Monday, 30 March 2015

Greek Dictionary

We all know about Grexits, but it is probably worth covering all further derivations of the Grex meme.

Grexcell - How good the Greeks are at avoiding tax.

Grextacy - The feeling Greece has when an EU payment arrives.

Grexcitable - The market when it comes to Greek deadlines.

Grexodus - Bob Marlios song about the movement of da Greek people to Germany

Grexistentialism - Greek philosophy characterised by what has been called "the Grexistential attitude", or a sense of disorientation and confusion in the face of an apparently meaningless or absurd world.

Grexposed - EU discovery that Greece never had any money.

Grexploited - What both sides are feeling.

Grextortion - What both sides feel the other is applying.

Grexwife - Merkel

Grextraction - EU attempt to receive a debt repayment.

Grexception - What Greece hope the EU will make when it comes to the rules.

Grexcessive - Greek Debt.

Grexchange - What Greece would like to do with their debt, preferably for a Grexpectation.

Grexpectation - What Greece offers instead of a promise. See Dickens' novel "Eat Grexpectations"

Grexcitement - The short lived Greek hope after the election of Tsipras.

Grexcluded - Greece’s invitation to the EU christmas party.

Grexcreta - What Greek bank shareholders can expect to hit the Grextractor fan

Grexcentric - The behaviour of the Greek Finance Minster

Grexcrutiating - The whole process.

Grexcellent - The weather rather than the outlook.

Grexcuses - Greek explanations.

Grexplanations - Greek esoteric theory that bypasses reality.

Grexcursion - The trip Greece may be making out of the EU.

Grexpulsion  - The German for Grexit.

Grexaltations - German mood after a Grexpulsion.

Grexecution - Greece carrying out a plan, charactised by the infinite time it takes.

Grexparrot - Monty Python's definition of Greece

Grextrapolation - Assumptions as to what other peripheries will to do on a Grexit.

Grexotic - A Greek proposal

Grexclaimation - An EU response to a Greek proposal.

Grexuvia - The remains of the exoskeleton that is left after the EU has sloughed off Greece

Tyrannosaurus Grex - What Greece likes to think it is to the soft underbelly of European cohesion.

Tuesday, 24 March 2015

"Which leads me on to" - A collection of observations.

Take a share, any share. If it pays a dividend how do you calculate its theoretical price? To be honest I don’t know because it would appear that if there was a right way then a share price wouldn’t move much at all as the efficient market hypothesis, which let me make clear right now, is the biggest load of tosh ever unleashed on the poor economics student, would, in its completely tosh way, dictate that the price is fairly priced.

Which leads me on to asking - Is a price a fair reflection of what it is meant to be? A reverse argument if you like. If we look at a price can we deduce the components that make it up? I ask as one of my greatest bugbears is the way the price of credit default swaps is examined and backward assumptions made that the price reflects the actual probability of default. We had it with Greece and we have it now with Austria. CDS is examined and the cry goes out in media land “There is a x% chance of y defaulting’. This is also tosh. The price is an ‘implied’ probability just as implied volatility in option pricing isn’t the actual volatility, instead being where people think it will be.

The difference between what people think the chances are of something defaulting and what the actual chance is are very different. Think of it this way. There is a horse in a stall quietly munching on its hay waiting for the start of its race. The horse is unknown and as such no one is betting on it and it is pricing at 100/1. Someone sees the price and thinks that's a fair bet on an unknown and bets on it in good size. The price moves to 33/1. This attracts attention and others bet on it and even some of the other jockeys bet on it in case they lose as a hedge (this happens in CDS). The price comes in to 15/1. At which point a rather drunken fellow fancies impressing his drunken friends by placing a massive wager on it and drives the price to evens. Meanwhile the horse is still quietly standing in its stall wondering what all the fuss outside is about. So at which point in all of that did the actual likelihood of the horse winning the race change from 100/1 to 50/50? The horse didn’t get any fitter nor did the competition get nobbled. Nothing has changed with respect to the actual probability of outcome. Yet the market price has. So it is with CDS.

The assumption that is used to counter this argument is that of the wisdom of crowds - "Well if everyone thinks that, then there is a pretty good chance I am wrong". But for many outcomes the wisdom of crowds is no better than random. If you were to ask the whole population to guess the outcome of the next lottery and then bet on the modal forecast you would have no better outcome than betting on any other set of numbers. Yet the belief that mass market behaviour can effect independent outcomes is rife. In a market where the guesser can interact and effect the outcome then yes, market prices and beliefs in them will move hand in hand. But in markets where the outcomes cannot be influenced by the actions in that market then they cannot.

