Credit - In the doldrums

"There are many countries in the world that when they reached the middle-income stage, they witnessed serious structural problems such as growth stagnation, a widening wealth gap and increasing social unrest." - Li Keqiang 

Looking at France's recent PMI print for manufacturing coming at 48.5 but most importantly services coming at 48.8 which in the French economy represent around 80% of the GDP versus 76% for the rest of the European union and given it has been a while since we have not used our beloved maritime analogies, we thought it would be nice to re-acquainted ourselves in our chosen title this week:

"The doldrums is a colloquial expression derived from historical maritime usage, in which it refers to those parts of the Atlantic Ocean and the Pacific Ocean affected by the Intertropical Convergence Zone, a low-pressure area around the equator where the prevailing winds are calm. The low pressure is caused by the heat at the equator, which makes the air rise and travel north and south high in the atmosphere, until it subsides again in the horse latitudes. Some of that air returns to the doldrums through the trade winds. This process can lead to light or variable winds and more severe weather, in the form of squalls, thunderstorms and hurricanes." - source Wikipedia

Colloquially, the "doldrums" are a state of inactivity, mild depression, listlessness or stagnation which we think clearly characterizes for us the French situation in particular and the European situation in general. 

Therefore this week we will focus our attention on France and ask ourselves an interesting question, can you have a credit-less recovery in Europe?

In relation to France, if the Services PMI contracts at such a rapid pace, it still doesn't bode well for France's unemployment levels with president Hollande hoping to overturn the trend by year end. In that specific case the trend is definitely not the friend of French president Hollande as services represent the number one employment sector in France (34% of total employment in 2010 according to INSEE).

We were not surprised either to see Germany's Flash Composite Output Index jumping to a 10-month high of 54.3 from 53.2 in October. The services index also climbed to a 9-month high of 54.5 from 52.9, the manufacturing PMI climbed to a 29-month high of 52.5 from 54.5, and the manufacturing output index increased to a 3-month high of 54.0.

The reason for Germany's racing ahead have all been explained not only in the title of a previous post of ours "Winner-take-all" in February 2013 but also in the contents should you want to dig further on the subject:

"In similar fashion to the winner-take-all computational principle, when ones look at the growing divergence between France and Germany when it comes to PMI, in the pure classical form, it seems only the country with the highest activation stays active while all other see their growth prospects shut down" 

We have updated the graph displaying Manufacturing PMI for both Germany and France - graph source Bloomberg:

As a reminder, in our first credit post of the year, namely the "Fabian Strategy", we sounded the alarm in relation to France being clearly in the crosshair in 2013:

The story for 2013 in Europe we think, will be France:
In relation to France, in our conversation "A Deficit Target Too Far" from the 18th of April 2012, we argued: "We also believe France should be seen as the new barometer of Euro Risk with the upcoming first round of the presidential elections. Whoever is elected, Sarkozy or Hollande, both ambition to bring back the budget deficit to 3% in 2013 similar to their Spanish neighbor. We think it is as well "A Deficit Target Too Far" on the basis of our previous French conversation (France's "Grand Illusion").

Back in November 2012 in our credit conversation "Froth on the Daydream" we argued:

"Should industrial production print fell to -3.3%, we believe France will no doubt be in recession, putting in jeopardy its overly ambitious target of 3% of budget deficit in 2013 (A Deficit Target Too Far")."

We also indicated in  our February 2013 conversation "Winner-take-all" the following:

"While the French government has decided to revise its growth outlook for the year, the overly ambitious fiscal deficit in France of 3% will not be met and even the revised growth outlook of 0.2% to 0.3% will not be reached."

To that effect we justified our negative stance using a definitely scary graph displaying, French industrial production (white line), French GDP (orange line) and French Services PMI (blue line, data available since 2006 only) which we thought was telling the story on its own at the time and still is, we think - source Bloomberg:

Of course the divergence story between Germany versus France, is not only a growth divergence story, it is also an unemployment divergence story - source Bloomberg:

We concluded our February note with this statement at the time:

"After all the "Japonification" of Europe is a story of a broken monetary policy transmission channel, leading to liquidity constraints to the private sector with and therefore no impact whatsoever to the real economy, so no potential for economic growth to resume in France in particular and Europe in general."

In relation to Europe's PMI data from November, France we think is the worrying outlier, as indicated as well by Nomura from their recent note from the 21st of November 2013 entitled "Modest recovery ongoing as trend stabilises":

"In France the PMI data for November were disappointing, suggesting the economy is losing momentum. The composite output PMI was 48.9 (from 50.5 previously), the lowest reading in five months and consistent with the three-month moving average declining marginally to 49.8 from 49.9 in October. While almost negligible in size, the fall in the three-month moving average of the French composite index is the first in eight months and it points to some possible downside risks to our French GDP forecast of 0.2% q-o-q for Q4. 

The weakness in the French data was evident in the manufacturing and services sectors. The manufacturing PMI dropped to its six-month low of 47.8 in November from 49.1 previously (consensus: 49.5). There was no bright spot in the detailed report. In particular, manufacturing new orders fell by more than 2 points to 46.1, signalling little chance of revival in the sector in the near term. Moreover, new export orders dropped by 3.6 points to 48.5 and the employment index slipped to its five-month low at 48.2.

In the services sector, the headline index declined by 2 points to 48.8 (consensus: 51). One element of concern was the sharp 4 point fall in the employment service index to 46.7, which underpins the subdued nature of the recovery in France. The new business sub-index is the only bright spot in the services report, which rose to 49.3 from 48.5. However, it remained below 50, thus not sufficient to bring the sector out of contraction in the near term." - source Nomura

and Nomura to conclude their report:

"The data also show a greater divergence in economic performance between Germany and France, with the data for France confirming the services sector remains the laggard as we have highlighted in the latest edition of our business cycle positioning tool Galileo" - source Nomura

If indeed the services sector remains the laggard, then at some point the French president will have to stop being delusional about the probability of reversing the unemployment trend before year end. It will not happen.

Moving on to the subject of the possibility of a credit-less recovery in Europe, Bruno Cavalier from French broker Oddo, came-up with an interesting report on the 20th of November. We have long argued that no credit, meant no loan growth and no loan growth meant no economic growth and no reduction of budget deficits. In his note Bruno Cavalier argues that the argument relating to the possibility of having a recovery without bank lending is incorrect in his note. He indicates that the credit ratio to GDP has fallen from 55% since 2009 to 46%. Obviously this credit ratio varies tremendously from one European country to another. For instance, since the peak figure of 1st quarter 2009, it is down by 50% in Ireland, 30% in Spain and 20% in Greece.

