While many have discussed the extreme analogs of the last few years in equity market performance, few have looked at the relative performance of the most explicitly impacted asset class of Central Bank largesse - the US Treasury bond market. Based on the almost perfect correlation between 2010, 2011, and this year's yield movements over the past few months, traders could be forgiven for considering that the 10-year yield will be below 1% by the end of August - no matter how many times they are told "but rates cannot fall any more" or this time it's different. One has to wonder just how long the Fed can control this herding of cats (by forcing everyone to front-run it) and what the hyper-inflating solution to asset-deflation expectations will look like this time.
The euro has depreciated to its lowest level in nearly nine years when measured in trade-weighted terms. Common wisdom is to assume that this might trigger a GDP forecast upgrade for the common currency area. UBS says "no", while at first sight, this 'devaluation' should boost output, the exchange rate response is simply part of the bigger, well-known picture of economic stress in the common currency region. Simply put, the currency has depreciated on fear and risk aversion - and economic growth tends to suffer rather than flourish in that environment - and furthermore, the two structural measures that help determine the outlook for the currency - the internal balance (output gap) and the external balance (current account) - point to further weakness.
EURUSD is down over 50 pips from Friday's close, about to test a 1.20 handle for the first time in over 25 months, as headlines pour from the beleaguered disunion. The AP reports of the German vice-chancellor's "more than skeptical" view that Greece can fulfill its obligations; after which "there can be no further payments" seemingly confirms our earlier note on the IMF's reluctance (and dismisses any hope that the IMF's call for more ECB 'assistance' will go unheeded. More worrisome is the Athens News story on Alexis Tsipras (leader of the Greek Syriza party) forecasting that the government will "soon present a return to a national currency (drachma) as a national success." He went on to state rather honestly for a politician that any payment extension (of the already re-negotiated TROIKA deal) is "essentially a longer rope with which to hang ourselves." The elite-perpetuating status-quo-sustaining unreality is summed up perfectly as he notes the Greek finance minister is the definition of a finance minister that the TROIKA would have chosen. Germany's Roesler adds a little fuel to the conflagration by adding that "for many experts,... a Greek exit from the eurozone has long since lost its horror."
The latest details on the Spanish financial sector bailout continue to remind us not to underestimate politicians’ readiness to undermine whatever is left of a free market capitalist system. Instead of adopting Economist Juan Ramón Rallo' (as we discussed here), who has suggested a “bail-in” formula to effectively restructure and recapitalize the financial sector in a more transparent and fair manner - which would teach the resulting bank owners to learn the lesson of the dangers involved in placing politicians and ballet dancers on banks’ boards; the actual plan is to cleanse the Spanish banking sector of its toxic assets by means of transferring them into “bad banks” has a new twist: instead of reflecting such assets’ real market value, the idea is to impose a markup (based on an estimated “long-term value”) to minimize losses. In contrast to Rallo’s “bail-in” proposal, the current Spanish banking sector reform is aimed at bailing out and protecting those who have benefited from the practices which caused the problem in the first place: the political class, inefficient regulators, as well as private companies close to the establishment.
It appears that following the resignation letter fiasco from Friday, the venerable IMF is trying to regain some level of credibility in the world. In a note obtained by SPIEGEL, senior IMF officials patience has clearly come to an end and has decided that, with Greece likely to go bust by September, it is no longer willing to provide additional Greek aid (we assume in light of the push-backs on the promised cuts that the aid was based upon). Pointing to this now being a euro-zone problem, their cessation of Greek aid is even more critical since both Holland and Finland pledged support because the IMF was involved. August 20th marks an important short-term hurdle as Greece is required to pay back EUR3.8bn to the ECB - and with collateral being withdrawn, we wonder how long before the ECB pulls the plug entirely - even on Greek T-Bills. Whether this is sabre-rattling before the delayed TROIKA visit or the IMF (and the rest of the TROIKA) indeed deciding enough is enough and realizing finally that more debt (or even maturity extensions) does not solve the problem of too much debt - only default will do that!
All organic structures can be modelled using evolutionary theory and governance, politics and economics, which involve the cooperation of millions of human beings are no exception. Because everyone is more familiar with evolutionary theory being used to model changes in the natural world, we’ll start by looking at examples in the natural world where revolution occurs as part of the process of evolution, demonstrating that revolution is not an artificial human construct but actually quite normal under particular circumstances. Revolution occurs in the natural world when a lifeform becomes extinct because the environment it depends on for survival changes at a faster rate than it can evolve. This can happen in two ways, either the environment is subject to sudden change, as in the case of the dinosaurs or, far more commonly, the environment changes gradually and the lifeform finds itself increasingly ill-adapted before becoming extinct. Because each lifeform has a relationship with other lifeforms there is a knock on effect.
In their Ten Thousand Commandments 2012 report which was released in June, the CEI estimates the cost of US government regulation at $US 1.75 TRILLION. That is just under half (48 percent) of the budget of the federal government. It is almost ten times the total of all corporate taxes collected and almost double the total collected from individual income taxes. It is also one-third higher than the total of all pre-tax corporate profits. It is the hidden cost of doing business in an interventionist economy. The fact that the cost of complying with these regulations is substantially higher than the total of corporate profits is a stark illustration of the end result of economic intervention. That end result is capital consumption.
