7 Reasons Why Europe's Recent Rally Could Be Short-Lived

With European leaders promising a debt crisis solution by the end of the month and all 17 countries having voted for the expansion of the EFSF, some renewed optimism has recently boosted the euro and European stock markets.

However, Europe's debt situation remains extremely complicated as it into its crucial EU summit on October 23.

Morgan Stanley's Global Currency Research team has outlined some major issues that they think will throw off Europe's path to a final solution.

In fact, they think the recent rally in the euro is just a short-term bear market rebound.  They see the euro at $1.30 in Q4 of this year and $1.25 in Q1 2012.

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Two Big Reasons You Should Still Worry About This Market

With stocks bouncing back, and the economy showing signs of not dying, you may be tempted to finally relax a little bit, and get some sleep, feeling confident that 2011 is more likely to be a replay of 2010 than 2008.

Maybe.

But even amidst the positive energy of the past two weeks there were red flags popping up.

The first is extreme correlation: Even on the good days, EVERYTHING that's not the dollar is going up. We keep pointing this out, that gold, for example, has been doing the exact same thing as stocks day in and day out. But it's not just that. Gold, Swiss Franc, the euro, equities, copper, silver, etc. all moving the same in lockstep. One day the dollar is down and they're all up, and one day the dollar is up and they're all done.

The general belief is that extreme correlation is a sign of market pressure -- of an unhealthy market that wants to snap.

And in fact there are others signs of this as well.

Various measures of funding strain, like LIBOR rates, continue to shoot up, with no slowdown, basically ever since the beginning of August.

Of course, a little perspective is needed on this front. We're still nowhere near as bad as where things were the great financial crisis.

Bottom line though: There ARE signs of worsening strain on the system, persisting even as things have gotten better over the last few days. Until you see correlations fade and some of these bank funding measures improve, better not turn your back.

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Four Reasons To Believe In Keynesian Models

A correspondent asks a good question: what evidence makes me believe that Keynesian economics is broadly right, given the relative absence of experience with large fiscal stimulus programs?

I’d answer that question with several points.

First, we’re talking about a model, not just a prediction about the impact of spending increases. So you can ask about the ancillary predictions of that model as opposed to rival models. Anti-Keynesians assured us that budget deficits would send interest rates soaring; Keynesian analysis said they’d stay low as long as the economy remained far from full employment. Guess who was right?

Also, there are some features of the approach that can be tested separately. Keynesianism isn’t just about sticky prices, but it does generally assume sticky prices — and there is overwhelming evidence, from a variety of sources, that prices are indeed sticky.

Also also: there’s plenty of evidence that monetary policy can move output and employment — and it’s very hard to devise a model in which that is true that doesn’t also say that fiscal policy can be effective, especially when you’re up against the zero lower bound.

Second, while we don’t have a lot of postwar experience with fiscal stimulus, we do have a lot of experience with anti-stimulus, that is, austerity — and that turns out to be reliably contractionary. Again, it’s hard to think of a model in which austerity is contractionary but stimulus isn’t expansionary.

Finally, there is evidence from fiscal expansions in the 1930s, which actually did lead to economic expansion too.

Mainly I’d stress the first point. We have a model of the way the world works, and the world does indeed seem to work that way. And an implication of that model is that fiscal stimulus will work under conditions like those we face now. If interest rates had soared, if the rise in base money had led to rising GDP and/or soaring prices despite the zero lower bound, I would have sat down to reconsider what I thought I knew about macroeconomics. In fact, however, my preferred model has passed the test of events with flying colors, while the other guys’ models have been totally wrong.

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The 4 Reasons Investors Are Feeling Giddy Today

  x You have successfully emailed the post. The Dow is up 275 points and the bulls having a field day.

Four big news items from China, Europe, and the U.S. could be making markets surge today.

With new economic data and announcements looking positive on all sides, the cynicism of late Q3 is gone, and Q4 optimism dominates.

