Flashman Letters

Eurozone Imbalances Weaken Trust in The Euro and Undermine Euro Area Cohesion | afoe | A Fistful of Euros | European Opinion

The EU’s own analysis of the problems in the Eurozone is coming nearer and nearer to that of both the IMF and the credit rating agencies. We are moving beyond short term fiscal deficit issues, and immediate liquidity issues, towards problems like competitiveness, and what was previously a taboo subject - the issue of Eurozone imbalances. These were, in fact, supposed to disappear with the passage of time, so it was expected that they would have diminished rather than increased. In that sense there is now an implicit admission that the institutional environment in which the common currency has been operated was severely deficient and badly needs to be improved. In my view this change in approach is already a big improvement, as is the fact that people are begining to face up to the reality that the Euro has exacerbated the imbalances, rather than reducing them.

In particular the Commission seem to be starting recognising that countries like Spain whose main export became pieces of paper (or IOUs on their future) which were securitised against assets which we can now see didn’t have the value they were thought to have (the housing stock, or should I say glut) entered a dynamic which was seriously unstable. Now we need to see the measures which can be applied for correcting these distortions.

via fistfulofeuros.net

Squeezing More Oil Out of the Ground: Scientific American

Chevron began to achieve its miracle in the 1960s by injecting steam into the ground, a novel technology at the time. Later, a new breed of exploration and drilling tools—along with steady steam injection—turned the field into a sort of oil cornucopia. Yet, Kern River is not an isolated case. Most of the world’s oilfields have revived over time. New exploration methods have revealed more of the Earth’s secrets. And leaps in extraction technology have led to tapping oil in once-inaccessible areas and in places where drilling was once uneconomic. In a way, technology is the real cornucopia.

via www.scientificamerican.com

Pretty Scary

The government had only to show probable cause to believe that it was connected to drug activity, or the same standard cops use to obtain search warrants. The state was allowed to use hearsay evidence—meaning a federal agent could testify that a drug informant told him a car or home was used in a drug transaction—but property owners were barred from using hearsay, and couldn’t even cross-examine some of the government’s witnesses. Informants, while being protected from scrutiny, … could receive as much as one-quarter of the bounty, up to $50,000 per case. …

Justice Department’s forfeiture fund … as of 2008 assets had increased to $3.1 billion. … Almost half of surveyed police departments with more than 100 law enforcement personnel said forfeiture proceeds were “necessary as a budget supplement” for department operations. …

Less than 20 percent of federal seizures involved property whose owners were ever prosecuted. … More than 80 percent of federal seizures are never challenged in court. … In many cases the property was worth less than the legal costs of trying to get it back. … Forfeiture defendants can’t be provided with a court-appointed attorney. …

To even get a day in court, owners were forced to post a bond equal to 10 percent of the value of their seized property.  The average DEA property seizure in 1998 was worth about $25,000. In 2000 a Justice Department source told the PBS series Frontline that this figure was also the cutoff under which most forfeiture attorneys advised clients that their cases wouldn’t be worth pursuing. …

via www.overcomingbias.com

Measuring crowded trades in financial markets | vox - Research-based policy analysis and commentary from leading economists

Data on crowdedness could potentially be useful to fund managers. Economic intuition suggests that as more speculators move into a trade, prices adjust and expected returns fall for speculators who come afterwards. When investors buy an undervalued currency, at the margin the spot rate appreciates and the currency becomes less undervalued. When investors swap out of low yielding securities for higher yielding ones, there is pressure to shrink the yield differential, lowering expected returns from the carry trade. (See also Jylhä and Suominen 2009). Trend following could be an exception whereby speculators piling into a trend help exacerbate and extend the trend, thereby attracting other trend followers. But under the notion that “trees do not grow to the sky,” trending currencies may become overvalued, making it risky for late arrivers to a trend-following strategy. Knowing that a certain trade had become crowded would likely encourage managers to look elsewhere rather than piling on and adding to the crowdedness and risk of trading style. Indeed, this conclusion is reached by Robert Litterman, managing director at Goldman Sachs Asset Management as reported by Reuters, “Quant hedgies must fish in fresh waters – Goldman,” in December 2009.

