2015.30.01 News


Once again we begin with the Eurozone where the latest ECB policy announcement to launch large scale quantitative easing looks increasingly justified. Deflationary risks have risen dramatically as German CPI turns negative.

Moreover, the Eurostat Consumer Inflation Expectations Index has declined sharply, as the public begins to anticipate lower price increases.

While the ECB goes to work on deflationary risks, I continue to see some “green shoots” in the Eurozone. Don’t get me wrong – the overall economy is in bad shape. French labor markets have worsened significantly, Italy is in perpetual recession, over half of Spain’s youth are not working, Greece is about to restructure its debt – again, etc. Nevertheless here are some indicators I am watching:

1. Since the ECB’s tress tests in early 2014 (which had been a source of uncertainty for banks in 2013), loan balances in the Eurozone are beginning to stabilize. Corporate loans are still declining but at a much slower rate.

2. As a result of these improvements in bank lending, the growth in measures of broad money supply has picked up markedly.

3. I already discussed improvements in business and consumer sentiment, such as the ZEW indicator for Germany.

4. While retail sales across the Eurozone remain quite low relative to pre-recession levels, there are signs of improvements (albeit from very low levels).

Market sentiment on Russia continues to worsen with the ruble now trading at 68.85 to the dollar (the dollar bought 35 rubles last summer). Sovereign CDS spread (second chart below) is grinding higher as the nation struggles to keep its credit markets going. This situation is going to get worse before it gets better.

Anyone planning to introduce/increase consumption tax in their country? Don’t. Abe took Paul Krugman’s advice not to raise the tax the second time around. The first hike was enough to really damage Japan’s household spending.

Texas oil well permits have fallen over 50% since October according to the Dallas Fed. Permits are at the lowest level since 2012. Now we are going to see this adjustment spill over into other areas of the economy and into the Texas labor market.

The US dollar strength has certainly been impressive. However it has become a crowded trade and a sharp (albeit temporary) pullback is becoming likely. Speculative accounts – both large and small – are increasingly net long the dollar. This is definitely the right call fundamentally, but technicals look stretched.

On the commodities front, gold continues to outperform broad commodity indices. With so many central banks easing or beginning to ease policy, gold has found some support.


– Asian markets were buoyed by a late rally on Wall Street, which came after upbeat corporate earnings. Australia’s S&P/ASX 200 was the top performer, rising 0.9 per cent – investors are betting on a rate cut from the Reserve Bank of Australia when it meets next Tuesday.
– The Nikkei 225 rose 0.6 per cent in spite of new data showing that household consumption shrank more than expected and core inflation fell for a fifth straight month in December. (FT)
– Energy groups cut investment Royal Dutch Shell and ConocoPhillips plan to make billions of dollars of cuts in response to the plunge in crude prices, which has pushed Germany into deflation. (FT)


– Investors have woken up to Greece’s nuclear risk – Telegraph
– Yellen tells Senate Democrats U.S. economy looks good: media reports | Reuters
– U.S. Homeownership Rate Falls to 20-Year Low – Real Time Economics – WSJ



2015.01.29 Thoughts

More on Greece.

“Debt write – down is extremely unlikely and unnecessary as well.” claims Zsolt Darvas.

1. Extremely unlikely, because “Eurogroup, told the new Greek government not to expect any write down of the nominal or face value of the €316bn (£236bn) debt owed by Greece. At least 85pc of the Greek debt is owned by the EU, International Monetary Fund and European governments meaning that the cost of any write downs or cancellation would be predominantly borne by taxpayers in eurozone countries hostile to bailouts, such as Germany or Finland. Wolfgang Schäuble, the German finance minister, also ruled out any haircut as Berlin officials insisted that Germany’s opposition to debt forgiveness “remains unchanged”.

