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  • Meaningful data gathered and analyzed from around the web. We look for what the headlines and squawking heads are not telling you.                                                      ...

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The Genius of Mutual Indebtedness

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June 19, 2012

Nigel Farage on the folly of the Eurozone bailout of Spain. His astonished take down of the notion of Italy loaning funds to Spain to bailout Spanish banks is spot on and emblematic of the inadequacy of the eurozone.

The Bang! Moment is Here

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June 17, 2012
John Mauldin 9-4-2011 9-37-24 AM

Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang – confidence collapses, lenders disappear, and a crisis hits.
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Clarke and Dawe on The European Debt Crisis: Sell Everything

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June 13, 2012

Now for some humor:

Can Kicking: Uncollateralized Trillion Euro Perpetual Zero Coupon

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June 6, 2012

From Michael Belkin of the Belkin Report. Hat tip: Barry Ritholtz.

Meanwhile, Back at the Ranch

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May 28, 2012
John Mauldin 9-4-2011 9-37-24 AM

It is simply hard to tear your eyes away from the slow-motion train wreck that is Europe. However, we need to tear our gaze away from Europe and look at the eerily near-simultaneous ending to the quantitative easing by the four major central banks while global growth is slowing...
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Further Reading: Dry Curacao Edition

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May 24, 2012

On May 24th 1935 the first major-league baseball game to be played under the lights saw the Cincinnati Reds defeat Philadelphia 2-1 at Crosley Field.

German Manufacturing Output Falls To A 35-Month Low. I think that the crisis will eventually drag even mighty Germany into recession. Their customers are sinking.

Cullen Roche tongue in cheek suggests kicking Germany out of the Eurozone. In the comments section I agree on his overall analysis, but do not believe that any of the countries in Europe truly want real fiscal and political integration, which would end their individual national sovereignty. In my mind the issue isn’t Germany, but collective denial. As always with Cullen, the discussion is frank, civil and educational.

Meanwhile the Greeks are busy deluding themselves about their situation:

“Even if we go bankrupt we need to tell them clearly that we won’t leave the euro in any event. They’ll have a bankrupt country in the euro, which means other countries can go bankrupt as well and the whole euro zone will blow up,” said electrician Thanasis Zahariadis, 47.

“So they won’t let us go bankrupt, no way. These are just threats. I’m going to vote anti-bailout.”

[...]

“There’s a lot of money in this country, they just need to tax the rich and it would solve so many problems,” said seamstress Argiro Maniati, 55. “The big parties brought us here, to poverty and suicide, and they are terrorizing us to make us accept tough measures.”

[...]

“Empty threats!” said Nikos Sokos, 29, who works in a cafe in central Athens. “There’s no way they’re going to kick us out. There won’t be a euro zone if they do that.”

[...]

“No one can force us to leave the euro. Now that they have us, they’re stuck with us,” he said. “If they change the laws to force us out, then there will be no euro zone. They’re just barking to scare us but actually they’re the ones who are scared,” he added.

Yeah, this will end well.

One of the trends I am most fond of in contemporary society is the resurrection of 19th century spirits and their associated cocktails. It fits nicely with my fondness for cocktails, the obscure and history. Combine all three and I am truly smitten. The indispensable liver and pen of Jason Wilson has been exploring this trend for years at the Washington Post and this week introduced me to several new liqueurs, including a 19th century Curacao:

“I really thought this was going to be a niche-of-a-niche product for a few geeks and misfits like us,” Gabriel says of his dry Curacao.

Well, I know that describes me. Read and enjoy. If you wish, you can have a brandy cocktail while doing so:

Summary:

The original mid-19th-century “cocktail” was usually just a mix of a base spirit, a few dashes of bitters and simple syrup, and “Curaçao,” a catch-all name for orange liqueurs. This version of the Brandy Cocktail does away with the simple syrup and increases the amount of orange liqueur.

Spirits columnist Jason Wilson recommends seeking out the new Pierre Ferrand Dry Curacao, which is based on a 19th-century recipe. But this works with Grand Marnier and, to a lesser extent, Cointreau or Combier. Wilson prefers Peychaud’s bitters, but Angostura works fine as well. Use a VSOP-quality or higher cognac.

