Some thoughts on the Recovery by Krugman. Although we disagree with some of his points, he shares some insight into the problems of this Great Recovery, or was it just green shoots?
If you were shocked by Friday’s job report, if you thought we were doing well and were taken aback by the bad news, you haven’t been paying attention. The fact is, the United States economy has been stuck in a rut for a year and a half.
Yet a destructive passivity has overtaken our discourse. Turn on your TV and you’ll see some self-satisfied pundit declaring that nothing much can be done about the economy’s short-run problems (reminder: this “short run” is now in its fourth year), that we should focus on the long run instead.
This gets things exactly wrong. The truth is that creating jobs in a depressed economy is something government could and should be doing. Yes, there are huge political obstacles to action — notably, the fact that the House is controlled by a party that benefits from the economy’s weakness. But political gridlock should not be conflated with economic reality.
Our failure to create jobs is a choice, not a necessity — a choice rationalized by an ever-shifting set of excuses.
Today’s market brings memories back to Resonance. Market is behaving more and more like the charts from the Physics studies we conducted, years ago. The oscillations are becoming greater and greater, and risk breaking down.
We have been arguing there is a huge risk of the HFT Algo driven market bringing the oscillations to an end, and we get a Flash Crash event once again. The market is simply not behaving healthy. From Wikipedia;
In physics, resonance is the tendency of a system to oscillate with larger amplitude at some frequencies than at others. These are known as the system’s resonant frequencies. At these frequencies, even small periodic driving forces can produce large amplitude oscillations, because the system stores vibrational energy.
Resonances occur when a system is able to store and easily transfer energy between two or more different storage modes (such as kinetic energy and potential energy in the case of a pendulum). However, there are some losses from cycle to cycle, called damping. When damping is small, the resonant frequency is approximately equal to a natural frequency of the system, which is a frequency of unforced vibrations. Some systems have multiple, distinct, resonant frequencies.
Resonance phenomena occur with all types of vibrations or waves: there is mechanical resonance, acoustic resonance, electromagnetic resonance,nuclear magnetic resonance (NMR), electron spin resonance (ESR) and resonance of quantum wave functions. Resonant systems can be used to generate vibrations of a specific frequency (e.g. musical instruments), or pick out specific frequencies from a complex vibration containing many frequencies.
Courtesey of European Peripherals. Let’s see if today’s sell off wiped out the last bulls short term, and everything snaps right back up, again? The Markets are trading rather jittery. The end stop of this market will be a real big wipe out, when the Algos end this in a grand Flash Crash. As we sugegsted over the last days, buy vol on downticks, as the market still prices risk totally wrongly. Below, Italy, Portugal and Spain indices.
Gold is trading at $1,553.11/oz, €1,104.47/oz and £973.00/oz.
Gold has risen to new record highs in pounds and euros as concerns about contagion in the eurozone and stagflation in the UK deepen. The euro has fallen sharply in international markets and is down 1.5% against gold so far this morning. European Council President Herman Van Rompuy has called an emergency meeting of top officials dealing with the euro zone debt crisis as concerns deepen over the sovereign debt crisis spreading to Spain and Italy.
Gold in USD and Berkshire Hathaway A Class Shares in USD – January, 2000 until July 2010 (Daily – Rebased to 1)
Gold has risen to record nominal highs at EUR 1,100/oz, GBP 971/oz and at $1,549/oz is only a few dollars or some 0.5% from the record high close of $1,556.70 seen on April 29th. The very poor U.S. employment numbers Friday suggest that the very tentative U.S. recovery is tottering and a recession looks very likely which is leading to safe haven demand.
Gold has had another period of correction and consolidation and is looking well positioned to eke out further gains as we move into the seasonal strong Autumnal period which begins in August.
Cross Currency Table
Spain’s 10-year yield spread over Germany widened to a euro-era record of over 300 basis points. Italian and Portuguese bonds are also under pressure with Portuguese 10 year yields surging to 13.4%.