EMU: Loans to the private sector - graph source Thomson Reuters, ECB, Oddo Securities:

EMU: Loans to the non-financial corporations - graph source Thomson Reuters, ECB, Oddo Securities:

Bruno Cavalier quotes a report that shows that out of 388 economic recoveries identified in 50 countries on several decade from researchers of the IMF (Abiad, Dell’Ariccia & Li (2011), “Creditless recoveries”, IMF working paper 11/58). They have established that one out of five recoveries is credit-less. He indicates that often, these credit-less recoveries have been preceded by financial crisis. The work of Abiad and Dell'Ariccia, shows that although credit might be constrained, a recovery is possible. Another study by the BIS, quoted by Bruno Cavalier (Takats & Upper (2013), “Credit and growth after financial crises”, BIS working paper 416), shows that in recoveries following a financial crisis, correlation between credit and growth are non-existent for the two first years following the crisis and turn slightly positive (but weak) in the consequent two years.

The on-going financial fragmentation in Europe can be seen in the differences in loan rates between core countries and peripheral countries - graph source Thomson Reuters, ECB, Oddo Securities:

Where we agree with Bruno Cavalier from Oddo Securities is the importance of tracking Bank Lending Survey which are done on a quarterly basis by the ECB. 

EMU: Credit conditions (z-score, supply & demand mixed) - graph source Thomson Reuters, ECB, Oddo Securities:

We argued in the past that the growth divergence between US and Europe were due a difference in credit conditions.

The divergence between US and European PMI indexes is all about credit conditions. This is why the US is ahead of the curve when it comes to economic growth compared to Europe. We have shown this before but for indicative purposes we will use it again, the US PMI versus Europe and Leveraged Loans cash prices US versus Europe - source Bloomberg:

The widest level reached since 2008, between both PMI indexes was 8.90. Whereas investor sentiment combined with an excess of demand over supply pushed the average price of S&P/LSTA Index loans up a quarter-point to a fresh post-credit-crunch high of 98.88 cents on the dollar in 2013.

Another survey we have been using specifically on France to track financial conditions has been a monthly survey in French published by the AFTE (Association of French Corporate Treasurers). In our conversation "The European crisis: The Greatest Show on Earth", we indicated:

"When it comes to credit conditions in Europe, not only do we closely monitor the ECB lending surveys, we also monitor on a monthly basis the “Association Française des Trésoriers d’Entreprise” (French Corporate Treasurers Association) surveys."

In order to comprehend the opinion of French corporate treasurers on the evolution of banks' margins, the AFTE calculates a difference between the average interest rate applied to new corporate loans and the 3 months Euribor rate. The series below stopped in October and continue to indicate some stability in banks' margin on new corporate loans below one year. New credits above a one year maturity provided  to French corporate treasurers remains at elevated levels:

What has been improving though for French corporate treasurers according to the latest November survey is access to financing. There is a slight improvement in the latest survey, but conditions remain tough for French companies:

While the rebound from the lows of the end of 2011 (which was due to the acute liquidity crisis faced by the European financial system), the LTROs have somewhat improved financial conditions for French corporate treasurers, nevertheless conditions remain tough at -6.2% of negative opinions still.

The latest AFTE survey ties up with Bruno Cavalier's note indicating the difference of opinion between bankers and small to medium size enterprises (SMEs) treasurers. Bankers indicate a lack of demand, while corporate treasurers indicate that financial conditions are still too restrictive, too tight.

SMEs which cannot get or accept a bank loan because cost was too high - graph ECB, Oddo Securities:

Share of SMEs which only get part of the loan they ask for - graph ECB, Oddo Securities:

Bruno Cavalier in his note concludes that given the on-going fragmentation in Europe and the credit rationing that follows, it reflects three parameters, risk aversion, difficulties of refinancing for banks and the balance between their risks and recapitalization needs. While the ECB will remain accommodative and the upcoming Asset Quality Review (AQR) in 2014, he thinks we cannot expect a strong rebound for credit availability in the coming months or quarters, but as balance sheets get cleaned up, the following credit cycle that will follow should comfort the economic recovery.

Touching again on the subject of credit-less recovery, another paper from the World Bank published in May 2013 by Naotaka Sugawara and Juan Zalduendo entitled "Credit-less recoveries - Neither a Rare nor an Insurmountable Challenge" made some interesting points:

"Private sector credit plays a crucial role in helping a country to recover from an economic recession. For instance, credit provided by commercial banks can re-energize the investment expenditure of enterprises and is an important option in handling household finances. While a recovery without private sector credit is possible, the empirical evidence suggests that such recoveries occur at a much slower pace. Indeed, a credit-less recovery, defined as a recovery from recession without a pick-up in real bank credit to the private sector, is not an unusual event but has been observed both among advanced and emerging economies.1 Even with different samples, the literature tends to find that the share of credit-less recoveries is around 20 to 25 percent of all recoveries." - Naotaka Sugawara and Juan Zalduendo, Credit-less recoveries - Neither a Rare nor an Insurmountable Challenge

Growth Performance, eight quarters before and after trough - source Credit-less recoveries - Neither a Rare nor an Insurmountable Challenge:

"In both country groups, though especially in the group of advanced economies, growth rates two years (or, eight quarters) before a trough, t-8, are similar between credit-less and credit-with events. However, the growth gap gets wider and becomes quite noticeable at least a year (i.e., four quarters) prior to the trough t. In the year the recovery occurs, credit-less episodes experience slow growth rates; however, this gap narrows after a year from the trough. By eight quarters after the trough, growth in credit-less recoveries is 1.5 percentage point lower than that in credit-with recoveries in developed countries. For emerging markets, the growth gap is even wider four and five quarters after the trough, but it also narrows during the rest of the second year following the trough. As a result, the growth differential in the group of emerging markets ends up at broadly the same level as in advanced economies." - Naotaka Sugawara and Juan Zalduendo, Credit-less recoveries - Neither a Rare nor an Insurmountable Challenge

They concluded their paper with these points:

"Credit-less recoveries are neither rare nor insurmountable challenges. The empirical evidence suggests that such recoveries occur at a much slower pace and are only somewhat more common among emerging markets. But recoveries do eventually occur. In fact, economic performance is in large measure correlated with the depth of the correction triggered during the economic adjustment that precedes the trough; specifically, the size of the downturn and the extent of external adjustment that typically accompany a recession (from the current account adjustment to developments in exchange rates). Also, openness has a dual role. Trade openness decreases the likelihood of a credit-less recovery as trade is a more stable source of financing. Conversely, capital account openness might have a large impact by the deleveraging process that typically follows a recession. But one must also be careful as to what this implies for countries going forward as the pre-recession period might have also meant large benefits in terms of growth.

