Recap 10-3-11

Main Items:

· US PMI improved to 51.6 in Sept vs 50.5 exp and 50.6 prev.

· Greece confirmed Sunday that it would miss the deficit targets outlined by the IMF / EU. The budget deficit will reach 8.5% of GDP this year, missing the 7.6% target.

· Spain’s banks are concerned that some of the country’s regional governments might default on some of their debt obligations before the end of the year. Dow Jones

· China suspends ~80% of new railway construction projects pending the clarification of government policies for the sector. The completion of many projects has been pushed back 1 year. In addition to safety issues, the Railway Ministry is facing a high debt burden. “Almost all banks have stopped lending for railway construction” – Reuters


· EU Sept PMI:

1. UK PMI Mfg improved to 51.1 vs 48.5 exp and 49 prev

2. Italian Mfg PMI improved to 48.3 vs 46.5 exp and 47.0 prev

3. Both French and German Mfg PMI was revised higher.

4. Norway Mfg PMI was roughly unchanged at 54.8 vs 54 exp and 55.4 prev

5. Swedish Mfg PMI improved to 48.1 vs 47.5 exp and 48.7 prev

6. Swiss PMI declined to 48.2 vs 50.5 exp and 51.7 prev

· Asia Sept PMI:

1. Chinese Mfg PMI improved to 51.2 vs 51.1 exp and 50.9 prev.

2. Chinese Non-Mfg PMI improved to 59.3 vs 57.6 prev

3. Australia Mfg PMI declined to 42.3 vs 43.3 prev


The price action today was sharply at odds with the data. The majority of global PMI data was at consensus or better than expected. We also saw some small upgrades to the US GDP forecast. My guess is that the price action is due to a combination of unfinished month end flows as well as worries that Dexia is going to implode. This shouldn’t be much of a surprise – Dexia is levered almost 100x, and Greek exposure represents 2/3rds of tangible equity.

As a result, the probability distribution of near term outcomes appears especially binary. My guess is that it will eventually work out because the Dexia’s exposure to the periphery, while massive relative to its equity base, appears manageable in the context of Benelux’s 1trn GDP. Dexia’s Greek and Portuguese debt total 5.4bn and Italian and Spanish debt 17.3bn. However, Belgium has been without an official government since June 2010, and now has the dubious distinction of being the world record holder for the length of time without a government. This is, as they say, a problem.

On a lighter note, the annual Ig Nobel prizes were chosen on Friday. My two favorites:

Peter Snyder, a professor of Neurology at Brown University in Providence, Rhode Island, was part of two research teams who won the Medicine Prize for studying how the urge to urinate affects decision-making. Snyder’s team set up an experiment in which volunteers did computer tests and then periodically drank 250 ml (about 8 ounces) of water as the scientists measured the effects of the volunteers’ gradually swelling bladders on attention and working memory. The aim was to see who could last the longest before bolting for the toilet. The study found that attention and working memory suffer when you are so focused on having to pee.

Makoto Imai, Naoki Urushihata, Hideki Tanemura, Yukinobu Tajima, Hideaki Goto, Koichiro Mizoguchi and Junichi Murakami of Japan for determining the ideal density of airborne wasabi — a pungent horseradish — to awaken sleeping people and for applying this knowledge to invent a wasabi fire alarm.


2 thoughts on “Recap 10-3-11

  1. It’s very interesting how US fundamental remain okay, but the capital markets seem to be pricing in a recession. In particular if you look at EM – fundamentally they continue to grow, but over the past several months their currencies and capital markets have been hammerered.

    In order for there to be a true recession in the US, companies would have cut-back – but that hasn’t happened, and most likely won’t as companies are already lean and de-levered – ex the financial sector. If you accept that line of thought, then there shouldn’t be layoffs – but I suspect companies will also be reluctant to hire which inevitably pushes the unemployment rate up as a new crop of employable individuals enter the market each year. Do you agree with this line of thought?

    Fundamentals aside, CDS levels on the broker dealers look downright scary. I’m very much in fear of the market pushing a major American broker dealer over the edge – not sure what the consequences of that would be. What are the implicaitons of this?

    1. Hi P –
      I agree that the probability of a painful recession in the US is quite low, for the reasons you cited. However, the UE rate may increase a bit faster or more than expected the small & medium businesses create and let go an outsized number of jobs, even relative to their total weight in the economy. As a result, sudden tightening of credit may well have an outsized impact.

      US financial CDS price action is certainly scary. I am less sure, however, that any will fail and if they do, whether unsecured creditors will be impacted. The liquidity position as well as aggregate exposures to the EU all look manageable. And as bad as the political situation is now, especially with respect to the banks, I believe both Geithner and Bernanke will act aggressively to prevent a disorderly default of any US broker dealer, although it is quite likely that equity holders will be wiped out. The only way the market can force a broker dealer default is via a liquidity crisis, and the bank’ low leverage levels and the Fed’s discount window effectively limit this risk, IMO.

      I think even if a broker dealer does go, we will not get to 2008 type levels, because people have taken some steps to prepare for it. Like you said, corporate balance sheets are flush, which means the trade disruptions we saw in 2008 will be much more muted. Recourse leverage across the system is much reduced, and a number of central bank liquidity provisions remain in place to make sure solvent financial institutions have access to liquidity.

      That’s my 2 cents, anyway.

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