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Thursday, December 1

1st Dec - Sweep the leg

Howdy ho! If you have your pop culture knowledge in order, today's headline is of course from the era-defining movie Karate Kid. 'Wax on, wax off' as a symbol for the long arduous apprenticeship. 'Sweep the leg' as the Minsky moment when all bets are off and whatever was previously agreed upon does not hold true anymore. 

There is no way to change the EU Treaties to get an effective solution in time, so either they have to come up with something crooked (doing QE while stating it is monetary policy, not fiscal) or downright illegal (do first and ask later, referendums are for wimps anyway). Sweep the leg.

One thing to add: the MEP’s must be hallucinating. They want to have equal rights with other EU institutions over the national budgets. On the same day they write up a code of conduct banning taking or asking for bribes. Oh yeah, even if they would take bribes, they would be banned from the parliament for couple of weeks – not even sacked.


Long post, again. ECB section and BoE's report are worth a look. Turn the radio off. Read some quality material. You can follow me on Twitter and Facebook and email me for suggestions and requests.  Watch your leg.


News (Thu evening) – BTH
Recap Global Macro Trading
European roundup – Zero Hedge
FX option vols – Saxo
Markets Live – alphaville FT
Debt crisis: live – The Telegraph
EZ crisis Live blog – The World / FT

EURO CRISIS
Fiscal Federalism Or Bust! Morgan Stanley Sees Dec 9th As Real European D-DayZH
A summary and a scribd-link to the research doc, I linked the article earlier.

Crisis-hit EU countries becoming more corrupteuobserver.com
"Eurozone countries suffering debt crises, partly because of public authorities' failure to tackle the bribery and tax evasion that are key drivers of debt crisis, are among the lowest-scoring EU countries," the watchdog said in its press release.

Parliament wants equal powers over EU economic governanceeuobserver.com
Warning that the "democratic credibility" of the EU has been damaged in the eyes of citizens as economic integration proceeds apace with little input from ordinary people, the European Parliament has demanded that it be given equal powers to the other EU institutions over national budgetary control.

MEPs hope to restore public trust with ethics codeeuobserver.com
Parliament today adopted a new code of conduct that bans MEPs from asking or accepting money in exchange for influencing legislation. (This after the previous link, should I cry or laugh? – MoreLiver)

Righteous to the bitter endFree exchange / The Economist
Interesting comments on Tyler Cowen’s blog post on German moral superiority.

Europe hits its debt ceilingWonkblog / WP
While Europe's economic problems are real, what imperils the Eurozone is a mostly political crisis, in which Germany and the ECB are threatening to permit armageddon unless their policy agenda is implemented. This is, in other words, Europe's debt ceiling. The Eurozone is facing an unimaginable economic catastrophe, but the players with the power to avoid it will only do so if their demands are met.

The Final Battle to Save the EuroThe Source / WSJ
In other words, if politicians show willing to take steps that will lock in basic fiscal reform, the ECB for its part will expand its role through the IMF. This should not only help to save Italy from insolvency but reduce the chances of a complete debt meltdown, in which not only European banks but sovereign states would be at risk from default

Headlines - Today's, Yesterday's, And Tomorrow'sPeter Tchir / ZH
It looks like
Europe won't push banks to get better capital ratios. It is a credit crisis and more capital would give lenders confidence but this is another sign that Europe just doesn't get it and is serving too many masters. Bank share prices should be the least of their concern and yet appear to be a high priority.

Here Comes Europe's Hail Mary - Presenting The "Redemption Fund"ZH
Morgan Stanley: The redemption fund would pool government debt exceeding 60% of individual countries'
GDP of euro area Member States… safe bonds are a crisis tool rather than a way of permanent integration of the euro-area government bond markets. Even though temporary, the debt redemption pact could contribute to the resolution of the current debt overhang problem.

EU Bank Writedowns to Exclude Pre-2013 Debt; French Bond Yields Drop Most on Record; Italian Bond Yields Drop Below 7%Mish’s
EU officials have hatched a plan to make banks and bondholders take losses for risks, not now of course, but after 2013. In the meantime, taxpayers will shoulder 100% of the losses for bank lending stupidity. On this confidence inspiring news, European bonds rallied sharply.