As to policies during the recession, policymakers must be aware that excessive fiscal loosening might end up exacerbating the likelihood of a credit-less recovery, though more research would be needed to understand better their medium- to long-term implications. In contrast, monetary policy seems to play a more beneficial role by not increasing the likelihood of a credit-less event, especially in advanced economies. Finally, the country choice to avail itself of an IMF-supported program is negatively correlated with the likelihood of a credit-less recovery. Seeking an IMF program tends to help countries recover with an increase in private sector credit. The relationship becomes statistically meaningful when the economic conditions at the trough are controlled for. 

And what can be concluded from the estimation about the likelihood of credit-less events in ECA? Here the model seems to suggest that indeed many countries in the ECA (Europe and Central Asia) region were likely to experience a credit-less recovery—and they indeed did. But one must also draw hope from the fact that investment—and presumably eventually growth—typically recovers 8 quarters after a trough. This would suggest that a credit-less recovery is not a reason for extreme concern. More worrisome is that the region is now facing a renewed negative external shock."

But when it comes to Europe, the situation is more complex due to the single currency than warrants the World Bank and Oddo Securities. In a Bruegel Policy Contribution of February 2013, the author Zsolt Darvas in his note entitled "Can Europe Recover Without Credit?" argues the following:

"Data from 135 countries covering five decades suggests that creditless recoveries, in which the stock of real credit does not return to the pre-crisis level for three years after the GDP trough, are not rare and are characterised by remarkable real GDP growth rates: 4.7 percent per year in middle-income countries and 3.2 percent per year in high-income countries.

• However, the implications of these historical episodes for the current European situation are limited, for two main reasons:

• First, creditless recoveries are much less common in high-income countries, than in low-income countries which are financially undeveloped. European economies heavily depend on bank loans and research suggests that loan supply played a major role in the recent weak credit performance of Europe. There are reasons to believe that, despite various efforts, normal lending has not yet been restored. Limited loan supply could be disruptive for the European economic recovery and there has been only a minor substitution of bank loans with debt securities."

• Second, creditless recoveries were associated with significant real exchange rate depreciation, which has hardly occurred so far in most of Europe. This stylised fact suggests that it might be difficult to re-establish economic growth in the absence of sizeable real exchange rate depreciation, if credit growth does not return." - Zsolt Darvas - Bruegel Policy Contribution.

One of the most important point which has sustained credit markets in Europe, has been the strong issuance levels in the bond markets and the arrival of new issuers due to the on-going deleveraging process of European Banks and the acceleration of "dis-intermediation" as large corporates become more reliable on bonds for financing rather than on bank loans which are generally more difficult to get due and service due to covenants. 

Zsolt Darvas made this very important points in his paper:

"Using US firm-level data, Becker and Ivashina (2011) interpret switching by firms from loans to

bonds as a contraction in credit supply, conditional on the issuance of new debt. They find strong evidence of substitution of loans by bonds during periods characterised by tight lending standards, high levels of non-performing loans and loan allowances, low bank share prices and tight monetary policy. They also find that this substitution behaviour has predictive power for bank borrowing and investment of small (out-ofsample) firms, which are not able to issue bonds.

In a related paper, Adrian, Colla and Shin (2012) also document the shift from loans to bonds in the composition of credit in the US, and argue that the impact on real activity comes from the spike in risk premiums, rather than contraction in the total quantity of credit. Gertler (2012) adds, by sketching a simple conceptual framework, that credit spreads are a more useful indicator of credit supply disruptions than credit quantities. Gertler (2012) cites Gilchrist and Zakrajsek (2012), who conclude that the increase in spreads during the recent financial crisis was likely symptomatic of unusual financial distress, and not just the reflection of the increased default risk faced by borrowers.

Certainly, the above-mentioned studies analysed data that was available at the time of writing and therefore their sample periods end between 2009 and 2011. Since then, a number of attempts were made by European governments and the European Central Bank to help restoring normal lending and therefore the finding that credit supply was limited up to 2009 or 2011 may not

necessarily imply that such limitations exit now as well. However, European banks still suffer from a large, €400 billion, capital shortfall according to the OECD (2013); the share of non-performing loans continues to be high; bank share prices are low even after the recent increases; and banks need to meet tight capital, liquidity and leverage requirements, even though some of the Basel III requirements were relaxed in January 2013 (Basel Committee, 2013). These factors suggest that credit supply may remain constrained in the EU." - Zsolt Darvas - Bruegel Policy Contribution.

We also agree with the author's final conclusion:

"If credit growth does not return, economic recovery may prove to be difficult in the absence of sizeable real exchange rate depreciation." - Zsolt Darvas - Bruegel Policy Contribution.

For illustrative purposes, we looked at Spain's non-financial loans versus GDP growth to illustrate the case of a the credit-less recovery discussed - graph source Bloomberg:

But Spain being in the colloquial "doldrums", namely a state of inactivity, mild depression, listlessness or stagnation, some of that air returns to the doldrums through the trade winds, could lead to light or variable winds and more severe weather, in the form of squalls, thunderstorms and hurricanes ahead in Europe, when one looks at the unemployment issues particularly hindering the economic prospects for peripheral countries.

One just has to glance casually at the Spanish "Misery" index to fathom the uphill struggle face by our European politicians - graph source Bloomberg:

The misery index is calculated by adding the 12-month percentage change in the consumer price index to the jobless rate. Arthur Okun, an adviser to Presidents John F. Kennedy and Lyndon Johnson, created the indicator in the 1960s.

So for us, unless our  "Generous Gambler" aka Mario Draghi goes for the nuclear option, Quantitative Easing that is, and enters fully currency war to depreciate the value of the Euro, there won't be any such thing as a "credit-less" recovery in Europe and we remind ourselves from last week conversation that in the end Germany could defect and refuse QE, the only option left on the table for our poker player at the ECB:

"The crux lies in the movement needed from "implicit" to "explicit" guarantees which would entail a significant increase in German's contingent liabilities. The delaying tactics so far played by Germany seems to validate our stance towards the potential defection of Germany at some point validating in effect the Nash equilibrium concept. We do not see it happening. The German Constitution is more than an "explicit guarantee" it is the "hardest explicit guarantee" between Germany and its citizens. It is hard coded. We have a hard time envisaging that this sacred principle could be broken for the sake of Europe."
 

