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[Premium] Daily Commentary: On policy advocacy and forecasting in Greece’s exit from the euro zone

Edward Harrison — Thu, 17 May 2012 01:18:29 +0000

I like write about what will happen and what policy makers will do rather than about what should happen and what policy makers should do. But Yanis Varoufakis's post on the Grexit below tells you that Greece's leaving would be catastrophic, a Grexit is a definite SHOULD NOT. I have a hard time finessing this one because I believe Greece's situation in the euro zone is untenable economically and politically but that breaking up the euro zone will crystallize worst case outcomes for which we are not prepared

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The euro zone has become a political economy black hole

Edward Harrison — Wed, 16 May 2012 21:00:21 +0000

Without going into the detail of my member posts, here's what I can say: it is clear Greece will eventually exit the euro zone. The question is the timing. But, the political about-face necessary to prevent contagion is a lot larger than politicians are now prepared to take

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On JPM’s Dimon’s still unassailable position and Facebook as the new Yahoo

Edward Harrison — Wed, 16 May 2012 19:30:42 +0000

I spoke to Paul Waldie and Brian Milner of the Globe & Mail on BNN's headline on Monday. The big story was JPMorgan Chase and the London Whale trades. JPMorgan Chase's CEO Jamie Dimon, as the leading lobbyists for the hands-off regulatory approach for US banks, has become a lightning rod for criticism of too big to fail banks in the US. Even so, I think it's unlikely that Dimon will be forced out of his position. We also talked about Yahoo and the oversubscribed Facebook IPO. They are going to have to execute really, really well to justify the IPO valuation

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[Premium] Amid plummeting trade growth, Chinese productivity trends are macro bearish

Edward Harrison — Wed, 16 May 2012 17:00:00 +0000

In recent months, we have seen a precipitous drop in Chinese trade growth. This comes from both the export and the import side. What's happening? A large part of it is wages. As I indicated two years ago in a post on the Lewis Turning Point, China has already sucked a large portion of the labour out of its countryside villages. And that has buoyed wage growth. However, while the external account is deteriorating, import growth is shrinking along with export growth. So, it is not that the Chinese are buying more stuff from abroad and foreigners are buying less in China. It's that demand is slowing globally, even in China. Here's the problem domestically then: malinvestment and financial repression. This article explains why

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US housing starts up 40% in last year but still half of 50-year average

Edward Harrison — Wed, 16 May 2012 12:56:54 +0000

Housing starts in the US were up today. The Wall Street Journal writes that number came in at 717,000, up from a low of 478,000 in April

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[Premium] On my disbelief over the Greek exit chatter

Edward Harrison — Wed, 16 May 2012 12:00:00 +0000

I just re-opened the thread on "How and why Greece will leave the euro zone" because there has been so much chatter about a Greek exit. I am still a bit in disbelief that Europe would allow the Greek economy to crumble so much thy would be forced to exit. You have to think contagion risk from a Greek exit is still pretty high. That tells me Europe is bluffing about cutting Greece off. But politicians sometimes get backed into a rhetorical position that takes on a life of its own. So bad things can definitely happen

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Another chart of the day: Greek bank deposits collapse

Edward Harrison — Wed, 16 May 2012 11:16:24 +0000

The chart below via Reuters' Scott Barber is what an economic depression looks like. It covers Greek bank deposits from 1998 to present

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Chart of the day: The German-Spanish 10 Year Spread is at an all time high

Edward Harrison — Wed, 16 May 2012 10:53:38 +0000

Spanish bond yields are spiking with no obvious reason to believe they will come down anytime soon. That puts the Spanish-German 10-year spread at an all time high

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[Premium] Europe is on the brink of something very big

Edward Harrison — Wed, 16 May 2012 10:20:17 +0000

Euro zone bond markets have come completely unhinged this morning. Spanish 10-year yields have hit the highest level this year at 6.5%. While Italian 10-year yields broke above 6% for the first time since late January. Meanwhile, German yields have moved to a record low of 1.44%. We are now back to levels of stress we last saw during the Italian crisis in November and December. However, this time policy space has narrowed considerably. In short, Europe has reached the critical breaking point

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[Premium] Daily commentary: On JPMorgan’s gigantic mistake

Edward Harrison — Mon, 14 May 2012 20:36:10 +0000

The big headline today is still JPMorgan Chase and it's huge trading losses. Clearly this is a black eye for JPM but the question goes to what longer term consequences the incident will have

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[Premium] More on the political economy of the coming Grexit

Edward Harrison — Mon, 14 May 2012 19:30:38 +0000

In February I wrote about the political economy of a Greek default (and euro zone exit), predicting that a Grexit was all but inevitable. In the last few days, there has been an almost feverish debate about this issue, so I wanted to update you with my thinking given how the situation in Greece and the eurozone has deteriorated since February and how the Greek exit from the euro will occur

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Will the Greek exit be voluntary or involuntary?

