Germany should leave the Euro?

Fascinating idea.  Should Germany leave the Euro to save it? Would these be a less catastrophic result than several Southern countries leaving? What does this mean for runs on banks?

It’s not all straightforward. We could still end up with a run on non-German banks since the  appreciation of the Deutschmark would correspond with a depreciation of the leftover-Euro against all other currencies. So the risks to depositors in Greek banks are similar to what they were before.

Interesting idea nonetheless.

Taxidermist Time

Clem Sunter outlines some scenarios and gives them probabilities. I’d stay as far away from this assessment as possible. In his explanation he demonstrates several times a pretty flimsy, superficial understanding of economics.

I don’t think he knows the first thing about why unemployment rates have dropped in the US.  He points to the dip as if it’s a bad thing, not recognising that the labour force participation rate is still stubbornly abysmal. The unemployment rate is going down in part because of increased discouraged workers removing themselves from the labour force through not actively looking for work.

His comments on low US interest rates completely miss that low long-term interest rates are a sign of a deeply depressed economy with a poor multi-year outlook on not a sign that the US is managing it’s deficits responsibly.  Many countries, including the UK, Germany, Japan, Switzerland and the US are basically at all-time low interest rates – a function of the poor economic prospects and low-inflation / deflationary expectations this amounts to.

The comparison against Japan is interesting in that it omits that the US is performing worse over the start of its “lost decade” than the Japanese did. We’re already in the scenario he gives a 40% probability

He talks about the remote possibility of Spanish and Italian bond default, without recognising that right now, today, Spanish bond yields are as high as they were during the height of the Global Financial Crisis and Spain has several banks in real trouble. The ongoing “jog on the bank” or near Greek exit from the Euro don’t even get a mention, even though they are some of the greatest Clear and Present Dangers to his global economic scenarios.

No mention of the fatal flaws in the design of the Euro and how this needs to be resolved, no mention of banking liquidity, a completely missed estimate of the message in ultra-low interest rates around the world?

This fox is ready for the taxidermist.

Inevitable meltdown

Yes, government bond yields around the world are plummeting to all-time lows.  They’re falling through the floor as investors realise the global economy is about as close to the drain as it’s been even through the “Global Financial Crisis”.

What do you mean “what about Greece and Spain”? Government bond yields are plummeting everywhere except where countries are part of a horribly flawed, disintegrating monetary union that isn’t in sync with the ideal currency union requirements.

Spain’s unemployment is higher than South Africa’s and the banking sector is teetering on the brink.  Greece desperately needs to go through the economy destroying exit from the Euro – the fallout from which will make it seem like leaving was the wrong choice when it fact it is the right choice.

European banks are enduring a jog on the bank – the relentless pressure of which will eventually push Greek then Spanish banks into a bottomless hole and take several European banks down with them.

It’s all falling apart and the world will not be the same after 2012. Textbook makers will make a killing out of updating their editions to reflect how much is different arising out of the 2012 disaster that was always going to happen.

Solar panel insurance critical to market

I have a view that solar energy will ultimately trump wind, tidal, geothermic and the range of other renewables being considered today. So I paid particular attention to the story about how much overcapacity there is in the solar market, resulting in thin or negative margins and many panel makers going out of business.

I don’t know what that means for the future of solar panel investment – the technology needs to progress a long way on efficiency and scale before it does succeed as the ultimate champion of renewable energy.

What is interesting is the role of insurance and insurers. Given how many panel manufacturers are going out of business, and given the cost-benefit equation for solar energy is all about an upfront investment that pays off over the long term, uncertainty about the performance of the panels in the long term is a market-killer. Insurers are stepping in to provide extra guarantees to support the long-term quality of the panels. If the manufacturer goes out of business, the insurer steps in to support the warranty.

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Not only eggs will be broken

Volatility skew didn’t exist before the 1987 market crash. Before then, the assumptions of the Black-Scholes option pricing model were felt to be about right. Constant volatility, continuously tradeable instruments with no discontinuities in prices, independent returns from one period to the next.

Then the market crashed downwards exhibiting leptokurtic, negatively skewed returns and large jumps between prices. This posed a much higher risk to those providing protection against market crashes since dynamic hedging failed to match the losses.

As a result, deep out of the money put options are more expensive they “should be”. Their implied volatility is higher than for otherwise similar at the money put options.

Financial catastrophe = fundamental rethink about risk and massive long-term implications.

Enter the Euro debacle. Some estimates suggest a temporary 50% decline in Greek GDP in a disorderly exit from the Euro. To be clear, that is the only sort of of exit there can be.

All those countries naively thinking that a currency union without fiscal, social, cultural and political union is a good idea must surely be thinking about these newly highlighted risks? It’s complicated enough creating a currency union, but it’s a bloody mess when you have to unscramble it. Not only eggs will be broken.

No time

No time to blog, not much time for Greece and the Euro. The slow months-long withdrawal of money from Greek banks has increased and is getting close to critical mass.