Monday, October 31, 2011

The Coming Global Credit Glut

"With world leaders meet at the end of this week at the G-20 summit in Cannes, France, the next economic minefield that they will face is already coming into view. It is likely to take the form of an opaque global credit glut, turbocharged by the fragile mixture of too-big-to-fail global banking with a huge and largely unwatched and unregulated shadow banking sector.
To be sure, that is not what many see. Federal Reserve Board Chairman Ben Bernanke and others have blamed the financial crisis of 2008 on a global savings glut, which fuelled flows of money from high-savings emerging-market economies – especially in Asia – that run chronic balance-of-payments surpluses. According to this school of thought, excessive savings pushed long-term interest rates down to rock-bottom levels, leading to asset bubbles in the United States and elsewhere.
But Claudio Borio and Piti Disayat, economists at the Bank for International Settlements, have argued convincingly that the savings-glut theory fails to explain the unsustainable credit creation in the run-up to the 2008 crisis. They have shown that the major capital inflows were not from emerging markets, but from Europe, where there was no net balance-of-payments surplus.
The alternative theory – of a global credit glut – gained more ground with the release last week of the Financial Stability Board’s report on shadow banking. The FSB report contains startling revelations about the scale of global shadow banking, which it defines as “credit intermediation involving entities and activities outside the regular banking system.”
The report, which was requested by G-20 leaders at their summit in Seoul last November, found that between 2002 and 2007, the shadow banking system increased by $33 trillion, more than doubling in asset size from $7 trillion to $60 trillion. This is 8.5 times higher than the total US current-account deficit of $3.9 trillion during the same period.
The shadow banking system is estimated at roughly 25-30% of the global financial system ($250 trillion, excluding derivatives) and at half of total global banking assets. This represents a huge regulatory “black hole” at the center of the global financial system, hitherto not closely monitored for monetary and financial stability purposes. Its importance was exposed only by analysis of the key roles played by structured investment vehicles (SIVs) and money-market funds (MMFs) in the 2008 meltdown.
The shadow banking system is complex, because it comprises a mix of institutions and vehicles. Investment funds other than MMFs account for 29% of total, and SIVs make up 9%, but the shadow system also includes public financial institutions (such as the government-backed mortgage lender Fannie Mae in the US). They are some of the largest counterparties with the regular banking system, and their combined credit creation and proprietary trading and hedging may account for much of the global liquidity flows that make monetary and financial stability so difficult to ensure.
The trouble is that, by 2010, the shadow banking system was about the same size as it was just before the 2007 market crash, whereas the regulated global banking system was 18% larger than in 2007. That is why the FSB report pinpoints the shadow banking system, together with the large global banks, as sources of systemic risk. But the global problem is likely to be much larger than the sum of its parts. Specifically, global credit creation by the regular and shadow banking systems is likely to be significantly larger than the sum of the credit creation currently measured by national statistics.
There are several reasons for this. First, credit that can be, and is, created offshore and through off-balance-sheet SIVs is not captured by national balance-of-payments statistics. In other words, while a “savings” glut may contribute to low interest rates and fuel excess credit creation, it is not the main cause.
Second, the volatile “carry trade” is notoriously difficult to measure, because most of it is conducted through derivatives in options, forwards, and swaps, which are treated as off-balance sheet – that is, as net numbers that are below the line in accounting terms. Thus, in gross terms, the leverage effects are larger than currently reported.
Third, the interaction between the shadow banking system and the global banks is highly concentrated, because the global banks act as prime brokers, particularly for derivative trades. Data from the US Comptroller of Currency suggest that the top five US banks account for 96% of the total over-the-counter (OTC) derivative trades in the US.
Indeed, the nightmare scenario haunting the world is the collapse of another shadow banking entity, causing global trade to freeze, as happened in 2008. The Basel III agreement on capital adequacy and other recent reforms still have not ring-fenced trade financing from these potential shocks.
We urgently need to monitor and understand the role of shadow banking and the too-big-to-fail banks in creating the global credit glut. Obtaining a full picture of global monetary and credit numbers and their determinants is a vital first step.
So far, the G-20’s call to “think globally” has turned into “act locally.” We hope that the G-20 leaders will think systemically at Cannes, and act nationally and cooperatively to defuse the global credit glut minefield."


Has America Become an Oligarchy?

PIMCO: Fed economic policies appear ineffective

"Bill Gross, founder and managing director of bond investment giant PIMCO, is sour on the idea that monetary policymakers can kick-start the economy through a series of policies that promote zero percent interest rates, quantitative easing and large-scale debt plans in the European Union.

Gross, writing in a commentary Monday, says without growth in the form of jobs and a significant stock market pick-up, none of the quick fixes laid out in America or Europe will stir real growth.

He says these policies work only if they generate growth. That is clearly not the case in this instance, he argues.

"Growth is the elixir that seems to make every ache, pain or serious ailment go away," Gross said. "Sovereign debt too high? Just grow your way out of it. Unemployment rates hitting historical peaks? Growth produces jobs. Stock markets depressed? Nothing a lot of growth wouldn’t cure. But growth is the commodity that the world is short of at the moment … No country has enough of it — not even China — and many of the developed countries (specifically in Euroland) seem to be shrinking into recess."

He argues near-zero interest rates and discounted future cash flows make it difficult to gain more return if economic growth doesn't occur across the economy. Furthermore, he advises fixed-income asset portfolios "should avoid longer dated issues where inflation premiums dominate performance."

Gross believes the lack of growth is the outcome of a rapidly changing economy that relies more on technology and less on a structured workforce. Not to mention, an aging global demographic.

"The situation, of course, is compounded now by high debt levels and government spending that always used to restart capitalism’s private engine," he wrote in a note to clients.

He added that "economists Rogoff & Reinhart have shown in their historic text, This Time Is Different, sovereign debt at 80% to 90% of GDP acts as a barrier to growth. Because debt service and interest rate spreads start to rise at these debt levels, a greater and greater percentage of a nation’s output must necessarily be diverted to creditors who in turn become leery of reinvesting in a slowing economy. The virtuous circle becomes vicious in its reflexive counter reaction, spiraling into a debt/liquidity trap á la Japan’s lost decades if not stopped in time."


Soros Says Brussels Deal Will Last From One Day to Three Months

"...“Given the magnitude of the crisis it is again too little too late,” said George Soros of the Brussels deal on Thursday. “It will bring relief partly because the markets were so obsessed by the lack of leadership. The mere fact that something was achieved was a major relief and it will be good for any time from one day to three months.
“Unfortunately it is not the last crisis because the fundamental issues have not been settled. It is clear that the amount of debt that Greece has accumulated and is accumulating is untenable and the country is effectively insolvent.”

The World Is Heading For A Very Nasty Credit Crunch

"Possibly the most significant consequence of the EU bailouts last week will be that the “solutions” to the problems in Europe will result in a global credit crunch

To me this outcome is a foregone conclusion. It's already happening.

The agreements give the EU banks till June 2012 to recapitalize.
There are only two possible outcomes. (A) Either the banks sell more common and preferred shares to the public, or (B) they improve their capital ratios by de-leveraging..."


