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Sunday, September 11, 2011

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German Court Ruling May Force Euro Zone Defaut

Posted: 11 Sep 2011 02:24 PM PDT

German Constitutional Court ruling may we force Euro Zone countries to defaut
Kiron Sarkar
September 11, 2011

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Christine Lagarde has been beaten up by European Finance Ministers for
a report, produced by the IMF, which suggested that European banks
needed some E200bn and Governments should force mandatory
recapitalisation’s of the relevant banks. Silly girl. The reality is
that European banks will need far, far more, though the Euro Zone is,
as usual, in total denial. This plan to deny (effectively lie) is
getting very tedious indeed. Don’t they know that markets are not that
stupid;

Bloomberg reports that the ECB is to dilute its attempts to wean
European banks off emergency funding (using higher interest rates).
Essentially, the ECB will ask financial institutions (together with
the relevant national Central Bank) as to how they intend to repay the
funds. Well, that’s a great plan. Does that suggest that they did not
do even the most cursory of credit checks before they provided
emergency funding !!!!. The reality is that the collateral received by
the ECB is effectively toilet paper – certainly in respect of Greece,
and they will face significant losses. How will they cope, given their
extremely limited capital – well they could ask Euro Zone Governments
to make up the loss (embarrassing), or they could print money.

The amounts involved are huge. Irish banks borrowed E97.9bn in August,
Portuguese E46bn and (off course) the Greeks a staggering E103bn, as
at the end of June – the latest data available and likely to have
increased since then. However, Mr Trichet is exiting at the end of
October this year and it will be Mr Draghi’s problem thereafter. Now
that’s a real plan and very much in the Trichet style. I still cant
forget his recent press conference where he stated that the ECB’s
performance had been “impeccable”. When the inevitable chickens come
home to roost, I wonder whether someone will replay that;

The Greek PM vowed that the country would meet its fiscal targets and
to press ahead with structural reforms, involving, inter alia, the
sacking of some 20,000 civil servants. There were violent protests at
the speech. Greece cannot and will not deliver and the rest of the
Euro Zone does not believe that they will. A default is a certainty
and relatively soon;

Recent reports suggest that US money market funds have been reluctant
to provide short term financing to European banks – no great surprise.
Analysts suggest that European banks face a US$500bn dollar funding
gap. The problem is that the cost to swap Euros into US$ has jumped
fivefold (to 103bps for 3 month loans, from just 20bps in June). This
extra cost is extremely serious for a number of European financial
institutions. In addition, recent data also suggests that there has
been a withdrawal of deposits by Europeans from European banks and the
proceeds deposited with US banks (source FT). Just to add to the
pressure, there are reports that the credit agencies (Moody’s) will
downgrade French banks imminently – BNP, Soc Gen and Credit Agricole
were placed on review for a possible downgrade in June;

The impact of the recent ruling by the German Constitutional Court is
likely to have a far more serious impact on the Euro Zone than
suggested by the initial headlines. Essentially, it prohibits the
German Government from accepting permanent rescue mechanisms if they
a) involve a permanent liability to other countries b) if these
liabilities are large or incalculable and c) if foreign governments
can trigger payments under guarantees, as a result of their actions.

If this is the right interpretation, the EFSF is OK (however it ceases
in 2013), but its replacement, the ESM (which is a permanent
mechanism) is not. Furthermore, it also suggests that an Euro bond
will fall foul of the ruling as they are permanent and will be large.
In a previous ruling, the German Constitutional Court stated that any
transfer of fiscal responsibility to Brussels would require approval
through a referendum. In the current climate, the Germans will not
vote in favour of such a possibility.

This ruling is the killer for the Greeks and, virtually certainly for
the Portuguese, as well. They will have to default and restructure
their debts. The Irish – well its touch and go, but if the global
economy continues to weaken, it looks like they are in trouble too.
The ruling also means that the ECB will remain the only player in town
and they are extremely reluctant participants. In addition, European
banks will need a lot more capital to meet losses on their holdings of
sovereign bonds.

I suppose you could have a constantly rolling “temporary” mechanism,
but that seems likely to be challenged. Another alternative could be
unsterilised QE by the ECB, but that is an anathema to the Central
bank. I will need to re check this carefully (given the extremely
serious implications) but, on the face of it, it looks like being a
real problem. The stakes have been raised sky high.

