from MacroScope:
Netherlands at core of the crisis
The Netherlands has become the latest country to come into the firing line of the euro zone crisis.
The cost of insuring five-year Dutch debt against default jumped to its highest since January as the government's failure to agree on budget cuts spiraled into a political crisis and cast doubt over its support for future euro zone measures.
Dutch Prime Minister Mark Rutte offered to resign on Monday, creating a political vacuum in a country which strongly backed an EU fiscal treaty.
Five-year Dutch CDS jumped 14 basis points to 133, only a whisker away from the record of 136 basis points hit on November of last year. The premium that investors require to hold 10-year Dutch bonds over their equivalent German Bunds rose to 79 basis points – its highest in 3-years.
Commerzbank's take on Holland:
Elections could be held in September 2012 at the earliest, because the Dutch constitution prescribes a period of 80 days between the dissolution of the government and new elections. In the interim, the government would be unable to get important reforms approved by parliament. This suggests that the 3 pct (budget deficit) target will be missed in 2013 and the country’s AAA rating is at risk.
A Dutch debt auction on Tuesday will provide another test of investor appetite following Monday's selloff.
from Anooja Debnath:
When it comes to recessions, 40 is the new 50
If it were about age, 40-somethings would cringe. But it seems a dead certainty that 40 now means 50 -- or even higher -- when it comes to predicting the chances of a recession taking place.
Going by past Reuters polls of economists, every time the probability hits 40 percent, the recession's already started or is perilously close to doing so.
After the brief recovery period from the Great Recession, Reuters once again started surveying economists several months ago on the chances of developed economies stumbling back into the muck.
As the data get nastier and euro zone politicians wrangle over the sovereign debt mess, the probability goes higher. Just not high enough or fast enough.
The probability that Britain slides back into recession hit 40 percent in the Reuters poll this week, up from one in three last month.
The last time that happened was in July 2008, a few months before U.S. investment bank Lehman Brothers collapsed. The British economy contracted by 2 percent that quarter, its second contraction of 2008. And we all know what happened next. If 40 is the new 50, we're in it.
"It is a very big thing to say we are going into recession ... it is one of those things people are cautious sticking their necks out about," said Alan Clarke, who said there’s a 75 percent chance of that happening.
DDD to DIY… and CCC in 2012
It’s just over a month until everyone winds down for a Christmas break — this means the season for the 2012 outlook briefings by various managers is starting.
Among the first I went to was ING Investment Management, which held the briefing this morning. Eric Siegloff, global head of strategy and tactical allocation, reckons the next year’s key theme affecting asset classes is summarised as CCC — crisis, contagion and credibility.
He believes 2012 is going to be an uncertain environment with the crisis in the banking system and the foundations of the euro zone threatening to spread beyond EU (contagion), hitting credibility of policymakers.
2010 was DDD — deleveraging, dealing with systemic risk and disinflation, and 2011 was about DIY — dividend, income and yield. To some extent the DIY theme carries on into 2012 where investors must allocate their portfolio into riskier but higher-yielding assets in order to get extra returns at a time when average returns remain low across various asset classes.
According to ING’s base case scenario, world equities are expected to gain 5 percent in 2012, compared with 2 percent in Treasuries and 7 percent in real estate. However, equities have 20 percent upside potential, and 15 percent downside potential — making it a very volatile world.
from MacroScope:
Dramatic ending to Greek tragedy
Greece is in the danger zone. Even as the country's finance minister sought to reassure his euro zone counterparts at a meeting in Poland, Greek credit default swaps were pricing in a more than 90 percent chance of default, according to Reuters calculations of Markit data. Economists in a Reuters poll see a 65 percent chance of that happening, probably within a year.
Such fears recently sent jitters across financial markets, prompting some words of comfort from German Chancellor Angela Merkel and French President Nicolas Sarkozy that they are determined to keep Greece in the euro zone. But speculation is growing that Greece will default, and that it will be a messy ordeal. Here are some of the potential dangers if it occurs:
* Greece may be seen as setting a precedent for Portugal and Ireland, analysts said. Yields on peripheral euro zone debt could surge rapidly, making funding costs increasingly unsustainable as yields on Italian and Spanish 10-year bonds surge back towards 7 percent. The ECB could have to intervene more aggressively in the secondary bond market to the detriment of its balance sheet.
* European banks may have to make more significant write-downs of their Greek holdings than they already have. This would hit French banks especially hard, since they are the most heavily exposed to Greek debt, with $56.9 billion in their portfolio -- more than double as much as Germany's equivalent holdings. French banks are also the most vulnerable to Italian debt, with a hefty $410.2 billion.