Europe to Recapitalize Banks Without Raising any Capital; Berlusconi Defiant as Focus Shifts to Italy; Sarkozy Under Fire for Seeking China’s Help

"Italy's Prime Minister Silvio Berlusconi denies entering an agreement for early elections and arrogantly insists he is the only one who can possibly save Italy from itself.
Berlusconi ruled out early elections and said the current legislature in Rome will last until 2013, according to an interview published yesterday in Corriere della Sera.

“Only I and my government can achieve this reform program for 18 months, which is why there is no way for me to stand aside,” the Italian leader told the newspaper.
Sarkozy Under Fire for Seeking China’s Help

Please consider Sarkozy Criticized for Seeking China’s Help

French President Nicolas Sarkozy came under fire from opposition leaders for seeking China’s help to resolve the euro area’s debt crisis..."

BOB JANJUAH: The Euro Bailout Is Fiction, And The S&P Is Going To Plunge

"...We all have reams of commentary on the latest eurozone „deal‟ to digest. I want to keep my contribution to a minimum. In summary, this latest round of eurozone shock and awe is, in my view, nothing more than a confidence trick and has possibly even set-up an even worse final outcome. With respect to the Greek debt „write off‟, the bank „recap‟, and the structured credit technology being applied to ESFS, my takeaway is fudge, fiction and fantasy. The eurozone leadership know they can‟t really put in any meaningful amount of new money to fix things, yet are lacking in courage when it comes to forcing proper debt write offs and debt relief, ditto forcing genuine bank recapitalisation and financial sector restructuring, and we have a humiliation and tragedy of epic proportions when we consider that the ESFS leverage „plan‟ seems to rely on convincing a largely poor country where GDP per head is close to USD5k to bailout out a bloc where GDP per head is larger by a factor of x6/x8.

I spend a fair bit of time in China. Chinese policymakers on the whole impress me with their ability to understand what the real issue are. If my experience and read of China is right, Mr Regling is going to come back to Europe with lots of kind and supportive words, but little or no real hard cash. China wants military technology, nuclear technology, access to European corporates (ownership!), and it wants Europe fully on its side vs. the US with respect to human rights, the currency/the trade surplus, and in terms of IMF, WTO, and UN „status‟...."


Demand For EFSF Paper Collapses As World Wakes Up To Post Bailout Hangover

"It just goes from bad to worse for Europe, which had been hoping to issue €5 billion in 15 year bonds to finance part of the Irish bail out via the EFSF. Instead, once seeing the orderbook, or lack thereof, Europe ended up slashing the notional by 40% and the maturity by 33%, to a €3 billion issue due 10 years from now. And that is hardly the end of the concessions. As the FT reports, "The bond from the European Financial Stability Facility will only target €3bn, instead of €5bn, and will be in 10-year bonds rather than a 15-year maturity because of worries over demand. A 10-year bond is more likely to attract interest from Asian central banks than a longer maturity. Banks hired to manage the deal are Barclays Capital, Crédit Agricole and JPMorgan." Do you see what happens Larry, when China walks? But so we have this straight, Europe plans to fund a total of €1 trillion in EFSF passthrough securities.... yet it can't raise €5 billion? Just.... Priceless..."


Sunday, October 30, 2011

America's Other 87 Deficits

"The United States has a classic multilateral trade imbalance. While it runs a large trade deficit with China, it also runs deficits with 87 other countries. A multilateral deficit cannot be fixed by putting pressure on one of its bilateral components. But try telling that to America’s growing chorus of China bashers.

America’s massive trade deficit is a direct consequence of an unprecedented shortfall of domestic saving. The broadest and most meaningful measure of a country’s saving capacity is what economists call the “net national saving rate” – the combined saving of individuals, businesses, and the government. It is measured in “net” terms to strip out the depreciation associated with aging or obsolescent capacity. It provides a measure of the saving that is available to fund expansion of a country’s capital stock, and thus to sustain its economic growth.

In the US, there simply is no net saving any more. Since the fourth quarter of 2008, America’s net national saving rate has been negative – in sharp contrast to the 6.4%-of-GDP averaged over the last three decades of the twentieth century. Never before in modern history has the world’s leading economic power experienced a saving shortfall of such epic proportions.

Yet the US found a way to finesse this problem. Exploiting what Valéry Giscard d’Estaing called the “exorbitant privilege” of the world’s reserve currency, the US borrowed surplus savings from abroad on very attractive terms, running massive balance-of-payments, or current-account, deficits to attract foreign capital.

The US current account, which was last in balance in 1991, hit a record deficit of $801 billion (6% of GDP) in 2006. This gap has narrowed in the past couple of years, but much of the improvement probably reflects little more than the temporary impact of an unusually tough business cycle.
This is where America’s multilateral trade deficit enters the equation, for it has long accounted for the bulk of America’s balance-of-payments gap. Since 2000, it has made up fully 96% of the cumulative current-account shortfall.

And that is what ultimately makes the China-centric blame game so absurd. Without addressing the root of the problem – America’s chronic saving shortfall – it is ludicrous to believe that there can be a bilateral solution for a multilateral problem..."


China to Europe: that’s a sure nice EFSF you have there

"The EFSF roadshow is in Asia trying to drum up interest in the newly leveraged, newly insured, revamped fund. The Chinese are counting their chips and considering whether to double down on their European bet. (Mrs Wanatabe is also checking out the goods.)

But Europeans shouldn’t rely on China to come to their rescue, argues Julian Jessop, Capital Economics’ Chief Global Economist. In a sharp note published on Friday, Jessop offers a free reality check to anyone who thinks Europe can avoid solving its own problems.
Why? Jessop makes at least three points:

1. China’s contribution would be relatively small:
[E]ven $100bn, or €70bn, would not fill much of the shortfall of €1 trillion required to cover Italy and Spain’s financing needs over the next three years. We have also been here many times before. There have been frequent warm words of support from China’s leaders throughout the euro-zone crisis. Given the pace at which China has been accumulating foreign currency reserves, Beijing has surely already been buying substantial amounts of euro-denominated assets, including those of peripheral governments both directly and via issues made under the existing EFSF. Crucially, none of this earlier support has prevented peripheral bond yields from rising and the crisis from worsening.
2. Something cliched about a duck. China is risk averse and tough negotiator:
Nonetheless, we do not expect China to play a pivotal role. After all, the Greek government is defaulting on around half its debt. The “voluntary” nature of the agreement with bond holders means that it did not meet certain technical definitions of a default, such as a “credit event” that triggers insurance payouts under CDS contracts. But the Chinese are presumably well aware of the (Peking?) duck test – if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. Similarly, if Greek bond holders have had to take a 50% loss, then this is a default in all but name.
In these circumstances, the idea of putting large amounts of China’s money on the line for Italy or Spain does not seem very appealing. China’s officials are acutely aware of the losses they have made on some past foreign investments and will not want to be seen to risk even more of their peoples’ capital on a potentially lost cause, especially if relatively wealthy European countries and the ECB are unwilling to put up more money themselves. China may well have purchased earlier EFSF issues, but these were AAA-rated and fully guaranteed. In the new special investment vehicles being discussed as part of the leveraging of the EFSF, only 20% to 25% of exposure would be insured against losses.
3. Chinese involvement may (slightly) reduce the magnitude of the problem, but it doesn’t change its make-up:
The upshot is that additional Chinese support, whether bilateral or channelled through the IMF, is likely to require additional guarantees, which may be unacceptable to Germany, or fiscal austerity measures, which may be unacceptable to Italy. Or it might just be that China makes another vague commitment to provide more capital on standby, but that support fails to materialise when it is actually needed. Finally, even if China does stump up more funds, the euro-zone’s structural problems are far greater than the difficulty of finding buyers for a certain amount of government debt each month. Additional Chinese purchases would do little or nothing to prevent the region from sliding into recession, to resolve the huge economic divergences that have opened up, or to ease the painful adjustment processes that weaker members will still have to undergo within the constraints of the single currency..."

