Beware of the PIIGS
Another must read by Doug Short.
“PIIGS” we are informed in the current Wikipedia entry “is a pejorative acronym used to refer to the economies of Portugal, Italy, Greece and Spain. Since 2008, the term has included Ireland, either in place of Italy or with an additional I.”
With apologies, I am joining the ranks of contributors to such august publications as the New York Times,Wall Street Journal, Financial Times and The Economist who have used this handy label as a linguistic convenience and, I believe, with no aspersions intended.
My topic is the relative size of these five countries in a basic economic sense — to one another and to the world as a whole. To make comparisons, I’m using GDP based on purchasing power parity (PPP). My source for the data is the IMF (International Monetary Fund), specifically the IMF’s World Economic Outlook Databases.
The complete IMF database includes over 180 countries. For the chart below, I used the 58 countries with the largest GDP, which thereby includes the newcomer and smallest of the PIIGS (both in size and GDP) — Ireland.
Fed Intervention and the Market
Guest post by Doug Short.
We’re on the threshold of the last month for the latest Federal Reserve intervention, Operation Twist, which was officially announced on September 21 of last year. We’ve seen several bouts of aggressive Fed attempts to manage the economy following the collapse of the two Bear Stearns hedge funds in mid-2007 about three months before the all-time high in the S&P 500.
Initially the Fed Funds Rate (FFR) underwent a series of cuts, and with the collapse of Bear Stearns, the Fed launched a veritable alphabet soup of tactical strategies intended to stave off economic disaster: PDCF, TALF, TARP, etc. But shortly after the Lehman bankruptcy filing, the Fed really swung into high gear. The FFR fell off a cliff and soon bounced in the lower half of the 0 to 0.25% ZIRP (Zero Interest Rate Policy), now in its fourth year.
If a picture is worth a thousand words, this chart needs little additional explanation — except perhaps for those who are puzzled by the Jackson Hole callout. The reference is to Chairman Bernanke’s speech at the Fed’s 2010 annual symposium in Jackson Hole, Wyoming. Bernanke strongly hinted about the forthcoming Federal Reserve intervention that was subsequently initiated in November of 2010, namely, the second round of quantitative easing, aka QE2.
The food chain-Bill Gross
Some thoughts on “big fish ewats small fish” by Bill Gross.
News That Matters
Better late than never. We are sorry for the delay today. Now, to the news section….
Ft.com
US benchmark borrowing costs plunged to levels last seen in 1946 and those for Germany and the UK hit all-time lows as investors took fright at what they see as a disjointed policy response to the debt crisis in Spain and Italy. In a striking sign of the flight to haven assets, German two-year bond yields fell to zero for the first time, below the equivalent rate for Japan, meaning investors are willing to lend to Berlin for no return. US 10-year yields fell as low as 1.62 per cent, a level last reached in March 1946, according to Global Financial Data. German benchmark yields reached 1.26 per cent while Denmark’s came close to breaching the 1 per cent level, hitting 1.09 per cent. UK rates fell to 1.64 per cent, the lowest since records for benchmark borrowing costs began in 1703.http://www.ft.com/intl/cms/s/0/7fc8b916-aa7d-11e1-899d-00144feabdc0.html#axzz1wQ4tZnA1
Brazil’s central bank has cut its benchmark lending rate to an historic low as part of efforts to revive growth in Latin America’s largest economy. The central bank reduced its Selic interest rate by 50 basis points to 8.5 per cent, undercutting the previous mark of 8.75 per cent reached during the 2009 financial crisis. Explaining its decision in a brief statement, the monetary policy committee of the central bank said: “At present, there remain limited risks to the trajectory of inflation. The committee further notes that given the fragility of the global economy, the contribution from the external sector is disinflationary.”http://www.ft.com/intl/cms/s/0/c3243fb0-aaae-11e1-9331-00144feabdc0.html#axzz1wQ4tZnA1
The Spanish government is under mounting pressure to open an investigation into the collapse of Bankia amid public anger at the salaries of its directors and the losses of savers who bought the rescued bank’s shares. Luis de Guindos, Spain’s finance minister, described €20m of severance pay for two directors of the bank as “unacceptable”, calling for an investigation by the Bank of Spain, at the same time as the central bank’s outgoing governor hit back at a “smear campaign” against him in the wake of the Bankia rescue. http://www.ft.com/intl/cms/s/0/d8b1b710-aa7a-11e1-9331-00144feabdc0.html#axzz1wQ4tZnA1
Dodge
Guest post by Ice Cap Asset Management.
Dodge City, Kansas is a lovely place. The home to 26,101 people regularly enjoy old west casinos, old west rodeos and old west movies. Like we say – it is a lovely place.