Which leads me on to the #NFPGuesses twitter tag, where we all have a lottery type guess at what the Non Farm Payroll data will be that Friday. All fun and games but under no circumstance should the analysis of all the results be deemed to indicate the correct outcome. Yet they are often cited as such. Short of the participants running off to get jobs or to resign their posts to get the result they are betting on, it really is not linked. Where of course this analysis is useful is determining how the market may react after the announcement, but not what the announcement will be.

Which leads me on to recommend that prices that are estimates are not turned into inputs into further models that are used to create further estimates. If they are then there will be horrible feedback loops where the likes of CDS are used as an input into the probability of default in a model that then sees that default risk rising because CDS prices are higher and so buys.. errr CDS. And on we go.

Which leads me on to Central Banks and Goodhart’s law, whereby CB policy influences market behaviour towards the assets and indicators that are themselves inputs into policy models. Here we are talking inflation expectations as measured through the 5yr/5yr which are driven by bond purchases anticipating CBS loosening because the 5yr/5yr is moving down as much because funds are buying bonds in anticipation of.. etc. More excitingly though, the reverse will apply in an unwind.

Which leads me on to government borrowing. There is simply gaaarillions of it and none of it is really seen as a problem as the interest payments on it are so stupidly low. To the point that Germany get paid. But should prices of bonds start to fall, yields will go up as will the running costs. Most unpleasant. But isn’t there some sort of borrowing cap that is applied to governments for risk reasons? No, as long as the coupon is paid the government can keep borrowing. The fact that the debt can probably never be repaid is rarely taken into consideration.

Which leads me on to mortgages.  Lets talk about the UK to start with. The government has knee-jerk reacted to the last banking crisis by laying down affordability tests for you and me that they themselves would have failed and failed in evermore spectacular style since 1823. If you are to be allowed to buy a house in the UK you have to be able to argue convincingly that you will be able to repay the whole of the debt within a relatively short space of time. That’s pay interest AND capital. A test any government would fail. Yet if I was to have retired (I haven’t) own a house worth £5 million have a pile of cash in the bank of £1m off which I am living then the bank would not be allowed to lend me a bean as I don’t have an income. The value of the underlying asset is ignored as you are not allowed to consider that the debt could be paid off by selling the asset.

Which leads me on to unaffordable housing. Which first begs the question “If it is unaffordable then how come it sells”? Ahh! You mean people who can’t afford it can’t afford it. That’s different. Someone is now making a judgement call as to who should be allowed to afford it. I notice that the government is reintroducing 'right to buy, whereby state tenants can buy their property from the state. Fine, create another first generation of cash winners, but the benefit doesn’t last further than the gentrification of some prime location hell holes. But the right to buy should not be confused with the right to have enough money to buy. It’s a market. I am a firm believer that market interference in the case of property leads to further distortions and that natural market forces should play out, even if, like a nature film, that involves big lions eating cute deer (note that there always seem to be plenty of deer left or the lions would have died out). If areas of London are too expensive for people who want to live there to live there then sorry, that’s life. I would like an Aston Martin DB5 yet I don’t launch a campaign protesting over unaffordable Aston Martins.

‘But that's where the jobs are” - Well they won’t be if no one can afford to live there. The employers will move and that would be the best thing for London, the workers and the rest of the country.

“But my family have always lived here, I was brought up here and I can’t afford to live here and I’m local’ - Well if your parents have lived here all there lives, what’s happened to all the cash they have made on their property? Just wait, as the greatest redistributer of cash between the generations is death.

Which leads me on to bubbles. Does it matter how high the price of something goes? I am inclined to answer "no, as long as no one borrows against its theoretical value". Whether that’s directly to buy it, as in a mortgage, or to use it as collateral to borrow against to spend on something else. If my humble cottage is worth a billion trillion pounds and I continue to live in it and don’t raise debt agaist it, nor spend profligately on other thing in the belief I can sell my cottage (effectively borrowing) then its price is immaterial to me or the rest of the economy. Should someone purchase my cottage from me for a billion trillion pounds and they haven’t borrowed to do so and carry on as I had, unborrowed, then nothing in the world is effected, we have just exchanged positions.

