Tuesday, May 04, 2010
I Have To Recalculate
This is a major financial shock. Look at the 5 and 7 year for May versus in January. I figured it was coming, but I was hoping that it would not be this dire. The problem is that no one can really bring themselves to believe that this solves the Greek bond problem, because the debt isn't being modified or restructured. In three years the Greeks will end up with a significantly smaller economy and even more debt.
So really, the theory is that the ECB gets the crappy bonds from the banks as collateral, I suppose, gives them real money, and tries to let them work themselves into a better position over a few years. Well, this is not doing the Euro any favors. And then what of the other countries? Is the ECB going to also take the other bonds? The problem with the bank workout theory is that the banks had those bonds in part because the lending environment was pretty poor, so working it out is going to be quite difficult. So bottom line, everyone looks at this and figures low rate, central bank shoving money out there, etc, and it does not make the Euro look good.
Anyway, there really isn't enough data yet to feed into the modeling program, so I am going to be sitting doing it mentally. It may take a few days. When I'm doing this I'm pretty much like Rainman, and can barely talk, so I may not be posting for a bit.
There is one thing everyone has to realize, and that is that we are seeing not higher real value on Treasuries, but a trading bonus from the expected decline of the Euro. I think it could get worse yet. Also, it is not a good sign when ag banks in China start selling stock or otherwise trying to offload their lovely portfolios. Ag banks in China have a sorrowful history. We will call this strike two after the attempt to flog all those Chinese developer junk bonds.
You could also get a nice helping of some brand-spanking new BofA credit-card backed bonds. Makes your mouth water, doesn't it? American Express default stats are considerably better than BofA's.
In the meantime, the Indians have been chattering for weeks about a good monsoon this year to bring food inflation down (last I checked, into the mid 20% range). Well, even the Indian bankers realize that counting solely on the weather is not the safest strategy, so they are taking other measures. Asia is not bad yet, but caution signs are clear. However it should overall be a slowing of growth. Singapore is still doing very well. (April Singapore Stats, long pdf).
The shock is going to have a long reach, as this story about Fannie/Freddie spreads discusses. It is likely that risk premiums in the near term will still not outweigh yield trends, though.
PS: Rockefeller Institute on the implications of April tax collections for state finances. "It's all over but the crying".
I'm not sure I understand this whole situation. I would think that having the effectively ECB monetize the Greek debt would be inflationary in the medium term, and PM's and the S&P500 would hold up. But the market is acting like it's purely deflationary.
I'm not sure the central bankers can run an inflationary-enough policy to overcome the deflationary environment, but I don't see what changed to all of a sudden convince everybody that the answer is deflation.
What am I missing here?
However these developments also imply that the Euro will drop in value, so there is a flight to the dollar (also occurring in India, etc).
So yes, it is inflationary inside the Eurozone for most imported products, but that doesn't show up as inflation in other major currencies. What you are seeing is the signal of lower expected growth.
As for commodities, there is a demand concern driving their prices down. The expected growth portion of the pricing is being knocked out.
I would be certain that the US were entering a sustained (if quite sober and moderate) growth phase if it were not for the state and local financing problem.
As it is, although the Euro crash may correct oil and may produce a decent second half for the US, the chance still remains that US will go negative in the second half just from state and local cutbacks.
How long can these governments keep fixing the books? And surely the current bond shock in Europe is going to make borrowing more difficult over here.
Tim, thank you very much for that article.
Rural counties in most states are hurting...
I grew up in a small farming community in Eastern Washington. I went back to my 20 year high school reunion in 2002. It felt like a ghost town. There were quite a few empty businesses on the main street. I can only imagine what it would feel like today.
Population in July 2008: 587. Population change since 2000: -9.4%
Questions for readers: Sammamish, Interlake, and Rosalia High Schools
What is Rosalia High School doing to achieve their well above average 7.8 with more than 52% low income students?
I was fortunate to have grown up there. For the most part, people were grounded in common sense. There were no get rich quick schemes. Drugs (other than alcohol in relative moderation) were something you just didn't see. There were no gangs. There was very little criminal activity. People were friendly for the most part. Both teachers and parents cared. It did make a difference. Most people didn't have much money clearly, but it didn't seem to matter all that much.
That way of life is on the decline and it saddens me.
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