Wednesday 18 August 2010

Dead Cat Bounce

From a market perspective, it still feels like a dead cat bounce:

Foreclosures are still rising and so far this year 110 banks faild in the US compared to around 140 for the whole of 2009.

In relation to Greece, I posted on the 16th of June that Greece was in a worse shape that Argentina (another I told you This is now reflected in the CDS market:

"The cost of protecting Argentine debt against non-payment for five years with credit-default swaps fell 15 basis points, or 0.15 percentage point, to 817 this week, 27 less than similar contracts for Greece, according to CMA DataVision. Greek swaps rose 24 basis points in the same period.

Five-year credit default swaps tied to Argentine debt tumbled 175 basis points the past three months, the biggest decline among governments in the world after Ukraine and Pakistan, according to CMA. Contracts for Greece surged 230 to 844 during the same period, the world’s biggest surge behind Venezuela.

Argentine credit risk will remain below Greece as surging commodity exports boost tax revenue in South America’s second- biggest economy, according to Wells Fargo & Co. While Argentina’s economy is forecast to grow 9.7 percent this year by Morgan Stanley, the fastest in the region, Greece’s gross domestic product may shrink 4 percent, according to the government and European Union estimates.

“It is definitely a longer-term trend,” said Aryam Vazquez, an emerging-markets economist at Wells Fargo in New York. “The economy is growing, and the growth outlook is very robust. But more importantly, the fiscal situation is very strong. Their financing needs aren’t even a concern now, and that clearly is not the case with Greece.”

The yield of Government debt also reflects the trend:

"The average yield on Argentine bonds sank 93 basis points to 9.92 this year, according to JPMorgan Chase & Co. indexes. The yield on the 5.83 percent peso-denominated bond due in 2033 is 10.15 percent. The yield on Greece’s bonds due in 2020 surged 438 basis points to 10.61 percent since trading began in March, according to data compiled by Bloomberg."

In Argentina, you continue to have a lower debt-to-GDP rate, less rollover risk and relatively high growth,” Craige said in a phone interview. “These are much more likely to attract capital than countries that have high debt-to-GDP, structural fiscal deficits and high rollover risk, such as Greece.”

But in relation to Argentina being a safe place to invest, it is definitely not the case until a government change, the election will be held in December 2011:

“Argentina’s macro management is still very poor,” said Bertrand Delgado, an economist at Roubini Global Economics LLC in New York. Argentina’s credit-default swaps will only “see a significant move downward with a regime change, to one that’s somewhat more market friendly and has the political capital to implement the necessary changes in macro policy. That’s still a long bet,” he said.

If you use import cover as an indicator of a country's cash reserve to protect itself from external crises, the common rule is three months worth of import is adequate.

China and Russia stand at more than two years (Russia is around 30 months, China around 26 months, source The Economist).

Emerging markets economies stand out as well in terms of Import Cover: Thailand, Brazil and Argentina.

Greece is still in worse shape than Argentina, its import cover stands less than two months
whereas Argentina is around 12 months.

At the same time while households in the US, the government is adding debt at a faster pace, this is not going to end well. Please find below Michael Pento's view:

"According to the Flow of Funds Report, households reduced debt at a 2.4% annualized rate (US$330 billion) during the first quarter of 2010. Meanwhile, the federal government was piling on debt at an 18.5% annual rate ($1.44 trillion). Since every dollar of government debt is a promise to tax the private sector in the future with interest, this public spending spree effectively negated the Herculean efforts of the private sector to return to a sustainable path.

That's where the arrogance of Washington is really apparent. Scores of millions of American consumers have made the decision that reducing their debt burden is in their best interests right now. But a few hundred individuals in government believe they know better than the collective wisdom of the entire free market.

By leveraging up the public sector, they have used their power to confiscate our savings. In short, they are forbidding us from following the common sense path to fiscal health. "

Until you start to see meaningful job creation in the US, we cannot really talk about a recovery. What we have so far is the worse jobless recovery since 2001:

Severe recessions normally generates strong-labour market recoveries. This is not the case this time around. What we have witnessed in many industries, is creative destruction à la Schumpeter. Given the current deflationary environment in this ongoing deleveraging process, companies have learnt how to cope with a smaller workforce. Some jobs will simply not return, no matter how much money you throw at it.

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