Global Economic Intersection
Advertisement
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
  • Home
  • Economics
  • Finance
  • Politics
  • Investments
    • Invest in Amazon $250
  • Cryptocurrency
    • Best Bitcoin Accounts
    • Bitcoin Robot
      • Quantum AI
      • Bitcoin Era
      • Bitcoin Aussie System
      • Bitcoin Profit
      • Bitcoin Code
      • eKrona Cryptocurrency
      • Bitcoin Up
      • Bitcoin Prime
      • Yuan Pay Group
      • Immediate Profit
      • BitQH
      • Bitcoin Loophole
      • Crypto Boom
      • Bitcoin Treasure
      • Bitcoin Lucro
      • Bitcoin System
      • Oil Profit
      • The News Spy
      • Bitcoin Buyer
      • Bitcoin Inform
      • Immediate Edge
      • Bitcoin Evolution
      • Cryptohopper
      • Ethereum Trader
      • BitQL
      • Quantum Code
      • Bitcoin Revolution
      • British Trade Platform
      • British Bitcoin Profit
    • Bitcoin Reddit
    • Celebrities
      • Dr. Chris Brown Bitcoin
      • Teeka Tiwari Bitcoin
      • Russell Brand Bitcoin
      • Holly Willoughby Bitcoin
No Result
View All Result
Global Economic Intersection
No Result
View All Result

When, Not If, Will Volatility Increase?

admin by admin
March 21, 2012
in Uncategorized
0
0
SHARES
11
VIEWS
Share on FacebookShare on Twitter

Written by Macrotides

Volatility rises and falls in response to stock market trend changes, which are created when investors. expectations of the future are not realized. The largest market moves occur as the gap between perception and reality is closed, as we.ve discussed previously. In late 2007, expectations were that the U.S. economy might slow, but there would be no recession and the rest of the world would decouple from the U.S.

When those expectations proved ridiculously wrong, the gap between perception and reality was closed violently, resulting in a huge spike in volatility. (Chart below) At the lows in March 2009, ‘hope’ was being treated as a four letter word, with perception dominated by despair. When reality proved the sun would come out tomorrow, the stock market rose and volatility plunged.

In 2010 and 2011, investors were blindsided by the emergence of Europe’s sovereign debt crisis, which caused volatility to pop, and then recede as investors perceived the crisis having past. These outbreaks roughly coincided with the end of QE1 and QE2, which has led many to believe the end of the QE programs caused the declines. That assessment overlooks the role played by the European sovereign debt crisis.

The current low level of volatility begs the question, “Is the perception the European debt crisis is contained correct?” We don’t think so, since the primary factor driving the crisis – too much debt and too little economic growth – will worsen in 2012, especially for the countries at the center of the crisis. At some point in 2012, bond yields in Portugal, Spain, and possibly Italy will rise, as investors realize these countries are going to find it difficult to emerge from recession and lower their debt to GDP ratios and budget deficits. The tipping point will come when investors begin to compare the increase in yields in these countries to Greece.s experience. The volatility index will remain low until investor.s perceptions are confronted with this reality. We don’t know if it will take two months or six months. Home prices peaked in the U.S. in the summer of 2006, but it was more than a year later before investors realized it would lead to a crisis. Investors don’t sell stocks because the VIX is low. They sell when reality does not support their expectations. The current low level of volatility suggests another gap is developing between perception and Europe’s economic reality.

Central Bank Balance Sheets

Since the financial crisis in 2008, every major central bank around the world has expanded its balance sheet significantly to prevent a deflationary financial collapse. Many observers have concluded that central bank balance sheet expansion is the equivalent of printing money. It is not.

If a large portion of the money sitting on central bank balance sheets was entering the economy through a surge in bank lending, it would have inflationary potential, as too much money chased too few goods. Currently, there is too little demand chasing too many goods in all the developed countries, while growth is slowing in China, Brazil, and India. In the U.S., the velocity of money is the lowest in 50 years, so the money that is in the economy is not turning over. People are just not spending as they have in the past. GDP = (velocity * money).

European Union

The sovereign debt crisis developed because a number of countries had too much debt and too little growth to support their debt loads. In the wake of the financial crisis, many countries were forced to run large budget deficits, which drove their debt levels above the key breaking point of 90% of GDP. When the recovery from the 2008 financial crisis proved weak, global investors in 2010 realized that Ireland and Greece would not be capable of paying back their accumulated debt. As global investors shunned Greece’s debt in 2011, its interest cost rose to unsustainable levels, triggering the need for a second bailout. Irrespective of all the fanfare, Greece.s bailout allowed it to default on $100 billion of its debt, so it could receive a loan for $130 billion.