On a final note, we think the outlook for the US could be further boosted by fall in Oil imports, making the exit strategy for the Fed as difficult as it was for the team of Apollo 13 and the heroin of visually stunning movie Gravity to land back to earth - graph source Bloomberg:

"U.S. oil imports are close to a 22-year low, a trend that is expected to continue through 2014 from increased domestic shale drilling. About 10.5 million barrels a day were imported in 2005, with about 8.5 million barrels coming from seaborne trade. That number has decreased to 5 million barrels, according to Teekay Tankers. Crude tanker ton-miles will decline, though product tankers should benefit from an increase in U.S. refined exports." - source Bloomberg.

"Happiness, to some, elation; Is, to others, mere stagnation." - Amy Lowell, American poet.

Stay tuned!

Guest post - Weakening Global Earnings Momemtum - Rcube Global Macro Research

"The myth of unlimited production brings war in its train as inevitably as clouds announce a storm." - Albert Camus

Courtesy of our friends at Rcube Global Macro Research, please find enclosed their latest publication, where Cyril Castelli and Stéphane Alloiteau look at the weakening momentum in global earnings:

Global earnings momentum is weakening.

Earnings revision ratios are moving lower almost everywhere except Japan.

In Asia, where we follow ERRs particularly closely (Asia being the workshop of the world, ERRs tend to be a reliable leading indicator), analysts have recently been lowering their estimates. The Chinese growth scare explains most of it.

AUDCHF weakness sends a similar message.

Asian earnings momentum weakness suggests that US treasuries yields have gone too far as we have recently warned.

In Emerging markets more generally, ERR have also substantially weakened:

In Europe the situation is also worrying, particularly so in France.

The recent upward move in the European composite PMI therefore looks unsustainable:

The only sign of strength is in Japan, where Earnings momentum remains close to historical highs.

World ERR is moving down, highlighting the potential risks to global growth.

"It is better to have your head in the clouds, and know where you are... than to breathe the clearer atmosphere below them, and think that you are in paradise."

- Henry David Thoreau 

Stay tuned!

Chart of the Day - Chinese Iron Ore back to 2010 levels

"But it is possible that, in the days ahead, these years we have lived through may eventually be thought of simply as a period of disturbance and regression." - Hjalmar Branting, Swedish statesman 

Back in May 2012, we argued that Australia at some point could be facing the "Iron Ore" conundrum given its exposure to Iron Ore. Although we had it wrong in relation to our negative stance on the Australian dollar, the Australian dollar has been so far remarquably steady compared to the US dollar - source Bloomberg:

When ones look at the significant drop in Iron Ore inventory at port since 2009 coming back to 2010 levels, one can wonder what can be expected in 2013 for Chinese growth given the recent weakness seen in China's PMI - source Deutsche Bank, Shipping Weekly, 4th of March 2013:

While Chinese iron ore imports were up 21% y/y, they were down 4% m/m after a strong December according to Deutsche Bank:

Yet this recent rally can be challenged according to a recent Bloomberg article from the 7th of March - Iron Ore Surge Prompted by Demand, Speculation, China Says:

"A recent surge in iron ore prices was caused by changes in demand, market speculation and “unreasonable” pricing methods, China’s top planning body said. The biggest mining company said it hadn’t curbed supplies.
Chinese steelmakers re-stocked iron ore during the traditional “winter reserve” period and ramped up purchases as confidence in the economy improved, leading to an explosive increase in demand in the short term, the National Development and Reform Commission said in a statement on its website.

Chinese steelmakers re-stocked iron ore during the traditional “winter reserve” period and ramped up purchases as confidence in the economy improved, leading to an explosive increase in demand in the short term, the National Development and Reform Commission said in a statement on its website.
The three largest mining companies and certain traders either delayed or controlled deliveries to make up for their previous losses, creating a false impression of temporary short supply, according to the NDRC. Some mining companies also bought iron ore from the market to drive up prices, it said. - source Bloomberg

Iron ore exports to China from Australia are indeed a strong indicator of Chinese industrial activity, and given it fell by 14.8% in February from 18.38 million tonnes in January to 15.66 million tonnes in February, one can wonder if the Chinese holiday season or the cyclone disruptions are entirely responsible for the slowdown or if there is more to it given Korea data could indeed herald surprise China exports drop according to Bloomberg:

"South Korea’s biggest export drop in seven months suggests China will surprise the market and also report fewer shipments in February, lessening the case for monetary tightening in the world’s second-biggest economy, according to Nomura Holdings Inc. 
South Korea is the only one of Asia’s 10 biggest economies to report February trade data thus far. Given that China is its biggest export market, Korea’s sales drop signals that its larger neighbor is poised to report weaker-than-expected shipments, said Zhang Zhiwei, Nomura’s chief China economist. The CHART OF THE DAY tracks monthly changes in the two nations’ overseas sales since 2008. South Korea said exports in February declined 8.6 percent from a year earlier, the second drop in three months. Based on that result, Zhang predicts China will announce tomorrow a 10 percent decrease when February figures are released in Beijing. Nomura’s economist is among only six of 33 analysts surveyed by Bloomberg that predict a drop. The median estimate is for an 8.1 percent increase. “The data suggests China’s recovery is not so strong,” Hong Kong-based Zhang said. “We still call for the People’s Bank of China to tighten policies, hike interest rates and regulate shadow banking activities this year. But recent weak macro data will only make the central bank delay it.” 
China this week affirmed its 2013 growth target at 7.5 percent after the economy grew 7.8 percent in 2012, the slowest pace in 13 years. China will report a February trade deficit of $28.5 billion, according to Zhang. That would be the first shortfall in a year and compares with an average monthly surplus of $16 billion in the past three years. Growth rates for exports and imports in the first two months are distorted by changes in the timing of the weeklong Chinese New Year holiday, which fell in February this year and January in 2012. Nomura’s forecasts tie in with the new export orders component of China’s official Purchasing Managers’ Index, reported on March 1, which fell to a six-month low of 47.3 in February. The broader PMI sank to a five-month low of 50.1, according to data from the National Bureau of Statistics and China Federation of Logistics and Purchasing. A reading of 50 marks the divide between expansion and contraction." - source Bloomberg.