Edward Harrison — Mon, 14 May 2012 15:00:49 +0000

Ever more voices are talking about the possibility of Greece leaving the euro zone despite the fact that there is no formal mechanism for a euro are member country to exit the single currency. This talk, however, makes sense because Greece's situation is untenable economically and politically. The Grexit is a question of when and how not if

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[Premium] China’s growth is slowing much faster than expected

Edward Harrison — Fri, 11 May 2012 16:00:25 +0000

The latest data out of China will give those expecting a soft landing pause about China's economic situation. While inflation has come down somewhat of late, so too have industrial output and capital investment. This is creating EM feedback loops which diminish the number of equity, corporate and sovereign plays in this space. Asia in particular should be impacted

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Spain: EU estimates for contraction now considerably deeper

Marc Chandler — Fri, 11 May 2012 15:37:53 +0000

This is not a good day for Spain. The day began with the EU Commission revising its estimates for the Spanish economy. The contraction is now expected to be considerably deeper. Spain unveiled its new efforts to address the banking problems. It is the fourth one since the crisis began and the second one since Rajoy became PM. Spain is forcing the banks to boost their loan loss provisions on real estate loans by 30 bln euros. They have already put aside about 54 bln euros. The Center for European Policy Studies warns that bank losses could be as high as 380 bln euros. Moody's estimates Spanish bank losses could be around 305 bln euros

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Super SGP coming – ECB: “A stronger and stricter fiscal framework is required”

Edward Harrison — Fri, 11 May 2012 14:00:01 +0000

The long-held view in German policy circles has been that the European sovereign debt crisis is a clear indication that the stability and growth pact (SGP) was not sufficiently robust in addressing fiscal discipline. The ECB is now addressing this with a policy paper

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Chart of the Day: Euro zone GDP by country

Edward Harrison — Fri, 11 May 2012 13:24:31 +0000

This chart was attached to a very good front page article in today's Wall Street Journal by Marcus Walker on How a Radical Greek Rescue Plan Fell Short. The article gives a blow-by-blow account on how the Greek crisis has unfolded and a detailed view on where each of the Greek and European leaders stood on various issues involved in Greece's debt restructuring. The chart itself demonstrates the enormous gulf between the size of the German economy and other economies in Europe, giving some sense of why the Germans (and the French) have come to dominate European policy discussions

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[Premium] On Europe’s advancing preparations for the Grexit

Edward Harrison — Fri, 11 May 2012 12:42:54 +0000

The evidence is becoming increasingly clear that German policy makers are prepared for Greece to exit the euro zone. Knowing this changes how one should view the likely policy responses in Europe. In the short term, this means allowing more time to meet the Maastricht hurdle and setting up a EuroTARP that banks can access for recapitalisation. Over the medium-term, we will see treaty changes for enhanced fiscal rules including a growth compact, penalties, oversight and specific mechanisms for a euro zone exit

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[Premium] Marc Faber on Euro zone breakup and US and European equities

Edward Harrison — Thu, 10 May 2012 16:51:04 +0000

Marc Faber, publisher of the Gloom, Boom & Doom report, spoke with Bloomberg TV's Betty Liu. The overall gist of his commentary was that a euro zone breakup would be beneficial and that he believes European peripheral equities are oversold. Take a look

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[Premium] Daily commentary: On the Spanish bank bailouts

Edward Harrison — Thu, 10 May 2012 16:43:36 +0000

In the links today are a lot of links in both English and Spanish about the bailout of Spain's fourth largest bank Bankia. With the partial nationalisation, Spain is moving one step closer to Ireland in committing the sovereign government to bank liabilities that have the potential to greatly increase sovereign debt

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[Premium] The European Endgame is within sight

Edward Harrison — Thu, 10 May 2012 01:17:37 +0000

Earlier this week I wrote a post called "Europe edges closer to the endgame" in reaction to the French and Greek elections. Today I want to expand on this for the weekly members' post. While I think we are finally arriving at the changes which presage the endgame, I do not think the events in France and Spain are going to be the catalyst for seismic change in policy responses. More likely, the sovereign debt crisis will impose policy change upon European policy makers after markets seize up and Europe risks breaking apart. Right now, Spain and its banking sector must be the focus for analysts looking to gauge the policy responses that will determine the European endgame. This post will cover all of that ground - Greece, France, Spain - and a lot more

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[Premium] On helicopter drops and wealth confiscation in Europe

Edward Harrison — Wed, 09 May 2012 19:18:01 +0000

Hugh Hendry made some remarks about confiscation last week that I addressed in my TV appearance on RT's capital account (see video here). The gist of his comments was that he fears government's ability to confiscate wealth as a means of dealing with the economic crisis in Europe. On RT, I said that I didn't think the situation had reached that point in Europe and so I was not overly concerned. But I do want to flag comments by a major bank economist that touch on these issues

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[Premium] More on the mean-reverting economic surprise index

Edward Harrison — Wed, 09 May 2012 18:55:27 +0000

A few of the investment banks have a macro or economic surprise index. In March I mentioned Barclays' version. This month I wanted to highlight Citi's version and what it is telling us about the US economy

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[Premium] Daily commentary: On monetary policy in a balance sheet recession

