Financial Transaction Tax to Distract from Spain?

The Telegraph had an interesting article on the financial transaction tax, linking the attention it is now getting with a desire to detract from Spain's defiance regarding this year's deficit target. As always, Telegraph articles must be viewed with a bit of critical distance due to their tendency to contain a fair amount of hyperbole, but we thought the following snips were worth relating:


„So why – with Greece’s €130bn bail-out signed but probably inadequate and a raft of sinner states teetering under their debt loads – have European leaders said today’s summit in Brussels will focus on a bank tax?

Summit groupies will have seen this before: it can mean leaders have reached deadlock, need more time – and almost always that they need to butter up the northern European electorate.

In the face of any hurdle the FTT is the technocrats’ box ticking dream: look busy; raise money; smack banks; tackle a complex, cross-border issue; and kick over-achieving London while you’re at it.

So what are they hiding this time? In a word Spain. In a few words, the stirrings of a radical retaliation of “sinner states” against the German-led imposition of austerity and central rule.


At the beginning of March, leaders gathered in Brussels to sign their "non-negotiable" fiscal pact, binding all European countries (except Britain and the Czech Republic who opted out) to tough rules on budget discipline. Angela Merkel was tickled pink: the deal would last forever, she said.

But with sensational timing, Mariano Rajoy announced Spain would break the rules, immediately.


After days of silence, last night in Brussels finance ministers asked Spain to set a deficit target of 5.3pc. Not only is the figure a massive leap in Madrid’s direction, but the language was completely different too.

In a statement, the ministers expressed hope rather than demand: “The Spanish government expressed its readiness to consider this in the further budgetary process,” it said.


(emphasis added and we corrected a few typos)

Now, we're not sure whether the latest preoccupation with the financial transaction tax is really meant to distract from Spain, but one thing we certainly agree with is that it 'is a bureaucrat's box ticking dream': 'look busy, raise money and smack banks'.

Of course as we have been at pains to stress in previous discussions of the 'Robin Hood tax', it will only serve to rob the poor in the end, as banks will simply add to the fees they charge their customers to recoup the amounts they will lose through the tax. Moreover, the tax will be ruinous for the capital markets where it is imposed and will therefore end up destroying more tax revenue than it creates. So it only looks as though the eurocrats were 'raising money and smacking banks'. Perception and reality are very far apart indeed on this particular issue. However, they sure are bound to 'look busy'.


More on the haggling between Spain and the eurocracy over its 2012 budget can be found in this Bloomberg summary.


“European finance ministers told Spain late yesterday to make cuts equivalent to 0.5 percent of gross domestic product from the 2012 budget. Economy Minister Luis de Guindos said Spain, the euro region’s fourth-biggest economy, remained “absolutely committed” to getting the shortfall under the EU’s 3 percent limit in 2013.

Even this hurdle looks too high,” Christoph Weil, an economist at Commerzbank AG, said in a report. “Spain would have to reduce the cyclically adjusted public deficit by a total of about 7 percent of GDP this year and next,” which would be an “enormous tour de force.”


So this is where the new 5.3% figure comes from.  Rajoy raised their 4.4% to 5.8%, and they are now coming back with 5.3%.  We'll see – no-one seems to have considered yet that revenues may fall short of their target as well, depending on whether the estimates regarding Spain's ongoing economic contraction turn out to be correct or not.


Global Economy: Good, Bad and Misleading News

Japan had something good to report for a change, namely a much bigger than expected increase in machinery orders. This is no doubt more relevant for Japan's economy than whether or not it has a trade deficit.


“Core machinery orders, which help gauge the strength of capital spending, rose 3.4 percent in January from the previous month, beating a median market forecast for a 1.6 percent increase.

The data bolsters the argument that domestic demand can drive the world's third-biggest economy this year as the country rebuilds from last year's disaster and could stay the hand of the Bank of Japan when it starts a two-day policy meeting later on Monday.

Other recent data, including larger-than-expected gains in industrial output and an upward revision to fourth quarter gross domestic product, also raised hopes that Japan's economy will gather momentum this year.”


