Bets
“Did Somebody Repeal The Laws Of Mathematics?”
Sunday, August 5th, 2012
From Grant Williams’ latest Things That Make you Go Hmmm
Remember late-2010? When Spain wasn’t a problem, but merely a potential problem? I do:
(FT, November 17, 2010): For some of the world’s biggest hedge funds, typically regarded as the savviest traders in the market, there is now one big question facing the eurozone: what is going to happen to Spain?
While Europe’s politicians are grappling with the crisis unravelling in Ireland, hedge fund managers are already turning their attention to the issue of how – and if – a peripheral crisis in Ireland could leap via Portugal and Spain to become a systemic crisis for the eurozone as a whole.
“The Irish problem will be contained,” says Guillaume Fonkenell, chief investment officer at Pharo, one of Europe’s biggest and most successful macro funds, which specialises in trading on macroeconomic events and trends. “For us contagion is the issue … If the market loses confidence in Spain, then all bets are off. Spain is too big to bail.”…
Back then, the general opinion was that if the contagion spread to Spain the game was over because there wasn’t enough money with which to bail out an economy the size of The Kingdom of Spain. I’m not sure exactly what happened— maybe I wasn’t paying attention—but suddenly, almost two years on and in an environment where even the rich nations of Europe are seeing an undeniable slide towards recession, there is no talk about Spain being ‘too-big-to-bail’ anymore.
Did somebody repeal the laws of mathematics?
Presumably, if the contagion reaches Italy that would be OK too now, I guess.
As it first hit the headlines as a potential problem, Spain made a presentation to potential investors that highlighted how strong the country actually was despite the conjecture amongst market participants. The presentation is highly educational and can be found in full HERE, but as a taster, here’s one particular slide that caught my eye:
Oh, to hell with it… here’s another:
Some opportunity.
* * *
Full letter:
Grant Williams
Portfolio & Strategy Advisor at Vulpes Investment Management Private Ltd
2 Battery Road #26-01, Maybank Tower Singapore 049907
http://www.vulpesinvest.com/
Tags: Bets, Chief Investment Officer, Conjecture, Contagion, Enough Money, Eurozone, Grant Williams, Guillaume, Hedge Fund Managers, Hedge Funds, Kingdom Of Spain, Macroeconomic Events, Market Participants, Mathematics, Paying Attention, Pharo, Politicians, Recession, Systemic Crisis, Taster
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The T Report: China & LIBOR: Spain, Messy & Messi
Wednesday, July 25th, 2012
by Peter Tchir, TF Market Advisors
PMI
Chinese PMI was better than feared, but if I had to bet on what number is less manipulated, Chinese data or LIBOR, I would have to bet on LIBOR. Since we don’t have much else to work with, I guess we are stuck looking at it, and it shows that the slowdown is slowing, but I can’t get very excited about that.
European manufacturing PMI came in at 44.1, worse than the already low expectations of 45.2. The situation in Europe is deteriorating and all the summits aren’t helping. The banks need to be recapitalized and “uncertainty” needs to be removed or else business will continue to grind to a halt.
Most interesting, I thought, was that German Manufacturing PMI came in at only 43.3 and even German service remained under 50. Germany is not immune to the woes in the rest of Europe or to the global economy. French manufacturing PMI was an equally dreadful 43.6. Maybe the growing weakness in the core will light a fire. It isn’t enough to have firewalls. They either have to spend that money and finally take serious default and currency risk off the table, or the economies will continue to slide deeper into recession or depression.
Pesetas and Real Madrid
Spain had a reasonable t-bill auction today. The yields were high compared to any of the core with 6 month t-bills coming in a 3.69%. In a normal world, that isn’t bad, but in a world where Germany and others get paid to issue money for 6 months, it doesn’t look great.
In any case, talk of redenomination continues. Many people argue that the only way out for Spain and others is to exit the Euro and create their own currency that they can devalue at will.
I continue to see several problems with that. Devaluation will be controlled by the markets and not the politicians making it uncertain where the exchange rate will settle in. If the bets are “too high”, “too low” or “just right”, I would certainly bet against “just right”.
The uncertainty created by a new currency will be immense. The confusion for banks and businesses will overwhelm any possible business. Who will want to do business in a country with a highly volatile currency where the end result remains highly uncertain? Who will do business in similar looking countries? Trade will grind to a halt and demand for non-essential goods will dry up as people wait to see the results.
