On and on it goes

From Bloomberg,

Feb. 10 (Bloomberg) — German Finance Minister Wolfgang Schaeuble will brief lawmakers today on steps he may take to support the Greek government as it braces for a wave of strikes protesting deficit-reduction plans.

The German initiative came on the eve of a European Union summit and followed a slump in bond prices amid speculation that Greece would fail to tackle the EU’s largest budget deficit. A German official said nothing will be agreed upon before tomorrow’s summit in Brussels and no decision has been made on whether aid would take the form of loan guarantees.

“We are considering support,” Michael Meister, financial- affairs spokesman for Chancellor Angela Merkel’s Christian Democratic Union, said in an interview yesterday. Schaeuble was scheduled to speak in Berlin at 7:45 a.m. local time.

The euro’s slide to a nine-month low and surging bond yields prompted leaders to drop their resistance to rescuing Greece and protect the rest of the euro region from market turmoil. Greek Prime Minister George Papandreou has failed to convince investors his deficit-cutting plans go far enough. His challenge will be highlighted today when labor unions shut down schools, hospitals and flights to fight his proposals.

“We are talking about support in the broad sense,” Olli Rehn, the EU’s new economic affairs commissioner, said yesterday. Meister said aid would come “under strict conditions and if the Greek government undertakes far-reaching state reforms.”

Signs of a rescue helped ease investors’ concerns that worsening government finances would derail the global recovery. The euro rose 0.3 percent to $1.3754 at 6 a.m. in Frankfurt and gains outnumbered declines by more than 3-to-1 among the 1,652 constituent stocks of the MSCI World Index. The yield on the Greek 10-year bond slid the most in at least 12 years.

Plan B?

For weeks, European officials have insisted that no bailout was planned and that Greece’s effort to reduce its deficit, estimated at 12.7 percent of gross domestic product, should be given a chance to work. EU policy makers have no “plan B” to help Greece, former Monetary Affairs Commissioner Joaquin Almunia said in a Jan. 29 interview.

“I’m not surprised it happened, just by the timing of it,” said Julian Callow, chief European economist at Barclays Capital in London. “They would have to structure it in a way that it’s sufficiently penal so as not to create a moral hazard issue and encourage other countries like Portugal, Spain and Ireland to keep on track in terms of getting their own houses in order.”

‘Unfounded’

German government spokesman Ulrich Wilhelm said in a statement that reports that a decision had “virtually been taken” to offer Greek assistance were “unfounded.”

Germany and other EU nations were considering offering Greece and other debt-ridden euro-area members loan guarantees, the Wall Street Journal reported yesterday, citing people familiar with the matter.

Papandreou was in Paris today, scheduled to meet French President Nicolas Sarkozy.

Papandreou’s government yesterday floated new steps to bring down the deficit and its efforts were saluted by Fitch Ratings, which called his 2010 deficit-reduction plan “achievable.” The measures include cuts of as much as 5.5 percent in government workers’ wages and a waiver on taxes for Greeks who repatriate funds held in foreign accounts.

Aid for Greece isn’t officially on the EU summit agenda. Still, EU President Herman Van Rompuy said this week he will lead a discussion of “some aspects of the present economic situation” over lunch, a session without notetakers that is traditionally devoted to the most sensitive subjects.

Conditions for Aid

In the interview in Strasbourg, Rehn, pointed to tomorrow’s summit and a meeting of European finance ministers next week and indicated that Greece will be held to strict conditions in exchange for any backing.

“Solidarity goes both ways,” Rehn said. “I am sure that in the next couple of days we will see discussion and decisions to this effect.”

EU law bars the European Central Bank or national central banks from bailing out EU countries through buying their debt or offering loans, according to a report by the German parliament’s research unit published today.

Options for Greece include bilateral aid or a package put together by a group of countries using the euro, Meister said.

Nobel laureate Joseph Stiglitz said Greece’s budget-deficit reduction plan will prevent a default, and he reiterated his call for the European Union to aid the nation against “speculative attacks” in financial markets.

“I’ve been very impressed with the comprehensive approach they’ve had,” Stiglitz said in an interview on Bloomberg Television in London yesterday. “There’s clearly no risk of default. I’m very confident about it.”