Many of Japan's corporations are in ruddy health these days balance sheet-wise (there are exceptions to this happy state of affairs, like the steel industry) and the export oriented ones have had to become very efficient in the face of a strong yen. Moreover, Japanese stocks remain quite cheap by traditional yardsticks.

There's actually a good chance that the recent outperformance of Japan's stock market is more than just another ephemeral flash in the pan this time around, especially if the yen's recent bout of weakness persists. No matter what one thinks of Japan's sclerotic political scene and demographic troubles, one fact remains undeniable: its stock market is still cheap. For long term investment performance in stocks, this is the most important criterion by far – how cheap  stocks are at your starting point. Nothing matters more.



The Nikkei and the yen (green line below) – maybe Japanese stocks are getting ready  to actually go somewhere for a change – click chart for better resolution.



Meanwhile, Vietnam's central bank has joined the global rate cutting spree, in order to 'support the economy amidst a slowdown'. Contrary to the widely held view that it is always a good thing when administered rates are cut in order to create another unsustainable and wasteful credit boom, we hold it is a net negative no matter which way one looks at. At best it is an admission that the economy is in bad shape and expected to worsen. At worst it is an attempt to restart credit expansion ex nihilo, which may create a brief illusion of prosperity, while further undermining the economy structurally. The snips below speak for themselves:


“The State Bank of Vietnam reduced the refinancing rate for the first time since 2009 to 14 percent from 15 percent, effective tomorrow, it said in a statement on its website today. It also cut the discount rate to 12 percent from 13 percent and the dong deposit cap for terms of one-month and above to 13 percent from 14 percent.


“The rate cut aims to support growth, as inflation pressures have eased and liquidity in the banking system has improved,” Hai Pham, a Singapore-based analyst at Australia & New Zealand Banking Group Ltd., said before the decision. “The central bank is confident about the inflation trajectory.”


Vietnam’s inflation rate in February was 16.44 percent, down from 17.27 percent in January. It remains the fastest in a basket of 17 Asia-Pacific economies tracked by Bloomberg. The nation is also juggling a trade deficit and liquidity concerns in the banking system.”


Since official 'inflation' rates tend to understate what is really happening with prices, the gap between the administered interest rate and the rate at which the dong loses purchasing power probably yawns even wider than the above figures indicate.


In India, a surprise increase in industrial output has turned out to be a highly questionable datum. As the FT's 'BeyondBRICs' blog relates:


In a surprise bounce, India’s industrial output grew by 6.8 per cent in January compared with a year earlier – significantly higher than the 2 per cent most economists had predicted, according to data released on Monday.

But economists believe the high growth – up from 1.8 per cent the previous month – is probably unsustainable, not only because of the erratic nature of IP as an indicator, but because it was driven by an explosion of thus far inexplicable 92.6 per cent growth in the food and beverage segment.”


Maybe there are a few distilleries where the '12 year old' whatever has finally ripened. As the FT article notes, the IP number is traditionally highly erratic and now seems to have become even more so.


US Stock Market – Is Fear Really Absent?

A recent article at Bloomberg comments on the 'worldwide liquidity express' and specifically mentions the decline in the  stock market's 'fear barometer', namely the VIX, as evidence of growing complacency. This, and other evidence of 'stabilization' so it feared, could 'lead to a premature withdrawal' of central bank liquidity (really):


“The VIX, a measure of equity volatility known as the “fear index,” has dropped 60 percent since the start of October, while the Bloomberg World Index of stocks is up about 16 percent.

Seeking to guarantee the recovery is a switch from 2011, which also began with economies improving. The Fed ended its second round of bond purchases in June and the next month released “exit-strategy principles” that outlined how it would unwind its balance sheet and normalize monetary policy. The ECB went further, raising its benchmark rate 25 basis points in both April and July to 1.5 percent.

Similar complacency could spell “a premature curtailment of central-bank liquidity,” which hurts the world economy, said Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment in London. He helps manage the equivalent of about $214 billion and last month adopted an “overweight” position in equities and commodities in his multi-asset funds for the first time since July.”


It is quite an amazing sight to see fund managers complain about the impending withdrawal of monetary heroin long before it has even entered the contemplation stage at central banks.

So what about the 'fear barometer'?



The VIX, which measures the premiums on SPX options (the precise formula can be seen here) has plunged – click chart for better resolution.



