Probably one of the better papers on the European situation and the possible solutions, that was presented on The Trader some time ago. With renewed dynamics in the region, a report well worth reading.
We see three plausible scenarios in the coming months:
1. The euro area manages to regain credibility regarding its willingness to “do whatever it takes” to resolve the current crisis while avoiding defaults and inflation. This ironically requires far more rapid and larger austerity than currently planned in the periphery.
2. The euro area choses decisively to end the moral hazard regime. While this will not be orderly, the problems can be reduced through comprehensive and rapid actions to restructure sovereign and bank debt in highly indebted nations, while recapitalizing banks elsewhere.
3. The euro area remains in limbo, unable to choose a clear path. This would lead to a large disorderly series of finan- cial sector and sovereign defaults, while an “inflationary majority” is likely to eventually assert control of the ECB and manage a massive liquidity expansion.
Full report, click here, (or keep listening to news by politicians trying to save Europe).
Sell in May…? Once again, we had the usual “this time is different” arguments at the time. Back in May (3 months ago), people couldn’t think clearly, as QE2 was giving Investors a blurry picture. Many were talking of the resilient Economy, and “this time IS different”. But, boy, were they wrong. It is NEVER different. From ING research back in May;
Last year, this constellation led to a soft patch in global growth and a difficult period for risky assets. So the big question now is whether or not investors should again follow the adage “Sell in May and go away, but remember to come back in September”. In our view, the answer would be that “this time is different”.
The crucial difference today is that we are further advanced in the economic cycle because of which the economy is more resilient. Global economic activity gauges (especially for the services sector) and labour market indicators (especially in the US and Germany) stand significantly higher than a year ago. Partly due to this, risky assets have performed remarkably well in view of the shocks that recently hit the economy (oil price, Japan, sovereign debt stress). The fundamental force behind all this is the fact that the corporate sector is in a more expansionary mood than a year ago as evidenced by its hiring and investment intentions.
And here is the answer. Maybe it is time to pick up some? Below DAX index.
As European futures reach the -5% mark soon, let’s review two important factors driving the Markets today..
1. Investor Psychology;
2. HFT Domination. As the market is falling, fund managers aren’t able to execute their orders in an efficient way, due to HFT front running the orders, and “confusing” the order book. Redemptions can’t be met in a ordinary way, and therefore we get the market trading in vacuum. Regulators will be the ultimate escape goat, when people realize what is going on in the market. Meanwhile, HFT tutorial below.
There is a proliferation of economics blogs, with increasing numbers of economists attracting large numbers of readers, yet little is known about the impact of this new medium. Using a variety of experimental and non-experimental techniques, this study quantifies some of their effects. First, links from blogs cause a striking
increase in the number of abstract views and downloads of economics papers. Second, blogging raises the profile of the blogger (and his or her institution) and boosts their reputation above economists with similar publication records. Finally, a blog can transform attitudes about some of the topics it covers.
Full report, world bank on eco blogs.
It is always easier to destroy, than to build up. DAX is clearly leading us lower while approaching those 2009 lows. It took 2 weeks to build the bounce up, and only 3 days to wipe it out, and break new lows. We will be back with a full Chartology later.
For the ones who missed Napier’s video from earlier this year, we urge you to refresh the Long Term Strategies.
With last week’s Economic figures out, the investors are turning the attention to what Angel Ben might pull out of the hat at the FOMC meeting coming up shortly. Jackson Hole was a non event, but people still rushed into buying equities, on hopes someone will overpay for their shares later. With QE 1 and QE2 not having saved the world (except ES futures), Fed will need to do something. What are the options?
1, Restart the printers and come back to buying assets. With the limited success of the previous programs, and the inflation threat, this option will be controversial. There is also a question worth mentioning. How big balance sheet expansion can the Fed run, indefinite?
2, Operation Twist, whereby the Fed would sell shorter maturities and buy longer maturities is the other option. By doing so, they won’t need to expand the balance sheet, but it would result in a flattening of the yield curve, and ultimately hurt banks ability to generate interest revenues. The yield curve has flattened already. Below is a comparison of the yield curve between the end of QE2 and Aug 31st, 2011. The bond markets are already discounting a possible Operation Twist. Action by the Fed would further flatten the yield curve, and hurt banks even more (and the banks need friends, not enemies at the moment).
The question is if Fed is running out of bullets, and while all policy decisions are made, looking at the wrong figures. It wasn’t too long ago, majority of members (and pundits), all predicted GDP figures of 3-4%, while Jobs were created….
Alistair Darling has launched a stinging attack on Sir Mervyn King, claiming the Bank of England governor did not understand the unfolding financial crisis in 2007, took the wrong policy action and ended http://ftalphaville.ft.com/thecut/2011/09/05/668546/darling-launches-stinging-attack-on-king/
Greece’s finance minister has staunchly defended his handling of the country’s relations with international lenders, the FT reports, accusing his critics of promoting “a mood of uncertainty and scaremongering.” Meanwhile Italy’s economy minister Giulio Tremonti promised on Sunday to meet the country’s budget commitments after the ECB stepped up pressure for austerity action, http://ftalphaville.ft.com/thecut/2011/09/05/668526/ecb-faces-delicate-week-with-italy-and-greece/
A Hong Kong regulatory review is delaying a high-profile hedge-fund launch by the former Asia investment chief for an asset-management firm owned by JP Morgan Chase, the WSJ reports, citing people familiar with the matter. Hong Kong’s Securities and Futures Commission is exploring allegations that Carl Huttenlocher, http://ftalphaville.ft.com/thecut/2011/09/05/668511/hk-regulators-delay-launch-of-huttenlocher-hedge-fund/
Tropical Storm Lee weakened late Sunday into a depression as it came ashore and moved slowly northwards, USA Today reports, but there were warnings further flooding could be seen. Areas of Alabama, Louisiana and Mississippi near the coast reported scattered wind damage and flooding, http://ftalphaville.ft.com/thecut/2011/09/05/668481/flood-fears-as-downgraded-lee-moves-north/
Before Europeans go to sleep and the ES future is down some 10 handles, let’s review three important charts.
….and while everybody seems to think we are done with the Black Swan for the year, we hate to break it, the Black Swan has not occurred as of yet. First two weeks of August was merely a small warm up. Black Swans are unpredictable……