 

Greece, the saga continues

Global markets bounced back on reports that European Central Bank President Jean-Claude Trichet is changing his travel schedule to attend a meeting of EU officials on Thursday and that plans are being developed to rescue Greece. The reports are raising hopes that policymakers will take bigger steps to contain troubles in Greece. The county is struggling with big budget gaps and is seeing demand fall for its debt

 

flippe-floppe-flye

Tuesday, February 9, 2010 at 11:39 am
I remain steadfast in my ability to endure major market corrections to the downside. The following is an interview of sorts, for your reading pleasure.

Do you know why “The Fly” is able to withstand such dastardly market action?

Answer: Because he has made so much fucking money over the last 5 years, this shit is simply an after thought.

Do you know why “The Fly” is so fucking confident?

Answer: Because he has a “calculator brain” and is never wrong, ever. He wins when he loses and wins twice when he lost. In a word: WHERESMYROOTBEER?

When will Le Fly start winning again?

Answer: As logic dictates, since he is in a perpetual state of winship, he is winning as we speak, despite what you may or may not think.

Are other bloggers even worth reading these days, aside from the Godly folks on iBC?

Answer: No.

Final question: What have you learned from the trading action of 2010?

Answer: Nothing. I already knew that shit (speeds off, from the comfort of his 80’s style stretch limosine).

From Dr. Brett:

But there’s an easy way to identify those who offer goods and services with integrity and those who don’t: Go to their websites or blogs and measure the ratio of self-promotional posts/articles to the number of substantive, informational posts/articles.

If you have substance, showing it is your best marketing strategy. If you don’t have substance, all you can bank on is hand waving.

We all put our best foot forward when we first meet someone we want to know. What vendors of goods and services put on their home pages represents their best feet forward. If there’s no substance there, caveat emptor.

 

Unemployment

Nothing really needs to be said. Far from being over, Obama’s misguided policies are simply intensifying the problems. Socialism never has the answer.

 

Greece and the IMF [or any EU member]

Dominique Strauss-Khan, the Managing Director of the IMF, said Thursday on French radio that the Fund stands ready to help Greece. But he knows this is wishful thinking.

•“Going to the IMF” brings with it a great deal of stigma. European governments are unwilling to take such a step as it could well be their last.

•The IMF is supposed to provide only “balance of payments” lending. That doesn’t fit well when a country is in a currency union such as the euro, which floats freely and does not have a current account issue, and the main problem is just the budget.

•Greece and the other weak eurozone countries need euro loans, not any other currency. If the IMF lent euros, that would be distinctly awkward – as this is what the European Central Bank (ECB) is supposed to control.

•Sending Greece to the IMF would result in some international “burden sharing,” as it would be IMF resources – from all its member countries around the world – on the line, rather than just European Union funds. But is the US really willing to burden share through the IMF? After all, Europe has long refused to confront the trouble in its weaker countries, now known as PIIGS (Portugal, Ireland, Italy, Greece, and Spain)? How would the Chinese react if such a proposition came to the IMF?

•Would the Europeans really want the IMF and its somewhat cumbersome rules to get involved – this would be a huge loss of prestige. It could also lead to some perverse outcomes – you never know what the IMF and the US Treasury (and Larry Summers) will come up with in terms of needed policies (ask Korea about 1997-98; not a good experience). The European Union (EU) has handled IMF recent engagement well in eastern Europe (from the EU perspective), but that was seen as the EU’s backyard. If the eurozone is in trouble, everyone will be paying much more attention – no more sweetheart deals.

•The IMF gave eastern Europe amazingly good deals over the past 2 years (by IMF standards). Would this fly with financial markets in the sense of restoring confidence in the PIIGS and their medium-term fiscal futures?

•Does the IMF really have enough resources to backstop all the PIIGS? The IMF’s notional capital was increased substantially last year, but just based on what we see now, the Fund would need even more ready money to tackle the eurozone – all the weaker countries would need at least preventive lending programs and these would need to be large. If that is where this goes, the EU looks simply awful and has failed at a deep level.

•The IMF could play a constructive “technical assistance role” alongside the European Commission, but everyone would want to keep this pretty low profile. Anything that goes to the IMF executive board would result in a lot of cheering and jeering from emerging markets. This would break the power of Europe on the international stage – perhaps a good thing, but not at all what the European policy elite is looking for.

