Guest post by Vix and more.
There are many ways to translate an opinion about the financial markets into a particular trade. Recently, I decided to act upon my belief that the eurowould weaken against the dollar by booking a couple of weeks in Europe. The trader/VIXologist itinerary would have probably run something likeIreland > Portugal > Greece > Spain > Italy, but instead I elected to steer to the north, vising the Netherlands, Belgium, Luxembourg, Germany and the Czech Republic.
For the first time in many moons, parliamentary votes, etc., the markets were reasonably well behaved during my vacation and the VIX didn’t even make it into the 30s.
As someone who spends a great deal of time nine time zones away from the events behind the European headlines, I was somewhat surprised to see the relative calmness and lack of concern in the people I spoke with about the European sovereign debt crisis. This is not to say that the consensus was that the most difficult phases of the crisis were in the rear-view mirror, only that in due time, all would be sorted out and life would go on in a manner similar to the way it was prior to 2008.
Biderman on the markets.
Spain’s Prime Minister Mariano Rajoy said he is willing to consider asking for a bailout and the markets respond by buying two year Spanish debt and European stocks. Reality is that Rajoy’s statement means nothing because Spain is already de facto bankrupt. Bankrupt means that that Spanish banks, provinces and the government not repay debts. Tax collections are lower than government spending. Rajoy knows help really means that Germany would control Spain’s purse strings. Is that likely to happen? Spain will leave the Euro before that happens. More over if Spain accepts German help, would that happen anytime soon? No way that happens in less than a year. By which time Spain’s economy is in the same condition as the Midwest cornfields. (full reading here and video below.)
Guest post by Azizonomics.
John Cochrane thinks that central banks can attain the price-stability of the gold standard without actually having a gold standard:
While many people believe the United States should adopt a gold standard to guard against inflation or deflation, and stabilize the economy, there are several reasons why this reform would not work. However, there is a modern adaptation of the gold standard that could achieve a stable price level and avoid the many disruptions brought upon the economy by monetary instability.
The solution is pretty simple. A gold standard is ultimately a commitment to exchange each dollar for something real. An inflation-indexed bond also has a constant, real value. If the Consumer Price Index (CPI) rises to 120 from 100, the bond pays 20% more, so your real purchasing power is protected. CPI futures work in much the same way. In place of gold, the Fed or the Treasury could freely buy and sell such inflation-linked securities at fixed prices. This policy would protect against deflation as well as inflation, automatically providing more money when there is a true demand for it, as in the financial crisis.
The obvious point is that the CPI is a relatively poor indicator of inflation and bubbles. During Greenspan’s tenure in charge of the Federal Reserve, huge quantities of new liquidity were created, much of which poured into housing and stock bubbles. CPI doesn’t include stock prices, and it doesn’t include housing prices; a monetary policy that is fixed to CPI wouldn’t be able to respond to growing bubbles in either sector. Cochrane is not really advocating for anything like the gold standard, just another form of Greenspanesque (mis)management.
Guest post by Lance Roberts of Streettalklive.
The markets have been rallying over the last month, due not to expectations of a recovering economy but“hope”, yet unfulfilled, of further balance sheet expansion programs from the Fed and the ECB. While each Central Bank meeting and EU Summit has come and gone with “no action”, market participants have ramped up the “risk on” trade, expecting action at the next meeting. During this time, as the markets salivate in anticipation of the next round of “globally injected goodness,” the bullish arguments for the market and the economy have continued to grow.
“Developments over the past few weeks have reinforced our view that US growth will improve modestly. First, the temporary negatives—the inventory cycle, the weather unwind, and the potential seasonal adjustment distortions—are now clearly behind us. Second, the housing recovery is picking up steam, with a sharp increase in the NAHB homebuilders index (the best short-term leading indicator of housing activity) and ongoing improvement in house prices. Third, real disposable income has continued to recover and is now up 4% on a 6-month annualized basis; this pace is unlikely to be sustained as the stabilization in oil prices feeds through into retail energy prices, but the gains do provide a basis for somewhat better consumer spending. And fourth, financial conditions as measured by our GSFCI have reversed all of the tightening that took place in the spring and now stands at the easiest level since August 2011.”