Archive for May, 2010|Monthly archive page

Election Farce Throws Iceland Into Political Chaos

In Health and Environment, International Econnomic Politics, National Economic Politics on 31.05.10 at 14:52

Promising a polar bear for the Reykjavik zoo, free towels at all swimming pools, a Disneyland theme park at the airport and a drug-free parliament by 2020, the newly formed Besti Flokkurinn (“The Best Party”) took the political establishment by surprise when it became the biggest party in Sunday’s municipal elections in the Icelandic capital, Reykjavik, securing six out of 15 seats in the new city council.

“I believe we are to see this vote as a protest against the traditional politicians, against the political parties and against the political realities experienced.”

Olafur Hardarsson

A political earthquake has shaken Iceland, with a comedy political party winning local elections in a development that showcases citizens’ increasing disregard for traditional politics.

In the country, which has been brought close to bankruptcy as one of the worst hit by the financial crisis, the electorate showed its true feelings for the political parties in local votes on Sunday. Jon Gnarr, Iceland’s best-known comedian, is now in a strong position to become mayor of Reykjavik.

And it is not only in Reykjavik that voters have turned their backs on the traditional political parties. Council majorities in the second largest city Kopavogur as well as in Hafnarfjordur fell during yesterday’s local elections. In the northern city of Akureyri, the upstart L List of Akureyri Residents achieved a clear majority, winning 45% of the votes and six councillors.

Iceland’s social democrat prime minister, Johanna Sigurdadottir, said the vote could spell the end of the traditional four-party system in Iceland.

The Best Party in Reykjavik was established just half a year ago by a core group of comedians, actors and musicians and was seen by many as a way to sidestep a broken political system.

According to the EUobserver, The new party ran their campaign under the slogan “Whatever Works” and suggested that it was time for a “clean out”.

A large part of the campaign was run via YouTube with the campaign video featuring candidates singing along to Tina Turner‘s “Simply The Best” with a modified chorus: “Best for Reykjavik, Best city of every week.”

On Sunday, it broke all expectations by winning 34.7 percent of the votes. The traditionally leading Independence Party, a centre-right political grouping, had to content itself with second place on 33.6 percent and five seats. The Social Democratic Alliance, which currently governs Iceland in coalition with the hard-left Left-Green Movement, won three seats while its coalition partner secured only one seat. As many as five percent cast a blank vote in the elections.

“I have never seen anything like this”, Olafur Hardarsson, professor in politics at the Reykjavik University told Iceland’s public broadcaster, RUV.

“I believe we are to see this vote as a protest against the traditional politicians, against the political parties and against the political realities experienced”, he added.

Here it is – “We Are The Best” – The Best Party Video:

Related by the Econotwist:

Iceland Refuse To Accept Debt

And Now; A Word From Iceland

Where Exactly Is “Money Heaven”?

Threat To Air Travel From Icelandic Volcanos Still Troubling

Stunning Volcano Pictures

På (litt) lenger sikt


Reblog this post [with Zemanta]

Bank Protest Sponsored By Banks

In Financial Markets, International Econnomic Politics, National Economic Politics on 30.05.10 at 17:22

Another update from the surreal world of banking: The May 16. protest outside homes of Bank of America executives, organized by liberal group National People’s Action and the Service Employees International Union, was in fact sponsored by Citibank and JP Morgan.

“CVH Would Like To Thank the Following Institutional Organizations For Their Generous Support Of Our Work.”

Community Voices Heard Inc.

On May 16, 2010, the now infamous SEIU protest at the home of a Bank of America executive’s home and at the home of a J.P. Morgan bank executive in Chevy Chase, Maryland. The protests were all about denouncing the “evil banks,” The Washington Post reported.

Here’s what we read on the NPA’s website:

National People’s Action (NPA) is a Network of community power organizations from across the country that work to advance a national economic and racial justice agenda. NPA has over 200 organizers working to unite everyday people in cities, towns, and rural communities throughout the United States. For 38 years NPA has been a leader in the fight to hold banks accountable to the communities in which they serve and profit.

In the 1970’s, National People’s Action spearheaded the fight to pass the Home Mortgage Disclosure Act and the Community Reinvestment Act, widely considered to be among the most transformative public policy to grow out of community organizing.

When we open the window to the organization’s Board of Directors, their names appear under the banner of the umbrella organization, Community Voices Heard, Inc. (CVH). Then, under the tab, “Strategic Alliances,” NPA appears and the following information are disclosed:

In 2007, CVH reported receiving $772,474 in donations.

