I am becoming less good at writing a daily note. Other things seem to take over. But I think it is a good discipline to write a note every day, because it helps to keep me engaged with the newsflow and market moves even when I am focussed on a specific idea. I must try to write something, even if it is not very long.

S&P 500

Times are very difficult at present. There are good arguments for why the S&P 500 may rise or fall. For a rise: continued expansion, Bernanke put on unemployment. For a fall: risks in Europe. I think that the current pullback is very much about European risk. The S&P 500 has fallen as credit spreads have widened; this could be because of falling expectations for monetary easing in the US, but since falling easing expectations mean an improving economy, that does not make much sense. It seems more reasonable to ascribe the increase in credit spreads to rising fears about Spain. I said back in January that the Euro crisis (ex Greece) was over until serious worries arose about the solvency of Spain or Italy. I thought austerity would get us to that point eventually, but I was not sure when it would happen. I will be surprised if it happens this soon, but it is possible. I certainly don’t have an argument for why credit spreads should blow out this far and no further, and therefore I am wary of buying SPX. On the other hand, it is frustrating to have this reason for wariness — the arguments for a continued rise mean that I would really like to buy, if only I could be sure that this was an entry point and not the start of a longer correction. I may still do so if the market offers me a really compelling entry point.


Let’s have a look at Spain. For all the noisy comment in the press, Spanish yields have only risen a little, and are trading roughly in line with Italian yields. I do think that Spain is in trouble — its political arrangements, with regional responsibility for health and education, make it difficult to fix and stick to a deficit-adjustment plan (not to mention the inherent problem of the recession provoked by austerity). But the bond market has not yet entered a vicious spiral. And it may well not do so at the present time, partly thanks to a reminder yesterday from a member of the ECB’s governing council that the Securities Market Programme remains in place and could be used to buy Spanish bonds if yields rise further.

The ECB has two tools at its disposal at present: the SMP and LTRO’s. LTRO’s address the problem of a deficiency of capital inflows into a country, but they cannot bring down government bond yields if market participants in the country concerned do not believe that they will be repaid (although this is not absolute: banks, at least, may play ball — if governments default, they are stuffed anyway). The SMP is the programme that can address the crossing-the-Rubicon aspect of bond yields (once they get to a certain level, it makes sense for a government to default, and hence solvency worries can become self-fulfilling). By preventing a spiral, the SMP can ensure that the only things that can raise bond yields in a country are a deficiency of capital inflows (addressed by growing TARGET2 imbalances, which are allowed to continue by LTRO’s) and a loss of confidence in its fundamental ability to repay its debts (as in Greece). I am not sure we are there yet with Spain. I suppose that is an argument for buying the S&P 500 today, on the argument that the latest worries are overdone, at least in the short term.


Mr. Shirakawa has said that the BoJ will pursue “powerful easing” to overcome deflation. This may be a response to the parliament’s rejection of Mr. Kono for the BoJ — he is something of a hawk. Whether Shirakawa will actually act remains to be seen — the BoJ’s balance sheet has been falling of late (as has the Fed’s — anyone know why?). Incidentally Mr. Kono said that he had a “strong sense of crisis” over the growing number of people who want to revise the BoJ law to try to get the central bank to do something about deflation. This is an interesting insight into a state of mind that has been too prevalent in Japan for the last two decades. Has Mr. Kono completely missed the grinding deflationary crisis that has gripped the country for much of that period? Apparently so. I think that policy-makers (and people in general) the world over are so fixated by the experience of the 1970’s inflationary episode that they persistently overstate the risk of (and harm caused by) inflation, and understate the risk and harm of deflation.


Janet Yellen helpfully said that she could see rates remaining low until 2015. That some policy-makers expect this is not a surprise, because the Fed explicitly reported their views — albeit anonymously — as part of its new communications strategy. But this was helpful, because I am thinking of shorting Fed Funds futures and this kind of comment should help to raise their price.

Greek Elections

Greek elections are scheduled for 6 May. Papademos is standing aside. I had a quick look at the polls. A Public Issue poll reported by eKathimerini yesterday has: ND 19, PASOK 14.5, Independent Greeks (a new, right-wing anti-bailout party that has grown out of ND) 11, Communist 11, SYRIZA 13, Democratic Left 12, Chrysi Avyi 5, LAOS 3, Ecologist Greens 3. I suppose it is encouraging that a clutch of left-wing parties are polling better than the combined Independent Greeks and the neo-fascist Chrysi Avyi, but my understanding is that all of the parties except for ND and PASOK are opposed to the bailout (though I have found this hard to check, and things can change when a party actually faces the prospect of government). eKethimerini reports that, on certain assumptions about which small parties will pass the threshold for representation, ND and PASOK will need 36% of the vote to form a coalition alone; at present, they are polling 33.5%.


  • US federal budget deficit has now been flat since June on a 12-month rolling basis.
  • Australia employment growth 44k b.e., quite a strong number, Mar.
  • Australia unemployment fell to 5.2%, b.e., Mar.
  • China new loans surged MOM to the strongest monthly level in over a year, Mar.
  • China M2 growth remained moderate compared to recent history, at 13.4% YOY b.e. Mar.
  • UK trade balance -8.8bn d.e. and quite wide, Feb. This does not bode well for the current account balance, which is already at a record low.

Coming Up

  • Trade balance
  • Initial claims
  • China GDP, investment, IP, etc.