Austerity explained in a few words. Austerity won’t help Europe, despite Germany giving this painful cure to the PIIGS. From the Atlantic.
Let’s try a thought experiment. Imagine you walked into the bank, told them you were going to be taking pay cuts for the next few years, and then asked for a loan. You’d be laughed out of the office or else pay an interest rate so high that “usurious” wouldn’t do it justice. The logic is simple: If you’re in debt and your income is shrinking, it’s mighty hard to pay back what you already owe.
It’s not any different when it comes to countries that can’t print their own money. That brings us to Spain.
We have traded derivatives for many years, read many volatility reports and attended multiple options presentations. This is the absolutely most unique visual and the “coolest” presentation of volatility we have seen over the past fifteen years. Great work by Chris Cole at Artemis Capital Management. For his last must read report click here, but before that, we urge you to watch the video presentation below.
“Nobody will deny there is roughness everywhere….” Benoit Mandelbrot
The movement of stock prices has been an obsession for generations of speculators and traders. On a higher level mathematicians believe that modern markets are an extension of the same fractal beauty found in nature. Visualized these stock markets may take the shape of a turbulent ocean with waves made of human hopes, dreams, greed, and fear.
Guest post by Louis Copper of BGC.
If you really want to know what investors are currently thinking, then move away from looking at equities, and turn your attention to government bond markets. These are showing quite clearly that fear is returning. Investors are fleeing for safety and demanding a high price for taking on risk. So today Germany has sold E4.21bn of two year notes at record low yields – at an interest rate cost of just 0.14%. As Journalist Graeme would say “Wowser”. And it comes only eight days after Switzerland sold two year notes at a record low interest rate of negative 0.251% (investors are willing to lend Switzerland more money than they will get back because they so want the safety of the Swiss government). At the same time, borrowing costs for the troubled Eurozone countries are rising fast. A week ago – last Wednesday – Italy sold 361 day bills at 2.84%, more than double the previous rate of 1.405% at an auction in March. And although the Spanish debt auction yesterday is being taken positively (because it managed to sell more debt than anticipated) Spain paid a price for this – again the interest rate was around double that of the previous month. A good test of investor’s confidence in Spain will come tomorrow with the sale of ten year bonds (the boss of the largest bond investment fund in the world, PIMCO’s Bill Gross, said that anyway Spanish bond auctions are mostly sold to Spanish banks – there are few other buyers). However despite rising fear, we are not yet at crisis yet, with 10 year yields on Spanish and Italian debt still 1-2% below the unsustainable 7-7.5% yields of last Autumn. So when will the next crunch come? When will even the local banks in Italy and Spain refuse to buy their own countries debt?
Spain, pain, Spain, pain and the saga goes on. Below some “spot on” points by Blackrock.
- Spain brings European sovereign risk back in focus: European risk again dominates the outlook for global financial markets. Whether policy makers have learned the critical lessons of past mistakes in Greece will determine the near-term outlook.
- One part Ireland… and one part Greece. Spain’s economic problems bear both resemblance and critical differences to aspects present in both prior crises in Ireland and Greece.
- The pain in Spain falls mainly on…Germany. The lesson of the failures of the Greek intervention at its core was to fail to recognize that Greece’s problems were not limited to Greece.
Some good points by The Economist of how badly the economy was struck by the 2008 crisis.
SINCE the financial crisis struck in 2008, the economic output of most of the rich world has stalled. By the end of the last quarter of 2011, GDP in the 34 countries of the OECD was 6.8% lower than it would have been had it continued at its 1995-2007 trend growth rate of 2.7% on average. In monetary terms, that’s $2,200 per person. According to the IMF’s latest economic growth forecasts for the years up to 2017, released on April 17th, it will take OECD countries another 2.7 years to reach its pre-crisis trend level of economic output. Applying these calculations to individual countries level, it is clear that the PIIGS have become particularly stuck in the mud, as can be seen in the chart below.