Their website lists categories of “supporters.” Under contributing foundations and corporations, the list below is displayed following the statement that;

“CVH Would Like To Thank the Following Institutional Organizations For Their Generous Support Of Our Work.”

So, the umbrella organization for the National People’s Action, whose anti-banking agenda drove the SEIU protestors to the home of two bank executives in Chevy Chase, ended up co-sponsoring the protest at the private residence of an executive from one of the “generous” institutional organizations that supports their cause!

And CVH also takes money from Citibank, according to

Related by the Econotwist:

Banks Protesters Storm Irish Parliament

Athens: Banks On Fire – Thee Dead

“The Economics Of War Unfolding Now”

U.S. Republicans To Spend $50 million on “Tea Party”

Wave Of Protests To Hit Troubled E.U. States

Top 10 Risks of 2010

2010 Analysis: Warns Against Social Unrest


Reblog this post [with Zemanta]

Goodbye Keynes – Hello Ricardo!

In Financial Markets, International Econnomic Politics, Views, commentaries and opinions on 30.05.10 at 04:48

The world have been fighting the financial crisis by using every possible trick according to John Maynard Keynes‘ playbook. But, as The Great Depression taught us, extreme government spending tends to cause about as much problems as it solves. Perhaps it’s time to put Keynes back on the bookshelf, and pull out the 200 year old theories of David Ricardo.

“While budget stimulus measures are intended to boost demand from financially constrained consumers, it may for others – the majority – result in the emergence of Ricardian behavior.”

Philippe d’Arvisenet

For those not too familiar with economic theories; Ricardian behavior is basically increased  consumer savings due to expectations of higher taxes in the future. This effect has been shown to emerge more widespread in countries with large governmental debt, and lead to significant difference in the recovery process among nations.

The increase in public debt registered over the last few years is without precedent.

In each of the main OECD countries, public debt is not on a sustainable path, BNP Paribas chief economist, Philippe d’Arvisenet writes in a research paper.

This contrasts with past periods, during which emerging markets have appeared more at risk from this perspective.

The majority of developed countries will have a public debt ratio in excess of 90% in the middle of the decade, BNP Paribas estimates.

However, according to the IMF,  from 2007 to 2014, the debt ratio in these countries is expected to rise by an average of more than 30 points of GDP, reaching an average of 110% of GDP.

Philippe d’Arvisenet points out that of this increase, 3 points will be related to supporting the financial system.

* 4 points to the increased cost of debt.

* 10 points to automatic stabilizers.

* 3.5 points to budget stimulus measures.

* 9 points to losses of tax revenues relating to the decline in asset prices.

“The widening of deficits is largely structural in nature. The deficit ratio adjusted for cyclical variations is 4.4% in the euro zone out of a total deficit of 6.7 points, with 9.8 points in the UK (out of a total of 13.3 points) and 8.8 points in the US (out of a total of 10.7 points). In the past, this structural deficit has shown a strong tendency to persist,” the french chief economist writes.

For the time being, surplus production capacity limits the risk of public debt having a crowding-out effect on private investment.

Ricardo, Who?

About 200 years ago British economist David Ricardo presented his “theory of equivalence” in a newspaper essay.

In Ricardo’s view, it does not matter whether you choose debt financing or tax financing, because the outcome will be the same in either case. Flip a coin if you like, because in terms of the final results, raising taxes by $1,000 is equivalent to the government borrowing $1,000.

According to traditional economic theory, like the Keynesian, public debt has a significant effect on the overall economy because consumers regards public debt as net wealth.

The Ricardian equivalence theory, on the other hand, suggest that is has no effect so ever.

While budget stimulus measures are intended to boost demand from financially constrained consumers,  in their case  the classic system of budgetary multipliers (Keynesian style economics) takes full effect.

But for others – the majority – the result will most likely be widespread emerging of so-called Ricardian behaviour.

Ricardian behavior is a term economists use to describe growth in consumer saving to cope with the costs of expected increasing taxes in the future.

The consumers expectations are usually fulfilled, and often extended, later research have shown.

In most cases, government borrowing ends up being more expensive for the citizens when inflation, higher borrowing costs and interest rates are taken into account.

The theory of Ricardian behavior is controversial, as it assumes that people think and behave financially rationally.

We know we don’t.

But other factors can trigger similar behavior, like lack of transparency in the state finances and mistrust in the governments economic policy.

