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Sovereign Risk Begins To Tick Up As Banana Equities Continue Following Fundamentals Inversely
Another indication of how banana equities represent the inverse of the fundamentals they are supposed to track, is today's action in Sovereign CDS: Virtually all the big names are wider between 5 and 10%, with the UK and US moving wider by 10.1% and 8% overnight. What is odd is that EUR denominated US protection is also wider: traditionally this tightens when it moves purely as a function of dollar moves. This means investors are finally approaching the sovereign derisking trade once again. With the US at 27 bps (and 20 bps a few weeks ago when we speculated about this as an attractive hedge entry point), the recent melt up in gold may just be moving over to sovereigns next. In that case, investors will need to reevaluate just how solid US "guarantees" on all asset classes really are. a 20% move in a little over a week does not send a message of reassurance that the Obama admin knows what it is doing any longer.
What it means practically is anyone's guess, although if sovereign risk seems to be returning to something reminiscent of normality, look for equities to not be far behind as they attempt to shed their "banana" moniker some day soon.
Update: Belgium 8 bps wider to 44 on Dexia news.
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"A 20% move in a little over a week does not send a message of reassurance that the Obama admin knows what it is doing any longer."
They never have known what they are doing.
+10. 'Any longer.' Hahahaha!!
The Chinese have been on to Obama from the very beginning. They're not stupid. They see him very clearly for the train wreck that he is on the U.S. Dollar.
On a daily basis I must remind myself I'm not dreaming and that everyone really does think they'll get out the door before 1) their peers and 2) the bomb goes off.
This form of Mutual Assured Destruction (MAD) is so much more exciting than amateur super powers calling each other's bluff while holding 50,000 thermonuclear devices in their back pocket.
http://en.wikipedia.org/wiki/Mutual_assured_destruction
It seems if your scenario was to play out it would have happened between 10/08-4/09. That started to become a real and looming possibility in 06-07, but we averted that during the most unpredictable stage when people had to radically change their near and long term views and expectations. The entire system was able to digest the newly discovered risks. Now we are in an environment where leakage (loss of faith and participation in the financial system) is not terminal, as there are plenty of options for participants to stay within the financial system and position for the changes that will unfold over time. We are on a path towards equilibrium. This is a little less exciting and dramatic. POE
No - sorry. Equilibrium was where we were headed during the time you mention, after the bubble started deflating. Instead, we've patched the bubble, and we are now floating higher & farther away from the place of equilibrium. Simply wanting or needing to be on a path towards equilibrium does not place one on that path. And true equilibrium is not necessarily a place where one desires to be, after spending a long time in better-than-equilibrium.
Exactly.....RTM does apply....
Okay by your analogy, the US economy is tied to a high flying flawed balloon. It seems by your comments that you would have this balloon deflate, without trying to plug the leak and keep it somewhat inflated. So in your analogy we would have come crashing down to earth by just letting leaky balloon go (splat). Great! I'm sure that gets you to where you and everyone else wants to be. The other choice take care of the immediate problems patch what you can and inflate to avoid the imminent destruction. Mean while you are buying the time to craft a less flawed system or something that can support the economy.
Two comments:
1. Deflating a bubble doesn't necessarily mean going "splat" on the ground. Equilibrium is somewhere in between. Unfortunately, it is a lot lower than where we've been - so it will seem (should seem) like "going down"... and maybe quickly before it slows, or overshoots or whatever. But it isn't digital.
2. What you say about constructing a new system that works while treading water with the old one sounds great in theory ... but I personally believe that the hope of constructing some new framework that can support allow past failures to persist as part of a foundation for a "new better good system" is unrealistic & unwise. I'd be OK with that if I thought we could "attempt" that (which we are actually doing) without hurting ourselves further - but I don't believe we can.
THAT
Equilibrium is relative to the forces in question. Yes if the FED didn't take aggressive actions deflationary forces would have been dominant and equilibrium would have involved a long drawn out period of deleveraging and deflationary feedback loops. The FED introduced new forces into the financial system that broke the deflationary cycle (which would have led to systemic failure). Asset prices are now rising (improving balance sheets). Yes, the new equilibrium will be a lot less fun (but compared to the deflationary spiral it will be much more fun).