Any guesses on how long that will last?

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Five Reasons Why The War for Social Network Supremacy Will Be Decided On Mobile

iPhone vs. Newspaper" />In the past few years, social networks have proliferated at an astounding rate. Facebook recently eclipsed 750 million users, Twitter has more than 100 million (an 82% growth from the beginning of the year) and LinkedIn, in the wake of its May IPO, just surpassed the 120 million-user mark.

Add to this the traction achieved by the newest kid on the block, Google+, which racked up more than 20 million users in the first few weeks since launch, and one doesn’t need a fortuneteller to figure out that there is a full-fledged war underway for social network supremacy.

As the battle heats up and pundits argue over who has the upper hand and best pre-requisites to succeed, one of the deciding factors that will dictate who comes out on top will arguably be each network’s mobile prowess. Here are 5 reasons why:

1. The most ubiquitous platform by far is mobile

At the beginning of the year, there were over five billion mobile users and approximately two billion Internet subscribers. Looking at Nielsen’s estimates, which state that about two-thirds of the world’s Internet population visit social networking sites, some quick math will lead you to the conclusion that there are about 3.5 times the number of mobile subscribers as there are users on social networks. The biggest opportunity for growth most definitely lies in the mobile space. 

A huge market like China, which Wireless Intelligence says will eclipse 1 billion mobile customers later this year, only has 74% mobile penetration. If this sounds high compare that to the USA, where the mobile phone penetration rate should pass the 100% rate per capita this year, while Europe and Africa are at a 130% and 50% respectively. This is a clear sign that even robust markets still have room to grow before hitting their peak.

2. Rise of the smartphone generation

While there is little question that mobile phones are the most ubiquitous platform, it is only recently that smartphones reached a critical mass of users. This is a development heralded by Apple and the launch of the iPhone and later perpetuated by Google’s Android and HTC, which effectively democratized the smartphone as a device by offering a wide variety of models at a low price point. It is the same strategy that helped Microsoft make Windows the most ubiquitous desktop operating system.

Nielsen predicts that smartphones will surpass feature phones in the U.S by 2011; just in the last three months, 55% of mobile phone purchases were smartphones. On a global level, 77% of all phones sold come equipped with cameras, which addresses the ever-growing consumer demand for in-direct social features, such as the ability to take pictures and video to share with friends and family via Facebook or Twitter.

In author Tomi T Ahonen’s blog, Communities Dominate Brands, he points out that only 400 million people access the Internet solely by way of a personal computer. Out of all 2 billion Internet users, that is a paltry 20%.

Consider the rapid growth of smartphones, as well as the millions of new users browsing the Web via tablet devices, and it’s not too far of a stretch to think that number could be closer to 10% by the end of the decade.

3. Consumer preferences are changing along with the way we communicate

Another strong indicator suggesting that mobile will play a deciding role in who wins and loses the social networking war is the apparent consumer shift from landline to mobile. People increasingly rely on their mobile phones for all their communication needs, not only voice.

According to figures released by the U.S. government earlier in the year, the number of American households relying exclusively on cellphones has seen an eightfold increase in the past six years, and was up around 27% in the first half of 2010. The Center for Disease Control (CDC) attributes this to both lack of use and affordability, as many lower-income families have chosen to cut the chord on their landlines in favor their cell phones.

Further studies have shown that it is not only cost savings and convenience that lead the change in consumer consumption habits, but new technologies that are changing the way people prefer to communicate.

In a recent Harris Interactive study commissioned by Rebtel, 19% of Americans claim they will use social networking more in the near future, with only 9% claiming to use voice. These figures are small in comparison to those who plan to use SMS, 28%, and video chat, 37%, more often in the near future to stay in touch with family, friends and co-workers.

Related research by Pew Internet shows that 13% of online U.S. adults are currently using Twitter, and half of those do so via their phone. This represents an 8% increase in users over last year, and signals that we are still in the very early stages of using our mobile devices to communicate with those in our various networks.