Could the recent slowdown and price manipulations for Iron Ore spell trouble as well for neighbor Australia given its dependency to Iron Ore exports? We wonder.

One thing for sure, the recent weakness in Korea's exports courtesy of Japan's agressive monetary stance has put the Japan-Korean risk gap near parity has indicated by Bloomberg:

"The push by Japan, the world’s most-indebted government, to weaken its currency to boost exports and end deflation may reduce its perceived default risk below South Korea’s, where won gains are having the reverse effect. The CHART OF THE DAY tracks the cost of insuring the five- year sovereign bonds of Japan and South Korea since August. Thespread between the two credit-default swaps fell to 1.2 basis points on Feb. 5, the narrowest since Oct. 11, the last time it was more expensive to insure against a Korean default, data compiled by CMA show." - source Bloomberg

Korea losing its competitive edge towards Japan thanks to a weakening Japanese yen could indicate weaker than expected Chinese growth as well as impacting Australia in the process.

"Worry is interest paid on trouble before it comes due." - William Ralph Inge, English clergyman



Stay tuned!

Credit - Winner-take-all

"One should always play fairly when one has the winning cards." -  Oscar Wilde

"Winner-take-all is a computational principle applied in computational models of neural networks by which neurons in a layer compete with each other for activation. In the classical form, only the neuron with the highest activation stays active while all other neurons shut down, however other variations that allow more than one neuron to be active do exist, for example the soft winner take-all, by which a power function is applied to the neurons." - source Wikipedia

Looking at the recent raft of European data in general and PMIs in particular, we thought we would venture again towards computational analogies in our chosen title, in similar fashion to our previous post "Banker's algorithm" in 2012.

In similar fashion to the winner-take-all computational principle, when ones look at the growing divergence between France and Germany when it comes to PMI, in the pure classical form, it seems only the country with the highest activation stays active while all other see their growth prospects shut down - source Bloomberg:

In our first credit post of the year, namely the "Fabian Strategy", we sounded the alarm in relation to France being clearly in the crosshair in 2013:

The story for 2013 in Europe we think, will be France:
In relation to France, in our conversation "A Deficit Target Too Far" from the 18th of April, we argued: "We also believe France should be seen as the new barometer of Euro Risk with the upcoming first round of the presidential elections. Whoever is elected, Sarkozy or Hollande, both ambition to bring back the budget deficit to 3% in 2013 similar to their Spanish neighbor. We think it is as well "A Deficit Target Too Far" on the basis of our previous French conversation (France's "Grand Illusion").

Back in November in our credit conversation "Froth on the Daydream" we argued:

"Should industrial production print fell to -3.3%, we believe France will no doubt be in recession, putting in jeopardy its overly ambitious target of 3% of budget deficit in 2013 (A Deficit Target Too Far")."

In this week's conversation, we would like to reiterate our views on France in particular and Europe in general and why France will be in the spotlight in 2013.

While the French government has decided to revise its growth outlook for the year, the overly ambitious fiscal deficit in France of 3% will not be met and even the revised growth outlook of 0.2% to 0.3% will not be reached.

Why so? Well, having a look at one definitely scary graph displaying, French industrial production (white line), French GDP (orange line) and French Services PMI (blue line, data available since 2006 only) tells the story on its own, we think - source Bloomberg:

A sobering fact, services in the French economy represent around 80% of the GDP versus 76% for the rest of the European union. the latest read at 42.7 for Services PMI is the lowest since February 2009. Overall French composite PMI is at 42.3, the lowest level since April 2009. 

If the Services PMI contracts at such a rapid pace, it doesn't bode well for France's unemployment levels. Services represent the number one employment sector in France (34% of total employment in 2010 according to INSEE).

Germany versus France, a story of growth divergence and unemployment divergence - source Bloomberg:

In that context, we would have to agree with Nomura's take on French Q1 GDP forecast of -0.3% q-o-q and as well with their annual GDP forecast of -0.5% in 2013, meaning France will have to find additional resources to fill the gap in its public finances.

"At the sector level, the euro area manufacturing PMI dipped slightly to 47.8 from 47.9 in January (Consensus: 48.5; Nomura: 48.4), mainly owing to the fall in the output sub-index (from 48.7 to 47.5). However, the forward-looking indicators seem to be more positive than the headline index, with the new orders component rising to 47.7 from 46.8 previously, thus taking the new order-to-inventories ratio to 1.02, the highest level since June 2011. In particular, thanks to the strong demand in Asia and the US, new export orders, mainly led by Germany, returned to expansion (at 51.7 from 49.5) for the first time since May 2011. In the services sector, the headline index (at 47.3 from 48.6) and almost all the sub-indices declined. Against a weak backdrop for domestic demand, new business and business expectations remained at low levels, suggesting a bleak near-term outlook. Country details again revealed significant divergences across the region, with the situation in France increasingly worrying." - Source Nomura - Euro area composite PMI to increase pressure on ECB - 21st of February 2013.

 The divergence between the US PMI and European PMI, is here to stay in 2013 - source Bloomberg:

But, before we look into more details about France in particular, first a quick credit overview.

The European bond picture, with Spanish 10 year yields staying around 5.15%, whereas Italian 10 year yields below 5% hovering around 4.45% and German government yields stable around 1.60% levels - source Bloomberg:

While this picture has been relatively stable for the last couple of weeks, the uncertainties surrounding the Italian elections could through a spammer and derail this overall picture of yields stability for peripheral countries.

Sovereign CDS wise, Credit Default Swaps in Portugal, Spain, Italy and Ireland have tightened over the last 3 Months, with Portugal showing the biggest improvement, tightening 32% to 381.1 bps. Italy improved the least, but still tightened 12.5bps (5%) to 247.5 since 23rd November according to CDS data provider CMA part of S&P Capital IQ:

Looking at the week ahead, arguably the Italian elections taking place on Sunday and Monday will be key in determining the willingness of the Italian population to push forward reforms: Italian elections (Sunday and Monday) as indicated by Nomura's take in their latest "The Economy Next Week" from the 22nd of February:
"The Italian national elections will be held on Sunday 24 and Monday 25 February, with polls closing at 2pm London time on Monday and the first exit polls likely available a few minutes after that. Our baseline view is for a centre-left majority in both houses of parliament, with Pier Luigi Bersani as prime minister. In the likely case Bersani fails to win the Upper House, we then believe he will negotiate and build a coalition with Mario Monti for the remainder of next week. We view this as more likely than new elections and we expect such a coalition to face difficulties in implementing reforms. The fragmented political landscape and the possibility that the shape of the government will be decided as a consequence of post-election alliances rather than from a decisive vote are recipes for instability and slow reform momentum, our main concerns after the elections." - source Nomura