 

AUY update

Not a great deal happening at the moment. There are currently, no new lows, Friday’s lows having held so far. There is also nothing much to get excited about on the upside, so for the moment simply “sitting” in the trade.

We’re sitting on a pretty close to 50% retracement of Friday’s close on the daily charts. As long as these levels hold through the lunch/early afternoon, we may very well see a surge into the close, which would be bullish for Tuesday.

 

New Orleans Saints win Superbowl

I don’t really watch American football much if ever anymore, basically because of the timezone thing, but a pretty big upset with New Orleans beating the highly favoured Colts.

I was always an Oakland Raiders fan, Kenny “the snake” Stabler, Art Shell, Dave Casper, Bilintikoff, et al.

 

Best get long for the moment

I’m done with Greece.

I was getting sick of it last week and now I’m really done after doing some research: First of all, Greece’s deficit (as we discussed last week) is a shocking 12% of their GDP and their national debt is 120% of their GDP (ours is about 100% now so something about glass economies and stones comes to mind) BUT, their whole GDP is $343Bn so we’re looking at a grand total of $41Bn to completely bail them out this year – the boyz at Goldman probably took about that much home in bonuses just betting on Greece to fail!

Do we really believe the $16,000,000,000,0000 EU economy is going to go down over $42,000,000,000 (0.26%)? Kind of hard to imagine when put in perspective. Of course it’s not just Greece, there’s Spain, Portugal and Ireland, although Ireland was last year’s worry with a $100Bn debt that they ended up fixing themselves by tightening their belts. For the Greeks, it’s more a matter of is there a will than a way as Greece has long been the EU’s least productive economy (followed by Portugal), which has historically made them uncompetitive with their northern cousins.

All it would take to fix Greece ($343Bn GDP) and Portugal’s ($220Bn) deficits is for Germany ($3,235Bn) and the UK ($2,200Bn) to buy a few extra Greek and Portugese goods and the factories would be humming again. The two countries each have about 1M people out of work (10% of the population) and if we assume 5% is close to full employment then we’re just talking about employing 1M people. Even if we pay those people $50,000 a year each, that’s “just” $50Bn and suddenly, everyone in Greece and Portugal is back at work, off the dole, paying taxes (iffy in Greece) and contributing to the GDP, which fixes the deficit

However, sentiment is a funny thing. It can turn a minor problem, into a major problem as the herd reacts as one. That being said, the bailout, relative to the bailouts already completed, is so minor, that I agree, Greece will not morph into the Lehman of sovereign debt.

That being said, the writing is on the wall. Bear Stearns was the early warning, or more likely Countrywide Financial, few paid enough attention. We have now had Dubai and Greece as far as sovereign risk, there will be others.

Some more figures:

Barclays Capital says the net external liabilities of Greece are 87pc of GDP, or €208bn (£182bn). Spain is worse at 91pc (€950bn), and Portugal worse yet at 108pc (€177bn); Ireland is 68pc (€123bn), Italy is 23pc, (€347bn). Add East Europe’s bubble and foreign debts top €2 trillion.

The scale matches America’s sub-prime/Alt-A adventure and assorted CDOs and SIVS of the Greenspan fling. The parallels are closer than Europe cares to admit. Just as Benelux funds and German Landesbanken bought subprime debt for high yield with AAA gloss, they bought Spanish Cedulas because these too had a safe gloss – even though Spain’s property boom broke world records. They thought EMU had eliminated risk: it merely switched exchange risk into credit risk.

A fat chunk of Club Med debt has to be rolled over soon. Capital Economics said the share of state debt maturing this year is even higher in Spain (17pc) than in Greece (12pc), though Spain’s Achilles’ Heel is mortgage debt.

The risk is the EMU version of Mexico’s Tequila crisis or Asia’s crisis in 1998.

Conclusion:

While Greece, will eventually be bailed out, one way or another, the ramifications could however [higher yields elsewhere] spark a default run across the board that somehow drags the US debt into the run. Now Houston, we have a problem.

 

Run on Greece?

A staggering €8bn-€10bn (£7bn-£8.7bn) may have been taken out of Greece by private investors since it became engulfed by economic turmoil in November.

