Is Finland Really A Closet Member Of The Eurozone Periphery?

The country’s debt dynamics are far from unsustainable at this point, but given the weakening in the country’s export performance and the steady unwinding of the housing boom we can now anticipate I would expect growth to be weaker than either the EU or the IMF are currently anticipating, and pressure on the country to increase fiscal spending to maintain expectations to rise, with the implication that pressure on the Finnish spread over 10 year German bunds will continue, as the country risks drifting off from being part of the core towards the growing periphery, at least in the eyes of investors

Europe’s Three No’s in Two Parts: Part II

The ECB is seen to be the key protagonist and the pressure is more acute on it to act. Yet it steadfastly refuses. The other solution that has been advocated is a joint European bond. It is not going to be forthcoming any time soon. Such bonds are not seeds but fruits of a fiscal union. Surveys suggest a little over half the market expects a country to no longer be in the euro zone by the end of 2012. Contrary to what some noted economists have argued, a Greek decision to drop out would be a tremendous policy blunder.

Many economists and investors see a binary outcome of the European debt crisis: either the ECB backstops the sovereign/there is a European bond, or the euro zone breaks up. Instead, we think that the continuation of what can be called “muddling through” is the most likely scenario for the period ahead. It is the absence of a comprehensive solution that will shape the investment climate. It means that the crisis continues. The risks are asymmetrically distributed to the downside, yet the ECB’s massive provision of liquidity would seem to contain the extreme tail risks

Europe’s Three No’s in Two Parts: Part I

Banks can borrow as much as they want from the central for three years at the refi rate. They are limited only by their desire and collateral. The ECB also liberalized further its definition of acceptable collateral. But expectations of large banks borrowing money from the ECB to buy sovereign bonds to use as collateral to borrow more money from the ECB does not appreciate the risks involved. The cost of hedging and insuring sovereign risk has risen. Also, if the collateral is a sovereign paper and the sovereign is downgraded, or if the collateral loses value for another reason, the bank will have to pony up more cash or collateral

Bubble Trouble in the U.S. Heartland?

The “smart money” has been buying up farmland hand over fist for the past few years and you can see how they helped drive up land prices in the U.S. heartland. Some think this is the place to be if the shit really hits the fan. Not gold, but productive assets that you can eat. Nevertheless, with ag commodities starting to rollover, farmland prices have probably seen their best days.

Chart of the Day: Post-Bubble Performance Comps of U.S. Financials and Techs

The guys over at Bespoke put out a great piece yesterday comparing the post-bubble performance of U.S. financials after the February 2007 top and the technology sector after the dot.com peak in March 2000.

Market Facing Strong Headwinds

All in all, the negative fallout from the EU sovereign debt crisis and the outlook for the U.S. economy are likely to have a strong downward pull on the stock market. Rather than reflecting fear, the market seems unusually complacent as investors are overconfident that the world financial authorities can pull a rabbit out of the hat at the last minute.

The Euro Rollercoaster Shows No Signs of Letting Up After Two Years

Through all of this hand wrangling, the Euro remains fixed at the same value as it started with in January, roughly $1.30. If open interest information from our futures markets are any valid indication, currency speculators, both commercial and retail, have severely shorted their future positions in the Euro. This repositioning began in August and shows no signs of reversing

The ABCs of Re-hypothecation in Gold and Securities Markets: What You Need to Know

The downfall of MF Global has exposed yet another patch of the underbelly of the brokerage industry. Practices that are routine and legal – and hitherto largely unknown to most investors – can leave a company vulnerable when abused

Norway Surprises and Ongoing Funding Woes

By cutting 50 bp in one swoop, the Norges Bank hopes to get ahead of the curve. This is part insurance against addition headwinds, but also responds to the recent data indicating an economic slowdown

The Euro and the S&P 500: Correlation Update

One of the characteristics of the investment climate that we have tracked over the course of the year is the tight relationship between the euro and the S&P 500. The following observations are based correlations conducted on percentage change of the euro and the S&P

The Ugly Chart Contest

Here’s a couple ugly charts we’re monitoring: China’s Shanghai Composite stock index and Commodity Research Bureau Index (CRB). Do you think there’s causality here? Remember the “China is buying/hoarding every commodity” story

The Volatility Paradox

Volatility tends to drop when market risk is building up and leverage is rising, luring investors into complacency. Indeed, the lower volatility justifies investors taking on more leverage; if volatility has dropped by a third, why not take one and a half times the leverage? This pro-cyclical dynamic arising from lower volatility in times of increasing risk-taking is the volatility paradox. The main take-away from the volatility paradox is that we shouldn’t use shorter-term, contemporary risk measures when they are very low