About This Space…

I might as well say it here, even though it has been on Twitter while I was on vacation. My macroeconomic goodness is moving to The Davian Letter and Minyanville.  So I guess I know who my two readers were: an investment newsletter and a financial infotainment website. Thanks for all the pageviews, guys.

But I don’t want to give up this space. I enjoy using it and I want to see what else can be done. Maybe I’ll turn it into a photoblogging site. Doubt it, though. I mean, I may be the only person on Twitter that actually admits I have mental diarrhea. There’s no way I’m going to comply with a STHU memo that easily. Plus, I fear my mental diarrhea is just getting worse and no amount of mental Maalox or Phillips Milk of Magnesia is going to help.

So I’ll just have to figure out what to do with the space in the meantime…

So stay tuned.

And thanks for stopping by, San Diego…

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Forgetting Faux Stress Tests, Reclaiming Experience and Possibly Ourselves

Today was some day.  While I’m on vacation, the release of the European bank stress tests was a big enough event for me to at least keep tabs on while I was away…

And then came the leaks.  What was stressed.  What wasn’t stressed.  How much.  How little.  The reaction to the test was a given at that point.

So while I was sitting in the cottage reading “Flow,” I was struck by this sentence on Reclaiming Experience:

There is no way out of this predicament except for an individual to take things in hand personally.  If values and institutions no longer provide as supportive a framework as they once did, each person must use whatever tools are available to carve out a meaningful, enjoyable life.

This is about finding happiness wherever you are, no matter what your predicament.  There was nothing any of us could do about the construct of the stress tests, we just had to choose how to react and figure out how to trade in markets after it was announced.  There’s nothing we can do about unemployment numbers or Fed interest rate decisions or even if we get fired from our jobs.  Ours is simply to choose how we will respond.  Even sitting back and watching reactions is a reaction, after all.

To be honest, finding a sense of contentment (I won’t even go so far as to call it happiness because what is that, anyway?) and balance has been problematic for me over the past three or four years.  I don’t think I’m alone in saying that.  So I’ve been on a quest to reclaim a part of me, or perhaps a better version of me, even if it only existed for a fleeting moment.

So when my wife got this picture…

I was thrilled.  You see, I call this guy “The Dude.”  Do I know if he bowls and has an eye for carpets that pull a room together?  No.  But this is actually a formal photo of the man.  Usually he’s just in swim trunks and sunglasses, sometimes with a boogie board under an arm.  Riding around barefoot and shirtless, he epitomizes contentment.  He could spend his days shoveling poop when he’s not visiting friends and family in the hospital, nursing home or cemetery for all I know.  The point is, when you see him, whatever bad events may be going on in his life don’t get him down.  That was a choice.

We had been trying to get a picture of him for four years now.  This time we got him.  So maybe there’s hope for us. Maybe Paradise isn’t lost.  Maybe we can get back to that place in our minds we once knew and we felt good.

Before the Dark Times.  Before The Deleveraging…

At any rate, I’m choosing to believe I can get back there.

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In Other News

I know Bernanke spoke today.  Frankly, I don’t care at the moment.  He said what he said, the market reacted the way it reacted to that message.  I’ll get back to that soon enough.

But for now, the biggest going on here in Kure Beach?  We arrived at our favorite cottage (i.e. home away from home)…

We went to a ribbon cutting since our friends took over management of a new property.  A place that has been there since the 1930s…

And the one and only Gyro stand with a walk-up window is now a burger shack.  Beach House Burgers to be exact…

And we met the mayors of both Kure and Carolina Beach, the two towns on the island.

Amazing what a 4 hour drive can do to your perspective.  I enjoy coming here precisely for that purpose.

Well, it’s getting late on the island.  I’m going to do something I haven’t done in ages.  Sack out early.

Good night, folks…

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Going Coastal

I just wanted to take a brief moment and inform all three of my readers (myself included) I am going to be taking a break from the normal financial and macro-related fare you find on this piece of blog.  I’ll be at the beach with my family for the rest of the month, taking a well-deserved and long overdue reprieve.

I’ll still have some posts, but they’ll be a different kind.  Perhaps a bit more personal, maybe even a bit more poignant.  There’s bound to be more photos.  Maybe even a video or two.  I haven’t thought that far ahead.

But it’s good to get away.  The ongoing nightmare known as European interbank lending isn’t going anywhere.  Neither is the debate on FinReg.  Nor the bigger macro backdrop complete with de-leveraging and debates about fiscal stimulus and whether or not central banks drove the macroeconomic bus off the proverbial cliff.  If all of that changed on a dime simply because I wasn’t blogging it, well, I guess I’ll shut up and let everything turn for the better.

But I know it won’t and you know it won’t.  These issues and the debate about how we respond to them will rage on, regardless of what any one of us might think or feel.

So in the meantime I’m going to take the opportunity to listen more attentively to my wife when she asks me to do something (an area I’m sure I have constant room to improve on), to play a bit more with my son and in general, let some of this stuff fade into the background…

And find something else to talk about for a little while…

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Whether It’s Euribor or Libor, It’s All IBOR All the Time

I wanted to expand on the issue going on in Europe with respect to funding.  I’ve been contending the situation is getting worse, not better.  And as a result, we’re seeing a blow-off coming in the Euro, which in spite of the recent “strength” we’ve seen, has some very fundamental issues and it’s questionable it will continue to exist in its current form.

