Myth Of Greek Problems

Following up on the Doug Kass, I mentioned yesterday, the excellent economists at Societe Generale have got a nice reference for Greece versus California.

Click on picture to enlarge, courtesy of Societe Generale.


I am looking forward to sunny Spain, and UK, US ... Some facts and myths of Euro zone debt crisis nicely packaged here.

Recovering Tariffs?

While we wait for a kind of bounce in risk markets, and here the wisdom of admired Jeff Saut of Raymond James may be spot on with the call for this week:

Economist, historian, and savvy seer Eliot Janeway stated decades ago, “When the White House is in trouble, the markets are in trouble!” Plainly, we agree and would add that the January Barometer has registered a cautionary signal, as has Lucien Hooper’s December Low indicator. That said, Friday’s turnaround, accompanied by pretty oversold readings, should lead to some sort of one- to three-session rally attempt. To that point, the NASDAQ 100 (NDX/1746.12) was “up” last week (+0.29%), as was Info Tech (+0.72%), Materials (+0.83%), and Natural Gas (+6.7%); so they may lead the “bounce.” Luckily, we have investments in all of these complexes. However, at session 14, in the envisioned 17- to 25-session “selling stampede, we remain cautious.

... I went to see what Google Trends are telling about the "TARIFFS". Another sign of healthy global economy?

Well, I looked also at the latest run through the blog roll, and chickens especially get grilled recently:
Protectionism: China and chickens versus Canada and Buy American
China Announces 105% Tariffs on Chickens in Retaliation for US Steel and Tire Tariffs
MARKET WRAP – VOLATILE DAY ENDS WHERE IT STARTED
China Vs. US Chickens
China Complains to WTO About EU Tariffs

and then these too:
Should we cancel Haiti’s debts?
China GDP Growth Trumps Arms Dispute
Wonderful books added to literature

that' s only for February to start with!

Well, some "bulls with faith" are burning fingers, some believe greed might get good again, some still see no panic at all ...

I do not fear to sell in strength ... but do not rush, as we, indeed may be still higher in a week or two.

CDS Spreads Lead Bond Spreads?

This comes from the astute Euro zone government bond guys at Nordea Markets today:

Greece’s CDS levels traded above Greek-German bond spreads before the spreads soared, suggesting that some market participants simply had to buy protection, almost at any price. We saw the same phenomenon in Portuguese CDS-bond basis.

It is also worth noting that the Greek and Portuguese CDS levels fell below bond spreads before the spreads narrowed in H1 last year, i.e. credit default swaps were leading the bond market performance. We would also note that the Portugal CDS spread is still wider than the bond spread, suggesting that the sell-off in Portuguese bonds will continue.

Click on charts to enlarge, courtesy of Nordea Markets.

Enjoy, while the Spain is a serious country ... Be careful!

Read more about the sovereign credit in "Q&A: Carmen Reinhart on Greece, U.S. Debt and Other ‘Scary Scenarios’" at WSJ Real Time Economics!

US Employment & Tax Receipts

While the market waits for US non-farm payrolls fantasy today, economists at Societe Generale have some nice charts today, linking employment and tax receipts:

In the US, personal taxes are the biggest source of government revenue. They make up 70% of current tax receipts vs. 21% from corporate taxes. Since the start of recession and job losses in early 2008, personal tax receipts have dropped by 32%, or by 3% of GDP. In other words, the drop in employment is responsible for nearly half of the widening in fiscal deficit over the past 2 years.

Click on charts to enlarge, courtesy of Societe Generale.

Would bond vigilantes appreciate improvements in employment?

But watch for quality of that employment improvement! Government hiring may be misleading ...

Fear Of Bond Market Collapse?

According to Bloomberg today:

Feb. 4 (Bloomberg) -- Nassim Nicholas Taleb, author of “The Black Swan,” said “every single human being” should bet U.S. Treasury bonds will decline, citing the policies of Federal Reserve Chairman Ben S. Bernanke and the Obama administration.

It’s “a no brainer” to sell short Treasuries, Taleb, a principal at Universa Investments LP in Santa Monica, California, said at a conference in Moscow today. “Every single human being should have that trade.”

Ufff! Scared? Well, Felix Salmon has an interpretation of Taleb's words:

Taleb isn’t actually giving investment advice here, although it might sound as though he is. He’s just making a rhetorical point that Bernanke and Summers are bound to make some kind of a mistake in trying to steer the US economy — and that such mistakes are likely to result in higher long-term rates. The problem is that, as we saw during the most recent crisis, every so often an economic disaster results in lower long-term rates. So overall I’d say that following Nassim’s investment advice from his book is definitely preferable to following off-the-cuff comments he’s making in Moscow.

Not convinced by Salmon's interpretation? Interestingly, but I look at 10-year US Treasuries in my screens right now, and we are trading close to the lowest intra-day yield of ca. 3.60%, but we were at 3.71% in the European morning today. Gold was also thrown down from (spot) 1110 USD in the European morning to 1062 as I write. Of course, the markets have been flooded with bond market bubble fear now. Also Australian equity strategists at Citigroup Global Markets had a refreshing reminder of bond market collapse of 1994 last week. The key messages were as follows:

Unlikely, but Beware — The massive sell off in bonds yields through 1994 caught the market by surprise. Even with the benefit of hindsight, it was not “obvious” in the way we now view equity market corrections of late 1987, 2000 and 2008.

Similarities to Now — Leading into 1994, economies were in upgrade mode with equity markets performing strongly. The Fed funds rate had been kept at a (then) record low for an extended period of time so as to nurse US commercial banks and the property market off the critically ill list.