If house prices are moving to infinity why do you want to own a property in the first place? To live in of course! But there are alternatives.

Which leads me neatly back to central banks, theoretical prices and equities. In a world of super low interest rates, let's say zero in many cases, a stock paying a dividend can be priced to infinity and still have a better yield than a zero yield bond. I have often mentioned the lunacies involved in negative yield land but we can now expand the collection of absurdities to the housing market. As with stocks, house prices can go to infinity and, as long as the tenant is paying maintenance costs, the rent can be infinitesimal and the owner is still yielding more than they will be getting on zero yield bonds. Looking at that in reverse it means, dear friends, that rather than paying £10^21 for a shoebox you do the owner a favour and rent it from them for £0.0000001.

In fact, if European yields are negative, the efficient boundary would suggest that a property owner could buy a property and pay you to live there and still outperform German government debt. Now how about that? Being paid to live in your house! Yet you still insist you have to be able to borrow money to buy your own house whatever the price?

Pray, tell me why you are so completely stupid?

Wednesday, 18 March 2015

Baby I Don't Care

Turn up the music LOUD and sing along with the words below as we tell Yellen just what we really think to the her weasely Fed timing words. 

Transvision Vamp 

This embed may not play,  if not open it here and crank it up. 


Well you can tell me your a dove
And you won’t raise rates in quarter two
But I knows what’s on your mind
You think that growth may cool
And deflation’s due to dollar
Give me ‘bullshit' forever and a day yeah 
But there's just one thing 
You don't have to say
You don't have to say when hikes'll be
You're the chair of FOMC
We"ll just have to wait and see.
Baby it's alright
Cos honey I don't care
Oh baby I don't care
Oh honey I don't care
Oh honey I don't care

Well you can turn expectations down low
Sometimes it's best for stocks that way 
So you can tell me all your stories
But please spare me the plays
Cos you don't have to say your a dove, see?
You don't have to allay rate hike fears
No you don't have to say when the date'll be.
Baby it's alright
Cos honey I don't care
Oh honey I don't care
Oh baby I don't care
Oh honey I don't care

Deep in your eyes
I see it in your dots
I know you'll wait and see
Sometimes it hurts
But you know that some things
Are best left never said

Cos you may never want to raise, see?
Though you have to say you can
You don't have to say when it'll be
Baby it's alright

Cos honey I don't care
Oh when I tell you baby
I don't care
Oh baby please believe me
I don't care
Oh when I tell you baby
I don't care
When your raise will be
I don't care
Oh baby please believe me
Don't you see that I don't care
I don't care
Oh honey I don't care
You know, you know that I don't care
You know, you know
That you don't have to say you’ll hike rates
And you don't have to say you'll cut
You don't have to say when it’ll be
Baby it's alright, oh honey it's alright
Oh baby I don't care

Tuesday, 17 March 2015

Whale Oil Beef Hooked

Whale oil beef hooked. Look at the price of oil and oil stocks.

Though I have been out of oil for a while I have been watching it with keen interest and a couple of associated stocks. Of interest is the timing of relative highs and lows.

Lets look at the charts below of Tullow, BP and Premier ( the candles) and Brent oil (the black line)

We can see that the lift off from the base in Jan was led by the stocks rather than oil and the turn lower kicked off in the smaller more speculative stocks like Tullow and Premier before oil finally got around to catching up. Even the mighty BP refused to go up after the start of February. 

So what is going on here if oil stocks are meant to follow the oil price? Well could it be that oil actually follows the stocks? If so how? 

I am wondering if we have a speculative interest, or even model interest in the markets that has worked out that the profits to be had influencing lead/lag correlaters is greater than playing in the underlying commodity alone due to influences of liquidity and market capitalisation.

Option 1 - So you are going to sell oil and you know that the amount you are going to sell is going push the market down as you know that once it starts to go everyone will chase it. So instead while oil is steady you instead you start selling oil stocks. the spreads between oil and the stock widen and other players support the stock as it now begins to look out of line, giving you a stronger bid into which to sell. You carry on selling stocks until the spread widens to such a point that others start to buy the stock and sell oil on the spread trade, which finally gets oil going down. At which point you start to sell that oil you were planning to sell. Which reacts as you predicted and accelerates downwards. With it the floor for the stocks goes and they melt below levels that they would normally be at relative to that oil price. At which point you buy your stocks back for a healthy profit. 