2. Unnecessary:
2.1 ” On the issue of repaying back its liabilities, it’s more a question of time, rather than money. Greece has already been the beneficiary of a number of debt extensions, and in 2012, underwent the biggest private sector debt restructuring in history. The average maturity on Greek government debt currently stands at 16.5 years. The sustainability, or otherwise, of the country’s burden relies more on the timetable for repayment rather than the overall stock of the debt, argue many economists.”

2.2 “Greece has managed to negotiate favourable terms on which it can service the cost of its loans and the interest paid by the country is far below that of Spain, Ireland, and Portugal (see chart below). Given that interest rates have fallen significantly from 2014, actual interest expenditures of Greece will be likely below 2pc of GDP in 2015, if Greece will meet the conditions of the bail-out programme.”

2.3 “Greece won’t recover without debt forgiveness. Wrong again. For all the fixation on the outstanding stock of Greek debt, kickstarting growth in the country is more likely to happen through a relaxation of budget rules rather than a debt cancellation. With the coffers looking sparse, the Syriza-led government is also asking for a renegotiation of the surplus rules imposed on the country. Greece is currently required to run a primary surplus of 4.5pc of its GDP. Before taking account of its debt interest payments, it is likely to achieve a primary budget surplus of around 3pc of its national output this year. This severely limits the new government’s room for fiscal manoeuvre. It also makes it almost impossible for Syriza to fulfil its pre-election promises to raise the minimum wage and create public sector jobs. According to calculations from Paul Krugman: “Dropping the requirement that Greece run a primary surplus of 4.5pc of GDP would allow spending to rise by 9pc of GDP, and that this would raise GDP by 12pc relative to what it would have been otherwise. Unemployment would fall by around 10pc relative to no relief”

And lastly. “The Greek media reports that capital flight last week reached €10bn as it became the clear that the amalgam of Maoists, ex-Leninists and radical socialists known as Syriza would win the election. Barclays estimates the outflow at €20bn since early December, roughly 12pc of GDP.
The European Central Bank is for now stepping into the breach. Liquidity support for Greek banks spiked to €54bn at the end of December, and is rising fast. If the ECB were to pull the plug, Greece would spiral into a systemic crisis immediately.”





“Greek Choices after the elections” by Zsolt Darvas.

2015.01.29 News


Let’s start with the unfolding situation in Greece, where the new finance minister Yanis Varoufakis has been calling the austerity program imposed by the troika a ““fiscal waterboarding”. A vivid description indeed.

Greek government bond yields spiked on Syriza’s escalating rhetoric as well as on the right-wing anti-austerity party (Independent Greeks) becoming Syriza’s new coalition partner. Think about it – the only thing the two parties have in common is their hatred for the Eurozone and the fiscal pain that was imposed on Greece. The battle lines have been drawn.

The Greek government bond yield curve has become more inverted as markets price in principal reductions that are likely to apply evenly across the curve (which is what typically causes such inversion).

It is expected that if such haircuts are applied, they would hit both official and unofficial accounts (including bonds held by the ECB). Debt forgiveness would also cut principal on the government bonds held by Greek banks – who are some of the largest holders. That’s why shares of Greek banks got decimated today. New bank bailouts will be required if there is any hope for sustained credit availability to the private sector. For now most credit activity will come to a grinding halt – and with it any hopes for nearterm economic recovery.

The overall equity market fell over 9% today as government officials halt privatization and the rhetoric escalates.

Greece also extended an olive branch to Russia. Both nations apparently feel they’ve been mistreated by the EU. And Putin now has a new ally within the Eurozone.

Global yields continue to fall as investors focused on relative value. One of the places to look of course is the US where some see the 30yr treasury as relatively cheap. And as the stock market sold off (due to the Fed staying with status quo), treasury yields went with it – with the 30yr yield hitting a new record low.

Investors also went after other (relatively) high yielding sovereign bonds. The 10-year New Zealand, Australia, Canada, and South Korea government bond yields hit record lows.

Speaking of New Zealand, the central bank governor Graeme Wheeler hinted that with commodity prices falling, the next rate move could potentially be lower.

Thus we could see yet another central bank joining the BoJ, ECB, BoC, RBI (India), SNB, PBoC, Riksbank, etc. in policy easing. Wheeler has another reason to talk NZD lower. The nation’s trade deficit has worsened (chart below)and a weaker currency could help. Why not join the currency war?

Looking back on the US shale revolution, it’s easy to see how the oil production cost curve had changed – once you get above $80-$85/bbl, production spikes. Which tells me that for some time to come, that will be the cap on oil prices.

Related to the above, Russian sovereign CDS spread hit a new high in the last couple of days. Ugly.


– An equity sell-off swept across Asia after the S&P 500 index fell overnight on indications the US Federal Reserve is on course to raise short-term interest rates this year. Sam Fleming parsed the Fed statement to see what to expect out of the next meetings. (FT)


– Japanese retail sales unexpectedly fall 0.3% – fastFT: Market-moving news and views, 24 hours a day – FT.com
– Homeowners in Poland Borrowed in Swiss Francs, and Now Pay Dearly – NYTimes.com
– Greek Bank Sell-Off: $11.4B Gone in Just Three Days – Bloomberg Business
– Shell cuts $15bn of spending after crude collapse – fastFT: Market-moving news and views, 24 hours a day – FT.com


Water shortage has become a serious threat for Sao Paolo…


Australia’s Central Bank on Track for Rate Cut

“Interest rate swap markets are pricing in a 50% chance that the central bank will cut rates next week, and a 100% chance for March, with two cuts firmly priced in by the end of the year.”

Earlier Thursday, Australia’s benchmark 10-year bond yield hit a fresh low of 2.478%, below the short-term interest rate of 2.5%, one of the strongest indications yet that investors believe the central bank will resume cutting rates next week. Long-term interest rates typically exceed short-term rates”

2015.01.28 News


I’d like to start with the Eurozone, where a showdown between the euro area institutions and Greece will be taking place in the next few months. Greece’s newly appointed finance minister Yanis Varoufakis, a staunch bailout critic, will lead the negotiations for debt haircuts. On the other side will be the International Monetary Fund and European Commission – with additional support from the ECB. A number of Eurozone politicians have already expressed skepticism about any debt forgiveness for Greece. But Varoufakis is likely to focus on the argument that Germany has to take a great deal of the blame for the situation in which Greece now finds itself. Here is a good quote from Strafor:
Stratfor (via Forbes): Another version, hardly heard in the early days [of the Eurozone crisis] but far more credible today, is that the crisis is the result of Germany’s irresponsibility. Germany, the fourth-largest economy in the world, exports the equivalent of about 50 percent of its gross domestic product because German consumers cannot support its oversized industrial output. The result is that Germany survives on an export surge. For Germany, the European Union — with its free-trade zone, the euro and regulations in Brussels — is a means for maintaining exports. The loans German banks made to countries such as Greece after 2009 were designed to maintain demand for its exports. The Germans knew the debts could not be repaid, but they wanted to kick the can down the road and avoid dealing with the fact that their export addiction could not be maintained.
The argument will also focus on the fact that Greece has done an amazing job in cutting its debt/GDP ratio – in spite of falling GDP.

Greek yields remain elevated, though below the recent highs. As negotiations progress, we are going to see a great deal of volatility in these bonds as well as across other euro area assets.

Now on to Russia where FX reserves show a significant deterioration. That’s the price of defending the ruble.

There has been talk among a number of nations about taking Russia off the SWIFT payment system – as part of the sanctions. That would be utterly devastating because it would cripple the nation’s ability to make or receive international payments – including debt payments. Medvedev threatened that “… if such decisions are made, I want to note that our economic reaction and generally any other reaction will be unrestricted” (source: RT). Indeed such action could result in a desperate and unpredictable response from Russia.

UK mortgage approvals continue to decline as the housing market cools. Strong housing market was the key reason the Bank of England was considering an earlier rate hike last summer (some expected them to pull the trigger in December). Now BoE liftoff is off the table for at least a year.

China’s firms’ industrial profits declined materially in recent months (chart below).

As I discussed last year, one of the key risks across a number of markets in 2015 will be the rise of the US dollar. Here is how the major trade-weighted exchange rate indices have moved in the past six months.

We are starting to see the consequences of this dollar strength in US large cap markets. Here is the headline for Procter & Gamble. The US markets sold off in reaction to this (as well as a the poor durable goods orders print).

A surprising pickup in the US housing market. Some are saying these indicators are misleading, but I am staring to see a pattern of improvements. Here is the new home sales report – materially above consensus.

The Fed’s liftoff expectations continue to get pushed out, as Morgan Stanley now sees the first rate hike by March 2016. This is more dovish than the futures markets. The reason of course is the massive decline in forward inflation expectations. Strong US dollar (with a potential for further rally) is another – which would of course exacerbate disinflationary pressures and, as we saw earlier, hurt corporate profits.

Overall, the IMF as well as numerous other economists remain quite constructive on the US economy.


– Apple sold 74.5m iPhones to report the largest profit in history in the three months to December. Its net profit grew 37 per cent to $18bn and beat ExxonMobil’s previous quarterly record of $15.9bn in 2012. (FT)
– Singapore loosened monetary policy It is the latest Asian country to do so as economic growth slips and oil prices pull down inflation. The central bank slowed the pace at which the Singapore dollar appreciates against other major currencies – a tool it uses rather than interest rates – and sent the Singapore dollar down the most in a single day since 2010, to S$1.35 against the greenback. (FT)
– The threat of sanctions on Russia European leaders threatened to impose more restrictions, saying there was evidence of Russia’s “continued and growing support” for separatists in eastern Ukraine, where fighting has escalated in recent days. The EU is struggling to maintain a united front on this issue, however, as Greece’s new government has distanced itself from this call for broader sanctions. (FT)
– UK growth speeds up The economy grew 2.6 per cent in 2014 – the fastest rate since the financial crisis. This has stoked confidence within the Conservative government even though the data wereweaker than expected and it took the British economy longer than its international rivals to exceed its pre-recession peak. (FT)
– The Federal Reserve The US central bank is expected to make a steady-as-it-goes statement after its monetary policy meeting but it will be under intense scrutiny as it prepares the way for a possible rate increase. Analysts will be watching to see whether the Fed notes the weakness in wage growth and will be looking for worries about low inflation expectations. (FT)


– BBC News – Scotch whisky ‘worth £5bn to UK economy’
– PRESENTATION: Here’s How Germany Ate Everyone’s Lunch After The Euro Was Created – Business Insider


– Australia’s Accelerating Core Inflation Cools Rate Cut Bets
The trimmed mean gauge of core prices rose 0.7 percent from the previous quarter, when it climbed a revised 0.3 percent, the Bureau of Statistics said in Sydney today. That was more than the median forecast of 23 economists for a 0.5 percent gain. Australia inflation is holding at the low end of the Reserve Bank’s target. “This tells you that demand in the economy is holding up reasonably well compared to supply and I think that’s the way the RBA’s going to see this story as well,” Paul Bloxham, chief Australia economist at HSBC Holdings Plc, said by phone in Sydney. “We continue to expect that the RBA will remain on hold this year, we don’t think they’ll deliver cuts.” It may be reluctant to lower borrowing costs further amid surging property values. Sydney home prices climbed 12.4 percent in December from a year earlier, a Corelogic-RP Data home value index showed.
– Watch What Wheeler Doesn’t Say as N.Z. Rate-Rise Odds Dwindle
In New Zealand, where policy makers are wary of reigniting home-price surges and expect growth of more than 3 percent this year, the response to disinflation could mean pushing any rate increase beyond 2015. “Although inflation is expected to drop to a very low level, this is a temporary phenomenon due to falling global oil prices,” said Westpac’s Stephens. “Cutting the cash rate at this juncture would be a mistake.”
– Singapore Dollar Is Weakest Since 2010
Singapore unexpectedly eased monetary policy, sending the currency to the weakest since 2010 against the U.S. dollar as the country joined global central banks in shoring up growth amid dwindling inflation. The Monetary Authority of Singapore, which uses the exchange rate as its main policy tool, said in an unscheduled statement Wednesday it will seek a slower pace of appreciation against a basket of currencies. It cut the inflation forecast for 2015, predicting prices may fall as much as 0.5 percent.
– Russia to Spare Defense Spending as Most 2015 Outlays Cut by 10% (“Defense” as in Offense.)
Russia will raise budget spending on social support and agriculture and exempt this year’s defense outlays from reductions as part of a 2.3 trillion ($35 billion) stimulus program that will see most other expenditures cut by 10 percent in 2015.
– Nobel Winner Shiller Says It’s Time to Buy Greek Stocks
– Tsipras Aims to Avert Catastrophe But Greek Markets Sink Further




“Let’s start with Russia where the ruble came under pressure again as Standard & Poor’s downgraded the sovereign credit to junk (BB+). The currency shed about 6% against the dollar as a result. The Russians continue to convert deposits into hard currency in spite of high premiums charged by the nation’s banks for such transactions. The chart below shows capital flight accelerating last year.

Credit conditions remain incredibly tight (2-year government bond yield is 16%) and a waive of bankruptcies and government bailouts is about to hit banks as well as non-financial firms.

The markets shrugged off the Greek election results as the euro bounced from the lows – which suggests that Grexit risks may be lower than some had originally thought. There is no question that there is a fight coming up between the troika institutions and the newly elected Greek government but the fallout of Grexit will be so dire for both sides that the “nuclear” option is likely off the table.

Deflationary risks continue to haunt the Eurozone as Spanish PPI fell 3.7% (YoY) – far worse than consensus.

Nevertheless the latest QE announcement and the euro’s sharp decline has lifted nearterm forward inflation expectations. The massive QE announcement has given the ECB credibility and the markets are taking this fight against deflation quite seriously.

German Ifo Business Climate Index stabilizing. As a contrarian, I remain relatively constructive on the Eurozone recovery in the middle of all the doom and gloom.

As an aside, the ECB and the BoJ will now carry the torch for the Fed in global central bank balance sheet expansion.

Now a couple of notes on Latin America:

1. Brazil’s FGV consumer confidence indicator hit the lowest level on record. Congratulations to Dilma Rousseff’s newly reelected administration.

2. Reuters published an article on Venezuela where a new profession is taking hold – standing in line and selling your spot to those who don’t want to spend all day waiting. A similar trend exists in the US on Black Friday, but Venezuela’s rising shortages are making this a full-time occupation for many. Boring, but lucrative. Below is a photo of an incredibly long line for groceries, a daily occurrence.

Canada remains vulnerable to further economic deterioration. While the Fed and the Bank of Canada policy rates have generally moved in lockstep in the past, they have now diverged. In recent years Canada’s energy/commodity boom (which had helped housing and the banking system) kept the Bank of Canada from moving rates to zero. Now it seems that the two nations’ policies are about to diverge again.

The data below showing the cost of Canadian oil sands production has to be making the Bank of Canada uneasy – with WTI crude futures below $46/bbl (and Western Canadian Select crude some $14 below that).”


– From Russia with love A Russian bank employee and two Russian government officials were charged with being part of a spy ring in New York City. Their mission: to mine intelligence on US sanctions and efforts to develop alternative energy resources and – possibly – to recruit New York City residents as spies. Less lovingly, Russia was downgraded to “junk” by Standard & Poor’s and Nato accused it of escalating the crisis in eastern Ukraine by sending in more of its own well-armed troops. (FT)

– Kurdish victory over Isis in Kobani Kurdish forces said they had wrested back control over the Syrian border city, which has also been the site of a four-month battle between Isis and the US-led international coalition. (FT)

– Alexis Tsipras After being sworn in as prime minister yesterday, he has three days to form a government and the new cabinet could be announced today. His choice to form a coalition with the Independent Greeks, a party opposed to the strict conditions attached to the country’s bailout, has already dismayed EU governments opposed to debt relief.
– Internal devaluation” via falling wages is incredibly costly — but Greece has been paying incredible costs, and has achieved a sharp fall in relative wages:

– The year in Vix and Volatility


– S&P. Cuts Russian Debt One Notch to Junk Level – NYTimes.com
– Most Americans Don’t Have Savings to Pay Unexpected Bill – Real Time Economics – WSJ
– Greece’s new prime minister wants Germany to pay for Nazi war crimes – The Washington Post
– Ruble Sinks to Six-Week Low After S&P Downgrades Russia to Junk – Bloomberg
“We had thought that the cut to junk was largely priced in, but the ruble is under pressure now and most likely the weakness will continue,” Dmitry Polevoy, an economist at ING Groep NV in Moscow, said in e-mailed comments. “There’s likely going to be selling in bonds.”
– Will the US soon have a budget surplus? | FT Alphaville


– Crowdfunding Revives Quake-Hit Small Businesses in Japan
“Websites for crowdfunding raised an estimated $5.1 billion globally in 2013 versus $2.7 billion in 2012, according to research firm Massolution. While specific figures aren’t available for Japan”

– China Industrial Profits Fall Most Since 2011 Amid Slowdown
““The upstream industries, from mining to oil exploration, are hurting badly from falling input prices, while some manufacturers are benefiting,” said Ding Shuang, a senior China economist with Citigroup Inc. in Hong Kong. “A deeper fall in industrial profits will damp investment activity to weigh on future growth.”Profits in coal mining plunged 46.2 percent in 2014, while the oil processing and nuclear fuel industry’s returns shrank 79.2 percent, the NBS said. Profits in automaking rose 18.1 percent and in electronics manufacturing they increased 17.1 percent.”

– EU Renews Push for Russian Sanctions; Putin Blames Ukraine

– China Money Rate Drops as PBOC Injects Funds Via Reverse Repos
““If capital outflows worsen significantly, the PBOC needs to double the effort to inject liquidity, and we will probably see upward pressure on market rates,” said Chen Yang, a Hong Kong-based rate strategist at Bank of America Corp. “In the very short-term, the depreciation pressure on the yuan reduces the chance of the PBOC cutting interest rates meaningfully.””

– Nomura Says Odds Up of Abenomics Derailing as Tax Doubted
““Signs are mounting that Japan’s fiscal sustainability is beginning to crumble,” said Uomoto, ranked Japan’s No. 1 credit analyst for the past two years.

The BOJ on Jan. 21 lowered its core inflation projection to 1 percent for the fiscal year starting in April, from 1.7 percent, citing a drop in oil prices for the revision.

The yen may decline to 160 against the dollar by 2017, according to Uomoto, if the BOJ continues the current level of asset purchases. The Japanese currency was at 118.1 per dollar as of 6:02 p.m. in Tokyo. The central bank now buys as much as 12 trillion yen of Japanese sovereign notes a month.

An increase in Japan’s sales tax to 8 percent from 5 percent last April led to a recession in 2014. Abe delayed raising the levy to 10 percent as planned until 2017.

“This is the first time for me to seriously prepare and explain a slide on a scenario that looks at Japan moving to an explosive situation,””


2015.01.26 Thoughts

http://fistfulofeuros.net/afoe/10640/ – a good read about “The Swiss franc appreciation and the sorry saga of FX lending”

I expect a run up on Eur/Usd. I don’t see any way how the Greeks can exit Eurozone. There might be some haircuts, which might spur optimism about Greece growth outlook. On the other hand other fragile countries like Spain and Italy might re-think their own position as people will point to the “success” story of Greece and ask “why can’t we do that?”.

2015.01.26 News


“In Greece the Alexis Tsipras’s Syriza party has won and some are asking if the nation’s future in the Eurozone could now be in question.


It’s important to keep in mind that while “Grexit” may look appealing to some, it will be a nightmare for the Eurozone – which simply has no mechanism for a member state exiting. It’s like a divorce when there are no divorce laws. Target-2 imbalances (latest of about €36bn) are about to spike as Greeks rush for the exits to preserve their euro accounts (before they get converted to drachmas). The more funds depositors move out, the more the Bank of Greece will owe to the Eurosystem via Target-2. Add to that the bailout vehicles holding Greek debt, the ECB’s bond holdings, the IMF, and the private sector bond holdings and we have a disaster on our hands. That’s why all parties involved in future negotiations will likely focus on keeping Greece in the the Eurozone.

Furthermore, if Greece remains in the Eurozone while having negotiated a major haircut (there is talk of 50%) on its sovereign debt, what will be the reactions of other nations who received bailout funds?

Continuing with the Eurozone, the ECB’s QE effort is unlikely to have the same “wealth” effect as it did in the US. That’s because the euro area households own smaller amounts of financial assets than those in the US.

As an example, here is the 30yr German government bond yield falling below 37bp – a new record. The fraction of Eurozone households that participated in this historic rally is probably relatively low. Many banks however did well.

South Korea’s economy remains fairly tied to China’s as the nation’s GDP growth is slowing again.

Japan surprised to the upside today, as exports beat expectations. Weak yen is starting to have an effect. Nations are using currency devaluation to improve competitiveness.

China’s yuan continues to weaken and is now at its lower bound permitted by the PBoC (upper bound for the dollar). Once again the question is whether Beijing is willing to ride along with the US dollar, making the yuan strong enough to impact competitiveness.”


““The Greek people have given a clear, indisputable mandate for Greece to leave behind austerity,” said Alexis Tsipras in his victory speech.

With nearly all votes counted, leftwing anti-austerity party Syriza is on track to win about half the seats in parliament. It had alsoclinched a coalition deal with a small rightwing party similarly opposed to Europe’s economic policy, giving it a clear majority.

Reinsurance reshaped by $11bn deal Axis Capital and PartnerRe, two of the top five insurance groups based in industry hub Bermuda, agreed an $11bn deal to merge and create the world’s fifth-largestproperty and casualty reinsurer. Premiums of reinsurers, which allow insurance companies to transfer the risks of hurricanes and other disasters, have been pushed down to their lowest levels in more than a decade by fierce competition.

My thoughts – Low prices on insurance leads to low money barriers to fragile system?


Bitcoin The first licensed US exchange for the virtual currency opens today. Coinbase Inc, is a start-up backed by $106m from the New York Stock Exchange. It is hoped it will bring much-needed legitimacy to the cryptocurrency. (WSJ$)

China’s credit buildup was pretty damn fast

That’s what an overall debt-to-GDP ratio going from 153 per cent of GDP in 2008 to 243 per cent in 2014 will do. After all it’s the rate of increase that’ll get ya (probability wise, that is).

No matter the cause, you can’t deny it’s impressive. And that the idea of a quick fix is pretty laughable.

Be it a managed slowdown and pivot towards consumption and/ or a regression to the mean, the strong likelihood is that the GDP growth rate won’t stop trending down for quite a few years.

Our analysis of China’s debt dynamics suggests it will take several years to stabilize the debt-to-GDP ratio. Too little tightening and the numerator of the ratio (debt) will continue to grow strongly; too much and the denominator (growth) could slow further. We projected how the debt-to-GDP ratio might evolve given the current stock and flow of debt, augmented with assumptions about external conditions, investment efficiency, and other factors. Even under very favorable assumptions, we found it would take five more years of gradually decelerating credit growth to stabilize the debt-to-GDP ratio”


“One reason cited [1] for why Syriza will be able to talk tough with the Troika, presuming it wins today, and can form a government, is that it has a healthy [circa 5%] primary budget surplus. That’s the difference between revenues and spending, once we ignore the cost of servicing debt. The hypothesised threat is that the new Greek government renounces the debt and has no more need to borrow from capital markets, taking more in taxes than it spends.