In any case; Ricardo’s main point that government borrowing is nothing more than a way of delaying tax hikes, seems to be accepted by many leading economists today.

No More Free Lunch

It should be clear by now that the public finance situation calls for credible recovery measures.

“While the conventional crowding-out effect does not have an impact, the budget situation – contrary to the situation before the financial crisis – now affects the assessment of risks and may inflate risk premiums. This results in a higher cost of debt, making adjustment even more difficult,” Mr. d’Arvisenet writes.

Adding that this situation could make an end to the until now observed developments characterized by rising debt with no impact on interest payments because of falling interest rates – a kind of “free lunch”.

“A high level of debt increases the probability of an interest rate or growth shock resulting in unsustainable debt, with higher debt ratios and a widening gap between the apparent real interest rate and the rate of growth. This configuration makes adjustment even more difficult and in any case presents a number of threats (snowball effect of debt).”

Recent data clearly call for immediate action.

BNP Paribas points to the fact that, as a direct consequence of the financial crisis – with an increase in the cost of capital and structural unemployment and a decline in economic activity – the potential level of GDP in the OECD region is around 3.5 points below the pre-crisis level.

In addition, unless there is an increase in taxation, the higher cost of debt means that some public services will have to be sacrificed.

An increase in taxation is frequently synonymous with fiscal distortions that can harm growth.

Debt then eliminates the ability to implement new support measures if needed.

A Credible Exit Strategy; Fact Or Fiction?

Ricardo’s theories might very well be correct,  but only in a perfect economy with free markets and responsible, rational people.

However, by understanding Ricardo’s line of arguments, it becomes more clear what’s wrong with the current economic policy.

BNP Paribas chief economist writes:

“In addition to purely budgetary considerations, deterioration in public finances is a potential challenge for central banks. The level of debt may result in not only increases in inflationary anticipations, but also uncertainties about the success of consolidation measures, making steering of monetary policy more complicated (what is the appropriate interest rate?). The weighting of the cost of debt may result in pressures favoring monetisation, casting doubt on the independence of central banks, not taking account of the fact that these institutions – which have increased the share of public debt securities in their balance sheets – are therefore exposed to greater interest rate risks.”

According to the IMF, a primary structural surplus of 8 points of GDP from 2011 to 2020 (from -4.3% to +3.6% of GDP) would be necessary in order to bring the debt ratio to 60 points of GDP in 2030, although with significant differences between countries: one-fifth of developed countries would have to make an adjustment of more than 10 points and two-thirds would have to make an adjustment of less than 5 points.

The adjustment would be halved for a target of stabilizing the debt ratio at the 2012 level.

The IMF estimates that over 10 years, and assuming growth of 2%, the end of stimulus measures could contribute 1.5 points of GDP.

In addition to the freeze on public spending excluding health-care, which implies priorities and efforts to improve efficiency, stabilization in expenses relating to the aging of the population proportional to GDP would provide a contribution of 3-4 points of GDP and tax deductions would provide a contribution of around 3 points.

“In the shorter term, as suggested by recent research, displaying a credible budgetary consolidation policy concerning primarily expenditure can enhance the effectiveness of support measures in place, by means of both consumer behavior (Barro-Ricardo effect) and also interest rates,” Philippe d’Arvisenet writes.

The Ricardian Union (Formerly Known As E.U.)

Research by Antonio Afonso at Universidade Tecnica de Lisboa, published in 2001, concludes that debt hardly will become neutral. And he’s probably right.

But Afonso’s finding, based on studies of 15 European countries, indicates that government debt has a considerable stronger effect on consumer spending in highly indebted countries, as compared to the less indebted nations.

There seems to be a limit around 50% of GDP; a debt-to-GDP ratio over 50 tends to make people more aware, and cautious, about their financial situation. They become Ricardian.

The prospect of a return to sustainable debt allays fears of inflation and therefore anticipations of a hike in interest rates, which helps to contain the rise in long-term rates, BNP Paribas argues.

“A budgetary exit strategy is a difficult exercise. The change in the primary balance needed to ensure a similar level of debt to that observed before the crisis – which would avoid transferring the consequences of the crisis to future generations – is considerable but not unprecedented.”

“Recourse to inflation” as dreamed of by some, does not seem to be the solution, according to BNP Paribas, refering to analysis of successful experiences of budgetary consolidation shows that a significant reduction in the debt ratio has been achieved in 10 or so countries, mainly by means of the primary balance.