Sadly, the austerity measures being imposed will deepen the economic contraction overwhelmingly Greece. The bi-annual survey by the Small Enterprises Institute, representing almost 800,000 businesses throughout Greece, found that 55% of small entrepreneurs think they will be unable to avoid bankruptcy. In 2011, there were 105,000 small business failures, and another 55,000 are expected to close this year. More than 70% of owners have used private savings to finance their businesses as bank credit dried up. Over 30% said they are behind on payments to suppliers, utilities, and social security funds. According to the survey, 244,000 jobs could be lost this year, with only 1 worker hired for every 7 workers laid off. We expect another bailout will be needed, unless Greece chooses to leave the Euro first.

The European Central Bank has trimmed its 2012 estimate of GDP from +.3% to a slight contraction. If accurate, the European Union will be in recession for most of 2012. However, their broad estimate masks the fundamental issue of the sovereign debt crisis. The weakest countries, Greece, Portugal, Spain and Italy, will all be in a deeper recession, which will only worsen their debt to GDP ratios. A review of new orders for manufacturing and service companies shows the disparity within the E.U. and the U.S. Greece is still in freefall, while Italy and Spain have bounced from the depths of the fourth quarter, but are still quite negative. Britain and Ireland are stable, with manufacturing near zero and showing positive a reading for services. New orders for manufacturing in both France and Germany are negative, which is a bit of a surprise. New orders for services are modestly positive in both countries.

With GDP of $1.4 trillion, Spain is the world’s twelfth largest economy. Overall unemployment is 23%, with unemployment pushing 40% for those under 25. Spanish banks cut lending by 3.3% in December from a year ago, the largest decline since the Bank of Spain started tracking these numbers in 1962. Bankruptcies rose 12% in 2011, according to Informa D&B. Spain reduced its budget deficit to 8.5% in 2011, but that was well above its EU target of 6.0%. In January, Spain signed an agreement as a member of the European Union to cut its 2012 deficit to 4.4% of GDP. In order to reach that target, Spain will have to reduce government spending by $52.3 billion, according to Moody’s, versus the $28 billion in cuts that were spread out over 2010 and 2011. Two weeks ago, Prime Minister Mariano Rajoy said Spain would aim to reduce its deficit to 5.8%, well above its 4.4% EU target. “This is a sovereign decision made by Spain.” Translation: “We will not allow the EU (Germany) to dictate to Spain how to run our economy.” Spanish trade unions, which represent 20% of Spain’s total work force, announced they will hold a general strike on March 29, against labor market reforms they called “…the most regressive in the history of Spanish democracy.” Spain’s real estate woes and weak growth are hurting bank balance sheets. Bad debts share of overall bank portfolios rose to 7.61% in December, the highest since 1994.

In 2011, Portugal’s economy contracted by 1.6%, but shrank at a 2.8% annual rate in the fourth quarter. In December, lending to the private sector fell 3.5% from a year ago. Bankruptcy filings by companies and individuals rose more than 50% last year and have continued to rise this year, according to the Portuguese Association of Bankruptcy Administrators. Citigroup has forecast Portugal’s economy will shrink 5.5% in 2012. In January, unemployment reached 14.8%, and will likely climb during 2012. With GDP falling and its economy shrinking, its debt to GDP ratio will climb to 118% from 107% last year.

The International Monetary Fund estimates that Italy’s economy will shrink by 2.2% in 2012. Prime Minister Mario Monti introduced a “Grow Italy” bill to open up competition, reduce red tape, and bureaucratic barriers to growth that special interest groups have relied upon for a long time. Mr. Monti was forced to water down his bill, after special interest groups successfully engaged in a bout of arm twisting. Italy’s debt to GDP ratio is 120%, and is desperate to increase tax revenue. How desperate? In February, Italy announced plans to change Italian law to ensure that the Roman Catholic Church pays property taxes on buildings used commercially. If adopted, tax revenue could be $650 million to $2.6 billion annually.

The biggest headwind facing Europe is the contraction in bank lending. As we have noted previously, bank lending in Europe represents 80% of credit creation, versus 35% in the U.S. Although the two LTRO operations by the ECB prevented a full scale liquidity crisis, they haven’t spurred an immediate increase in lending, and we don’t expect that to change until the third quarter at the earliest. Loan demand from strong companies, which the banks would love to extend credit, will remain tepid until a real recovery in Europe is in sight. With the EU in recession, banks will naturally be reluctant to lend to those medium and small firms that are struggling and need credit. This will affect small and medium sized businesses disproportionately, and result in a rise in corporate bankruptcies throughout Europe. The majority of banks in Europe need to increase capital ratios and additional lending makes that more difficult. This means many banks in Europe have an incentive not to lend in coming months. Given the current challenging environment, European banks will continue to be more interested in playing defense, which will make it difficult for Europe to pull out of its recession.

