Daily: Expect more missed targets and crisis in Spain
I actually thought about doing the daily on the Wells Fargo fraud ‘without fraudsters’ meme because it really captures the problem with regulation of our financial system but that is a policy issue. Instead, I want to focus on a macro investing and economy issue, namely the IMF forecasts. I had a few bits and piece on them earlier in the week but here are some more on Spain specifically. What the Spanish forecast highlights is the difficulty Spain will have in getting itself back under the Maastricht Treaty 3% hurdle given the present policy course. The question is what that means.
Bill Gross and other investors are piling into Spanish debt because of the ECB backstop. But there is still risk. The short end of the Spanish curve is probably fairly riskless yield pick up because I can’t see that debt being restructured. So to the degree you want to get euro exposure, it makes sense to think about Spain and Italy (and Ireland) in the space up to two years’ maturity. But what the IMF forecasts show is that Spain will miss targets. And then we will have to see how yields react to this, even with an ECB backstop, something that only matters if you don’t hold to maturity.
I believe Spain will be forced into a Troika program later this year and then it will continue to issue debt into the market with the ESM a primary buyer and the ECB a big buyer on the secondary market. For that to work, you need Spain to seek a package sooner rather than later because the threat here is that the market for Spanish short-term bonds gap down and that Spain gets shut out of the private market. What the ECB certainly wants is business as usual for Spain with extra ECB liquidity support.
At the end of the day, what this all points out is that the policy response in Europe is still inadequate. Irrespective of the ECB backstop, the real economy is in a world of hurt in the periphery. Austerity makes that considerably worse, increasing downside risk in bonds and keeping euro zone breakup aka re-denomination risk on the table.
Adding liquidity is not enough | Joseph Stiglitz | Business | guardian.co.uk
“the Fed and ECB actions sent three messages that should have given the markets pause. First, they were saying that previous actions have not worked; indeed, the major central banks deserve much of the blame for the crisis. But their ability to undo their mistakes is limited.
Second, the Fed’s announcement that it will keep interest rates at extraordinarily low levels through to mid-2015 implied that it does not expect recovery anytime soon. That should be a warning for Europe, whose economy is now far weaker than America’s.
Finally, the Fed and the ECB were saying that markets will not quickly restore full employment on their own. A stimulus is needed. That should serve as a rejoinder to those in Europe and America who are calling for just the opposite: further austerity.”
Back to the Brink for the Eurozone? by Kemal Derviş – Project Syndicate
“If conservative politicians and economists in Europe’s north continue to insist on the wrong overall macroeconomic policy mix in Europe, they could yet bring about the end of the eurozone, and, with it, the end of the European project of peace and integration as we have known it for decades. This is not to argue against the need for vigorous structural and competitiveness-enhancing reforms in the south; it is to give those reforms a chance to succeed.”
El FMI cree que el déficit público no bajará al 3% hasta el año 2017 | Economía | EL PAÍS
The IMF doesn’t believe Spain will meet the Maastricht 3% deficit hurdle until 2017. This is mportant because it tells you that Spain is going to miss targets if the IMF are right.
The IMF expects the worst budget results for Europe in 2013 to be in Greece and Spain. What’s more is that the IMF is projecting a deficit next year that is three times the size of Spanish government projections, a clear indication that the IMF doesn’t see Spain meeting deficit targets.
La compra de viviendas aumenta en agosto tras 17 meses de caídas | Economía | EL PAÍS
Spain saw its first uptick in property transactions in 18 months. That’s pretty good to see given how much property prices are burdening Spanish bank balance sheets. I don’t think it will last and believe these prices have much further to drop. But this one data point countering that downbeat view is a good thing if it can be sustained because its usually sales volume that changes first, then come prices.
Fitch ve “altos riesgos” de que Novagalicia Banco acabe siendo liquidada | Economía | EL PAÍS
The Sanish bank Novagalicia is in jeopardy of nationalisation according to the ratings agency Fitch. They rate it BB+. Oliver Wyman claims the company only needs 7 billion euros more capital and has already received over half of this shortfall. This is one group that was known to be selling pref shares and the like to depositors in order to bolster its capital base. It’s only a matter of time before it gets more bailout money.
Germany is expected to have budget surpluses in 2012 and 2013 but the numbers are moving against Germany as economic growth projections diminish
IMF warns of threat to EU banks from capital flight | Business | guardian.co.uk
“Total assets of banks could shrink by trillions of dollars as money is taken out of peripheral eurozone countries”
United States
Audit Notes: Fraud without fraudsters edition : CJR
“Unsurprisingly, it’s the bank as a corporate entity getting sued here, which means no individuals are being held accountable. It’s as if the fraud magically committed itself, without fraudsters. Neither the WSJ nor the NYT points out that no individuals are being sued, much less prosecuted.”
U.S. Sues Wells Fargo, Accusing It of Lying About Mortgages – NYTimes.com
“United States prosecutors sued Wells Fargo on Tuesday, accusing it of lying about the quality of the mortgages it handled under a federal housing program. It was the latest in a series of lawsuits related to banks’ lending practices during the housing boom.