IMMINENT THREAT: Foreign Borrowings Will Lead To The Destruction Of The US Financial System

"...How does the U.S. try to counter the danger represented by foreign borrowings? After exporting our profligate spending to China with no intention of reform, we wield the implied threat that if China doesn’t continue to lend to us, it will go down with us. The Chinese may not see it that way as they feel the pinch of inflation, experience inevitable cyclical growth slowdowns, and develop new trading partners.
Foreign borrowings of the United States represent a clear and present danger to the U.S. dollar and to the U.S. financial system. Potential dumping of U.S. dollars would start a run on the currency and a financial panic that would tip our already precarious economy into a deep depression. No matter how much currency central banks use to try to manipulate exchange rates, the market always has more. The U.S. needs contingency plans against a large scale withdrawal of funds from the U.S. and from U.S. financial institutions. In the gravest extreme to avoid a run on the U.S. currency and a collapse of the U.S. economy, the U.S. requires a standby plan to sequester a foreign nation’s funds, just as we have done in the past."


Spain's Unemployment "Unexpectedly" Rises to 21.52%; Expect Market Focus to Shift from Greece to Portugal, Spain, Italy

"With news of a "voluntary" haircut on Greek bonds of 50%, it's time to look ahead to the next big trouble spots. By measure of 10-Year government bond yields, Portugal at 11.8%, Italy at 6.02%, and Spain at 5.51% (as compared to Germany at 2.18%), Portugal, Italy, and Spain clearly have critical issues.

Moreover, the economic data from Spain is continuously awful. For example Spain's Unemployment "Unexpectedly" Rises to 21.52%
The number of unemployed persons increased by 144,700 in the third quarter, bringing the total number of unemployed amounted to 4,978,300 people, according to Labour Force Survey (EPA) released today by the National Statistics Institute (INE). Spain has not seen such a high unemployment rate since the fourth quarter of 1996.
Austerity measures and economic reforms in the "Club-Med" Euro states are much needed. However, the short and intermediate-term effect will not be good for sovereign debt yields, budget targets, or GDP.

Spain and Portugal are accidents waiting to happen (sooner rather than later), and judging from bond yields alone, it is safe to add Italy to that mix.

The euphoria of a "settlement" (that fixes nothing) in regards to the crisis in Greece will soon give way to the massive number of even larger problems elsewhere in the Eurozone."


Czech PM Considers Referendum to Halt Joining EU

"The Czech Republic is having second thoughts about joining the EU, and rightfully so. The EU Observer reports Czech PM mulls euro referendum
The ruling euro-sceptic ODS party in the Czech Republic wants to push for a referendum on the country's future eurozone accession, claiming that the rules have changed since 2003 when Czechs said yes to the EU and the euro.

We signed up to a monetary union, not a transfer union or a bond union in our accession treaty. This is the major reason why the Czech Prime minister wishes to call the referendum on this matter," said Czech MEP Jan Zahradil, leader of the European Conservatives and Reformists..."

The "Dumb Money" Refuses To Play Along: China State Media Says It Won't Rescue Europe

"A few days ago China telegraphed it refuses to continue to be seen as the world's rescuer and the dumbest money in the room. Many assumed China was only kidding: after all how would China let its biggest export partner flounder? And furthermore, all China does is provide vendor financing, right? Well, as it turns out, wrong, because to China the current state of Europe is far from the terminal crisis Europe is trying to make it appear. This is happening even as a thoroughly desperate and grovelling Europe, kneepads armed and ready, has said via the EFSF's Regling that it will even consider issuing Yuan-denominated bonds. Alas, China is less than impressed. As AFP reports, "China’s state media Sunday warned that the country will not be a “savior” to Europe, as President Hu Jintao left for an official visit to the region including a G20 summit. Hu’s visit has raised hopes that cash-rich China might make a firm commitment to the European bailout fund, but in a commentary, the official Xinhua news agency said Europe must address its own financial woes. “China can neither take up the role as a savior to the Europeans, nor provide a ‘cure’ for the European malaise. “Obviously, it is up to the European countries themselves to tackle their financial problems,” it said, adding that China could only do so “within its capacity to help as a friend." A friend, who at this point is quite sensible, and realizes far better deals are to be had down the line if one merely waits. That said, we are certain China is not the only one out there with an instant notification pending the second Santorini, Ibiza or the Isle of Capri hits E-bay.


China’s Vice Foreign Minister Cui Tiankai said Friday that the G20 should focus on the sovereign debt crisis in “developed countries” and the growing pressure of global inflation.

He added that members should make efforts to stabilize financial markets and restore investor confidence.

For its part, G20 partners will also be looking to China to stimulate domestic demand, diversify its export-led economic model and allow the yuan currency to appreciate more freely so as to slim down its massive trade surpluses.

Another Chinese official has played down hopes of a breakthrough at the G20 meeting. Vice Finance Minister Zhu Guangyao, also speaking Friday, said investment in the European bailout fund was not on the agenda.

Beijing fears the financial risk of a major investment, which could also spark a domestic backlash as the Chinese public asks why they should bail out wealthier nations. Already, opposition to such a move is being expressed on the Internet, on China’s hugely popular weibos - microblogging sites similar to Twitter - and in state media.

The bold says it all. And for those to whom it is still confusing:

“China will only participate in a global program that is defensible to the Chinese people. So don’t expect a ‘bailout’ or ‘rescue’ from China,” China Macro Strategist for brokerage CLSA, Andy Rothman, told AFP.

China has been burned before on overseas investment. It bought stakes in investment bank Morgan Stanley and asset management firm Blackstone only to see values collapse in the 2008 global financial crisis.

“China was taken in. Once bitten, twice shy,” said independent economist Andy Xie, former chief economist for Morgan Stanley.

So, about that magical European box full of promises and quite empty of money..."


EUR Opens Lower As Bailout Disenchantment Returns

"Following another weekend of consistently disappointing news on the latest and greatest bailout front, where the #1 question of just who funds the €560 billion EFSF hole remains unanswered, it is not surprising that the EURUSD has entered the pre-market session modestly lower. If China continues to posture as it has over the last 48 hours, expect this to trend lower as Asia wakes up, with the only possible saving grace the fear that weak-hand residual EUR shorts, which as noted on Friday remain at stubbornly high levels, may cover on any slide..."


