Category Archives: Investment outlook

“August 2011: The euro crisis reaches the core”

Yves here. This article gives one of the best high level summaries of the problems besetting the Eurozone I have seen. I’m not as keen about his remedy, which is not to say that it isn’t clever and wouldn’t in theory work. But from everything I can tell, the ECB is simply not prepared to expand its balance sheet anywhere near as much as would be needed.

By Daniel Gros, Director of the Centre for European Policy Studies, Brussels. Cross posted from VoxEU

Investors are anticipating the unravelling of the 21 July 2011 “solution” and a breakdown of the interbank-market that would throw the economy into an “immediate recession” like the one experienced after the Lehman bankruptcy. This column argues that this will happen without quick and bold action. The EFSF can’t work as designed but if it were registered as a bank – which would give it access to unlimited ECB re-financing – governments could stop the generalised breakdown of confidence while leaving the management of public debt in the hand of the finance ministers.

Are Rating Agencies Now Trying to Mug Rich Municipalities?

A savvy and cynical reader sent me this story from the Boston Globe yesterday, “Rating agency downbeat on Mass. communities.” We wanted to show readers that we are not merely after Standard & Poor’s but all sorts of rating agency incompetence and socially destructive behavior. Key extracts:

Irony Alert: If This is 72 Hours of Central Bankers Trying to Save the World, What Would Abject Capitulation Look Like? (Updated)

Reader Valissa pointed to an article at Bloomberg which looks like an effort at hagiography gone flat. Titled “Central Bankers Worldwide Race to Save Growth in 72 Hours of Policymaking,” it tries to perpetuate the myth of the overlords of the money system as all powerful, concerned with the public good, and competent. But as we know, they are increasingly politicized, hostage to ideology, unduly concerned with the pet wishes of banks, and tend to deny the existence of problems until they are acute.

Look at this impressive list of actions:

Philip Pilkington: European Citizens are Not Being Taxed to Fund the Bailouts

By Philip Pilkington, a journalist and writer based in Dublin, Ireland

We hear it time and time again: EU taxpayers are paying for the bailouts in the European periphery. The problem with this statement? As popular as it may be in the media right now, it’s not quite true – at least, it’s not true if you take a proper macroeconomic perspective on the crisis rather than looking at it through the crass lens of nationalism.

We Speak to BNN About Europe, Economic Outlook

Wow, am I sour faced in this one!

I had gotten to the studio ahead of time (standard protocol) and was miked up earlier than usual. So I listed to probably 12 minutes of unbelievable cheerleading, which is not the sort of thing I expected on BNN, which usually does not sell the CNBC Kool-Aid. I think I was braced for a fight which never came.

Hope you enjoy it regardless.

Asia Getting Hammered, Discouraging Report on ECB Commitment (Updated: Europe Opens Up, US Futures Rise; Second Update: Rally Fizzles)

Wellie, nothing like a lack of leadership to turn an ugly market day into an utter rout. But in another sense, the fake leadership in lieu of real leadership (as in taking a tough stand now and again and bringing the public around) is what set up conditions for a spectacular market unwind in the first place.

It’s one thing to do the equivalent of put the financial system on life support to deal with a crisis, quite another to leave the patient on life support and pretend you’ve returned to status quo ante.

The downdraft continues.

Obama Owns This Crisis

Obama created an unnecessary financial crisis. Not that we would have escaped eventually having one, but he played like a fool into the Republican desire to use the debt ceiling to push for budget cuts, and he tried outsmarting them to get his long standing desire of entitlements cuts through. Having the S&P downgrade hit when the Eurozone crisis was in an acute phase was like rolling a car full of explosives into a burning house. “Obama victory” may come to be the modern version of “Pyrrhic victory”.

And the man touted as a silver tongued orator can’t even talk up the markets. He actually managed to talk them down. Big time.

Market Upheaval (Updated)

Since this will be trumped by the market opening in the US, I’ll be brief.

So far, this is playing out like I expected. Bad but not horrific.