Option 2  is that you never have any oil to sell. You follow the strategy above ( including the selling oil part) but after buying your oil stock back you buy your oil back. 

This is not a new tactic and may have been famously employed in the gold markets where gold mining stocks have greater liquidity than the gold market 

April 26, 1993

Shares surge: Gold prices and the stock of mining companies soared Monday after money manager George Soros bought a 10 percent share in Newmont Mining, one of the U.S.'s largest gold mining companies. Soros, who heads the Quantum Group of investment funds, purchased the stake from European tycoon Sir James Goldsmith, Newmont officials confirmed. Gold prices have climbed 7 percent since March 10.

Gold surges after the completion of buying a miner? Hmm. Someone buying back their shorts now that their use for holding down prices during negotiations for the stock has run its course perhaps? 

Now of course there could be lot of other reasons for the price of oil and stocks behaving in the way they do but the suspicious cynic in me would be reading the massive bounce in a couple of those stocks today as an indication that oil will also base today ...  for a while at least. 

Monday, 16 March 2015

IT Dementia

I was once considered the IT Geek. I used to be able to write programs in machine code and I always knew which bit of tech was top of the pile, I knew ALL the functions of every latest phone and I had a Windows based smartphone in 2002 that played mp3s when everyone else relied on iPods. I knew every setting in Windows, I could fix the wiring in the house, I even knew what every button on a 1990s VCR remote control did.

But but but…. I am now swamped. My brain just can’t cope with it all and I want to turn into an Apple zombie where the nice men in Apple white coats just make the shiny thing work without me having to trouble my little brain as to how. I have hit the equivalent of IT dementia.

I am currently having to cope seeing my dear old Dad slip into that dark land of dementia, a land from which you know there is no return, only a one way trip down a tunnel of engulfing gloom as the light of the past recedes leaving only a memory of growing darkness. My mother said something very astute about him the other day, but then as a high flying consultant neurophysiologist in her day I should have guessed she would. When I asked how he had gone downhill so much recently she replied, “Well his dementia hasn’t accelerated, it’s just that he has been able to cope without the bits he has lost so far. But having denuded the excess capacity it is now eating into what he needs to function so the effects are much more noticeable". Poor Dad.

But IT is the same. We can fill up so much of our brains with its complexities before they suddenly hit the ‘full’ mark, at which point our brains have a choice. Forget the less important facts and replace them with those of a greater importance ’sort by rating’, or they can just forget the oldest stuff leaving space ’sort by date’, or it can do what my BLOODY MAIL SERVER HAS DONE. Sorry to shout, but I am only just holding enough brain CPU in reserve to type this, so stress levels are a little high as my brain has done exactly what my bloody mail server has done.

"Your mailbox has exceeded its quota, please delete messages from your inbox.” Yes, that’s my brain re IT ability.

I try to delete -

"The IMAP command “UID COPY” (to INBOX.Deleted Messages) failed for the mailbox “INBOX” with server error: You exceeded your mail quota.”

All the more annoyingly someone says that they have forwarded me a mail with how to rationalise my IT knowlege. Which leaves me with a paradox. Just as with my mailbox, my brain is full of IT yet I need to learn more IT in order to relinquish IT. Yet as my brain is at maximum quota of IT so I can’t learn any more in order to get rid of it.

In a large organisation at this point you pick up the phone to the help desk and act the dementia patient as the World of Warcraft playing spotty youths flock around your desk, not so much to fix the problem with one deft keystroke, but more to gawp in barely suppressed mirth and the gibbering IT demented moron who doesn’t know how to archive his mail box. However I don’t have that privilege anymore, working for a boutique operation it is often quicker to google the problem and embark upon a mission into the depths of system setups that rivals Frodo’s travails in the Mines of Moria, as I tiptoe through the darkness trying not to upset the smallest setting that will call the Balrog of irretrievable system failure upon me.

Having said that, it is most likely NOT the quickest solution, as Google swiftly refers one to chat rooms that need logins, or whose remedy involves a 7th dan in wonkishness. The other course of action is to try one of those YouTube entries purporting to solve just your problem. Now, I’m not being racist nor nuffink, not that I call 'identifying a larger than average population of wonks’ racist but is it my imagination or is the national pastime of 17-20year old Canadian young men to sit in their rooms and make incredibly badly communicated videos of themselves offering solutions to basic problems over a time frame of 20 minutes that can mostly be answered with a ‘just flip that switch there’ 0.3 second subliminal mind flash? You guys really are making it impossible for the self-help needing IT dementia sufferers like me from finding that self-help. I give up on you.