The contribution of growth was negligible in this respect (apart from in Spain and Ireland), chief economist Philippe d’Arvisenet says.

“We can therefore see that consolidation measures are taken with a long-term view – one or two years has not been enough. This does not mean that it is not necessary to continue with the reforms intended to support growth,” he adds.

However, there are just too many uncertainties relating to this matter to be able to count considerably on this factor.

What About Fiscal Illusions?

Among the uncertainties are another – rarely mentioned – theory called “fiscal illusion.”

“Fiscal Illusion” is a public choice theory of government expenditure first developed by the Italian economist Amilcare Puviani in 1897.

“Fiscal Illusion” suggests that when government revenues are unobserved or not fully observed by taxpayers then the cost of government is perceived to be less expensive than it actually is.

Examples of fiscal illusion are often seen in deficit spending.

CATO Institute economist William Niskanen, has noted that the “starve the beast” strategy popular among U.S.  conservatives wherein tax cuts now force a future reduction in federal government spending is empirically false.

Instead, he has found that there is ‘a strong negative relation between the relative level of federal spending and tax revenues.

Tax cuts and deficit spending, he argues, makes the cost of government appear to be cheaper than it otherwise would be.

Paulo Reis Mourao at Australian National University presented in 2008 an empirical attempt to measure fiscal illusion for almost 70 democracies since 1960.

The results obtained reveal that Fiscal Illusion varies greatly around the world.

Countries such as Mali, Pakistan, Russia, and Sri Lanka have the highest average values over the time period considered, while Austria, Luxembourg, Netherlands, and New Zealand have the lowest.

But, as you know; some illusionists are better than others.

The French Solution

The greatest increase in public debt forecast for the next few decades relates to the aging of the population, BNP Paribas concludes.

“The matter of health-care and pension reforms is crucial (without reform, the associated cost would be 4-5 points of GDP between now and 2030,” according to the French banks research.

“Reforms in this area are even more important as their effects become more significant with time and their initial cost is limited.”

Based on lessons of other recent research, BNP Paribas notes:

“The greater effectiveness of rules that are easy to implement (public spending versus deficit), as demonstrated for example by the failure of the Gramm Rudmann Hollings Act of 1985 and the success of the Budget Enforcement Act that succeeded it;”

* The increased effectiveness of automated mechanisms, compared with discretionary practices such as those relating to sanctions for excessive deficits in the euro zone;

* The appeal of anti-cyclical measures (rainy day funds etc.).

The bank make the following suggestions:

(1) To stabilize the public debt ratio (debt to nominal GDP), it is necessary to generate a primary balance equal to the product of the debt ratio by the difference between the real rate of interest on debt and the rate of growth.

(2) Not forgetting that inflation is not manifesting itself and that inflationary fears alone are likely to provoke a rise in real interest rates.

(3) From this viewpoint, the change in retirement age has substantial effects both directly (increase in tax revenues, reduction in expenditure) and indirectly on potential growth (working-age population and participation rate).

Related by the Econotwist:

Merkel, Obama, Sarkozy Have Investors Shitting Their Pants

Proposal For New Single European Bond

You Sue Me, I Sue You, Oh Peggy, Peggy Sue

Breeding New Watchdogs

Gerald Celente: “The Great Crash Has Occurred”

A Baltic Future For Greece?

“We Stand At The Brink Of The Next Great Crisis”

Who’s Hiding In The Sherwood Forrest?

Euro Zone: More Fiscal Integration Or Not?

Force The Rich!

Wild-West Capitalism (Don’t Blame The Baby Boomers)

E.U. To Reform Economic Policy

Central Bank Of Norway Call For A New “Global Order”

Evaluation Of Norwegian Monetary Policy

Bernanke: “We Welcome A Review Of The FED’s Management”

Final Words Of A Central Banker


Reblog this post [with Zemanta]

U.S. Stock Market: Worst Week Since 1940

In Financial Markets, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 29.05.10 at 00:42

Today’s downgrade of Spain sealed the faith of Wall Street this week, posting the biggest weekly decline since 1940. The financial crisis seem to be back with full force, maybe even more. Some market participants are convinced that the recent economic events, particularly in Europe, is the damning evidence of a failed monetary policy.

“There’s nothing wrong with throwing a little money at a problem to make it go away. But what happens if you throw a lot of borrowed money at a problem, and the problem doesn’t go away?”