Finally, in a country where much of the “daily essentials”, particularly energy have to be imported, it is far more difficult to see how the people or the country, prosper. In successful devaluations, the country has often been natural resource rich and been able to “harness” those resources for their domestic economy during the devaluation process.
But those arguments are confusing, so let’s look at Barcelona and Real Madrid. Will Barcelona be able to afford Messi? How much of the revenue of these clubs from domestic markets? The higher the percentage of domestic revenue, the more expensive players will be. And it wouldn’t just be foreign players. Spanish players would also be tempted to leave. The clubs would have to pay their players in Euros. That could become a huge burden for Spanish clubs. As the peseta plummets, how will they afford these top players? Will clubs in other countries be able to pay them?
What if the situation in Spain erodes where daily protests become a way of life? What if the devaluation causes domestic problems? If political tensions grow and civil unrest increases will players want to stay in Spain when they could demand the same money elsewhere, without the additional risk?
Maybe Germany is hoping to transform the Bundesliga into the best league through currency devaluation? Yes, this is largely tongue in cheek, but it may be worth thinking about what Liga BBVA would look like after devaluation. People may not be passionate or understanding of the economy, but they are passionate and informed about their football clubs. In a world where much of the talent is imported and the local talent is free to leave, the analysis may not be as fanciful as it sounds. M
any Canadians saw it happen to their teams when a combination of a weak Northern Peso (this was pre loonie) and high taxes made it hard for Canadian franchises to compete (the BlueJays have never recovered). It wasn’t just sports. There were big issues of “brain drain” as many top people and companies looked to move to the U.S.
A weak currency may not be as helpful as people think and in fact may cause far more problems than it fixes, especially since this wouldn’t merely be devaluing, it would be creating a new currency and leaving a union, adding to the confusion and complexity of the task. Any real “progress” towards a near term redenomination would cause me great concern for all risk.
Risk “Meh”
Markets really don’t seem to know what to do. The greed is saying sell-off because Europe is a mess, yet the fear is that enough government money and liquidity comes into the market that we ignite another rally.
Domestic credit continues to do okay. Spreads have widened in the past few days, but very calmly and with relatively little enthusiasm for any move wider. You can pick up some high yield bonds marginally cheaper, but that’s probably only until you engage an offer and find out they aren’t really selling.
My concern that Europe will mess this up is growing. They seemed to have been implementing small steps that could work, but they seemed to have slowed down, and the level of dangerous (and poorly thought out) rhetoric is growing. I will continue to keep a close watch on the situation and am continuing to lighten up risk, though will add when drops seem overdone.
The price action in Spanish bonds is chilling, but volumes are incredibly low.
Tags: Bets, chinese data, Currency Risk, Devaluation, Exchange Rate, German Service, Global Economy, Libor, Low Expectations, Madrid Spain, Politicians, Real Madrid, Recession, Redenomination, Slowdown, Summits, T Bills, Tf, Uncertainty, Woes
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Frontline On MF Global’s Six Billion Dollar Bet
Thursday, May 24th, 2012
While the sur-realities of just what Corzine and the rest of the MF Global ‘traders’ did has been extensively discussed here and elsewhere, PBS’ Frontline provides the most succinct (and relatively in-depth) documentary on just what occurred from how the corrupt CEO lobbied regulators who had the power to stop his risky bets to the endgame realization of the missing customer money. A narrative, not just of “a bet that went bad”, but “a Wall Street morality tale“. Must watch!
The story of Jon Corzine, the former head of Goldman Sachs and political power broker, who took over MF Global in the spring of 2010 with oversize ambition and a passion for risk. But after a massive bet on European debt turned sour, the firm lay in ruins, with more than a billion dollars of customer funds missing.
Chapter 1: Six Million Dollar Bet – The Power of Jon Corzine
Watch Six Billion Dollar Bet on PBS. See more from FRONTLINE.
Chapter 2: Six Million Dollar Bet – The Final Days Of MF Global
Watch Six Billion Dollar Bet on PBS. See more from FRONTLINE.