1 serving

Ingredients:

  • Ice
  • 2 ounces cognac
  • 1/2 ounce orange liqueur, preferably Pierre Ferrand Dry Curacao (see headnote)
  • 1 dash Peychaud’s bitters (may substitute Angostura bitters)
  • Twist of lemon peel, for garnish

Directions:

Fill a mixing glass halfway with ice. Add the cognac, orange liqueur and bitters. Stir vigorously, then strain into a chilled cocktail (martini) glass. Garnish with the lemon peel twist.

A nice Brandy Cocktail might just be what the doctor ordered for EU policy makers. Ireland may need another bailout.

As Europe gets cheaper it is tempting to just buy an ETF and start averaging into Europe and buy in force if there is a crisis. However, European indexes have always included lots of Eurozone bank and financial institutions. Given the non trivial possibility that bank shareholders could be completely wiped out if the Euro breaks up, or even under less disastrous circumstances, that seemed unappealing. However, the market seems to be taking care of that:

“…eurozone bank valuations now make up only 8% of the eurozone’s total market capitalization, the lowest level in nearly 40 years and down from more than 20% at its height in 2007.”

Jeffries now seems to be moving toward my long held views about where China is likely headed:

“While the contagion once again spreads through Europe, there is enormous denial over the Chinese economy.”

The government of China is concerned as well:

Continued weakness in China’s economic data, as well as growing risks of a Greek exit from the euro zone, will drive Beijing to launch aggressive stimulus measures in order to prevent a further deterioration.

Personally, if the bubble has burst stimulus has a very delayed effect. Not to mention that the type of stimulus contemplated is a questionable effort anyway given the type of bubble it is:

Stimulus has been a benefit to China’s economy for 2009-2011 in the form of higher GDP growth. The potential second order consequence of FAI (Editor: Fixed Asset Investment) growing at 25-30%pa (2-3x GDP) is the significant spike in projects under construction in 2009-2011 becomes a spike in completed projects in 2012-13. If construction activity has significantly outpaced demand (we think it has using sales as a proxy) then the excess is likely to become inventory. The prospect of renewed stimulus is the obvious caveat; but it’s not clear to us that more stimulus will help given our view that a key cause of the underlying weakness is a problem of excess inventories caused by too much construction.

The biggest and most concerning data point is this:

China’s biggest banks may fall short of loan targets for the first time in at least seven years as an economic slowdown crimps demand for credit, three bank officials with knowledge of the matter said.

Let us understand what is going on here. China is trying to loan more money but not enough people want to take out loans. That sounds an awful lot like a collapse in demand from credit that typically accompanies a popping bubble and its associated debt deflation.

For all my concerns about China, it is India that may be facing a mass default and restructuring as devaluation looms.

In fact, all the BRIC’s seem to be running into a wall.

Markets may be struggling, but WalMart has been on a tear. Wish we had bought even more.

Okay, JP Morgan has suspended their buyback program. I am generally not a fan of buybacks, but this decision leaves me scratching my head.

Speaking of JP Morgan, would Glass Steagall have prevented the financial crisis? Obviously there were regulatory issues, but frankly the calls for regulation (for example, by Elizabeth Warren) seem poorly thought out:

The first domino to nearly topple over in the financial crisis was Bear Stearns, an investment bank that had nothing to do with commercial banking. Glass-Steagall would have been irrelevant. Then came Lehman Brothers; it too was an investment bank with no commercial banking business and therefore wouldn’t have been covered by Glass-Steagall either. After them, Merrill Lynch was next — and yep, it too was an investment bank that had nothing to do with Glass-Steagall

The first domino to nearly topple over in the financial crisis was Bear Stearns, an investment bank that had nothing to do with commercial banking. Glass-Steagall would have been irrelevant. Then came Lehman Brothers; it too was an investment bank with no commercial banking business and therefore wouldn’t have been covered by Glass-Steagall either. After them, Merrill Lynch was next — and yep, it too was an investment bank that had nothing to do with Glass-Steagall.

Next in line was the American International Group, an insurance company that was also unrelated to Glass-Steagall. While we’re at it, we should probably throw in Fannie Mae and Freddie Mac, which similarly, had nothing to do with Glass-Steagall.

Now let’s look at the major commercial banks that ran into trouble.

Let’s first take Bank of America. Its biggest problems stemmed not from investment banking or trading — though there were some losses — but from its acquisition of Countrywide Financial, the subprime lender, which made a lot of bad loans — completely permissible under Glass-Steagall.