Euroland: An Intractable and Never-ending Crisis?Bill Gross / Morningstar
The problem of Euroland is twofold however. First of all, they will remain a dysfunctional family no matter what the outcome. You can't tell a German much, and while they can issue what appear to be constructive orders and solutions to the southern peripherals, there is little doubt that none of them will "like it very much."

Money Flows, but What Euro Zone Lacks Is GlueNYT
Mr. Johnson contends that there is nothing much wrong with Italy that a vacation from the euro and a 20 percent devaluation of the currency would not solve — the traditional, pre-euro way Italy promoted growth and kept solvent.

Markit Eurozone Manufacturing PMIMarkit (pdf)
Final Manufacturing PMI at 28-month low, input prices fall for second month running, job losses reported in all nations except Germany and Austria. New$ to use summary.

The European debt crisis in eight graphsWP
Nice short summary.

ECB
Draghi: “We are aware of the scarcity of eligible collateral” alphaville / FT
He’s trying to get a point across. Not only is the ECB arguably losing control, it’s trying to flag up that the chaos is the result of messed up transmission mechanisms in dealer markets more than the result of a changing view of Eurozone credibility… Even if the ECB broadens the criteria on the collateral it acccepts — and remember it already accepts some of the poorest quality collateral in central banking circles — that won’t necessarily solve the problem in the public bilateral markets where only top quality bonds will do.

Draghi’s fiscal compactalphaville / FT
Is Draghi saying the ECB will go all out and produce its big bazooka if the Eurozone agrees to closer fiscal union and budgetary oversight from Brussels with a big stick to beat the non-compliant?

Keeping it liquid Eurozonealphaville / FT
The amount of cash on overnight deposit at the ECB has breached the ‘psychologically important’ €300bn for the first time since June 2010. So, Eurozone banks want to keep things very liquid and prefer to leave funds at 0.50 per cent overnight rather than lend to each other… Things must be bad if the German’s are considering supporting something.

What ECB QE could look likealphaville / FT
Credit Suisse:
Germany (“the paymaster”) has to urgently decide between two “evils” — “activating the ECB printing press more decisively or Eurobonds”… It would be far easier to announce large scale asset purchases along the lines of QE as long as it is announced as a monetary policy tool. This would not be against the treaty since under the latter, the ECB has a clear price stability objective of below but close to 2%. The backdrop is given to use QE as a monetary policy tool.

EU risk spreads continue to come back in. Is it enough?Saxo Bank
ECB is handcuffed for now and can’t monetize like the other G4 banks do, even while suggesting that things might be otherwise (which they aren’t, which is the whole point and reason for extreme caution in biting on the bait that set off yesterday’s risk-buying explosion).

SWAP RATE CUT (earlier here)
Fed saves Europe's banks as ECB stands patEvans-Pritchard / The Telegraph
The move came once it was clear that Europe's prostrate banks would struggle to roll over $2 trillion (£1.3 trillion) of debts denominated in dollars. Data from ratings agency Fitch shows that US money markets have slashed funding for French banks by 69pc and German banks by 50pc.

Does Anybody Who Gets It Believe Central Banks Did All That Much Yesterday?naked capitalism
Since we seem to have an international policy of “bondholders take no losses until the situation becomes completely untenable,” I don’t see a sensible resolution in the offing. The European leadership has lurched from stopgap to stopgap to avoid taking tough action. Now that the crisis is upon them, badly ingrained habits and tight timetables argue against happy outcomes.

Global central banks take action to prevent EU credit cruncheuobserver.com
The situation became grave after the meeting of eurozone finance ministers on Tuesday when they admitted that they would be unable to leverage the region's bail-out fund anywhere near the level that had been hoped. Without such a rescue, in effect mainly from the US Federal Reserve, the European banking system could have lurched to a halt.

Barclays: Market Reaction To Fed-Action "Exaggerated"ZH
The coordinated rate cut addresses the liquidity shortfall in the European banking system, but it does not address the causes of the slow-motion bank run – only reduces the cost of official substitute liquidity by 50bp.

