Euro Area

 

Bonds: A Crowded Trade

In the financial markets, we have been waiting for a crash of U.S. stock prices. And waiting. And waiting. It still hasn’t come.

Last week the spectacular bull market in U.S. stocks that began in March 2009 continued with even more gains. On Friday, the S&P 500 hit another all-time high.

But the real action was in the bond market. Over the last three weeks, about half a trillion dollars has been wiped off the value of global bonds … despite lower than normal trading volumes.

According to Citigroup strategist Mark Schofield, the sell-off is a “stark reminder of just how congested a lot of market positioning has become.” This makes it “increasingly difficult for investors to exit those positions when the time comes to do so.”

 

piggy bank

 

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Bankrupt Greek Government Hopeful …

Hope dies last, as they say in Germany, but it has always been certain that the EU would do “whatever it takes”, to use a Draghi-ism, to keep Greece in the euro fold by finding a way to continue the existing extend and pretend scheme. So we are not surprised to learn that Alexis Tsipras is “hopeful” and that there has been “progress” at the talks – although it actually sounds like they have achieved precisely nothing.

 

sparkly tsiprasSparkly Greek prime minister Alexis Tsipras

Image via formiche.net

 

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The Madness of Negative Bond Yields

As we have frequently discussed in these pages, time preference must always be positive on a society-wide basis – it is a praxeological law that future goods and/or satisfactions are valued at a discount to identical present goods. We emphasize “identical” here because sometimes people are asserting that there are exceptions, such as in the famous example that men would prefer having ice in the summer over having it in the winter (thus, in wintertime, ice available in the future would be valued more highly). However, “summer ice” is not identical to “winter ice”, even though it has the same physical properties. The reason is that the satisfaction if provides is not the same.

 

bank

 

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Dudes, Where’s My Money?

Over the weekend, conservative German newspaper FAZ (Frankfurter Allgemeine Zeitung) reported that euro-group negotiators were allegedly “shocked” by the lack of viable reform plans offered by Greece and the general attitude of the Greek delegate. As Reuters reports:

 

“Euro zone officials were shocked at Greece’s failure to outline plans for structural reforms at last week’s talks in Brussels, a German newspaper on Saturday cited participants as saying, adding the Greek representative behaved like a “taxi driver”. A meeting of deputy finance ministers on Thursday gave Athens a six working day deadline to present revised economic reform plans before euro zone finance ministers meet on April 24 to consider unlocking emergency funding to keep Greece afloat.

Euro zone sources told the Frankfurter Allgemeine Sonntagszeitung that they were disappointed and shocked at Athens’ lack of movement in its plans, and in particular its reluctance to talk about cutting civil servants’ pensions.

The mood between Greece’s leftist government and its euro zone partners, especially Germany, has deteriorated in the last few weeks, with personal recriminations flying between ministers and calls from Athens for Berlin to pay war reparations.

The paper said at last week’s meeting the Greek representative just asked where the money was “like a taxi driver”, according to sources, and insisted his country would soon be bankrupt.

The euro zone sources told the paper that Greece’s creditors do not believe this is the case and that it would be a domestic political issue if Athens is unable to fully pay salaries and pensions.

The paper also said that German Finance Minister Wolfgang Schaeuble, who has taken a tough line toward Greece in bailout talks, would have to get the Bundestag lower house of parliament to vote on any fundamental changes to the reform program.

 

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A Brief Update on Recent Developments

On Friday, the Greek government has submitted its latest reform proposals to the EU. According to press reports, these are supposed to raise €3 billion and consist of the following:

 

“[…] moves to combat tax evasion, more privatizations and higher taxes on alcohol and cigarettes. […] The Greek government said the 18-point reform program did not include any “recessionary measures”.”

