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Latest | Highest ratedWhen Germany Bails Out Greece [View article]
When Germany Bails Out Greece [View article]
CNBC has been giving this extensive coverage and as of this writing nothing has been agreed to beyond that Germany has the most to gain by containing the crisis. There is a million ways to skin the cat, including the introduction of a temporary weak euro for the PIIGS with the proviso debt would remain in the strong euro.
This is just the beginning.
European Union: A Tale of Two Futures [View article]
There are a number of ways this might play out but I do not think the holders of Greek sovereign debt are going to permanently forgive interest on the debt; the haircut would be too much.
Bruce Kasting draws similarities between the PIIGS and Uruguay and Argentina who both converted/pegged their domestic currency to a much stronger reserve currency: the dollar. The PIIGS with the euro have enjoyed the same benefits of reduced inflation and economic growth but it has been accompanied by massive debt creation, both in the public sector and the private sector. With underlying imbalances and twin deficits, it’s been an unsustainable financial illusion or charade. With the mask removed in the current environment, reality is readily apparent.
With this as a background, a possible solution developing favor and articulated by the folks at RGE (Roubini) is to implement a two tiered euro to tackle the underlying source of the problem. From RGE:
On RGE's Europe EconoMonitor, Michael G. Arghyrou and John Tsoukalas propose a last-resort plan for devaluation that would prevent moral hazard. The plan involves "the temporary implementation of a two-currency EMU, with both currencies run by the Frankfurt-based ECB. The core-EMU countries will continue to use the present currency, the strong euro. The periphery countries, on the other hand, will adopt, for a certain period of time, another currency, the weak euro. Crucially, the bonds and external debt of the periphery countries will stay in strong-euro terms. Transition from the weak to the strong euro should be made conditional upon meeting a suitably defined criterion referring to the current account balance [rather than the fiscal position], a more accurate indicator of long-term competitiveness developments."
China Dumps U.S. Asset Backeds and Corporates [View article]
Dollar-denominated risk assets, including asset- backed securities and corporate, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. Meanwhile, the Chinese military has urged the government to sell US bonds, boosting defense spending on Taiwan arms deal. Hence, we watch US spreads intensively. A widening of spreads would not bold well for share markets while putting economic recovery at risk. It was US liquidity feeding financial markets until January this year. Hence a decline of risk appetite suggests repatriation flows moving back into the USD.
Economic Jolt: Job Openings and Labor Turnover, December 2009 [View article]
Why Germany Won't Bail Out Greece [View article]
I think it is important to note, though, as the EU's largest economy Germany has a vested interested in containing or constructing a firewall around the Greece problem as they would not want to see widespread fear emerge across the continent. I think some are confusing this concern with interest in providing financial assistance.
One last note: I believe the financial house that assisted with the swaps is headquartered at 85 Broad St. Yes, Goldman.
The Problem of Exponential Debt [View article]
QUICK CHAT # 15- Start 2/8/10 [View instapost]
QUICK CHAT # 15- Start 2/8/10 [View instapost]
Economic Growth: Another (Half) Step Forward [View article]
'Resolution Authority'? That Was So Last Year [View article]
Solid Earnings Help Market Direction [View article]
QUICK CHAT # 15- Start 2/8/10 [View instapost]
Since the onset of the credit crisis in 2007, there have seen three occasions when a surge in risk aversion caused a period of U.S. dollar strength on flight-to-safety trades — July 15, 2008 to September 11 2008 (around the GSEs); September 22, 2008 to November 21, 2008 (post-Lehman financial collapse) and then from December 17, 2008 to March 5, 2009 (the final leg down in the financials). Here is what happened, on average, during these dollar-rally episodes — ultra-defensive strategies and heightened volatility:
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The DXY (U.S. dollar index) rallied an average of 12.3%.
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During these episodes, the Canadian dollar sank 11% against the U.S. dollar, but was only down 1.9% against a basket of non-U.S. currencies.
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The S&P 500 corrected an average of 18.5%. Underperforming S&P equity sectors included materials, energy, industrials and financials. Outperformers included utilities, staples, health care, tech and telecom.
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Despite the downdraft in commodities, the TSX performed in line with the S&P — losing 18%.
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In the TSX sectors, the winners and losers were different than in the U.S.A.: Financials and industrials actually outperformed. Only materials and energy seriously dragged down the Canadian market. As in the U.S., staples, health care, utilities, tech and telecom outperformed. Outside of resources, the TSX sectors actually outperformed their S&P comparable.
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Still, it pays to note that we are talking about “relative” performance. Every equity sector on both sides of the border was down during these periods.
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The oil price, on average, fell 26%, and gold was off an average of 11%. The CRB index corrected an average of 22%.
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The VIX index surge an average of 34% during these U.S. dollar-rally episodes.
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We saw a bull steepening in the bond market — 2-year T-note yields plunge an average of 36bps while 10-year T-note yields dipped 8bps.
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Baa corporate spreads widened an average of 54bps; and by 268bps for high-yield bonds.
QUICK CHAT # 15- Start 2/8/10 [View instapost]
One theme I have been working on is investing around the growing middle class in emerging markets; the pace of this trend can easily be debated but the fact it will happen is fairly certain. They are going to consume greater quantities of energy, water, telecomminications, food, conveniences and aspirational luxury brands. The latter, which have all taken a beating as of late, might include DEO, COH, BID, LUX and LRLCY.
Here's a link to a piece in Forbes offering a similar take on the theme:
www.forbes.com/2010/02...
The Problem of Exponential Debt [View article]
The fiscal and monetary policies we have followed the last decades and through the crisis are indefensible and have vastly limited our options amid a wealth destroying balance sheet recession/depression.
Looking forward, there are three broad options: (1) continue on the politically popular and unsustainable path of spending until there is divine intervention and the structurally impaired economy is healed, debt does not matter and everything is fine, (2) retrench and shrink the size of government, increase savings, expand investment, reduce taxes and purge the system of all excesses and malinvestments.....a path inherently deflationary but one which would allow us to rebuild our economy upon a solid foundation and (3) modify option (1) and reorient spending
towards projects with (a) durable features and (b) the capacity of generating future wealth and income such as highways (Eisenhower), space (Kennedy) and investments in future, critical technologies deemed to have the potential to spawn vast new enterprises. Under all three options we should try to expand exports but this will be difficult and only be a drop in the bucket.
Option (2) is economically risky and politically out of the question as social spending, transfer payments, entitlements and the size of government would need to be drastically reduced. This would be anathema to politicians who derive status and power from controlling and looting the Treasury. And it may be too late for option (3) and it would required cutbacks to make room for the new expenditures; the cutbacks would be resisted and the spending on new initiatives would be so politicized as to neuter the programs of benefit and value. There would be endless debates as to the programs themselves and location and the color of the people running the programs.
By default, then, its option (1) and the status quo and the accelerating accumulation of debt that is and will further impair the economy through the massive weight and cost of debt. Our hubris will allow us to justify this course but, as the author notes, Reinhart and Rogoff suggest this is a doomed course.