Under pressure from the European Union and international markets to rein in the nation’s €300bn debt, socialist prime minister, George Papandreou, announced last week that he would have to enforce tough deficit-cutting measures. But the coming austerity package is leading panicked wealthy Greeks to divert their savings out of the country.

“In the last four to six weeks a lot of money has been moved abroad; I’ve heard extraordinary figures,” analyst, Kostas Panagopoulos said.

We’ll see this week whether the measures implemented will prevent a full scale run out of the euro generally, and not just Greece specifically. Should a fully fledged run from the euro develop, the EU might well break apart, as, a functioning money underpins the system. If the money no longer functions, the EU no longer functions.

 

Bloomberg bloomer

Feb. 8 (Bloomberg) — For all the concern over the $1.6 trillion U.S. budget deficit and record debt load, the dollar is as valuable now as 35 years ago.

Measured against a basket of currencies from the Group of 10 nations proportioned by how they trade against each other, the greenback is up about 3 percent since 1975, according to Bloomberg Correlation-Weighted Currency Indexes. That was four years after the Bretton Woods agreement, set up in 1944 to link currencies to the price of gold, collapsed. The U.K. pound has dropped 34 percent and the Canadian dollar has fallen 6 percent.

The U.S. dollar gained 6 percent since November after losing 12 percent in the first 11 months of 2009 as measured by the Bloomberg index. Barclays Capital and Morgan Stanley say the U.S. will grow faster than the rest of the developed world this year and 2011. At the same time, Europe faces worsening finances in Greece, Spain and Portugal, Japan’s economy is struggling and concerns about valuations in emerging markets are increasing.

“To quote Mark Twain, the reports of the dollar’s demise have been greatly exaggerated,” said Win Thin, a senior currency strategist in New York at Brown Brothers Harriman & Co., which manages about $40 billion in assets.

Rising Demand

Nowhere is that more evident than in the market for U.S. Treasuries. The amount of America’s government debt held by investors outside the U.S. rose 17 percent to $3.6 trillion in 2009 through November, according to the Treasury Department.

Purchases may continue to rise as investors seek refuge from growing sovereign credit risk in the euro area. The dollar “will benefit from relative liquidity of the U.S. Treasury markets,” Barclays Capital currency strategists led by David Woo in London said in a Feb. 5 report.

Barclays Capital economists said in a report the same day that U.S. gross domestic product may grow 3.6 percent this year, versus 2.5 percent for the developed world, and 3.1 percent in 2011, compared with 2.6 percent elsewhere. Japan’s GDP may expand 1.9 percent this year, and the euro zone 1.3 percent, they said.

A day earlier, strategists at New York-based Morgan Stanley boosted their dollar forecast, saying it will strengthen to $1.24 per euro by year-end from its previous estimate of $1.32. It traded at $1.3676 as of 6:46 a.m. in New York today. The firm sees the U.S. currency gaining to 109 yen from 89.42 today, and rallying to $1.49 to the pound from $1.5578

Reserve Currency

Investors and traders predicted last year the dollar would lose its position as the world’s reserve currency, which means it’s the first place central banks look to park their cash.

“With all the concerns about the problems with the U.S. financial system last year, the banking sector in the euro zone looked a bit more stable,” said Robert Sinche, chief strategist at Lily Pond Capital Management LLC in New York. “That created a sense of the euro as an alternative to the dollar.”

Central banks that disclose breakdowns of their reserves bought a record $60 billion worth of euros in 2009’s second quarter, more than half of their new cash in the period, based on International Monetary Fund data adjusted for exchange-rate changes using methodology developed by Barclays Capital.

They then reversed course, putting 15 percent of new reserves, or $17.8 billion, into euros in the third quarter, the smallest share of any period in which their reserves grew since early 2008. Central banks put 45 percent, or $52 billion, into dollars, up from 36 percent.

Rally by Default

Rather than a referendum on the U.S., the dollar may be rallying by default. Nouriel Roubini, the New York University professor who predicted the credit crisis, said on Feb. 4 that the greenback may weaken for the next three years.

Moody’s Investors Service said last week the U.S. government’s Aaa bond rating will come under pressure unless additional measures are taken to reduce budget deficits projected for the next decade. The ratio of government debt to GDP and revenue increased “sharply” during the seizure in credit markets and recession, Moody’s said.

