Markets are all over the place. SNB to intervene or not. Meanwhile Paramo is out giving another speech. This time on the Contagion in Europe. Nothing really new, but worth reading. We wish the ECB good luck.
Financial contagion and public policy
Since the writings of Walter Bagehot financial contagion has become an issue that is discussed widely in policy, market and academic research circles.  Taking a broad perspective embracing different views and studies, contagion could be defined as a situation in which instability in a specific financial market, institution or country is transmitted to one or several other markets, institutions or countries. A first characteristic of contagion is that the spread of instability would usually not happen without an initial trigger event – which often appears to be a relatively contained event. A second characteristic is that the transmission of instability is in some way abnormal, for example, in terms of its speed, strength or scope. Though spillovers are to be expected in an interconnected financial system, contagion is distinct in that it often reflects a market failure and a dangerously amplified transmission of instability.
The underlying market failure consists of the fact that contagion often involves externalities.  As a result, the private costs of the initial financial market failure, that is the costs to the actor triggering contagion, are lower than the social costs. In the specific case of the sovereign debt crisis in Europe, the trigger could, for example, be that a country in a precarious fiscal situation does not seriously implement the necessary fiscal consolidation measures. This could lead interest rates on this particular country’s government debt to rise and could in turn also constrain economic growth in that country. This is what I call the “private costs” of such behaviour. Although in this case the lack of fiscal discipline is something which is strictly related to one country, this circumstance may still lead volatile financial markets to also lower their expectations about fiscal consolidation efforts in other countries. As a result, those other countries also begin to face costs in terms of significantly increased interest rates on their government debt.
Over the last weeks, we have got an increasing amount of emails, asking about the European Crisis. It is a complex matter, but still the best “easy” explanation is the below video. Greece, Italy, Spain, EFS, bail outs it all sounds nice, but Europeans love bad ideas that sound nice. Courtesy Omid Malekan, again.
As reality is catching up China, the ghost cities are getting even less populated, if possible. With property prices falling, due to a total lack of demand, the boom is turning into a bust. Jim Chanos has been spot on, and is still very pessimistic on this sector in China. People are simply not wanting to realize the reality, and won’t accept that the good times are gone in China. With China supposed to save the EFSF, Europe and the World, we ask ourselves, who is to bail out the Ghost Cities? From Sky;
Kangbashi is a showcase city, laid out spaciously on the grasslands of northern China. It was dreamt up by the local secretary of the Communist Party as a monument to the country’s new-found prosperity. The place is dominated by impressive public buildings – a marble-clad library, a state-of-the-art theatre and a giant convention centre. In the centre of town a 70m-high statue of two fighting horses looms over Genghis Khan Square. The only thing missing is the people. Kangbashi was built to house one million residents, but so far only 20,000 have moved in.
Full tragic video here.
Some facts on the real bear market, and the post bubble rallies in Japan. By D Short.
Earlier this month Japan’s preliminary Q3 GDP come in at 6.0%, which was a substantial gain over the previous three negative consecutive quarters. However, the global financial distress has weighed heavily on the Nikkei 225. Yesterday it hit an interim low, 79% off the all-time high at the end of 1989 and 28% off the interim high of April 2010. The index is currently only 15.7% above its historic low set on March 10, 2009, the day after the US markets hit their Financial Crisis lows.
Here is a look at the Nikkei 225 which gives an overview of the cyclical rallies and their duration during Japan’s secular bear market, now in its 21st year.
Another casualty, Hungary, has been cut to junk by Moody’s. Hungary has been struggling to get those unorthodox measures to work, but apparently Moody’s doesn’t think it is sufficient. The forint it falling once again, as the contagion in Europe continues spreading. With many people having mortgages in CHF and EUR, this sure is not helping the people already under water when it comes to paying their debt. Those low interest loans were so good, if it wasn’t for that currency risk.The forint is down 16% from June, the worst performer. Just as ZH points out, the average yield on the 10 year has been around 7.2%, exactly where the Italian 10 year is trading currently….From Bloomberg;
“The first driver of today’s downgrade is the uncertainty surrounding the Hungarian government’s ability to meet its targets on fiscal consolidation and public sector debt reduction,” Moody’s said in its statement. “Hungary’s recent requests for assistance from the IMF and the EU illustrate the funding challenges facing the country.”
India is to throw open its $450bn retail sector to foreign supermarkets, granting access for the first time to giants such as Walmart, Carrefour and Tesco that have long sought to enter an underserved market of 1.2bn people, http://ftalphaville.ft.com/thecut/2011/11/25/763771/india-opens-doors-to-supermarket-giants/
The US, backed by Saudi Arabia, is refusing to sign off on a flagship global climate fund, the FT reports, days ahead of an important UN climate summit. The fund is one of the few measures to emerge from seven years of talks on how countries should share the burden of cutting greenhouse gas emissions, http://ftalphaville.ft.com/thecut/2011/11/25/763591/us-blocks-key-climate-fund-as-carbon-prices-plunge/
France is pushing for a European oil embargo on Iran, breaking a diplomatic taboo that could have significant ramifications for the energy market and global economic growth, the FT reports. Paris has made the proposal to European Union members preparing a new round of sanctions following the release of a UN nuclear agency report this month. http://ftalphaville.ft.com/thecut/2011/11/24/763511/france-pushes-for-iranian-oil-embargo/
The Chinese government has launched a crackdown on hundreds of unregulated electronic equity and futures exchanges that have sprung up in recent years to trade everything from fine art and commodities to insurance products, http://ftalphaville.ft.com/thecut/2011/11/24/763481/china-cracks-down-on-rogue-exchanges/
Reading for those who still believe there will be a Euro currency. There are some issues to be dealt with. From Paramo’s speech in Oxford today.
The sovereign debt crisis will be the theme of my remarks today. I do not want to engage in the minutiae of the issue or signal any particular policy stance by the ECB. Instead, I would like to take a step back from the crisis and reflect on what it has taught us so far about economic and monetary union in Europe. Obviously, I concentrate explicitly on the euro area, i.e. the seventeen countries sharing the single currency. The status and role of the United Kingdom, the dynamics of the British domestic debate on Europe, and the cooperation with the Continent in addressing the crisis are not the focus of my remarks.
I have three main propositions.
“Something is going to go ‘bang’ soon,” fears Alexander Graf Lambsdorff, 45, a member of the European Parliament for Germany’s business-friendly Free Democratic Party (FDP). Then the lights will go out in Brussels.
The power outage would be the consequence of a serious breakdown in European democracy, a downing of the power lines connecting Brussels and Europe’s citizens. If Brussels no longer had the confidence of citizens, or what the Treaty on European Union refers to as the “peoples of Europe,” the European Parliament, Council and Commission would be operating without the basis of legitimacy. The idea of peace, freedom and prosperity would be out of juice.
While the HFT news machines scan for the latest Merkonty flashes, below some chart levels by Macro Story.
Another pattern has failed to the downside. First it was the wedge everyone was watching now the flag pattern. Something else to point out is notice on the chart where we are today versus in early August when the market sold off hard.
This is a perfect example of why you need to let a trade run even though the technicals may say remove it. If we are witnessing a global asset liquidation then this market can stay oversold. We’ve been conditioned though the past few months to cover before profits vaporize.