Paul Kedrosky's Infectious Greed

From the weekend Barron’s Mid-Year Roundtable, here is some trenchant and detoxifying Felix Zulauf:

If you ran the ECB, how would you deal with Greece?

There is no painless solution. We have to let entities, even governments, default. But we have to make sure first that the banking system can handle its clients’ defaults. That is the problem. In the European banking system, equity capital is only 3% of assets. In the U.S. it is 4.5%. Raising banks’ equity-capital ratios is the only way to solve the problem in the long run.

We missed the chance during the financial crisis. I would have handled the whole crisis differently. I would have nationalized the banks and not allowed them to pay any dividends or big bonuses. First they would have to improve their equity-capital positions. This would go hand in hand with extremely low growth.

You would have been very unpopular.

The fiscal authorities have to support the system. But instead of wasting money to boost consumption, they should be spending on investments that will bear fruit long term. By the middle of the decade at the latest, we will have a major crisis, bigger than 2008. Several countries will default, particularly in Europe. Quasi-fixed exchange rates between the U.S. and China will start to unravel, which will force the U.S. dollar down tremendously. It will push bond yields up and stocks down.

via Barron’s Mid-Year Investment Roundtable – Barrons.com.

This is not a good sign for the Groupon IPO — more stock-floggers needed:

Groupon Inc., seeking to raise $750 million in an initial public… [cont.]

[Full post at my Bloomberg blog]

Groupon to Offer IPO Role to Six More Banks (Bloomberg)Market efficiency, anticipation and the formation of bubbles-crashes (arXiv)Nigeria: The Cost… [cont.]

[Full post at my Bloomberg blog]

From the latest BP energy report, impressive growth in global renewable energy, up 73 percent year over year. Most of this is happening in Europe,… [cont.]

[Full post at my Bloomberg blog]

Interesting new paper:

Market efficiency, anticipation and the formation of bubbles-crashes

Serge Galam

(Submitted on 8 Jun 2011)

A dynamical model is introduced for the formation of a bullish or bearish trends driving an asset price in a given market. Initially, each agent decides to buy or sell according to its personal opinion, which results from the combination of its own private information, the public information and its own analysis. It then adjusts such opinion through the market as it observes sequentially the behavior of a group of random selection of other agents. Its choice is then determined by a local majority rule including itself. Whenever the selected group is at a tie, i.e., it is undecided on what to do, the choice is determined by the local group belief with respect to the anticipated trend at that time. These local adjustments create a dynamic that leads the market price formation. In case of balanced anticipations the market is found to be efficient in being successful to make the “right price” to emerge from the sequential aggregation of all the local individual informations which all together contain the fundamental value. However, when a leading optimistic belief prevails, the same efficient market mechanisms are found to produce a bullish dynamic even though most agents have bearish private informations. The market yields then a wider and wider discrepancy between the fundamental value and the market value, which in turn creates a speculative bubble. Nevertheless, there exists a limit in the growing of the bubble where private opinions take over again and at once invert the trend, originating a sudden bearish trend. Moreover, in the case of a drastic shift in the collective expectations, a huge drop in price levels may also occur extremely fast and puts the market out of control, it is a market crash.

via [1106.1577] Market efficiency, anticipation and the formation of bubbles-crashes.

PIMCO’s Bill Gross is apparently net short U.S. debt in the sense that it is net long said debt. Got that? Me neither, but it’s fun.

Pacific Investment Management Co., under criticism for missing this year’s rally in Treasuries, revised how it lists asset holdings to show that its flagship fund held U.S. government debt in May.

The $243 billion Total Return Fund managed by Bill Gross increased its holdings of U.S. government debt to 5 percent from 4 percent in April, according to data on the Newport Beach, California-based company’s website. In the prior month’s posting, the category that was classified as government and government- related debt had shown negative holdings of 4 percent. The website showed an added category this month of swaps and liquid rates with holdings of minus 9 percent. Michael Reid, a spokesman at Pimco, declined to comment.

via Pimco Adjusts to Show Gross Fund Owns U.S. Debt – Bloomberg.

From a new paper on email spam, 95% of revenues (in the study) cleared through three banks. Remarkable.

via Economist

Today in bad charts, I offer you this sample from a new paper on clustering in IPO underwriting commissions. Notice where the black “line” is? The line of data obscures the data.

[Update] As someone suggests in a comment to this post, a histogram would be better.

• World Bank global economic report, June 2011 (Source)
• Richard Dreyfuss dramatizes iTunes legalese (Source)
• Statistical Review of World Energy 2011 (Source)
• Eclectica Fund 2011 04 (Source)
• The Black Swan of Cairo (Source)
• Homer-Dixon on energy & complexity (Source)
• Weeds Increasingly Immune To Herbicides (Source)
• Aerobic capacity influences the spatial position of individuals within fish schools (Source)