Eric Sprott/David Franklin

U.S. stocks tumbled, capping the worst May for the Dow Jones Industrial Average since 1940, while the euro slumped and Treasuries rose after the downgrade of Spain’s debt rating and escalating tensions in Korea.

The Dow Jones Index dipped 122.36 points, or 1.2 percent, to 10,136.63 Friday and have lost 7.9 percent so far this month.  Standard & Poor’s 500  sank 1.2 percent to 1,089.41, led by financial shares after Fitch stripped Spain of its tripple-A rating.

“Spain’s downgrade just adds to more uncertainty,” Quincy Krosby, chief market strategist at Prudential Financial Inc., says in a commentary on Bloomberg News.

“There are too many geopolitical events. We have a three-day weekend in the U.S., and traders will definitely want to lighten their books.”

“A Busted Formula”

The more bearish side of the market are interpreting the latest events as more hard evidence of a failed economic policy – that the biggest fiscal experiment in modern history is about to become the biggest fiasco.

Siding with the political response in the early 1930’s that sent the global economy into severe depression, culminating in the world war 2.

The following argument is brought forward by the Canadian fund managers Eric Sprott and David Franklin at Sprott Asset Management/Sprott Private Wealth:

There’s nothing wrong with throwing a little money at a problem to make it go away. There’s equally nothing wrong with throwing a little borrowed money at a problem to make it disappear, as long as you have the means to pay that borrowed money back.

But what happens if you throw a lot of borrowed money at a problem, and the problem doesn’t go away? If you’ve ever experienced a situation like that you can probably understand how Europe feels right now. It just unleashed a magnificent $1 trillion euro bailout and the market responded with a selloff by the end of the week! So what happened? That money was supposed to make the problem go away, after all. And it was a lot of money. Why did the market respond to it with such disdain?

We believe the market’s reaction is confirming what we have long suspected: that these bailouts provide next to no long-term value. They don’t produce real jobs. They don’t improve productivity. They just prolong the precarious leverage game played by the financial sector, and do so at tremendous cost to taxpayers. “Bailout and Stimulate” has been the rallying call for governments and central banks since the beginning of this financial crisis – and it has certainly had its impact over the last two years, but not the type of impact we need to propel real, sustainable growth. There are three recent, glaring examples of this busted “Bailout and Stimulate” formula in action:

Exhibit A: The United States

From the outset of this financial crisis, the US Government and Federal Reserve have spent prolific amounts of money to save its banks and stimulate its economy. According to Neil Barofsky, special investigator general for the Troubled Asset Relief Program, the United States has now spent approximately $3 trillion on various programs to stem the financial crisis.1 This figure is expected to be updated again in July.

This $3 trillion expenditure includes stimulus programs like ‘cash for clunkers’, the extension of unemployment benefits, infrastructure spending, the “Making Home Affordable” program, as well as the activities of the Federal Reserve. To measure what the fiscal stimulus has actually accomplished we looked to the US Federal budget outlays/receipts to gauge the impact of the stimulus on GDP.

Table A presents current dollar GDP increases year-over-year alongside current dollar budget deficits. Comparing the two in current dollars provides a sense of the hard dollar impact that stimulus spending has had on the economy. As the chart illustrates, the net impact of the stimulus contributions and promises made since 2008 have resulted in a combined budget deficit of close to $2.5 trillion dollars and an incremental net increase in GDP of $200 billion. A $200 billion return for a $2.5 trillion increase in debt represents a terrible return on investment. It implies that the net impact of the stimulus on GDP since 2008 has been a mere 9 cents for every deficit dollar spent. Buying dimes with dollars is bad business, government-funded or not.

Another troubling statistic relates to the cost of job creation for the American Recovery and Reinvestment Act (that’s the $787 billion program designed to produce real jobs in the United States). The White House estimates that it takes approximately $92,000 of government spending to create one job in the US. The White House justifies this exorbitant amount by stating that at the current employment level, each job in the US economy generates $105,000 in GDP, thus resulting in good “bang for the (taxpayer) buck”.5 Spending $92,000 to generate $105,000 in GDP seems justifiable on the surface. But further digging reveals that the actual cost to save or create one job in the US was $117,933 per job from February to December 2009.6 That’s well over $92,000, and more than the $105,000 “return” each job is supposed to provide in GDP. If this metric is correct, it means the US government is actually suffering a negative return from its job stimulus.

