John Taylor Interview, July 27, 2012

John Taylor, CEO of FX Concepts LLC is interviewed by Bloomberg's Sara Eisen on July 27,2012 and describes his opinions around the current level of GDP in the US, actions out of the FOMC meeting this week and the ECB meeting this Thursday, his outlook for the Euro, US$ the Yen and the Aussie $. This is a compelling interview in which he admits to being stretched emotionally to the point of wanting to pull his hair out. He contends that emerging market currencies are what he is looking to for a signal of sustainable risk-on sentiment.

James Rickards interviewed by James Turk

James Rickards is talking candidly with James Turk of GoldMoney.com, about economic issues around the world, especially the Euro countries, the US and China. A common thread throughout the interview is the impact on the value and uses of gold. He also speculates freely about what various outcomes might look like as politicians wrestle with ways to create a needed solution and still be reelected. The interview took place during August 2011 and is still relevant.

Economic Condition Review

Here at the end of the 3Q2011 all eyes are focused on the European Union (EU), the European Central Bank (ECB), the International Monetary Fund (IMF), the Federal Reserve Bank (FRB), and now laser like focus on the 17 European Monetary Union (EMU) parliaments who are individually considering their agreement to further assistance for Greece. The process is complicated by the complexity of the euro currency experiment. It is also complicated by the number of politicians in positions of influence. I hope cynicism is reaching high tide. The danger is extreme if there is not a plan developed to corral the ripple effects from what is expected to be substantial losses to major banks who are Greece's sovereign debt owners. One danger is that there is a known lack of adequate reserve capital at several European banks due to their investment in the sovereign debt of Greece and other over indebted countries. Compounding the problem is the lack of detailed information about credit default swaps intended to hedge risk on Greek debt. Lack of information deepens the fear.

The probability of Greece's default is high as reflected in the yields for their debt. Greek 2 year bonds yield 65.24% and their 10 year debt costs them 22.67% as of 9/29/2011. For reference, 10 year bond yields in other EMU countries are Germany at 2.01%, Italy at 5.58% and Portugal at 11.16%. The US Treasury 10 year is at 2.00%. The problem is how to contain the eventual wreck.

Greece Debt is a Disaster, But for Who?

Martin Wolf appears on Yahoo Tech Ticker to describe his understanding of the debt problem of Greece and how it might impact investors and the government entities who have provided emergency bailout loans. One unknown is, who are the investors who get hurt. Wolf speculates that a debt crisis is less damaging when it is anticipated, like in the case of Greece. He feels that the debt holders are preparing now. Let's hope with him that the creditors to Greece are prepared for an inevitable writedown! He does not mention the potential contagion caused by credit default swaps being triggered and we learn again that they are useless in a default when one of the counter parties is unable to meet their obligation in the default of debt. Unfortunately, there is too little transparency in this market. The fact that the risk is not spoken about explicitly, and officials talk in couched terms about "massive contagion" and "incalculable consequences", should alert informed investors about the fragility of the resolution of the Greek debt. It may be a small contributor to world GDP, but it is now in position to be very influential to the stability of a financial system that has not recovered from the crisis it generated in 2008.

More Analysis of Greek Debt

This from Credit Suisse:
• We still think it unlikely that Greece would leave the euro: Greek net foreign liabilities are high at 88% of GDP (rising to c180% if Greece left the euro with a devaluation of c50%); cheap ECB loans are 33% of Greek banks' funding: without this, the loan book might have to fall c20%; a Greek exit could trigger capital flight from peripheral to core Europe, requiring considerable deleveraging in the periphery; the ECB owns cEu50bn of Greek bonds and the EU/IMF have lent Greece Eu53bn; leaving the euro could mean leaving the EU.
• We also think on balance Greece would choose to avoid early debt restructuring, given that: it would only be in a good bargaining position when it runs a primary budget surplus (vs. a 1% deficit this year); Greek banks' annual PPP is equivalent to 3% of loans, thus the longer the restructuring is postponed the less recapitalisation of banks is required; Greece has only a Eu27bn funding shortfall in 2012E.

Perspective on US and Euro Debt

Former Comptroller of the Currency, David Walker, talks about the issues facing the US Congress as they huff and puff about the debt ceiling this summer. Walker describes the landscape, then he offers up a solution and describes ways to make long term progress.

Thinking About PIIGS

The debt crisis unfolding in Greece, and another probably coming up in Portugal and maybe even Spain, is interesting for me. It is an opportunity to deepen my understanding of what it means to be involved in a debt default which could be our experience someday in the United States. I have read the size of these economies, as a percent of the European Union (EU) GDP, is reported to be about 2% for Greece, Portugal is less at 1.5% and Spain is a meaningful 9%. So why all the fuss and worry over the two small economies?

Individual Currency Charts Replace the DXY Chart

The DXY index represents a bucket of six currencies weighted as follows... the Euro 57.6%, Yen 13.6%, Sterling 11.9%, Canadian Dollar 9.1%, Swedish Krona 4.2%, and Swiss Franc 3.6%. This design was created by J.P. Morgan in 1973.