But first, I wanted to present a more comprehensive view of the term structure of Dollar/Euro Libor spreads:

The telling thing here is the fact that the short end has risen much higher than the long end, so this is a bear flattening in action.

I should probably explain why I look at the spread between Dollar and Euro Libor rates in this manner.  Here’s why (emphasis, mine):

In response to the reemergence of strains in U.S. dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing the reestablishment of temporary U.S. dollar liquidity swap facilities. These facilities are designed to help improve liquidity conditions in U.S. dollar funding markets and to prevent the spread of strains to other markets and financial centers. The Bank of Japan will be considering similar measures soon. Central banks will continue to work together closely as needed to address pressures in funding markets.

via FRB: Press Release–FOMC statement: Federal Reserve, European Central Bank, Bank of Canada, Bank of England, and Swiss National Bank announce reestablishment of temporary U.S. dollar liquidity swap facilities–May 9, 2010.

That was all about this:

The purple circle goes back to the start of the sovereign debt crisis.  What nobody was talking about then was the sell-off in the Euro being driven by funding concerns with banks.  I wrote a post back in May where I came to the realization that these events are all about banks trying to fund themselves in the most relevant currency they can use.  To try and illustrate that, let’s take a look at the direction of those Libor spreads and the EURUSD exchange rate.

First, let’s take a look at a longer term daily EURUSD chart:

So you can see there was a bounce in early June and the Euro has been riding it ever since.  To get better visibility into what happened, here’s another EURUSD chart over a shorter timeframe:

Note the sharp break in the uptrend and change in trajectory of the rally.  But I want to focus on the beginning of the uptrend, June 8.  You can see what was happening to the spread between dollar and euro Libor:

Right around that time frame, spreads started widening.  So as funding was getting scarce,

Meanwhile, here is a look at Euribor curves going back to the beginning of the year:

One of these days I’m going to get something up and running and treat these properly by plotting them out as 3D surfaces to look at.  But that day is not today.  Regardless, you can see the curve is having some dramatic shifts out. Again, developing a 3D surface of Euribor, euro Libor and dollar Libor would probably help us in thinking this through to understand what’s going on.

But in the meantime, here’s are a couple of graphs of Euribor/Euro Libor spreads:

The humped nature of the spread curve indicates to me there are issues in the front-end of the curve out to 3mths and then they relax.

I’m curious as to why it happened, but I’m almost certain someone smarter than me is already working on it…

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Libor and the Bataan Death March for European Banks

I’m a little late in getting this out, but the charts will speak for themselves:

That was just the actual Euro Libor curve.  Here are two ways to look at Euro Libor funding relative to Dollar Libor:

The pace of widening between Euro-denominated Libor and dollar-denominated Libor has dramatically increased over the past week or two.  And if you take a look at the EURUSD chart:

You can see the Euro low was set in June which coincides with the increase in Euro-denominated Libor.  What I am sensing here is a surge both in the Euro and rates being driven by the liquidity crunch in Europe that’s building to some sort of apex at which point the true nature of the deflationary, lackluster conditions present there will be visible to everyone.  So that means you can add Europe to the list of economies that will be dealing with a significant overhang of deflation/deleveraging.

Longer term, this is setting itself up to be the Deflationary Derby: Japan, the US, Europe and other participants to be named at a later date.

But before we get there, there are some banks in Europe that are bound to be casualties of the ongoing liquidity squeeze we’re seeing.  Something like the Bataan Death March in WWII: the soliders taken prisoner by the Japanese had no food and water.  The banks have no commercial paper and little to no short-term funding. 

But both have one thing in common: they happened under the hot, sweltering sun…

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On Gold, Guns, Bread and Cadillacs…

Well, maybe not guns.  This isn’t that kind of post.  But I am going to talk about gold briefly.  One of the more interesting ways to think about the value of gold is its value in purchasing household items.  Because back in earlier times that was exactly how you paid for things.  Gold is money, after all.  Indeed, in the book “Hedgehogging” Barton Biggs refers to gold in such a manner:

The Old Testament recounts how, in 600 B.C., one ounce of gold bought 350 loaves of bread.  As of today, one ounce will still buy 350 loaves of bread in the United States.

Barton Biggs: Hedgehogging

In my area of the country in North Carolina, one ounce of gold will get you 446 loaves of bread.  So when measured in those terms, we’re overvalued even after the action we’ve seen over the past few months:

Today I heard it referred to in another way: gold vis-a-vis Cadillacs.  So first, I have to present to you the definitive video clip on Cadillacs…

And now back to the gold/Caddy ratio.  I stumbled across this post (hat tip: @hedgefundinvest and @FinanceTrends) that looked at the fact that in 1971 with gold pegged at $35 an ounce you needed about 11 pounds of gold to buy a ’71 Eldorado.  Take away the peg and it would’ve been much less gold (at $103 an ounce you need about 5 pounds).

Now?  You can get 2 Cadillac XLR-Vs for the same 11 pounds if you’re taking the $35 per ounce as your starting point.  If you used 5 pounds, well you’re out of luck because you won’t have enough based on Friday’s close at $1193.50.  So the starting point you choose is important.

But as for the overvaluation or lack thereof currently?  At these levels it may still be overbought even though we’ve seen a pretty sharp pullback from $1,250.  But I’d be wary about how much more of a decline we see here because volume has been higher even on up days and the revolt against central banks isn’t over by any stretch.

So in my mind, we’re in for more volatility not less.

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