Tags: ambition, Bet, Bets, Billion Dollars, Customer Funds, Endgame, Global Traders, Global Watch, Goldman Sachs, Jon Corzine, Mf Global, Morality, Narrative, Pbs, Pbs Frontline, Power Broker, Realities, Realization, Regulators, Six Billion
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Rotation (Research Puzzle)
Thursday, April 5th, 2012
Those investors known as sector rotators try to judge the most attractive parts of the market and weight their portfolios accordingly. Often they do so based upon their assessment of where we are in the economic or market cycle, as a simple Google search on the term will demonstrate.
The “how” of it varies from manager to manager, with some being index huggers and others willing to have more concentrated bets. Many of the managers have gotten much more global in the last couple of decades, so the amount of currency risk is another factor to consider.
Interestingly, the standard reports of many data providers (and those of in-house systems) use those same sectors, whether the manager is a sector rotator or not, which sets up lines of codification that affect decision making that most people don’t think much about.
In any case, the chart above shows the relative performance of three of the domestic sectors since the end of 2009, as represented by their ETFs. Energy (XLF) has been under pressure of late, while technology (XLK) has done well (on the back of AAPL especially). The consumer staples (XLP) have lagged the strong market so far this year.
It’s quite an interesting picture, with all three close to where they began. No one said this was easy. (Chart: Bloomberg terminal.)
Tags: Aapl, Bets, Codification, Consumer Staples, Currency Risk, Data Providers, Decades, Domestic Sectors, ETF, ETFs, Google, Google Search, Huggers, Investors, Nbsp, Portfolios, Puzzle, Relative Performance, Strong Market, Xlf, Xlk
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Buy Commodities, Sell Brands (Smead)
Wednesday, March 28th, 2012
by William Smead, Smead Capital Management
We saw Warren Buffett quoted the other day saying, “We like companies which buy a commodity and sell a brand”. We thought it would be very helpful to unpack his thought and put it into the context of today’s circumstances. We at Smead Capital Management believe these current circumstances are framed by the historical over-pricing of commodities, the coming economic contraction of China, the successful cleansing of the income statements of US households and the inevitable rebound in housing in the US. We will look at the makeup of our portfolio companies which buy a commodity and sell a brand to consider their upside potential in this interesting environment.
When non-economic investors load up on investments in anything which has had a big run up, please circle the wagons. When commodities were at their low point in 1999, it was hard to find any institutional investor or financial advisor recommending exposure in commodities for investors. As of the end of 2010, institutions are dedicating as much as 52% of their portfolio to alternative investments. This includes commodities, gold and energy. These investments are made today for diversification purposes and are simply bets on rising prices. These bets look good in a rearview mirror as we’ve had a once in a generation move into this asset class. We believe that commodities have never been more over-priced in the US and are entering a decade-long bear market.
We believe the reason commodities have been in a bull market for so long is the uninterrupted economic boom in China. When a country with 1.3 billion people grows at over 10% for a number of years without an occasional recession, it ends up relying on fixed asset investments for growth. When fixed asset investments dominate your GDP numbers, borrowed money prepares to turn sour and ultimately lead to a recession/depression. This is something that “getting rid of cable” can’t cure.
The Federal Reserve came out with their household debt service ratio (HDSR) last week. It shows that by the end of 2011, American households had brought the ratio down below 11% to 10.88%. This matches up with the levels seen in the early 1980’s recession and the “anemic” economic recovery of 1990-93. These earlier readings preceded two of the best modern economic growth periods since World War II. While the doomsayers moan about absolute debt levels, we feel they are missing the story on the health of the income statement of the average household. This has boded well for the economy historically. Also, if we continue to be slow to buy houses and cars, this HDSR could put discretionary spending into its most favorable position in decades.
Lastly, this current “anemic” economic recovery has been severely retarded by the boom commodity prices of the last two years, in our opinion. We’ve had to work off a huge number of foreclosed and short-sale housing inventories, while the deep recession temporarily crippled household formation (Jeff, Who lives at Home). It is rebounding as 20-somethings get sick of living with the parents and the parents get sick of living with Jeff. As Mr. Buffett said recently, “eventually hormones take over” and as Brett Arends pointed out in Smart Money,” renting is more expensive than buying in about 75% of American cities.” You add high lumber, copper, iron ore and oil prices to this mix and you get the worst depression in housing and blue-collar employment since the depression. All these headwinds are about to become tailwinds, in our vision, over the next five years.