4. Pure mobile social networks

Group messaging services like GroupMe and textPlus and IP-based SMS substitute services like WhatsApp, and Kik, which had 2 million downloads within three weeks of its cross-platform launch, have given rise to a new era in mobile messaging and social networking.

Free services like these allow users to share photos, their location and send messages across different platforms that aren’t limited to 160 characters. They provide powerful tools for people to privately communicate in real-time with multiple friends at the same time. Also, perhaps most importantly, they are free.

Skype’s recent purchase of GroupMe is further evidence how this war is being waged on all sides of mobile. In a press release, Skype says that: “The acquisition of GroupMe complements Skype's leadership in voice and video communications by providing best in class text-based communications and innovative features that enable users to connect, share locations and photos and make plans with their closest ties.”

I expect we’ll continue to see many similar examples of these partnerships to offer better social networked utilities for customers who now expect the broadest scope of communications services at their disposal and social networking features directly integrated with their mobile phones.

5. Digital wallets and the new mobile economy

Increasingly, we see that consumers are more and more comfortable using a variety of services on their phones that were originally intended for desktop platforms; a prime example of this is the increase of mobile purchases and recent moves by major credit cards who are now feverishly keen on providing customers with a mobile digital wallet.

Gartner research currently predicts that mobile payment users will reach 141 million globally by 2011, with payments projected to hit $86 billion. That is a 38% increase in users and nearly a 76% jump in volume from 2010.

In addition to this, mobile revenues (now standing at nearly 1 trillion dollars for voice and data) is twice the amount of the personal computer industry. This includes advertising, subscription fees and content revenues.

Where the money flows, brands will follow, and this combined with all the other factors make it very plain to see that mobile will continue to be at the epicenter of the social networking battle not just in 2011, but for many years to come.

Author Note: Andreas is the CEO of Rebtel, the world’s second-largest mobile VoIP company. Prior to Rebtel, the Goldman Sachs alum was COO of Taptu, a leading UK-based mobile search engine, and TradeDoubler, Europe's leading performance-based marketing company.

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There Are Two Big Reasons Why Goldman Sachs Just Got Sued For Fraud Again (GS)

Dan Sparks

The FHFA's massive bank lawsuit extravaganza is a reminder of the horrific behavior that took place inside the subprime mortgage machine: fraud.

In it's lawsuit against Goldman Sachs, the FHFA claims that Goldman directly committed common law fraud, and particularly claims that Goldman "aided and abetted fraud."

This is the second time a government agency has accused Goldman of fraud. It's a big deal.

The agency seeks to recover the damages it sustained as a result of Goldman's wrongdoing, including the amount it paid for the securities ($11.1 billion) plus interest, the amount the value of those securities have lost, and legal fees.

The most serious of the FHFA's 10 causes of action against Goldman is for fraud.

And there are two big reasons why the FHFA says Goldman's actions were fraudulent. In short, they are the money it paid to get a window into the mortgage origination process and Dan Sparks.

Here's the first. From a key sentence in the FHFA lawsuit:

Because the information that Goldman provided or caused to be provided [to ratings agencies] was false, the ratings were inflated... [and] also that Goldman Sachs knew, or was reckless in not knowing, that it was falsely representing the underlying process and riskiness of the mortgage loans... because Goldman’s longstanding relationships with the problematic originators, and its numerous roles in the securitization chain, made it uniquely positioned to know the originators had abandoned their underwriting guidelines... [and because] as a result, the GSEs paid Defendants inflated prices for purported AAA (or its equivalent) Certificates, unaware that those Certificates actually carried a severe risk of loss and inadequate credit enhancement.

The big thing here is that Goldman funded mortgage originators, who encouraged property appraisers to inflate home values by firing them if they didn't and gave half million dollar loans to people like hairdressers and gardeners.

The other main reason Goldman is getting sued for fraud is that some of its employees signed the "shelf registration documents" registering the securities for multiple issuance with the SEC.

