Further Reading: Dry Curacao Edition

May 24, 2012
By

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.

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