“If the current upward trend in government debt were to continue and become irreversible, the rating could come under downward pressure,” said analysts led by Steven Hess, a senior credit officer at Moody’s in New York.

The Obama administration’s plan to offset spending by more than $1.2 trillion over 10 years showed larger deficits and higher debt levels than in the original budget, Moody’s said. The ratio of debt to GDP in the U.S. will continue to expand, reaching 76.5 percent in 2019 compared with an earlier forecast of 70.1 percent, Moody’s said.

Treasury Secretary Timothy F. Geithner said in an ABC News interview broadcast yesterday the U.S. isn’t in danger of losing its Aaa rating.

“Absolutely not,” Geithner said, when asked whether a downgrade is a concern. “That will never happen to this country.”

‘A Better Bet’

The U.S. Office of Management & Budget said America’s budget deficit will fall each year through 2014, to $706 billion from $1.56 trillion in 2010, as borrowing needs drop to $814 billion from $1.75 trillion.

“Under stress, people trust the U.S. to do the right thing,” said Sebastien Galy, a currency strategist at BNP Paribas SA in New York. “The U.S. is a better bet.”

A global reserve currency must provide investors with the ability to invest, which requires liquid markets, and few capital controls, according to investors. China’s yuan can’t replace the dollar because it isn’t fully convertible and doesn’t float freely. The euro region and the markets for commodity currencies, such as the Australian, New Zealand and Canadian dollar, don’t have enough trading to absorb the amount of cash the reserve banks hold.

‘No Alternative’

“There is no alternative to the dollar, so it’s status as a reserve currency can’t be under threat,” said Adam Boyton, a senior foreign-exchange strategist at Deutsche Bank AG in New York.

The dollar’s preeminence will remain intact, as it continues to be the most widely used currency in business and finance worldwide, the Federal Reserve Bank of New York said in a report released Jan. 5. Some $580 billion in banknotes, or 65 percent of all bills in circulation, were held outside the U.S. as of March 2009, according to Fed data.

The greenback has an 86 percent share of the foreign- exchange market, more than twice the euro’s 37 percent. Its share of the international debt market is 39 percent.

“The international role of the dollar remains substantial a decade after the introduction of the euro, and despite changes in the value of the dollar and the financial turmoil that began in 2007,” Linda Goldberg, a vice president at the New York Fed, wrote in the report.

Relative Deficits

While the Congressional Budget Office expects America’s debt to reach 65 percent of GDP in 2010, that would still be below the 77 percent of GDP the European Commission expects for Germany, the U.K.’s 80 percent and Japan’s 180 percent.

“I would want to stay away from the euro, the euro zone and some of the emerging European currencies,” Michael Gomez, the co-head of emerging markets at Pacific Investment Management Co., said on Feb. 4 at a conference in Moscow. The Newport Beach, California-based firm manages the world’s biggest bond fund.

At their meeting this weekend in Iqaluit, Canada, Group of Seven finance ministers pledged to press ahead with economic stimulus measures. Canadian Finance Minister Jim Flaherty told reporters that “we need to continue to deliver the stimulus to which we are mutually committed and begin looking at exit strategies to move to a more sustainable fiscal track.”

Yen Gains

Rather than using a weighted average of exchange rates based on trade data, which is reported on lag and subject to revision, the Bloomberg Correlation-Weighted Currency Indexes calculate weights based on variances in exchange rates.

The indexes have a start date of Jan. 2, 1975, and a base value of 100. The index for the dollar was little changed at 102.69 today and the yen index was at 395.70. The Swiss franc index was at 271.20 and the euro index was at 107.60, from 271.23 and 107.58 on Feb. 5 respectively. The index for the euro replicates the German deutsche mark before 1999, when Europe’s common currency started trading.

The New Zealand dollar index fell 0.2 percent to 50.14 today, the Swedish krona index climbed 0.1 percent to 52.89 and the Australia dollar index dropped 0.2 percent to 64.07.

Though the dollar is the world’s reserve currency, it doesn’t affect the movement of foreign-exchange rates as much as the euro, the indexes show. Since the euro’s creation, its correlation to other G-10 currencies has steadily risen, overtaking the dollar in 2004 and all others by December 2008