The FHFA alleges that those employees made false statements and omitted facts such as:

A number of the properties were stated as "owner-occupied" when in fact they were second homes or investment properties. (The FHFA says this is material because a borrower who lives in a mortgaged property is less likely to stop paying their mortgage and thus a better investment.)The mortgage loans' Loan-To-Value (LTV) ratios, key numbers in determining the risk of a mortgage loan, were said in Prospectus Supplements to have ratios of 80% or less (meaning that the borrower got a loan for less than their house is worth -- a much more attractive investment than a borrower who took out a loan for more than their house is worth) when in fact many were higher because the appraised values given to the homes were significantly than the actual value of the homes.And those documents, which were key in determining the value of the securities sold to Fannie and Freddie, are alleged to have been manufactured fraudulently by Goldman and its employees.The reason Goldman the company is sued for manufacturing these documents and not the people named seems to be that Goldman 1) provided money to the mortgage originators so that they would grant more mortgages to borrowers and sell them to Goldman to securitize, 2) incentivized its employees to securitize and sell as many loans as quickly as possible*, and 3) that there was "significant overlap between the management of the Goldman Sachs Group and the directors and officers of GS Mortgage Securities," meaning basically that Goldman made mortgages a big part of its business.

(In fact, in subprime RMBS securitizations, Goldman's deal volume increased from $2.1 billion in 2003 to $9.7 billion in 2004, to $14.5 billion in 2005 to $15 billion in 2006. And in ALT-A RMBS securitizations, Goldman's deal volume increased from $3.8 billion in 2004 to $10.4 billion in 2005 to $20.5 billion in 2006, according to the lawsuit.)

Goldman is also on the hook because it saw the poor quality of the loans it bought from the mortgage originators it funded (the lawsuit says Goldman received daily updates on how many loans were delilquint), retained third-party due diligence providers to analyze those loans that it considered securitizing regardless of the delinquinces (a smart move considering that it might have absolved Goldman of responsibility for any poor-quality loans in the Securitizations) but Goldman didn't listen to the companies' recommendations to exclude a significant number of loans. Goldman included the loans in its Securitizations anyway. Then it got the ratings agencies to rate them attractively. But it stated in offering documents that the loans had generally met the guidelines of the due diligence review.

 Our takeaways: Dan Sparks is full-on attacked in the lawsuit. The FHFA basically blames the rot of Goldman's mortgage business on him and his team's "traveling the world" to "make some lemonade from some big old lemons" (his words).

Of all the Goldman employees named as defendants, Sparks is the bad guy this time. The others are barely mentioned. 

It's the FHFA's imperative to encourage the mortgage industry to support a robust housing market. So at first it might seem that the lawsuits are counter-productive for discouraging lending during a time when already, few are lending.

And in a way, it is. But the FHFA lost billions. And they're a regulator that has to disincentivize fraud, which of course makes home buyers wary of the housing market.

This lawsuit, and any others that might follow, help achieve that goal.

Endgame: It seems like a settlement is coming.

It's a hard sell, to us at least, that Goldman can be found directly at fault for Fannie and Freddie's losses because 1) No matter who it paid to do so, Goldman didn't originate most of the loans, and that's where the real fraud took place; 2) Fannie and Freddie should have investigated the quality of the loans before investing in them (although the FHFA says it could not have known); and 3) Much of the blame is on this system that created impossible loans to pay off so that someone would actually invest in those loans (incredible yield) so that it could grant loans to people who couldn't pay them off because discriminating against poor people was litigously discouraged back in 1992.

This lawsuit certainly spells out Goldman's role in each step of that system (Using evidence from the lawsuit, we could probably create a flip book of Sparks blazing the trail for each of them), but Fannie and Freddie remain "sophisticated investors."

