Club Med Hangover -- Bond yields climbing in Spain and Italy

Nearly a month ago I mentioned rising yields in Spain possibly causing problems.  I underestimated the number of countries. Both Italy and Spain's treasury yields have spiked higher.

Italy 10 year

Spain 10 year

Spain 10 year versus German 10 year

 

None of the charts are pretty.  While Italy was getting most of the headlines for the rate of yield increase please note how Spain's yields are higher.  Any EU country bordering the Mediterranean is having serious problems right now.

North Korea watch -- look out for some sabre rattling?

North Korea is rumored to have recently closed all universities and put the students to work:

From North Korea Econ Watch

The reports said the students would be put to work on construction projects in major cities and on other works in a bid to rebuild the economy. This could indicate that the country’s food crisis and economic problems are worse than previously thought.

Combined with reports of additional EU aid it appears the speculation of severe stress in the Hermit Kingdom appear to be correct.

From the Guardian

The European commission is to give €10m (£9m) in urgent food aid to North Koreans on the brink of starvation, after negotiating for "unprecedented access" to ensure that the food goes straight to those most in need.

With North Korea on the ropes I wouldn't be surprised to see some sabre rattling and more than your usual number of threats and provocations in the near future.  South Korea recently winning the 2018 Winter Olympics bid provides North Korean a new 'delicate' target to threaten as well. 

Economics for the post MTV Generation -- It's the debt stupid

I previously mentioned an entertaining video regarding the competing economic theories of Keynes and Hayek.  Here is round two, and while its a few months old it deserves attention.

When watching the video pay close attention to the assistants to each boxer, you may recognize some other names as well as what appears to be Chairman Ben Bernanke in the first row of the meeting.





While the debate over monetary and fiscal stimulus continues (most recently as the wrangling over the federal debt limit) I'd like to repeat a graph I've shown before.

Total US debt (private, corp, government) to GDP rose for this entire data series until the great financial crisis of 2008.  Since then its been dropping and this is one reason our recovery has felt so sluggish as corporations and individuals continue to delever.

I have mentioned before how even with a very steep yield curve we are not seeing a rebounding economy and others have noticed this as well; the steep yield curve mechanism appears broken.

From Bonddad:

for virtually the entire period beginning in late 1929 and continuing right through the Great Depression and into the 1950s, the yield curve was resolutely positive. And yet that period coincided with the two worst downturns in the last 100 years, as well as three other recessions.

Until the private sector deleverages monetary policy levers will be less effective. I have suspicions as to how Mr. Bernanke will 'fix' this problem but I'll leave that to a later post with evidence.

So what explains the current crisis and malaise? I think Steve Keen is on to something.  I strongly suggest you watch this video and examine his theories.

edit: sorry about the autoplay. Hit the pause button to stop it.



http://www.ritholtz.com/blog/2010/01/steve-keen-on-the-modern-economy-and-the-outlook/
http://www.debtdeflation.com/blogs/2010/07/07/naked-capitalism-and-my-scary-minsky-model/
http://www.debtdeflation.com/blogs/2009/12/01/debtwatch-no-41-december-2009-4-years-of-calling-the-gfc/

Hedge fund watch - Hugh Hendry and Jim Chanos

Here's some recent news from a few hedge fund managers:

A short video from Hugh Hendry (thanks Creditwritedowns)



Some notes from Jim Chanos' presentation at the Vail value conference. (thanks Katsenelson) Provides more detail on Chanos' bearish position in China.  Note Chanos is a short seller so he is always bearish on something.

Sino Forest even ripped off the scam

As more information comes to light regarding accusations of Sino-Forest fraud it appears even their technique was stolen from someone else:

From IndiaExpress -- March 2003


Dream plantations that never bore fruit

The brochure said the company would develop the land for agro-forestry farms and after expiry of the plan period, trees and cash crops would be cut and money from the sale would be guaranteed by post-dated cheques.... The Income Tax Department sniffed out a trail of bribes the company had paid buying real estate. The department says it has evidence that the palms of the registering authorities were greased while purchasing land at Jharmari for Chandigarh Extension 22 Project.

I should do a forensic study to see if the income statement and balance sheet could have alerted people to the possible fraud. A rogues gallery of failures / frauds could me most instructive.

Greece and Ireland are not the only European problems.

While Greece is dominating the news (again) there are other rumblings in Euroland you should be watching.  Below is the spread between German and Spanish 10 year yields.  The trend is not going the right way.

Furthermore yesterday Spanish 10 year yields went up on a 'risk off' day.  No longer does the market consider the government debt of Spain a safe haven when the equity and other risk markets go down.  I'm closely watching the relative and absolute levels of  Spanish debt  As the Greece situation develops keep an eye on this to see if the panic spreads to Spain.

Housing update -- Build it and they will come?

Does supply lead demand or the other way round?

Attached is the year over year change in the Case-Shiller home price index and new housing permits.  The year over year rise in 2010 was most likely due to the one time tax credit provided by the Federal Government.  

One may notice it appears new home permits lead the rise and fall of home prices.  Regardless both prices and new home permits are negative on a year over year basis which does not bode well for future employment or home price appreciation.