Archive | April, 2011

Ben Bernanke plays hide and seek with inflation

30 Apr

Michael Burry’s FCIC Testimony – Audio

29 Apr

http://fcic.law.stanford.edu/interviews/view/14

Trending news 28 April 2011

28 Apr

Bloomberg Quote of the Day 22-25 April 2011

28 Apr

The growing era of the new corporate giants

28 Apr

More than 40% of the top 20 listed companies worldwide are now based outside of the US. The worldwide economic rebalancing is picking up momentum.

Why debt matters and you know it does

26 Apr

If you want the long and the short of it then basically debt matters and we have 5000 years of recorded history to affirm that. It seems that we have a dichotomy of beliefs: those who are aware of the deficit and the urgency required in dealing with it, and those who deny it or by their actions negate an acknowledgment of  it. It is naive to assess debt purely in a historical context and to assume that if we have maintained similar debt-to-GDP ratios prior, we can therefore withstand high levels of indebtedness again, and again. This is making a wholly wrongful assumption that the micro and macro environment has remained constant. Adam Smith stated that nations trade with one another to economise on different comparative advantages and that global trade is a reflection of that. Seismic shifts in the world economy have damaged that idyllic thesis.

Debt historically was tempered by enduring the pain and affliction that accompanied it. The payment of high interest rates instituted discipline. Our liberal attitude towards debt and the pedestrian pace with which we are dealing with it infers that we view it more as a longer term issue rather than an immediate one. It seems almost ironic that Wall St and Main St seem to view everything else in the short term, but have a more relaxed and long-term perspective on indebtedness.  In order to see how much debt a nation can withstand history does offer some useful parameters. Rogoff and Reinhardt suggest that nations with above 90% debt-to-GDP ratios are highly more susceptible to economic collapse and turmoil.

GDP as a measure of economic output is fraught with inaccuracies and composition errors. A better measure is to either discount those errors, which in itself becomes more of a subjective exercise, or more prudently just to look at the revenues and expenses of a nation. Whatever measure is employed current debt burdens have now become clinical.  The almost unbelievable irony is that interest rates remain unchecked at historical lows in an environment of deep stimulus, and where the Fed is purchasing the overwhelming majority of treasuries. We know debt matters and we have 5000 years of recorded history to affirm that.

We see events in Ireland, Spain, Greece and Portugal but we think because we are the USA or hold the world reserve currency we have acquired some sort of divine favour to borrow, spend and consume while the rest of the world saves, invests and forgoes current consumption; and somehow that equates to economic progress and growth. This is what we do. The disconnect and cognitive dissonance of it all is truly an enigma. Clearly while the fundamentals remain awful for the US economy everything is about timing and perception. Something holds values because we perceive it to hold value, but once that blanket perception changes, we can now see in spite of our previously anchored views, that things have changed; seeing is different from hearing.

The idea of government and the state being different to the common man or woman, or somehow being intrinsically distinctive, is one of the most elegant frauds being perpetuated today; a true disconnect.  The belief that we cannot make the same baseline comparisons to government debt in the same way as businesses for example, or that we cannot view deficits as losses as governments are not businesses, helps to sustain incompetent financial behaviour and practices.  It is reminiscent of those preachers who hold their masses and claim that the individual by themselves cannot understand God’s word; you need to go through Mr Holy and he is holier than thou and the monopoly of truth. Prior to investment banking I had a career in bankruptcy and corporate insolvency.  I am struggling to find out why the papers have not been filed against USA Inc.

Gordon Brown finally ‘saved the world’ with new post at the World Economic Forum

24 Apr

It is truly remarkable that Gordon Brown has any influence left to impact economics and finance on a domestic or global basis. He will take up the post of chairman of the Policy and Initiatives Co-ordination Board at the World Economic Forum.

One British newspaper reads:

Tory deputy chairman Michael Fallon said Mr Brown has yet to face up to the legacy of debt that he bequeathed to taxpayers. ‘This is a case of putting the arsonist in charge of the fire station,’ he said.

‘It beggars belief that somebody who is yet to apologise for the mess he made in our finances should be advising the rest of the world.’

http://www.dailymail.co.uk/news/article-1379764/Gordon-Brown-gets-new-economics-job-prevent-financial-crisis.html?printingPage=true

Greeks now undertaking a criminal investigation of London trader

24 Apr

http://www.guardian.co.uk/business/2011/apr/21/citigroup-faces-inquiry-over-greek-debt-rumoursThe Guardian has reported that a London Citigroup trader is going to face a criminal investigation by the Greek authorities and Interpol for sending out the below email. If there is evidence to suggest that the trader has been acting on inside information then please progress, but the email reads:

“MKT NOISE Over the last 20min, there seems to be some increased noise over Gr debt restructuring as early as this Easter weekend. Spreads are moving wider now with 2y spread +100 from +35 at midday, while Gr banks are at -4%, -6% vs +2% in the morning.

The last few days the talks over Gr restructuring/rescheduling have intensified, despite the ongoing denials by Gr and foreign officials.

If a credit event takes place it is crucial to see what the terms would be as a haircut would have a much different outcome vs an extension of maturities.”