So I now turn to the half bottle of Amaretto that was by my side. I know the image is not as hard as an old hack in a Saigon steam-shop, garbed in a once white, sweat soaked vest, pummelling out his diatribe on an old Underwood No. 5 typewriter, swigging from a once-corkstoppered unlabelled bottle of firewater, but hey, allow me some leeway here. It was all I had. "Had" being the word as it appears to have evaporated. So with the last sticky sweet essences of almond evaporating away I turn to my last port of call. It may be late, but when a man is in trouble a man is in trouble.

“Darling, do you know how to make my letters thing on my computer thing work please? I was about to send your mother an invitation to join us for Christmas, a message to your sister offering to pay for her children’s education, an apology to your friends we were at dinner with last week for upsetting them with my dreadful sense of humour and a large donation to that donkey orphanage you so want to help. But it won’t let me as apparently the IMAP command “UID COPY” (to INBOX.Deleted Messages) failed for the mailbox “INBOX” with server error: You exceeded your mail quota, what ever that is”

Sunday, 15 March 2015

Backward Engineering.

I have recently read a few good pieces on why Germany needs to do more to iron-out its internal structure problems.  They focus largely on the demographic imbalances caused by an ageing population and a falling birthrate. Whilst they correctly cite various remedies that need to be implemented to stop it following the demographic trajectory of Japan they tend only very briefly to mention the most obvious quick fix answer, the one that Japan has failed to implement for all its cultural and xenophobic reasons and the UK Prime Minister only today is citing as one of the reasons the UK is doing OK -  Immigration.

The Eurozone was constructed by applying a wardrobe of artificial straightjackets designed to hold itself together. But as with most regulation, or even complex financial product pricing, if you contain one variable then stresses will display themselves through another (what is ‘implied volatility' in options calculations other than the remaining free variable once all the others in the Black and Scholes equation have been tethered). It’s like grasping a balloon between your fingers. Squeeze one part and it will pop out somewhere else.

I saw this marvellously demonstrated years ago at a Michael Jackson concert in the Singapore national stadium. We, the expats, sorry I mean 'immigrants',  in the crowd, were not used to having to sit still (as required) throughout an MJ style concert and so clumps of people would spontaneously leap to their feet and start dancing at which point a posse of security guards would rush over and demand they sat down again. It didn’t take long for the crowd to realise that the guards could not cover all bases so when one part of the audience was quelled another would rise on the opposite side of the stadium causing the guards to race over to quell them. This became a game with the crowd actively playing the guards, rising and falling just for the merriment of driving the guards in futile hot heeled persuits across the vast stadium. But basically they could not contain the natural forces that dictated that at a Michael Jackson concert the crowd were going to get to their feet and move.

The straightjacket of the EU is the Euro. Its unionised monetary policy without fiscal union has led to a veritable monetary buffet. Stimulus is provided through a centralised monetary buffet free-for-all from which all countries benefit, yet those who excessively benefit from it never have to pay through tightening domestic fiscal measures. As the feeding continues those with the best credit take more and get fatter and their credit improves further and they take yet more, meanwhile the hungry ones at the back find the table bare and demand it be refilled. The ECB kindly oblige.

Greece is the diner who fills his pockets and when challenged replies 'Who me? I only had the tomato soup”
Spain and Italy hide the piles of smoked salmon under a lettuce leaf so they aren’t spotted heading off with the best bits.
Portugal is under the table feeding on everything that hits the floor and hopping no one will notice it is there.
France is seen as polite and thankful, only taking what the waiter brings over to her. But the waiter is of course French.
Ireland meanwhile can’t believe they are being given free grub when they are actually meant to be dining with the UK.
The UK haven’t got a ticket to the buffet and though their mouth is watering they guess the food is poisoned.
Austria say they are a friend of Germany's and Germany says it's ok for them to have some of theirs.
Holland is trying to explain how the buffet works and is smacking the hands of anyone who leans past them.
Denmark was just walking past and is trying to explain that although it has a food sharing deal could people please stop eating off its plate.
And then there is Germany who protests the cost of the buffet and demands it should stop being refilled but when presented with another tray of low EUR/USD and negative funding foie gras helps itself and does nothing in the way of fiscal exercise to burn it off.