Guest post by Vix and more.
This is the third year I have been periodically publishing some proprietary data I developed with respect to economic data vs. expectations that I variously present in an aggregated format or across five groups of economic activity (manufacturing/general, housing/construction, employment, consumer and prices/inflation.) This time around I have elected to do both, with the aggregated data in the top chart and the detailed breakout in the lower chart.
The aggregated story tell the picture at 30,000 feet: economic data have been consistently topping expectations since late September and the stock market has risen in conjunction with better-than-expected news. The detail chart tells a more nuanced story. Here one can see positive surprises almost across the board in the fourth quarter of 2011, yet a rash of disappointments in 2012 in housing/construction as well as manufacturing/general economic data.
In both 2010 and 2011, it was the end of positive surprises in manufacturing and general economic data that coincided with bearish downturns in stocks. So far in 2012, the disappointments in manufacturing and general economic data have not been able to put a dent in the stock market rally. My sense is that this data and the stock market will be moving in the same direction within the next month. Whether that means an uptick in the data or a downtick in stocks remains to be seen.
The YPF story is receiving a lot of attention in Spain. Argentina is accused of stealing assets in order to hide the Argentinian bad economy. Let’s see how this plays out. Wonder what people would say if Spain “seized” peoples euros and gave them new pesetas instead? From El Pais.
Repsol on Tuesday accused the government of Argentinean President Cristina Fernández de Kirchner of seizing control of its YPF unit in order to distract public attention from the Latin American country’s social and economic crisis.
At a news conference, Repsol chairman Antonio Brufau confirmed the leading Spanish oil firm would seek redress with the World Bank’s International Center for Settlement of Investment Disputes. Speaking in Mexico, Prime Minister Mariano Rajoy expressed his “profound discontent” at the move, while his government, which has the backing of the European Union in the dispute, warned of reprisals.
Spain is continuing to dominate the news. Bad Bank loans are hitting new record levels, while the (European) tax payers are paying for the stupidity. From Bloomberg.
Spanish, Italian and Portuguese banks are loading up on bonds issued by their own governments, a move that shifts more of the risk of sovereign default to European taxpayers from private creditors.
Holdings of Spanish government debt by lenders based in the country jumped 26 percent in two months, to 220 billion euros ($289 billion) at the end of January, data from Spain’s treasuryshow. Italian banks increased ownership of their nation’s sovereign bonds by 31 percent to 267 billion euros in the three months ended in February, according to Bank of Italy data.
In Spain, stronger banks such as Banco Santander SA, the country’s largest lender, can handle losses from their sovereign holdings. Photographer: Denis Doyle/Bloomberg
German and French banks, meanwhile, have cut holdings of those countries’ bonds, as well as Irish and Greek debt, by as much as 50 percent since 2010 in some cases. That leaves domestic firms on the hook for a restructuring such asGreece’s last month and their main financier, the European Central Bank, facing losses. Like Greece, governments would have to rescue their lenders with funds borrowed from the European Union.
“The more banks stop cross-border lending, the more the ECB steps in to do the financing,” said Guntram Wolff, deputy director of Bruegel, a Brussels-based research institute. “So the exposure of the core countries to the periphery is shifting from the private to the public sector.” (Full article here).
Guest post by Azizonomics.
This is a demographic disaster.
From the Guardian:
Unemployment among Europe‘s young people has soared by 50% since the financial crisis of 2008. It is rising faster than overall jobless rates, and almost half of young people in work across the EU do not have permanent jobs, according to the European commission.
There are 5.5 million 15- to 24-year-olds without a job in the EU, a rate of 22.4%, up from 15% in early 2008. But the overall figures mask huge national and regional disparities. While half of young people in Spain and Greece are out of work, in Germany, Austria and the Netherlands it is only one in 10. In a further six EU countries, youth unemployment is around 30%. Of those in work, 44% are on temporary contracts.
The same phenomenon exists in the United States: