Q2 ended

ECB rolled it all over

Greece weathered the quarter end storm without going parabolic as in previous spikes, as ECB buying continues to provide the secondary market liquidity that enables dealers to buy the auctions.

Euro back up towards 1.24

This would be the time for equity markets to bottom and start discounting fading solvency risk

Might get a temporary pull back on tomorrow’s employment report but seems a weak economy is already fully discounted by US equities, probably also well beyond the actual weakness.

15 Responses

  1. “seems a weak economy is already fully discounted by US equities, probably also well beyond the actual weakness”

    Really? I guess this may be a matter of opinion and/or valuation approach (many disagree with your statement), but it would be interesting to see you discuss your views on the stock market in more detail some time, given that you often comment on its valuation in brief, alongside other topics.

    Certainly stocks have fallen in relative terms over recent months, but do you presume they must have been fairly valued before this most recent correction? Maybe you are only talking short term reactions, so of course you are right that “fading solvency risk” should induce a rally.

    But since you have a background in markets and have generally seemed neutral to bullish toward equities, I’m curious if you feel like sharing your thoughts on sustainability of historically high margins in the face of persistent disinflationary/deflationary forces even amid “muddle through”. For a couple recent examples of data/graphs, see here and here. (I have some mixed opinions but won’t list them here). Of course none of this matters as much as the real economy and jobs so I’ll understand if you don’t expand on your market commentary 🙂

    1. margins are a result of pricing power, generally due to limited competition especially where products and services are continuously being updated and have a competitive advantage for a while, and not necessarily excess demand per se

  2. “ECB rolled it all over.”

    Yeah, so they’re “printing money!”

    You can’t have it both ways. When the Fed does this they jump all over the dollar because they say it’s money printing. But when the ECB does this (in quantities that it took the Fed months to achieve) that’s bullish for the euro???

    1. “Printing money” is when the CB create money for the benefit of democratically elected governments and is, of course, the work of the devil. “Quantitative easing” is when a CB creates money for the benefit of their fellow bankers. That’s always good. After all, everyone knows that Jesus had a special place in his heart for money changers—oh, or am I remembering that wrong?

      As an ethical question, this is a tough one, since the ECB efforts help banks and governments— however since the goal here is to create money to bail out the national banks, I suppose any incidental and perhaps unavoidable, help given to governments can be forgiven ( the rule of double effect and all that). :o)

      so yes, bullish for the euro!!!

      1. The German banks looked into the abyss and gave the ECB the nod to roll the presses.

    2. it’s bullish for the euro because it removes solvency risk that was causing portfolio shifts to weaken a fundamentally strong currency.

      the dollar was not pricing in solvency risk and states leaving the union when the fed did qe.

      and qe was fundamentally bullish for the dollar as it tightened fiscal effects.

  3. The point is this: Warren admitted that the Fed’s rate reductions and eventual QE was bearish for the dollar, yet he says that what the ECB has done is bullish for the euro.

    You can’t have it both ways. If you try to do that then your analysis lacks consistency.

    On the other hand, if that’s how markets treat these moves then the markets are irrational and if so, what is the point of trying to analyze them at all? It’s better to just follow the trend and jettison all fundamental analysis.

    1. Mike, I think the difference between the EU and USA case is the solvency issue with the national banks.

      1. We did the same thing with TARP with our banks here in the U.S. and the dollar was hammered.

        It doesn’t matter what it is for. As Warren said on his Fox Business interview, “It’s all the same money…the numbers in a bank account are simply marked up.”

        If that’s the case and the ECB “marked up” numbers in a bank account causing the euro to rally, then marking up numbers in a bank account in the U.S. should have had the same effect (stronger dollar) if the markets were rational. But the effect was exactly the opposite.

        The markets are irrational, which means they are not disposed to rational analysis and the analyses that Warren uses is therefore inconsistent. You can’t say that addressing the solvency issue in the Eurozone is bullish for the euro, but addressing solvency issues in the U.S. by exactly the same means, is bearish for the dollar. You simply can’t if your analysis is going to be consistent.

    2. the rate reductions and qe were fundamentally bullish for the dollar, as they tightened fiscal.

      any selling was technical and short term, and later reversed.

      1. the interest paid on tsy secs was down last time i checked even though the total outstanding tsy’s went up?

        also, the fed turned over 50 billion to the tsy from qe interest that would have gone to the private sector.’

        also, while savers lost interest income, borrowers didn’t gain much as bank net interest margins widened, and banks don’t ‘spend’ any of that the way savers do.

        that all cut into agg demand.

  4. Mike, I have a fried that trades bonds. He has studied this for decades and concluded that it is only possible to trade effectively very short term, day to day, and he trades both sides. He evaluates his position daily, He does not trade intra-day. The longest he is like to hold a position is about three days. He leverages strong signals higher and weak signals lower. This way he is always in the market.

    He has concluded that it is all technical, and fundamentals are insignificant in trading.

    1. I’m beginning to think your friend is right. For example, we all know that the credit rating of the U.S. has ZERO effect on the ability of the U.S. to satisfy any and all obligations denominated in dollars, yet when the ratings agencies downgrade the U.S. credit rating (and believe me, they will!) the bond market will be sold heavily resulting in a huge decline.

      1. Wow, talk about tugging on Superman’s cape. The credit agencies are all regulated by the US Government. Downgrading Uncle Sam’s credit rating would have such a catastrophic effect on the market (think of all the pension, mutual fund and money market funds required to hold AAA securities), that the agencies should go ahead and downgrade their own credit ratings at the same time. Congress won’t waste any time shutting them down.

        The President and Congress do not work for the bond market. The only way that will sink in to anyone is if the Government solely funded its deficits with sovereign credit and not sovereign debt (i.e. Tsy issuance of greenbacks instead of bonds with the Fed pegging the FFR, if at all, with IOR). If the market needs gilt-edged securities, the US Government can guarantee State bonds.

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