Exactly the type of thinking that led (and to this day still leads) the USA to build more and bigger and even more expensive weapons and weapon systems.
Of course, 20 years later plenty of direct evidence has been released to show that the entire Russian missile gap was created out of thin air by some er...interested parties to enable the military to buy more weapons, which the military industrial complex loved as well. And more jobs were created. Who said insanity wasn't good for the economy? It's not sustainable but hell, leave that problem to the next generation.
Well, I suppose that this is where we disagree.
You appear to think that we can create new, permanent equilibriums through intervention. Then that suggests strongly that you also believe we can keep tweaking until we've reached an equilibrium that we like, doesn't it? Because if we can truly steer the ship, why wouldn't we?
You see, that is why I disagree. In my opinion what you're describing is not unlike a kid being in a bathtub, trying to push the water to one side with their hands, and hoping that it will stay there when the pushing stops. the problem is it won't, and the pushing can't continue forever.
I believe there is only one authentic equilibrium (similar to mean reversion), and we're getting farther away from it.
Well I was that kid in the bathtub except when I wanted the water on one side I tilted the tub.
Seriously now, I totally get your view and I may be split 55%:45% in favor of my view. The problems we face absolutely could have been averted. It was pretty stupid (short run) decision making that got us here. That being said, if I were in bernanke's shoes I would have followed a similar course. The ultimate risk was the entire system coming unglued, and a break down in societal fabrics (a lot of adverse conditions flow from that). Today I can say, society is still functioning and the US still has a presence on the international stage (we avoided a really ugly power vacuum).
I don't view this as a purely US caused problem at all, we had some serious overseas enablers that were all to happy in fueling our consumption of their exports. So they bare their share of responsibility.
societal fabrics is the biggie.
If the average joe knew that they were being stolen from to the degree that is ocurring they would have gone for pitch forks.
The problem is that moral hazard has to be enforced on people, companies and systems.
We have not done that. Reinflating the status quo make GS even scarier.
My advise -- make sure that your elected officials know that you plan to unelect them if they don't do the right things between now and 2010. I don't care which party they are.
Do we understand triggering events on Sov CDS? A triggering event is highly unlikely.. not the right method for attaining protection.
"What it means practically is anyone's guess, although if sovereign risk seems to be returning to something reminiscent of normality, look for equities to not be far behind as they attempt to shed their "banana" moniker some day soon. "
Is there a possible development in the world that, according to you, would not predict the equity market decline?
I am sure you are aware, but just wanted to say this out loud: The trade of being long stocks globally and funding the position by borrowing in USD has been a phenomenally profitable trade since March 10, 2009. This, at least based on my casual reading, has been very muhc contrary to the predictions of 95% of the people contributing to this this site. Where's the mea culpa? Nowhere to be found. Instead, it's yet another prediction of "banana equities" crashing next week.
omg, 2 bps!
it's the end of the fucking world.
Default on sovereign debt denominated in local, fiat currency is completely optional. A CDS on such paper is similar to buying protection against negative interest rates.
UK's had a 16 base point move in 28 days & japan 27....
UKIN 9A17DE Utd Kdom Gt Britn & Nthn Irlnd 57 (d)+1 (7d) +5 (28d) +16
JAPAN 4B818G Japan 71 (d)-1 (7d)+5 (28d) +27
Hugh Hendry says he was short SD's a while ago when the UK was over 100.
Not known many others get involved with Sovereign CDS
Brasil trading tighter today?:
11-13 15:43: Vivendi (VIV FP) buys 37.9% of Government of Brazil and has irrevocable options to buy additional 19.6% stake
Q4 2011: World of Carnival Online
I beg someone to explain this to me!
USDBRL -1%
Spot gold in BRL +5.44%
Spot gold in USD +1%
Gold in BRL is +10% for the week.
Tyler or anyone;
Is there any correlation between sovereign risk and yields on their debt? Is seemed like there was a spike in the yield intra day yesterday, but closed relatively flat.
Why doesn't zerohedge.com publish comments that are critical of the blog entry or the bloggers recent forecasting performance?