Credit Writedowns

Analysts’ latest adjustments to corporate earnings forecasts for Japanese firms show many more upward than downward revisions. Merrill Lynch tracks the “number of stocks for which consensus EPS estimate has risen vs. the number for which it has fallen” over a 3-month period. That ratio (chart below) has spiked relative to other nations.

Now, you may well deduct from all of this that I am as bearish as I have ever been, but nothing could be further from the truth. The issues I have discussed in this month’s letter are clouds on the horizon which are likely to take years to play out and, in the meantime, investors will continue to be preoccupied with far more mundane issues. All I know is that financial markets cannot stay disconnected from economic fundamentals forever so, ultimately, the Tony Dyes of the world will be proven right. Unless they lost their jobs beforehand, that is.

This is an important day for Portugal. It is selling 10-year bonds for the first time in more than two years. Demand is reportedly strong. Today’s 10-year sale follows the 5-year bond sale in January and heralds to full return of Portugal to the capital markets. Portugal’s success in returning to the capital markets is a success for European officials more broadly.

I see that Paul Krugman has shifted his rhetoric in a recent post on British government economic policy. Let me explain how in this post so that I can make a point as to how bond market vigilantes actually work.

Since we’ve never been at these yield levels, this is uncharted territory in corporate bond pricing. Certainly bond spreads have been lower in the past – especially during the boom years. But in the post-crisis era, corporate spreads seem to have found a floor.

By Marc Chandler The US jobs report offered a pleasant surprise after the string of mostly disappointing data. Private sector employment rose 165k and the Feb and March series were revised up by 114k jobs. The 3-and 6-month averages now stand at 215/216k. The unemployment rate fell to 7.5%, the lowest since December 2008. The one aspect of the report [...]

Japan is stuck in a shrinking population trap, and neither monetary nor fiscal policy will adequately solve the problem. Continuing to run fiscal deficits in a deflationary environment will only means that government debt is pushed onward and upwards leading to a variety of possible scenarios as to what the end game will finally be. Reining in the deficit, by raising consumption tax, for example, will probably only make deflation worse with a one year time lag, as happened in 1997, and will almost certainly force the economy into more economic shrinkage which in any event makes the debt issue worse.

I just finished watching the ECB’s monetary policy committee press conference led by Mario Draghi. And the ECB has just announced a series of actions I believe constitute a new economic paradigm for the euro area, one that moves away from front-loaded austerity and comes with non-interest rate monetary accommodation. I want to briefly outline here what this means outside the paywall.

ECB President Draghi confirmed the decisions made today to cut the main refi rate by 25 bp to 50 bp and cut the lending rate, the ceiling of its rate corridor, by 50 bp. Most importantly he seemed more open to a cut in the deposit rate and it is this that drove the euro lower after trading choppily initially.

It seems that the markets are discounting many of the risks that have plagued Ireland’s economy in recent years. Ireland’s stock market has significantly outpaced the S&P500 in the last few months – ISEQ is up 20% over the past year.

The current crisis – which is arguably no longer a crisis but rather a way of life – has all now gotten so complex that the issues involved are almost certainly, and in principle, “beyond their ken.” Spain’s economy will continue to march boldly forward towards what now seems almost guaranteed to be long term decline, while from within the captain’s tower, far from an acceptance that what is happening really is happening, we will continue to hear yet one more crazy and implausible story after another telling us “if only this”, or “if only that” even as representatives of the Plataforma de afectados por las hipotecas (or equivalents) start to assemble outside the local version of the winter palace looking for their hides.

Spain’s 10-year bond yield has fallen 108 bp this year. Just above 4%, the yield is the lowest Q4 2010. The 2-year yield has fallen 93 bp this year. The yield is slipping through 1.70%, for the first time Q2 2010. Recent data suggested that Spanish banks have been the featured buyers of Spanish bonds. The Spanish government released data at the end of last week that we have poured over. These figures paint a strikingly different picture. Spanish banks have indeed bought Spanish debt, but non-residents bought even more in Q1.