* The lawsuit says "Defendants had enormous financial incentives to complete as many offerings as quickly as possible without regard to ensuring the accuracy or completeness of the Registration Statements or conducting adequate and reasonable due diligence... if for no other reason than to quickly get them off Goldman's books." 

In reality Goldman and its employees had two incentives:

1. GS Mortgage Securities was paid a percentage of the total dollar amount of the offering whenever the Securitization was complete, if GSMS was the depositor (and it was in most of the relevant instances in this lawsuit regarding securities that Fannie and Freddie invested in).

2. GS, the underwriter, got a commission based on how much it sold the Certificates for. 

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More Reasons Why Greece's Finnish Collateral Deal Is Rubbish

  x You have successfully emailed the post. Forget other European countries trying to jump on the collateral bandwagon. There's an even better reason why Greece's collateral deal with Finland won't work.

According to FT Alphaville, a negative pledge clause in existing bond legal documents actually prohibits the collateralization of bailout loans without doing the same for other, foreign-law bonds.

The owners of the bonds do have the right to waive the clause, but in any practical scenario this would be unlikely. German business newspaper Handelsblatt wrote that "Greece could get a wave of lawsuits from private creditors" should any collateral deal go through.

If Greece failed to provide collateral against these bonds as well as EFSF loans, these bonds would be in default.

FT Alphaville thinks there might still be a way to get collateral to work without activating the negative pledge clause. If the European Financial Stability Facility (EFSF) lent directly to an outside agency in charge of the collateral, policymakers might be able to get around this paperwork.

But, we've pointed out before, providing collateral even just to EFSF lenders could leave Greece with fewer funds than it needs to stay afloat. This situation does not bode well for the viability of the Greek bailout.

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Yes, It's Absurd That 46% Of Americans Don't Pay Income Tax—But Not For The Reasons You Think

Amid the yelling back and forth about how America should deal with its debt and deficit problem, two major debates have emerged.

The first is whether the problem should be addressed via spending cuts or tax increases.

The sane answer is both.

Federal government spending recently surged over 20% of GDP, higher than it has been for most of the past century (see Chart 1). Barring a massive surge in GDP growth, or huge reductions in social-program spending (Medicare, etc.), federal spending will remain too high to offset merely with tax increases. So spending has to be cut.

Tax revenue, meanwhile, is running below the bottom of its long-term range of 15%-20% of GDP (Chart 2). So, barring truly massive spending cuts, which seem politically unfeasible, tax revenue needs to increase.

So, among those who acknowledge that the solution isn't black and white—that spending will have to be cut and taxes will have to increase—the fight narrows down to what should be cut and who should pay more.

And the specific argument above who should pay more income taxes, as it has since time immemorial, boils down to: Rich people (pick your definition), versusEveryone else

In the past month, several billionaires have weighed in on the "rich people should pay more" argument. Warren Buffett, one of the richest men in the world, argued that it's outrageous that he pays a lower tax rate than his secretary and said Congress should make him pay more. Charles Koch, meanwhile, argued that he pays a huge amount of taxes and that he thinks he can spend his money more efficiently than the government can.

I personally think billionaires can and should pay more. But that's not the point of this article. While the billionaire argument continues to rage, there's also the fight over the other side of the scale: "Everyone else."

And one of the points made in this fight is the well-publicized fact that 46% of Americans don't pay federal income tax.

That's ridiculous, howl rich people and their defenders. Everyone should pay tax. Why should half of the country get some of their government services for free?

And you know what?

They're right.

It is ridiculous.

What's more, it's hurting the country.

But not for the reasons you think.

Conservatives frequently throw the "46%" statistic around and suggest that half the country pays NO taxes. This isn't true. The 46% pay payroll taxes, sales taxes, state taxes, and other taxes. But they don't pay federal income taxes. And they should.

Why?

Not because this will suddenly balance the budget. It won't.

Everyone should pay income taxes because we're all in this together. And no one in this country should get something for nothing.