Therefore, betting on the US economy and the US consumer looks very favorable to us, especially where the rebounds in employment and consumer confidence have an impact. In fairy tales, people are asked to spin straw into gold. We like to own companies which spin milk and coffee (SBUX), cotton (JWN and CAB), internet access (EBAY and ACN), tax returns (HRB) and chemicals (MRK, AMGN, BMY, ABT, PFE and MYL) into gold. Profit margins on commodity-related companies and companies reliant on emerging market growth could plummet in the near future. Just ask the folks at BHP Billiton. They announced March 20th, 2012 that they are seeing in a big drop off in demand from China. In turn, we believe margins could go up for anyone who is positively impacted by lower energy prices and/or commodity prices in general. This is especially true if you “buy commodities and sell brands”.
Best Wishes,
William Smead
The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. Some of the securities identified and described in this missive are a sample of issuers being currently recommended for suitable clients as of the date of this missive and do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.
Tags: Alternative Investments, asset class, Asset Investments, Bear Market, Bets, Capital Management, Circle The Wagons, Commodities, Commodity, Diversification, Economic Boom, Economic Contraction, ETF, ETFs, Generation Move, Income Statements, Institutional Investor, Portfolio Companies, Rearview Mirror, Rebound, Recession, Warren Buffett
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Homer Simpson’s Financial Markets and “Fixed Income” Products (Tchir)
Sunday, March 25th, 2012
by Peter Tchir, TF Market Advisors
Stop tomorrow’s problems today.
Just this week we had:
TVIX – an ETN that provides double the daily change in the vix futures. Who is smart enough to be able to take big bets on VIX futures that doesn’t have a futures account? Who is this designed for?
MF Global & “customer money” – months after the problem, no good explanation of where the money went, and even more scary, is that the it remains unclear whether MF did anything illegal with customer money. Our understanding of how our money should be treated, and the legal rights we have signed away don’t necessarily match up.
CPDO – the legal battle in Australia over this disaster continues. In the top 3 of mis-rated product of all time. You take something that is BBB+ on average, LEVERAGE it, and get AAA. It relied on “self-insurance” the thing partly responsible for the equity crash in 1987.
Greek CDS auction – finally a Credit Event occurred and settled this week. Very few people still seem to understand how lucky CDS holders were that the auction on New bonds delivered a real payout. The system didn’t fall apart as some had worried, but no reason that CDS cannot be at least 90% cleared, or better yet, traded on an exchange.
BATS – “Making Markets Better” according to their website had to pull their own IPO. Maybe they didn’t realize algo’s don’t provide actual liquidity, all they do is take real liquidity from exchange and run around the electronic world trying to scalp a few fractional cents not available to individual investors anyways. If they have to list on a proper exchange, people really should question the need for these other exchanges, sub-penny trading, etc.
I’m all for some complexity and innovation, but it does seem after a week like this, that the financial markets have become too complex, and some real effort should be made to simplify things and put everyone on an even playing field.
Which brings me to a story I’m just getting up to speed on. It seems like banks and investment banks are working on ways to satisfy their customer’s demand for yield. They should come with a warning that “yields in hindsight may be smaller than they appear”. I haven’t been able to confirm that this is being sold to retail or how much has been done, but I decided to poke around in some bonds listed by Citibank – mostly because somehow they seemed to have needed more support from the taxpayers than any other bank (except for BAC which I have picked on too often).
So let’s take a look at what appears to be a Citibank NA Certificate of Deposit – how dangerous could that be?
It seems a bit long for a CD – 2032 final maturity, especially since it is callable at any time. According to this it hasn’t been issued yet, so maybe this is all a bad dream, but since I was able to find it on Bloomberg, it probably is something they are trying to sell.
So on any “fixed income” product, the big question is what is the coupon? It pays 6%!
Ok. I could buy Citigroup Inc 5.85% bonds with a 2034 final maturity. They are non-call and priced around 103.5 to give a yield of 5.57%. So stop right there. The CD may be marginally higher in the capital structure and slightly safer, but for 20 years I would much rather have 5.57% non callable bond rather than a 6% bond callable at any time. I would spend more time working out the value of the call and if the trade-off is even remotely fair, but there is no point, because the coupon isn’t “fixed” it resets annually.
So after 1 year, the coupon will be 5% minus 6 month LIBOR at the time. If today was a “setting” date, the coupon would be only 4.25%. So as short term rates rise in the future, this coupon on this Inverse Floater will go do. If 6 month Libor is ever at 4% or above on a setting date, then this bond will have the “floored” coupon of 1%. So if the Fed starts raising rates or LIBOR goes up because bank credit risk deteriorates, you own a low coupon bond in either a high rate environment, or weak bank credit environment.
