Category Archives: Investment outlook

Marshall Auerback and Warren Mosler: Core Europe Sitting Pretty in their PIIGS Drawn Chariot

By Marshall Auerback, a portfolio strategist and hedge fund manager, and Warren Mosler, an investment manager and creator of the mortgage swap and the current Eurofutures swap contract. Cross posted from New Economic Perspectives

The refusal to countenance a Greek default is now said to be dragging the euro zone toward even greater crisis. Implicit in this view, of course, is the idea that the current “bailout” proposals are operationally unsustainable and will lead to a broader contagion which will ultimately afflict the pristine credit ratings of core countries such as Germany and France.

Well, we see a very different view emerging: The “solution” currently on offer – i.e. the talk surrounding the European Financial Stability Fund (EFSF) now includes suggestions of ECB backing. This makes eminent sense. Let’s be honest: the EFSF is a political fig-leaf. If 440 billion euros proves insufficient, as many now contend, the fund would have to be expanded and the money ultimately has to come from the ECB — the only entity that can create new net financial euro denominated assets — which means that Germany need no longer fret about being asked for ongoing lump sums to fund the EFSF in a way that would ultimately damage its triple AAA credit rating.

Despite public protestations to the contrary, it is beginning to look like the elders of the euro zone have begun to embrace the reality that, when push comes to shove, it is the ECB that must write the check, and that it can continue to do so indefinitely.

Stocks Hammered by EuroCrisis Worries; Bank of America, Citi Down Nearly 10%

It’s becoming increasingly obvious to Mr. Market that the officialdom in Europe is not on a path to resolving its burgeoning sovereign/bank crisis. It is insisting on imposing austerity on debt burdened countries, which will only shrink their GDPs, making their debt hangovers even worse.

And Germany wants to have its cake and eat it too

Randy Wray: Euro Toast, Anyone? The Meltdown Picks Up Speed

Yves here. Readers may note that Wray cites the cost of the US bailout of the financial crisis as $29 trillion. I’ve never seen a figure like that (the highest estimate I’ve seen was from SIGTARP, which set the “theoretical maximum” at $23 trillion, and that figure was widely criticized. Barry Ritholtz has kept tab over time, and his tally has been in the $10-$11 trillion range). But this estimate is not core to his argument.

By L. Randall Wray, a Professor of Economics at the University of Missouri-Kansas City and Senior Scholar at the Levy Economics Institute of Bard College. Cross posted from EconoMonitor

Greece’s Finance Minister reportedly said that his nation cannot continue to service its debt and hinted that a fifty percent write-down is likely. Greece’s sovereign debt is 350 billion euros—so losses to holders would be 175 billion euros. That would just be the beginning, however.

Europe Readying Yet Another “This Really Will Do the Trick” Bailout Package

Well, we are clearly in crisis mode. We are back to weekends being a period when you need to watch the news in a serious way.

And in another bit of deja vu all over again, the powers that be in Europe are readying yet another bailout plan, this one supposedly big enough to do the trick once and for all.

The Fed Twists in the Breeze

Mr. Market so far is not at all impressed with the announcement today that the Fed will be changing the composition of its portfolio by selling $400 billion of near-dated Treasuries and buying the same amount of longer maturity Treasuries. Since the Fed will maintain the same Fed funds target rate, the Fed’s intent is to keep short term rates low and also reduce longer term rates.

The fallacy with the Fed approach, as our Marshall Auerback has pointed out repeatedly, is that targeting a quantity means the central bank has no idea what result it will achieve.

Bianco on earnings volatility and recession

Edward here. Economists are telling us that the economy is decelerating rather quickly. What does that mean for stocks, in either a recession or no-recession scenario? Jim Bianco was on Bloomberg Television yesterday with some insightful comments about stock valuations and economic cycles. Bianco told Bloomberg that he believes the likelihood of recession in the […]

Tape Painting or Real Rally?