The risk of contagion affecting European and international banks and a new banking crisis rises by the day.
Meanwhile, in the U.S., President Obama is seeking a massive $4 trillion in a deficit reduction package. Failure to do so may lead to a U.S. and global sovereign debt crisis.
For more in depth analysis of US and it’s transformation, read Emanuel Todd.
Below Guest Post from The Daily Reckoning,
We always take my car ‘cause it’s never been beat.
And we ain’t missed yet with the girls we meet.
– The Beach Boys
We are sitting in our favorite café in Paris…listening to the Beach Boys and reflecting on the decline of the US Empire. Back in the ’60s, the Beach Boys celebrated a country that was young, growing, optimistic…and a winner. Now, what we see is the whole kit-and-kaboodle of life in the US giving way to desperation, delusion and an irresistible impulse to commit imperial suicide. The economy turns sour. The military becomes malignant. Households are corrupt, bankrupt and dependent. Even the churches sing their hallelujahs to Caesar now.
What’s “imperial suicide?” It’s what empires do. If no other empire arises to kill them…they kill themselves. China will probably eventually crush the US militarily. But that is far in the future. The US can’t wait. It lets the zombies run wild.
Is there an alternative way for the Euro?
This paper argues monetary union stability requires a government banker that manages the bond market and it offers a specific proposal for stabilizing the euro that does not violate the “no country bail-out” clause. There is accumulating evidence that the euro’s current architecture is unstable. The source of instability is high interest rates on highly indebted countries which creates unsustainable debt burdens. Remedying this problem requires a central bank that acts as government banker and pushes down government bond interest rates to sustainable levels. That can be accomplished by creation of a European Public Finance Authority (EPFA) that issues public debt which the European Central Bank (ECB) is allowed to trade.
The debate over the euro’s financial architecture also has significant political implications. That is because the current neoliberal inspired architecture, which imposes a complete separation between the central bank and public finances, puts governments under continuous financial pressures. Over time, that pressure makes it difficult to maintain the European social democratic welfare state. This gives a political reason for reforming the euro and creating an EPFA that supplements the economic case for reform.
Some CDS Updates. Risk is off, despite the fact Basel III seems slack with regards to what is a risky sovereign asset, Sovereign Debt Risk and Basel III-The next Financial crisis. With last week having produced one of the sharpest rallies ever, get prepared for some volatility this week, when Algos go crazy in a no volume market.
PORTUG 1050/1100 +25
ITALY 264/271 +14
GREECE 2175/2325 +75
SPAIN 323/331 +11
IRELAND 925/975 +25
U.K. 68/ 71 +2
BELGIUM 182/189 +10
FRTR 93/ 96 +2
AUST 70/ 74 +2
5y cds high beta
It is back, the anger on naked short seller. Italy is not happy with the bank stocks falling, so they now start the blame game of the naked short sellers. Could it be Italy’s Economy is in total chaos, while the bunga bunga man is enjoying himself? Whoever responsible, the naked short sellers now need to disclose their positions. We ask ourselves, does anybody care about when these short sellers loose money, when the markets go parabolic?
For those interested in the man who screwed an entire nation (Italy), please read full report on Silvio.
Below from Bloomberg,
The measure, which takes effect starting tomorrow, follows similar action take in other European countries, including Germany, Rome-based Consob said in a statement posted on its website.
Consob’s commissioners met today after shares of Italy’s biggest banks fell to the lowest in more than two years on July 8, and government bonds dropped, driving 10-year yields to a nine-year high.
Short selling involves the sale of securities borrowed from the owner, and generates profit when the trader repurchases them at a lower price and returns them to the owner. The amount of shorting is limited by the willingness of owners to lend.
On July 5, European lawmakers voted in favor of a ban on short selling of government bonds in the EU unless traders have at least “located and reserved” in advance the securities they intend to sell. The European Union Parliament in Strasbourg, France, also called for restrictions on traders’ use of credit- default swaps to profit from defaults on sovereign debt they don’t own.