The last week or 2 have become so repetitive that there's little new to cement on, but some elements of Europe's gran plan are becoming clear.
The ECB will never directly lend to governments by buying their bonds in the primary market.
They will however continue to "stabilize" the market by buying on dips in secondary.
They will also led indirectly through Europe's banks via the new 3 year lending facility. This allows banks to lock in cheap funds and use them to buy government bonds, earning a handsome spread at the same time. This funds governments and allows banks a nice fat profit with minimal capital use to effectively rebuild their balance sheets.
As long a the sovereign bonds in question don't default first of course.
And therein lies the rub.
Personally I think the plan will work but it will take time. That is always going to be a problem when facing a hyperactive and hypernervous bond market, but it's time supposed market professionals for their heads round the fact that there is no quick fix to this. It's going to take a long time to fix both the banks and the governments.
3 years ago governments bailed out banks. Now it's time for banks to return the favour.
Happy Christmas
Thursday, December 22, 2011
Sunday, December 11, 2011
More imperfect evidence
I can't help but notice that the airwaves here in Singapore are suddenly full of adverts by car companies with offers of free insurance, free tax and free petrol.
To top it off, COE peices are falling for those not in Singapore, COE stands for certificate of entitlement. This is a 10year permit that allows you to put a car on the road. Here in Singapore cars are rationed strictly, and buyers of new vehicles have to buy a COE before they can put their new car on the road. COEs are sold twice a month on an auction basis, and so are a pretty good indicator of immediate economic health and confidence. And prices are falling, admittedly only from 75k to 72k, but only a month or 2 ago people were talking 100k. I have a theory that COE prices are only still so high because car importers are registering their cars and then struggling to flog them.
Singapore is calming down, and Singapore is the canary in the Asian coalmine. If Singapore goes into reverse then Asia is in trouble.
To top it off, COE peices are falling for those not in Singapore, COE stands for certificate of entitlement. This is a 10year permit that allows you to put a car on the road. Here in Singapore cars are rationed strictly, and buyers of new vehicles have to buy a COE before they can put their new car on the road. COEs are sold twice a month on an auction basis, and so are a pretty good indicator of immediate economic health and confidence. And prices are falling, admittedly only from 75k to 72k, but only a month or 2 ago people were talking 100k. I have a theory that COE prices are only still so high because car importers are registering their cars and then struggling to flog them.
Singapore is calming down, and Singapore is the canary in the Asian coalmine. If Singapore goes into reverse then Asia is in trouble.
Dont mention the war
It's 1939 again. Britain stands alone against the forces of Europe, marshalled by Germany. Except this time both Germany and Britain are right. Ish.
Germany are right to refuse the idea of "Eurobonds" and Britain are right to stand against the move to federalism.
Eurobonds make no sense without at the very least fiscal federalism first. Why would any country agree to underwrite issuance by another country without control over that country's spending and borrowing? A moments thought reveals that to be self evident. Without that what is to stop governments going on reckless spending sprees off the back of northern European fiscal prudence?
And Britain is right to veto the idea of being tied into the same fiscal system as the Eurozone members. Britain's biggest asset right now is sovereign control over its own currency, budget and economy. Giving that up without getting something in return makes no sense.
There is a lot of talk about a "two speed Europe" now that Britain has exercised its veto.
I think that is right, but not in the way Europeans are portraying it. The beneficiaries are the Plucky Brits. A flexible labour market, a flexible economy, continuing membership of the European Union with its attendant free trade zone, strong ties to the slowly recovering US economy, a government that got on top of its debt problems early, a very low refinancing need due to the long average maturity of UK government debt, and lastly control over its own currency mean the UK is likely to recover sooner and faster than a Eurozone which is only now facing up to its problems, and then reluctantly.
Germany are right to refuse the idea of "Eurobonds" and Britain are right to stand against the move to federalism.
Eurobonds make no sense without at the very least fiscal federalism first. Why would any country agree to underwrite issuance by another country without control over that country's spending and borrowing? A moments thought reveals that to be self evident. Without that what is to stop governments going on reckless spending sprees off the back of northern European fiscal prudence?
And Britain is right to veto the idea of being tied into the same fiscal system as the Eurozone members. Britain's biggest asset right now is sovereign control over its own currency, budget and economy. Giving that up without getting something in return makes no sense.
There is a lot of talk about a "two speed Europe" now that Britain has exercised its veto.