There are further reports that the IMF is raising funding. Normally a
bad sign, as it suggests that they see a need (ie a Sovereign rescue?)
for the funds;

~~~

Kiron Sarkar is a qualified UK accountant, Kiron joined the M&A dept of N M Rothschild in London. He was then appointed head of M&A of Rothschild (Hong Kong). On his return to the UK, he was a founding member of the Rothschild international privatisation team. Subsequently headed up the Central and Eastern European ("CEE") team – rated No 1 in 4 out of 5 years (Privatisation International).

On leaving Rothschild, he worked as privatisation adviser to the UK Governments Know How Fund, which was established to advise Governments in CEE on policy, privatisation, economic, financial, regulatory and other issues. Subsequently European Head of Media, Tech and Telecoms at CIBC World markets. Following CIBC, Kiron advised on telecoms and energy deals in CEE.

Kiron has acted as a lead adviser in respect of over US$150bn of deals and has worked globally in both developed and emerging markets.

JP Morgan Explains The Euro Crisis With Lego

Posted: 11 Sep 2011 12:00 PM PDT

I said earlier I wanted to find something “joyous and upbeat,” and this came to mind:
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This chart comes from a Michael Cembalest of JPM, posted by Felix Salmon of Reuters (JP Morgan Explains The Euro Crisis With Lego).

  1. The toreador in a floppy hat, and the F1 driver with his helmet, represent Spain, Italy and the rest of the Euro Periphery.
  2. The three men with helmets, shields, and medieval weaponry represent the CDU, CSU and FDP parties in Germany.
  3. The blue-and-white sailor boy is Finland. Obvs.
  4. The woman with an oversized carrot and her friend in overalls with a shovel represent the Social Democrats and Greens.
  5. Wotan represents the Bundesbank.
  6. The piggy bank is the IMF.
  7. The grey-haired Banque chap is the ECB.
  8. The chap in the red bib is Poland.
  9. The artists are France.
  10. The angry chef, the sweeper with a broom, the airline pilot, and the rest of the motley crew at bottom left, represent EU taxpayers in Core countries.
  11. The storm troopers are the EU Commission and Euro Group Finance Ministers, chaired by Jose Manuel Barroso and Jean- Claude Juncker.
  12. The monocled banker and his assistant are EU bondholders and shareholders.

Gee, nothing about the Irish or the Swiss . . . ?

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Source: Michael Cembalest, JPM via Felix Salmon, Reuters

JP Morgan Explains The Euro Crisis With Lego

Sound of Silence

Posted: 11 Sep 2011 10:53 AM PDT

This seems appropriate:

Paul Simon offers a deeply moving and atmospheric rendering of his signature tune "Sound of Silence," on the occasion of the 10th anniversary of 9/11.

This Live performance was delivered from Ground Zero.


307 views

Relentless Media Hype

Posted: 11 Sep 2011 08:51 AM PDT

I’ve already had my say about what happened 10 years ago. I do not feel a compelling need to revisit it again and again and again.

MSNBC is replaying their September 11, 2001 broadcast; the WSJ made their entire 9/12 paper available online. Other outlets are doing similar “tributes” if thats the right word.

I don’t know if anyone else feels this way, but the relentless 9/11 coverage and tributes feels both ghoulish and exploitative. Sorry, but this is simply too much, I’ve had more than I can take of this. I do not care to spend the entire day crying, but if I watch any more of this coverage that is what will happen.

To those  people who can find some consolation in this, I wish you well. Its a macabre spectacle to me. I need to find something more joyous and upbeat.

WP: Market Action a ‘Conversation’ Between Investors

Posted: 11 Sep 2011 06:11 AM PDT

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My Sunday Business Washington Post column is out. This morning, we look at earnings, analysts forecasting track record, and what that means for stock valuations if we have a recession.

I actually like both headlines today: The online version is Market action a ‘conversation’ between investors very much sums up a philosophical view I have held for a long time. The print version cuts right to the chase: The investor's dilemma: Earnings, valuations and what to do next.

Here is an excerpt from the column:

“To make sense of this, let's look at a stock price relative to a company's earnings — the key to understanding valuations. The slowing economy can help explain stock prices over the next year, as well as your queasiness.

Start with a basic method for valuing stocks. To grossly oversimplify, what you pay for a share in a company is based (in large part) on a formula called "earnings multiple." How much you should pay today is a function of how much the company is likely to earn next year. The Wall Street analysts who create those earnings forecasts put a multiple on it, lets say 15X and — voila! — we get a fair estimate for what prices stocks should be next year.

What could possibly go wrong with that? Plenty. Three major things: estimates, multiples and forecasting error.”>

After last week’s huge Apple layout and art work, this week, I am relegated to a simple column (at least I’m next to a great piece on Voodoo economists by Steven Pearlstein):
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click for ginormous version of print edition


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Publishing note: Over the Summer, I filled in for WP’s tax columnist, publishing just about weekly over the past 2 months. After this week, I return to publishing 2X a month. I hope to use the longer interim between columns to focus on investment issues in greater depth, including more research, versus the timely/topical weekly items.

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Source:
Market action a ‘conversation’ between investors
Barry Ritholtz
Washington Post, September 11, 2011
http://www.washingtonpost.com/business/market-action-a-conversation-between-investors/2011/09/07/gIQA7KU5EK_story.html

Washington Post Sunday, September 11, 2011 page G6 (PDF)

OpenWatch Project: Recording the Police

Posted: 11 Sep 2011 06:00 AM PDT

OpenWatch is a participatory citizen media project which uses mobile technology to enable public monitoring of authority figures.