By Marshall Auerback and Edward Harrison Marshall here. That was an impressive rally into the close in New York. Stocks ended up across the board. Yves Smith, who was off the grid today, asked “was there any news driving” the rally into the close or was it just tape painting. Here’s what I wrote: No, […]

Jurgen Stark = Credit Anstalt 2.0 (and Euromarkets Reacting Accordingly)

It is remotely possible that the EU officialdom will temporarily reverse the train wreck that started last Friday with the resignation of Jurgen Stark from the ECB. That was seen as a sign that Germany has adopted bailout fatigue as official policy. That in turn would mean that Greece will not get any more money lifelines (which as commentators predicted some time ago, means a likely banking crisis, which was the reason for them not to exit the Eurozone).

Mr. Market is giving a big vote of no confidence in European leadership, although the FTSE has reversed some of its early-session losses.

Auerback/Parenteau: Jackson Hole will be a Black Hole for Those Hoping for QE3

By Marshall Auerback, a portfolio strategist, hedge fund manager, and Roosevelt Institute Fellow, and Rob Parenteau, CFA, sole proprietor of MacroStrategy Edge, editor of The Richebacher Letter, and a research associate of The Levy Economics Institute. Cross posted from New Economic Perspectives

Those leading the charge for “fiscal consolidation” now seem positively shocked by the violent gyrations in the stock market, as expectations rapidly seem to be shifting toward an “L” shaped recovery or worse – a possible global recession. To those of us on this blog who have consistently downplayed the prospects of global recovery in the midst of widespread private sector AND public sector retrenchment, none of this sadly comes as a surprise. We are, as Bill Mitchell noted recently, experiencing a “self-inflicted catastrophe”, largely because of dangerously destructive myths in regard to the efficacy (or lack of it) in regard to fiscal policy. But in spite of the shrill rhetoric of the fiscal austerian brigades, the markets are beginning to intuit that a nation cannot have a fiscal contraction expansion when all other spending is flat or going backwards and yet that remains the general trajectory of policy.

More on the Opacity of Bank of America’s Financial Statements

Yesterday, I made a basic point about the financial statements of banks and other financial firms, citing Steve Waldman, who said it better than I could:

Bank capital cannot be measured. Think about that until you really get it. “Large complex financial institutions” report leverage ratios and “tier one” capital and all kinds of aromatic stuff. But those numbers are meaningless. For any large complex financial institution levered at the House-proposed limit of 15×, a reasonable confidence interval surrounding its estimate of bank capital would be greater than 100% of the reported value. In English, we cannot distinguish “well capitalized” from insolvent banks, even in good times, and regardless of their formal statements.

The illustration of Steve’s point was that investors freaked out on Monday about an estimate that Bank of America might need to raise $40 to $50 billion in equity. The idea that the market would be surprised (as in not know that and simultaneously regard that figure as plausible) says a great deal about how little confidence investors have in their knowledge of big financial firms.

Why is Bank of America’s Stock Cratering Yet Again? It’s the Extend and Pretend Endgame

Yesterday, the S&P 500 ended flat, yet Bank of America continued its truly impressive implosion, with its stock tanking 7.89%. It is now trading at a market cap of $65 billion, versus a book value of common equity of roughly $215 billion.

Market commentators were having so much fun discussing the meltdown that FT Alphaville even dedicated a post to the “The Bank of America Explanation Game.” This was its tally, and the post includes an explanation for each:

Satyajit Das on the Botox Economy

As much as I like Satyajit Das’ books (his new offering, Extreme Money, is just out and was reviewed favorably in the Financial Times), I wish he’d get on TV more often. His being in Sydney puts him at a bit of a disadvantage.

This clip is amusing.

Guest Post: Innovate or Die

By Sell on News, a macro equities analyst. Cross posted from MacroBusiness

I have been reliably informed by Houses & Holes that we are “all going to die”, and rather sooner than we all imagined. Something to do with the economic meltdown in Europe and America, I believe. While I have no reason to doubt such potent insight — after all, death is the best one way bet available — I think it could do with a little refining. What is dying is the industrial era in the developed world, a trend that is obscured by the fact that the developing world is industrialising at an accelerating pace.