Everyone knows that if you don’t take your share at a free-for-all, someone else will. So Germany is growing fatter than them all. The best credit gives them the lowest borrowing costs and of course people always lend first to those who don't need it. With monetary policy generalised and fiscal policy local, there is a policy bias towards continuing looser monetary policy and relatively tighter fiscal policy. Why eat your own packed lunch when a free one is being provided?

So where do the adjustments occur? If a country will not voluntarily adjust its fiscal policy for the greater good but takes advantage of the generalised monetary policy, the last resort to adjust imbalances is for people to physically move and take jobs in booming areas, thus increasing labour supply and dampening wage pressures. This leads us back to the beginning. Germany needs immigration to counter its own demographics and the rest of Europe needs Germany to take immigrants to dampen economic cross border stresses.

So why hasn’t the whole of Greece upped sticks and headed off to Germany? The rich probably have and are there doing well and not paying taxes back in Greece (exaserbating a different problem that could also do with the unionising of fiscal policy) and the poor haven’t because they aren’t welcomed and don’t speak German.

Germany does exhibit the highest immigration figures in Europe but the fact that demographic failures are discussed at all is a sign that immigration is not doing enough to dampen the stresses. More can be done. But when economies suffer and disparities and national wealth inequalities extend, nationalism and protectionism start to dominate. These are natural barriers to migration. Until a European can head off to another part of Europe without being perceived as a foreigner stealing a job, the ultimate balancing function of migration that the EU has to rely upon (having artificially restricted all other variables) is less likely to work just when it has too.

Whilst the EU was originally formed to prevent wars, the mantle of cultural unity that has recently solidified over the cooling magma of past European conflicts is not yet strong enough to see swathes of non local lingo speaking arrivers taking from the buffet table of those who only have a buffet table due to them taking more from the original buffet table that the arrivers didn’t take as much from in the first place. So to speak.

Which leads me back to a tenet that I have been mumbling under my breath since 1998. -
"It won’t be the Euro that unifies Europe. It will be the English language."

Tuesday, 10 March 2015

QE QAR QRASH - Driving by committee

I am beginning to feel that the talk of QE did more good than its actual execution. This could fast turn into a QE QAR QRASH. EU QE is like driving an F1 car by committee and no one really knows the course.

QE buying running up the yield curve taking us further into the negative yield twilight zone is just compressing the inevitable spring of unwinds from this abhorrent state.

But in the meantime we have equities going down because of fear of US rate hike fears and bonds going up because of EU QE. It's nuts m'lord.

Still think both should go down ultimately as we have the next deleveraging saga. Only this time it won't be in personal debt but where that debt went - into state hands so soveriegn debt deleveraging. But of course the man in the middle is corporate debt who have been loading up thinking they are as bullet proof as sovereigns, mostly due to the investor market treating them as kings in the hope of currying some Maundy Yield Money.

If that debt is associated with its own currency then it will be FX dampened, but where its tied to a 3rd party currency (EU) all the pain will be in the debt and we will be back where we started in EU.

Be interesting to see who gets the blame. In 2008 it was the naughty lenders who took the social wrap. Next time around I predict it will be the naughty state borrowers who are blamed. Always blame the bigger entity it seems.

Monday, 9 March 2015

Euro issues.

To paraphrase Churchill "Never in the field of EU bond buying has so much been expected to be bought by so few from so many."

The monstrously low EU rates have, to no surprise, triggered a glut of Euro issuances with another swathe hitting the wires.

Berkshire Hathaway
Hosts of Chinese names

The effect on the Euro depends on how the proceeds are then handled. If they are to be used to fund Euro investments and paid off with euro returns then they self hedge . But if, as is the case with Berkshire and the majority of these, they are to be used to repay non EU debt load or to fund non EU investments then FX exposure opens up. Which can be then hedged or left exposed.

If they are fully hedged with FX swaps then currency risk is removed but so is the EU low yield advantage through the forward points. If it is partially hedged with rolling short date FX swaps then there is yield curve exposure and cash flow differentials on on each roll  date due to FX spot moves. If it is left unhedged then low rates are fully utilised at the cost of opening up FX risk. The risks of which are now being seen by emerging market countries who loaded up on USD debt and are now being squeezed by a strong USD and rising US rates.