Be Honest – The European Debt Deal Was Really A Greek Debt Default

"Once the euphoria of the initial announcement faded and as people have begun to closely examine the details of the European debt deal, they have started to realize that this "debt deal" is really just a "managed" Greek debt default. Let's be honest - this deal is not going to solve anything. All it does is buy Greece a few months. Meanwhile, it is going to make the financial collapse of other nations in Europe even more likely. Anyone that believes that the financial situation in Europe is better now than it was last week simply does not understand what is going on. Bond yields are going to go through the roof and investors are going to start to panic. The European Central Bank is going to have an extremely difficult time trying to keep a lid on this thing. Instead of being a solution, the European debt deal has brought us several steps closer to a complete financial meltdown in Europe..."


Friday, October 28, 2011

POLL: Is It Really Over? Holes in E.U. Bailout Plan

"Thursday was such a great day and the markets cheered endlessly as if the world is suddenly saved. With the DJIA having gone back over 12,000 and with the freshest economic data showing a less-bad economy than expected, we published ten reasons the U.S. may have avoided the double-dip recession. But… We have been digging around for more and more details about the Eurozone EFSF and the backstop fund to determine if this effort is truly “fixed.” So, here is what we ask you in an anonymous poll (down below) if you are financially savvy about economics, trends, and markets: IS EUROPE NOW FREE AND CLEAR, OR ARE THE PROBLEMS GOING TO MOUNT FURTHER?
In our poll below we have no undecided options this time. We just want the ”decided” opinions today.
There are some articles which are critical of the deal, but we just really want to know what you think. Here are some quick widely spread articles if you wish to read before the poll at the bottom:
  • The Economist wrote about the rescue plan: summit was supposed to put an end to the euro crisis. It hasn’t!
  • A Dow Jones story on noted that Germany’s highest court has “halted the use of a special parliamentary sub-committee to decide over euro-zone bailouts” as another obstacle.
  • The Daily Capitalist issued a brief guide to the crisis on Thursday and noted as the first point “It isn’t over.”
  • Reuters offers a skeptical view as well."

at  POLL: Is It Really Over? Holes in E.U. Bailout Plan - 24/7 Wall St.


"Ben Davies, founder of Hinde Capital, was recently on King World News to discuss his outlook for the gold market. Davies is wildly bullish about gold and has a fairly similar perspective on the metal as I do. He sees two of the primary drivers of gold being demand from China and the Euro crisis which is being perceived as a failure of fiat currencies. But Davies is also focused on a seasonal driver in the near-term. Since he believes we are in an environment that is consistent with the last ten year (easy Fed, negative real rates, strong demand from China, etc) he believes the seasonal trends should hold true. Davies says:
“You really don’t need to say much when you look at the chart, it’s extremely bullish. We took the current year and pushed it forward four weeks to adjust the seasonality. We realized that the market was working on a four week basis ahead of time and if we adjusted the seasonality by bringing it forward four weeks, readers can see that come October we were going to actually have a rally into the year end. Historically you would tend to see a dip in October, but we already had that dip in September.”
Source: King World News

Fitch says 50% Haircuts would Constitute Default; No Official Ruling from ISDA Yet; Wrong Decision Could Kill CDS Market; How Will Setup be Resolved?

"The yield on 10-year Italian bonds is back over 6% following a weaker than expected bond auction. Who wants to load up on Spanish, Portuguese, or Italian bonds if they cannot hedge with credit default swaps?

No ISDA Ruling Yet

Everyone is acting as if the International Swaps and Derivatives Association (ISDA) has issued a ruling on on whether 50% haircuts forced at gunpoint are "voluntary", but there is no official ruling yet, only hints..."


The Global Moral Hazard Dawns: Merkel Says "It Must Be Prevented That Others Come Seeking A Haircut" As Ireland Cuts GDP Forecast

"Just about 48 hours after it was duly noted as the greatest threat to the Eurozone in the post bailout world, Germany finally grasps the enormity of what global moral hazard truly means. As we said before, the biggest risk facing Europe, and by that we mean undercapitlized French banks (all of them) obviously, is not Greece or what haircut is applied to the meaningless €100 billion in Greek debt when all the exclusions are accounted for. It is what happens when everyone else understands they now have a carte blanche to pull a Greece at will. And while until now we had some glimmer of hope there was a behind the scenes agreement for this glaringly obvious deterioration to not manifest itself, Merkel just opened her mouth and proved our worst fears wrong. As Reuters reports, "Chancellor Angela Merkel said on Friday it was important to prevent others from seeking debt reductions after European Union leaders struck a deal with private banks to accept a nominal 50 percent cut on their Greek government debt holdings. "In Europe it must be prevented that others come seeking a haircut," she said." Too late, Angie, far, far too late. Because, just as expected, here comes Ireland and literally a few hours ago, launched the first warning shot that will imminently lead to what will be demands to pari passu treatment with Greece. Next up: Portugal, Spain, and, of course, Italy, which however won't be faking its own economic slow down..."


Europe Tries To Kick The Can Down The Road But It Will Only Lead To Financial Disaster

"Have you heard the good news? Financial armageddon has been averted. The economic collapse in Europe has been cancelled. Everything is going to be okay. Well, actually none of those statements is true, but news of the "debt deal" in Europe has set off a frenzy of irrational exuberance throughout the financial world anyway. Newspapers all over the globe are declaring that the financial crisis in Europe is over. Stock markets all over the world are soaring. The Dow was up nearly 3 percent today, and this recent surge is helping the S&P 500 to have its best month since 1974. Global financial markets are experiencing an explosion of optimism right now. Yes, European leaders have been able to kick the can down the road for a few months and a total Greek default is not going to happen right now. However, as you will see below, the core elements of this "debt deal" actually make a financial disaster in Europe even more likely in the future.

The two most important parts of the plan are a 50% "haircut" on Greek debt held by private investors and highly leveraging the European Financial Stability Facility (EFSF) to give it much more "firepower".

Both of these elements are likely to cause significant problems down the road. But most investors do not seem to have figured this out yet. In fact, most investors seem to be buying into the hype that Europe's problems have been solved.

There is a tremendous lack of critical thinking in the financial community today. Just because politicians in Europe say that the crisis has been solved does not mean that the crisis has been solved. But all over the world there are bold declarations that a great "breakthrough" has been achieved. An article posted on USA Today is an example of this irrational exuberance..."


Thursday, October 27, 2011

Eurozone Leaders Agree a Few Rescue Details, Like 50% Haircut on Greek Bonds; Plan to Develop a Plan Gooses Markets

"...I doubt that anyone with an operating brain cell thinks the Eurozone leaders were willing to break the banks. And the overall scheme, in particular the €1 trillion+ rescue facility, as we have discussed in prior posts, is unworkable unless real money comes in. That either means the ECB, which the Germans are dead set against, the IMF, which will contribute but not on a scale to be sufficient, or China. Bloomberg said that Sarkozy was going to call Chineser president Hu Jintao to hit him up for funding tomorrow.

