this blog.
Happy Fridays. Today's market advice: remember Eddie Murphy in the movie Trading Places? See the video for golden market advice. Holiday reading-post coming soon.
During 2012, the euro area is likely to see a new and considerably more credible set of fiscal rules and budget oversight regulation. This has been a clear and understandable demand from the ECB and Germany. But while the new fiscal compact will undoubtedly help stabilize the euro area, it must not serve as the end of the institutional reforms needed by the region.
How Long Do Housing Cycles Last? A Duration Analysis for 19 OECD Countries · End in Sight for Housing Troubles? · The Role of Capital Gains Taxes in the Housing Bubble · Household Balance Sheets, Consumption, and the Economic Slump · What Fuels the Boom Drives the Bust: Regulation and the Mortgage Crisis · Real Estate Bubbles and Weak Recoveries
Still some LTRO commentary, but the talk is definitely returning to business as usual - i.e. fear & loathing. Standard Thursday's "Back to School" coming out later, and a Holiday Readings, (almost) completely off-topic links to both old and new articles that I've found interesting.
I've posted a lot of stuff previously on LTRO during the past week or so, here are today's stuff. Evening post later.
- MoreLiver
BEFORE
Banks Will Still Be Under-Capitalized, UBS Does The LTRO Math – ZH UBS: it is highly likely that any term profit and loss improvement seen by banks will fall short of providing enough punch to resolve the issue of bank undercapitalization by the end of June 2012.
I plan to take a holiday break from posting, the LTRO reactions and a X-mas reading package are at least coming still. We will see if TROLOLO will save the world.
Big day tomorrow – how much are the banks going to take LTRO from ECB at 1% interest for three years, and how much of that money will find its way into the “Sarko Trade” i.e. periphery bonds. Today a dedicated section on “Sarko Trade” to sort you out.
Have you noticed that LTRO letters can be used to form TROL? I barely managed to resist the urge to link to a trololo song on youtube. I think I’ll save that for later. Barroso, van Rompuy and Merkozy are soon going to troll us all, and the only rational response to that will be either cake'em or troll'em.
Quote of the Day:What will happen if a punished country refuses to pay? The answer is probably nothing – Dominique Strauss-Kahn skeptical on the proposed EU intergovernmental treaty.
Good morning! Past weekend’s two deaths have put me in a surprisingly good mood. No-one will miss the Dear Leader – except (maybe) his family and lovers of status quo. Of course, succession plays are always question marks and what the markets really don’t want right now is more uncertainties. Risk-off in Asian equities and nervous meetings in White House's situation room and whatever they have in Beijing and Seoul.
Many will miss Havel, including me, but in a way he became immortal long ago. His peaceful, intellectually honest approach set an example that is now quoted and remembered as he has passed away. Havel's way is something that the world needs right now maybe more than ever.
The legendary 'Transputer' files were once available in one place, downloadable and all. Not surprisingly, the contents were removed because of copyright issues. Those who used DownThemAll-Firefox extension were wise in the face of inevitable. Disclaimer: I have not read all of these. You can follow me on Twitter and Facebook and email me for suggestions and requests.
Hello there! Again a massive Weekender linkfest. After the dust has settled, the true importance of the EU meeting is now understood. The dirty unpopular politics have been outsourced to the ECB. ECB alone decides what collateral it accepts and what haircuts it will use. With the unlimited 3-year LTRO it is hoped that a circular solution would be found – banks loan money from the ECB, buy Italian and Spanish bonds and deposit these back to the ECB. Liquidity problems solved! PIIGS survive!
This is the so-called Sarko-trade (or Corzine trade). Understanding its rules and limits is key to understanding the short-term developments of the European crisis. The banks need all the liquidity they can get and might not be interested in new bond purchases from the primary (=auctions) or secondary markets.
If banks would do the Sarko-trade in size, they would also become even more exposed to the ECB’s whims. This means the ECB and the governments could easily pressure them later to e.g. take "voluntary" writedowns (=PSI).
The recipient countries of these Sarko-trades would also be in a difficult position. If the level of fiscal austerity, technocratism and lack of criticism is not at a high level, ECB might increase the haircuts on those sovereigns and de facto bring down that country's financing. This is not folio hat stuff - ECB already kicked out Berlusconi - and if they could kick him out, they can get rid of anyone. The politicians know this and will prefer playing along.
We had a decade unlike the others. Now it is back to 'business as usual'.
Then to this weekend's wonderful links. Given the editorial, a dedicated section on the Sarko trade and a new Views with market analysis and opinions from sources that are, well, authoritative.
Here are the "Best of The Week"-links, from Friday to Friday. A longer "Weekender"-post is coming tomorrow. You can follow me on Twitter and Facebook and email me for suggestions and requests. Watch your leg - the eurocrats are cooking.