But of course the EU is different isn’t it? The Euro is going to keep falling and rates are going to stay low forever. Basically the same arguments that were applied to the US two or three years ago. Hmmm.

As these bond issues pick up, the Euro will feel continued pressure in a self fulfilling way. Issue, sell the proceeds for which ever country currency they are needed in, see FX fall and feel justified to have left the FX exposure open. This is basically the ‘low yields mean currency falls’ mechanics from the debt issuance side rather than the ‘lower rates so won’t invest there’ investor side. Yet someone has to be buying these bonds and they will have to buy Euros to do so if they are non EU players. But the demand for EU based investment at stupid low yield is not so much coming from new overseas investors. It’s mostly ‘Have to be in Euro’ investors who are just looking for anything of good credit that is paying more than 0%, which results in portfolios switching along the curves of both duration and credit. Which means that local institutions, banks and pension funds have to buy the negative yield and take the pain or buy these new issues. Basically, I cant see the Euro being supported by a wave of overseas money arriving especially to buy these new Euro issues.

So it would no be a huge surprise to see Euro keep falling encouraging more to issue and keep the cycle going switching from Usd funding to Euro. Right up until all bases are loaded and rates are perceived to be going up again. So the best way of running your Euro bond issue is to run it unFX hedged until the Euro bases and then hedge as rates outlook change or the last issue is done. But that is a game of chicken watching the issuance calendar and being ready to hedge when the last player is in.

With all the Euro issuing going on I do wonder if the calculating minds of the structures and investment bankers have worked out a way to palm the stuff off into the whale shark grazing mouth of the ECB. As the ECB is allowed to buy covered bonds and ABS as part of its program, how much of this nonEU issued Euro debt will end up buried in ABS structures that end up in the ECBs vaults?They may well end up holding non-EU issued Euro debt via a complicated back door.

Meanwhile I also wonder exactly how legged over the ECB is going to get buying their bonds. The world has preloaded and anyone who has worked in a dealing room will know the drill when a CB calls up for a price. Very much like Gordon Brown and his gold sales.  Ok, I know that this is being done through e-platforms, but the moment the name is seen then the response will be the same. The cry goes out ‘ECB is in! Offers vanish and clients are sent messages along the lines of ‘ We are seeing very good demand right now from a good European, I said GOOD European, name’ and spec buying pushes things against them. Then the game of 'guess the amount they have done' kicks off and the guesses then correlated against price action in order to work out a rule of thumb guide to future price action, which will then be anticipated and so work less well going forward.

Unless of course there is a rerun of the apocryphal story from a 1990’s FX trading room.

Sales Guy - “USD/DEM in 10 for a bank please’
Spot trader “10/15”
Sales Guy - “Mine”
[Prices leap about 200points]
Spot trader - “WTF .. Who was that???"
Sales Guy - “Err.. Federal Reserve Bank"
Spot trader - “********* YOU ***ing MORON ******NEXT TIME THE FED IS IN ***** YELL IT OUT!  MINE MINE MINE MINE ’

2 weeks later
Sales Guy- ‘ Hi guys, Fed's in"
[Price barely budges]
Spot trader - ‘Mate are you sure? WTF it’s offered! Who told you they are in?’
Sales Guy - ‘Reception, they just called up to say they are here for our meeting’
Spot trader - “**** *******  *** ******* MORON!! .. YOURS YOURS YOURS YOURS'

Friday, 6 March 2015

Prince on Bonds - Sell 'em like it's 1994

NFP's have damaged US Treasuries to the extent that I think I can resurrect and retune my bond version of Prince's 1999. Sorry Prince.

Sell 'em like it's 1994

Don't worry, I won't hurt you
I only want you to buy my bonds

Was I dreamin' when I bought these
Cuz' they sure ain't goin' my way
After NFP's this mornin'
Coulda sworn it's judgment day
The screens all bloody,
There are yields rising everywhere,
Tryin' to run from bond destruction,
Just gimme a bid that's fair.

Cuz' they say two thousand fourteen bond QE party over,
Oops, through the floor.
So tonight I'm gonna sell 'em like it's 1994.

I was dreamin' when I bought these
Thinking Fed would buy and buy 'em fast.
But QE was just a party. QE parties weren't meant to last
Growth is all around us, my mind says prepare for flight
So if I gotta deal, I'm gonna sell my bonds tonight.

