Posts Tagged ‘EMF’

Notes From Underground: The Europeans delivered on a bailout of the Peripherals (Maybe So, Maybe Not)

July 21, 2011

After reading through the vast amount of news on the Brussels “emergency” meeting, I am not sure I truly understand what the final outcome of the European resolutions for financial stability entail. There are bond swaps on Greek debt, which will mean a soft default, and then there is an increase in the size of the EFSF funding and a move to allow the  buying of secondary sovereign bonds. Again, it is not so easily to understand at this juncture as so much contradictory information is being provided that the final agreement doesn’t appear at this time.


Notes from Underground is Back and 2+2=5 is Certainly the Cornerstone

March 23, 2010

While we were at play the world did not stop, but so it goes.

From the standpoint of Europe we will always have Greece, but as we read the news the real story developing is the strains that exist between France and Germany. This does not surprise us at Notes for we always believed that the real struggle was going to be the battle over who controlled monetary policy in Europe. We see the Gaullist principle of Germany as the horse and France as the jockey is coming to an end. The realities of the PIIGS are subverting French dreams of a unified Europe, which would be a counterweight to the Anglo-Saxon model of capitalism.

The Germans will not favor a European Monetary Fund (EMF), as they are afraid of the German Constitutional Court (GCC) rendering such an action as being against the laws of Germany entering the EU. If no EMF, then it will be the IMF that brings some debt relief plan, but that outcome is fraught with problems for the French. IMF support for Greece would undermine the great desires of the French for  European political unity. It will also cause a problem for Sarkozy, as it will put the spotlight on Domique Strauss Kahn at a time when the right in France has just been decimated in local elections. French presidential elections will be held in 2012 and Sarkozy will be wary of bringing his potential opponent, DSK, to the forefront. The Greek debt crisis is uncovering many problems that that Eurocrats have buried in Brussels. The Germans are also coming under attack, as their lack of domestic demand and frugal ways have aggravated the dramatic imbalances within the EU. It seems that the European elites are naming Germany as a currency manipulator–hmm, where have we heard that before?

Even with all the turmoil in Europe, the DOLLAR has not rallied to the extent that many have predicted. The SWISS FRANC and other currencies have recieved some haven status as investors are searching for stable currencies with sound fundamentals, instead of falling into previous patterns. Typically, the DOLLAR OUGHT to be much stronger as the threat of economic instability threatens EUROPE. The U.S. equity market seems to have captured some attention but we find it more than of passing interest that the DOLLAR has not rallied to new highs. We are more than comfortable with the fact that cheap money continues to fuel equity demand but we are cautious about the resumption of protrectionist rhetoric making its way into the global debate. Nothing will put a crimp into the global equity rally than an unleashing of protectionist measures. Remember that any action that inhibits the flow of goods or capital can easily break the fragile global financial system.

In tomorrow’s Financial Times there are two articles putting the onus on Germany to change its economic model. One is by Martin Wolf and the other by Ralph Atkins. We advise our readers to read them both as they are casting a different light on the current turmoil in the EU. Germany will be tested but as we watch Merkel, we are certain that the good burghers of Bavaria will not be pushed into adopting profligacy as the solution to the European imbalances. Sarkozy is trying to mount a rear guard action by pointing the finger at Germany but this is not the Europe of the 1950s. To paraphrase Jimmy Breslin in his comment about Rudy Guiliani, Sarkozy is a little man in search of a balcony.

Notes From Underground: Speculators are to blame-we didn’t lie and cheat our way into the EURO

March 9, 2010


The Greeks have arrived in the U.S. to ask the Americans for help in reining in hedge funds’ speculative activity. Papandreou and his minions are asserting that the speculators are driving interest higher by continuing the assault on Greek debt. The huge spread between the Greek debt and those of more qualified borrowers in the European community has angered Greek officials. We have warned for two months that the debt spreads were creating a NEGATIVE FEEDBACK LOOP. The higher rates go, the higher the financing costs and the more the budget cuts are needed to meet the promises made to Brussels. This is the problem now and will be until Greek rates return to a much lower level, hence they need a co-signer to guarantee the debt to lenders.

The eurocrats are presently trying to deal with this by suggesting that the EU form a European Monetary Fund (EMF). This concept is fraught with problems. It presently falls afoul of EU law and the bigger problem is that it will be frowned upon by Washington and Asian countries. During the Asian financial crisis, the Asian community wanted to initiate an Asian fund to help meet the needs of struggling TIGER economies. Washington and European policy makers rebuffed the idea because they saw it as a disruption to the global process. It will be interesting to see how the IMF reacts to the creation of an EMF, since the IMF head is a powerful Eurocrat. It is a very tired old saw that the Europeans love to blame the speculators for their problems. As we have said for 18 years, the Brits should have built a statue to SOROS in Trafalgar  Square as he saved them from themselves (and we are not a blind disciple of Soros). Speculators are the first warning signal of ill-conceived policies for the markets, though not efficient 24/7, do the analysis that policy makers often avoid for reasons of political expediency. We don’t defend the wanton use of all financial instruments, but we do and will always defend the market’s ability to vote with its money. Nothing has done more damage to the human zoo than arrogant policy makers defending bad policy. Mr.Papandreou we remind you, when you point a finger there are three others pointing at you.

One of our favorite topics is the U.S. yield curve and its impact on the DOLLAR, EQUITIES and COMMODITIES. The Fed has been out talking about many things and placing many weapons in their arsenal to rein in the vast amount of liquidity. There has been recent action on the reverse repo scenario, such as raising the DISCOUNT rate, and much talk about the interest rates on bank funds held at the FED. All of these actions and the chatter have led to a little bit of tightening on the 2/10 U.S. curve but nothing earth-shattering as the market continues to come to terms with the timing of these actions.

In a speech delivered yesterday, New York Federal Reserve Bank Executive Brian Sack laid out the important strategy for the FED in its need to remove the huge amount of MBS and Treasuries presently on its balance sheet. As Sack stated, $2.0 trillion of the $2.3 trillion is MBS and Treasury instruments. There has been an ongoing argument about whether or not the Fed’s QE program has forced the whole risk curve lower. Brian Sack lets the world know in footnote 3 that he believes there is evidence that the FED asset purchases have contributed to the lower levels of long-term risk.

This is important because it supports Bernanke’s Feb. 10 statement that the FED will be very reticent to aggressively start unwinding their balance sheet. It seems that they will let securities roll off as the securities mature or are prepaid. We have been warning that the FED models suggest that the disposal of assets would have minimal impact on the mortgage market. It seems that Sack’s work indicates that the aggressive unwinding would be very disruptive, especially if the economy is still in a fragile recovery. As Sack said, it will shrink the “balance sheet in a gradual and passive manner.” We will keep our eyes on the yield curve for this FED stategy should keep the curve from steepening. If the curve were to start a bear flattener as the FED actions begin, and, without the inclusion of any disposing of the assets on the FED balance sheet, the market’s response will reveal a great deal of information. The all-important variable will be timing this, both for the FED and the trading world.