Tuesday, February 16, 2010

Downhill

Congratulations to Didier Defago, new Olympic downhill champion, for conquereing the Dave Murray course yesterday in Whistler. The run is the second longest in Alpine skiing (behind Wengen in, perhaps uncoincidentally, Defago's home country of Switzerland), and as such requires a substantial degree of stamina. It was this endurance angle that made yesterday's competition so compelling, as the fastest skier on the top half of the course (Bode Miller) plainly ran out of gas further down the mountain; it proved to be impossible to determine who the ultimate winner would be on the basis of the splits throughout the race.

It seems as if risk-asset bears will require a bit of stamina as well, as the downhill trajectory of global markets is proving to be as treacherous and bumpy as the Dave Murray. Stellar headline results from Barclays have given stocks an early-session fillip, and no doubt punters are wondering if "Magic Monday" will transmogrify into "Terrific Tuesday" courtesy of yesterday's US holiday.

Yet beneath the surface, tensions still bubble along. The Greek situation remains unresolved, and Ecofin president Juncker rubbished the notion this morning that the IMF could be of any assistance whatsoever. OK, fine, but what are the alternative solutions? A European bailout seems like a pretty unpalatable solution for obvious reasons; in addition to the questonable legality of such an outcome, it's not exactly a vote-winner in the core of EMU to subsidize a country where the national sport is tax avoidance.

So what are the options for Greece? The country is threatened by both liquidity issues (its ability to roll over debt) and solvency concerns (its ability to pay off principal and fund its ongoing outlays.) Fiscal reform is unlikely to bear immediate fruits of such richness that these problems will vanish. So what can they do?

It's impossible to formally deval within the Eurozone, though they can effect a de facto "financial devaluation" on both the liability side (via bondholders' haircuts) and the asset side (via a substantial wealth tax.) Neither of these will prove sufficient to permanently solve Greece's problems, however, especially given that they do nothing for Greece's competitiveness on the trade front.

The most likely option at this juncture appears to be what might be called the "Thriller" approach, i.e. muddling through, fighting fires on a case-by-case basis, and slowly turning into a zombie.

In any event, just because the course of markts has flattened out a bit for the time being doesn't mean that there aren't dangerous dips in store for the intrepid skier of financial markets. Over the past couple of days the ECB has seen decent demand (~€4 bio/day) for funds at its marginal rate of 1.75%; one wonders what sort of institution that has eligible collateral to borrow with this facility couldn't find cheaper funds elsewhere (such as, er, EONIA.)

In the context of yesterday's comment on the fictional nature of benchmark short rates, this demand for funds is interesting, to say the least.

Elsewhere, curves ontinue to steepen to relatively extreme levels; the US 2-10 swap curve is now basically at its steepest level of the past two decades (and that's with 10y swap spreads at an egregiously low level!) Sadly for the punter wishing to take the other side, the negative of the flattener is close to prohibitive; the 2-10 curve one year forward is nearly 90 bps below spot.
Still, at some point the flattener will start to appeal. In the last two US monetary policy cycles (really, the only two of the "swaps era"), the curve started flattening well before the Fed started putting rates up: more than a year, on average. Given the negative carry, now might not be the time to think about this trade, but should the carry become less onerous it will starg to look migty attractive. Moreover, the front end of the swap curve could come under pressure if the outlook for the financial system (jnspired by a Greek haircut/default, perhaps?) starts going downhill....

25 comments:

Anonymous said...

I like the fact that you follow the alpine disciplines in Vancouver.

As a Norwegian I was ~100% confident that Lund Svindal was without chances when he was 0.80 behind Miller at the second (?) split.

What an exciting race..

Anonymous said...

Just saw a bit of snowboard myself

The Winter Olympics - the last refuge of the white athlete ?

Rossco said...

If Greece gets downgraded in the interim and their bonds become ineligible as ECB collateral, do we get a short term spike in demand for euros ?

Matt Johnson said...

hmm, how about a spot of bullish flattening? i think that the inflation premium is much too high. i think the discount rate hike is preperation for dealing with the reserve bomb (that probably won't go off), and my guess is that we'll see bullish flattening as core inflation grinds lower and lower. if you pull out some odd turds like tobacco (the 250% excise hike) core inflation is s lower than most realise.

i just posted on this very topic today

http://ricardianambivalence.wordpress.com/

Macro Man said...

@ Anon # 1, I was pleased to seee Svindal do well. He comes across as a pretty good guy (he was interviewed by Michael Johnson on a BBC special last week), and it's always good to see someone come back from a bad injury and do well. I wonder if he is available to give English lessons to professional athletes in England and the US?

