Koo’s solution for the Spanish/Italian balance sheet

Nomura’s Richard Koo has a note out today which contains a novel idea for how the larger European peripherals might be able to assuage their two headed problem of both needing more stimulus and having borrowing rates that make it implausible.

“Solution: allow only residents to buy government bonds

As I have previously proposed, one way to solve this eurozone-specific problem is to prohibit member nations from selling government bonds to investors from other countries. Allowing only residents to hold a nation’s government debt will prevent the investment of Spanish savings, for example, in German government debt. Most of the Spanish savings that have been used to buy other countries’ government debt will therefore return to Spain.

During a balance sheet recession, Spanish government bond yields will then fall just like those of the US, the UK, and Japan, providing support for the necessary fiscal stimulus.

Fiscal stimulus at a time when the private sector is not saving is reckless and irresponsible; fiscal consolidation is necessary at such times. But when private savings are increasing sharply and economic conditions are severe, allowing private savings to flow overseas prevents the government from implementing needed fiscal stimulus. This state of affairs in the eurozone is a tragedy that must be addressed.”

Chart of the Evening

Before I get into this I would like to say I am exceptionally worried about the repercussions of the treasury failing to be able to make good on its payments at some point next week due entirely to political posturing. Though I would put a near zero chance on a UST missing a coupon, the willingness of payment on non-bond treasury obligations is already damaged goods and if there is not a plan in place to raise the ceiling this week, it will be an exceptionally ugly set of circumstances for everyone.

However, the chart I chose to bring attention to this evening is important because a seemingly endless string of yapping idiots continue to contend that an S&P downgrade to the long term debt of the US would be catastrophically problematic for interest rates.  Zerohedge today went so far as to tweet “@zerohedge: For all those saying a US downgrade would have no impact on anything, please cite one historical precedent.”

Luckily for all of us the rates team at Nomura did just that and from the look of things every historical precedent seems to prove that an S&P AAA downgrade is the bell rung for govvie buyers to re-enter the market.

Chart of the Day

Nomura’s Quant FX team is out with the best chart I have seen in a while.

Clearly the play here is that the EMU should agree to allow for the EFSF’s use to short Netflix. Problem solved. You’re welcome Europe.

Sunday Night Reading List

The_Analyst called me this morning threatening to dilute my equity share of the blog prior to our IPO if I keep going months on end without posting anything. As we currently are valuing ourselves at 2.34 billion, 13x EBE*, I am going do my level best to keep that from happening.

With that in mind we thought it might be a service to our readers to share some research that I found helpful this past week. Below is a hodgepodge of stuff from the shops that don’t freak out when they find their notes on scribd (so no JPM, BAML, MS, or Citi.) If you are looking for a more regular flow of mainly macro research, and can put up with an inundation of cursing, you’d be well served by following me on twitter.

 

The Absolute Return Letter this month focusing on the Eurozone

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Nomura on the debt ceiling clusterfuck

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Nomura on the second most ridiculous farce on earth, the Greek “default” currently unfolding

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BNP EM Outlook for the second half of the year

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BNP US Economics Daily for July 11 “The Proverbial Fan”

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Stan Char presentation Asia ex Japan at a glance

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Stan Char give us part 3 of their on the ground monster Chinese Real Estate report

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GS US Equity views

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RBC Global Directions

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*Earnings Before Everything

Goodbye Ruble Tuesday

Last night Natsionalnyi Bank Respubliki Belarus announced it had re(de)valued it’s controlled  exchange rate to 4,930/USD from 3,155/USD on their ruble starting at today’s fix.

Probably the best thing for them long run, as grey market currency trading had taken over for official rates since it was so far off base. However it made for one hell of an ugly chart.

BYRUSD year to date

Yelling from the margin

Within the infernal torrent that is my twitter stream today there are 3 standout topics for most ignorantly referenced:  dissection of dealers 10-Q’s,  PIMCOs holdings, and commodity margin hikes. Last one is easiest and since I only have a few moments, lets deal with that.  If you have not read   Kiddynamite‘s post from last week on silver margin hikes you should probably do that first.