ECB Considers Massive Purchases of Italian and Spanish Bonds (Update: Eurobazooka Armed)

Even thought the US media has been fixated on the downgrade of Treasuries to AA+ by Standard and Poor’s, the real risk to the markets is continuing decay in Eurozone sovereign debt. The BBC’s Robert Peston said today that the failure of the ECB to buy Italian bonds would be a Lehman moment. As our Ed Harrison stresses, while some countries like Greece have a solvency crisis and need to have their obligations restructures (as in written down), the stress on Spanish and Italian bonds looks like a classic liquidity crisis. And the concern has spread to the core, as French sovereign debt (remember, rated AAA) was trading at a 90 basis point premium to German bunds. As Ed noted:

Market Rout Continues

After a very bad day in the US, Asian markets swooned and European markets fell again, but their declines are less gut wrenching. 2-3% falls in most Euromarkets at the opening (2.5% for the FTSE, 2% for the Dax, and 3.5%.for the Milan’s FTSE-MIB) but for the most part, they have come back somewhat as of this hour. The FTSE is now down 2.2%, the CAC 40 a mere 1.2%, the DAX 2.7%, and the FTSE-MIB has is in positive territory, up 0.25%. This follows plunges of 3.7% for the Nikkei and 4.5% for the Hang Seng indexes.

Market Craters: Dow Falls 512 Points

What we are seeing today is not as bad as the worst days of the crisis, but it ins’t much consolation for investors who had gotten back in the pool on the belief that the system had been patched up reasonably well and the economy was on the mend.

“Is Too Much Significance Given to U.S. Credit Rating?”

A useful discussion with Marshall Auerback on Fox News on the debt ceiling deal and the implications of a possible downgrade of US Treasuries. Enjoy!

“Is Standard and Poor’s Manipulating US Debt Rating to Escape Liability for the Mortgage Crisis?”

By Scarecrow and Jane Hamsher. Cross posted from FireDogLake

The Politico headline says it all: U.S. credit downgrade worries Obama, Congress more than default

It’s not the default that strikes the most fear in the White House and Congress these days. It’s the downgrade

As Robert Reich notes, Standard and Poors is the “biggest driver in the deficit battle.” Why would anyone care what the corrupt and disgraced organizations who quite nearly brought down the world economy think about anything at this point? And yet, that is where elite opinion is focused right now:

[W]hat really haunts the administration is the very real prospect, stoked two weeks ago by Standard & Poor’s, that Barack Obama could go down in history as the president who presided over his country’s loss of its gold-plated, triple-A bond rating.

[]

Financial analysts say such a move would hit Americans with more than $100 billion a year in higher borrowing costs, but it’s not just that. It would be a psychic blow to a nation that already looks over its shoulder at rising economic powers like China and wonders, what’s gone wrong? And it would give the president’s Republican rivals a ready-made line of attack that he’s dragging the country in the wrong direction.

This rumbling has been coming from Capitol Hill for a while, which made us start asking questions about what was really going on with Standard and Poors. It felt like there’s a story-behind-the-story driving S&P’s actions in the debt ceiling debate, which appear inexplicable at face value and go way beyond what Moody’s or Fitch have done. And the more we looked at the timeline of events, the more we wondered how the intertwining dramas of a) S&P downgrade threats, b) the liability that the ratings agencies may have for their role in the 2008 financial meltdown, and c) the GOP’s attempts to insulate the ratings agencies from b) are all impacting each other.

ECRI expects ‘double dip scare’

Cross-posted from Credit Writedowns Below is a video of Lakshman Achuthan, co-founder and chief operations officer of the Economic Cycle Research Institute (ECRI), talking about the economic outlook for the US. I profiled Achuthan’s views on a broad US slowdown when I wrote in May about why a global slowdown will hit by summer. Now […]

Get Ready for TARP 2.0

Washington DC appears to be readying itself for a repeat of the TARP, namely, the passage of unpopular legislation to appease the Market Gods (and transfer even more income from ordinary Americans to the Masters of the Universe). It isn’t yet clear whether this drama will be played out via generating bona fide financial market upheaval or mere threat-mongering (the Treasury market seems pretty confident that well-trained Congresscritters will fall into line). But unlike the TARP, which was a classic example of well-placed interests finding opportunity in the midst of upheaval, this reprise is a far more calculated affair.