Yeah, they say two thousand fourteen bond QE party over,
Oops, through the floor
So tonight I'm gonna sell 'em like it's 1994

Lemme tell ya somethin'
If you didn't come to buy mine.
Don't bother knockin on my door
I got some stocks in my pocket,
And baby they've started to roar
Yeah, everybody's long bonds,
Watch 'em all dive today
But before we'll see that happen,
I'll have sold mine anyway.

Oh, they say two thousand fourteen bond QE party over,
Oops, through the floor,
Were runnin' out the door (tonight I'm gonna)
So tonight we gonna (dump 'em like it's 1994)
We gonna, oww

Say it one more time
Two thousand fourteen bond QE party over,
Oops, through the floor,
Were runnin out the door (tonight I'm gonna)
So tonight we gonna (dump 'em like it's 1994)
We gonna, oww

Alright, it's 1994
You say it, 1994
1994 don't stop, don't stop, say it one more time
Two thousand fourteen bond QE party over,
Oops, through the floor,
Yeah, yeah (tonight Im gonna)
So tonight we gonna (sell 'em like it's 1994)
We gonna, oww

Yeah, 1994 (1994)
Don't you remember well (1994)
When all bonds were a sell  (1994)
Prices fell down the well (1994)
I don't wanna loss,
I'd rather give all my bonds away (1994)
Listen to what I'm tryin to say
Everybody, everybody say sell 'em
C'mon now, no hope from Yellen
That's right, everybody say (sell 'em)
Can't run from the revaluation, no (sell 'em)
Sell 'em, watch these Govies fall (sell 'em)
Tell ya the Fed's a hikin' baby, sell (sell 'em)
Employment's risin' (sell 'em)
Cmon, cmon, you sell (sell 'em)
Everybody, (sell 'em )
Sell 'em down to the ground, sell (sell 'em )
(dwell them )
Come on, take my bonds, baby (sell 'em)
That's right, and buy the Dax (sell 'em )
(sell 'em )
That's right (sell 'em)
Got stocks 'n' shares in my pocket man and Bonds? (sell 'em )
Oh, they've dumped right through the floor (sell 'em)

Mommy, why is everybody selling bonds?
Mommy, why is everybody selling bonds?

Monday, 2 March 2015

Deflation to inflation in one paragraph.

One of the concerns being raised about European QE is that there will not be a enough quality debt left for them to buy or if there is then there won't be enough for the investor to buy. No supply of debt left for the investor to buy?

Well excuse my French but isn't that the whole *^*^** point? To make it so impossible to buy debt that people stop buying debt and buy something else instead? Like 'things that people make' perhaps? At some point someone will realise that there are other things to buy other than negatively yielding IOU's and as soon as they buy those other things the price of those other things will go up and that, voilĂ , is called inflation. At which point people won't want to buy IOUs that they have to pay to hold as there is now something else going up in value and... Woh! Don't want to miss that and, hey, you don't buy bonds during inflation do you? Oh look, our selling of bonds to spend money on other things is making inflation go up even more. Quick, quick! Buy 'stuff' sell bonds! Whoops, this is moving fast, are the central banks going to act? No sorry, I'm a central bank and I'm waiting to see if prices moved LAST month and then I'll look at next month to make sure. Meanwhile - Wow, prices are higher and woh! Bonds are tanking. Hell, yield differentials are making equity holdings look poor on a yield comparison, I'd better sell them and buy stuff too. Quick make more stuff, people are buying stuff! Hire people to make it. Sorry not enough trained people to make stuff. Ok hire the people that can make stuff. They want more money? Just pay them, Jeez we are missing making stuff fast enough to sell (and tell the kids if they want to earn a buck do a degree in stuff making). Whilst - hang on, I'm a central bank. I'd better raise rates a bit, but oh that's odd equities are down and bonds are down but inflation is up, errr should I be raising rates? Perhaps I'll wait a month, and wow, the government refunding is getting expensive. I'm a corporate and my bond rollovers are expensive too and oh, I'm paying people more to make stuff and funding it at higher costs, woops, look stuff is going up in price still, I could hedge by buying stuff myself whilst trying to make more stuff to sell. Uh oh, we've got a stuff bubble. Oh yeah, that's called really high inflation. Huh? Wasn't it yesterday we had deflation? That's confusing. Oh I don't believe it,we are stuffed the other way now.

...or something like that. Here endeth the rant.