Category Archives: Global Debt Crisis

29th October 2013 — Fed monetary policy – building a modern Tower of Babel

The story of the Tower of Babel is one of the classic legends of humanity overreaching itself.

Recorded in the Book of Genesis, the Babel story tells of a time when all the people on Earth lived united and shared a common language. They gathered in modern day Baghdad (a.k.a. Babylon) to build a great city and tower to celebrate their superiority and advanced learning. God, however, took a different view of their achievements. He came down from the tower, scattered the people across the face of the earth and introduced different languages, to confound future attempts at such hubris. Some non-Biblical versions of this story have God destroying the Tower of Babel as a punishment.

Whether or not you believe the story of the Tower of Babel, ancient insight into the human condition recognised the dangers our species can pose to itself when it becomes too assured in its ability to control all that it is surrounded by.

Sadly this lesson appears lost on modern central planners.

 

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October 15th 2013 — Hedge your bets; 48 hours from an American default

If you are not watching this story, it’s time to switch on. The deficit ceiling debacle is back in full force. News crossed the wires, about an hour ago, that the Republican leaders in Congress have had to admit defeat in their efforts to provide an alternative plan to the bipartisan agreement, which is taking shape in the Senate.

We are now just over 48 hours from a US Default.

While the odds are still against this actually happening, they have nevertheless just shortened significantly.

The Democrats have a new found hardness about them and it looks like they are determined not to blink first in this latest fractious standoff.

 

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14th October 2013 — The will get rid of the debt ceiling (at some point)

Last week’s joyous market rally, in response to the Republican offer to extend the debt ceiling by six weeks, was absurd. Quite exactly why a marginal stay of execution was a reason to buy stocks is beyond me. American politicians have had over two years to reach a resolution, since the deficit ceiling became a full-blown crisis, so why should we have expected any magic after six more weeks?

But whatever the case, clearly this time was reason enough for stocks. On reflection, I suppose it’s quite simple really. When the market wants to go up, it goes up, defying logic and reason. Either you choose to go with it or you get out of the way. For what it’s worth, I’m electing to do the latter for the time being.

 

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16th July 2013 — When 5% is the new 6%

Just over a year ago you couldn’t open a financial website or publication without seeing a headline proclaiming that the yields of Spanish or Italian 10 year government debt were above the “unsustainable 6% threshold”.  The popular belief was that these stricken nation states could not afford to service borrowing costs above this level and that this was going to lead to a default, precipitate a wider crash and even destroy the Euro. As the eurozone crisis peaked, all lazy journalists needed to do was a quick check of Bloomberg to get the latest bond prices and the sensationalist copy basically wrote itself… From a reporting perspective, one of the great things about the 6% threshold was that it made it easy to communicate quite how bad the situation was.

As the crisis abated however, the worst fears were not realised, bond yields dropped and the headlines went away. However, this whole issue could be about to reignite unless the European Central Bank (ECB) acts.

 

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4th April 2013 – Japan opens the floodgates

Well what can I say?

I certainly can’t say I’m surprised.

Concerned, worried, sad…..?

I woke up this morning to headlines that Japan has launched another massive QE barrage on the financial system.  Although not as big as the Americans’ this QE blitz is a lot more flexible, affording the Bank of Japan the opportunity to buy REITS and ETFs.  It’s no wonder the Nikkei has gone bonkers and I expect to surge even higher.  The Yen will likely fall sharply.

After the recent analysis by Kyle Bass, this move looks risky.  Inflation and currency depreciation erode wealth and usually lead to higher interest rates.  Given the enormous weight of Japanese government debt and the vast holdings of said debt by Japanese institutions is the Bank of Japan looking wistfully across the Pacific at the market response to the Fed’s QE.

Defying many expectations, the yield on US Treasuries continues to fall, demand for them is strengthening strong and inflation remains benign.

What is risky about this is that Japan is not America (and who says I don’t have market insight!!!).  Continue reading