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Guest Post: A Historical Note On Multi-Sigma Sovereign Risk

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Fri, 03/19/2010 - 22:46 | 270721 johnnyBoy
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The unsustainable phenomenom will continue until they (the Club) wish it not to.  At that time, they will be well-positioned for the ride down. 

P.S.  I know the answer to your math question becuz I did the same one this weekend with my 1st grade grandson.

Fri, 03/19/2010 - 23:25 | 270734 JR
JR's picture
Authority at the Fed and other central banks may be “conditioned to think they are all-powerful,” but as JM says, “The are not.”  Rozeff’s comments at lewrockwell.com seem to make the case that there is a breaking point to currency devaluation...

Murderer of the Day: Postscript

Posted by Michael S. Rozeff on March 19, 2010 06:18 AM

A hat tip to Edward for a news item confirming Kim Chong-il as MOTD yesterday. On March 18, Pak Nam-gi was executed by firing squad for treason. A North Korean finance official, he was blamed (scapegoated) for the failure of the government’s currency reform last year. (He was called an enemy of the state , who “snuck into the revolutionary ranks to intentionally wreck the economy.”)

The devaluation forced savings to be converted. 100 won became just 1 new won. Imagine $1 becoming 1 cent. People were allowed to convert only 100,000 won of their savings (worth $50–$86), resulting in instant confiscation and poverty. Pricing chaos was immediate with rice soaring.

http://www.lewrockwell.com/blog/

Kim Chong-il Cops TOTDA

Posted by Michael S. Rozeff on March 18, 2010 06:01 PM

Totalitarian of the Day Award goes to Kim Chong-il (aka Kim Jong-il), North Korea’s “Dear Leader,” “Great Leader.” News reports today say that he has secreted at least $4 billion in European bank accounts, just in case he loses his position atop the nation that he has impoverished. That’s a minimum of 10 percent of the country’s GDP, which is no doubt over-estimated at $40 billion.  I feel generous so I also award him the dishonor of Thug of the Day. Worse still, Murderer of the Day.

Fri, 03/19/2010 - 23:34 | 270739 jdrose1985
jdrose1985's picture

Absolutely amazing.

Wanna talk about how bad it is here? Imagine being the soul unlucky enough to be born into a situation like THAT!

Sat, 03/20/2010 - 00:00 | 270746 Crab Cake
Crab Cake's picture

Not even a mention of our beloved nobel peace prize laureate POTUS?  Herr leader of two ongoing military campaigns, acknowledged torture facilities, who knows how many black sites and operations, and over 900 bases in foreign countries? 

Should not the irony at least give him a nod in the running for murderer/thug of the day? 

Hope and Change.

Sat, 03/20/2010 - 01:30 | 270774 jeff montanye
jeff montanye's picture

dishonorable mention at least.  

Sat, 03/20/2010 - 04:24 | 270813 Selah
Selah's picture

Don't forget that Obama INHERITED this mess!

How could he have known how badly Bush screwed our nation up?

Bush and the Republicans are to blame for the wars and torture. Obama promises to end the wars and torture and usher in a new era of transparent and open government, where reckless spending is eliminated and deficits are reduced, Main Street is no longer a debt-slave to Wall Street, and finally the US Constitution is restored as the supreme law of the land!!!

I could go on, but I vomited in my mouth as I wrote that and need to go spit it in the toilet.

I'll probably see a copy of the Constitution in there...

 

Sat, 03/20/2010 - 08:37 | 270843 aurum
aurum's picture

obama and hope...what a joke

Sat, 03/20/2010 - 11:56 | 270901 Absinthe Minded
Absinthe Minded's picture

Oooohh so close, my cursor was on the junk button.

Sat, 03/20/2010 - 14:55 | 270965 Harbourcity
Harbourcity's picture

hhahaha ditto.

 

Sat, 03/20/2010 - 00:11 | 270752 Village Idiot
Village Idiot's picture

He's so wonewee...