To further convolute the issue, one must also consider that the supposed $105,000 GDP return for each new job doesn’t incorporate the fact that the $92,000 (or $117,933) spent to create it was BORROWED. Why does this aspect of government expenditure never make it into the analysis? Spending $92,000 for a $105,000 pop in GDP represents bad logic when that $92,000 isn’t yours to spend. If we incorporate the interest costs required to borrow the $92,000, are we really producing value or just digging a deeper hole?

Numerical discrepancies aside, the fact remains that GDP is a terrible metric to measure the return of a job program. GDP is technically the value of all finished goods and services produced in an economy. From a business perspective, GDP is akin to revenue, which isn’t an asset, and is different from ‘earnings’ or ‘profits’. Businesses don’t hire additional workers for their marginal increase to ‘revenue’ – they hire to increase their marginal ‘profit’. The White House approach to job stimulus will maximize spending, not profit. Rather than maximize spending, why not maximize actual employment by finding a way to produce a job for less than $92,000? Surely some of the fifteen million unemployed workers in the US would appreciate some help in that area.

Exhibit B: The Latest Bailout Failure in Europe

In a show of force designed to impress the world markets, the European Union pieced together an unprecedented loan fund worth almost €1 trillion euros. The fund’s capital was made available to rescue euro zone countries in financial trouble. The European Central Bank announced it was ready to buy euro zone government and private bonds “to ensure depth and liquidity.” The US Federal Reserve, the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank announced that temporary US dollar swap facilities would be opened to provide liquidity. Never have so many organizations coordinated and contributed so much to a single bailout effort!

So what was the ultimate effect of this shock and awe campaign? After enjoying a short-lived obligatory rally, the market for stocks, bonds, and the euro (in terms of USD) traded lower by the end of the week. Gold, a barometer of fear, appreciated almost 6% in euro terms over that same week.

Which brings us to the crux of the problem…

Exhibit C: Over-Levered Banks

Banks are at the epicenter of this financial crisis. The reason? Leverage. We outlined our measurement of bank leverage in our article Don’t bank on the Banks in November 2009. As equity investors we worry about the impact a change in assets will have on a banks’ tangible common equity. Readers will note that the German financial regulator recently banned naked credit-default swaps of euro-area government bonds and banned naked short selling in ten German banks and insurers. It shouldn’t surprise you to learn that, according to their most recent filings, German banks are some of the most levered in the world. Table B shows the leverage calculation for each of the four largest banking institutions in Germany as of March 2010.

Commerzbank has the highest leverage of the German banks at 124:1. This means that if their assets drop in value by a mere 0.8%, their tangible shareholders equity is effectively wiped out. How many asset classes do you think have dropped by 0.8% since Commerzbank’s last filing in March? We would guess almost all of them have (except gold of course). Hence the recent ban on naked short selling of German bank shares. They’re too vulnerable to handle the market’s wrath.

The German banks are not alone. Most large banks around the globe are operating with too much leverage. The governments can keep the “Bailout and Stimulate” game going, but it won’t amount to much in the long-term unless the leverage issue is wrung out of the banking system. Until that happens, bailing out the banks is akin to pouring money down a bottomless pit.

The key point to remember with bailouts and stimulus is that it’s ultimately your money that the government is spending – and your children’s money. The numbers strongly suggest that your money isn’t being spent wisely. We need real jobs and real growth, not bigger, more leveraged banks. The market isn’t oblivious – it can see what’s happening. Gold’s recent strength in lieu of seemingly ‘deflationary’ economic data confirms the market’s doubts over government intervention in the financial system.

Needless to say, we remain bearish.

Full post, including illustrations and references at Zero Hedge.


Eric Sprott and his colleagues have built an impressive track record over the last years, collected a numerous prestigious awards, and are currently ranked among the top 100 fund managers in the world.



The Thomson Reuters Lipper Award 2010 in the Precious Metals Equity Category.

Best Long/Short Hedge Fund Globally, 2008, and Best Canadian U.S  Performance Awards, 2007, by HFM Week.

Ranked as the worlds best global hedge fund in 2002, and as number 49 last year by Barron’s.

Eric Sprott,  Fund Manager of the Year 2007.

Eric Sprott, Entrepreneur of the Year,  Ontario Region 2006.

Related by the Econotwist:

Spain Loses AAA Rating – Here’s The Full Report

Transantlantic Bailout Buddys Agree To Disagree

China To Dump Euro?