Edward Harrison — Wed, 09 May 2012 18:00:27 +0000

There has been a lot of back and forth by academic economists on monetary policy. The reason is two-fold. First, during the so-called Great Moderation many economists increasingly looked to monetary over fiscal policy for countercyclical support. Second, even so, fiscal support is expected to wane, making some nervous about the durability of recovery

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Chart of the day: US Real Personal Income Growth

Edward Harrison — Wed, 09 May 2012 13:34:17 +0000

The ECRI released the following chart on the year-over-year growth in US real personal income. The takeaway here is that personal income growth is seriously flagging going into the fiscal cliff which promises to turn income growth decidedly to income contraction

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Achuthan: The US will be in recession by the end of next month

Edward Harrison — Wed, 09 May 2012 12:27:38 +0000

Lakshman Achuthan is sticking to his call that the US will enter recession in the second half of 2012. He spoke to CNBC's Squawk Box crew about it this morning. Take a look

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Spiegel: Kohl-era German documents reveal euro formation was about politics

Edward Harrison — Wed, 09 May 2012 12:00:31 +0000

"The German government has, for the first time, released hundreds of pages of documents from 1994 to 1998 on the introduction of the euro and the inclusion of Italy in the euro zone."

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[Premium] Gillard to push Australia into recession?

Edward Harrison — Wed, 09 May 2012 11:21:19 +0000

Australian Prime Minister Julia Gillard clearly doesn't understand the financial sector balances because she is about to make a policy mistake which will likely tip her economy into recession. This is a gold-level post

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Global Growth Is Slowing

Edward Hugh — Tue, 08 May 2012 21:30:27 +0000

So momentum is weakening across the entire global economy at the present point, not just in say Europe, or China. Global output is still growing but it is growing at an increasingly weaker pace. What could change that

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Class Warfare

Rick Bookstaber — Tue, 08 May 2012 20:01:37 +0000

we are seeing an ever shrinking number of people paying an ever greater portion of the taxes. Though they also are the ever shrinking number of people acquiring an ever greater portion of the wealth. There is little that matches the artfulness in waving off criticism of the widening income gap as “class warfare”. And there is little that matches the gullibility of those who follow along

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Europe edges closer to the endgame

Edward Harrison — Tue, 08 May 2012 18:42:47 +0000

Later this week, I plan to write a more comprehensive post on the European sovereign debt crisis to incorporate what we have learned since the French and Greek elections. Here's a short preview of what I will have to say

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Don’t Fight the Last War: Lessons from the Battlefields of Risk Management

Niels Jensen — Tue, 08 May 2012 17:41:25 +0000

Our brains are not calibrated to deal with the unexpected. Most of us believe we are good risk managers but in reality we are not. Most of us trust that risk can always be quantified and expressed through some fancy modelling whereas, often, it cannot. The world is not normal, yet universities continue to teach our young students the wisdom of Markowitz and Sharpe which brought us modern portfolio theory and, more specifically, the capital asset pricing model. Garbage In, Garbage Out, as they say. One of the fundamental assumptions behind modern portfolio theory is that asset returns are normally distributed random variables. The return profile of US equities fairly closely matches that of a normal distribution with the exception of large negative returns. They have come about more frequently than one would or should expect

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[Premium] Daily commentary: The fiscal cliff

Edward Harrison — Tue, 08 May 2012 12:12:01 +0000

The set up for having temporary tax and stimulus measures expire risks a new recession and such a downturn would be ugly, especially given the elevated level of US S&P earnings expectations and the relative P/E ratio of the US market

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[Premium] Daily commentary: As predicted, the US jobs report was weak

Edward Harrison — Fri, 04 May 2012 14:52:14 +0000

I wrote you last week after the third consecutive elevated jobless claims report, saying this was a definite harbinger of a weak jobs report. This has proved true. While March's gain of 120,000 jobs was revised up to 154,000 and unemployment declined from 8.2% to 8.1%, payrolls rose by only 115,

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Norway dumps Irish and Portuguese bonds, Switzerland increases Sterling reserves

Marc Chandler — Fri, 04 May 2012 13:34:09 +0000

The Swiss National Bank reported its reserve figures yesterday and the increase in its sterling holdings are notable and may help explain the its relative strength, despite data a soft real sector reports, culminating in the news last week that, defying expectations, the UK economy contracted in Q1, the second consecutive quarter that the British economy shrank. Separately, Norway's sovereign wealth fund, the Government Pension Fund Global, indicated it has sold off its Irish and Portuguese bond holdings, pared its Spanish and Italian holdings and increased its exposure to Mexico, Brazil and Indian bonds

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The Denial on Housing in Spain

Claus Vistesen — Fri, 04 May 2012 11:55:38 +0000

This post highlights a brilliant piece of journalism by Bloomberg reporters Sharon Smyth, Neil Callanan and Dara Doyle. The story takes us to Spain and Ireland and the former's denial with regards its housing market. A passage that was particularly staggering was the comments by Miguel Angel Garcia Nieto, mayor of Avila (a town showcased in the article), that this is just an interim soft spot as a result of the crisis and that oversupply and overcapacity will eventually be absorbed. Hope, as they say, springs eternal

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