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News (Tue evening) – BTH
Danske Daily – Danske Bank (pdf)
FX option vols – Saxo
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT
EURO CRISIS
Select excerpts and comments + the full research note on scribd.
Eurodämmerung – Krugman / NYT
I’d guess soaring rates on Italian debt leading to a gigantic bank run, both because of solvency fears about Italian banks given a default and because of fear that Italy will end up leaving the euro. This then leads to emergency bank closing, and once that happens, a decision to drop the euro and install the new lira. Next stop, France.
The ECB continues to believe that financial stability is not part of its core business. As its outgoing president, Jean-Claude Trichet, put it, the ECB has “only one needle on [its] compass, and that is inflation.” The ECB’s refusal to be a lender of last resort forced the creation of a surrogate institution, the EFSF. But everyone in the financial markets knows that the EFSF has insufficient firepower to undertake that task – and that it has an unworkable governance structure to boot.
The Eurozone needs exit rules – voxeu.org
With the sovereign debt crisis spreading across Europe, there is no shortage of suggestions on how to save the Eurozone. This column says exit rules are the silver bullet. It argues that exit rules would decrease the probability of a breakup of the Eurozone by enhancing market discipline, increasing the political bargaining power of EZ members vis-à-vis the profligate countries, enhancing internal discipline in the profligate countries, and reducing market uncertainty.
Politics: the beginning and the end of the Euro – Fatas & Mihov
The dream of the latest Euro-rescue plan lasted for one week. Already painful reality emerges to confront the bold but baseless claims of Europe’s leaders. Only with exceptional skill and determination can they make this work.
Promoters of the first loss guarantee scheme seem to believe that just providing it will solve the crisis and the commitment will not be drawn upon. When the EFSF was originally instituted, EU policymakers also thought it would never be needed to be activated.
Certainly Mr Draghi is conscious of the difficulty and the discomfort it might create among his German colleagues. There are no other good options, however. He will either save the euro or allow it to fail.
The euro crisis: Eurodoom – Free exchange / The Economist
Europe is back to crumbling before our very eyes.
The magic money tree – Buttonwood’s / The Economist
The big lesson from last week is that European governments could not (or would not) sort out the problem on their own. It is hard to see why this was a desperately bullish sign. The bond markets seem already to have seen through the plan
Euro Area Fact Book – Danske Bank (pdf)
Striking Euro Gold (and Silver) – Project Syndicate
Clown of the day: strange idea to introduce national currencies that are allowed to fluctuate within trading bands, just like it was done in early 1990’s. I have to ask: why bother with this half-assed system, if you want to have floating exchange rates?
European finance ministers and leaders have now met countless times to discuss Greece’s growing problems. These fraught discussions have not just used up precious time but worse, have sown personal mistrust and exhausted scarce political capital. This has poisoned the atmosphere and seriously limits the ability of the seventeen Euro area countries to make decisions that are collectively sensible but individually difficult.
The debt crisis in Europe has never been a liquidity crisis. That's why the bailouts have failed to stop it. Investors are fleeing the bonds of certain European countries because they believe their economies are fundamentally broken, simply uncompetitive compared to either stronger countries in Europe or up-and-coming emerging markets. That means investors don't have confidence in their long-term outlook, and thus their ability to handle their large debt loads.
Credibility is not everything – voxeu.org
Many have argued in recent months that the Eurozone’s emergency meetings should be about restoring credibility, with a ‘big bazooka’ or otherwise. This column looks at Italy, a country financiers are fast turning their back on. It argues however that the problem is Italy’s fundamentals – not its credibility.
Did the Euro’s Architects Expect it to Fail? – The Source / WSJ
CEO of Cazenove Capital Management: Maybe EZ flaws were intentional as common fiscal policy would otherwise be politically impossible.
EU Deal and Hell Freezing Over – ZH
Peter Tchir: Europe can still get it right but they need to deliver on promises - and for once really really think about the best way to use EFSF and to consider how markets (sovereign debt markets in particular) will actually respond and not base plans on how the EFSF wishes markets would respond.
The ECB is not here to save the world — redux – alphaville / FT
Six per cent is not a comfortable place for the 10-year debt anyway… For the world’s third biggest bond market (etc.) this is remarkable. For it to happen under the ECB’s watch, is more remarkable still.
Europe to Recapitalize Banks Without Raising any Capital; Berlusconi Defiant as Focus Shifts to Italy; Sarkozy Under Fire for Seeking China’s Help – Mish’s
Saving the euro now to fix it later is far from ideal. But it’s the best of bad options, something Europe’s leaders would do well to recognize before they reach the point of no return.
This week’s summit was supposed to put an end to the euro crisis. It hasn’t – The Economist
For all the backslapping and brave words, they have once again failed. There will be more crises, and further summits. By the time they settle on a solution that works, the costs will have risen still further.
