CautiousInvestor

When Germany Bails Out Greece

We're running out of backstops for unsustainable policies.

When Germany Bails Out Greece

Keeping the EU intact, adhering to the Maastricht treaty, avoiding a collapse in the euro and avoiding moral hazard all impose interesting constraints.

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

Jeff, a great article that reflects much thought.

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

FT Alphaville offers some insight from BNP Paribas which suggests that it is both a move to safety and move to sell treasuries in response to the Taiwan arms sale:

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

So we are in a human depression characterized by declining openings and hirings which have declined YOY but have stabilized at frighteningly low levels which has caused those fortunate few that have jobs to hold onto them knowing there are no other options. Against this backdrop, we have around 17 million unemployed/underemployed and a worforce growing by 100K to 120K per month. From this, it's easy to see the road going forward is going to be tough and marked by persistently high unemployment.

Why Germany Won't Bail Out Greece

Indeed an great analysis and, as with Andrew, I agree with your conclusion. I would add that the EU, for all of the obvious political reasons, would like to solve its own problems but the IMF is better positioned to dispense harsh medicine.

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

This HOG is beyond control. It started, harmlessly enough, as nice little HOG which citizens fed under the belief and a quaint notion the HOG represented national interests. As the HOG grew its genetic nature changed with its increasing size; now the HOG is feral and eating the hopeless citizens, not realizing the citizens are essential to the HOG's long term survival.

QUICK CHAT # 15- Start 2/8/10

HTL, I think this bump is in response to Greece rescue rumors. To give you an idea of what we are dealing with they are going to take the "drastic" step of increasing the retirement age from 61 to 63.

QUICK CHAT # 15- Start 2/8/10

Tripple, another to follow is Hermes (HESAF.PK) and I just added another to the list through a SA article: Moet (LVMHF.PK)

Economic Growth: Another (Half) Step Forward

After removing the impact of the inventory correction and other noises from the lastest advance release of 4Q09 GDP, it's more likely that final demand is growing at a rate of 1.7% to 2.0% which is very consistent with the YOY growth in 4Q09 sales of publicly held companies which reported sales growth of 2%, excluding financials. Remove the stimulus sludge, and we have something less which will become a growing concern as we go forward.

'Resolution Authority'? That Was So Last Year

If and when we agree upon a resolution authority, it should be constructed and written upon euthanizing the insolvent firm, not "saving" it so that it can return to its parasitic pursuits.

Solid Earnings Help Market Direction

Excluding financials, YOY growth in revenue for reporting companies in the last quarter is 2% in nominal terms, not exactly a harbinger of great things to come. And if you assume some of the sludge of stimulus accrued to the benefit of top line growth, the picture becomes more muted and bleak.

QUICK CHAT # 15- Start 2/8/10

Rosenberg quantifying and putting dollar rallies in perspective:

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

Biding time with short exposure, I'm trying to develop a list of durable investment themes to guide my investing once I think market valuations are aligned with the dismal economic outlook and once I have a better understanding of the investment landscape.

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

Nice 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.