However, even while the VIX has plummeted, the CSFB 'Fear Index' has risen above its highs of last year:



The CSFB Fear Barometer, via Sentimentrader – click chart for better resolution.



So what gives here? The CSFB fear index is a special measure that tries to capture the eagerness with which institutions bid for SPX puts compared to SPX calls. It measures a 'zero cost collar': if someone sells a 10% out of the money SPX call, it shows us how far out of the money the put option would be that he could buy for the call premium received. In short, this is a variation on the Ansbacher index: it compares to cost of calls and puts. Since SPX options are a playground of institutional investors, this is supposed to be a 'smart money gauge' that shows us what the biggest traders think. It is held that a combination of a low VIX and a high CSFB fear index is especially worrisome.

In fact, if you look at least year's 'low VIX, high CSFB index' combination, it appears that this assessment is correct. Although it is not a precise timing indicator, it does constitute a significant 'heads up'.

Below we show a few more charts in this context which have been created by our friend Bart at ''. 



Bart's Greed-Fear Index vs. gold and the SPX. The index is composed of the CBOE put/call ratio, University of Michigan sentiment, the gold silver ratio and the DJIA. It remains in 'greed' territory, but is not at an extreme level – click chart for better resolution.



A shorter term close-up of the chart above – click chart for better resolution.



This is Ed Yardeni's Boo-Bust index, which Bart reverse-engineered. It has the BDI, Brent crude and the CRB raw industrial commodities spot price as its components. It seems to us that this is currently unduly influenced by the BDI, which reflects a growing glut of ships – click chart for better resolution.



A short term view of Yardeni's boom-bust index – click chart for better resolution.



Credit Market Charts

Below is our customary collection of charts,  updating the usual suspects: CDS on various sovereign debtors and banks, bond yields, euro basis swaps and a few other charts. Charts and price scales are color coded (readers should keep the different scales in mind when assessing 4-in-1 charts). Prices are as of Monday's close in the case of CDS, basis swaps and yields are as of today.

As might be expected, the new Greek long term bond yields are at a very different level now.

The CDS price on our chart seems to be stuck at the level it went out at at the time the 'credit event' was declared.  We'll have to wait and see when the new instruments begin to trade. If they trade already, we'll have to dig for the proper quotes, so bear with us.

In the meantime it is noteworthy that the recent rise in CDS on Portugal and Spain continues. Otherwise the waters still seem calm.



5 year CDS on Portugal, Italy, Greece and Spain – click chart for better resolution.



5 year CDS on France, Belgium, Ireland and Japan –  a mixed bag – click chart for better resolution.



5 year CDS on Bulgaria, Croatia, Hungary and Austria – click chart for better resolution.



5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – click chart for better resolution.



5 year CDS on Romania, Poland,  the Ukraine and Estonia – click chart for better resolution.



5 year CDS on Bahrain, Saudi Arabia, Morocco and Turkey – click chart for better resolution.



CDS on Germany, the US and the Markit SovX index of CDS on 19 Western European sovereigns – funny enough the recent uptrend in the SovX persists – click chart for better resolution.



Three month, one year, three year and five year euro basis swaps –  a bit better again – click chart for better resolution.



Our proprietary unweighted index of 5 year CDS on eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito) – click chart for better resolution.



5 year CDS on two big Austrian banks, Erste Bank and Raiffeisen Bank – click chart for better resolution.



10 year government bond yields of Italy, Greece, Portugal and Spain – Greece's new 10 year bonds now yield about 19%. Still at a distressed level (the coupon is 3.5%!) – click chart for better resolution.



Austria's 10 year government bond yield, Ireland's 9 year yield, UK gilts and the Greek two year note – click chart for better resolution.



5 year CDS on Australia's 'Big Four' banks – click chart for better resolution.



US stock indexes: DJIA, DJT, SPX, and the Nasdaq Composite – drifting apart – click chart for better resolution.



Lastly, here is a chart we recently came across at Business Insider (which in turn seems to have gotten it from MJ Perry) – it shows the decline in ad spending on print media. The dead tree industry is rapidly dying off – click chart for better resolution.





Charts by: Bloomberg, Sentimentrader, StockCharts, MJ Perry


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