But this “Certificate of Deposit” looks tame compared to another they seem to be marketing at the same time. Again, I don’t know for certain that they are marketing this, but it does show up on Bloomberg under a list of Citi bonds, so I have to assume it isn’t there by accident.
So this one is a “dual range accrual”. So it look like you have to track the number of days in a period where 3 month Libor is between 0% and 5% and the Russell 2000 is above 75 (maybe they mean 750?). If both conditions are met for the entire period, you get a 4.25% coupon. So a Citibank CD that is callable at any time, has a best case coupon of 4.25%, and could be 0% in either a high rate environment (libor above 5% or in a weak stock market the RTY is below the threshold). Retail investors are selling options hand over fist with the promise of some decent yield in the first year. I find it hard to believe they understand the options they are selling, and I find it impossible to believe that they are selling the options at anything close to fair value.
Stop tomorrow’s problems today, but if you are show a “fixed income” product where the coupon is too good to be true, it is too good to be true!
Copyright © TF Market Advisors
Tags: Bats, Bbb, Bets, Bonds, Complexity, Electronic World, Etn, Financial Markets, Fixed Income Products, Greek Cds, Homer Simpson, Individual Investors, Ipo, Leverage, Mf Global, Nbsp, Proper Exchange, Real Liquidity, Self Insurance, Tf, Vix Futures
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Bailouts + Downgrades = Austerity And Pain (Nomi Prins)
Friday, January 20th, 2012
Submitted by Nomi Prins
Bailouts + Downgrades = Austerity And Pain
The markets (read: traders with big books at mega financial firms and hedge funds) weren’t particularly shocked by last week’s wave of heavily pre-broadcast S&P sovereign debt downgrades. For months, the question wasn’t ‘if’, but ‘when.’ True to form, just as with the US downgrade, S&P’s reasons skated the surface of prevailing wisdom – governments have too much debt, and not enough income. That’s only a fraction of the story.
Nowadays, when any sovereign (including the US) gets downgraded by a rating agency, it’s not just because its debt repayment ability is questionable (the publicized logic of rating agencies), but because it incurred more expensive debt to float its banking system. It chose to subsidize banks over people.
The S&P likes moving on Friday nights. It was on a Friday night that it downgraded US debt to AA+ from AAA. On Friday night, January 13, 2012, it downgraded France and Austria from AAA to AA+, and 7 other European countries, too; Cyprus, Italy, Portugal, and Spain by two notches; Malta, Slovakia, and Slovenia, by one notch. Portugal, Cyprus, Ireland and Greece are at junk status. Germany’s AAA rating is intact.
Nowhere in S&P’s statement about “global economic and financial crisis”, did it clarify that sovereigns were hit due to backing their largest national banks (and international, US ones) which engaged in half a decade of leveraged speculation. But here’s how it worked:
1) Big banks funneled speculative capital, and their own, into local areas, using real estate and other collateral as fodder for securitized deals with derivative touches. 2) They lost money on these bets, and on the borrowing incurred to leverage them. 3) The losses ate their capital. 4) The capital markets soured against them in mutual bank distrust so they couldn’t raise more money to cover their bets as before. 5) So, their borrowing costs rose which made it more difficult for them to back their bets or purchase their own government’s debt. 6) This decreased demand for government debt, which drove up the cost of that debt, which transformed into additional country expenses. 7) Countries had to turn to bailouts to keep banks happy and plush with enough capital. 8) In return for bailouts and cheap lending, governments sacrificed citizens. 9) As citizens lost jobs and countries lost assets to subsidize the international speculation wave, their economies weakened further. 10) S&P (and every political leader) downplayed this chain of events.
The United States
On Aug. 5, 2011, S&P downgraded US government debt to ‘AA+’. This was four days after Congress voted to raise the US debt cap – to prevent a downgrade – proceeded by political squabbling and the US Treasury and Fed begging Congress to raise the debt cap. S&P, beacon of stamp-any-toxic-asset-AAA, accountability, claimed, “American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.” In other words, too much debt, too little income.