To most apt investors the email is purely a well summarised indictment of the current Greek bond market situation tied within the political complex. The note also briefly states the market reaction towards the Greek banking sector. The mentioning of widening Greek CDS spreads would have completed the rout. On the basis of the three paragraphs the email contains nothing contentious, it is alarmingly difficult to see where the problem lies. While this is undoubtedly going to cause additional strain for the Greek government, hiding or criminally prosecuting individuals who are merely highlighting facts is unwise. It was laughable hearing that the Greeks were seeking additional war reparations from Germany to soften their debt burdens, but this is now comical. Greece has become a circus and their politicians have routinely been  shown to be liars and grossly ignorant of their financial difficulties; history has also been a testament to that.

Delving into the Financial Crisis Inquiry Commission’s interviews

24 Apr

http://fcic.law.stanford.edu/resource/interviews

If you have not already listened to or read some of the transcripts of the Financial Crisis Inquiry Commission’s analysis into what caused the mortgage mess, take a look. Clearly some of the interviews provide a lot more utility and value than others; there are some participants that have nothing to lose and want to contribute to the exchange like the guys formerly at Deutsche Bank, Greg Lippmann and Eugene Xu. Michael Burry – have a read of The Big Short (by Michael Lewis) for further details regarding him also contributes to the inquiry. These are individuals who made a lot of money by being on the right side of the trade so their insights are imperative. Others such as Blankfein are playing a game, mixing some truths among many lies; all the investment banks were leveraged with toxic junk to the stratosphere; Blankfein has to pretend like they didn’t know as well; well they didn’t for a long period of time, but they realised just before the rest of the herd did, and were able to short change clients like the Abacus deal totally oblitering any fiduciary responsibilities they were supposed to have.

It’s an interesting collection of interviews; it is easy to comment now with such hindsight but those who were able to profit from the mess with such accuracy have every right to re-tell these generational events; to discuss cause and effect. While it has taken 18 months to culminate these findings, a few of these guys could have saved the Commission a lot of time reading ‘Learn Derivatives in 24 Hours Guaranteed!’, ‘Trading for Dummies’ etc., without having to persist with spending so much money and energy in generating findings whose future value is unlikely to be exercised. The inquiry was essentially an event in blame transfer; to ensure regulators and the government at large were not to be held accountable for their complete absence of oversight and inaction; and to mitigate any negativity they received by offsetting that with a greater public frustration at Wall Street; directly at the major firms that underpin this community. What I find most striking is the lack of prosecutions, or, at least, trials of those individuals who committed fraud; it is peculiar that Chris Dodd and Barney Frank, two of the individuals that orchestrated the crisis by proselytising the GSEs, and their federally mandated guarantees of toxic trash are now framing the new legislative works; are things upside-down or is it just me?

Why short term fixes in the mortgage market are going to cause long term structural issues

23 Apr

The US mortgage market is unique; the peculiar composition and dominance of government sponsored entities guaranteeing mortgage debt destabilises the price matching function of the free market. The GSE’s do not allocate capital effectively; securitisation masks risks instead of decreasing them.  Markets traditionally are a meeting place between buyers and sellers where supply and demand match to establish price. Sometimes this process is compromised where monopolies or price fixing exists, but generally the system functions well and roots out inefficiencies. It allocates capital to the most efficient and effective operators. Furthermore, even bankruptcy is a healthy process; it re-allocates capital to the more efficient providers and exits those companies who cannot create a return on capital employed.

The US mortgage market is characterised by heavy government policy, involvement and interference. Almost 90% of mortgages are federally guaranteed by GSEs. This transfers the risks from the lender to the government.  Why should the government be the orchestrator of the mortgage market? Why should gains for the banks be privatised and the losses are socialised? There are many countries where home rentals are in the majority; home ownership shouldn’t be a mantra that the government prosletysizes; it is job of the individual who should consider whether they can afford to and whether this is in their best interests; where the government is involved this causes unnecessary distortions at a magnitude which is going to be catastrophic, and has already been.  A federal guarantee also encourages relaxed lending standards or the complete absence of them; the government is not qualified to make an assessment of individual creditworthiness, the government itself is insolvent.  The government should not be dictating to individuals that they should make it their lifetime objective to purchase a home; again it is for individuals and their families to make that decision and direction. What the government should be advising is that individuals should spend and save prudently even if that means renting. It is absolutely due to the government abuse and behaviour in the mortgage market that had encouraged rampant speculation in the largest domestic sector.

A home primarily is a place to reside in, it should not be leveraged as an object of speculation.  Now I don’t want to repeat the causes of the crisis and this is no attempt to do so, I am just noting that after a crisis that pinpointed exactly what the major problems are,  Fannie and Freddie Mac, nothing meaningful has changed with these GSEs.  The government needs to move out the way and let the market operate to re-establish the true price-finding mechanism of the free market; governments need to be apt to ensure lending standards are being enforced and that they are not artificial; bank writedowns should be encouraged and the interpretation of regulation should not be freely adjustable; this allows financial institutions to value their assets purely as they see fit rather than marking to market.   Deposits should be enforced and short term flipping should be taxed to discourage speculation. There is no need for the government to be so deeply mashed within the mortgage market; it is incredible that rates are approx 5% with implicit government guarantees; rates are being artificially subdued with government intervention; the upcoming rate hikes are going to penetrate the mortgage and wider markets; debt matters and we have 5000 years of recorded history to prove that.

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