Yet years ago when it was still cool to be a cowboy, cowboys of all types were getting’ out of Dodge. And who could blame them – bullets flew around town on a regular basis.
As we look across the globe today, Dodge City’s are popping up all over the place across America, Europe and Asia. However, within the World of financial markets, government sponsored economic policies are desperately trying to keep everyone in the 2012 financial version of Dodge.
Today’s question of the century is which market is the equivalent of Dodge? One thing is for sure, financial bullets are flying fast and furious these days forcing every sane investor to keep their head down. For all other investors, be a good cowboy and be sure to have an exit plan – you never know when you’ll need it.
All eyes on Spain
Spain tried playing poker vs ECB using peanuts, but the strategy failed. Bankia won’t be allowed to use ECB funding via the backdoor. The Peninsula Iberica is on fire. Some further insight via Macro Business.
The news from Europe was all Spanish overnight as the country continues to struggle to find traction on any plan that will lead it away from the need for external help:
Spain backtracked on a plan to use government debt instead of cash to bail out Bankia, as Prime Minister Mariano Rajoy struggles to shore up the nation’s lenders without overburdening public finances.
An Economy Ministry spokesman said yesterday that the government was considering using an injection of treasury debt instead of cash to recapitalize BFA-Bankia, as laid out in legislation approved in February. Spanish bond yields rose and investors criticized the idea, which the spokesman, speaking anonymously under ministry policy, said today had become a “marginal” option for the 19 billion-euro ($24 billion) rescue.
The government’s push to merge banks continues with the announcement that three savings banks, Ibercaja, Liberbank and Caja3, will vote shortly on whether to combine into a single entity. The merger, if approved, would create the country’ seventh largest financial institution with a combined £96bn in assets. Obviously we’ve seen this before with Bankia, which unfortunately didn’t go to plan.
SPX vs Facebook
Time to buy FB?
Invesre correlation perfected.
EC, ECB, EFSF, ESM, EU….
Market thoughts by Peter Tchir of TF Market Advisors.
So the EC wants the ECB to bypass the EFSF and use the ESM to recap EU banks? That was the rumor that shifted global stock markets by 1% in a matter of minutes?
It has been a while since we looked at the EFSF Flowchart or had a detailed look at the EFSF Guidelines but it looks like it is time to dig a bit deeper into what is possible and what is not.
The ESM is not yet up and running. There was talk that it would be done by June or July of this year, but in typical EU fashion I don’t think much progress has been made towards that promise. So right now the EU is stuck with EFSF and the potential to set up the ESM.
The EFSF actually has a lot of powers. I’m not sure exactly why it is such a big deal if the EFSF (or ESM) invests directly in banks or lends money to countries to invest in banks. In theory the countries could lose on their bank investment but pay back EFSF loans? That is a possibility but it would seem more and more likely that if the bank rescues fail the sovereign is dead anyways, so the market might be reacting too much to that distinction.
The bigger problem is that the EFSF is not well set up to leverage itself. The EFSF is technically the entity that could be buying bonds in the secondary market. It is supposed to have taken over that role from the ECB, yet it hasn’t done that. Why not? It is possible that they haven’t figured out a good way to leverage the EFSF and therefore would get minimal bang for the euro by buying bonds in the secondary market without leverage. The same issues apply to its role in the primary markets. Yes, the EFSF can intervene in the primary markets, but again, had very convoluted leverage schemes, which would never work.
The problem isn’t so much what the EFSF is allowed to do, it is how constrained it is in terms of leverage and access to funding. There is almost nothing that can be done about how EFSF is set up at this stage, nor should there be. That messed up entity should be put out of its misery.
Spanish Equity Valuation
Spain is the talk of the town. The biggest problem is that all trends extend for much longer than majority think even possible…..
Time to start applying the same negative chartology to Spanish properties?
Chart Scott Barber.
Medicine-yes, but monedas first
Austerity bites. Latest out of Spain, is that Roche actually wants to get paid for providing medicine. As the Spanish economy is continuing the fall into the abyss, companies are now adjusting to the fact many regional municipalities lack money. From El Pais.
The pharmaceutical giant Roche has decided to set a ceiling on the orders that 11 Spanish hospitals will be allowed to place until they settle at least part of their ballooning unpaid bills. One more center, the Hospital Provincial de Castellón, will have to pay the Swiss multinational, which manufactures many of the cancer treatments used in Spanish hospitals, for its orders in cash.
Farmaindustria, the pharmaceutical industry association, calculates that the outstanding debt on drugs ordered by hospitals was close to 6.4 billion euros in late 2011. A delay in payments from struggling regional governments is leaving public hospitals in the red, while pharmacies in some regions, such as Valencia, have gone on strike to protest the fact that the Generalitat also owes them millions of euros for subsidized drugs.
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