I am so disappointed in Merkel.
I shouldn’t be. I should know better.
When she said two weeks ago there would be no pooling of debt foolishly I believed her. I didn’t have time then to blog about this, but I planned to. I was going to write a piece praising the Germans for sticking to their position, remembering the lessons of history and not bowing to pressure to prop up failed systems of Government.
Now events have overtaken me.
Fresh on the heels of the Barclays scandal the next set of future disasters are being nicely primed.
This morning it was announced that Germany appears to have caved in and is going to allow the merging of Eurozone debt. The actual deal can be read here. The existing European Financial Stability Facility will now be able to buy bonds in stricken banks and sovereign nations until the European Stability Mechanism is ready to take over.
Naturally this is being hailed as a great breakthrough and most definitely NOT a German u-turn.
It looks like more folly to me.
As I’ve said time and time and time again, a debt crisis cannot be solved with more debt.
Stocks have jumped since the announcement, but the reaction has been somewhat muted. The market does not seem to believe this is a genuine solution or I would have expected more of a surge. In fact such scepticism has already manifested itself in research notes claiming this is not the end of the European Sovereign Debt Crisis.
The road show looks set to continue for a while yet.
The London Interbank Offer Rate (“LIBOR”) is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. It is calculated daily and is a benchmark for interest rates around the world. It is used to calculate the rate of interest that businesses pay on loans and ordinary people pay on their mortgages. It is especially crucial for those with variable rate mortgages.
And it’s been corruptly fixed. For years.
A huge scandal is breaking now that Barclays have been fined £290million for manipulating LIBOR to their own ends. To be fair this is not a new story and I have come across it several times in recent years. However this judgement is damning.
Zerohedge provides a good summary of some of the email evidence provided by Barclays. This reveals how endemic deeply cavalier attitudes and behaviour were (are) in these institutions. Consider not only the manner in which these people happily went about their nefarious deeds, but also that they were stupid enough to leave metaphorical piles and piles of electronic evidence. They clearly thought they were untouchable.
It is precisely this set of behaviours that the “too big to fail” policies were always going to support and encourage. Continue reading
I’ve received some criticism for the recent piece I wrote for the OPEC Bulletin, in which I demonstrated the case the monetary policy of developed nations is behind the recent sharp peaks and troughs in the oil market.
Apparently I failed to take into account the vast hording of cash by banks and corporations.
I don’t agree.
Record hording has certainly been going on. Regular readers will know I follow the ECB overnight deposit rate quite closely. It has remained at c.€730billion since February. This is unprecedented and mirrors the same situation in the US.
However these deposits are a fraction of what has actually been printed.
The case I made in the article was supported by charts. I didn’t manipulate these in any way. I simply showed when key central bank action happened and plotted this on the chart for the daily close prices of WTI since 1986.
So it is with interest that I note today’s news of the huge losses being suffered by the airline industry as a result in the recent plunge in the price of oil.
If oil were behaving like a normal commodity this sort of price behaviour simply wouldn’t happen unless a consensus-shattering event had occurred. Has any such event happened this year?
No it hasn’t. Continue reading
Over the weekend I watched this video clip published on Zerohedge. It’s a recent speech given by Dr Michael Burry to graduating students. Dr Burry was one of the people who made a fortune trading against holders of subprime debt, prior to the advent of the Credit Crisis.
He speaks a lot of sense and warns us of more trouble to come. I fully subscribe to this view, but one phrase he used really caught my attention.
He spoke about “the Dark Age of Finance”, which we now live in. I can’t think of a better description for our time.
In his speech Dr Burry tells us how when he asked awkward questions of the system, the system responded by attacking him. He speaks about the highly destructive self-serving nature of the modern financial sector and how deeply corrosive this on society and will become increasingly on living standards.
The free flow of capital should be one of humanity’s greatest strengths. It should allow us to engage in great projects to meet global challenges and improve the lifestyle of all who live here. It should unleash the power of science and technology, breathe life into grand engineering projects and inspire our species to strive forward in confidence. It should be efficient and encourage effective allocation of resources.