Quote of the day: It is as much a tale of over lending as it is of over borrowing and, just as nobody should feel undue sympathy for those who miscalculated the amount of debt they could service, nobody should feel for those who miscalculated their lending risks. –Joshua Rosner
· Implied Risk Premium and the Business Cycle: You Can’t Always Get What You Want · Do Mood Swings Drive Business Cycles and is it Rational? · When Credit Bites Back: Leverage, Business Cycles, and Crises · Confidence Matters for Nowcasting GDP: Euro Area and U.S. Evidence from a PMI-Based Model · Skyscraper Height and the Business Cycle: International Time Series Evidence · The behaviour of small cap vs. large cap stocks in recessions and recoveries: Empirical evidence for the United States and Canada
European team players in action: French central bank governor Noyer says the threat of downgrading France is political, and given the numbers, U.K. should be downgraded instead. Great stuff from one of the most crooked central bankers of the Western world. Do not hit me for my sins, hit my friend instead.
The Swedes and the British had the nerve not to join a currency union twice. One catastrophic failure under German rule was enough for them. This is the habit of successful empires and people – they learn from their mistakes. The losers are like the Empire from the Star Wars: they keep building new Death Stars just to have it explode again in the sequel.
Research round-up coming up later today. Have fun with your not voted choices and unelected representatives!
I'm throwing more and more material out. I believe most of the stuff on blogosphere today has already been said, and I am not going to waste my or your time on repetition.
Quote of the Day: "Van Rompuy likes to alternate between his two pet lies. 1. ECB will step up bond purchases, 2. Eurobonds are coming. Someone needs to stand up to Herman Van Rompuy and call him a disgusting liar straight to his face in an interview." – Mish’s
Quote of the day: Last week was the week we finally put Europe behind us, at least for the rest of the year — unless Europe turns out to be like the classic horror-movie monster that constantly rises from the dead to wreak havoc again just when the audience and/or heroine thinks all is safe. It’s certainly had that sort of track record so far this year. – WSJ / MarketBeat
Markets have spoken, and are not very happy with the summit. The euro, bond yields and stock markets all show pure risk-off. If the markets are allowed to fall some more and yield levels deemed unsustainable are again reached, EU is going to have a very hard time convincing anyone that their solution is working (unless they turn on the printers). What they should be doing right now is to intervene (ECB SMP) and threaten (more statements!) right now. The longer the risk-off continues, the harder it is to later repair the damage. Market might be forgiving and understanding, but it does have a long memory. Pain is stored and trust is diminished.
Friday's and today's price action in the European bond markets kind of reminds me of the last July's "summit to end all summits". Clearly we are moving in a risk-off manner again. I try to write something coherent for the evening post. The BIS Quarterly Review in the "Other" is surprisingly interesting even to practitioners, take a look.
Markets are not interested in any of that stability-stuff or treaty changes. We already had those, but they were ignored and circumvented. The only thing that markets want to know is are the Italian and Spanish debt backstopped by the ECB or not. Markets were somewhat fooled to believe that ECB would take this role when the new budget-constraining measures would be in place. We got none of that, but the Cardinal (van Rompuy) announced that the PSI measures are dropped. No investor money will be burned! Taxpayers to pay banks’ bad investments! Heads I win, tails you lose!
Eurogeddon – fear not, it's under control – The Telegraph
According to Mario Draghi, president of the European Central Bank, we can all stop worrying about the potentially catastrophic consequences of a euro break-up because it's not going to happen. So confident is he of this outcome that it would be "imprudent" to make contingency plans for anything else.
In other words, if the prospects for growth were good, the institutional changes would be an easy sell, and the debt problems would mostly take care of themselves. However, if the growth isn’t there, then ultimately, the institutional reforms won’t be sustainable, because the nations on the periphery won’t be able to reduce debt burdens without destroying their economies.
Lots of material today, a pity since now I didn't have time for an editorial. But just as an appetizer, a new nick for the dynamic duo: Sarcomengel. There will be plenty of those tomorrow.
Today's sections: ECB, Treaty change, Bank stress tests and a very nice Breakup.
Howdy-ho! Here are the selected links from this week's posts. A Weekender-post coming up later today. 
I plan to take a holiday break from posting, the LTRO reactions and a X-mas reading package are at least coming still. We will see if TROLOLO will save the world.
Markets are not interested in any of that stability-stuff or treaty changes. We already had those, but they were ignored and circumvented. The only thing that markets want to know is are the Italian and Spanish debt backstopped by the ECB or not. Markets were somewhat fooled to believe that ECB would take this role when the new budget-constraining measures would be in place. We got none of that, but the Cardinal (van Rompuy) announced that the PSI measures are dropped. No investor money will be burned! Taxpayers to pay banks’ bad investments! Heads I win, tails you lose!
Seems like not everyone is terribly interested in the proposed treaty changes, as bloggers already realized.