Sat, 03/20/2010 - 14:16 | 270948 seventree
seventree's picture

...resulting in instant confiscation and poverty

"instant" is the key word here. Stretch the process out gradually and most people won't even feel their pockets being picked.

Fri, 03/19/2010 - 23:27 | 270736 jdrose1985
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6 years was the longest dated maturity.. the michael jackson bond.

Is an inverted yield curve good or bad for banks?

Sat, 03/20/2010 - 12:54 | 270917 rubearish10
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Very bad for banks since cost of current cash is more expensive than longer term debt finance returns such as loans.

Sat, 03/20/2010 - 13:23 | 270932 jm
jm's picture

It wasn't exactly the longest dated maturity... it was the longest maturity that had any semblance of liquidity to it.  Longer-dated stuff was buy and hold. 

Note today's 5-7 year on-the-run treasuries are the most liquid. 

An inverted yield curve is a very bad for the price of anything leveraged up.  Fro example, a home mortgage bought at 5% down is 20x leverage.

Current loan books would suffer under sustained curve inversion.  

Fri, 03/19/2010 - 23:28 | 270737 Lionhead
Lionhead's picture

JM, excellent article; thanks for the historical perspective on the yield curve. Too bad the yield scribes at the time didn't have better tools for posterity. Keep these critical thinking missives coming.

"Sovereign irresponsibility makes high grade corporate debt more attractive than government paper." Yes, particularly when the corporations are dumping their toxic waste onto the government debt. I favor corporate debt in my portfolio as the AAA rating on most developed country debt is another myth to entice unsuspecting buyers that can be seduced by a rubber stamp rating. Emerging market debt is more attractive to me than debt issued by crazytown USA.

 

Sat, 03/20/2010 - 10:39 | 270871 dnarby
dnarby's picture

Seems to me like corporate debt isn't exactly a safe bet either.

If the currency those debts are denominated in goes through hyperinflation, then they are devalued.

If the currency goes through deflation, then the company defaults on that debt.  That's better than hyperinflation because you will have a claim in b/k restructuring...  But you had better be holding very seinor debt (and not holding debt in a company that has a politically connected membership, because they may abrogate your rights e.g. GM).

Now that I've thought about it, this seems to be yet another argument for intentional hyperinflation, as it preserves the executive structure of the corporations (assuming shareholder don't get wise and boot them all).

Sat, 03/20/2010 - 16:15 | 270986 jm
jm's picture

I don't personally worry too much about Treasuries, although I don't begrudge anyone for thinking otherwise.  It's good to think about extremes so you can get some footing and traction if things blow up. 

This article is an extreme, extreme historical case which we are not near yet.  I think you would actually see these weird corporate-sovereign crosses in death rattle countries like Greece et al.

A more relevant issue to me is that the yield differential model could fail to work.  I've been working on a hybrid AAA-SP500 model to replace the 30Y.

Sat, 03/20/2010 - 18:05 | 271024 Lionhead
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JM, I think sovereign debt is akin to the derivative of its currency as posited by Armstrong. If the currency is strong, the bonds will follow, hence the idea of buying emerging market debt. I do have a slice of TIPS that were bought a long time ago when the gov't mispriced their fixed coupon in order to attract buyers. A most opportune buy for me.

Your model sounds intriqing; a model of confidence vs inflation expectations? Would this be similar to the TIPS breakeven rate sans the gov't supplied CPI numbers?

Sat, 03/20/2010 - 18:27 | 271030 jm
jm's picture

In a nutshell the yield differential model compares the yield on 30Y to s&p 500 as an indicator of a market correction.

When 30Y yields exceed dividend yield by x amount, the risk-free rate will eventually become just too compelling to ignore, and the market sells off. 

Note that now hilarious "risk-free" appelation.  There was always risk in treasuries, but not so front and center as now.  The yield differential model may not work as it did in the 90s and naughties.

What currencies/credits you like?