* Fears of more contagion and further write-downs could make banks even more reluctant to lend to each other. A key measure of financial stress -- the three-month spread between euro Libor and overnight index swap rates -- hovered near its highest in over two years. Said Gary Jenkins, head of fixed income research at Evolution Securities:
You would get the loss on the Greek debt of course but I think much more important is the funding situation. Who is going to be lending the banks money if you have got euro zone sovereigns defaulting and you are unsure about what is going to happen next?
* Banking sector problems could hurt equity markets at large: stock valuations could fall significantly, raising concerns over the ability of corporations to raise capital. That would hurt business and consumer sentiment and further diminish the likelihood of a meaningful global recovery, says Richard McGuire of Rabobank.
from Jeremy Gaunt:
The rule of three
It is beginning to look like financial markets cannot handle more than three risks. First we have, as MacroScope reported earlier, Barclays Wealth worrying about U.S. consumers, euro zone debt and Asian overheating.
Now comes Jim O'Neill and his economic team at Goldman Sachs, with three slightly different notions about risks in the second half, this time in the form of questions. To whit:
1) How deep will the U.S. economic slowdown be and what will the policy response be? (That's two questions, actually, but let's not nitpick).
2) How much decoupling is possible between the U.S. economy and others, notably China?
3) Will sovereign and systemic risks intensify again or settle?
For what it is worth, Goldman reckons none of the three should be too damaging:
"Our own forecasts envisage a period of some muddiness in the near-term that ultimately resolves towards a more positive global view. But given the fragilities in the system, we will be watching our various proprietary tooks ... and trying to stay open-minded."
Financial survival tips for the age of debt
From whom would you rather take investment advice: one of the thousands of bankers or wealth managers who did not see the financial crisis coming or one of the few economists who predicted it?
In his 2003 bestseller “The Dollar Crisis”, Richard Duncan forecast how the unbridled creation of liquidity was set to spark a financial crisis. Three years after the crisis unfolded, Duncan’s new book, “The Corruption of Capitalism”, paints an even bleaker future.
Duncan expects that, in the years ahead, governments will prop up economies with ever-bigger doses of fiscal and monetary stimulus, but that eventually the extreme imbalances in the world economy will be corrected by market forces.
This will probably involve a collapse of globalisation and a drastic reduction of the standard of living of almost everyone alive
So how can investors protect themselves from such a dire outlook? Duncan says that his books aim to give policy advice, not investment advice. In “The Corruption of Capitalism” he writes only one line, at the very end of the book, about how to prepare for lean years:
In economic upheavals down through the centuries, gold, land and a broadly diversified investment portfolio have preserved many a fortune
When MacroScope asked him to elaborate recently, Duncan said that gold is his favourite investment, because it will appreciate in line with amount of fiat money that central banks will create.
Ain’t it wonderful when financial plunderers advise regular (i.e. poor) folks how to manage their money.
The biggest division in this nation is not gender, religion, nor age, political party nor region. It is social class.
Social class in America is basically measured by wealth.
So once again we have the upper classes telling middle and lower classes how to live.
Mr. Obama, you promised change. Americans need relief.
Left Blog
Remember the subprime crisis?
Remember the U.S. subprime crisis? Lombard Odier thinks the crisis is not over, and worse, a second wave is just ahead of us.
Paul Marson, chief investment officer at the investment firm, thiknks that Alt-A and Option ARM (Adjustable Rates Mortages) mortgages are due for resets in 2010/11.
Alt-As sit somewhere between prime and subprime mortgages. Option ARMs are mortgages which required little or no documentation, where borrowers had the option of making minimum monthly payments lower than the accruded monthly interest on the loan. Given the shocking borrower quality, the hope was that house prices would continue to rise and homeowners could simply “flip” the property when the mortgage came to reset.
Lombard says there are almost $200 billion of Option ARMs to reset in th years aset and the delinguency rates are already running at close to 40 percent and the reset time-bomb is equal in magnitude to that of subprime in 2007/2008.
“Whoever said the credit crisis was over (probably Tim Geithner!) is severely misguided,” Marson said in a note to clients. “The consequence of ‘subprime the sequel’ is that further substantial losses will be taken by the government purse and the financial sector is a long way from being able to function normally.”
from MacroScope:
Crisis? What Crisis?
The title of this post is taken from two sources. One was a headline in British tabloid, The Sun, in January 1979, when then-prime minister James Callaghan denied that strike-torn Britain was in chaos. The second was the title of a 1975 album by prog rock band Supertramp that famously showed someone sunbathing amidst the grey awfulness of the declining industrial landscape.