Is the recent bank stress really driven by the sovereign debt crisis? – voxeu.org
The recent massive decline in market capitalisation of banks does not appear to be driven primarily by the banks’ holdings of sovereign bonds. It would therefore be wrong to see the bank recapitalisation as a way to prepare banks for losses on their sovereign debt only.
Swiss Magic and Central Bank Price-Targeting – The Street Light
Why doesn’t the ECB simply state a yield ceiling on Italian debt: caution, conservatism, and politics, of course. But the Swiss Franc experience reminds us that, from an economic perspective, price targeting by a central bank can sometimes make very good sense.
He described derivatives markets as a vast, opaque structure which has lost touch with reality and which is eroding fundamental values.
Defying Gravity – Humble Student of The Markets
scroll down and after the charts there’s a good list of macro concerns (mostly European) with links to further reading.
GREECE (REFERENDUM)
Market Falls Harder on Reports of Shaky Greek Government – MarketBeat / WSJ
Greek Referendum: No Would Boost Risk of Disorderly Default – MarketBeat / WSJ
Comments from six banks
Greek referendum: uncertainty is back – Danske Bank (pdf)
The Greek referendum: Voting away your debts – Buttonwood’s / The Economist
Greek Referendum Could Mean CDS Greek Default Trigger – EconoMonitor
Fitch: Greek Referendum Threatens Eurozone Financial Stability – Research Recap
Well played Mr. Papandreou – Peter Tchir / ZH
Is A Greek Military Overhaul An Attempt To Prevent A Coup? – ZH
CREDIT DEFAULT SWAPS
Sovereign CDS — not dead yet, not even resting – alphaville / FT
Credit-Default Swap Risk Bomb Is Wired to Explode: Mark Buchanan – View / BB
Doesn't Anyone Want to Be a Swap Anymore? – Lawbitrage
CHINA
Asking China for money into Europe essentially means that Europe is asking China to lend to Europe in order to buy Chinese exports, and this should absolutely be the last thing Europe wants, especially for the peripheral countries.
Good points on the Chinese point-of-view
China’s contribution would be small and they are risk-averse and will not take bad deals at a bad price.
Jim Chanos BB interview + summary text.
OTHER
RavenPack on Stock Returns Following Analyst Upgrades and Downgrades – HistorySquared
Negative analyst downgrades persist in the direction of the downgrade for much longer than upgrades, which have a tendency to revert over the medium term. Includes a 44-minute video webinar.
Upstream sovereigns – voxeu.org
decomposes international capital flows into public and private components and claims that upstream flows from emerging to advanced economies and global imbalances in general are the result of the same underlying factor.
What's all this Financial Transaction Tax fuss about? – Re-Define
Region is still very dependent on commodity prices, but more diversified now than in the past.
Book review bonanza – Abnormal Returns
Study of Commodity Investment and Volatility: No Granger Causality Found – allaboutalpha.com
Order Flow Forecasts Exchange Rates – HistorySquared
Strategy based on order flow outperforms plain carry trade, purchasing power parity, and momentum strategies. Alpha from order flow strategies can be replicated using a combination of strategies based on publicly available information.
Event-Driven Trading and the “New News” – The Journal of Portfolio Management
U.S. portfolio simulation results for “pure news” signals applied over the period 2006–2009 as well as a true out-of-sample period in 2010, which indicates alpha in excess of 10% a year. The authors also describe other applications of automated qualitative analysis for information-driven social media client relations.
Sharing risk can increase risk – The Physics of Finance
DIVERSION
Talk to Al Jazeera - Slavoj Zizek – Youtube
Thought-provoking.
A Curated Linkfest For The Smartest People On The Web – Simoleon Sense
Mental Model: Feedback Loops – Farnam Street
Interesting excerpts from outside texts, you might want to check their other models as well.
Meet Some Of The Most Interesting Female Hedge Funders In The World – BI
Why Is This Cargo Container Emitting So Much Radiation? – Wired
http://www.wired.com/magazine/2011/10/ff_radioactivecargo/all/1
100 Great Time Management Ideas – scribd
Patrick Forsyth’s book online
Stuart Kauffman: The End Of A Physics Worldview: Heraclitus and the Watershed of Life – NECSI
1h23min video lecture
Why Startups Fail – The Big Picture
Huge infographic with quite interesting notions
King of Kings: The Last Days of Muammar Qaddafi – The New Yorker
Daniel Kahneman: How cognitive illusions blind us to reason – The Guardian
The Engine of Capitalism – City Journal
Review of Kahneman’s latest popular book on behavioral finance.
Greed is Not Good – City Journal
Review of the movie Margin Call.