Sat, 03/20/2010 - 18:52 | 271038 Lionhead
Lionhead's picture

I see; well, I think the SPX is overpriced here both in terms of valuation & dividend yield considering their subordination in the capital structure. So, my equity proxy is high yield where I get capital appreciation & hi coupon sans some volatility. Since perceptions have changed in our era, there's many distortions when considering what is/is not risky, what is/is not fair priced/mis-priced. It is a daily challenge.

I don't like to talk my book, but in general I like Asian bonds of many stripes & colors, currencies in hard asset countries like Australia & Brazil. I'm afraid I break my rule on gold though!

We shall see what the "move" in the MOVE index portends. Pun intended. ;)

Sat, 03/20/2010 - 00:33 | 270741 Crab Cake
Crab Cake's picture

"Those in authority at the Fed and other central banks are conditioned to think they are all powerful.  They are not.  Their power rests in their ability to transfer financial system risk into a category of sovereign risk."

A very powerful statement.  The author points to economics and extrapolates that the math isn't there for the "all powerful", and I will point to American society.  The patience, ignorance, and lethargy, of the People is not infinite; though it might seem so.  When these people have nothing left to lose the power structure will crumble before a road rage governmental revolutionary episode that will make the French Revolution seem quaint.  The era of the all powerful men was ended by the era of the gun.  Bullets make all men equal.  The People know the score.  Three quarters of the American people couldn't comprehend your piece above (generous?), but they do understand transferance of financial system risk into a category of sovereign risk.  People do understand that they've been robbed, that they're rights are eroding, that laws don't apply to the rich, that the politicians don't serve them and are lying, that their childrens' future has never been bleaker...      I work in customer service for a TBTF (just another serf), I assure you the concept of being pissed on from above by "the all powerful bankers" is loud and clear.  The People still aren't sure how best to fight, and many still have too much to lose to take the first step.  However, both of these things is changing rapidly.

"Americans can always be counted on to do the right thing...after they have exhausted all other possibilities."  -Winston Churchill

I think we all know what the right thing to do is.....

Fri, 03/19/2010 - 23:59 | 270747 JR
JR's picture

46 comments already on this illustrated article by James Quinn (noted in Martenson’s Daily Digest today):

It Was A Wonderful Life (Jim Q.)

The loss of the American Dream can be traced to 1913. The creation of the Federal Reserve by powerful banking interests and corrupt politicians marked the beginning of the end for the U.S. dollar. The implementation of a personal income tax opened Pandora’s Box and unleashed incalculable horrors upon the American public. The top marginal tax rate in 1913 was 7%. It reached 94% by 1944.

http://theburningplatform.com/blog/2010/03/18/it-was-a-wonderful-life/

Sat, 03/20/2010 - 00:05 | 270750 Crab Cake
Crab Cake's picture

The dollar of 1913 is now worth less than 5 cents, and isn't convertible to gold.

I have a theory that one would do best to take every penny they have, and put it in.... well pennies.  Deflation - cash is king, check.  Inflation - cash in commodity, check.

Pennies people, and don't forget to invest in a smelter.

Sat, 03/20/2010 - 00:14 | 270753 Village Idiot
Village Idiot's picture

Stepping over dollars to pick up penny's - literally.

Sat, 03/20/2010 - 00:31 | 270757 delacroix
delacroix's picture

pennies, are mostle zinc, the nickel, is the only US coin, worth more than the metal in it

Sat, 03/20/2010 - 00:37 | 270758 Crab Cake
Crab Cake's picture

Alright, nickels then, and hyperinflation would make it all the more worth while. 

AND

One would be guarded from deflation.

Gold my arse.

Now where to store them nickels?

Sat, 03/20/2010 - 04:48 | 270818 Selah
Selah's picture

While Gold has it's place, and SAE's are about to be VERY popular, they are too large of denomination for everyday transactions. Save every Nickel that you come across: 

http://www.survivalblog.com/nickels.html

I've spent about 4 or 5 Nickels in the last 2 years and now have a tub of them. I try to arrange my purchases to get one every time I buy something. You will only get ONE Nickel as change per transaction (do the math).

10 $FRN a pound and rising, bitches...