 

In the meantime it has also emerged that the privatization of the port of Piraeus, which Syriza had previously reportedly opposed is about to go forward after all, and is expected to bring in proceeds of around € 500 m. Pressure on the Greek government has recently increased, not only due to the fact that it is expected to run out of money soon, but also as a result of a downgrade of its credit rating by Fitch late last week to a lowly CCC rating. This makes it even less likely that the government will be able to roll over maturing treasury bills.

 

greece-austerityPhoto credit: Yorgos Karahalis / Reuters

 

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An Accelerating Trend

While the euro itself has recovered a bit from its worst levels in recent sessions, euro basis swaps have fallen deeper into negative territory. In order to bring the current move into perspective, we show a long term chart below that includes the epic nosedive of 2011. We are not quite sure what the move means this time around, since there is no obvious crisis situation – not yet, anyway.

A negative FX basis usually indicates some sort of concern over the banking system’s creditworthiness and has historically been associated with euro area banks experiencing problems in obtaining dollar funding. This time, the move in basis swaps is happening “quietly”, as there are no reports in the media indicating that anything might be amiss. Still, something is apparently amiss:

 

1-euro basis swapsParty like it’s 2011: Three month, one year, three year and five year euro basis swaps – click to enlarge.

 

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John Dizard Has the Right Idea

John Dizard is one of the few FT columnists we actually like to read (much of the paper’s editorial line consists of boring, if in our opinion dangerous, Keynesian shibboleths). Anyway, Mr. Dizard’s most recent column doesn’t disappoint. It contains what is known as “actionable advice” and is entitled “Embrace the contradictions of QE and sell all the good stuff”. It starts with a quote attributed to New York based short seller Ben Smith, reportedly uttered in the fall of 1929: “Sell ’em all! They’re not worth anything!”

 

the dog gets it

Bail-out or not, one way or another it’s eventually going to become a default …

Photo via desicomments.com

 

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They Didn’t Want to Call it the “5 Year Plan”

We have already commented on previous occasions on the EU’s “investment plan” (see: “EU Planning to Spend Money it Doesn’t Have” for details), which is bound to result in the production of countless white elephants across Europe (such as Poland’s “ghost airports”). These investments are apt to “boost GDP” in a number of countries, but will very likely leave nothing but proverbial bridges to nowhere behind. It is going to be yet another giant waste of scarce resources.

Apparently the EU has now given its placet to a “Four Year Plan” with the aim of investinf €315 billion, with various EU governments vying for the best place at the trough. It seems they didn’t want to make it a “Five Year Plan” – that would have been too reminiscent of the Soviet GOSPLAN agency, so a four year plan was adopted. However, what they may not have been aware of is that Stalin actually gave orders that the Soviet Union’s five year plans had to be fulfilled in four years:

 

5 year plan in four yearsAn old Soviet GOSPLAN poster: “Let’s fulfill the five year plan in four years!

 

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The Song and Dance Resumes

In recent days it has become increasingly clear that the political theater between the EU and the new government Greece is set to continue. For a while, markets were convinced that what is widely considered the worst case scenario (a Greek default and exit from the euro) had been avoided, but it appears it hasn’t been avoided just yet. Various EU politicians have expressed concern over the public statements of Greek politicians in recent weeks, as they are making it tougher for them to sell the agreement to their own parliaments and citizens, but these statements may be mainly designed for the Greek government’s domestic audience anyway.   dreamstime_xxl_37380474-1170x877

Photo credit: btwcapture

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Not Quite Right in the Head?

The belief that the market economy requires “steering” by altruistic central bankers, who make decisions influencing the entire economy based on their personal epiphanies, has rarely been more pronounced than today. Most probably it has actually never been stronger. It is both highly amusing and disconcerting that so many economists who would probably almost to a man agree that it would be a very bad idea if the government were to e.g. take over the computer industry and begin designing PCs and smart phones by committee, think that government bureaucrats should determine the height of interest rates and the size of the money supply.

 

germany-european-central-bank-48-630x437

Photo credit: Michael Probst

 

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