According to the US Treasury, the main reason for the debt increase was a stalling economy – lack of enough incoming tax receipts to pay US expenses, (which include interest payments on growing debt.) That’s not true. Tax receipts dropped $400 billion to $2.1 trillion in 2009 vs. 2008. Expenditures jumped to $3.5 trillion in 2009 from $3 trillion in 2008. Treasury debt ballooned by nearly $4 trillion from 2008 through 2010.
Where’s the money? About $1.6 trillion lies on the Fed’s books as excess reserves which banks – dealers for sovereign debt – put there. Nearly a trillion dollars went to backing Fannie Mae, Freddie Mac – which enabled banks to artificially overvalue related securities, and extra interest payments. There was $700 billion in TARP, which though mostly repaid, never manifested into debt reduction, and hundreds of billions of dollars of asset guarantees underlying big bank mergers. So, 75% of the extra debt went to saving banks. S&P didn’t mention this. The policy repeated across the Atlantic.
Ireland
The Irish government’s pain started when it guaranteed the bonds of Anglo-Irish bank in September 2008. By May, 2010, Central Bank head, Patrick Honohan, assured the world that he’d have ‘two big banks, fixed by the end of the year.’ Upon that endorsement, the government backed bondholders on the banks’ behalf. The economy deteriorated.
Six months later, nobody would lend to Irish banks. Irish austerity promises didn’t change the fact that Irish banks weren’t big enough to contain their waste. By November, 2010, banks paid for $60 billion Euro of maturing bonds with emergency ECB loans, and the ECB became the backbone for the Irish bank guarantee scheme, whose participants included Ireland’s big financial firms: Irish Life & Permanent p.l.c., Bank of Ireland, Allied Irish Bank p.l.c., Anglo Irish Bank Corporation Limited, and Irish Nationwide Building Society. Irish Government Debt doubled from 65.3 billion Euro to 118 billion Euro since 2009.
The ECB deemed the bailout a success. Yet, by the summer of 2011, Ireland was downgraded to a notch above junk and households (and foreigners) accelerated extracting money from Irish banks, weakening the banks’ funding base further. The Irish government now owes 110 billion Euros to the banks, the National Asset Management Agency (NAMA, aka “bad bank”) the EU, ECB and IMF, with no way to repay it.
Spain
According to a recent Business Week article, Spanish banks hold 30 billion Euros ($41 billion) of “unsellable” real estate loans. Just like in the US where smaller banks got hit hardest, small and mid-sized Spanish banks did too. In addition, about 308 billion Euros worth of Spanish loans are ‘troubled.’ Home prices in Spain are off 28% from their April, 2007 peak, with land values in the outskirts of urban areas, down by as much as 75%.
In economic desperation, the public elected conservative party leader, Mariano Rajoy, as Prime Minister in the end of 2011 who promised to lead Spain to economic recovery, by invoking austerity measures in return for backing to help the biggest Spanish banks.
Meanwhile, the top six Spanish banks sit on $33 billion of foreclosed assets having set aside 105 billion Euros in write-downs against bad loans since 2008, with another 60 billion Euros to come. The backdrop is a 23% unemployment rate, triple its 7.9% May, 2009 level. Property transactions continue to decline. Foreclosures keep ramping up. The gap between what banks want to sell foreclosed or troubled property at, and what investors are wiling to pay continues to widen, forcing more small and mid-size banks to buckle under larger than anticipated losses, which in turn squeezes liquidity out of local usage.
Greece
According to an SEC report from the National Bank of Greece (NBR) for the year ending 2010 – loans to businesses and households were expected to “remain under considerable pressure…[due to] “downward pressure on household disposable incomes and firms’ profitability from the austerity measures… are likely to impair further demand for loans.” They weren’t kidding. In order for the NCB (or any bank) to reduce its dependency on ECB funding, it has to reduce loans to its own economy.
The ECB agreed to accept worse collateral (with junk ratings), including bank issued bonds with Greek government guarantees (under a May, 2010 rule change for all member countries). The ECB bought Greek (and other) government bonds in the secondary markets, to support their value and thus, their value as loan collateral. As with the Fed’s QE measures, Euro-style – this only perpetuates a fantasy of demand.
After four rounds of austerity measures, nationwide protests, 110 billion Euros in IMF and ECB bailouts to keep bondholders (and banks) happy, escalating interest rates driving borrowing costs higher, a downgrade to junk, and a Prime Minister swap; Greece remains in tatters with more pain to come.