Are we now getting blasé about the latest crisis? Not so long ago, perfectly respectable economists and financial analysts were talking about a new Great Depression. The world was on the brink, it was said. Now, though, consensus appears to be that it is all over bar the shouting. The world is safe.
Wealth managers at Barclays have gone as far as telling their clients to get over it.
Move past the crisis .... The past year's events were deeply traumatic for most investors, but now is the time to move on, and take a more "business as usual" approach ...."
Such bullishness may not be comforting to the record numbers of jobless in parts of the world, but it is bordering on consensus. It is left to the likes of perma-bears such as Nouriel Roubini to try to burst the bubble of optimism on which many are floating. The economist began one of his latest articles bluntly:
Think the worst is over? Wrong.
Roubini's main point is that unemployment is likely to get worse rather than better and that many U.S. jobs that have been lost will not come back.
Not only is it too soon to celebrate, we are now plunging headlong into economic catastrophe in the west, leaving the reins of true power firmly grasped in the hands of the architects of this misery – the banks.
from The Great Debate UK:
Is a bubble burbling in financial markets?
-Jane Foley is research director at Forex.com. The opinions expressed are her own.-
The discrediting of the efficient markets theory in the aftermath of the financial crisis appears to have been accompanied with growing support for the view that rather than efficient in nature, financial markets are predisposed towards the formation of bubbles.
A bubble can simply be defined as an occurrence that begins when the price of an asset has been driven significantly above it "fair" value. According to the efficient markets theory this would not happen.
If bubbles are a natural outcome of financial market activity it is relevant to ask whether the very loose fiscal and monetary policies of many central banks and governments are presently sowing the seeds of the next bubble.
Even though the real economies of the U.S., UK, Eurozone and Japan continue to be defined by expectations of rising unemployment and falling real wages, access to cheap money has already helped restore the profitability of many investment banks.
In turn, this has fed risk appetite which is evident in the rally in stocks since the spring, increased demand for "risky" currencies and a recovery in commodities prices. Brent oil has rallied by 128 percent from its 2009 low. The ability of oil to rally despite the existence of oil supplies well above the seasonal average suggests there is already speculative element in this market which could be in danger of driving prices above their fair value.
This week’s meetings of the Federal Reserve, the Bank of England and the European Central Bank have focussed attention not so much on rates, but on the extraordinary policy decisions taken by these central banks in the wake of the financial crisis and whether conditions are ripening in favour of a gradual withdrawal of some of these policies.
Jane, since you assert that the demand for crude was flat while the price was rising, a plausible explanation would be that the whole production curve has been elevated to compensate the loss in US$ value. I think that conditions for spotting a bubble formation stages should be investigated in correlation with the level of affordability for the end consumer. The housing bubble was predicted 2 years in advance, based on this kind of approach.
However, in repeated statements, Middle East suppliers were not shy spelling out that their comfort zone prices were between US$75 and US$80 when the barrel was hovering around US$60. In very short time, prices on the market have been elevated to a plateau of US$80, with no apparent changes in observable factors concurring in price formation. Therefore, what is the mechanism of translating a statement of desire into effective pricing in a market deemed free?
from MacroScope:
Crisis reading: What’s in the book bag?
Readers of MacroScope who live in the northern hemisphere will be gearing up for some summer reading.
James Montier, the market psychologist who is also an equity analyst at Societe Generale, has come up with his annual recomendations of what to read. The full list is here, but for the current economic and market crisis he has this to offer:
My favourite book in this category is Bill Fleckenstein’s ‘Greenspan’s Bubbles’ -- an excellent exposé of incompetence during Alan Greenspan's tenure as Fed Chairman. The next choice in this group is Whitney Tilson and Glen Tongue’s ‘More Mortgage Meltdown’. This book explains clearly how we ended up in this mess (and is based on the authors -- real time experience), and an added bonus is the insight into Tilson's investment process provided by the case studies. My final choice in this section is Jim Grant’s ‘Mr. Market Miscalculates’. I've mentioned this excellent book before, and I believe it deserves a place on all investors' bookshelves.
Montier got MacroScope thinking. There must be many more crisis books, or related ones, that are worthy of a read as the summer rolls in. How about John Kenneth Galbraith's 'The Great Crash, 1929' or Tom Wolfe's 'Bonfire of the Vanities', which still has one of the best descriptions ever of how bond traders make money.
So let's have your suggestions. What should you read to mark the crisis?