People pay a lot more attention to the decisions they and their representatives make when they have some skin in the game. They care about what their money is spent on. They understand, in a way that folks who pay nothing don't, that you can't just have everything they want (unless they're willing to pay for it). They feel personally insulted and injured when the government squanders their money, the way it has squandered so much money over the past decade (bank bailouts anyone?).

Just as important, they become active members of—and contributors to—the system, not members of a class of people who benefit from services paid for by others.

The current system, in which only half of the country pays the federal bills for everyone else, has contributed to the "us vs. them" environment in which class warfare is increasingly taking hold. This runs counter to the iconic promise of America, which used to be based on the success and breadth of the middle class.  Although there will always be arguments about who should pay more, the fact that almost half the country pays no income tax isn't helping.

But no, no, no, say the folks who defend the fact that 46% of Americans don't pay federal income tax.

Of those 46%, half are "elderly." And a third of the non-elderly make less than $20,000 a year.

That's true.

But they still should pay something.  Not a huge amount.  But something.

For the poorest Americans, even a few hundred dollars a year would go a long way toward changing the debate from "us vs. them" to just "us."

And it might—might—make rich people a bit more willing to pay a bit more.

Americans are at their best when they are working together to solve a common problem. Our current debt-and-deficit problem is a common problem, as is the debate over how much spending should be cut (and what) and how much taxes should be increased (and how).

We need the whole country to pitch in and solve that problem. And one good step in the right direction would be to broaden the tax base so that everyone is paying something.

UPDATE: I've gotten lots of smart feedback already on this argument. The most persuasive case against it is the argument that, when one looks at TOTAL taxes paid, it's clear that everyone is already paying something. I still think that it's the federal income tax that most people focus on when they think about paying their tax bill and that everyone should pay something.  But here's a chart from Paul Krugman showing the breakdown of total taxes by income bracket:

SEE ALSO: THE TRUTH ABOUT TAXES: Here's How Low Today's Really Are

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Analyst Shares 4 Reasons Why Citigroup Is Better Than Bank of America

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Citigroup(C_) and Bank of America(BAC_) have both been pummeled equally in the stock market in the past month, but analysts say Citigroup is the better opportunity.

Last week, UBS analyst William Tanona said the stock of Citigroup deserved a premium over Bank of America as it faces "less dramatic uncertainties" from large, mortgage-related liabilities and stronger earnings power.

On Wednesday, Glenn Schorr at Nomura released a report, making similar arguments. While the analyst thinks the selloff in both the stocks are overdone, he still prefers Citigroup and JPMorgan Chase(JPM_) over Bank of America. "..given similar valuations, we think Citi is the more attractive opportunity, based on its edge in capital, reserves, exposure to the growth markets and smaller mortgage-related risks. We also see attractive value in JPM at 1.0x tangible book."

Schorr lists four reasons why Citigroup is not Bank of America.

First, Citi is better capitalized. The analyst estimates that Citi's Basel III Tier 1 Common Ratio at the end of the second quarter was at 6.7% versus 5.1% for Bank of America.Citi also has less mortgage-related tail risk. "Citi's mortgage servicing portfolio is about one-quarter the size of Bank of America's, so the headaches surrounding servicing issues are a much smaller thorn in Citi's side. In addition, the two banks' rep and warranty risks are meaningfully different, with Bank of America's outstanding repurchase claims totaling about 11x the amount of Citi's claims pipeline." He also notes that Citi will likely pay less in any State AG foreclosure settlement, given its lower mortgage exposure.Three, Citi has a lower consumer banking presence in the U.S. relative to Bank of America and would be less affected by regulations affecting consumer banking such as new overdraft rules and the Durbin Amendment that restricts fees charged by banks to merchants for debit card transactions.Finally, Citi has greater exposure to faster-growing emerging markets, with 60% of net revenue coming from outside the U.S., compared to 20% in the case of Bank of America. But its exposure to the troubled European nations is not any more than Bank of America.

This post originally appeared on The Street.

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