Even though this plan, such as it is, has lots of gaps, including an insufficiently large rescue facility (Sarkozy’s brother Olivier, head of the financial services group at Carlyle, in an FT op ed earlier this week, estimated the total required for banks alone to be $2 trillion, or €1.4 trillion, and that’s before you add in sovereign rescue requirements).

Mr. Market is nevertheless cheered by this sketchy, flawed outline. Most Asian markets were up over 2%, the Dax is over 3% higher, the FTSE has nearly 2% in gains, and the euro is close to 1.40. Perhaps the Eurocrats can keep these “get us through the next crunch” rescue packages going, but each deal seems to be harder to push over the line..."


EZ rescue: Déjà vu all over again

"EU leaders are at it again. This column argues that the crisis won’t be over until the underlying flaw of the euro is fixed – namely the separation of monetary and fiscal policy. German public opinion has to realise that the euro was built on imperfect foundations and that these imperfections must be corrected. Meanwhile, the Italian president of the ECB will need all his technical and political expertise to keep the Eurozone together.

It is now a habit. Every three or four months, European summits are devoted to ending the Eurozone crisis. Each time tough and controversial decisions are taken and new innovations to European governance are introduced. For a few weeks things seem to get better, but then everything goes back to being as it was, if not worse. Why?

What should be done to solve the problems for real?

The Eurozone core weakness has been known since the beginning – the separation of monetary and fiscal policy. This is the principle upon which the European monetary union was built, but the crisis made it clear – without a central bank acting as lender of last resort, highly indebted countries are too vulnerable to changes in market confidence. Unless this central problem is addressed, the crisis is unlikely to reach a turning point.

Why the EFSF has failed to fix the problem so far

The EFSF was created as a remedy to this structural flaw of the Eurozone. After realising that its size was insufficient, its capacity was enlarged. A new idea came out of the European summit, namely to extend its scope, concentrating the resources of the EFSF in order to partially guarantee newly issued debt of countries at risk. This would allow both Italy and Spain to issue debt which would be partially guaranteed until the end of 2013.

The next failure

There are reasons to believe that this remedy – like the innovations of the past – will fail to restore market confidence.
  • First, the resources of the EFSF will be exhausted in a few years – but confidence cannot have an expiration date.
Knowing that there could be a confidence crisis in a couple of years, why should one trust the solution today?
  • Second, without guarantees, the debt that has already been issued would be penalized, making European banks even more fragile.
This would worsen the vicious spiral we are seeing at work, namely distrust towards debt and banks, higher cost of capital, lower investments and growth, and further slippage towards debt unsustainability.
To cope with this problem, the summit agreed to rely on a special purpose vehicle that would buy sovereign debt in the secondary market. But it is not clear whether its resources would be sufficient for the task, nor where they would be coming from.
  • Third, the guarantees that have been proposed – which cover the losses only up to 20% – are modest.
Experience teaches that, when debt is really restructured, losses are much higher – on average around 50%..."



"Equity markets are rightfully celebrating the fact that, in the near-term, a full blown banking crisis with private sector contagion has been avoided. But we shouldn’t get too far ahead of ourselves here. An interesting development in response to this Euro package is the Italian bond market. The bond vigilantes are shrugging their shoulders at this. As you can see in the chart below, yields on the 10 year Italian bond initially fell, but have since recovered all of their lost ground since the announcement last night. What’s going on here? Why are the equity markets responding so favorably while the bond market barely budges? I think the message from the Italian bond market is quite clear – this is not a real solution to the Euro crisis. Equity markets are more hyperbolic and looking at the near-term. One is saying, “the coast is clear for now” while the other market is saying “there is much work to be done here”..."


Good News for Bears: Torture by Rumor Ends

"...Although many details are yet to be resolved, the bulls got everything they wanted except endless printing by the ECB. However, the sad fundamental situation remains unchanged
  1. No structural problems have been solved
  2. Banks most assuredly need more than 106 billion in recapitalization efforts. The idea that French banks only need to raise 8.8 billion is preposterous.
  3. No investors in their right mind will fund Greek and Spanish banks to the tune of 56.2 billion euros
  4. The haircuts were not voluntary

Instead of the rumor mill of potential actions working to lift the market 24 hours a day for three straight weeks, it will be up to the EU to make the plan work. However, the plan won't work because of point number one above: not a single structural problem has been solved.

Although this rally may run for a while longer on fumes of past rumors and blind hope, it will eventually wear itself out..."


Attention Finally Turns To The Two Ultimate Backstoppers Of The World: Germany And China

"It has been long in coming but finally the credit market is noticeably refocusing its attention to the two countries that are supposed to carry the burden of bailing out the world on their shoulders: Germany, and, that perpetual placeholder for global rescues, China. As noted yesterday, while following today's anticipated ISDA decision to effectively make price discovery in CDS null and void, and in the process also put the whole premise of sovereign debt insurance into doubt, CDS still provides a very useful metric courtesy of the DTCC, namely open interest, or said otherwise, gross and net notional outstanding in the CDS. And while we will reserve the observation that not only did ISDA kill sovereign CDS, but in the process it also ended bilateral netting effectively pushing up net CDS to the level of gross, we will highlight that as of the last week, net notional in both German and China CDS has hit a record, of $19.6 billion and $9.3 billion, respectively. This is occuring as notionals in the two most active countries to date, France and Italy, have been declining. In essence, what the CDS market is telling us is that while the easy money in French and Italian default risk has been made, it is now finally the turn of China and Germany to defend their credit risk and sovereign spreads. We expect that if China is indeed confirmed to be the backstopper of Europe through funding the EFSF in whole or in part, that while its CDS may or may not surge, net notionals will continue to increase as it means that ever more are laying insurance, as hobbled as it may be, on the country which recently was forced to bail out its own banking system, let alone Europe. Keep a close eye on China, which while the bulk of the market is taking for granted as the global rescuer of last resort with hard money, the smart money is already positioning itself for the next big disappointment..."


The Banks Have Volunteered (at Gunpoint) To Get 50% of Their Money Taken - No Credit Event???

"So, the European joke has come full circle. Indebted nations borrow more money to bail out other indebted nations who ask insolvent banks to cut a 50% off deal on the loans that were given to them, but the insolvent banks will then have to raise capital which the will of course borrow from the over-indebted nations whom they just gave money to. Get it? Problem solved - BTMFD!!!

The rally is based off of bullshit and an inability to count. After the voluntary haircut (volunteered at gunpoint, may I add), Greece will still have roughly 120% debt to GDP ratio with a declining economy. Unsustainable still. I would fade this rally with careful stops..."