I think that is right, but not in the way Europeans are portraying it. The beneficiaries are the Plucky Brits. A flexible labour market, a flexible economy, continuing membership of the European Union with its attendant free trade zone, strong ties to the slowly recovering US economy, a government that got on top of its debt problems early, a very low refinancing need due to the long average maturity of UK government debt, and lastly control over its own currency mean the UK is likely to recover sooner and faster than a Eurozone which is only now facing up to its problems, and then reluctantly.
Monday, December 5, 2011
The Germans are right
The only country that seems to get the full implications of the last 3 years is Germany.
Rather than rushing in and throwing good money after bad in a desperate hope of stimulating your way put of the mess, the Germans realise the fundamental problem is too much dent, and the only solution is for that debt to be paid off. That means belt-tightening and pain all round, for many years.
At the risk of stereotyping, the Germans have always been prepared to buckle down and put in the hard work. The Anglo-Saxon model of quick fixes and instant gratification fueled by debt got us in this mess. Time for a try of the German model, with some pain now, rather than even more pain in the future.
Rather than rushing in and throwing good money after bad in a desperate hope of stimulating your way put of the mess, the Germans realise the fundamental problem is too much dent, and the only solution is for that debt to be paid off. That means belt-tightening and pain all round, for many years.
At the risk of stereotyping, the Germans have always been prepared to buckle down and put in the hard work. The Anglo-Saxon model of quick fixes and instant gratification fueled by debt got us in this mess. Time for a try of the German model, with some pain now, rather than even more pain in the future.
Thursday, December 1, 2011
Light at the end of the tunnel
I have a feeling we're finally getting somewhere in europe. Draghi has said the ECb will be more interventionist if there is a closer fiscal union. The recent surges in yields for Spanish, Italian, and most alarmingly French government bonds seem to have finally scared their respective governments into caving into German demands for that closer fiscal union.
I would expect some steps in the right direction will be announced after the Dec 9 summit, which in turn will allow the ECB to up its involvement with the implicit approval of Germany, on the understanding that the changes will be implemented (major changes of course require all 27 member countries to ratify treaty amendments which can literally take years. The ECB will have to act ahead of that).
Meanwhile the market rallies of yesterday seem to be fading, and with good cause.
Only an equity investor could interpret coordinated central bank intervention in money markets, political statements that banks are facing a new credit crunch, and an easing in China in the face of slowing manufacturing and falling house prices as good news. Will they never learn?
We might be grinding towards some sort of movement in Europe, but whatever happens real growth in most of the western world is likely to be anaemic at best for years to come as the debt burden is paid off.
Some will point to recent manufacturing data from the US as evidence of a sustained recovery there which will drag the world along, but sadly it's largely an illusion created by huge and unsustainable government debt and deficits, and even if it were not, the US
is only about 25% of the world economy these days, and falling. It's still hugely important but it can no longer single handedly save the world. At some point the US will have to embrace big government cuts. The US economy is less reliant on government spending than many but the size of the cuts required to bring some sort of fiscal sanity to bear are bound to slow growth dramatically.
Low and slow will be the growth path
of the future.
I would expect some steps in the right direction will be announced after the Dec 9 summit, which in turn will allow the ECB to up its involvement with the implicit approval of Germany, on the understanding that the changes will be implemented (major changes of course require all 27 member countries to ratify treaty amendments which can literally take years. The ECB will have to act ahead of that).
Meanwhile the market rallies of yesterday seem to be fading, and with good cause.
Only an equity investor could interpret coordinated central bank intervention in money markets, political statements that banks are facing a new credit crunch, and an easing in China in the face of slowing manufacturing and falling house prices as good news. Will they never learn?
We might be grinding towards some sort of movement in Europe, but whatever happens real growth in most of the western world is likely to be anaemic at best for years to come as the debt burden is paid off.
Some will point to recent manufacturing data from the US as evidence of a sustained recovery there which will drag the world along, but sadly it's largely an illusion created by huge and unsustainable government debt and deficits, and even if it were not, the US
is only about 25% of the world economy these days, and falling. It's still hugely important but it can no longer single handedly save the world. At some point the US will have to embrace big government cuts. The US economy is less reliant on government spending than many but the size of the cuts required to bring some sort of fiscal sanity to bear are bound to slow growth dramatically.
Low and slow will be the growth path
of the future.
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