Italy and Portugal
Last summer, S&P warned it would downgrade Portugal if it didn’t play ball with the IMF and EU over a 78 billion Euro bailout. So Portugal towed the austerity line. Its economy deteriorated. S&P downgraded it to junk status.
The IMF and EU declared that Italy too, needed ‘structural reform’, meaning public austerity and privatization. National assets went up for fire-sale, as they did in Spain and Portugal, to the highest international bidder. Now, the high borrowing costs the government faces as a result of bolstering the banking system, paying bondholders and selling infrastructure, has resulted in more downgrades and dim prospects.
According to the Italian Central Bank, 500 Italian cities are facing losses on derivatives contracts. JPM Chase and Banco IMI are accepting Italian government bonds as collateral, rather than less risky US Treasuries or cash, certain that the ECB will step in to buy, and thus prop up, Italian bonds if needed, as they did in August, 2011.
As Greece showed, using high-cost sovereign debt as collateral leads to more bailouts to ensure big lenders get their money back. JPM Chase, having weathered the US subprime crisis with support from the US Fed, isn’t about to lose on that bet. Meanwhile, several Italian towns, the City of Milan and the Tuscan region, are suing the big American, German, Swiss and French banks over derivative losses and misleading asset purchases, who will likely get bailout money anyway.
Bailout Economics Doesn’t Work
ECB bailout money didn’t (and won’t) go towards helping any European country’s local economy, any more than it went to aiding the mainstream US economy. The ECB and IMF, at the Fed, US Treasury and US administration’s urging, camouflaged the insolvency of European banks, perpetuating losses with bailouts, and forcing cowardly governments to support them, while turning a blind eye to boosting core economies.
Meanwhile, banks with access to the ECB’s ‘window’ are taking the money and immediately putting it back into the ECB as reserves. Overnight deposits at the ECB continue to break records, currently hovering around 500 billion Euro ($640 billion). As in the US, European banks aren’t using that liquidity to help fix local economies, but hoarding it to preserve themselves. The amount on reserve is 98% of the total made available in emergency 3-year loans in late December at 1% interest; banks get 0.25%, which means they are paying 0.75% interest for the loans, far less than the market would charge them.
The die has been cast. Central entities like the Fed, ECB, and IMF perpetuate strategies that further undermine economies, through emergency loan facilities and bailouts, with rating agency downgrades spurring them on. Governments attempt to raise money at harsher terms PLUS repay the bailouts that caused those terms to be higher. Banks hoard cheap money which doesn’t help populations, exacerbating the damaging economic effects. Unfortunately, this won’t end any time soon.
Copyright © Nomi Prins
About Nomi Prins
Former Goldman Sachs Managing Director, Nomi Prins, is an independent journalist, author and speaker. Her latest book is a dramatic historical novel about the 1929 crash, Black Tuesday. Her last book was It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street (Wiley, September, 2009/October 2010). She is also the author of Other People’s Money: The Corporate Mugging of America (The New Press, October 2004), a devastating exposé into corporate corruption, political collusion and Wall Street deception, chosen as a Best Book of 2004 by The Economist, Barron’s and The Library Journal. Her book Jacked: How “Conservatives” are Picking your Pocket (whether you voted for them or not) (Polipoint Press, Sept. 2006) catalogs her travels around the USA; talking to people about their economic lives.
She has appeared on numerous TV programs: internationally for BBC World, BBC and RtTV, and nationally for CNN, CNBC, MSNBC, CSPAN, Democracy Now, Fox and PBS. She has been featured on hundreds of radio shows globally including for CNNRadio, Marketplace, NPR, BBC, and Canadian Programming.
Her writing has been featured in The New York Times, Fortune, Newsday, Mother Jones, The Daily Beast, Newsweek, Slate, The Guardian UK, The Nation, Alternet, LaVanguardia, and other publications.
Before becoming a journalist, Nomi worked on Wall Street as a managing director at Goldman Sachs, and ran the international analytics group at Bear Stearns in London. She is a Senior Fellow at Demos, based in Los Angeles.
Tags: Austerity, Banking System, Bets, Capital Markets, Debt Repayment, Distrust, Downgrades, European Countries, Financial Crisis, Fodder, Friday Night, Friday Nights, Junk Status, National Banks, Notches, Repayment Ability, S Wave, Sovereign Debt, Sovereigns, Speculative Capital
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Biggs Raises Bullish Bets
Tuesday, October 18th, 2011
Barton Biggs, managing partner and co-founder of Traxis Partners LP, talks about his investment strategy and stock market outlook. David Kelly, chief market strategist af JPMorgan Funds also shares a few ideas.