One thing for sure, the Italian election is going to be a close call and could add potential uncertainty to the European project. As displayed by Bloomberg's Chart of the Day, the Berlusconi effect, while present, might
not be enough to counter Italian premiership candidate Pier Luigi Bersani - source Bloomberg:

"The CHART OF THE DAY shows that Bersani’s average lead in opinion polls of 6 percentage points for elections to the lower house of Parliament is similar to Romano Prodi’s advantage of 5.8 percentage points over Berlusconi in 2006. While Prodi went on to win by just 0.1 percentage point, the victory margin for Bersani will drop to only about 2.4 percentage points assuming the same survey bias this year, as more parties contest the election now than seven years ago. The bias may reflect a so-called Berlusconi effect, whereby voters tell polling companies they won’t support the three-time premier, perhaps out of embarrassment, only to cast ballots for him on election day, D’Alimonte said. The case resembles the “Bradley effect,” named after Tom Bradley, the black former Los Angeles mayor who unexpectedly lost the 1982 California election for governor after most surveys indicated he would win. “There’s certainly a number of people who are reluctant to say they’re going to vote for Berlusconi, but they actually will,” D’Alimonte said by phone. Still, “it’s unlikely they will be enough” to give Berlusconi the edge over Bersani in the election for the Chamber of Deputies, he said." - source Bloomberg

Interestingly we have been tracking over the months the growing divergence in the performance of the Standard and Poor's 500 index and the Eutostoxx in conjunction with Italian 10 year government yields - source Bloomberg:

The lag in European stocks given the very recent negative tone in European economic data has made them much more volatile. Should the "Risk-Off" scenario come back in the coming weeks it should lead to additional weakness for the Eurostoxx and rising Italian yields in the process.

In similar fashion, the recent weakness in European stock has led to a growing divergence between the evolution of VIX versus its European counterpart V2X - source Bloomberg:

While V2X has reached 20.40 from a low of 14.85, VIX has surged from its low of 12.31 towards 15.22.
As we pointed out last year in our conversation "The two main drivers of equity volatility" with the help of our friends from Rcube Global Macro Research:
"The two main drivers of equity volatility are for us, credit availability (Merton model) and revisions of earnings forecasts estimates.

The relationship between the Eurostoxx volatility and the Itraxx Crossover 5 year index (European High Yield gauge) - source Bloomberg:

As we posited in "Yield-Famine": "Credit is increasingly becoming a crowded trade, forcing yield hungry investors to get out of their comfort zone and reaching out for High Yield as well as Emerging Markets in the process. While everyone is happily jumping on the credit bandwagon in this "yield famine" environment, we would advise caution given liquidity, as we discussed on numerous occasions (and liquidity mattered a lot in 2011...), is an important factor to consider in relation to investor confidence and market stability."

On the subject of credit becoming a crowded trade, it seems some high-yield investors are also starting to take notice of credit entering bubble territory. As reported by Cecile Gutscher and Doug Alexander in Bloomberg on the 22nd of February - Top Junk Bond Manager Marshall Sees Rally Ending:
"CI Investments Inc.’s Geof Marshall, the second-biggest Canadian manager of high-yield debt, said the four-year rally in below-investment-grade bonds is coming to an end as companies begin to take on too much risk. “The high-yield rally is long in the tooth,” Marshall, who manages $6.8 billion as head of high-yield investments, said in a Feb. 20 interview at his Toronto office. Investors can expect “coupon-like returns” this year, he said. The Bank of America Merrill Lynch High-Yield Index gained 18.8 percent in 2012, beating the returns of investment-grade corporate debt for the third time in four years. After using junk bonds to propel his Signature Diversified Yield mutual fund to the top 10 among Canadian balanced funds last year, Marshall is cutting holdings of the securities to 35 percent, from 40 percent in the middle of 2012. Following four years of balance-sheet repair and cost-cutting, many issuers are shifting their preference back to boosting return on equity, while the re-emergence of debt-laden takeovers such as Dell Inc. and HJ Heinz Co. will undermine confidence, he said. “Companies can borrow cheaply, shareholders are clamoring for returns, so to the extent that high-yield companies can borrow for growth or to increase dividends, I think you’ll see more of that,” Marshall said. “The quality of high-yield issuance probably begins to deteriorate in general.”' - source Bloomberg.

In terms of sector allocation and as far as the story of the "Great Rotation" goes, namely allocating from credit to equities, it seems some players are already taking a few chips from the High Yield table and rotate some of their High Yield allocation into equities as reported in the same Bloomberg article:
“What we’re doing is very gradually letting the high-yield weight fall” in funds including the High Income fund, where junk is mixed with other assets, Marshall said. “As we get inflows, the marginal dollars are being invested in equities as opposed to credit.” Apart from equities, Marshall is boosting bets on U.S. dollar leveraged loans, which pay similar coupons of about 6 percent to U.S. junk bonds and get paid first in bankruptcies. “The value gap between loans and high-yield bonds is greatly diminished,” he said." - source Bloomberg.

Geof Marshall concluded is  Bloomberg interview with the following important points:
"“We’re at the cusp of transitioning from a market that’s driven by systemic, macro challenges, risk-on, risk-off, to a market that’s going to be more idiosyncratic,” Marshall said. “I don’t think the high-yield trade is over per se, I just think that returns are going to be lower going forward.” - source Bloomberg.

Moving back to our French subject, and in continuation to last week conversation around goodwill impairments on corporate earnings, French giant France Telecom, in similar fashion to its French relative Credit Agricole wasn't spared either by goodwill writedowns and took a 1.84 billion euros impairment charge on its units in Poland, Romania and Egypt which dragged down its 2012 profits. As we indicated last week in our conversation "Bold Banking", the Telecommunications sector has seen some large goodwill impairments in recent years, such as Deutsche Telekom 7.4 billion euros goodwill writedown in November 2012 on its T-Mobile USA unit and Vodafone as well with a 5.9 billion pound writedown on assets in Italy and Spain.
Whereas France has been one of the worst performer of core European countries, its flagship France Telecom has been arguably the worst performer in French CAC40's index falling 32.4% during the past 12 months.

But, what have the factors plaguing French GDP?

