Markets are a bit upset after JPM reported a $2bn mark-to-market loss in its CIO unit. From what Jamie Dimon said, it sounds like some smart-alec hedges went wrong. I often say that I am a simple fellow, because I think: if you expect that X is going to happen, you should bet on X. Smart-alec baskets that are supposed to be correlated with X are dangerous.

Incidentally there were rumours that something was afoot at JPM last month. FT Alphaville even ran a series on it (


What is going on in Spain? There is talk in the air about a bailout, but does the country need it? If it can borrow at sensible rates, it ought to be solvent, on reasonable assumptions. Even a bad recession in the next couple of years does not change that picture, because Spain’s debt/GDP ratio is still relatively low today. I cannot see why a bailout should be imminent. As usual, people are worrying about “who the buyers will be,” but this is a worry, not a model. I do not see why buyers should not appear as long as the country is solvent, as they do in the normal run of things.

Something that is reportedly under consideration at the EU level is the imposition on Spain of further conditions in return for an extension in the time it has been given to meet its 3% deficit target. At present, the targets are 5.3% in 2012 and 3% in 2013, but there is a suggestion that the country might be given another year to hit 3%. Perhaps it is this that has motivated the Spanish government to take over Bankia (by converting prefs into a 45% common equity stake) and to promise that further measures to help the banking system (probably higher provisions for good loans and a scheme to get rid of bad ones) will be announced today. Or perhaps the government would have done that anyway.

We are still not at the root of the problem. It has been known for some time that Spain’s banks were in trouble. The Bank of Spain said last year that they had EUR 184bn of “problematic” real-estate loans. So the need for action on the banks is not new. Further, the risk of a bank collapse has been greatly reduced by the ECB’s latest actions; and, in extremis, Europe has the capacity to bail out Spain’s banks.

What has changed recently is the state of the economy. Europe’s new recession and the fact that a country’s deficit/GDP can deteriorate as the denominator falls seem to have taken the market by surprise. Since my expectation that Europe would enter recession and that austerity would likely make it impossible to hit deficit/GDP targets was the reason for my bearishness last year, they feel like old news; but I wonder if perhaps they are not. Perhaps the undeniable reality was needed finally to drive the nonsense of expansionary austerity out of the market narrative.

Let us take the bad recession as given. What does this mean for Spain? Not insolvency, as I argue above. Does it mean a self-fulfilling downward spiral in the bond market? No, because the ECB would act to prevent it. Does it mean a monetary contraction in Spain (manifest as a disappearance of new capital from the bond market) on account of the balance-of-payments deficit? No, because the ECB will continue to fund the deficit through TARGET2. So what is the problem? It is hard to conclude that the problem is anything other than a market panic. This is an argument for buying US equities, perhaps Spanish equities, and perhaps Spanish government bonds.


Another place where the woe seems overdone is Greece. Syriza has been quite obstructive, but Pasok is presently attempting to form a coalition and Democratic Left has come up with a proposal to keep Greece in the euro while working towards an easing of austerity measures. Pasok and ND are two seats short of a majority — they only have to bring one small party on board to form a government. A new election is far from inevitable.

On the other hand, the fact that woe is overdone does not mean that there is no cause for woe at all. The rest of Europe might react badly to a government that was committed to renegotiating austerity (although the mood in Europe may be changing — see Spain and France). More ominously, Syriza’s hardline stance seems to have benefited the party — a recent poll put its support at 23.8%, up from 16.78% in the election.


  • Australia employment +15.5k b.e. Apr.
  • Australian unemployment 4.9% b.e. Apr.
  • China trade balance 18.4bn b.e. Apr. and back to usual levels (talk of a decline in the current account balance may have been, as usual, premature). Export and import growth both slowed, import growth by more.
  • US trade balance close to post-crisis wides, Mar. Presumably the high oil price is to blame here.
  • Initial claims 367k, b.e. for a second week but still above recent lows.
  • Federal budget balance turned positive on a monthly basis for the first time since 2008. On a 12-month rolling basis, the balance continues to come in. Fiscal policy is mildly tight in the US.
  • UK Nationwide consumer confidence fell back, d.e., remains very low.
  • China CPI 3.4% a.e. Apr. Full year 2012 target is 4%, so there may be scope for easing.
  • China fixed asset investment 20.2% ytd/y d.e. Apr. Lowest rate for some years. Monetary tightness is having an effect.
  • China IP 9.3% yoy d.e. Apr.
  • China retail sales 14.1% yoy d.e. Apr. Lowest for some years.
  • China new loans 682bn d.e. Apr. Fell back from last month’s spike but still quite elevated.

Today and the Weekend

  • PPI
  • Prelim. Michigan sentiment