Archive - Apr 26, 2012

All you need to read and more.

Following this week's ongoing battery of abysmal economic news out of Europe it will hardly come as a surprise that yet another indicator has been released and is pointing to a multi-year low in the deleveraging (elsewhere called incorrectly austere) continent, namely the Euro-area wide confidence index which just slide to the lowest leve since 2009, missing every single estimate and declining sequentially across the board... And with the UK, Greece, Italy, Portugal, Ireland, Belgium, Denmark, Holland, Czech Republic, and Slovenia now in re-recession, and Spain a definitive shoo in next week, the kicker is that German GDP will almost certainly now report a second consecutive GDP print in a few days, thus pushing the entire European continent in a double dip.

We start today's story of the day by pointing out that Deutsche Bank - easily Europe's most critical financial institution - reported results that were far worse than expected, following a decline in equity and debt trading revenues of 23% and 8%, but primarily due to Europe simply "not being fixed yet" despite what its various politicians tell us. And if DB is still impaired, then something else will have to give. Next, we go to none other than Deutsche Bank strategist Jim Reid, who in his daily Morning Reid piece, reminds the world that with austerity still the primary driver in a double dipping Europe (luckily... at least for now, because no matter how many economists repeat the dogmatic mantra, more debt will never fix an excess debt problem, and in reality austerity is the wrong word - the right one is deleveraging) to wit: "an unconditional ECB is probably what Europe needs now given the austerity drive." However, as German taxpayers who will never fall for unconditional money printing by the ECB (at least someone remembers the Weimar case), the ECB will likely have to keep coming up with creative solutions. Which bring us to the story du jour brought by Suddeutsche Zeitung, according to which the ECB and countries that use the euro are working on an initiative to allow cash-strapped banks direct access to funding from the European Stability Mechanism. As a reminder, both Germany and the ECB have been against this kind of direct uncollateralized, unsterilized injections, so this move is likely a precursor to even more pervasive easing by the European central bank, with the only question being how many headlines of denials by Schauble will hit the tape before this plan is approved. And if all eyes are again back on the ECB, does it mean that the recent distraction face by the IMF can now be forgotten, and more importantly, if the ECB is once again prepping to reliquify, just how bad are things again in Europe? And what happens if this time around the plan to fix a solvency problem with more electronic 1s and 0s does not work?

It was only a matter of time, and we were waiting patiently for the V-Squid to rear its ugly head. Presenting the newly improved version...

In the science of physics, we know that ice freezes at 32 degrees. We can predict with immense accuracy exactly how far a rocket ship will travel filled with 500 gallons of fuel. There is preciseness because there are constants, which do not change and upon which equations can be constructed.. There are no such constants in the field of economics since the science of economics deals with human action, which can change at any time. If potato prices remain the same for 10 weeks, it does not mean they will be the same the following day. I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry. And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist. It is as if one were to assume a constant relationship existed between interest rates here and in Russia and throughout the world, and create equations based on this belief and then attempt to trade based on these equations. That was tried and the result was the blow up of the fund Long Term Capital Management, a blow up that resulted in high level meetings in this very building. It is as if traders assumed a given default rate was constant for subprime mortgage paper and traded on that belief. Only to see it blow up in their faces, as it did, again, with intense meetings being held in this very building. Yet, the equations, assuming constants, continue to be published in papers throughout the Fed system. I scratch my head.