In a recent note entitled French GDP - Drivers of Corp Revenues and Investment, CreditSights indicated the following:
"The shrinkage is primarily a result of weak corporate investment spending, which is in turn the result of weak household expenditure and, since the fourth quarter, falling export demand." - source CreditSights.

What are the swing factors according to CreditSights:


"It is household consumption and investment spending that tend to be the swing factors. Government's purchases of goods and services from the private sector have tended to be reasonably stable.

But investment spending (to the extent that it is corporate investment spending) is not only a driver of corporate revenues, it is also responsive to revenues. If companies are experiencing weaker sales they will run down inventories and then look to cut back on capex.



That relationship between investment spending (including building of inventories) and company revenues is illustrated by the scatter plot on the right hand chart above. It shows annual changes in investment spending versus annual changes in revenues. Even ignoring the outliers in investment and revenues during the 2008 recession, the R square (the extent to which changes in revenues are associated with changes investment spending) is still 33%. That suggests that French companies' investment plans are, unsurprisingly, heavily reliant on their revenues. And therefore French companies are unlikely to start investing unless it is in response to a pick up in demand somewhere else. In short, corporates require an external stimulus either from greater household spending or greater export demand." - source CreditSights.

Truth is when it comes to greater export demand which could offset the current headwinds plaguing the French economy, France is indeed the outlier, has displayed in the following graph from Deutsche Bank's note "Why Italy and France lack competitiveness from the 20th of February 2013:

As far as our title and computational analogies goes "Winner-take-all". While Germany has been the clear winner in the period going from Q1 2008 to Q3 2012, both Spain (+12.2%) and Ireland have seen their performance improve as far as peripheral countries are concerned.

As a follow up on our introduction relating to the significance and importance of the recent poor display in France's Services PMI, France export underperformance is not due to unfortunate sectorial diversification as indicated by Deutsche Bank note:

"French machinery exports in cumulative terms increased 68% in the 12 years to 2011. But they would have risen by twice as much if they had kept pace with the trading partners’ demand levels in the machinery sector. Indeed, France’s performance gap in the machinery sector is 0.5.

An advantage of developed economies is a more advanced service sector. Unfortunately, France’s poor performance was not limited to exports of goods, as shown in Figure 9. Even in services, the country did not manage to keep up with the expansion of trading partner demand." - source Deutsche Bank.

Regarding the growing divergence between Germany and France, both countries have taken different paths leading to different outcomes as indicated by Deutsche Bank's note:
"France and Germany have followed different strategies to take advantage of globalisation. German companies have outsourced only part of their production process to low-cost countries, mainly located in Central and Eastern Europe. Germany’s geographical position facilitated this process. Using the intermediate low-cost inputs allowed German firms to reduce overall production costs and increase the productivity of their own production plants as well as their profitability. Conversely, French companies often outsourced the entire manufacturing process to lowcost countries. So although the product is sold by a French company, it does not enter French exports." - source Deutsche Bank

A stark reminder of the "Regret Theory":
"The Regret theory (also called opportunity loss) being defined as the difference between the actual payoff and the payoff that would have been obtained if a different course of action had been chosen by our European politicians. The Regret theory is also a model of choice under uncertainty defined as the difference between the outcome yielded by a given choice (credit crunch, economic recession) and the best outcome (muddle through) that could have been achieved in that state of nature (deflationary forces at play).

As far as Europe is concerned, one can wonder what would have been the "economic outcome" if a different course of action would have been undertaken. On that matter we wonder why our "European elites" did not use the minimax regret approach being a decision rule used in decision theory, game theory, statistics and philosophy for minimizing the possible loss for a worst case (maximum loss) scenario." - source Macronomics 

Not only France has lost ground in industrial exports but more critically in high-tech sectors as displayed by Deutsche Bank:

"France’s export market share in high-tech products decreased sharply from 7.1% in 1999 to 4.4% in 2006, rebounding modestly to 4.8% in 2008. Over the 1999-2008 period, Germany’s export market share in high-tech products increased slightly from 7% to about 8%.


The EC sees France’s decreasing market share of high-tech exports as a consequence of insufficient innovation. While – contrary to Italy – R&D in France is not too far from that of Germany (Figure 19) and public investment is high, private investment in R&D lost ground compared to Germany. According to the EC, over the past decade R&D spending by companies in France remained broadly constant at 1.4% of GDP per year, while in Germany it rose to 1.9% of GDP." - source Deutsche Bank.


Finally, loan growth in France to households and corporates points to additional weakness in economic growth, as indicated in the below graph from Nomura's economic research:

We hate sounding like a broken record but, no credit, no loan growth, no loan growth, no economic growth and no reduction of aforementioned budget deficits.

After all the "Japonification" of Europe is a story of a broken monetary policy transmission channel, leading to liquidity constraints to the private sector with and therefore no impact whatsoever to the real economy, so no potential for economic growth to resume in France in particular and Europe in general.

"Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom." - Viktor E. Frankl, Austrian psychologist.

Stay tuned!

Macro update - Scaring off the Stymphalian birds (or the bonds vigilantes) and "Stuck in the middle with you"

After cleaning the Augean Stables, Heracles was given the task of defeating the Stymphalian Birds, man eating birds with beaks of bronze and sharp metallic feathers.

This week's analogy follow up on the post relating to our hero's task of cleaning the Augean stables, relating to the amount of toxic greek debt plaguing the Augean stables (European banks...).

Although our Heracles hero, shot many of Stymphalian birds with his arrows and the rest flew far away, supposedly never to return, the Argonauts later encountered them. In the European Greek saga, our Stymphalian birds (or the bonds vigilantes), will indeed return at some point, like they did for the Argonauts. The problem with Greece, is an acute problem of solvency rather than a funding issue. M Market's big relief at both the Greek agreement on another round of austerity measures (155-138, a Pyrrhic victory?),
as well as a welcomed decent print for the ISM in the US (ISM came at 55.3 which was better than expected the 52), gave us some welcome respite in all this recent price action and excitement. Question being now, will this ISM print prove transitory and when will our greek friends come back to haunt us?

Time for some macro and markets updates!