What about Wachovia? Its near-collapse was largely a function of its acquisition of Golden West, a mortgage lender that saddled it with billions of dollars in bad loans.

Citigroup’s problems are probably the closest call when it comes to whether Glass-Steagall would have avoided its problems. It gorged both on underwriting bad loans and buying up collateralized debt obligations

In that case, Glass-Steagall would have done two things: it would have prevented the trading losses and it also would have kept Citigroup from getting so big, which was one of the reasons it required a bailout.

Jumping Into The Abyss: A Bull Case for Gold Mining Stocks

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May 22, 2012
Jumping Into The Abyss: A Bull Case for Gold Mining Stocks

JJ Abodeeley looks at Gold Stocks and how cheap they have become.
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Morgan Stanley: Bull vs Bear

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May 22, 2012
Lance

My old firm, Morgan Stanley, has done something that is extremely surprising. They have been bearish, something large Wall Street firms rarely are. The last really bearish major strategist who was outright and long time bearish that I remember was also at Morgan Stanley, Barton Biggs in the late...
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Further Reading: The Billionaire Cocktail Edition

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May 21, 2012
Lance

China Risks, European Risks, The Billionaire Cocktail and more in todays Further Reading.
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Things That Make you Go Hmmm…: 5/20/2012

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May 21, 2012
Things That Make you Go Hmmm…: 5/20/2012

Grant Williams looks at the inevitable math of a Greece exit from the Euro and the comical responses from European Leaders.
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Dr. Frankenstein’s Europe

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May 19, 2012
John Mauldin 9-4-2011 9-37-24 AM

The euro has never been a real currency. It was and still is an experiment, fashioned and shaped by a generation with noble ideas and vision, but tied together by an unworkable structure. Can its foundation be reworked into a solid structure? Or will natural centrifugal forces pull it...
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Further Reading: Creole Gumbo Edition

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May 15, 2012
Lance

China Real Estate Crash, Chavez confronts supply and demand, Europe and the need for integration, JP Morgan in my nightmares and more in today's Further Reading.
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The Pain in Spain

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April 24, 2012
John Mauldin 9-4-2011 9-37-24 AM

It really does seem to be All Spain All the Time, but there is a reason. Unlike Greece, Spain makes a difference to the eurozone. It may be both too big to allow to fail and too big to save. Last week I came across a very informative 50-page...
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Hoisington Quarterly Review and Outlook- First Quarter 2012

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April 22, 2012
Hoisington Quarterly Review and Outlook- First Quarter 2012

Lacy Hunt and Van Hoisington of Hoisington Investment Management Company have published their latest commentary on the US economy. This quarter they look at how public and private debt levels have stunted our economy's ability to grow.
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The Transparency Trap

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January 28, 2012
The Transparency Trap

The Transparency Trap Tell Us What You Think We Want to Hear A Very Soft GDP Number Central Banks: A High-Wire Balancing Act What Does It All Mean? A Few Thoughts on LTRO Greek Exhaustion Syndrome Cape Town, Stockholm, Geneva, Paris, and London This week we take a brief...
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Caterpillar and the Economic Outlook

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January 26, 2012
Lance

According to Caterpillar the US and Global economy will not go into recession. Should we consider their opinion important?
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Working Out of Debt

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January 24, 2012
Working Out of Debt

This week we look at a report called “Working Out of Debt,” from the McKinsey Global Institute. It is one of the best, most definitive pieces on the topic I have read. For those trying to understand how the deleveraging process will affect their particular world it is a...
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2+2=1?

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January 23, 2012
James Dailey

At the risk of being drafted as a Republican presidential candidate, I will now lay out how we are flip flopping around on our outlook like a fish out of water. In case you cannot tell by now, our conviction level in a specific narrative as to why markets...
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Staring into the Abyss

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January 21, 2012
John Mauldin 9-4-2011 9-37-24 AM

Europe's leaders are committed to keeping both the euro and the eurozone as it is. But for it to do so, everything must change, as the wonderful quote from the 1958 Italian novel suggests. This is no easy task, as no one wants a change that will impact them...
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Economy Entering A Period Of High Risk

1
January 20, 2012
David Moser- Comstock

Although a number of economic indicators have recently improved, the economy is now entering a period of high risk. When we look at the numbers, it is difficult to tell where additional growth will come from. Although consumer spending, which accounts for 70% of GDP, picked up from...
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