Issue 81- June 11, 2012


Next Chapter

As we write this newsletter, events are unfolding in the Eurozone. Specifically, banks in Greece and Spain are seeing a steady flow of deposits out of local banks into institutions in Germany, Switzerland and the UK. While there is no pan European deposit insurance, the real fear surrounds a currency transformation and subsequent devaluation. Consider a depositor with €100,000 in a Spanish bank. If the banks were to close and Spain moved back to the Peseta, the depositor’s 100,000 Peseta account might be worth €50,000 the following week. Meanwhile there is absolutely no reason why the depositor would not open an account in Germany and transfer Euros there. In fact, in yet another cruel irony of the Euro design, the transfer mechanism known as Target 2 (Trans-European Automated Real-time Gross Settlement Express Transfer System), is actually facilitating these outflows.

In olden days (and relatively newer times as well), if depositors lost confidence in a bank and lined up to take out their cash, the bank would eventually run out of cash and would have to close. Not now though. Target 2 acts like a conveyer belt of cash from weak banks to strong banks to the ECB and back to the ever weakening bank thus compounding the problem by effectively making the leaky ship ever bigger.

Effective solutions remain elusive. The flaws in the basic design of the euro leave little room for an acceptable resolution. In the past, we suggested that policy makers were effectively “foaming the runway” in an effort to buy additional time for corrective actions. Now, however, the deposit flight is changing the problem to where leaders are “running out of runway”.

Election Lessons

The May elections in France and Greece clearly demonstrated the practical realities and limits of what Eurozone leaders are currently able to accomplish while remaining in office. The required pillars of stability such as a common banking or fiscal authority were not established prior to the rollout of the euro. Why? It was impossible to find agreement on these issues. It was hoped that the benefits of the common currency would make these thornier issues easier to overcome with time. Unfortunately, time has worked against them. Austerity measures and subordination of sovereignty might be the necessary next steps to stem the tide but if it was difficult in the optimistic light of the heady pre euro days, it is now almost inconceivable that such seismic changes can be accomplished.

Recent measures that have been raised such as pan euro deposit insurance and Eurobonds both fall short. Deposit insurance would be interesting if depositors could be assured that their native currency would remain the Euro and at this time that is far from assured. Eurobonds on the other hand, would amount to joint and several liabilities and would be a herculean task to pass 17 parliaments. In the meantime, these bonds might as well be called Bunds – the name for current German debt – as they would be the de-facto guarantor. Germany has remained clear that they are willing to provide additional support in return for further concessions. However, Greece has also made it clear, that they no longer expect to have to abide by their previous agreements. So there you have it: a stalemate at the highest levels of government. They can neither move forward towards a more formally integrated European Union, nor maintain the current ruinous arrangements. Private capital for banks and sovereigns will remain sidelined until such time as a path forward can be negotiated. In the absence of an agreement, events may take over. The outcome of the Greek elections on June 17th may well be the catalyst or perhaps it might be something else. But the current progression of mutually assured destruction will not persist indefinitely.

A Gentleman's C

Corporate earnings for the 1st quarter have largely been reported and once again, Jim Bianco’s description of a “Gentleman’s C” seems most appropriate. Earnings remain positive albeit with a slowing pace of growth. This was also true of the previous quarter, but unlike those readings, this quarter’s reports were coupled with declining economic releases. Corporate balance sheets remain in terrific shape and continue to make a very compelling case for owning high quality businesses.

Interest rates remain subdued and we saw another leg down in rates in May with the US 10 year Treasury touching 1.42% at one point. As rich as this may seem, there are 10 other countries whose sovereign paper trades at even lower yields. Germany issued 2 year notes at 0% and Swiss 5 year paper trades at negative yields (where you pay more today than you will receive back over time). In part these rates reflect a flight to quality but they also may represent a call option on future currency appreciation in both Germany and Switzerland.

Commodity prices also retreated in May. Oil which could not seem to shake loose from the $100/bb range now trades in the low $80s. Investors’ love affair with gold has also recently turned cold. The commodity reached a high of $1783/ounce in late February but has now retreated to just under $1600/ounce. The combination of lower rates and commodity inputs will serve as a welcome backdrop to near term economic performance and should provide a cushioning effect to further Eurozone sponsored weakness.


Across the globe, central banks have very publically announced that they are ready to provide support as needed but have admonished political leaders to essentially get in the game. Pundits on their calls state time and time again that they expect the powers that be in Europe to move quickly towards that tighter fiscal union. But the facts belie this theme. Fringe parties in both France and Greece won a substantial number of votes for example. David Rosenberg of Gluskin Sheff in Toronto, who has the steadiest voice by far throughout this episode, has called for the end of Euro.