Arguably this is happening better now than it ever has, but I have to ask is the system good enough? Continue reading
It was announced today that between 2005 and 2010 US Household net worth declined by an average $36,000.
While the jobless recovery continues and growth is non-existent in reality, I believe this statistic best exemplifies how broken the old economic ways are.
Central bank inspired printing led to a glut of cheap money. Cheap money fuelled a credit boom and encouraged all manner of excessive behaviour. Apparent growth was a mirage, but prices were pushed up as if solid fundamentals were at play.
I don’t believe the statistics are available but I would be amazed if the headline figure has improved in 2010. Equally I would be shocked if this pattern were not mirrored across all the heavily-indebted, over-leveraged industrialised nations.
There is an argument that this reduction in net worth is nothing more than we deserve.
Whatever the case the process of deleveraging (reduction of debt) must continue, but this will only cause more deflationary pressure. I don’t think there is any doubt that this has to happen.
What then though?
So far central bankers have apparently been terrified of deflation and have used this to explain all the measures of monetary stimulus they have enacted in recent years (while denying it has anything whatsoever to do with bailing out their friends in financial markets). The record stimulus measures have certainly had an inflationary effect on financial assets, but so far it has at best reduced the pace of price decline in the housing sector.
At some point, after a likely more painful process, deleveraging and deflation will come to an abrupt end. Losses will be recognised and we will suddenly find ourselves in a world awash with funny money. Lessons from the Weimar Republic give us clear indication of what can occur in a developed nation when this situation is allowed to persist.
I may be missing something but the Fed’s announcement of an extension to Operation Twist is surely a major disappointment isn’t it?
The sale of short-term bonds and purchase of long-term bonds falls far short of the liquidity injection the market has been expecting.
I thought the chances were the Fed would act. I recently wrote that the collapse in the price of oil might have served as a trigger for more QE, but I think I misjudged this. Perhaps we need to see a wider collapse before this happens. I did write that the looming Presidential Election may cause the Fed to wait before it acts and this now looks like it is the case.
I know some believe the Fed will act to stabilise markets to help Obama. I saw a piece recently that Romney has publicly stated he would get rid of Bernanke if, by some miracle (my words not his), he wins the White House. Judging by the Fed’s latest action it would appear Bernanke is not too concerned by this.
Markets have sold off slightly, but not much.
I’ve opened a short position on the Dow. Continue reading
Just a quick blog today as I want to save the following two links.
Zerohedge have recently been publishing regular updates on Domestic Equity Mutual Fund Flows in the US as evidence that retail investors have given up on equity markets. While I disagree with their analysis (because I do not believe greed has disappeared from the human condition), the charts are very useful. The latest version is interesting as it suggests a net inflow for the first time in 3 or so months. I’m not sure how much can be read into this yet, but this is a chart I am starting to use in my analysis.
The second link is from the Technical Take. This is a newsletter I am signed up to and think it is excellent. They use three methods for assessing investor sentiment and it has proven to be a fairly good indicator of the strength of the current market. I am planning to incorporate this into my market strength test tool, when I start development of that.
I’m off to Euro 2012 soon, so will probably not blog for a few weeks now
In this delusional world we now live in I often find myself asking the question “why can no one admit when something is broken?”
The Eurozone clearly cannot survive in its current form, governments have vastly unsustainable deficits, debt-driven “growth” cannot last indefinitely, the financial services industry sucks the life out of the real economy and the regulatory system is a joke.
The economic system is too complex and the overhead of operating it is punitively high.
When we think about the measures policy makers have taken to try and convince us all that everything is fine and we will happily go back to the way things were, they are truly staggering. They have unleashed trillions of Dollars, Euros, Yen and Pounds on the system, have torn up contract law, ridden roughshod over democratic process, ignored the needs of the masses to the benefit of the few, held no-one accountable and, worst of all, NOT SOLVED A DAMN THING.
There is a serious lack of effective leadership at the top of society and I think the only good thing about the whole situation is that the problems are going to become so bad that choices will be removed from these people as their options become more limited and action will be forced.
Rather than feel downbeat about all this I choose instead to be amused. Continue reading