 

 

 

Sat, 03/20/2010 - 01:52 | 270780 A_MacLaren
A_MacLaren's picture

The metalic value varies daily with spot valuations of the base or precious metals.

A penny is not a penny 1909-1982 Cent (95% copper)  vs 1982-2010 Cent (97.5% zinc)  the copper ones are worth more than the zinc one, based on melt value.

Check here: http://www.coinflation.com/

 

Sat, 03/20/2010 - 12:43 | 270912 Mercury
Mercury's picture

240 95% copper pennies in a pound. Melt away the 5% non-copper content and you have a little less than a pound so lets say approx. 250 95% copper pennies yield a pound of copper. So, if you hoarded pennies the last year they were 95% copper, $2.50 give or take would be your cost basis in a copper trade.

Sat, 03/20/2010 - 11:09 | 270883 illyia
illyia's picture

It is interesting to see Jim Quinn's "It was a Wonderful Life" popping up around the net - in good viral fashion. Says something about the growing awareness of the vision we've lost.

And, the way toward renewing it.

That vision thing...

Sat, 03/20/2010 - 04:31 | 270814 Gunther
Gunther's picture

Wholesale price increases decelerated over time??
What I know is that during  a gold standard prices were flat to moderately falling; with exceptions being wars and other catastrophes.

Sat, 03/20/2010 - 08:21 | 270840 jm
jm's picture

This wasn't the gold standard.  That was 1880 on.  1862- 1879 was the greenback era.  Free float paper dollars and banks/gov refused to redeem the notes for gold.  Just like our own monetary system in the main.

I didn't look at prices in 1880-1900, but I observed that the constructed yield curve was inverted over 70% of the years of this period. 

 

Sat, 03/20/2010 - 09:21 | 270855 jm
jm's picture

The issue isn't gold standard vs. non-gold standard I think.  That gets it backward.

The issue is an economy's ability to profitably absorb capital due to the bulletpoints in the article.  A central bank is more than willing to supply liquidity to an economy that can use it, inflation or no.

When an economy cannot absorb volumes of capital profitably, liquidity doesn't do anything but sit in a bank vault.  A gold standard actually works in this context.  As does low-credit risk, long maturity debt.

Putting a central bank bid under financial asset prices and throwing low-interest money in banks when firms and consumers are busy paying down debt has limited effects. 

Sat, 03/20/2010 - 07:49 | 270835 sweet ebony diamond
sweet ebony diamond's picture

i think that when the ship sets sail, you don't want to be the brainless, greedy captain

think about that people, just in case anybody is thinking of stepping up

Sat, 03/20/2010 - 11:13 | 270885 RobotTrader
RobotTrader's picture

Heh, so far, the "worst of the worst" crap banks in Europe look like they have bottomed for now.

Notice how they were completely unfazed from the maniacal commodity stock selling Friday when the Euro collapsed.

You would figure that if "another shoe was about to drop", then these stocks would have gotten blowtorched.

Instead, the only sector blowtorched the last few days were oil service stocks and natural gas stocks.

But the junker banks were resilient:

 

 

Sat, 03/20/2010 - 11:15 | 270887 RobotTrader
RobotTrader's picture

Speaking of "multi-sigma" risk.....

These REIT's have been totally immune from all the EUR/USD gyrations, inflation/deflation hysteria, and have marched up relentlessly.

Camden Properties looking good here:

Sat, 03/20/2010 - 16:19 | 270989 jm
jm's picture

REITs.  I like CIM very much.  Juicy yield, extreme loss severities priced in, not afraid to jump outside their comfort zone, consistent insider buying.

Talking my book, just like everybody. 

Sat, 03/20/2010 - 23:38 | 271146 delacroix
delacroix's picture

rbs paid 1.3 billion in bonuses, on a revenue base of 1 billion. thats 300 million deeper in the whole, and the stocks going up?          If I spend my money on crack, and whores, before I pay the rent, I'm homeless WTF

Wed, 04/14/2010 - 08:09 | 299711 mark456
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