Source: Bloomberg, October 17, 2011.
Tags: Barton Biggs, Bets, Chief Market Strategist, Co Founder, David Kelly, Investment Strategy, Jpmorgan Funds, Outlook, Stock Market Outlook, Traxis Partners
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Short Selling Rises Most Since 2006 in September – Just Ahead of Rip Roaring Rally of October
Monday, October 10th, 2011
It almost never fails does it? Just as investors position themselves for zig…. instead zag happens. Apparently we just saw the largest increase of short selling since 2006 in September – which worked out nicely for about 1.75 days in October, before this face ripping rally of 10%. One can be sure part of this move upward is those newly placed shorts covering – indeed we saw such a vicious move last Tuesday in the closing 45 minutes, I have to assume many of those positions were harpooned that day.
- Investors are increasing bearish trades around the world by the most in at least five years, convinced the lowest valuations since 2009 will prove no barrier to losses after $11 trillion was erased from equities. Borrowed shares, an indication of short selling, climbed to 11.6 percent of stock last month from 9.5 percent in July, the biggest increase since at least 2006..
- Trades that profit when Chinese equities decline have reached a four-year high and bearish bets in the U.S. are the most since 2009, exchange data show.
- Slowing economies are spurring short sellers after indexes in 37 out of 45 major countries tumbled 20 percent, the common definition of a bear market.
- “The Lehman collapse is way too clear in people’s minds,” said Henrik Drusebjerg, who helps oversee $230 billion as senior strategist at Nordea Bank AB in Copenhagen. “They don’t want to get burned as much again. They know either they get some protection or get out altogether.”
- About 4.1 percent of NYSE shares have been borrowed and sold, up from 3.5 percent at the end of July, data from the bourse shows. U.S. short sales are rising at the second-fastest pace on record after the 2008 financial crisis, according to exchange data dating back to 1995.
- Short selling
, where traders borrow shares and sell them, hoping for a decline, is increasing even as equities approach the cheapest valuations on record. The MSCI All-Country World trades at 11.8 times reported profit, compared with 11.9 in the five months after Lehman’s collapse. The measure’s average price-earnings ratio since 1995 is 21, data tracked by Bloomberg show. - The bond market indicator that has predicted every U.S. recession since 1970 now shows that the economy has a 60 percent chance of contracting within 12 months. The so-called Treasury yield curve, adjusted for distortions caused by the Fed’s record low zero to 0.25 percent target interest rate for overnight loans between banks, shows that two-year notes yield 20 basis points, or 0.20 percentage point, less than five-year notes, according to Bank of America Corp. research.
And the last time this happened?
- Bearish bets last increased faster in March 2009, the same month the S&P 500 began a bull market that doubled its value.
Tags: Bear Market, Bets, Bourse, Collapse, Copenhagen, Decline, Exchange Data, Financial Crisis, Indexes, Last Tuesday, Least Five Years, Lehman, Msci, Nordea Bank, Nordea Bank Ab, Nyse, Short Sellers, Strategist, Trillion, Valuations
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Arnott: Look Outside Mainstream Stocks and Bonds (Morningstar)
Wednesday, September 28th, 2011
Arnott: Look Outside Mainstream Stocks and Bonds
Investors need to broaden their horizons and consider alternatives and tactical bets if they want to achieve respectable returns in the coming years, says Research Affiliates’ Rob Arnott.
The 3-D Hurricane Hurtling Toward the Economy
A combination of deficits, debt, and demographics will weigh on the U.S. economy for the next 10-15 years, says Research Affiliates’ Rob Arnott.
Arnott: Apple Pretty Darn Expensive
Research Affiliates’ Rob Arnott thinks it is unlikely Apple deserves it’s place as the largest market-capitalization company in the country and that investors shouldn’t expect outsized returns.
Tags: Apple, Bets, Bonds, Demographics, Economy, Horizons, Hurricane, Investors, Largest Market Capitalization, Mainstream, Morningstar, Research Affiliates, Rob Arnott, Stocks And Bonds, Stocks Bonds
Posted in Bonds, Brazil, Markets | Comments Off