Wednesday, October 26, 2011


"Long-time bond market bull, David Rosenberg, is reassessing his outlook on the secular bull market in bonds. In this morning’s commentary he said:
“The bond market remains in a full fledged secular bull market, though it is probably safe to say after this year’s downleg in yields to new lows out to the 10 year part of the curve at least we are in the very mature phase. With that in mind, it may pay to reassess what the backdrop may look like when the Great Bull Market in Bonds, which began in 1981 with 30 year Treasury Bonds yielding 15.25%, finally comes to its glorious end.
For starters, I think it’s safe to say that the bull market in bonds will end reasonably close to the point in time that inflation (or deflation) bottoms. This is because we have determined that the only economic factor that correlates workably with interest rates, at least for long term Treasury bonds, is core CPI inflation.
…what about the end of the Great Bull Market in Bonds? It could come pretty soon. You heard right. Long term Treasury bond yields could reach a secular bottom in the next couple of years. And what will it look like? Well, rates will likely be much lower than anyone expects and, as occurs at most secular market peaks, the public will probably swear by them. In order for the public to love 2% 30 year Treasury bonds, they will first have to believe in stable or modestly deflating core CPI as a long term forecast. After all, what other safe investment has delivered inflation plus 2% or better, ghuaranteed, in the past 30 years? They will also need to be fed up with risk and, judging by the extreme volatility of the stocks and weakness in real estate, who could blame them? We can see that boomers are already voting with their feet, as the mutual fund flows clearly indicate.
Finally, the investing public will probably need to be afraid to be out of the bond market. That will most likely be due to a “flight to quality” as we continue to suffer bear market in stocks and real estate and suffer the economic setbacks of renewed recession.
Pull this all together, as I said at the outset, bonds are not better or worse than equities. They are different. It goes without saying that the best time to allocate to equities is at the point of maximum pessimism. We know that historically, that moment has coincided with valuations below 10X trailing 12 months reported earnings and dividend yields above 5% as measured by the S&P 500 index. We also know that conventional wisdom is erroneously linear at inflection points, so not only is the market “cheap” at these secular lows, but the future is much brighter than generally perceived. Pulling the trigger at that magic moment when bonds have peaked and stocks can’t hurt you anymore and dividend yields are more than secure at twice the Treasury rate would be nice. But you never know for sure at the right time or you think you know for sure too early. For now, we are not even close.”
So, Rosie says to keep on riding that bond bull market. But beware the winds of change. They might fast approach in the coming years."


The Dollar and the Renminbi as International Currencies

"There's been a lot of discussion of the potential rise of the Renminbi as an international currency. In particular, Jeffrey Frankel has recently written a paper on the subject (blogpost), backed in part on research we did in our papers [1] [2] on the dollar. Now, the New York Fed's Linda Goldberg, Mark Choi and Hunter Clark have re-examined some of benefits of being an international currency in a post entitled What If the U.S. Dollar’s Global Role Changed?.
Some have suggested that the large benefits extracted by the United States from the dollar’s privileged international status could be undermined should the currency’s role decline. We examine this claim by grouping the potential consequences of a change in the dollar’s relative international status into five “buckets.” These consequences are summarized in the table below and discussed in more detail..."

Possible Effects of a Reduced Role of the Dollar
Bucket Impact Comments
Seigniorage revenues to the United StatesSmall reductionSeigniorage revenues are relatively low; dollar cash holdings outside the United States are not likely to change much.
U.S. funding costs Increase from low levels While the United States does not have an “exorbitant privilege” in funding, reduced demand for dollar reserves can raise U.S. funding costs. Higher funding costs on debt raise interest payments to external creditors. This tightens domestic spending constraints, and some domestic expenditure could be crowded out.
Dollar value Dollar depreciates; imports become more expensive Dollar depreciation arises from lower net demand for dollars.
U.S. insulation from foreign shocks Reduced U.S. autonomy in policy International trade invoicing patterns change and U.S. import prices and consumption become more exposed to foreign shocks and exchange rate movements.
U.S. global influence Reduced influence Some rebalancing of country powers in international negotiations and institutions may occur.


Revealed – the capitalist network that runs the world

"AS PROTESTS against financial power sweep the world this week, science may have confirmed the protesters' worst fears. An analysis of the relationships between 43,000 transnational corporations has identified a relatively small group of companies, mainly banks, with disproportionate power over the global economy.

The study's assumptions have attracted some criticism, but complex systems analysts contacted by New Scientist say it is a unique effort to untangle control in the global economy. Pushing the analysis further, they say, could help to identify ways of making global capitalism more stable.

The idea that a few bankers control a large chunk of the global economy might not seem like news to New York's Occupy Wall Street movement and protesters elsewhere (see photo). But the study, by a trio of complex systems theorists at the Swiss Federal Institute of Technology in Zurich, is the first to go beyond ideology to empirically identify such a network of power. It combines the mathematics long used to model natural systems with comprehensive corporate data to map ownership among the world's transnational corporations (TNCs).

"Reality is so complex, we must move away from dogma, whether it's conspiracy theories or free-market," says James Glattfelder. "Our analysis is reality-based."

Previous studies have found that a few TNCs own large chunks of the world's economy, but they included only a limited number of companies and omitted indirect ownerships, so could not say how this affected the global economy - whether it made it more or less stable, for instance.

The Zurich team can. From Orbis 2007, a database listing 37 million companies and investors worldwide, they pulled out all 43,060 TNCs and the share ownerships linking them. Then they constructed a model of which companies controlled others through shareholding networks, coupled with each company's operating revenues, to map the structure of economic power.

The work, to be published in PLoS One, revealed a core of 1318 companies with interlocking ownerships (see image). Each of the 1318 had ties to two or more other companies, and on average they were connected to 20. What's more, although they represented 20 per cent of global operating revenues, the 1318 appeared to collectively own through their shares the majority of the world's large blue chip and manufacturing firms - the "real" economy - representing a further 60 per cent of global revenues.

When the team further untangled the web of ownership, it found much of it tracked back to a "super-entity" of 147 even more tightly knit companies - all of their ownership was held by other members of the super-entity - that controlled 40 per cent of the total wealth in the network. "In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network," says Glattfelder. Most were financial institutions. The top 20 included Barclays Bank, JPMorgan Chase & Co, and The Goldman Sachs Group.

John Driffill of the University of London, a macroeconomics expert, says the value of the analysis is not just to see if a small number of people controls the global economy, but rather its insights into economic stability.

Concentration of power is not good or bad in itself, says the Zurich team, but the core's tight interconnections could be. As the world learned in 2008, such networks are unstable. "If one [company] suffers distress," says Glattfelder, "this propagates."
"It's disconcerting to see how connected things really are," agrees George Sugihara of the Scripps Institution of Oceanography in La Jolla, California, a complex systems expert who has advised Deutsche Bank.

Yaneer Bar-Yam, head of the New England Complex Systems Institute (NECSI), warns that the analysis assumes ownership equates to control, which is not always true. Most company shares are held by fund managers who may or may not control what the companies they part-own actually do. The impact of this on the system's behaviour, he says, requires more analysis.

Crucially, by identifying the architecture of global economic power, the analysis could help make it more stable. By finding the vulnerable aspects of the system, economists can suggest measures to prevent future collapses spreading through the entire economy. Glattfelder says we may need global anti-trust rules, which now exist only at national level, to limit over-connection among TNCs. Sugihara says the analysis suggests one possible solution: firms should be taxed for excess interconnectivity to discourage this risk.