Greek 5 year Sovereign CDS, some respite in its stratospheric rise:


Similar story for European Sovereign CDS:


Given the correlation between Sovereign CDS and Banks Senior 5 year CDS, no suprise even there on the tightening move:


In Portugal, tightening for Portuguese banks 5 year senior CDS:



and in France:


On the 29th of June according to CDS data provider CMA, Ireland CDS 5 year was standing at 783 bps, giving a cumulated probability of default of 47.5% over 5 year, and Portugal was standing at 775 bps with a similar level of CPD (Cumulated Probability of Default) of 48%. Greece was at 2132 bps, with a CPD of 81.5% over 5 year. Clearly the solvency issue for Greece is not resolved. Please note Greece 5 year CDS is still trading upfront, meaning, that rather than making a quarterly payment for the yearly spread, it is "cash only" upfront please for the premium. At this level of spread we are talking about a premium of around 35%, meaning for a 10 million notional trade, you would have to fork out 3.5 million USD to get covered, cheap...

Meanwhile on the 30th of June, the Italian government introduced additional fiscal austerity measures that aim to reduce the general government deficit by €47 billion (3% of 2011 GDP) by 2014. S&P said there was onne in three chance it will cut ratings of Italy in the next 24 months. Italy's debt to GDP ratio was at 119% at end-2010.

On the 30th of June we also got Unemployment Claims in the US at 419k versus 429k previously. Unemployment is still a major drag. Same story so far.
Chicago PMI came at 54.1 versus a previous print of 56.6. This set the tone for the ISM which was announced on the 1st of July. ISM manufacturing index rose to 55.3 in June from 53.5 in May
From that point Mr Markets mood changed from "Risk off" to "Risk on". Equities should continue to rise in the short term.

Nearly two thirds of the total beat of the ISM came from a jump in inventory levels, this is not great: from 48.7 to 54.1. Why ? Because an increase in inventories is a negative for future activity. Let's keep an eye on the ISM.
We are getting confusing data, The University of Michigan Consumer Sentiment index fell to 71.8 in June from 74.3 in May, well below the 74.0 that was expected.

Emerging Markets Top Gun: Welcome to danger zone...


The Economist Overheating index:

The Economist - Temperature Gauge"THIS chart, based on an analysis by The Economist, ranks 27 economies according to their risk of boiling over. We take each economy’s temperature using six different indicators: the inflation rate, the unemployment rate relative to its ten-year average, GDP growth relative to trend, excess credit (the growth in bank lending minus the growth in nominal GDP), real interest rates, and the forecast change in the current-account balance in 2011."

Emerging Markets Consumer Prices, percentage increase on year ago, thank you QE2?

Source - The Economist

Emerging Markets Real interest rates:

GDP Growth Forecasts for 2011:

Also in the news: China's official Purchasing Managers Index fell to a 28-month low to 50.9 in June with imports index tumbling to 48.7, lowest since August 2010.

UK PMI below expectations, coming at 51.3 on consensus of 52 and below May's 52.3, the fifth consecutive decline since the series' record high of 61.9 in January. UK is entrenched in stagflationary territory. I posted extensively on this blog on the UK situation. It is bleak. The Bank of England is facing higher inflation, weak growth, weak industrial output, high unemployment.

Risk aversion, the big picture, who is weak, who is strong:

A continuation on the story on US banks and why you need to avoid their common stock, David Goldman sums it up nicely in his blog:

Inadequate Loan Loss Reserves: You Read It Here First

“Bad Mortgages Weigh on Banks” is the headline of Nick Timiraos’ WSJ report that nearly 20% of US banks’ mortgage holdings are delinquent.

"The market knew this perfectly well, and reflected this knowledge in the pricing of commercial and residential mortgage-backed securities, as I explained in a blog post June 28. My calculations suggested that US banks will have to increase loan loss reserves."

WSJ Report: Troubled Mortgages Still Plague Banks - By Nick Timiraos"The report said 19.7% of mortgages in banks' portfolios were delinquent at the end of March. By contrast, nearly 6.8% of mortgages backed by Fannie and Freddie were nonperforming, as were 11.4% of all mortgages."

Stealers Wheel's 1972 - Stuck in the middle with you
"Clowns to the left of me, jokers to the right, here I am..."

"While many subprime and other risky mortgages were packaged into securities and sold off to investors, banks chose to keep certain loans or were stuck with them after securitization markets froze in 2007. Loans held on bank balance sheets “in and of themselves are reflective of lesser quality loans” than those backed by Fannie, Freddie, or federal agencies, said Bruce Krueger, a senior OCC mortgage examiner."
Ouch...

and Nick's article as well:
"Banks and thrifts hold around $2.6 trillion in mortgage debt, including around $765 billion in second mortgages and home-equity lines of credit. Regulators said that because banks write down loans long before a foreclosure sale occurs, the longer delinquency and foreclosure timelines couldn’t be used to avoid losses.

But some analysts said the figures should raise concerns over banks’ loan-loss reserves, especially if home prices take another tumble. The loan delinquency rates “suggest that the banks are severely under-provisioned relative to potential losses,” said Daniel Alpert, managing director of Westwood Capital. “Even without the [second mortgage] issue, it’s qualitatively not good.”

So, for some the result will be:

BofA to Book Massive Charges Tied to Mortgages - WSJ - David Benoit
"NEW YORK—Bank of America Corp. will take a massive blow of more than $20 billion in the second quarter for various mortgage-related costs, including $14 billion the bank will put aside to repurchase soured mortgage loans from investors.

The costs show the continuing impact on the nation's biggest bank from the housing crisis and its purchase of home lender Countrywide Financial.

The bank will pay $8.5 billion to settle claims brought by a group of high-profile investors, including BlackRock Inc., MetLife Inc. and Pacific Investment Management Co., or Pimco, that purchased mortgage-backed securities that subsequently went sour."

From Bloomberg - New York Fed Halts AIG Bond Auctions on Market Conditions

"The Federal Reserve Bank of New York is halting its sales of mortgage bonds acquired in the rescue of American International Group Inc. "Given prevailing market conditions” for residential mortgage-backed securities, “we do not anticipate any sales of bonds in the near term or until such time as the New York Fed deems it will achieve value for the public," Jack Gutt, a New York Fed spokesman said in an e-mail.

Funny foreclosure story of the week:

Donald trump versus Bank of America

Donald Trump squeezes Bank of America - Kim Peterson

The Fall of the House of Kluge Leads to the Rise of the Yard of Trump - WSJ
Mortgage on the estate was 22.8 million USD.
Bank of America bought it back for 15.3 million USD during foreclosure auction.
Donald Trump's bid during auction, 3.6 million USD.
Thing is, the Donald had already snapped up in February before the auction: the lawn, the driveway of the foreclosed Kluge Mansion, and the Bank is, well not amused.

Truly "stuck in the middle" with Trump...