For many onlookers in the UK, the eurozone debt crisis may seem quite curious, with Ireland, Portugal, Spain, Greece and now Cyprus all having hit the buffers since the onset of the global credit crisis.

It is a situation – which in the UK has been resolved, so far, by printing more money – that continues to play havoc not only with the eurozone, but also the global economy. Although certainly not the biggest eurozone economy, the addition of Cyprus to the list of indebted, bailed-out economies is of importance.

Indeed, as one of the recent entrants to the euro – joining in 2008 – the situation seems more serious. One of the enduring images of the Cyprus financial crisis last year was that of one Cypriot threatening to bulldoze his way into a local bank in order to gain access to his savings. But how did it come to this?

The Cyprus story begins with the onset of the eurozone debt crisis, which readers will be familiar with. The most recent flare-up, however, is very much linked to the Greek debt crisis. The second round of haircuts for Greek national debt was the trigger that set in motion a train of events leading to this year’s €10bn bail-out package.

Cyprus had been very successful in attracting money to its banking sector and had drawn a number of Russian clients using it as an offshore tax haven. However, Cypriot banks were heavily exposed to Greek debt and, therefore, affected by further yield reductions last year, as part of that eurozone member’s own bailout conditions.

This move – combined with a weakened economy facing recession – prompted the Cyprus government to approach foreign investors for more than €1bn to prop up the
Cyprus Popular Bank. The Cypriot economy was already under pressure thanks to the impact of the credit crisis a few years earlier.

One of the more contentious issues had been a levy on deposits below €100,000, which had prompted long queues outside banks

It had been downgraded by several ratings agencies and had also seen a disastrous explosion at its Evangelos Florakis naval base, which also caused much damage to its main power station.

A $2.5bn Russian loan had been thought enough to plug a funding gap but after being downgraded to junk status by ratings agencies – increasing the cost of borrowing – and forcing Cyprus to seek help last June. Europe’s financial heavyweights moved in, aiming to prevent the eurozone from collapsing. Again. After a fraught negotiating period, a €10bn deal was agreed with the Troika – the European Commission, International Monetary Fund and European Central Bank – but not before scenes seen in March unfolded.

Mounting frustration One of the more contentious issues had been a levy on deposits below €100,000, which had prompted long queues outside banks after withdrawal limits were imposed on cash machines. This was later dropped after strong protests. Levies above €100,000 remained. European paymasters did not want to be responsible for safeguarding the deposits of rich Russians.

Another condition of the European bail-out was the restructuring of the country’s two largest banks – Laiki and Bank of Cyprus – which will involve losses for both junior and senior bondholders. The banking sector is likely to face further challenges as it is ‘downsized’ to an EU average by 2018.

Hedge fund veteran George Soros who made £1bn betting against sterling in 1992 believes the deal has more insidious ramifications for weaker banks throughout Europe. ‘What happened in Cyprus undermined the business model of European banks, which relies heavily on deposits,’ Soros claimed in a speech earlier this month. ‘Until now the authorities went out of their way to protect depositors. Cyprus has changed that. Attention is focused not just on the impact of the rescue on Cyprus but the impact on the wider banking system. Banks will have to pay risk premiums that will fall more heavily on weaker banks and the banks of
weaker countries.’

Taking advantage

So, how else can investors take advantage of the situation?

‘Retail investors have tried to short this market repeatedly over the past six months with limited success, and the old adage about not fighting trends rings true,’ says Matt Basi, head of UK sales trading at CMC Markets.

‘We’ve seen clients with long positions in single stocks taking short index positions to try and manage their risk, but the fact remains that buying dips in this market has been the most successful ploy for some time now.’

The effort made by authorities to keep Cyprus – and indeed the other embattled euro bloc members – in the eurozone suggests that the single currency is safe, for now

‘Of course, that’s not to say a sharp correction isn’t just around the corner – just that blindly selling the equity markets as they tick relentlessly higher has proved an extremely expensive stance in 2013 so far, and that caution is advised.’

The Cyprus Stock Exchange General Index remains at depressed levels: over one year it is down by 60% (to 11 April 2013). Yet, with further tough times ahead and as it implements austerity measures, it would make a brave investor to long the local stock market. The short outlook seems just as unpredictable, as the bailout acted to arrest the slide and reduce volatility.

‘While shares as a whole ought to be biased higher if the European Central Bank were to begin cutting rates, the constantly lingering threat of another unexpected near-term jump in tail risk – perhaps linked to political uncertainty in Italy this time – argues for the primary of flexibility,’ says Ilya Spivak, currency strategist at DailyFX.

One of the main ways investors can take advantage of the Cyprus situation is by trading the euro. The deal removed the threat of imminent bankruptcy and statements by Cypriot officials have also reaffirmed its commitment to euro membership.

‘Cyprus makes up such a small proportion of eurozone GDP that the demise of a couple of their financial institutions would, taken as single events, have raised a few eyebrows and knocked a few points off the major indices,’ explains Basi of CMC Markets.

‘It was their attachment to the eurozone and the necessity to come up with a desperate bailout package that sparked the panic – a panic that would have been unnecessary if the eurozone, or Cyprus themselves, were ready to just cut the island loose.’

The effort made by authorities to keep Cyprus – and indeed the other embattled euro bloc members – in the eurozone suggests that the single currency is safe, for now. Indeed, the country’s small size may even have helped keep it in the eurozone.

‘The likelihood of any eurozone member state exiting the currency bloc remains virtually nil,’ says Ilya Spivak

‘This applies to Cyprus no less than it does to a far larger country, such as Spain for example, because the critical concern is that of precedent for the region rather than any individual member state per se. Close Brothers Asset Management’s head of direct global investments Chris Bailey adds: ‘Investors need to embrace any weakness associated with uncertainty on the perspective that the ECB/EU authorities will support the system.’

CMC’s Basi adds: ‘While the US Federal Reserve continues to pump liquidity into financial markets, investor risk appetite endures. Markets continue to make new highs in spite of Cyprus, as reasonable equity valuations and cheap money encourage bulls to push prices higher.

‘That said, the failure of the euro to climb higher with risk assets suggests FX traders and multi-asset funds remain more cautious when it comes to the single currency.’

But despite the success of the bailout, questions of a Cyprus exit have still not been ruled out. This is partly seen as a reflection of the continuing volatility facing the global economy and the troubles faced by fellow bloc members.

Portugal was forced to find additional savings last month after a court found some of its proposals unconstitutional.

George Soros has even questioned the German-led push for austerity in heavilyindebted countries, which he claims does not work, arguing for the issuance of eurobonds to solve the bloc’s problems.

‘It’s reasonable to expect that Cyprus eventually leaves the eurozone,’ says John Hardy, head of FX strategy at Saxo Bank.

‘But the time scale is certainly unknown and the situation could stretch out for a considerable period of time.’ Hardy adds: ‘A Greek exit first would make Cyprus a done deal, but Greece has surprisingly hung in there so far.’

Potential for recovery

Confidence in the eurozone as a whole is likely to figure highly on investors agenda and despite the latest efforts to secure the single currency, it appears investors remain cautious about adding to positions.

Whilst the US Federal Reserve continues to pump liquidity into financial markets, investor risk appetite endures. ‘Markets continue to make new highs in spite of Cyprus, as reasonable equity valuations and cheap money encourage bulls to push prices higher,’ adds Matt Basi. ‘That said, the failure of the euro to climb higher with risk assets suggests FX traders and multi-asset funds remain more cautious when it comes to the single currency.’

As I have maintained for some time we are in a massive deflationary cycle that is nowhere close to ending. In fact, it is just about to cripple the global economy if you ask me. Here is an excerpt of what I wrote on Feb 4:

“What people need to realize is that we are in a deflationary spiral until there is evidence otherwise. Printing money and government spending are inflationary in normal economic environments, but this is far from a normal economic environment. Anyone that thinks this is an inflationary environment is just not willing to look at reality. There is ZERO wage inflation, asset prices continue to fall, and the debt situation is getting worse not better making asset prices fall further. The central governments can keep interest rates this low forever because banks ARE NOT lending and if they raise rates asset prices will collapse because no one will be able to service their debt.

Without a meaningful debt solution I do not see how it is possible for us to have inflation. The central governments around the world can continue to print money at an alarming rate without inflation because the amount of money evaporating and going to money heaven is greater the amount being created. Short term interest rates and commodities are the best leading indicators of inflation. Short term rates are making new highs in price and lows in yield almost every day. The 6-month libor rate has dropped in yield for 24 straight months and shows no sign of an uptick anytime soon.

Are some prices rising like health care? Yes, but that hardly means there is inflation. Agricultural commodities like corn, wheat, and soybeans are very close to their lows for the past few years. Energy commodities such as crude oil, natural gas, and unleaded gas are still more than 50% below their 2008 highs, no inflation there either. While industrial metals and precious metals have had huge moves in the past year the CRB index is still more than 40% below its 2008 high, hardly inflationary. Commodities and interest rates will tell us when there is inflation and we are not anywhere close to it, yet.

The bursting of bubbles is massively deflationary and the deflation can last for decades. How long will this last? I have no idea but until evidence shows otherwise I wouldn’t bet on it changing anytime soon. In my view we are headed for a double dip and our troubles are far from over. Lastly, while the equity markets have had a V shaped recovery the economy hasn’t. Unless this changes in a hurry the equity markets are going to reflect the real economy sooner rather than later. I just don’t see it happening, so consider yourself warned.”

Here is another excerpt of what I wrote on February 6th”

“The other problem with us heading into massive inflation is that we are not acting in isolation. Many other central banks around the world are acting just as irresponsible as we are here in the US. Where is this inflation going to come from? My point is what currency is going to be the safe haven? We are too connected globally today that many of the old economic models do not work the same as they once did before globalization. If the whole world is acting as one and we are all in the same predicament I just don’t see how we go inflationary…”

Greece Jitters

I can’t see the Greek situation having much any impact on company earnings but it could hit market sentiment. I think it’s still interest rates that will determine the market even though they have little real consistent historic patterns over recent decades.

From 2003 to 2007 rates went up nine times and peaked exactly when the markets peaked so the lesson was that there can be many rises before a recession.

From 1991 to 2000 rates peaked in June 1998 eighteen months & seven rate cuts before the markets topped. Rates continued falling until June 2003, four months after the market bottom. No lesson to be learnt.

Between May 1988 and Oct 1989 there were 11 rate rises in less than eighteen months prior to the 1990 recession. Lesson to be learnt is that we could get many rate rises in a short time frame.

That’s three different recessions* with no similarity at all with rate behaviour regarding time frames or rate direction. From the current perspective the next rate rise or two is very unlikely to signal doom but could cause increased volatility.

I think the risks are that rates will be rising with little slack in the labour market, falling unemployment and after a long bull market. The risk imo is that recession could come upon us faster than may appreciate if wages continue rising faster than CPI & RPI inflation. The number of self employed fell last year, suggesting wages are now more reliable and better on PAYE.

* 2001 was a US recession only.

I think the market is being too optimistic, too soon on Greece. Their red lines are still no pension cuts, no budget cuts and no rise in electricity prices. All things Germany says they must do. I’m still cautious until proven wrong.

Private companies can go public through a stock market listing, also known as an initial public offering (IPO). In these cases the first offering of stock is rarely the last, and further shares will be created through rights issues and share placings. The typical path of a successful company starting from scratch would be it gets going on the savings, bank borrowings or mortgage taken out by the founders. Once the company is incorporated, shares are created with the entrepreneurs
owning the whole share capital.

Needing more money to expand they then turn to venture capitalists who will buy new shares in the business, in return for which the latter own a portion of the company and sit on its board. This initial injection of outside money is a first stage investment. If the company is one of the minority to survive it will then get further slugs of venture capital funds, and if it evolves further will probably move on to an IPO, moving in to the publicly traded arena. The IPO will typically be partly a primary offering of new shares to raise money for the company, and partly a secondary one, with the founders and venture capitalists selling some of their existing shares to lock in welcome profits. Stock market volatility all but choked off the flow of IPOs in 2009 as firms proved unwilling to risk getting a bad price for their shares or no price at all.

An IPO is a way for a company to build capital to invest in the business. Basically the company issues shares and sells them to investors for a partial stake in the business. The value of a stock depends on the value of the enterprise; if more investors seek shares in the company, then the company’s stock price will rise.

Spread betting is very addictive and hard to find that adrenaline burst anywhere else but we need to resist the urge until the markets settle a bit.

I just got news one of my trading friends (he has no name here) has crashed and burned. He appears to have lost the lot. I knew something was wrong but didn’t suspect that. He’s someone I like enormously but from whom I have never taken any ideas because I could never quite work out what it was he did. He also seemed to be making too much money. I don’t know what happened but I suspect he just got it wrong too many times…let’s face it, good money management will keep you in the game for longer but it can’t keep you in the game forever. I also suspect he didn’t have the flexibility to adapt to the change in the market. He started at a time the market was falling….and then found it difficult to make money when the market turned for the better. Anyway, a sad day.

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85% losers keeps cropping up. Day traders, Investors, Fund Managers, Spreadbetters, all statistics show that around 85% lose. O’Shaughnessy showed the same results as Comley but quite a few years earlier. Many academic studies have shown the same results.

A truly appalling statistic from Comley’s book is that between 1998 and 2010, while investors made a total of $9 billion out of listed hedge funds, the fund managers themselves pocketed a massive $440 billion – comprising 98% of all the profits made. It’s this culture of corporate looting in banking, stockbroking and pretty much everything that’s made it so hard for us small investors…

The vast number of retail investors who were hammered in the dot-com bubble, when just about everyone wanted to take part in stock ownership, then went on to miss out at the best time to be buying stocks (2002/2003), by which time they’d had their fingers burned and instead pulled money out.

Similar with buyers of real estate or shares again in 2007 – the party was over by the time the average retail investor wanted a piece of the action, and in 2009? You couldn’t give the same companies away, regardless of fundamentals, and yet the burned private investors were mostly pulling their money away.

The pattern goes back for about a hundred years. Each time you can be sure that the S&P will lose about half of its value, a lot of people will pack in investing for good, and a whole lot more will come back a few years later. It rarely ever happens in the same way, the patterns for predicting it are rarely the same. All we can do is keep this in our minds, try and manage our risk, and expect our favourite companies to be on a “bargain sale” once or twice a decade. I wouldn’t be too fearful of the 85% rule so long as you get why that figure is so high – most people want to buy at the worst time and then sell at the worst time!

Quantitative Easing and the UK Economy

Quantitative Easing works by digitally pumping new monies into the system which is then used to purchase government bonds, commonly referred to as gilts.  The increased demand for gilts in turn pushes down the interest rate paid on the loans, known as the yield.  Quantitative Easing  as such involves pumping liquidity into the market via quantitative easing.

Quantitative Easing = Printing more money = falling £v$ = higher commodity prices = inflation = erosion of savings = less consumer spending = lower GDP. The cycle used to be broken by higher wages with the inflation bit. That used to to inflate our debt away as wages went up. The problem now is that we have to hold down public sector wages and the private sector is now competitively linked to to unemployment and global labour rates. Expect higher fuel prices and imported foods. On the plus side the lower £ is good for exporters such as service sector and manufacturing, so they should be able to employ more which should add to GDP. So, bad for retailers but good for financial services and manufacturers.

Quantitative Easing: 40 years ago when we studied this at university as (open market operations) two things stuck in my mind:

1. It was done in secret.
2. It had to be done in secret as the distinguishing mark of this policy is that it all gets reversed as soon as the market bounces back.

The Fed has in the past intervened a number of times during times of financial turmoil  including 1987, 1994, 1998, 2001 to 2003 and 2008, via interest rate cuts.   Since 2009 the USA Federal Reserve has also launched two quantitative easing programmes costing a total of $2.3 trillion. It has also injected a further $400 billion in Operation Twist, a tool that was used to push down bond yields and borrowing costs. This programme was then expanded further from $40 billion to $85 billion a month, for QE-IV, once Twist expired in December.

The Bank of England has likewise added a further £50 billion to its Quantitative Easing scheme bring the total to £375 billion in July 2012 while the European Central Bank launched an Outright Monetary Transactions programme in the summer. Meanwhile the Bank of Japan keeps boosting its QE schemes amounting to a total of ¥101 trillion so far.

Quantitative Easing Programme 1 was implemented to help put out the fire and remove the possibility of a meltdown in the financial system = SUCCESS

Quantitative Easing Programme 2 was implemented with the goal of  driving down borrowing costs so as to stimulate the economy = FAILED (it has only served to drive asset prices higher while improving  banks balance sheets..which have not been passed onto the end consumers/small businesses)

Quantitative Easing Programme 3 same as above = Isn’t likely to boost the underlying economy but any additional liquidity should keep assets from falling.

In theory QE programmes are designed to boost confidence and create a wealth effect by supporting risk assets and boosting investors portfolio values so as to give us higher spending power. The aggressive action is somewhat helping to calm the markets with companies and people paying off debt and saving as opposed to spending.

What has happened to the old fashioned infrastructure boost spending – utilise the money to build big projects and create jobs – as opposed to bailing out banks that are effectively bust, allow them to fail and send any corrupt bankers for hard time!

On the one hand, the US Federal Reserve, Bank of England, Bank of Japan and European Central Bank are all trying to keep inflation down by keeping interest rates at record lows.  Chairman Bernanke’s theory seems to revolve around driving down yields forcefully on instruments that are traditionally considered safe holdings such as USA Treasuries (and cash and bonds) in a bid to get investors to seek better returns elsewhere (such as equities and property). The theory is that the extra cash will then help drive up stock prices and create extra wealth encouraging people and companies to spend more. In reality this has only led to a modest recovery but one can’t deny that each round of monetary stimulus has driven down bond yields and provoked a rally in share prices.

On the issue of writing off household debt – debt’s biggest enemy is inflation, and as some have pointed out, the majority of the West is doing everything to provoke that. Allowing the indebted to refinance at record-low rates and restructure their debt is as relevant to households as it is to businesses and countries, they just need the tools and help to do so.

On that, there are a few issues. Firstly, the Fed and ECB’s action has never been designed to lower indebtedness – inadvertently, it may create an environment in which inflation eats into that debt, but I’m puzzled on how they come to the conclusion that “QE isn’t helping indebtedness, therefore a global recession is coming”. I’m not sure if I’m missing something but that’s a pretty big conclusion to jump to!

When it comes to using QE to justify arguments that massive inflation is being provoked by Fed action – let’s look at it another way.

Oil today is $90. Oil after QE2 was about $90. In October 2008, before QE1 began, Oil was $90. Before most people began talking about things like Quantitative Easing, Oil was on a steady march up to $147. The numbers can be bent into different shapes, but speculative moves aside, there hasn’t been definitive proof that real inflation is really taking place as a result of QE. At least not yet.

In any case record-low interest rates, quantitative easing (QE) and currency market intervention will remain the order of the day for the near to medium term although trusting the bankers to put it right does seem futile to say the least…

Hmmm? So they have to print money? But won’t that devalue the euro? And doesn’t that mean each Toshiba TV costs more, so even more euro’s flow East? The East continue to get richer while the West continue to get poorer then? And if it was that easy why didn’t they do it before?

Funny, you should mention that, the biggest concern amongst the hedge fund community isn’t Europe now, it’s China. After fairly aggressive stimulus, growth prospects continue to be revised down for China, the latest suggestion being 5% growth.

Why? Globalisation. Money flowing east isn’t the problem, the Chinese economy remains heavily reliant on Europe and the US consumer. It’s not a game of “West is in trouble, evil East gets the jobs and money”, unfortunately we all tend to suffer together and grow together in cycles.  Meanwhile the International Monetary Fund doesn’t seem impressed and has slashed global growth forecasts for 2013!

As the Dow makes multi-year highs, I believe the Hang Seng is making multi-year lows, such has been the shock of how much Chinese growth is slowing in this cycle. And my biggest concern is how much of the data can you believe coming out of China, they have a habit of being a tad enronesque with their figures, I have a feeling there are a few more sino-forest type companies that could rear there head at any time!

Having said that I think the structural China story is one that may take thirty, forty years to properly play out – meanwhile the market tries to place a value multiple on that in the present. I’m not sure how high that multiple was in 2007, or how much growth it was anticipating going forward, but you can bet it was inflated by so many of us wanting a piece of the action.

Moodys downgrade our banks. Moody’s have effectively stuffed the UK. Disgraceful. Government pumps in £75bn, Moody downgrades banks by 3 notches…..money goes up in puff of smoke. Sometimes I feel ratings agencies should be closed down, not least because of their role in causing this crisis in the first place. The timing of their pronouncements is extremely suspect. While we are at it, can we add the BBC to that least of “come the revolution”? Yes it’s grim out there but people are intent on pushing agendas.

The downgrades were as follows:

• Lloyds TSB and Santander UK were downgraded one notch from an Aa3 ratings to an A1
• Royal Bank of Scotland and Nationwide were downgraded two notches from Aa3 to A2
• Co-Operative bank was downgraded from A2 to A3.
• Newcastle building society, Norwich and Peterborough building society, Nottingham building society, Principality building society, Skipton building society, West Brom building society and Yorkshire building society were all downgraded between 1 and 5 notches each.
• Barclays Bank PLC was not downgraded but left at Aa3

Why were the Credit Ratings Cut?*

The ratings were cut because Moody’s now considers these banks to be at a higher risk of defaulting than they were before. However, Moody’s were quick to point out that the downgrade did not “reflect a deterioration in the financial strength of the banking system,” and went on to say that ‘The downgrades have been caused by Moody’s reassessment of the support environment in the UK which has resulted in the removal of systemic support for seven smaller institutions and the reduction of systemic support… for five larger, more systemically important financial institutions.’

In short, Moody’s is of the opinion that the British government has removed some support to the banking sector making a default slightly more likely if things go wrong. Elisabeth Rudman, senior vice president at Moody’s said after the downgrade: “Compared to their European peers the UK banks are well positioned from a capital perspective. But the environment they are operating in is still very tough and there’s an awful lot of uncertainty out there in the euro zone.” Banks and building societies involved in the downgrade were quick to emphasise this point. A spokesperson from the Building Society Association commented: “It does not represent any change in financial strength and it is business as usual across the sector”. The Chancellor of the Exchequer George Osborne, in an interview with BBC Radio 4’s Today programme said that he was ‘confident that British banks are well capitalised, they are liquid, they are not experiencing the kinds of problems that
some of the banks in the eurozone are experiencing at the moment.’

Impacts of the Downgrade*

In truth the immediate impact shouldn’t be too extensive. The most recent round of quantitative easing announced by the Bank of England should inject enough cash into the banks to counteract the rising cost of the banks borrowing money thanks to their new lower credit ratings. Any effects are likely to be seen in a drying up in credit for smaller businesses. There have been calls from the Lib Dems to nationalise RBS completely so that they can sidestep this problem by forcing the bank to lend to smaller businesses and encourage economic growth. This however is unlikely.

The greatest and most immediate affect the downgrade will have is summed up by Jason Riddle, founder of campaign group save our savers: “The downgrade of 12 banks and building societies will further undermine savers’ faith in the banking system.” With the memory of 2008 still fresh in everyone’s memory and dissatisfaction with banker’s wages and bonuses; people are beginning to lose patience with the problematic banks.

* with some excerpts from SVS CFD Securities report

Having said that I think Moody’s have a point to downgrade UK banks. The Bank of England is giving the banks monopoly money to pump into the economy and strengthen their balance sheets. The government are deliberately devaluing the £ to make our exports more competitive and our imports more expensive. They are trying to inflate our way out of debt. You can’t expect to devalue your currency without devaluing your assets – in this case banks. I believe it was Harold Wilson who devalued the £ and said ‘This won’t effect the £ in your pocket’ – except when you go to the supermarket or pay your fuel bills hmm

And its not just the United Kingdom…In the USA we have an Armageddon looming and the debt bomb keeps ticking…

The US debt to GDP increase shows me that they are dying a slow death from a cancer called debt, which has spread to 100% of GDP and become terminal. imo USA is no better than Europe, globalisation has wrecked ALL western economies together.

It took the USA 219 years to accumulate $8.6tn of national debt up until 2007. In the last 5 years alone, they have accumulated a staggering $7.1tn (up 82.5%) almost doubling the national debt to $15.7tn. In 1980 US debt was just $1 trillion, GDP was $2.7 trillion.

US GDP has grown 470% since 1980

US Debt has grown 1470% since 1980

Long term debt to GDP increase ratio = 3.12:1

2007 – 2012 GDP increased from $13.9tn to $15.4tn up by 10.7% or avg 2.1% pa

2007 – 2012 Debt increased from $8.6tn to $15.7tn up by 82.5% or avg 16.4% pa

Short term debt to GDP increase ratio = 7.71:1

This tells me that the speed the debt disease is spreading and has increased by 148%. The runaway train has increased speed from 70mph to 174mph.

In 2009 US debt was $12 trillion, it has grown 23% to $14.8 trillion in just 2 years. If it grows at the same rate it will hit $18.2 trillion in 2 years, (almost double the 2008 level) their new debt ceiling is set at $16.4 trillion and maybe hit in just 12 months if my calculator is right? If they are spending $1.3 trillion more than they are earning how can they reduce debt? Tick tock!

Comment from Henry: The US debt isn’t a problem going forward. They will be energy self sufficient within 5 years which will address their balance of trade and debt. They are the world largest food exporter and technology exporter. They hold the greatest proportion of intellectual property in the world and they are still the dominant global economy with a currency that everyone rushes for in uncertain times. These factors plus inflation will be capable of bringing their debt under control.

Update: November 2012: Goth the European Central Bank (ECB) and USA Federal Reserve have now launched open-ended monetary easing measures. The ECB hasn’t set a limit to its Outright Monetary Transactions while the Federal Reserve’s third round of quantitative easing (QE), will see it spend $40 billion a month until further notice. This follows the lead of the Bank of England which has launched its own third round of quantitative easing making the total spent to-date amount to GBP375 billion.

The single most important economic statistic in 2011/2012 for the currency markets will likely be unemployment data from the G10 nations. The credit crunch has already impacted global capital markets, with equity prices around the world plummeting under the pressure of forced liquidation. However, the next chapter in this drama is likely to revolve around the labor markets, which could begin to degrade significantly as GDP growth contracts around the world.

Already, the U.S. unemployment rate has climbed above 9 percent. In the United Kingdom., jobless claims have climbed to the highest level this decade while Japan has seen the jobless rate climb back above 4 percent — an unsettling trend in a country where 5 percent unemployment is considered to be crisis-like conditions. In fact only Europe and the commodity block economies of Australia, Canada and New Zealand have been able to maintain job growth in this challenging environment.

The size and scale of job losses in 2011/2012 may tell us much about future direction of the G10 currencies because the extent of the unemployment problem will likely determine everything from final GDP demand to monetary and fiscal policy of each individual nation and monetary union. Presently, the currency market is anticipating a very severe contraction in the Euro Zone, as many market players presume that the credit crunch that has created such disarray in the European financial sector will result in very challenging economic conditions for Euro Zone businesses and, ultimately, a substantial decline in demand.

However, the latest data does not support such a dire view. Germany, the region’s most important economy, continues to generate jobs, even in these trying conditions. If the German labor demand remains relatively healthy, the ECB, which is tasked primarily with maintaining price stability, may not ease monetary policy nearly as much as most markets players believe. Furthermore, with EUR/USD having declined nearly 20 percent off its peak, the region’s exporters – its biggest driver of economic growth — should stand to benefit from the more benign exchange rate environment, further mitigating the recessionary scenario. In short, with the EUR/USD priced for drastic slowdown in the region, the unit may see a bounce in 2009 if Euro Zone labor conditions deteriorate materially.

If G10 economies can avoid massive unemployment, markets across all asset classes are likely to stabilise and the relentless risk aversion flows that have characterised currency trading over the past several months are likely to moderate.

I run many different strategies, depending on lots of different factors – market conditions, timeframes, instrument. As far as I’m concerned trying to use the wrong trading strategy in the wrong type of market conditions will usually end in failure.

Each trade I take my strategy within that trade is very much biased towards how much I have gone into on the trade, so a trade at say £10pp is going to be treated very differently to one at £300pp. I always try to get myself into a free trade as soon as possible, it’s actually a lot easier trading with larger sums than smaller amounts, say at £300pp it goes 10pts in my favour I will have £2k off that leaves me with £100pp to play with and a 20pt leeway before I’m out of pocket, this leaves me with plenty of options on how I want to play the trade out going forward.

If my trades are taken off of larger timeframes and news is backing my direction i will more than likely look to pyramid, so no trade I enter has a hard and fast rule, but i’ll be thinking along the lines of how much risk I’m taking into the trade getting it risk free asap and if possible running a slice of it to maximise profits, you know a lot of people set up each trade with risk parameters and i’m not against that it’s just not how I trade.

Some lovely trades lately ,last 45mins on the Dow Jones can quite often give a nice move, I went long DAX at 5204 and 14 traded it right back to its pivot at 5311,with a few add on’s at 55 and 67 along the way, also bought gold at 1603 (still in that trade) and about 20 minutes before market closing I took a small long on Apple stock (AAPL). So fingers crossed come 14.30pm although the hourly candle is one hell of a bullish engulfer, yesterday was pretty much the perfect conditions for day trading, a lot of people get caught out because today they will think ahh we have this trading game nailed now, and will give it all back the next day, I know I’ve been there, now i approach each day on its merits.

So let’s have a look at a stock and the reason I took the trade, AAPL was delivering news but not the news we expected i.e. the new iphone5, so the stock takes a battering along with the market, the news is an iphone 4s basically quicker processor and better camera and this icloud thing to keep a pace with the samsung, Is this bad news or more clever AAPL marketing. My thinking is that they have another product to market for xmas and you can bet your bottom $ an iphone5 will be just around the corner, they have more cash than you can shake a stick at, so knowing I won’t get an entry on the hourly which is how i prefer to play AAPL, I drop down to the 5,and the following chart shows when I entered!

My technical anlaysis is far from textbook stuff, but it is stuff that gets used in the trenches day in day out, so it’s been tested proved and improved over time and no doubt I will go on improving things as new things come to light, a lot of people have technical analysis websites, write books etc and don’t even trade, I wouldn’t give them the time of day, battle hardened veterans is the way to go, hmmm been up since 4.30am quite often I struggle to sleep after a real full on trading day can’t seem to stop buzzing this is what caused me problems trading accounts full time, I now pick and choose when I do this…

Tobin Tax Impact on the Financial Markets

Despite vehement opposition from many quarters, the European Commission seems hell-bent on introducing the Financial Transaction Tax

The consideration of a financial transactions tax on bond, shares and derivatives contracts in Europe continues to be the subject of intense debate.  With the persistent financial crisis hitting the news, there has been frequent reference on the introduction of a financial transactions tax. This tax, commonly referred to as ‘Tobin tax’ after its original supporter, James Tobin, in the 1970s, would mean that individual transactions undertaken by a financial institution would be hit by a levy fee.

If the proposal goes through member states will start imposing a tax of 0.1% on trading of shares and bonds, and 0.01% on derivatives transactions.  However, the tax will not be introduced unless all 27 countries unanimously agree.  The majority of EUR countries including the bloc’s powerhouses France, Germany and Italy are supporting the introduction of the tax which is also known as the Tobin tax.  The European Commission is now expected to present a deeper analysis on the impact of the introduction of the Tobin tax on the European economy hoping to bring the opposing member states on board.

The 11 countries involved in the Financial Transactions Tax are Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia.  Everyone from the US Treasury to the UK government has told the EC to drop the controversial tax, but many tax experts believe the levy will be introduced at least by some countries.  International financial collectives including the International Swaps and Derivatives Association and the Association of Financial Markets in Europe have fiercely lobbied EU institutions with letters, media statements and at informal meetings.

Of course when the president for the European Commission, José Manuel Barroso came up with a proposed tax on financial transactions in Europe (Tobin tax), he clearly had the banks and financial sector in mind. The tax, if it were to be adopted, would impact financial transactions between financial institutions from 2014, charging 0.1% (10 basis points) against the exchange of stocks and bonds and 0.01% (1 basis point) across derivative contracts.  The tax is intended to apply to financial transactions where at least one of the parties to an applicable transaction is resident within the 27 member state European Union.  In fact the tax is broad in the sense that it catches a broad range of financial instruments, such as those negotiable on the capital markets, money-market instruments (except instruments of payment), units or stocks in collective investment undertakings, derivative transactions and the purchase and sale of structured products (including securitisations, warrants and certificates). It would also cover transactions that take place outside an organised market, such as Over the Counter trading in derivatives. The Commission believes that such a tax would contribute up to 57 billion euros per year, which would help ‘ensure that the financial sector makes a fair contribution at a time of financial consolidation’ taking into consideration, amongst other things, the heavy government bailouts to support the financial sector during the crisis.

The idea behind the tax was originally to punish high frequency traders but the result has been that institutional investors, sovereign wealth funds and almost every part of financial services will be hit as a result.  And most industry commentators agree that a Tobin tax is likely to hit pension funds and other investment schemes and middle-sizes enterprises which utilise derivatives to hedge against price fluctuations in currency and commodity prices because it would be hard for them to go round it. In such a scenario banks are likely to pass the costs of such a tax to their end clients while shifting their hedging outside of the European sphere while multi-nationals are also likely to use subsidiaries to avoid the Tobin tax. Meanwhile day traders are more likely than not to move offshore and shift more of their transactions from stocks and bonds (which would be taxed at 0.1% with the Tobin tax) to CFDs and other derivatives (taxed at 0.01%).

There is continuing opposition to a financial transaction tax, in both the continent of Europe and in the USA. In particular, critics fear that the tax could lead to a decline in economic activity and, thereby, a decline in overall taxable revenues. In the USA, proposals for a financial transaction tax  keep getting pushed behind due to opposition by main governmental authorities.

The tax may be controversial but pro-Tobin backers argue that such a tax would help harmonise and establish minimum standards for similar taxation provisions that have already been enacted by a number of European Member States. In the United Kingdom for instance, they have already imposed a tax on UK banks in the aftermath of the financial crisis, responding to popular demand and criticism brought about due to the huge bailouts that some UK banks recevied. In particular, in January 2011, the UK introduced a bank levy which is essentially based on the balance sheet positions of each financial institution at the end of the year, as opposed to a tax on every transaction that the institution engages in. The UK also imposes a 0.5% stamp duty levy on all transactions involving UK securities, which is in fact similar to the Commission’s proposed structure but covering a narrower range of transactions.

In any case I still have to question how and on what basis long term investors will benefit from a Tobin tax.. Such a tax would only serve to reduce market efficiency and increase costs which is unlikely to translate into benefits. The UK’s Government Office for Science conducted a review on High Frequency Trading where it emerged that much of the qualities which make up High Frequency Trading are good: transactions costs have been brought down and market efficiency has been improved so caution must be taken to avoid curtailing the many advantages that the high frequency markets have brought.

High Frequency Trading cannot be blamed for the May 2010 flash crash. In actual fact, the Securities and Exchange Commission/Commodity Futures Trading Commission investigation noted that the one-day stock markets crash was due to a long-term participant’s inflexible execution of a huge trade. High Frequency Trading temporarily removed liquidity in response to this, but other market maker participants did so as well. All participants follow the same exchange rules and will widen prices to adjust trading volumes if they are faced with abnormal market conditions in an effort to mitigate risk. On a number of key markets (NYSE Liffe, for instance) no party is obliged to respond to easy and every quote request, as for both conventional market makers and High Frequency Trading firms controlling their stock market trading is an important component of prudent risk management in an imperfect world. It is also worth mentioning that there has been many liquidity crisis in the past that haven’t involved High Frequency Trading as happened in 1987 and 1962.

London has thrived the financial sector despite stamp duty as the growth has been in foreign exchange, credit, debt, structured finance and other industry areas that do not by themselves attract stamp duty. Even in the case of UK securities, the stamp duty is not paid by most institutional investors as they make use of CFDs (contract for differences) which aren’t subject to the tax. It would be a great blow to the United Kingdom if it were to lose its financial sector as a consequence of imposing a Tobin tax as the past has shown that the industry has paid about a quarter of corporate taxes received, with its workforce paying 15% of income taxes received.  IG’s chief executive Tim Howkins told the Financial Times in March he was not expecting the tax to be introduced, calling the plans ‘political posturing’ and pointing to growing opposition from France’s financial community. But the reality is the tax could hit spreadbetters hard, particularly if they’re not prepared for it.

Financial institutions have to-date been able to trade efficiently with each others which has greatly contributed towards facilitating the low cost of lending to business entities and households over the last years. This is in effect a social utility. I can’t see any evidence that High Frequency Trading as an industry seeks to manipulate the market it serves. Manipulation of the stock markets is in effect illegal in many jurisdictions so is punishable by law. A financial transaction tax like the Tobin tax which is being proposed would cost the United Kingdom in terms of tax revenue and jobs while damaging private and institutional investors by raising costs, only to ultimately raise a lot less monies than expected. (and that would be given to the European Union) while volumes would collapse coupled with liquidity and market stability. Some analysts predict that such a tax could potentially reduce trading volumes in Europe by up to 30% although the tax is unlikely to take effect until 2014. According to the World Federation of Exchanges, last year, more than $10,000bn in securities trading switched hands on European markets. In any case although volumes are likely to go down and spreads increase, a financial transaction tax is unlikely to make high frequency trading disappear, far from it…

Germany and France in particular have continued to press the adoption of a European financial transaction tax.   But of course although proposal has much support within the European Commission  and political support it would need unanimous approval from the 27 Member States in order to pass into law and this is unlikely at present since the UK and Sweden are likely to veto such a proposal unless it is adopted on a global basis. A global agreement by the G20 also seems unlikely with the USA presently resisting such a transaction tax so chances are that even if such a tax was agreed it would not be brought into effect across all European Union countries. In such a case of partial adoption where the UK used its veto to block the tax, the Tobin tax would still impact UK institutions entering into transactions with counterparties located elsewhere in the UK without the United Kingdom getting any share of revenues. But of course such a step would also boost business to UK exchanges. A general adoption of the tax, even in a reduced geographical sphere, might provide sufficient upport for the tax and persuasion for global implementation at future meetings of the G20.

What’s the Cost?

The Global Financial Markets Association (GFMA) warned the FTT will hike the cost of trading foreign exchange by up to 18 times, and although it’s not talking
about the retail investment market, the implication is that the costs will impact on the price of spreadbetting and forex trading. There’s also a secondary impact to consider: namely a potential reduction in liquidity, leading to a widening of bid/ ask spreads. Another irritation is it’s not entirely clear
who will be tasked with collecting the FTT. Some think it will have to be collected by the tax authority where the trade takes place.

This means that London, as one of world’s leading financial centres, will generate the lion’s share of this revenue and act as collection agent despite the UK being outside the FTT zone and our government being vehemently opposed to the tax. Others think the burden will lie with the firms who oversee the trades. This would require significant systems change and investment, even for firms whose governments would in no way benefit from the revenues that were raised. The biggest criticism of the tax however, is that it won’t set out to achieve its aims.

For all of the handwringing about encouraging lower levels of risk, what this tax is likely to do is to simply change the way traders operate – which could actually lead to an increase in systemic risk. From ICAP’s report: ‘Systemic risk could increase as the FTT runs counter to G20 objectives and obligations under the European Market Infrastructure Regulation by disincentivising central clearing,’ the report says. ‘Treating overseas branches of the FTT-zone firms less favourably than those operating through subsidiaries is not compatible with the freedom of establishment required under EU treaty. The proposed FTT would also restrict the freedom of movement of capital.’ And the EC would fail in its objective to find an efficient means to raise capital, as it has, according to the Association for Financial Markets Europe, wildly underestimated the ration of GDP loss to tax revenue gained.

Update August 2012: France has become the first country to adopt a tax on financial transactions. The tax consists of a 0.2% levy on all stock purchases involving all publicly traded companies with a market cap of over 1bn euros. This essentially means that anyone buying shares in such companies (including credit default swaps) in about 109 companies will have to fork out the extra tax to the French Treasury. The tax is expected to raise around 170 million euros in 2012 and 500 million euros next year. Sweden and the UK still oppose the idea while Germany, Italy and Spain have voiced their interest in introducing a similar levy.

Update October 2012: 11 euro zone countries have reached an agreement to proceed with the tax on financial transactions. The initiative has originally been pushed by Germany and France but was opposed by the likes of Britain, Sweden and other proponents of free markets. However, the initiative gained popular approval at a European Union finance ministers’ meeting in Luxembourg, when more than the required nine states agreed in principle to the new tax. Luxembourg, Cyprus, Finland, Ireland, Malta and the Netherlands have chosen to stay out. Britain and Sweden, which are not in the eurozone, have also stayed out. If finalised, this will be the first time a tax is launched without the unanimous backing of the 27-nation bloc.

When you first learnt day trading did you sit next to an expert for a while? I have seen a few day traders trade, but I have created my own specific style that suits me, this has evolved over time, I can’t even remember what strategies anyone used but I recall mainly trend following moving averages crosses you will be surprised how simple they keep things. They will take a fair few losses and then run big winners, but taking losses can have a psychological impact on many traders and it will stop them taking that big winning trade.

A friend of mine was taking the Stanzione trades and he had a run of 9 losing trades in a row you know what happened the next one which he didn’t take was a nice winner, but I’m like Gordon Gekko. I hate losing trades – it ruins my day so that approach would not be right for me. I have no contact now with traders I knew back then but I presume they are still trading. Again I try to keep contact with other traders to a minimum because the talks you have plant that seed that can come back to haunt you.

A lot has been made of screen watching, trying to catch every trade, I really don’t approach day trading like that. If you are daytrading you can’t expect to be catching 60 70 80 pt moves off of the smaller timeframes, lock in trail and maybe a thing to do for newcomers is have an achievable target and once hit get out of there, if you keep coming back into the market i.e. overtrading you will get caught.

Well its been interesting on here with some undoubted skill on show but I`m sticking with my daytrading as it has served me well over the years. A profit every year. I obviously don`t have the right mentality/knowledge for stock trading. “If it ain`t broken…” etc. I have managed to more than triple my day trading account this year so far.

I think both time, natural skill and conviction are needed to be successful in that way.

I wondered how you set yourself up emotionally/psychologically during times like yesterdays wild swings on Wall Street? As a long term investor one can monitor macro economic stats…etc to gauge a view on the market in the medium term and ignore ‘noise’ but intraday on volatility like we have seen it can be very frustrating if you do try and pick a direction, do you literally play what is in front of you and try and ignore your opinion? I have found that when I let opinion take over a trade it’s often wrong were if I’d played what the chart was telling me it would have been a good trade!

I’m not quite sure how to answer obviously as a day trader we need to be focused very much on what the charts are telling us. Because the markets quite often take a while to react to news and then usually they don’t react how we expect, so psychologically I like to think of day traders as special forces you are in a hostile environment on your own and your senses need to be switched on at all times, I listen to snippets of news just to see what’s going on as soon as I’m in a trade I pretty much turn all news off as I find it can affect my decision making.

I start each day with a clean slate knowing the market can go in any direction and try to be prepared for whatever that is coming by keep a check on the major markets. I like to trade at the longer timeframes just to see what the general trends are if markets are ranging etc and then ready for the battle to commence, I’m not sure this answers your question? But that’s how I look at the market! Although really, why not take a bit off and try and run the rest?

Hi, I’m quite new here – not a day trader even though I seem to watch the screen constantly. I’m quite young (24 tomorrow!) and I’m looking to invest for the long term (5+ years). Just trying to judge a good entry point.

My plan was to drip feed all the way down into solid FTSE100/FTSE250 stocks – I have a shortlist of shares I’m watching. Buying on fear is a good plan, but trying to figure out when fear is at its maximum is difficult – like trying to judge the bottom of a market. And then psychologically – pressing the buy button when everything is plummeting is also quite difficult.

Don’t buy all the way down, wait for market to turn and then buy…

2011 has been a difficult year – untradeable to a certain extent – it may be better to wait for a clear upturn in the market, you might miss a smidge of the early bit of cream, but people have been trying to catch an upturn in this market for months and I guess most have got a bloody nose from trying to do so. The fact is it’s very difficult to sit on the sidelines but that has definitely been the thing to do since early summer, well unless you had a shorting strategy, it’s been said on here a 1000times before but patience, discipline and a simple plan that you can adhere to is the way to go!

Day trading is perhaps an excellent example of how money is made by keeping losses smaller than profits rather than using a crystal ball to predict the future movement of instruments.

Sometimes I feel that we are talking ourselves into a double dip recession! Spanish and Italian bond yields up again. VIX up. Europe is a ticking time bomb, the US will keep hitting its debt ceilings, just like they did in August 2011 and 2012. There will be a strong smell of bullsh!t at the teddy bears picnic.

And how can the USA be allegedly recovering while Europe is shrinking? All the big yank companies have huge exposure to the shrinking eurozone. Spain’s 24% unemployed people won’t be buying Dell computers, Microsoft software or Apple iphones. They won’t be taking their kids to MacDonald’s or buying them Coca Cola.

Are the PIGS, Portugal, Italy, Greece, and Spain, going to be the trigger point for a 2010 economic collapse?  Portugal, Italy, and Spain have serious structural problems. It is possible that these all come home to roost all at the same time in 2013. If it does I would not be surprised to see the Euro fall dramatically and the Dollar surge higher. While bubbles lead to deflationary spirals and bailouts lead to inflationary spirals we may be at the tipping point of which is really going to take hold, inflation or deflation. No one has ever been able to offset deflation, ever. So, why do so many people think that we can offset the deflationary spiral now? This is going to be interesting to say the least….my suggestion is to follow the trends and let the markets tell us what to do and how this is going to unfold.

Remember, Greece isn’t the Only Problem

While the debt situation in Greece is plastered all over the front pages today, remember that they are not the only problem. Their European neighbors in Portugal, Italy, Ireland, and Spain all have massive debt problems as well.   Japan is another one with huge debt problems and they have been in a massive deflationary spiral for decades. And the US has more than its fair share of problems as well.

Here in the US alone we have Trillion Dollar deficits as far as the eye can see with no end in sight. On top of that several states are in huge trouble, as well. The main point behind this post is that there are many more shoes to fall both in the US and abroad. So, keep your eyes open and realize that there are still substantial risks to this recovery and the global economy.  The question is now will these countries make the tough decisions necessary to get themselves back on track or will they destroy their currencies by borrowing more and printing money? I haven’t seen any tough decisions made yet…

I dunno why we ever lend to the Greeks…according to one article I read they have spent 50 of the last 200 years not repaying their debt. A poor credit risk if ever there was one.

It is like giving the local gambler, £100 whenever he asks, they have a history of poor money management, people retiring at 53 on 95% of their salary, billionaires paying less tax than a cleaner, strikes me the reason they are moaning is not that they are facing austerity measures more a reality check!  It’s hard to imagine how pissed off the Greeks must be life as they know it has been turned upside down, yes we have all read the stupid way they run business and crazy pension schemes, it reminds me of the parallels between world economies and the premier league, unfortunately Greece have done a portsmouth.

And it also seems most countries economies are run with the same ineptitude as most football clubs the sums do not add up and this is why a lot of people are coming up with the A scenario, politicians are just not qualified enough to make the correct decisions to steer us out of this crisis and it’s even worse if your politicians are wearing handcuffs i.e. from the European Union or as in our case from the European Union and from our own making in electing a coalition government.

I suppose what Greek people have to accept now are the effects of default and exit – lower wages cuts in this and that – but remaining in euro with support of big countries. but they are still going to be expected to pay back money, which they simply haven’t got, and will not have. So yo no comprendo…

In any case I’d be careful about shorting this market, whatever comes out of Greece and let’s face it it’s not going to be good with unemployment running at 22% and a party who intends to throw out any non Greeks, doing well in the polls.  The problem is that the Euro countries are simply throwing good money after bad imo, you keep bailing banks countries out,it will come to a point, where nobody will be able to pay anybody back and we will see a crash that will make 08 look like a blip,this is pencilled in to happen in 2013, can’t remember where I read the 2013 quote now but i suppose it is possible…

The Greek/Spaniard living next door to you owes you a money, he can’t pay you back because he’s doesn’t have a job and is spending more than he’s earning. He’s getting £100 a week in benefits but its costing him £110 a week to pay his bills. He’s going £10 deeper into debt every week. Would you lend him more?

Having said that it was only 13 years ago that Russia defaulted and went bust. Look where they are now. Same for Argentina and Iceland. Countries soon recover. The issue for us is what happens to the debt and what effect it has such as bank bail outs. In other words the debt gets passed to tax payers in other countries and bank shareholders.

The consequences inside those three countries shortly after default was food shortages, very high unemployment, high inflation and very reduced social benefits. Beware companies that trade inside Greece such as GBO?

What would have happened if the UK banks (RBS, Northern Rock,etc), hadn’t been given any bailout?

Thousands of businesses would have gone bust, it would have infected other banks causing thousands more businesses to go bust. There would have been an inability of some remaining businesses to pay wages to staff or to pay their suppliers causing food shortages in shops & fuel shortages – in general a deep depression or worse.

Is Italy the next Greece?

Last week over lunch a friend who is an analyst for temporary staff consultants said that the trends in Italy indicate that the industrial and commercial economy has been growing by 7% year-on-year for at least 5 years. This is a marker for growth. It may be that other older industries are slipping and shedding staff. The optimism is that there is some growth in Italy that is absorbing some unemployment. His conclusion FWIW is that Italy is not the problem country. If he is right, then IMHO Italy will benefit from losing Berlusconi and if it can collect taxes, get tougher with public sector and the corruption in the south etc they can fix it.

Update June 2012: I think there’s a fresh load of sh!t heading right for the debt fan. Merkel and Sarkozy have had a divorce, this new French bloke Hollande doesn’t want to impose austerity to bring his country in line with EU legislation. Someone needs to tell him that you cant spend more that you earn. Then of course we have our old friends the Greeks waiting for handouts that they will never be able to repay, and (the market seems to have forgot them) now their Spanish cousins waiting for the opportune moment to throw the biggest load of sh!t yet. I’m keeping my head low ….Ho! And, if that’s not enough don’t forget that yank debt clock is still ticking very fast towards its upper limit which will be hit later this year.

Comment by trader Henry: Does austerity work? Once you borrow you have to pay it back & if you borrow too much it causes pain when your debt is called in. If you don’t do it voluntary you will have it imposed on you. Bankruptcy is always worse than an IVA but the terms of an IVA are very strict such that if you default you do go bankrupt. The UK took the pain in the 1970’s by sticking strictly to what the IMF imposed on us. Many others have had to take the same pill or they have gone bankrupt through lack of discipline. You can’t expect to grow your bank account while paying back huge debts so its a case of accepting austerity until the debts have been unwound. The UK, US & PIGS are no exception. There is no other way – pay back your debts or go bust.

The problem with Greece is there’s nobody left to pay the debt. They’ve put the keys through the letter box and walked away. The creditors will be left holding the baby. I see the Greeks throwing their toys out of the pram but in the end they have to default or accept the austerity imposed by the IMF. If they go for bankruptcy no amount of civil unrest will stop the supermarket shelves from emptying or having no money to pay wages for teachers & health workers. Their imports will rise to prices they can no longer afford and their businesses won’t be able to get loans for working capital. Its Argentina/Russia/Iceland all over again.

Update August 2012: Visitor Comments:

– Picked family up from airport yesterday after holiday in Crete. They spent time with a Greek business couple who say hotels are less than half full and are worried they will not earn enough money to see them through winter, talk of paying back handers to get ‘better’ medical treatment, fires started by ‘opposition supporters’ to scare off tourists and the tax man randomly demands taxes from local businesses that they can’t pay. Does not paint a good picture.

– Had lunch today with someone from Spain. She said that she was pretty sure Spain would need a full bail-out quite quickly and confirms there are simply no jobs. She said they already have a lost generation. Her kids are 13/11 and bilingual…she thinks they will come and work in UK or abroad. The press in Spain suggests that the ratings agencies are creating a problem with their constant downgrades. She is an English teacher, so is coming at this purely from what she sees and reads.

Update September 2012:

Comment by trader Henry: ECB gets its money like any other central bank. They have control over interest rates and money supply, so they can print or remove whatever is needed – cash or bonds. They were set up as lender of last resort to the EU banks but that duty has now been extended to EU states. However, banks or states that want last resort support have to ask for the bailout and all usual strings are attached to the loans (bonds buying). If I put my socialist hat on I’d say those strings are usually aimed at making society poorer in the short/medium term. The end result is inflation – it’s unavoidable in the long term. Oil & food will go up. Equities will go up. Wages will go up. But only over the longer term.

Imo a similar solution will result in the US as a means to avoid the F/C. Similar is going on in the UK with our continuous bond printing. Inflation, inflation, inflation. It’s the easiest, most politically acceptable way to reduce debt. A decade of 4-5% inflation and you’ve cut your debt in half. From an investor’s perspective, I see solid blue chips as inflation protection. That is why I believe large market caps are outperforming AIM at the moment and will do for some time.

The latest move on the euro zone’s bailout fund means states won’t go bust or leave the Euro but it will mean more austerity if they want support. Short term that may hurt equities earnings.

Update June 2013: 

While the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) seem to be dominating the headlines right now I warned about this months ago.  I also think that we should pay particularly close attention to how this plays out and everything that is going on over in Europe because there are similar problems in the US. It is only a matter of time before they will have to implement austerity measures, (cuts in gov’t spending) which should cause unemployment to increase again and pressure on house prices.  While the Fed has done a masterful job of putting a band-aid on this problem they haven’t cured it by any means. Long term I am still bearish.  I know it sounds crazy but that’s what I see happening.  My point is that you should enjoy this rally while it lasts because this isn’t going to end well when the music stops. Until then I have no problem playing the long side…