One thing won't chime with some of the protesters' claims: the super-entity is unlikely to be the intentional result of a conspiracy to rule the world. "Such structures are common in nature," says Sugihara.

Newcomers to any network connect preferentially to highly connected members. TNCs buy shares in each other for business reasons, not for world domination. If connectedness clusters, so does wealth, says Dan Braha of NECSI: in similar models, money flows towards the most highly connected members. The Zurich study, says Sugihara, "is strong evidence that simple rules governing TNCs give rise spontaneously to highly connected groups". Or as Braha puts it: "The Occupy Wall Street claim that 1 per cent of people have most of the wealth reflects a logical phase of the self-organising economy."

So, the super-entity may not result from conspiracy. The real question, says the Zurich team, is whether it can exert concerted political power. Driffill feels 147 is too many to sustain collusion. Braha suspects they will compete in the market but act together on common interests. Resisting changes to the network structure may be one such common interest.

When this article was first posted, the comment in the final sentence of the paragraph beginning "Crucially, by identifying the architecture of global economic power…" was misattributed.

The top 50 of the 147 superconnected companies

1. Barclays plc
2. Capital Group Companies Inc
3. FMR Corporation
4. AXA
5. State Street Corporation
6. JP Morgan Chase & Co
7. Legal & General Group plc
8. Vanguard Group Inc
10. Merrill Lynch & Co Inc
11. Wellington Management Co LLP
12. Deutsche Bank AG
13. Franklin Resources Inc
14. Credit Suisse Group
15. Walton Enterprises LLC
16. Bank of New York Mellon Corp
17. Natixis
18. Goldman Sachs Group Inc
19. T Rowe Price Group Inc
20. Legg Mason Inc
21. Morgan Stanley
22. Mitsubishi UFJ Financial Group Inc
23. Northern Trust Corporation
24. Société Générale
25. Bank of America Corporation
26. Lloyds TSB Group plc
27. Invesco plc
28. Allianz SE 29. TIAA
30. Old Mutual Public Limited Company
31. Aviva plc
32. Schroders plc
33. Dodge & Cox
34. Lehman Brothers Holdings Inc*
35. Sun Life Financial Inc
36. Standard Life plc
37. CNCE
38. Nomura Holdings Inc
39. The Depository Trust Company
40. Massachusetts Mutual Life Insurance
41. ING Groep NV
42. Brandes Investment Partners LP
43. Unicredito Italiano SPA
44. Deposit Insurance Corporation of Japan
45. Vereniging Aegon
46. BNP Paribas
47. Affiliated Managers Group Inc
48. Resona Holdings Inc
49. Capital Group International Inc
50. China Petrochemical Group Company
* Lehman still existed in the 2007 dataset used

The 1318 transnational corporations that form the core of the economy. Superconnected companies are red, very connected companies are yellow. The size of the dot represents revenue <i>(Image: </i>PLoS One<i>)</i>

(Data: PLoS One)"


The gap between federal spending and taxation means the U.S. government debt will double in the next five to 10 years.

"Marc Faber : It took the U.S. 200 years to get to a federal debt of $1 trillion in 1980, another six years to get to $2 trillion, and now it’s north of $15 trillion. Referring to a chart showing the ballooning debt-to-GDP ratio, Faber says adding in the unfunded liabilities of Medicare et al. would mean extending the chart up to “the fifth floor of this building”. The conference is being held in the basement. The gap between federal spending (more than 70% of it mandatory) and taxation means the U.S. government’s debt will double in the next five to 10 years..."


Monday, October 24, 2011

Assessing the Damage of the European Banking Crisis

"...When evaluating a problem of such magnitude, one might as well begin with the problem as the Europeans see it — namely, that their banks’ biggest problem is rooted in their sovereign debt exposure.

The state-bank contagion problem is fairly straightforward within national borders. As a rule the largest purchaser of the debt of any particular European government will be banks located in the particular country. If a government goes bankrupt or is forced to partially default on its debt, its failure will trigger the failure of most of its banks. Greece does indeed provide a useful example.
Until Greece joined the European Union in 1981, state-controlled institutions dominated its banking sector. These institutions’ primary reason for being was to support government financing, regardless of whether there was a political or economic rationale justifying that financing. The Greeks, however, have no monopoly on the practice of leaning on the banking sector to support state spending. In fact, this practice is the norm across Europe.

Spain’s regional banks, the cajas, have become infamous for serving as slush funds for regional governments, regardless of the government in question’s political affiliation. Were the cajas assets held to U.S. standards of what qualifies as a good or bad loan, half the cajas would be closed immediately and another third would be placed in receivership. Italian banks hold half of Italy’s 1.9 trillion euros in outstanding state debt. And lest anyone attempt to lay all the blame on Southern Europe, French and Belgian municipalities as well as the Belgian national government regularly used the aforementioned Dexia in a somewhat similar manner.

Yet much debt remains for outsiders to own, so when states crack, the damage will not be held internally. Half or more of the debt of Greece, Ireland, Portugal, Italy and Belgium is in foreign hands, but like everything else in Europe the exposure is not balanced evenly — and this time, it is Northern Europe, not Southern Europe, that is exposed. French banks are more exposed than any other national sector, holding an amount equivalent to 8.5 percent of French gross domestic product (GDP) in the debt of the most financially distressed states (Greece, Ireland, Portugal, Italy, Belgium and Spain). Belgium comes in second with an exposure of roughly 5.5 percent of GDP, although that number excludes the roughly 45 percent of GDP Belgium’s banks hold in Belgian state debt..."


US in possible downgrade encore shock

"Eurozone crisis-ed out? Here is a refreshingly simple distraction: US sovereign ratings!
The “not-so-super” Deficit Commission is very unlikely to come up with a credible deficit reduction plan. The committee is more divided than the overall Congress. Since the fall back plan is sharp cuts in discretionary spending, the whole point of the Committee is to put taxes and entitlements on the table. However, all the Republican members have signed the Norquist “no taxes” pledge and with taxes off the table it is hard to imagine the liberal Democrats on the Committee agreeing to significant entitlement cuts. The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan. Hence we expect at least one credit downgrade in late November or early December when we expect the super Committee crashes.
That’s from BofAML’s US economist Ethan Harris and team. It comes in the context of explaining why their US forecasts (which now see 2.5 per cent growth in H2/2011, and 1 per cent growth for 2012) are rather different to the herd:..."


Contagion Spreads to Insurance Sector

"The Financial Times Deutschland reports German watchdog Bafin fears contagion to insurance sector

The supervisory authority BaFin has asked the major insurers operating in Germany to disclose tell the exact amount of their deposits with banks. Companies must quantify all forms of investment in financial institutions as well as specify whether it is secured or unsecured loans. The papers include collateralized mortgage bonds.

A survey was conducted by BaFin in the spring showed the ten largest insurance companies have invested up to 55 percent of their deposits with banks. Rolf Wenzel, Assistant Secretary, Federal Ministry of Finance said "there is a risk of contagion..."