In a lawsuit filed in Federal District Court in Manhattan, the prosecutors accused Wells Fargo, the country’s largest originator of home loans, of defrauding the government for more than a decade. The bank recklessly issued mortgages and then made false certifications about their condition to the Federal Housing Administration, a government agency that insured them, the complaint said.
The problematic loans were not eligible for the government insurance, according to the lawsuit, and when they soured, the F.H.A. was obligated to cover the losses. The Justice Department is seeking hundreds of millions of dollars in damages.”
Romney 49%, Obama 47% Among Likely Voters
“Mitt Romney holds a slight edge over Barack Obama — 49% to 47% — in Gallup’s initial “likely voter” estimate, encompassing interviews from Oct. 2-8. Preferences tilt the opposite way among registered voters, 49% vs. 46% in Obama’s favor.”
Ambassador Died in Smoke While Agents Searched for Him – Bloomberg
“U.S. Ambassador to the United Nations Susan Rice told television news programs on Sept. 16 that intelligence at that point showed the attack started as “a spontaneous, not premeditated response” to demonstrations in Egypt over a “very offensive video.” Then it “seems to have been hijacked, let us say, by some individual clusters of extremists,” she said.
The officials who described the attack yesterday, though, said the State Department never concluded that it began as a protest over the video. There were no protests at or near the compound that day, they said, speaking on condition of anonymity while the incident remains under investigation.”
Money as a passion, not a standard | FT Alphaville
“Is the crisis the result of money having become detached from pain? What’s more, do financial bailouts, QE3, zero-interest-rate policies and easily printed money only detach money ever further from this historical link to suffering? And is this why such policies are currently drawing so much scrutiny and contempt?”
Welcome to the ‘Desert of the Real’ — a postmodern economy | FT Alphaville
“Volatility guru Christopher Cole, who heads up the volatility fund Artemis Capital Management, is known for making interesting arguments when it comes to volatility and risk. Previous philosophical thoughts have questioned the concept of volatility, proposed that risk itself is changing, and that QE and other forms of government intervention are warping volatility beyond recognition.
His latest note, though, takes us to an entirely new dimension of market abstraction.”
Elsewhere
Will Iraq’s energy boom postpone peak oil yet again? – Telegraph Blogs
“Well, here is a shocker for the peak oil camp.
Iraq’s oil output will more than double from 2.6 million to 6 million barrels a day (b/d) by the end of the decade. This is 45pc of world oil supply growth over these years.
It will reach 8 million b/d by 2035. By then, Iraq will have overtaken Russia to become the world’s second biggest oil exporter – supplying China with 2 million b/d in a modern marine revival of the silk trade – and earning $200 billion a year in revenues.”
Unemployment jumps on rising participation – ABC News (Australian Broadcasting Corporation)
“The Bureau of Statistics figures show the jobless rate rose from 5.1 per cent in August to 5.4 per cent in September, which is the highest figure since April 2010.
The rise was slightly higher than the increase to 5.3 per cent which economist forecasts centred on.
The Bureau’s figures showed trend unemployment, which smooths out monthly volatility, remained steady at 5.3 per cent.
However, the rise in unemployment was not caused by job losses in September – 14,500 jobs were created, including 32,100 full-time positions offset by a decline in part-time jobs of 17,700.”
Technology
Confirmed: Apple-owned fingerprint software exposes Windows passwords | Ars Technica
“Security consultants have independently confirmed a serious security weakness that makes it trivial for hackers with physical control of many computers sold by Dell, Acer, and at least 14 other manufacturers to quickly recover Windows account passwords.
The vulnerability is contained in multiple versions of fingerprint-reading software known as UPEK Protector Suite. In July, Apple paid $356 million to buy Authentec, the Melbourne, Florida-based company that acquired the technology from privately held UPEK in 2010. T”
Facebook Fought SEC to Keep Mobile Risks Hidden Before IPO – Bloomberg
“When Facebook Inc. (FB) filed its proposal Feb. 1 to go public, it touted the effectiveness of ads linked to customers’ friends, citing research from Nielsen, the audience-counting company.
Barbara Jacobs, an assistant director for corporation finance at the U.S. Securities and Exchange Commission, was skeptical, as she and her staff vetted the filing to ensure Facebook had disclosed all material information to investors. The claim appeared to be drawn from marketing materials, not a Nielsen study, she wrote to Chief Financial Officer David Ebersman, 42.
She gave him an ultimatum: Produce the study and provide Nielsen’s consent for use of the data — or don’t use it, she wrote to Ebersman on Feb. 28. Facebook dropped the reference after initial resistance.”
Apple PC shipments reach new high of 13.6% despite contracting global market
“The preliminary U.S. estimates from Gartner saw Apple, which shipped more than 2 million units to garner 13.6 percent of the market in the third quarter, remain firmly in third place behind HP and Dell, though both leaders saw double-digit contractions of 19.3 percent and 15.9 percent, respectively. Market leader HP shipped over 4.1 million PCs in the September quarter to capture 27 percent of the U.S. market, while Dell managed over 3.2 million units to end with a 21.4 percent share.”
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