Hokey Pokey

14 novembre 2011

John P. Hussman, Ph.D.


The repeated waves of fresh crisis and temporary hope in Europe are starting to look a lot like the Hokey Pokey. Last week, Italy briefly put its right foot in. Then, thanks to purchases of Italian debt by the European Central Bank, it put its right foot out. Meanwhile, everyone is calling on Germany to turn itself around, and Greece is still just shaking all about.

Until last week, much of the concern about European debt focused on relatively small countries with high debt/GDP ratios. In particular, Greece, Ireland and Portugal have debt/GDP ratios of 166%, 109%, and 106%, respectively. But Italy actually comes in at 121% debt/GDP, the highest of any European nation next to Greece. Far worse, Italy has a GDP that is 7 times the size of Greece, and is 3 times the size of Greece, Ireland and Portugal combined. So Italy’s debt is not just huge relative to its own economy – it is just plain huge, at about $2.5 trillion in dollar terms. This is a terrible problem for France, whose banks are the largest single creditor to Italy, holding Italian debt worth about one-fifth of Italian GDP.

With Italian yields pushing past 6% and briefly passing 7% last week, Italy is actually very much in the situation that Greece was in about 18 months ago, when it was hoped that new « austerity » measures would shrink the deficit by forcing painful cuts in government spending. They didn’t. The effect of austerity policies in weak economies is generally to damage the economy even more, causing a significant shortfall in tax revenues, so deficits don’t materially improve despite the reduced spending.

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Quote of the day / citation du jour

9 novembre 2011

From Rudiger Dornbusch, MIT economist  (who was a professor to the new head of the ECB, Mario Draghi):

« The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.« 

Sortir du nucléaire, à quel prix ?

7 novembre 2011

Les Echos

Le premier point est que le risque nucléaire ne s’accommode pas de demi-mesures. Si l’on pense qu’une catastrophe nucléaire est à la fois possible et absolument insupportable, il ne sert à rien de diminuer de 30 % ou de 50 %, ou même de 80 % la production d’électricité d’origine nucléaire, et on doit penser que seule l’interdiction totale est acceptable. Le risque nucléaire est défini par la probabilité très faible d’un dommage très grand. On pourrait même dire : la probabilité infinitésimale d’un dommage infini. Le danger est le produit de la probabilité par le dommage. Réduire de moitié le parc nucléaire réduit de moitié la probabilité, mais pas le danger, car la moitié de l’infini reste l’infini. La logique du risque nucléaire est donc par nature dichotomique. Les extrémistes qui ne se contentent pas d’une sortie partielle mais exigent une sortie totale ont la logique pour eux.

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European equities – trick or treat?

7 novembre 2011

FT Alphaville

In keeping with the bearish mood this Monday morning, we present selected lowlights from the latest Graham Secker note. Morgan Stanley’s European strategist has downgraded equities to “underweight” following the double-digit rally, to reflect the inadequate policy response to the Eurozone debt crisis, weakening economic growth, falling margins and some technical gubbins.

Now, we should make clear, Secker’s not forecasting a big fall in stocks in the near term. Rather his downgrade reflects the fact that the overall macro environment in Europe is becoming tougher, equities are not particularly cheap and no big policy breakthrough appears to be imminent. (Indeed, one of the things that would make Secker turn positive on equities would be QE from the ECB).

But he still thinks investors should be looking to preserve wealth by selling into the recent rally.

October’s rally unlikely to be sustainable
To use seasonal parlance, we believe the market’s strong bounce in October will prove to be more of a trick than a treat. While the market may hope this is the start of a longer-lasting rally into year-end, we suspect this is just a traditional counter-trend rally in an ongoing bear market. We believe investors should look to use any residual strength in stocks and sectors as an opportunity to construct an even safer and more secure portfolio – at this time the prime goal of investors should be wealth preservation rather than wealth generation. In this regard, we are making some changes to our European model portfolio, increasing our underweight in Financials, and putting more funds into defensives.

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Quote of the day

7 novembre 2011

From Pimco’s Mohammad El Erian:

« The big exposure to Americans is the general exposure to the equity market. You cannot be a good house in a bad neighborhood, that’s just a fact. The equity market is the house, and the global economy is the neighborhood. So if the global economy takes a leg down, the equity market is going to take a leg down too.« 

Reduce Risk

7 novembre 2011

John P. Hussman, Ph.D.


A quick note on Greece – as of Friday, the yield on 1-year Greek debt has soared to 212%, up from 144% a week ago, just after the grand « solution » to the crisis was announced. Over the past week, the price of 1-year Greek debt has plunged by 20%, to 38.4 (bid 35.81, ask 40.97 to be exact). Which begs the question – if everyone has agreed that Greek debt will only be written down by 50%, why is the 1-year note trading at just 38% of face value, with longer maturities trading below 30% of face? This sort of incongruence isn’t inspiring.

Much of the reason Greece is seeking a voluntary exchange of debt from its bondholders is that an « involuntary » exchange would be a default event, which would trigger payments on credit default swaps. But across the global financial system, there are only about $3.7 billion in credit default swaps outstanding against Greek debt, and even in the event of an « involuntary » exchange, the actual amount of payouts would be less than that notional value.

One of the greatest advantages Greece has is that about 90% of its debt is governed by Greek law. The terms of any debt exchange, voluntary or involuntary, are more than simply technical details, as any restructuring should significantly reduce the discounted value of the new debt, and I suspect that the next stumbling block is that Greece will change its laws to impose « collective action clauses » on its debt, sufficient to restructure the debt more easily, given the consent of some supermajority of its bondholders. That would help to avoid any holdouts to « voluntary » restructuring, but it would also allow the possibility of a larger haircut. Little of this has been worked out, so even widely publicized « final » deals are not final until the details are settled. In any event, a 50% haircut still puts the Greek debt/GDP ratio above 100% by the end of the decade, so it’s possible that Greece will pursue a further haircut, even if it triggers CDS payments. We’ll see soon enough whether the widely accepted 50% figure actually holds up.

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Citi: « The Bear Market Rally Is Behind Us; We Anticipate A Move To 1,000-1,015 »

3 novembre 2011

Zero Hedge

to sum it up:

« While we are the last to put much weight in the predictive power of technical analysis, lately it has become all too clear that the only thing more worthless than technicals is fundamentals. Which unfortunately means that with the lowest common denominator (and marginal price setter) in the market being robots, in turn programmed by 20 year old math Ph.Ds who only know charts, it may be time to revise our skepticism. Enter Citigroup’s Tom Fitzpatrick, who together with Goldman’s John Noyce, are the two best sellsiders in this particular field. In short, neither has much good to sayl in fact when it comes to near-term bearish sentiment, it will be hard to find someone as pessimistic as Fitzpatrick, even among the Janjuahs and Rosenbergs of the world. Citi’s conclusion from a just released note should be enough to scare anyone who believes that the bear market rally started just about a month ago will persist: « While we respect the October monthly close on the S&P 500, we did not close above the 12 month moving average…we believe the bear market rally is behind us and anticipate a move towards the 1,000-1,015 target over the weeks and months ahead. » And while charts will never be a good guide as to what words may come out of G-Pip’s mouth next, with so much market action these days being purely backward looking, we would urge caution.« 

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