Peripheral And Core Eurozone Yields And Spreads At Widest Since October Equity Lows

"Stocks are not the only thing to surge since the October 3 lows. As the chart below shows, yields (and spreads to Bunds) of all Eurozone bonds, both in the core and the periphery, have followed the equity Risk On sentiment diligently (if inversely), and are now at the widest they have been in the past 3 weeks. In other words, contrary to expectations of a mitigation in sovereign risk exhibited by a drop in spreads or yields, or both, following the CDS ban, we have seen precisely the opposite as sovereign risk has soared. But at least it has been accompanied by what continues to be an epic short squeeze, and has thus been masked by the overall market noise. In fact, one can make the argument that in many ways we are seeing the same response that we saw back in the US in advance of various monetization episodes, as it is becoming increasingly clear that it is the sovereigns themselves that are the risky assets, while corporates across the board must be saved at all costs by the ECB, the Fed or both. To purists wondering how it is possible to have a risk transfer of this magnitude in a continent in which the central bank does not have the same market levitation capabilities as the Fed (the ECB essentially needs a Bundestag approval for all its decisions going forward) we wish we had some insight..."


U.S. rating likely to be downgraded again: Merrill

"(Reuters) - The United States will likely suffer the loss of its triple-A credit rating from another major rating agency by the end of this year due to concerns over the deficit, Bank of America Merrill Lynch forecasts..."


It’s All Connected: An Overview of the Euro Crisis

"European leaders are meeting this week to deal with growing debt problems rattling investors worldwide. Here is a visual guide to the crisis..."

Sunday, October 23, 2011

Painful Precursor

"It's been said (many times) that correlation is not causation. That said, if the last 30 years are any guide, the recent sharp deterioration in consumer sentiment is the precursor to a dramatic (and widely unexpected) increase in unemployment.


So much for the "recovery."


News Links: Is Bank of America preparing for a Chapter 11?

"Is Bank of America preparing for a Chapter 11? | Reuters

To my earlier post regarding the need for a restructuring at BAC, “Housing, debt ceilings & zombie banks,” the move to put the derivatives exposures of Merrill Lynch under the lead bank could be preparatory to a Chapter 11 filing by the parent company. The move by Fannie Mae to take a large junk of loans out of BAC, the efforts to integrate parts of Merrill Lynch into the bank units earlier this year, and now the wholesale shift of derivatives exposure all suggest a larger agenda..."

Leaked Greek bailout document: Expansionary fiscal consolidation has failed

"Below is the leaked Greek bailout document that everyone has been talking about. Yesterday, the Financial Times wrote:
Greece’s economy has deteriorated so severely in the last three months that international lenders would have to find €252bn in bail-out loans through the end of the decade unless Greek bondholders are forced to accept severe cuts in their debt repayments.
The dire analysis, contained in a “strictly confidential” report by international lenders and obtained by the Financial Times, is more than double the €109bn in European Union and International Monetary Fund aid agreed just three months ago.
-EU looks at 60% haircuts for Greek debt -"

News Links: Europe on the brink of a disaster

"The single currency is close to collapse - Telegraph
With Europe on the brink of a disaster, the euro must be reconstituted as an entity based on economic reality, not ideological folly.

More than half of the money lent to Greece so far by the International Monetary Fund and European nations has gone to repay bondholders, a transfer of billions of dollars from taxpayers around the world to European banks and pension funds that invested in the troubled Mediterranean nation.

Standard & Poor's (S&P) is to warn that a double-dip recession in Europe would imperil France's AAA rating and set off a string of downgrades across Southern Europe, undermining the EU's debt crisis strategy.

Europe’s big banks will be forced to find €108bn ($150bn) of fresh capital over the next six to nine months under a deal to strengthen the banking system agreed by European Union finance ministers.

As the UK discovered to its cost during its ill-fated membership of the ERM, it is tough to impossible to be in any form of currency union with Germany.

Zillow: Case-Shiller likely fell 3.8% in August

"Two key indices of home prices likely fell in August, suggesting large numbers of foreclosures and continued high joblessness are acting as a drag on the market, according to a new forecast.

The Case-Shiller 20-city composite home price index, scheduled to be released on Tuesday, likely fell 3.8% in August from a year earlier and 0.3% from July on a seasonally adjusted basis, said a forecast from Zillow Inc. (Z: 27.03 +1.62%) chief economist Stan Humphries. The downward trend will continue through the end of the year, he predicts.

"We expect to see continued home value depreciation as unemployment and negative equity remain high," said Humphries. "The large foreclosure pipeline will produce relatively low priced REOs in the market, putting downward pressure on prices going forward, and we do expect the pace at which homes exit this pipeline to pick up in the near-term."..."


The Vicious Cycle At The Heart Of Europe's Crisis

"The term "Receding Horizons" (just when you think you can touch the pot of gold, it's moved out of reach again), as I first defined years ago with regards to energy, is back; this time in crisis-politics. Just as Europe would need to show a more united front than ever, the gloves are coming off. And there's nothing but solid logic behind it all: the deeper the crisis, the more the various needs diverge.

President Sarkozy faces a 2012 election campaign with a sovereign credit rating downgrade looming ever bigger. And French banks are in devastatingly deep doodoo. Chancellor Merkel, however, faces entirely different priorities: strong opposition from all sides, including her own party, to ever-growing German funds and credit being used to prop up the sinking parts of Europe..."

whirlpool down the tube


Magic Turns 340 Billion Euros Into 940 Billion Euros; Six-Day Marathon of Lies, Deceit Underway

"...Simple Math
  • The total overall cap is 500 billion Euros
  • 160 billion Euros has been spent
  • 340 billion Euros remains
  • 340 billion Euros + zero Euros = 940 billion Euros

Bear in mind this raises the permanent fund above the agreed upon amount. The German Supreme court has stated this cannot be done without a voter referendum.

Please see Germany's Top Judge Throws Major Monkey Wrench Into Leveraged EFSF Machinery, Demands New Constitution and Popular Referendum for Further Powers for details.

There is no way voters will approve this.

Also bear in mind the German Supreme court has ruled there should not be a permanent bailout fund at all. I am unclear if the ruling meant beyond the ESM or at all all. Either way, there should be a popular referendum on the matter, with an emphasis on "should be"..."


Late Payments in Spain Soar to 7.14%, Highest Since 1994; Portugal Economy Expected to Contract More than Forecast in 2012

"Courtesy of Google translate, please consider Late payment of the financial system up to 7.14% in August, highest since 1994
Defaults on loans granted by banks, savings banks, cooperatives and credit institutions (EFC) to individuals and companies in August stood at 7.14%. This is the highest level since November 1994, according to the Bank of Spain.

According to the provisions of Bulletin Gesif Axesor tracking delinquencies and entrepreneurship, the default rate of banks in Spain will end the year 2011 about 8% as it will keep the upward trend in the last months of the year.

With the default rate on the rise and persistence of the difficulties of access to credit would not be surprising that the ratio of non-compliance continued growth path of 9%, predicts the newsletter..."