Anonymous said...

How about the ECB buying EUR to stabilize the markets? ...
Ed.

Anonymous said...

Remember the Treasuries` pie reshuffle; TIC is out.

Miss both Jansen & Setser ...

leftback said...

"How about the ECB buying EUR to stabilize the markets? ..."

They wouldn't... they couldn't..!! Ha ha ha.

Enjoyed the comments re: the short end yesterday, but it seems like one of those all-pain no-gain trades right now. If the deflationists prove correct, then all the money would be made at the long end anyway, so the short end represents mainly risk. It is interesting to see that TIPS fever seems to be abating and they are trading down, along with junk, as the short dollar trade slowly unwinds.

Anonymous said...

Liquidity crisis? Let's go JCT, another round of Ouzo for the boys...

Anonymous said...

BTW, what's the line from the deflationists re: UK inflation?

leftback said...

"another round of Ouzo for the boys..."

You know you're going to hate yourself in the morning...

"what's the line from the deflationists re: UK inflation?"

depends on how QEasy UK Govt is feeling, old chap. May moderate if the € continues to weaken.

LIQUID MAN said...

what alternative are there to EU or IMF assistance? RUssia. Greece is meeting with them today or in the coming days. Russia has a geopolitical interest in helping them out before germany does and with less strings attached.

Anonymous said...

Russia needs whatever cash it has on hand to defend the ruble should it weaken again. Their big move into Euros over the past few years isn't looking too keen. Hence they're talking IMF/WB bailout.

leftback said...

The Russia gambit isn't going to fool the ECB.

Despite the 80% popular opinion in Germany against a bailout, some kind of deal will be struck and the Euro will then decline, assisting German exports as the world economy begins to slow from the Chinese stockpiling that was 2009.

leftback said...

The Russia gambit isn't going to fool the ECB.

Despite the 80% popular opinion in Germany against a bailout, some kind of deal will be struck and the Euro will then decline, assisting German exports as the world economy begins to slow from the Chinese stockpiling that was 2009.

Ouzo Man said...

Queue Gary #1 to explain how there will be no German funded bailout.

Ouzo Man said...

Cue rather... that was the Ouzo talking.

leftback said...

Greeks bearing gifts

Anonymous said...

This is what happens when the Ouzo runs dry.

leftback said...

Absolute belter at the San Siro tonight, MM. Shame you weren't in Manhattan the previous week, we could have used another brutally uncompromising full back.

Anonymous said...

You have said lots of things all these days about the Greek drama. I could add many more since i am Greek but i rather amuse you with one of the best songs ever.
Lately it seems to me that it could have been written regarding my country as Miss Lonely.
Today after the explosion news of JP Morgan offices i fitted in and the final verse :
"When you got nothing, you got nothing to lose"
Bob Dylan, Like a Rolling Stone

soekid

patfla said...

This is an interesting take on the situation in Greece and, it's claimed, by someone who's Greek. Based on what's written, my instinct is to accept that claim.

As reposted on Paul Kedrosky's blog.

http://paul.kedrosky.com/archives/2010/02/greece_our_debt.html

Ouzo Man said...

That anonymous Greek banker comes off a bit goofy if I may say so. A lot of chest puffing about how rich and sly the Greek public is with scant regard to the political realities that are overhanging the country.

Lest we forget, Greece was occupied by the Turks from 1453 until the early 19th century, again occupied by the Nazis, and then suffered a brutal civil war where Stalin's Communists nearly took over the country.

Now the Socialists have regained power and are under enormous pressure by the left-wing extremists wielding riots, bombings and general strikes.

To hear this guy tell it, none of that is relevant because, hey, Greeks are really good a tax evasion. Poppycock.

Anonymous said...

To be called anonymous from someone with nickname Ouzo Man....
No Mr Ouzo i am not anonymous since my nick is on the lower left part of the comment.
I am not a banker either.
Now considering that enormous pressure you refer to, please allow me to tell you that all the left parties in Greece are less than 12%
while the Socialist party won by more than 10% from the second with 44% just 4 months ago.
Also i inform you that the Conservative party -the second one-
with 33,5% is in full agreement as far as the economical reform needed since that was the reason the early October election took place.
As far as the tax evasion concern i could accept that comment from you but to accept such a comment from Jean-Claude Juncker whose day job is Prime Minister of Luxemburg, a country known as tax heaven for off-shore and holding companies is a litlle bit hard to swallow....


soekid

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