The evil of modern central banking can nowhere better be seen than in this week’s mad stampede into $4 billion of Greek bonds. The fact is, Greece is not credit-worthy at nearly any coupon yield, but most certainly not at the 4.75% sticker that was attached to the offering. And the claim that Greece’s fiscal affairs have turned for the better is really preposterous. But none of this matters, of course, because the howling pack of money managers who scooped up the Greek debt at an oversubscribed rate of 5X were not pricing the non-credit of the former Greek state, but the promises of Mario Draghi. The very worst evil of monetary central planning is that it enables clueless politicians to believe in their own fiscal fairy tales, and to persist in the ritual can-kicking that is the scourge of central bank intoxicated politicians everywhere. In the context of its shattered economy, the Greek budget is a house of cards. Still, its current leaders, whose tenure is precarious by the day, get their turn in the spotlight to issue utterly specious pettifoggery...
When it comes to key players in a global fungible monetary system, a far more important decision-maker than the US government is the FDIC-insured hedge fund that controls all central banks: Goldman Sachs. Which is why it is certainly notable that moments ago none other than Goldman effectively downgraded Russia's sovereign risk by announcing it is "shifting from constructive to neutral view on Russian sovereign risk." With the legacy rating agencies now largely moot and irrelevant, what the big banks say suddenly has so much more import. But when the biggest - and most connected - bank of them all, outright lobs a very loud shot across the Gazpromia Russian bow, even Putin listens.
• the risk of runs and asset fire sales in repurchase (repo) markets;
• excessive credit risk-taking and weaker underwriting standards;
• exposure to duration risk in the event of a sudden, unanticipated rise in interest rates;
• exposure to shocks from greater risk-taking when volatility is low;
• the risk of impaired trading liquidity;
• spillovers to and from emerging markets;
• operational risk from automated trading systems, including high-frequency trading; and
• unresolved risks associated with uncertainty about the U.S. fiscal outlook.
For the last year or two, European banks have engaged in the ultimate of self-referential M.A.D. trades - buying the sovereign debt of their own nation in inordinate size to maintain the ECB's illusion of control (even as their economies collapse and stagnate) while referentially obtaining the funding for said purchase from the ECB by repoing the purchase back to the central bank, usually with no haircut to mention. Today though, as The FT reports, a top official at the European Central Bank has signalled it will try to force eurozone banks to hold capital against sovereign bonds, in an attempt to stop weak lenders using its cash to hoover up the debts of crisis-hit countries.
The following five themes (and three bonus ones) are what UBS Andrew Cates believes will be of the greatest importance for global economic and capital markets outcomes for the next five years. There is little to surprise here but the aggregation of these factors and the increasingly binary outcomes of each of them suggest there may be a little more uncertainty about the future than most people sheepishly admit...
“This is different" and "this location is different" is the mantra of every property bubble. We will soon see if the London property bubble is truly different or will suffer the fate of the bubbles throughout history. Of the four charts in our market update today, which ones do you think show characteristics of a bubble? Those diversifying and buying gold in the UK will be rewarded in the coming years. The smart money is reducing exposure to overvalued London property and increasing exposure to undervalued gold.
Nearly 2,400 years ago, Aristotle wrote one of the defining works of political philosophy in a book entitled Politics. It’s still incredibly relevant today, particularly what he writes about tyranny. The ancient Greeks used the word ‘turannos’, which referred to an illegitimate ruler who governs without regard for the law or interests of the people, often through violent and coercive means. Aristotle attacks tyrants mercilessly in his book, and clearly spells out the criteria which make a leader tyrannical. You may recognize a few of them...
Liquidated ETF gold holdings are being shipped from the U.K to Switzerland for refining into smaller one kilogramme gold bars, Australian bank Macquarie wrote in a note yesterday. These were then sent to Asia and bought by Asian investors. The note confirmed, what has been known anecdotally for some weeks.
It’s been said that goldfish have the shortest memory of any animal – only about three seconds. But a few years ago, scientists from Israel’s Technion Institute of Technology conducted an experiment which put to rest this erroneous myth. Based on their research, it turns out that goldfish have a memory closer to FIVE months... which seems to be quite a bit longer than most fund managers, bankers, and politicians. Their meme regarding crises, appears to be "but why should any of this matter? Those who control the system would never let things get bad." Pick up a book some time. History is full of examples of entire societies who thought the exact same thing. And yet, it happened. To throw caution to the wind and say, “In bankers we trust” is a foolish course of action… and presumes quite a bit upon the character of an entire industry that has consistently proven itself to be morally dysfunctional.
With the nation's short-term funding markets in crisis mode - no matter how much they are jawboned about temporary seasonal factors - it seems yet another indicator of stress is flashing the red warning signal. China's sovereign CDS has spiked by the most since Lehman in the last 3 days - up 55% to 140bps. This is the highest spread (risk) in 18 months and looks eerily similar to the period around the US liquidity market freeze. Hedging individual Chinese bank counterparty risk is hard (given illiquidty) and so it would seem traders are proxying general risk of failure via the nation's sovereign risk (and stocks which also languish at post-Lehman lows). On a related note, Aussie banks have seen there credit risk rise 50% in the last month as they suffer domestically and from the China contagion.
We have removed the levels to protect the innocent but which of these equity (or bond) markets would you be adding to today?
"The opposite of currency wars is not necessarily currency peace; it can easily be interest rate wars," is the warning Citi's Steve Englander sends in a note toda, as EM and DM bond yields have relatively exploded in recent weeks. The backing up of yields represents an increase in risk premium, so this will likely have negative effects on asset markets and the wealth effect abroad as well. It is difficult to explain the magnitude of the yield backup in terms of normal substitution effects, and broadly speaking, if you were to compare the backing up of bond yields with the beta of the underlying economy and asset markets there would be a good correspondence. So, Englander adds, it is fear, not optimism that is driving bond markets.
Dare 'Ye Test the Analysis To Ascertain It's Virility? Madness, I say! Sheer, Utter Madness! In other words - SYSTEMIC RISK is here, NOW!
With equity valuations no longer levitating but in a different, 4th dimension altogether, and credit spreads compressing dramatically (and unreasonably)... It is in situations like these, when the crash comes, that the proverbial run for liquidity forces central banks to coordinate liquidity injections. However, something tells me that this time, the trick won’t work. Over almost a century, we have witnessed the slow and progressive destruction of the best global mechanism available to cooperate in the creation and allocation of resources. This process began with the loss of the ability to address flow imbalances (i.e. savings, trade). After the World Wars, it became clear that we had also lost the ability to address stock imbalances, and by 1971 we ensured that any price flexibility left to reset the system in the face of an adjustment would be wiped out too. From this moment, adjustments can only make way through a growing series of global systemic risk events with increasingly relevant consequences. Swaps, as a tool, will no longer be able to face the upcoming challenges. When this fact finally sets in, governments will be forced to resort directly to basic asset confiscation.
Wondering why the Italian bond market has been stable and "improving" in recent months, with yields relentlessly dropping as a mysterious bidder keeps waving it all in despite the complete political void in the government and what may be months of uncertainty for the country, and despite both PIMCO and BlackRock recently announcing they are taking a pass on the blue light special offered by BTPs? Simple. As the Bank of Italy reported earlier today, total holdings of Italian bonds by Italian banks hit an all time record of €351.6 billion in February.