via www.voxeu.org

Rajiv Sethi: Identifying Bubbles

This basic idea has been used previously in a number of event studies. David Bates, for instance, found that "out-of-the-money puts, which provide crash insurance, were unusually expensive relative to out-of-the-money calls" during the year preceding the 1987 stock market crash. He interprets this as reflecting "a strong perception of downside risk" over this period. Joseph Fung found that implied volatility deduced from the prices of index options rose sharply in May and June of 1997, predicting the Hong Kong stock market crash of October 1997. He concludes that "option implied volatility could be incorporated into an early warning system intended to indicate large market movements or crisis events." There were no index options traded at the time of the 1929 crash, but Rappoport and White used data on brokers loans collateralized by stock (which they interpret as a option-like contract) to ask whether the crash was predicted. They found that:

During the stock-market boom, "the key attributes of brokers' loan contracts (the interest rate and the initial required margin) rose significantly, suggesting that lenders felt a need for protection from a sharp decline in the value of their collateral... The rise in the margin required and the interest rate charged suggest that those who lent money for investment in the stock market (bankers and brokers) radically revised their opinion of the risks inherent in making brokers' loans as the market climbed and once again when it collapsed.

via rajivsethi.blogspot.com

Fannie Mae: Delinquencies Increase Sharply in November - What Recovery

Click on graph for larger image in

via www.calculatedriskblog.com

Greek burdens ensure some Pigs won’t fly

It is one thing to provide financing to a country or a company that is generating strong internal cash flows and got into trouble only because of excessive investment (the case of Ireland and Spain). It is quite different to prop up one whose equity is being eroded because internal cash flow is not even sufficient to maintain the capital stock (Greece and Portugal).

When taking over a company in distress, one does not consider only the views of management. Similarly, a bail-out of a country makes sense only if all stakeholders contribute. Saving a country that is consuming too much makes sense only if the entire body politic accepts that more than a fiscal adjustment is required. Deep cuts in private sector wages and consumption are needed before any outsider should even consider stepping forward.

via www.ft.com

Funds flee Greece as Germany warns of "fatal" eurozone crisis - Telegraph

The yield on 10-year Greek bonds blasted upwards by over 40 basis points to 7.15pc in a day of wild trading. Spreads over German Bunds reached almost four percentage points, by far the highest since Greece joined the euro, and close to levels that risk a self-feeding spiral. Contagion hit Portuguese, Spanish, Irish, and Italian bonds.

George Papandreou, the Greek premier, said in Davos that his country had been singled out as the weak link in a "attack on the eurozone" by speculators and political foes. "We are being targeted, particularly by those with an ulterior motive."

via www.telegraph.co.uk

Massive Earthquake Reveals Entire Island Civilization Called 'Haiti' | The Onion - America's Finest News Source

"That an entire civilization has been somehow existing right under our noses for all this time comes as a complete shock," said University of Florida anthropology professor Dr. Ben Oliver, adding that it appeared as if Haiti's citizens had been living under dangerous conditions even before the devastating earthquake struck. "Of course, there have been rumors in the past about a long-forgotten Caribbean nation whose people struggle every day to survive, live in constant fear of a corrupt government, and endure such squalor and hunger that they have resorted to eating dirt. But never did we give them much thought."

Added Oliver, "Had it not been for this earthquake, I doubt we would have ever noticed Haiti at all."

via www.theonion.com

China Financial Markets - No one has the slightest idea - Better said lots of smart people have all sorts of different ideas:

The point of all this is to suggest the richness and even ferocity of the internal debate taking place within China.  There is a tendency I think, especially among the foreign cheerleading fraternity, to ascribe a unanimity of opinion within China and to see this both as a good thing and as a confirmation of the views of the cheerleaders.

I would argue that this is wrong on all three counts.  First, there is most certainly no consensus.  The debate in China is as fierce and as well-informed as it is anywhere in the world.  Second, unanimity, or even strong consensus, would not be a good thing for China.  Given how complex matters are, any strong consensus would simply represent a failure to debate the issues, and a corresponding increase in the probability of making horrible policy mistakes.  In fact if there is a rapidly growing consensus about anything it is that policymakers seriously flubbed the chance to force through adjustment measures, such as a revaluation of the RMB, earlier when conditions were much more propitious and when the cost of adjusting would have been much lower.  Third, cheerleading tends to occur far more enthusiastically among foreigners than within China.  That is clearly a good thing.

via mpettis.com