Poor Performances Following Central Bank Liquidity InjectionsHistorySquared
A recent post showed the returns to risk assets following recent central bank interventions has been negative. DailyCapitalist looked a little further back, highlighting failed examples from 2007-2008. The below charts put the announcements into context.

TODAY’S AUCTIONS
French Yields Fall By Record, Other Sovereign Spreads Collapse Following Successful French, Spanish AuctionsZH

France and Spain Get Another Auction DoneMarketBeat / WSJ
The auction had been better than some market observers had feared due to what RBS strategists described as a “momentary shift” in risk appetite after central banks’ coordinated action Wednesday.

Strong demand for Spanish debtalphaville / FT
Knight Capital: Yet more evidence of the massive demand for collateral to pawn off to the ECB. No point in extending the analysis beyond that point – because it’s true. Trying to do ANY sort of fundamental analysis in this market is like bringing a #2 pencil to a gunfight.

BOE’s BI-ANNUAL STABILITY REPORT
BoE charts, UK banks’ gloomalphaville / FT
Banks are being asked to not choke off the real economy and strengthen their capital levels at the same time. They are, however, finding it rather difficult to get funding from anywhere except central banks, unless that funding is secured. And even secured markets are proving dysfunctional. As a result, banks are shrinking their balance sheets. Deleveraging is the theme of the year, and the move is only being exacerbated by the continued sovereign debt crisis.

BoE charts, risk weights you can’t trustalphaville / FT
Isn’t it depressing when a central bank has to report that parts of the regulatory framework have cracks so big that they are a looming threat to the stability of the financial system? Is there no angle from which danger isn’t coming from these days?

Financial Stability Report, Dec-2011BOE
Presentations, summaries, full text, charts etc. Sovereign and banking risks emanating from the euro area remain the most significant and immediate threat to UK financial stability.  These risks have intensified materially since the June 2011 Report.

OTHER
The Sovereign Debt Train Wreck Satyajit Das / The Big Picture
Given the magnitude of the US debt problem and the lack of political will, the most likely policy is FMD – “fudging”, “monetisation” and “devaluation”… Since 2007, the global financial markets have been providing warnings of an impending serious crisis. Private sector credit problems have spread to sovereign nations. Debt problems of smaller nations have flowed on to larger nations. The problems are gradually working their way to the issue of US debt. Without rapid and decisive action, which seems to be unlikely, a major organ failure within the global economy is now inevitable.

Fed Conference: Central Bank Liquidity ToolsAlea
Closed to the media! Never mind. Papers to be presented:

The PBoC and that RRR decisionalphaville / FT
Comments from Standard Chartered, UBS, looking at the recent PMI, euro crisis connection.

Losing Momentum: Is It Time to Exploit Mean Reversion?The Psy-Fi Blog
A range of recent research now threatens to actually shed some light onto these anomalies suggesting that the momentum effect has vanished and that value effects are real but caused by idiosyncratic factors. It also suggests that mean reversion, upon which many investing careers is based, generally works but sometimes only if you have an investing lifetime to wait. On a positive note, NOW might be a really good time to try and exploit it.

DIVERSION
Best Psychology Books Of The Year – 2011Farnam Street

Models.Behaving.Badly by DermanReading the Markets
Book review

Learning Effectively From Experience Farnam Street
High performers learn from both success and failure making small adjustments. Conversely, low performers, learned more from success.

Human Brain Is Limiting Global Data Growth, Say Computer Scientiststechnology review
Evidence has emerged that the brain's capacity to absorb information is limiting the amount of data humanity can produce

How Stephen Wolfram Is Preparing For The Singularityfastcoexist.com
Computing and mathematics legend Stephen Wolfram is worried about bigger problems than climate change or overpopulation. He just joined the Lifeboat Institute, a think tank devoted to ways of protecting humanity from deadly nanoweapons and rogue artificial intelligences.

Infants prefer a nasty moose if it punishes an unhelpful elephantDiscover Mag
Two lessons: morality is selective and even infants get it.