About the OpenWatch Project from OpenWatch on Vimeo.

Hat tip Glenn Reynolds

Spiegel: German Finance Minister Prepares for Possible Greek Bankruptcy

Posted: 11 Sep 2011 04:09 AM PDT

These are the headlines at Spiegel Online, which should hit the markets like a ton of bricks offers on Monday.   Looks like Spiegel  posted the teaser to the full story to be released on Monday. Not a great way to restore market confidence, in our opinion.

Here's how the post ends:  Read the full story on Monday on SPIEGEL ONLINE International.

And here's how it begins,

With doubts growing about Greece's ability to implement important savings measures and reforms, there are concerns that insolvency may be inevitable. In Germany, officials in Wolfgang Schäuble's Finance Ministry are exploring what Athens' financial collapse would mean for the euro zone

German Finance Minister Wolfgang Schäuble, who is reportedly doubtful that the country can be saved from bankruptcy, is preparing for the possibility of Greek insolvency. Officials in his ministry are currently reviewing scenarios for handling such a situation, exploring what it might mean for the rest of the euro zone. Under the first scenario for a Greek bankruptcy, the country would remain in the euro zone. Under the other, Athens would abandon the common currency and reintroduce the drachma.

And this,

One of these key instruments would be credit lines provided to countries like Spain or Italy if investors stop lending them money after a Greek bankruptcy. If banks were forced to write off the billions in Greek government bonds on their books, they could become reliant on billions in rescue fund aid in numerous euro-zone countries. Both developments are to be expected in a Greek insolvency, regardless of whether the country exits the euro or not.

Volker Bouffier, the governor of the state of Hesse, which is home to Germany's financial capital Frankfurt, is a member of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) party, as is Schäuble. Bouffier is now urging that the possibility for countries to leave the euro zone be created quickly. Current European Union treaties provide no provisions for a country to abandon the currency.

Call us paranoid but we were perplexed reading this in the G7 comminque,

Central Banks stand ready to provide liquidity to banks as required. We will take all necessary actions to ensure the resilience of banking systems and financial markets.

Do or are the banks, and which ones, for that matter, going to need to CenBank liquidity? Certainly not U.S. banks who are sitting on a mountain of excess reserves.   Is the G7  anticipating or seeing a liquidity crunch in Europe?  Maybe that is why gold is flopping around like a fish out of water.

Is Greece so far out of compliance with its IMF program that there's no hope?  Or is this just hardball negotiating tactics to give them one last chance before Germany pulls the plug?   We have no freaking idea and just trying to make decisions with imperfect information.  We're getting whipped around by the tape bombs coming out of Euroland just as much as anyone else.

Nevertheless,  Zero Hedge cites this Dow Jones story,  IMF Likely To Re-Activate $580B Resource Pool Amid Europe Crisis-Sources,  which states,

The International Monetary Fund will likely re-activate a $580 billion resource pool in coming weeks to ensure it has funds to help cover Europe's worsening sovereign-debt crisis, according to several people close to the matter.

The IMF activated the so-called New Arrangements to Borrow in April of this year for a six-month period. The IMF's board, which met informally on the issue late Friday afternoon, would have to approve re-activation of the resource pool if the fund wants to tap it beyond September.

"A large majority of the board members are in favor of re-activating the NAB," as a precautionary measure, one of the people said. The board is scheduled to formally approve activation next Friday, the person said.

David Lipton, first deputy managing director at the IMF, said recently in a private meeting that keeping the NAB available may be necessary in coming months given Europe's debt meltdown, people familiar with the matter said. The crisis is entering a dangerous new phase as the risk of Greece defaulting rises and Italy and Spain's sovereign debt has come under attack.

And we note this from Reuters quoting French FinMin Alain Juppe,

Greece has made some mistakes. They have to correct these mistakes. They also have to honor the commitments that they have made.

Enough to make you think something big is about to break as it appears the powers that be are assembling a huge armada of liquidity.   Or maybe we're just paranoid.  Stay tuned.

What’s The Profile Of The Typical Entrepreneur?

Posted: 10 Sep 2011 10:00 PM PDT

Click to enlarge:

Source:
What's the profile of the typical entrepreneur?
Social Beast, September 1, 2011

Meh! Bloomberg Market’s 50 Most Obvious

Posted: 10 Sep 2011 04:42 PM PDT

This week’s Bloomberg Markets Magazine has their list of the 50 most influential people in finance.

There 5 categories of 10 people each. Policy Makers, Bankers, Money Managers, Corporate Innovators, Thinkers.

The list is obvious, its boring, its predictable, and its filled with people who the media may consider influential by way of title, but in reality are unlikely to influence you, dear reader, the actual man in the trenches.

If you had to guess who the 50 are, you are likely to come up with at least half.

Influential to Mom & Pop on Main Street?  Maybe. Some halfwit congressman trolling for campaign contributions? Definitely.

But are these people influential to you, the self directed investor, the active trader, the Wall Street professional? I doubt it.

Which raise an interesting question: Who influences your thinking as investors? What people do you have to read? Who makes you stop when they come on TV and listen to what they have to say?

Who influences you . . . ?

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Source:
Most Influential 50 in Global Finance List
Robert S. Dieterich
Bloomberg Markets Magazine, Sep 7, 2011
http://www.bloomberg.com/news/2011-09-07/most-influential-50-people-in-global-finance-full-list-bloomberg-markets.html
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