The Day after Cyprus

Marc To Market's picture

During the Asian financial crisis, the chief economist of the IMF, Michael Mussa, once explained that there were three kinds of crises; liquidity, solvency and stupidity. The crisis in Europe continues to morph.

European officials have succeeded in stabilizing the situation with words of assurances.  Despite the dramatic price action yesterday, there has been no follow through euro selling. European bourses have mostly stabilized. Spain's bourse is an exception, led by developments in the telecom space (Telefonica's filings) while financial shares are slightly firmer on the day. Spanish and Italian bonds are recovering from yesterday's slide.

Many participants are still trying to digest the meaning of Dijsselbloem's comments yesterday and also may be deterred from taking fresh positions due to month/quarter and fiscal year end.  The confusion is not so much among investors as it is about the European officials themselves.    Brussels immediately tried to play down the euro group head's comments.  They have been resisting the German and IMF effort to shift more of the cost of the adjustment from tax payers to investors and, incidentally, uninsured depositors are unsecured creditors in cases of insolvency.  

 To square the circle drawn by Dijsselbloem's comments one needs to recognize that there some relatively unique aspects of the Cypriot situation, like divided island, the large role of Russia, including facilitating putting off the adjustment with a 2.5 bln euro loan a couple of years ago, and the reliance on deposits to fuel the financial expansion beyond any reasonable metric.

There is some sense that Cyprus is a turning point.  We suggest that it is as much as Greece, Ireland, Portugal and Spain have been turning points.   Institutional capacity is grown and innovation is forced.  This is how the situation evolves.  This is how EMU, only partially developed at birth, is developing.     Germany and the IMF have long pushed for bailing in investors and they continue to press their case, when the opportunity presents itself.  It is never an all out victory or defeat.    

Cyprus and this latest European crisis continues to dominate other developments and the news stream is light in any case.   Of note, new BOJ Governor Kuroda's comments before the Diet bolstered the JGB market and the 10-year yield fell to now decade lows near 0.53%.  Kuroda was sympathetic to merge the Asset Purchase Program (APP) with the ongoing rinban operation (monthly BOJ purchases of JGBs) and to scrapping the self-imposed BOJ rule that limits JGB holdings to the amount of bank notes in circulation. 

Essentially Kuroda has reinforced market expectations at the April 3-4 BOJ meeting (no longer much talk of an earlier, emergency meeting) that the central bank will increase the amount and duration of its JGB purchases and may increase its purchases of riskier assets, such as REITS, as well.  Related, but separately, many expect the yen's weakness stabilized since earlier this month, will resume after the new fiscal year begins next week.

 The US reports a slew of data today.  Durable goods orders for February are expected to have rebounded from the 5.2% drop in January.  This likely reflects the robust auto sector.  CaseShiller home prices index is expected to extend recent increases.  The 20-city price index was up 6.84% in December (year-over-year) and is expected to have risen toward 7.75% in  January., which would be the fastest since June 2006.   Separately new single family home sales will be reported.  After a strong gain in January (15.6%), a small pullback is likely in February.  Richmond Fed and Conference Board's Measure of consumer confidence will likely be overshadowed by the other data. 

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KingTut's picture

Two weeks ago most of the world couldn't find Cyprus on a map.  Now, it is at the center of the world financial crisis. In a way, that's all you need to know.  When a gnat sized half-country like Cyprus is perceived as capable of bringing the financial system down, perception is faltering.  Our system is utterly dependent on mutual confidence and trust, and what is that but perception?  The world's economy depends on our confidence in our financial leaders, but if they flounder and trip over themselves trying to deal with this gnat, how far are we from a complete collapse in that confidence?

Of course, on this blog, confidence in our financial leaders is a distant memory, but the rest of the world has yet to wake up.  The recent past has been relatively calm because the world's central banks have been mostly on the same page.  The race to the bottom was really a form of global inflation to make all the debts managable.