Going forward, the key metrics worth monitoring will be bank lending and yields in Portugal, Spain, and Italy. The LTRO operations have been successful in brining sovereign yields down significantly, which is certainly positive. We expect yields to reverse once it becomes apparent that the fiscal and economic conditions are not improving. If yields do rise and investors begin to compare Spain or Portugal to Greece, the bell will ring for the third round of Europe’s sovereign debt crisis. We don’t know if this will take two months or six months, but feel it’s just a matter of when, not if.


Other Articles by Macrotides

analysis blogopinion bloginvesting blog

Related Articles

Is Decoupling Possible in a Global Economy? by Macrotides

Will Stocks and the Global Economy Roll Over in 2012? by Macrotides

 

Recent Investing Blog articles

 


About the Author

Macrotides is a monthly subscription newsletter written by a wealth manager associated with a major Wall Street investment bank. The author’s firm has requested that he not use his name to avoid any incorrect implication that his views might reflect those of the bank. The author has written investment advisory subscription newsletters based on macroeconomic analysis and market technicals for more than 20 years. Enquiries can be made at[email protected].


 

Previous Post

You’ve Got To Ask Yourself One Question: Do You Feel Greedy Punk, Well Do You?

Next Post

This Is The Quiet Before The Storm, Better Seek Shelter

Related Posts

Ethereum ICO Whale Address Moves 145K ETH After 3 Years Of Silence
Economics

Ethereum ICO Whale Address Moves 145K ETH After 3 Years Of Silence

by John Wanguba
August 15, 2022
Australian Court Instructs Google To Pay $43M For Misinforming Users
Econ Intersect News

Australian Court Instructs Google To Pay $43M For Misinforming Users

by John Wanguba
August 15, 2022
Dollar Fell Marginally Last Week As Inflation Seems To Peak
Economics

Dollar Fell Marginally Last Week As Inflation Seems To Peak

by John Wanguba
August 15, 2022
Mark Cuban Sued For Supposedly Promoting Crypto Ponzi Scheme
Business

Mark Cuban Sued For Supposedly Promoting Crypto Ponzi Scheme

by John Wanguba
August 15, 2022
Germany Economy Lose $265B In Added Value  Due To Rising Energy Prices And War
Economics

Germany Economy Lose $265B In Added Value  Due To Rising Energy Prices And War

by John Wanguba
August 13, 2022
Next Post

This Is The Quiet Before The Storm, Better Seek Shelter

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Browse by Category

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Browse by Tags

adoption altcoins banking banks Binance Bitcoin Bitcoin adoption Bitcoin market Bitcoin mining blockchain BTC business China Coinbase crypto crypto adoption cryptocurrency crypto exchange crypto market crypto regulation decentralized finance DeFi Elon Musk ETH Ethereum finance funding inflation investment market analysis markets Metaverse mining NFT NFTs nonfungible tokens nonfungible tokens (NFTs) price analysis regulation Russia social media technology Tesla the US Twitter

Archives

  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • July 2011
  • June 2011
  • May 2011
  • April 2011
  • March 2011
  • February 2011
  • January 2011
  • December 2010
  • August 2010
  • August 2009

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized
Global Economic Intersection

After nearly 11 years of 24/7/365 operation, Global Economic Intersection co-founders Steven Hansen and John Lounsbury are retiring. The new owner, a global media company in London, is in the process of completing the set-up of Global Economic Intersection files in their system and publishing platform. The official website ownership transfer took place on 24 August.

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Recent Posts

  • Ethereum ICO Whale Address Moves 145K ETH After 3 Years Of Silence
  • Australian Court Instructs Google To Pay $43M For Misinforming Users
  • Dollar Fell Marginally Last Week As Inflation Seems To Peak

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

No Result
View All Result
  • Home
  • Contact Us
  • Bitcoin Robot
    • Bitcoin Profit
    • Bitcoin Code
    • Quantum AI
    • eKrona Cryptocurrency
    • Bitcoin Up
    • Bitcoin Prime
    • Yuan Pay Group
    • Immediate Profit
    • BitIQ
    • Bitcoin Loophole
    • Crypto Boom
    • Bitcoin Era
    • Bitcoin Treasure
    • Bitcoin Lucro
    • Bitcoin System
    • Oil Profit
    • The News Spy
    • British Bitcoin Profit
    • Bitcoin Trader
  • Bitcoin Reddit

© Copyright 2021 EconIntersect - Economic news, analysis and opinion.

en English
ar Arabicbg Bulgarianda Danishnl Dutchen Englishfi Finnishfr Frenchde Germanel Greekit Italianja Japaneselv Latvianno Norwegianpl Polishpt Portuguesero Romanianes Spanishsv Swedish