Spain, Bad Banks, Assets, Losses and Lies
The Trader has written extensively with regards to the Spanish economic disaster. Here is a must read piece by Golem XIV.
I thought it might be a good moment to take a broad look at Spain’s financial troubles and outlook. For those of you who tire of details, the executive summary is that is that it is bad and without a doubt going to get considerably worse over the next 6 – 18 months despite Spanish government and EU claims to the contrary.
Here’s why.
On Friday (31st Aug) the Spanish Government passed what it said would be Spain’s definitive banking reform. This is actually the third such ‘definitive’ reform. The previous two were more blather than action. All the talk in this reform centres around the creation of a so called ‘bad bank’. Which, it is being claimed, will sort Spain’s ailing banking system once and for all. This despite the fact that Spain already has a bad bank, a really bad one, Bankia. I say this only half in jest. I’ll come back to Bankia in a moment.
First let’s deal with what a bad bank actually is and does.
Time for international monetary coordination
With Europe threatening the World Economy, here are a few thoughts by Paolo Manasse via Voxeu.
Many observers of the European Sovereign debt saga had long realised that the ECB was the only European institution up to the task of avoiding a breakup of the euro (see for instance Eichengreen 2009 on this site). The newly forged institutions, the ESFS/ESM, are both ill designed and inadequately funded (Manasse 2011).
The sharp criticism of German piecemeal approach, however, forgets that the ECB was created “in the image and likeness” of the Bundesbank; price stability is its core mandate. That was the price to be paid for convincing Germany to give up the Deutsche mark, and to share the same currency with inflation- and deficit-prone Italy. Now that the survival of the euro seems to hinge on the monetisation of southerners’ public debt, one way or another (primary or secondary purchases, anti-spread firewall), it is not surprising that the Bundesbank, backed by the FDP and CSU parties, is simply saying “no”. Weidman’s alleged resignation just proves the case. Full article here.
Adios Espana
With IBEX still going strong since bottoming out early this summer, one could think the economy is getting better. Quite the opposite, the Spaniards are getting more desperate by the day. People are withdrawing cash from the banks, like never before.
The new trend though, is Spaniards following the money, ie moving abroad as the Spanish economy is continuing the free fall. From NYT,
“The macro situation in Spain is getting worse and worse,” Mr. Vildosola, 38, said last week just hours before boarding a plane to London with his wife and two small children. “There is just too much risk. Spain is going to be next after Greece, and I just don’t want to end up holding devalued pesetas.”
Mr. Vildosola is among many who worry that Spain’s economic tailspin could eventually force the country’s withdrawal from the euro and a return to its former currency, the peseta. That dire outcome is still considered a long shot, even if Spain might eventually require a Greek-style bailout. But there is no doubt that many of those in a position to do so are taking their money — and in some cases themselves — out of Spain.
Priced in or not Priced in?
Guest post by Peter Tchir.
Not Priced In
This is one of the most memorable clips in recent years on CNBC. The Tepper “Balls to the Walls” take on QE2. It was short, simple, and spot-on. He nailed it.
What was interesting at the time was that his belief in how good QE2 would be wasn’t universally shared. Many, myself included, questioned what further reduction of rates would do. I doubted the theory that the money would drive financial assets higher.
I thought the problems were too big for something as simple as treasury buying to “fix”. Then for the next 6 months it seemed, we watched stocks go higher and “POMO” days because the bane of existence to anyone caught short the market. It wasn’t the impact of lower rates, it was flooding the system with money, and the impact on the dollar.
Even when QE2 was announced, the market didn’t react much, because the market didn’t believe QE2 would have much of an impact, so it “wasn’t priced in”.
Priced In
That cannot be said anymore….
The Q Ratio and Market Valuation
Guest post by Doug Short.
The Q Ratio is a popular method of estimating the fair value of the stock market developed by Nobel Laureate James Tobin. It’s a fairly simple concept, but laborious to calculate. The Q Ratio is the total price of the market divided by the replacement cost of all its companies. Fortunately, the government does the work of accumulating the data for the calculation. The numbers are supplied in the Federal Reserve Z.1 Flow of Funds Accounts of the United States, which is released quarterly.
The first chart shows Q Ratio from 1900 to the present. I’ve calculated the ratio since the latest Fed data (through 2012 Q1) based on a subjective process of extrapolating the Z.1 data itself and factoring in the monthly averages of daily closes for the Vanguard Total Market ETF (VTI).
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