Cut adrift from the Troika, the Greek government does not have the funds to stand behind its own banks. They would be left insolvent by a Greek default [economically, they are already, really]. A run on Greek banks, either prompted by default or the threat of it, could not be stemmed by a credible guarantee of deposits.

The primary surplus would fast disappear as the contraction in money, credit and economic activity played out.

tax collection is plummeting right now as Greeks forecast that unpopular property and other taxes will be ended, and perhaps also that there will be less appetite to collect on legacy obligations that the new political leaders discredited. Ironically, this drop in tax collection reduces Syriza’s ability to deliver on the promised goodies which will win them the election.”


“Rebels press Ukraine offensive, Obama promises steps against Russian-backed ‘aggression’ | Reuters

Japan exports grow most in year, signaling steady recovery from recession | Reuters

Greece’s debt pile: is it really unsustainable? – FT.com”


“Who Owns the Government Bonds the ECB Will Buy?

Fedspeak Cheatsheet: What Are Fed Policy Makers Saying?

Chairwoman Janet Yellen (voter) No public comments
Vice Chairman Stanley Fischer (voter) No public comments
Gov. Daniel Tarullo (voter):No public comments
Gov. Jerome Powell (voter) No comments on monetary policy
Gov. Lael Brainard (voter): No public comments
Boston Fed President Eric Rosengren, Jan. 15 in a Wall Street Journal interview:“I’m willing to be patient” with rate increases, and “if we don’t see any evidence [of rising inflation] in wage and price data for a year, then I’d wait a year before I’d be doing something.”
New York Fed President William Dudley (voter) No public comments
Philadelphia Fed President Charles Plosser, Jan. 14 in Philadelphia:“The economy has returned to a more normal footing, and as such, I believe that monetary policy should follow suit.”
Cleveland Fed President Loretta Mester, Jan. 2 in a Fox Business Network interview:“I could imagine the interest rates going up in the first half of the year.”
Richmond Fed President Jeffrey Lacker (voter), Jan. 9 in Richmond:“There is no pre-set timetable for raising rates…The FOMC’s actions genuinely will depend on the economic data available at the time.”
Atlanta Fed President Dennis Lockhart (voter), Jan. 12 in Atlanta:“I believe the first action to raise interest rates will in all likelihood be justified by the middle of the year.”
Chicago Fed President Charles Evans (voter):Jan. 9 in a CNBC interview:“We shouldn’t be raising rates before 2016 if things transpire as I’m expecting.”
St. Louis Fed President James Bullard, Jan. 20 in a Wall Street Journal interview:“It is important to get started and to start normalizing policy… I don’t think we can any longer rationalize a zero interest rate policy.”
Minneapolis Fed President Narayana Kocherlakota, Jan. 13 in New York City:“Raising the target range for the fed funds rate in 2015 would only further retard the pace of the slow recovery in inflation.”
Kansas City Fed President Esther George: No public comments
Dallas Fed President Richard Fisher, Nov. 3 in New York: No public comments
San Francisco Fed President John Williams (voter), Jan. 5 in Boston:“I see no reason whatsoever to rush to tightening. I don’t see any upside risks to inflation.”


The Commerce Department will release the first numbers on fourth-quarter gross domestic product on Friday. Economists think real GDP grew at an annual rate of 3.3%. While that’s far slower than the 5% surge in the third quarter, it is still a solid coda to a quirky year that began with a harsh winter causing economic activity to contract in the first quarter.”


Tsipras Forges Anti-Austerity Coalition in EU Challenge

Prices in Europe Continue to Sink, Showing Why Draghi Had to Act

Poland Considers Franc-Loan Conversion to Make Banks Pay

Kuroda Remarks Open Possibilities for Shift in BOJ Stimulus
“Among options analysts highlight: regional-government bonds, a type of security that could aid public support.”