Merkel, Obama, Sarkozy Have Investors Shitting Their Pants

European Banks: “Leman Times Ten”

Welcome Back to Earth, Mr. Market

RBS Analyst Warns Investors

Albert Edwards: Europe On The Edge Of A Deflationary Precipice

“Sending Europe Back To The 1950′s”

Stock Market Guru: Sell Everything!


Reblog this post [with Zemanta]

Spain Loses AAA Rating – Here's The Full Report

In Financial Markets, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 28.05.10 at 20:39

Fitch Ratings strips Spain of one its A’s by downgrading the country’s long term credit rating to AA+, from AAA.  Fitch anticipates that the economic adjustment process in Spain will be more difficult and prolonged than for other economies. Here’s the full rating report from Fitch.

“Fitch believes the Spanish government could find it hard to implement some of the expenditure cuts. In particular, the agency has some doubts over the feasibility of the cuts that need to be made by Spain’s autonomous communities.”

Fitch Ratings

“The downgrade reflects Fitch’s assessment that the process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium term,” the rating agency writes in its special report on the Spanish economy.

Fitch Ratings downgraded Spain’s Long‐Term Foreign‐ and Local‐Currency Issuer Default Ratings (IDRs) to ‘AA+’ from ‘AAA’ on 28 May 2010.

Despite these expectations, the Stable Outlook on Spain’s sovereign rating reflects Fitch’s view that the country’s credit profile will remain very strong and consistent with its ‘AA+’ rating, even in the event of some slippage relative to official fiscal targets, Fitch analysts says.

The Spanish government has announced an ambitious fiscal consolidation plan to ensure a return to sustainable public finances after the global financial crisis.

Fitch believes the Spanish government could find it hard to implement some of the expenditure cuts. In particular, the agency has some doubts over the feasibility of the cuts that need to be made by Spain’s autonomous communities, who may also see a reduction in the transfers they will receive from the state budget.

“Nevertheless, Fitch believes the risk that economic growth will fall short of the government’s projections is a more important consideration. The Spanish government is forecasting a sharp recovery in private consumption and investment. Fitch believes that Spain’s unemployment rate, the legacy of its construction boom, and its high level of indebtedness will weigh on private consumption and investment in the medium term.”

Consequently, Fitch is forecasting weaker growth for the Spanish economy in the medium term than the government is, although the agency’s projections on the contribution of net trade to growth in the medium term are slightly more optimistic than those of the government, the report says.

“Slightly” More Pessimistic

Anyway – the rating agency have trouble seeing how the Spanish government will be able to meet its growth projections for the next decade.

I’m not sure if I would call a difference in the  GDP projections of 1,2 – 1,3 percentage points (about 35%) for “slightly” lower, but that not the biggest issue here.


Here’s a copy of the full rating report from Fitch.

Latest: U.S. stock market takes another beating after the news about the downgrade of Spain. Stocks currently down between 2,5 and 3,8 percent.

Check the U.S. markets live indicators at high5finance.

Related by the Econotwist:

China To Dump Euro?

European Banks: “Leman Times Ten”

Euro-Slide Continues After Spanish Bank Rescue

Euro Collapse As Greek, Portugese And Spanish Spreads Widen

Europe’s Debt Crisis Now Spreading To Portugal

Attacks Against Spanish Financial Markets?



Download MetaTrader 4.0 for FREE at high5finance Trading Center

Reblog this post [with Zemanta]

Transantlantic Bailout Buddys Agree To Disagree

In Financial Markets, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 28.05.10 at 12:19

Thursday’s talks in Berlin between U.S. Treasury Secretary Tim Geithner and his German peer, finance minister Wolfgang Schäuble, did not go particularly well, according to European media. At an extremely short press conference, Mr. Geithner praised the latest European bailout efforts, but refused to comment on Germany‘s ban on short selling.

“The U.S. and Europe are in broad agreement on the importance of putting in place more conservative constraints on risk-taking.”

Timothy Geithner

According to The Financial Times Deutschland, German officials describes the talks as “frank and intensive” – a Brussels euphemism for a disagreement. The paper also points out that it was the guest, Mr. Geithner, who ended the extremely short press conference, something that is regarded as bad manners in Berlin.

Geithner pointedly refused to comment on the German government’s decision to ban short sales, and to lobby for a financial transactions tax.

The top U.S. finance official and his German counterpart, Wolfgang Schäuble, agreed to disagree on the detail of finance market reform, The Irish Times writes.

“The US and Europe are in broad agreement on the importance of putting in place more conservative constraints on risk-taking and more conservative capital requirement,” Mr Geithner said. Adding that for regulators to do their job properly it is essential to bring “more transparency and disclosure to derivatives markets”.