“For many of the Club Med countries, today’s fixed-exchange rate regime within the EMU is a similar tourniquet as the gold standard was back in the early 1930s. Spain and Greece are seeing their economies implode and youth unemployment emerge as a massive source of social instability and yet so many people out there are clinging to this view that these countries are so obviously better off being strapped into a monetary gurney.”

It is very possible that a break from the union by Spain for example would be supported not by just central banks but also by the vast pools of private capital such as the global sovereign funds which were so poorly treated in the Greek default. A Euro 2.0 comprised of a smaller number of members with more common economic characteristics could be a great success and a formidable global player. The devil of course is in the details.

To be continued –

Jen & Patsy


In this Edition

  • Next Chapter
  • Election Lessons
  • A Gentleman's C
  • Opportunities

Huntington Steele

925 4th Avenue
Suite 3700
Seattle, WA 98104



Past Issues

80 - 05.10.12
Choices/ Texas Hedge/ Outcomes

79 - 04.09.12
13,000 x 1,400/ Lessons Learned/ It's Not Insider Trading When Congress Does It/ Crystal Ball

78 - 03.21.12
Goldman's Casablanca Moment/ Mr. Macy meet Mr. Gimbel/ The Fiduciary Standard - The Gold Standard

77 - 03.05.12
Punxsutawney Greece/ Foaming the Runway/ "The Euro Crisis is Behind Us/ Healing Hoopla/ What Price Income?

76 - 01.09.12
2012 - The Continuum/ Europe - Working in the Injury Time/ "Risk On - Risk Off"/ The Road Ahead

75 - 12.05.11
The Problem/ What Could Go Wrong/ Compound Interest/ Germany or Bust/ The Cavalry/ Stress Tests/ Next Chapters/ MF Global

74 - 09.29.11
Broken Transmission/ Chickens and Eggs/ Where to?

73 - 08.29.11
The Confluence/ The ECB/ US Economy - Distinction without a Difference/ A Different Kind of Exit/ Gold as a Thermos/ Where to Now?

72 - 06.28.11
Sovereign, Central, Commercial/ Why we call them "Banksters"/ "Extended Period" just got a lot longer/ Forward.

71 - 05.24.11
The Question is... How Many Years?/ "Unexpected" Housing Weakness/ P.I.G.S. Can't Fly/ Stages.

70 - 04.11.11
Inflation for thee, but not for me/ On the Other Hand .

69 - 04.05.11
Implications - A Bevy & A Wedge/ Implications - Quantitative Easing 2.0/ Implications - Rules Rules Rules/ Catching Up with the Can.

68 - 03.03.11
What Ever Happened to Housing?/ Where Do Loans Come From?/
Where Do Loans Go?/ The Last Straw/ The Path Forward/ Equity/ Clearing Mechanism/ Restart Your Securitization Engines.

67 - 01.10.11
Curiosity of the Federal Reserve/ Complacency & Fragility

66 - 11.12.10
Phew/ Taxes and Employment/ Quantitative Easing Returns/ Incentives & Unintended Consequences/ Dear Mr. President

65 - 09.28.10
Progress in the Absence of Milestones/ Changing Nature/ Correlations & Valuations/ Synthetic Securities

64 - 08.18.10
A Tricky Diagnosis/ Traditional Treatment/ Bad Medicine/ New Age Medicine/ Homeowners/ The Banks/ Pension Plans/ Bull Flattening

63 - 06.17.10
Hip & Groovy/ The Trouble with Zombies

62 - 05.24.10
Next Sequel/ 2012

61 - 05.04.10
Intensity/ Principles versus Rules

60 - 04.01.10
Grand Isle to Lincoln
/ Mile Post 312/ Mile Post 353/ Mile Post 399/ P.I.G.S. are a Problem

59 - 02.17.10
Surprise, Surprise, Surprise/ P.I.G.S. Matter/ Leverage vs. Debt/ Going Forward



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Market Highlights



3/30/12 12/30/11 12/31/10 12/31/09 12/31/08 12/31/07
13,212 12,218 11,578 10,428
S&P 500 US


1,408 1,258 1,258 1,115
Nasdaq US
3,092 2,605 2,653 2,269
EAFE Int'l Equity
1,553 1,413 1,658 1,581
5 Yr Treasury .747 1.07 .85 2.02 2.71
5 Yr AAA Muni .83 1.03 .94 1.75
10 Yr Treasury
2.28 1.96 3.38 3.92
10 Yr AAA Muni
2.24 2.08 3.44 3.26
30 Yr Treasury 2.76 3.33 2.914 4.325
30 Yr AAA Muni 3.53 3.72 3.82 4.9
EUR Currency 1.246 1.33 1.29 1.34
JPY Currency 79.26 82.08 77.36 81.32
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