Even as Europe has become an utterly dysfunctional experiment in everything relating to modern economics and monetary theory, it has one redeeming feature: it has proven that the Defection regime under Game Theory is 100% correct. It says that once the defections from an unstable Nash equilibrium begin, there is no stopping until the entire system collapses under its own weight. This is precisely what has happened in Spain, where first Catalunya, then Valencia on Friday, and now virtually everyone else is set to demand a bailout. From Bloomberg: The Balearic Islands and Catalonia are among six Spanish regions that may ask for aid from the central government after Valencia sought a bailout, El Pais reported. Castilla-La-Mancha, Murcia, the Canary Islands and possibly Andalusia are also having difficulty funding themselves and some of these regions are studying plans to tap the recently created emergency-loan fund that Valencia said it would use yesterday, the newspaper said, without citing anyone."
And you can restructure all you like, but many underwater homeowners with a serious income shortfall will still not be able to pay their mortgages. Who carries the can? If the mortgage has been sold on then the loss will be on the new owner. In reality this is far more likely to be the taxpayer. Simply, the taxpayer may well end up carrying the can for a whole lot of bust mortgages. What Taibbi — who usually has a very good sense of moral hazard — and MRP effectively seem to be considering is not only the continuation and expansion of Kelo, but also potentially the transfer of liability from bust irresponsible lenders to the taxpayer. While this is sure to enrich the bureaucracy and well-connected insiders — and admittedly, while it may help some underwater homeowners — it seems incredibly risky for the taxpayer. While debt-forgiveness is one way out of the debt trap, we should be careful and recognise that many so-called debt-forgiveness schemes may instead be dressed-up scams and frauds that end up enriching special interests while putting the taxpayer deeper into a hole.
By now everyone is aware of the silver-like surge in corn prices over the past month, driven by the recognition that what is quickly becoming the most severe drought in US history is here to stay indefinitely longer as elusive rainfall remains just that. As can been seen on the chart below, corn prices have risen by 54% since mid-June. What may come as a surprise is that another critical commodity - Soybeans - has only risen by half as much, or just 28% in the past month. Why "only"? Because as the following two charts from Morgan Stanley show, the fundamental picture for soybeans may be just as bad if not worse as corn, which would mean there is far more price upside in soy in the coming days, especially if strategies based on prayer, for either central bank intervention or rain, remain unasnwered.
Perhaps it is worth a reminder that, while every effort by the Central-Banker-In-Chief and his political play-things to proclaim free-market omnipotence in stark contrast to the wholesale manipulation of any and every market and macro-economic lever possible, Adam Smith some 250 years ago pointed out the inevitable unintended consequences of such grand conceit. As the [central planner] seems to "imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board", the end result is that "society must be at all times in the highest degree of disorder."
If last week's 74-page all-encompassing thesis on "how 'everything' is interconnected and headed for 'complete systemic disintegration'" is a little too much, here is a 10 minute clip that ties together all the loose ends of the reality bubbling just beneath the veneer of hope that so many call our markets. A spectacular gathering of all things bearish that provides everything you wanted to know about the inevitability of a major economic collapse but were afraid to ask: a little too doom and gloomish perhaps, but sadly that does not make it improbable, especially in the current environment where the central planners keep doing the same over and over, hoping that just once "this time will be different." From demographic trends, over-leveraging, corporate profit extremes, deflationary impacts, and hyperinflationary reflexivity- there's a little here for everyone on a warm Saturday afternoon.
With just a few days left until the pre-opening soccer games begin in the UK, we continue our five part series (Part 1, Part 2, Part 3) on the intersection between markets and the Olympics by considering whether an integrated Europe would have performed relatively better - i.e. would 2+2>4 - and what are the factors. Goldman's analysis of the pros and cons of 'integrating' their Olympic teams is extremely apropos the current deteriorating (yet desperately dreaming of improving) coordination of these 17 disparate nations. The answer, of course, is that there are some benefits from this medal 'integration' in specific cases but since German reunification, their medal performance has deteriorated - even in the team events where aggregating talent pools should have its greatest gains. In a 'zero-sum' context such as competing for Olympic medals, Germany's gains must come at the expense of other countries - and rather notably there are few French medal winners before or after an 'integration. Sounds familiar?
With Valencia bust, Spanish bonds at all-time record spreads to bunds, and yields at euro-era record highs, Spain's access to public markets for more debt is as good as closed. What is most concerning however, as FAZ reports, is that "the money will last [only] until September", and "Spain has no 'Plan B". Yesterday's market meltdown - especially at the front-end of the Spanish curve - is now being dubbed 'Black Friday' and the desperation is clear among the Spanish elite. Jose Manuel Garcia-Margallo (JMGM) attacked the ECB for their inaction in the SMP (bond-buying program) as they do "nothing to stop the fire of the [Spanish] government debt" and when asked how he saw the future of the European Union, he replied that it could "not go on much longer." The riots protest rallies continue to gather pace as Black Friday saw the gravely concerned union-leaders (facing worrying austerity) calling for a second general strike (yeah - that will help) as they warn of a 'hot autumn'. It appears Spain has skipped 'worse' and gone from bad to worst as they work "to ensure that financial liabilities do not poison the national debt" - a little late we hesitate to point out.
There is no mystery to the “headwinds” that continue to plague and mystify monetary policymakers. The global economy is not pulled into re-recession by some unseen magical force, conspiring against the good-natured efforts of central bankers. Instead, the very thing central banks aspire to is the exact poison that alludes their attention. Conventional economics will continue to believe and empirically “prove” that the theory of the neutrality of money is valid, giving them, in their minds, unrestricted ability to intervene and manipulate over any short-term period (though it is getting harder to argue that these emergency measures are “short-term” nearly five years into their continued existence). The occurrence of panic in 2008 and the unresolved and unremoved barriers to recovery in the years since, however, fully attest to nonneutrality, an ongoing form of empirical proof that their models will never be able to refute. And we are all condemned by it.