“These are global markets; you need common standards,” the U.S Treasury Secretary highlighted.

“You don’t want to just let risk move outside the scope of regulation.”

This remark was seen as a discreet, critical nod towards Germany’s national ban on speculative trades last week, including naked short selling.

Germany’s finance minister, Mr Schäuble, on the other hand, defended the national ban, saying Germany had been unable to wait until a European agreement in the autumn.

“We’ve done our national homework on this and have to keep moving forward,” Schäuble said.

Plays Down Reform Rifts

Timothy Geithner did the best he could to play down comments of transatlantic tensions ahead of next month’s G20 summit, saying the US and Europe were in “broad agreement” over financial market reform.

Mr Geithner ended his trip to Europe with praise for the euro zone rescue fund: it contained the “right elements” that required decisive action to put it to work.

But other than a pledge to provide the financial markets with up to 750 billion euros, there are very few other “elements” in the European bailout package.

The Euro Collapse: Good, Bad or Just Ugly?

The Berlin meeting followed a stopover in Frankfurt where Mr Geithner met European Central Bank (ECB) president Jean-Claude Trichet as well as his likely successor, Bundesbank president Axel Weber.

The euro staged a rebound yesterday – after days of unyielding pressure – as the Chinese authorities denied a report that Beijing was reviewing its holdings of European sovereign debt.

Although European and US equity markets continued to rise, there were conflicting signals from the ECB about the implications of the turmoil sparked by the Greek debt emergency.

ECB executive board member José Manuel Gonzalez-Paramo said the euro zone could not afford another country to repeat Greece’s deception over the scale of its deficit.

However, the chiefs of the French and Austrian central banks adopted a positive stance on the currency’s decline, saying it was benefiting exporters.

(And they think derivatives is complicated!?)

Market Snap Shots

Anyway – here’s the situation in the European currency market at noon local time.

The euro is continuing to strengthen against most other currencies Friday after yesterday’s reassurance by Chinese authorities that they’re not considering selling off their enormous euro positions to re-balance their foreign exchange reserves.

In reality there’s nothing else they can say, (regardless of true or false), but the investors seem to be buying it.




China To Dump Euro?

Merkel, Obama, Sarkozy Have Investors Shitting Their Pants

European Banks: “Leman Times Ten”

Welcome Back to Earth, Mr. Market

Proposal For New Single European Bond

RBS Analyst Warns Investors

Euro-Slide Continues After Spanish Bank Rescue

Albert Edwards: Europe On The Edge Of A Deflationary Precipice

“Sending Europe Back To The 1950′s”

Fitch: Credit Markets Still Deteriorating

Stock Market Guru: Sell Everything!


Reblog this post [with Zemanta]

PennyMac Offer Investors A 98 Million Pool Of Liquidty

In Financial Markets, International Econnomic Politics, National Economic Politics on 28.05.10 at 01:06

PennyMac Mortgage Investment Trust is offering a $98 million pool of loans to investors, according to market sources.

“A way of exploring leverage”

PennyMac spokesman

One bidder who has seen the offering documents said the Calabasas-based vulture fund is marketing the loans as “mostly performing,” adding that investors are allowed to buy different portions of the pool.

No other details were available at press time.

More at The Swapper.

Related by the Econotwist:

Wall Street: “God’s Work”

Wall Street – unplugged

På markedets skyggeside

Reblog this post [with Zemanta]

PennyMac Offer Investors A 98 Million Pool Of Liquidty

In High Frequency Trading, Law & Regulations, Quantitative Finance on 28.05.10 at 00:50

PennyMac Mortgage Investment Trust is offering a $98 million pool of loans to investors, according to market sources.

“A way of exploring leverage”

PennyMac spokesman

One bidder who has seen the offering documents said the Calabasas-based vulture fund is marketing the loans as “mostly performing,” adding that investors are allowed to buy different portions of the pool.

No other details were available at press time, according to Structured Finance

A PennyMac spokesman said the company generally does not discuss its auctions until after a sale actually takes place. He noted that the publicly traded vulture fund and servicer will consider securitizing some of its assets “as a way of exploring leverage” but could not say anything concrete about the matter.

PennyMac also is rolling out a conduit to securitize agency quality loans and eventually jumbo mortgages.

Related by The Swapper:

The Alchemists of Wall Street

Reblog this post [with Zemanta]