But Cyprus marks the point where they all realize there's not enough to go around.   It will rapidly turn into "every man for himself".  Like Jamie Dimon (Chuck Prince?) said, it's musical chairs, and when the music's playing you have to dance.  But when it stops, all hell breaks loose.  Make sure you don't bring a knife to gunfight.  It's getting very quiet around here.


rlouis's picture

..." three kinds of crises; liquidity, solvency and stupidity. The crisis in Europe continues to morph."


and stupidity is also defined as the escalating incoherence of the lies children tell. Watching the US market is a joke.

suteibu's picture

I hate to dicker with you, Marc, but just 3 days ago you said "We think this means that the bulk of the yen's weakness is found in  the rear view mirror."  Now it seems that 94 is the floor and you expect it to weaken more in April; "...many expect the yen's weakness stabilized since earlier this month, will resume after the new fiscal year begins next week." 

Of course, the latter would be the rational view given statements by Abe, Aso, and Kuroda who continue to assure the public that they will do anything and everything to inflate the yen (the value of this policy to the economy is certainly debatable).  While Japanese leaders often say things they do not mean or do not intend to carry through, in this case, they have probably gone too far with their comments to back off.

Marc To Market's picture

Suteibu, I do think the bulk of the yen's weakness is behind us.  The dollar is JPY94.50 right now, having been down to JPY93.53 yesterday.  I did not say I was looking for the dollar to strengthen in April.  I specifically said others do.  I simply disagree with them.  I  try to make a clear distinction between what I think, or the analytic team that I head up think about something and what others do or what is priced into the market.  I am sorry if it was confusing.  It is a small nuance.  I will redouble my efforts to write clearer (which does not mean without typos)  That I think the bulk of the dollar's gains are behin it does not rule out a new high above the March 12 high of JPY96.71. It has come from around JPY80 around the time the Japanese election was announced in mid-Nov last year.  The market, I think, has priced in the easy monetary and fiscal policies of the Abe government.   For me, one of the pyschological tells was the Wall Street Journal article that noted the billions of dollars hedge funds were making on the trade of the century--short yen. 

suteibu's picture

Thanks for the clarification, Marc.  I noted that you wrote "many expect" but did not see you reiterate your stance.  It wasn't a "gotcha" question.  I am warming up to your recent articles.  Your efforts are duly noted and much appreciated.  Good luck going forward.

That said, the plan to weaken the yen may be affected to a larger degree by what happens in Europe making it difficult for Abe/Kuroda to achieve their goals, but I don't believe their determination should be discounted over the medium and long-term (not that I am a proponent).

forrestdweller's picture

spain is going down in an economic death-spiral. they could be next, although the banks have already been bailed out, but that will never be enough, with about 27% unemployed and 5 million worthless empty houses for sale.

falak pema's picture

who cares about spanish RE when they have olives and rioja wine.

CheapBastard's picture

<<uninsured depositors are unsecured creditors in cases of insolvency>>


Painful lesson to learn for many savers. Should be on the front page of every New Account Info when a sheeple opens a bank account.

FiatFrivolity's picture

Wouldn't surprise me if the Cyprus banks remained closed for a 2nd full week.

rsnoble's picture

EU officials are the ones that need to be put in a bag.  An airtight one at that.

ElvisDog's picture

I think Japan is the greatest economic mystery on Earth. They have been trying everything over the past 20 years to destroy their currency (and subsequently their economy) but nothing they do seems to kill it.

suteibu's picture

Give Abenomics a chance.  It has destruction written all over it.

LawsofPhysics's picture

The BRICs are just about done with the charade in the west.  Things moving exponentially faster now.

Setarcos's picture

The only comforting(?) fact to know is that no one any longer knows what is going on, e.g. since the Glass-Steagal Act was abolished and derivatives launched into cyber-space.

Bankers no longer understand banking and economists are left floundering for want of an adequate theory, post-Capitalism, to explain this chaotic new world disorder of Financialism.  So I have no idea what Marc to Market is on about, e.g. because of HFTs which have "a life of their own", though devoid of any real life.

All old paradigms have failed, including politically.

orez65's picture

What is going on is quite clear: the culmination of the biggest fiat money scam in the history of the world.

Iocosus's picture

who reports the numbers? the same type of people who said Chernobyl was safe? Or Fukishima?


Setarcos's picture

Or just some computer program?

orangegeek's picture

Philly Housing Index had a good run from the start of 2012 - the year of elections.


Wave B up should be complete.  Wave C down will be gruesome.

new game's picture

buy the bullshit

every pyramid need moar...

Setarcos's picture

Very true, though impossible in a finite world of course.