October 28, 2011
I was just going to be lazy this morning and use quotes for this morning’s note, but given the activity out of the EU in the past couple of days, I decided to write a quick summary of the deal coming out of the meetings, which lit a fire under global markets yesterday.
In essence, the holders of Greek debt agreed to take a 50% haircut. Because of the “voluntary” nature of the cut, if anyone voluntarily loses money, the default provisions of the Greek CDS weren’t triggered. The EU, through the EFSF, will provide up to 1 trillion Euro in support for European sovereign debt. Although it is unclear at this point where the 1 trillion Euro will come from, it will consist of existing assets (roughly 350 billion euro), leverage, and possibly sovereign wealth funds or other investors.
The risk are obvious. First, what if they can’t get the assets required to make the leverage manageable? Second, what if, in spite of the added liquidity, the sovereign debt issues don’t go away? A 3:1 or 4:1 leveraged fund could quickly have its collateral wiped out if the global economy doesn’t recover, creating an even bigger problem down the line. The upside is that if global growth reaccelerates, the plan may buy the EU time to catch the tailwinds of the recovery and the economic growth bails them out. Come on recovery!
OK, on to some quotes.
“It's not that liberals aren't smart, it's just that so much of
what they know isn't so." ~ Ronald Reagan
“It’s weird protesting on Bay Street. You get there at 9 AM and the rich bankers who you want to hurl insults at and change their world view have been at work for two hours already. And then when it’s time to go, they’re still there! I guess that’s why they call them the 1%. I mean, who wants to work those kinds of hours? That’s the power of greed.”-Jeremy, 38, Occupy Wall Street Protestor.
The total overall cap [of the ESM] is 500 billion Euros
160 billion Euros has been spent
340 billion Euros remains
340 billion Euros + zero Euros = 940 billion Euros“
- Mike Shedlock, on the latest European ‘Masterplan’ to merge the EFSF + ESM
“The trouble with quotes on the internet is that it’s difficult to determine whether or not they are genuine” – Abraham Lincoln
“The economy needs balance-sheet repair, but very low interest rates together with ample central bank funding and asset purchases delay the recognition of losses and the repayment of debt. Too much capital has been accumulated in the wrong sectors, but the easing tends to favor investment in the very long-lived assets in excess supply (eg construction). The bloated financial sector needs to shrink, but the easing numbs the incentives to do so and may even encourage punting. The financial sector needs to generate healthy earnings, but as short-term interest rates approach zero and the yield curve flattens, they compress banks’ interest margins unless banks take on more interest-rate and, possibly, sovereign risk; and as long-term rates decline, they can generate strains in the insurance and pension fund sectors. Thus, as the easing continues, it raises the risk of perpetuating the very conditions that make eventual exit harder. A vicious circle can develop. Put differently, when dealing with major financial busts monetary policy addresses the symptoms rather than the underlying causes of the slow recovery. It alleviates the pain, but masks the illness. It gains time, but makes it easier for policymakers to waste it.”—Claudio Borio, BIS
“I remember sitting in his back yard in his garden one day, and he started talking about God. He said, "Sometimes I don't. It's 50-50. But ever since I've had cancer I've been thinking about it more, and I find myself believing a bit more. Maybe that's because I want to believe in an afterlife, that when you die it doesn't just all disappear. The wisdom you've accumulated, somehow it just lives on." But then he paused for a second and he said, "Yeah but sometimes I think it's like an on-off switch. Click, and you're gone," he said. Paused again and said, "And that's why I don't put on-off switches on Apple devices."—Walter Issacson, Steve Jobs’ Biographer
After observing Occupy Wall Street protestors in front of a bank in New Haven, CT last Sunday, seventeen year-old high school senior Justin asked his father “do you think they know that the bank is closed today?”
Game 7 tonight!
Have a great weekend