Weekend Links

How many years has the economic crisis set back the most affected countries?

China's foreign exchange reserves move the Euro.

Is an engineering degree better than an MBA if you plan to start a company?

Marketing dollars vs. the time spent by consumers on different categories of media.

With more investors entering the market and less interest in homeownership, the US is seeing the number of homes rented increase.

The MF Global fallout and other links

• I am surprised the markets shrugged off the MF Global loss of client funds so easily.  I am hopeful that the end result will be tighter restrictions to prevent such losses in the future.  Until this happens though I would have thought risk premiums might need to widen generally or a least some other brokers might suffer as customers gravitated towards the strongest.

• A retrospective on housing market declines that looks at where Australia might be in that process.  Real estate still seems expensive in Australia and with China likely to be shoring up its economic growth this year, I don't think AUD interest rates will be adding price support to housing.

• A study that looked back at asset backed securities and their ratings histories found that the securities included in CDOs later experienced worse ratings downgrades.   The conclusion implied that CDO sponsors were exploiting some kind of information advantage to skew the results that the buyers experienced.  This was the case even when controlling for yield which is where I would normally expect default expectations to be priced.  The authors looked at the entire asset-backed universe but CDOs were concentrated in the housing and commercial real estate sector.  I may have missed where the ABS sector was controlled for but if it was not controlled for I could see how warped investor demand for housing CDOs led to warped housing prices and ultimately very poor performance of housing ABS without needing asymmetric information between CDO sponsors and buyers.  I don't know what really happened of course, but the explanation from the authors seems like an elaborate and difficult application of exceptionally good ex-ante judgement.  Such good judgement is both valuable and rare so it is best applied with simpler strategies and fewer moving parts to depend on.

• The Euro is getting whipped around by the vicissitudes of Greek restructuring talks and record short interest in the Euro.  It seems to me the Euro goes down when it appears Greece will stay in the Eurozone. Many news stories seem to be attributing the opposite affect and equating a solution that maintains the current membership as reason for a strong Euro.  Weakening makes more sense to me both with the growth through currency devaluation necessary to stabilise debt to GDP ratios and also the precedent set for the Euro if weak members leave.  (update 28/01/2012: A good example comment on the Euro - "A broadly weaker dollar is being sapped by the Fed’s dovish stance, which is lifting the euro and gold despite there being no resolution on Greece’s debt negotiations."  The Euro is up against the JPY and AUD)

• Apples earnings report was impressive but they might need a new slogan.

Weekly summary: Stopped out of gold short

I stopped out on the way back up through 1250 today.  It tested down through its 20 day average on Wednesday but didn't stay below for long.  There is some chance the bounce back was expiry related but gold continued higher after the expiration.  Any trapped longs from Monday's breakout have surely been stopped or replaced by stronger hands by now negating one of the drivers for the trade.

The gold rally might get tested in the near-term with the Eurozone fright having past and China resuming currency liberalisation.  I expected a bit more risk seeking this week as markets moved past the fears of a few weeks back but the results were pretty muddled.

• Bonds are still pressing highs but momentum is ebbing.
• Gold is similar with early weakness giving way to a weekly close near highs.
• Equities are heavy but holding recent lows.  It is tough to gauge the impact of the US financial reform debate, with banks trading relatively heavy but wider market moves not reacting to the news flow on that topic.
• the Australian dollar and Canadian dollar should benefit a lot from stabilising macro news.  Both got dumped more on liquidity than fundamentals when the Euro made lows.  The movements this week support the story that stability is returning but only weakly with movements being a bit lacklustre.  Action in the AUD may be slightly muddled by the Australian leadership change but the big news on that front is probably yet to come as the mining tax negotiations get underway.  

On the Eurozone fright, I don't think I had given enough weight to the idea the Germany could abandon the Euro.  The smaller size of the PIGS, and particularly Greece, made me quickly assume that either Greek debt would be written down or Greece would leave the union.  How can anyone benefit from a currency union where the strong members are encouraged to leave?  Anyway, with the Euro keeping gains and moving up through the week my view may be becoming more mainstream.

On China, it seems like the world is still debating whether the announcement last weekend really means anything (or this).  China is in an odd spot of wanting to dip a toe in with gradual currency movements but knowing that once its intentions clear the market will front run the policy.  This makes timing difficult but ultimately it all appears to be heading toward a stronger yuan and stronger Chinese consumption.  This may uncover some domestic imbalances as it goes forward but near term this also points towards stability.

I also wonder if the traders aren't a bit too negative on the G20.  The view seems to be that either there is nothing to talk about or talks might degenerate into an ugly round of finger pointing.  I expect politicians will err on the side of vague positive statements and keeping disagreements out of the public eye.  Even acknowledging that the world can not return to the pre-2008 configuration of trade and capital flows might be viewed as above expectations.

Weekend links: Australian commodity risks, Permabear update, Record GLD holdings, and the Canadian dollar recovers

A few quick links:

Australia's ability to service foreign debt more dependent on strong commodity prices  than housing.  (datadiary.com)

The permabears: where are they now? (Businessweek.com)

Gold holdings of the GLD exchange traded fund reached a record high. (Marketwatch.com)

The Canadian dollar is recovering better than other risk assets. (financialpost.com)

Enjoy the weekend!

Memorial Day Links: No Bubble in Australian Housing and Greek Problems Continue

"The short story is that the escalation in housing costs has been mainly motivated by underlying demand- and supply-side fundamentals, not leverage as some doomsayers would have us believe. "


“Could this be the last weekend of the single currency? Quite possibly, yes.” (Hat tip Calculated Risk)