Ok, simple and quick. Margin on commodities futures are done by way of dynamic formulas that attempt to keep enough collateral on the books to cover daily price swings before positions are marked to market. (Note: they are not determined by The Bern-ank, JP Morgan, high frequency trading, or any other bad guys out to ruin your inconsequential ETF trade.) This in vital in ensuring all trades are covered and that they do not default to the exchange.  As such margin requirements are a function of the underlying commodity’s volatility. 

Now here are the volatility charts for oil and silver from the past two years. All measures of which are currently at their highs, so please stop fucking complaing about margin hikes.

Standard Chartered’s Trip to Inland China

As much as I try to focus on the numbers and relatively high level macro stuff, I also appreciate it whenever I get sent some research that involves analysts actually getting off their desks and checking things out. Maybe it’s just the Peter Lynch mentality I grew up idolizing.

Anyhow, really enjoyable and insightful piece from Emerging Market Credit specialists at Standard Chartered on their recent trip to inland China. Thought I would share it.

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A Renminbi by any other name

I do not have anything to terribly exceptional to add to the conversation, but I am yet to see any blogs mention the bizarre disconnects across the three most traded proxies for the Chinese Yuan. It’s been a mysterious topic of discussion in liquid markets land as the spikes, dips, and rolls are oddly scattered about the past few days of the time series.

Anyhow, here’s the offshore Hong Kong deliverable, the onshore mainland CNY, and the offshore 1 month (freely traded) NDF over the past two weeks. Make of it what you will.

Discussion of the issue is more than appreciated in the comments.

Nice Guy Eddie On Metal Reporting

In case you have not spoken to anyone recently and this is the first thing you have read in a fortnight, silver has been on a complete tear over the past two weeks. It topped up a near linear 20% run Friday in a truncated trading day.

As such there has been an rush of media coverage and since financial journalist like to attach reasons, founded or otherwise, to the price moves of everything the general consensus reached was “inflation fears.” In past week FT Lex, WSJ, NYT, AP, the Guardian, CBS, and NBC along with many other news organizations ran articles placing the blame for the run up in precious metals squarely on the shoulders of “inflation fears.” Reading this line repeated over and it reminded me of my favorite quote from Nice Guy Eddie in Reservoir Dogs: “If you fucking beat this prick long enough, he’ll tell you he started the goddamn Chicago fire, now that don’t necessarily make it fucking so!”

Now I am not a precious metals expert by any means, but writing that price moves in metals are based on inflationary fears, over and over again doesn’t make it so. Apparently these writers and their editors are unaware that the domestic inflation outlook is an easily quantifiable and also is readily available set of numbers. They’re called breakeven inflation rates and amazingly they are quoted in real time every day the market is open.

Here is how the 10 year breakeven has fared during the 20% run up in silver over the past two weeks.

Choppy and bit downward. Same goes across the curve from the 2yr to the 30.

That said, journalists, analysts, letter writers, et cetera: please find another explanation that is not so easily debunked. If you are in a pinch just blame JP Morgan, the tinfoil hat legions love that one.

“But S&P are intelligent men.”

Today’s morning econ email from Paul Donovan at UBS is perfect. Also, too long for twitter so here it is.

“I come to bury US creditworthiness, not to praise it

+ The noble credit rating agency S&P has said there is a one in three chance of a US downgrade within two years. The US can print its own money, and the cost of printing is less than the cost of default. But S&P are intelligent men.

+ The US has no history of coups, repudiating domestic debt. Credit ratings are supposedly an assessment of relative risk and yet there was no comment on France, nor on Germany or the UK. But S&P are intelligent men.

+ Given a choice between abandoning the world’s most liquid and most widely held bond market, or abandoning credit rating agencies as arbiters of portfolios, most investors will likely chose to abandon the agencies. But S&P are intelligent men.

+ The Euro area has seen more significant spread widening, with the US Treasury denying it has suggested a Greek restructuring might be desirable. Markets will not wait for credit rating agencies, but will decide credit worthiness on their own intelligence.”