Warning Signs — Look for upward movements in US Fed fund futures, an increase in long term inflation rate expectations, underperformance by US treasuries and hawkish central bank commentary as signals of a potential repeat.

Click on chart to enlarge, courtesy of Citigroup.

Well, from historical perspective the jump in yields in 1994 does not look that big at all. Further, we have discussed the bond market collapse of 1994 behind the scenes in the meantime. The key finding so far are:

... contrary to 1994 when no one believed it should come/crash it appears that most believe that bonds can only collapse this time around!
... they appear very eager to buy interest rate caps i.e. this is an expression of fear of an upcoming bond bear market. Again, this attitude is very different to the end-1993/early 1994 sentiment where "everyone" believed that the 1993 bull market should carry on (forever).

So far it looks different to 1994. And it is not only about the Greece or PIIGS in the Eurozone, but also other fiscal jokes.

Behind the sovereign debt background, there are some issues in the credit markets worth mentioning. According to BNP Paribas credit strategists:

Within corporate credit, financials have been the main underperformers, particularly in CDS, with the spread between iTraxx Senior Financials and Main hitting 12bp – a higher differential than after Lehman's demise.

Click on chart to enlarge, courtesy of BNP Paribas.



Credit jokes?

Refreshing On Current Chinese Affairs

Some links on Chinese hope:

First of all, let's start with a great sum up by Felix Salmon with Shorting reserves.
It may get tough in the real life, and not only with language ...

Nice chart-book by BBVA, and comment by BNP Paribas on latest PMI reading.

James Chanos with little love about 1 hour long...

Deutsche Prescribes The Focus On Fiscal Performance For Baltics

Busy economists at Deutsche Bank finally had the chance to make a quick look at the economic affairs in Baltics last week. In their weekly "Focus Europe" their take was rather straight forward:

The Baltic economies are showing some tentative signs of stabilization. Base money has stabilized as currency pressure has eased while demand for FX deposits appears to have peaked, at least for now. The data flow on economic activity is no
longer uniformly negative and at least in Estonia and Latvia 2010 should produce some modestly positive QoQ GDP growth rates.

Click on chart to enlarge, courtesy of Deutsche Bank.

All three governments have taken extensive measures to contain their budget deficits. But only in Estonia has fiscal management been sufficient to maintain the deficit within 3% of GDP. This may be sufficient to win the country EMU entry next January.

In Latvia and Lithuania sizeable fiscal hurdle sremain ahead. Deficits in both countries remain well in excess of the criterion in Maastricht while Latvia’s October general election could weaken political support for further reform. In the near term better than expected fiscal performance in Latvia has boosted the sovereign’s liquidity position while access to Eurobond markets is crucial for Lithuania if it is to avoid an IMF programme.

Click on table to enlarge, courtesy of Deutsche Bank.

Interestingly, has Deutsche noticed some demand for "Italian-style" lipstick cosmetics in Estonia?

Encouragingly Estonia may receive an upbeat recommendation from the European Commission in May on its bid to adopt the Euro in January of next year. But even though we should learn in April that it met the fiscal target last year and that inflation should remain below the required threshold, risks remain. For example could the Riksbank’s provision of a swap line to the Estonian central bank represent a violation of the ERM II criterion? The ECB also recently warned against some elements of a piece of proposed government legislation on national statistics. ‘Several provisions of the draft law indicate that the Ministry of Finance has extensive powers to interfere in the production of national statistics.’

Saving The Dates For US Speculative Grade Festivities

Credit strategists at BNP Paribas have released the "preliminary schedule" today:

According to a recent report by Moody's, US speculative grade companies face more than $800bn in refinancing requirements over the next 5 years including $555bn in bank facilities and $250bn in bonds. Of the $800bn, around $100bn in debt matures in 2010-11 and more than $700bn will mature in 2012-14. The refunding needs for 2010-2012 are up by more than one-third from the 2009-2011 period to $255 billion-the biggest three-year amount in the history of Moody's 12-year-old study. The enormous amount of debt due over the next five years(Moody's report covers 2500 companies) stems from a robust period of refinancing and leveraged buy-out activity prior to summer 2007. Although refinancing risk has recently eased given the reopening of the high yield market, the success of any future refinancing will depend on the risk appetite of lenders and a sustained pace of recovery in the global and particularly the US economy.

Click on chart, courtesy of BNP Paribas.

Credit clowns are usually late in the game. Nonetheless, get ready for whatever side of the trade! Bond vigilantes are invited to the deficit cosmetics show. However, in the worst case, Fed still has the room on the balance sheet, as there are no limits.

Reading On Inequality In Times Of Crisis

Interesting take on inequality by Jonathan Heathcote, Fabrizio Perri and Gianluca Violante at voxeu.org, for reading click here.

End Of Deflation Risk and High Inflation Numbers

While I am fighting the disruptive blizzard in my backyard tonight, at the Fed, according to Financial Times, the deflation "risk had "passed"".

However, at the other side of our planet of "global warming" Nomura is concerned about the inflation running high in India:

The RBI has left interest rates unchanged in its policy review on 29 January 2010. Although the RBI has hiked the cash reserve ratio (CRR) by 75bp, the market should heave a sigh of relief, as it has been concerned about rate tightening owing to inflationary pressure. Although we have been expecting a rate hike, the fact that
the RBI has opted to keep rates unchanged does not constitute a fundamental change, in our view, that a tightening is inevitable. We believe inflation remains the key issue, which will drive the markets, and we still expect the markets to face some more downside risk from here.

Food price inflation in India is now being joined by wider systemic inflation, driven by demand-side factors as expansionary policies work their ways through the system. Rate cyclicals remain particularly vulnerable to an expected market correction.

Click on chart to enlarge, courtesy of Nomura.

From the hell in the hands of Devil?