Perchance to dream – March 7th 2015

This week has seen an acceleration of dollar strength, and its opposite, emerging currency weakness, along with a further rise in the yield of US Treasuries. Gold has been given another bath and has closed under $1,200. The euro has taken the brunt of western economy currency weakness, ending the week at a 12 year low, yet European stock markets are on a tear. The up trend in US equities is still very strong and US unemployment is approaching the “natural rate”, which is in the low 5% range.

These are just a few of the many variables we have to factor in to our assessments of the global economy and financial markets and where to invest our money. That there are more opinions than there are inputs says much about the statistical probability of successful forecasting! We just don’t know with any accuracy what is in store, other than that buying value on a long term basis is the only strategy worth pursuing over the long term.

And where is the value today? If you turn over a few rocks in unlikely places you might find a morsel or two, Japanese REITs maybe or some of the junior gold miners, but where is mainstream money going to find a home? When you can’t determine the risk free rate of investing with any certainty because central banks have manipulated the rate via QE or just plain skulduggery in the LIBOR “fixings”, then it becomes even more dangerous to make assumptions. The rate proxy used to be the yield on 10 year Treasuries and given the explosive rise in said yield this week it may be making a comeback!

The spread between Treasuries and Bunds is at a significant high and should be corrected shouldn’t it? Well maybe not a while. The ECB in its “infinite” wisdom (they are subject to the same statistical probabilities of success as we mere mortals) have decreed that buying sovereign bonds down to yields equal to the ECB facility rate of minus 0.20% is allowable. So with 10 year Bunds currently yielding a positive 0.40% there is still a way to go! Along with a continuing decimation of the euro, which is driving up the cost of imports for those forced down the austerity road while giving a free ride to the major exporters, the champion which just happens to be…wait for it…Germany!

Like so many things today, it just doesn’t make any sense does it? The rise and rise of the dollar has been reinforced by comments from she who must be listened to at the Fed (repeat observation about statistical probability at least twice in this case for emphasis…) that their “patient” stance on the slow economic recovery may well transform into “OMG have you seen the unemployment numbers” by the middle of the summer and we have the first rate rise. This is causing havoc in emerging economies, and others closer to home (Austria anyone?), with huge dollar loan obligations that are getting harder and harder to service – shades of 1994? In the short term there might be a pause for breath, but longer term history suggest that when the dollar gets moving it can travel a long way. But what might impede its progress?

It is hurting countries with a dollar peg and the significant “other” in that scenario is of course China. Might they let the peg go? Well they will have to at some time and the “lets abandon the dollar as the global reserve” rhetoric is gathering more adherents. A recent bill board in down town Shanghai eulogised the yuan as the “next world currency”. China has been adding gold to its reserves as fast as it can go with the suggestion that some sort of gold backed currency would provide a very satisfactory alternative to the “worthless” dollar not to mention the quite “euseless” euro. Since Nixon abandoned the gold standard in 1971, fiat currencies have been running on borrowed time.

Why then is the price of gold falling? Well if you were a large central bank and all the items on your balance sheet were bits of paper and your “competitors” were swapping their paper holdings, mostly yours, for the barbarous relic, then wouldn’t you want to see the price fall for at least two reasons. Firstly to force people out of the only store of value left to them and secondly to accumulate that gold at a much lower price to make your balance sheet more respectable.

Central bankers understand value it would seem, but only when it suits them. This still doesn’t answer the question of where to invest today. Value managers are finding it increasingly tough, if not impossible, to find what they are looking for and equity markets are generally looking stretched although still in up trends for the time being. Bonds, which traditionally have been the safe haven, risk-off investments in today’s parlance, are now taking on what looks like equity downside characteristics. Gold is being bludgeoned, but may be worth picking up in “baby steps” as it trends lower and commercial property, whilst not as expensive as its residential neighbour, isn’t cheap either. Oh that there were a yield from cash! “Perchance to dream, ay there’s the rub”.

Clive Hale –The View from the Bridge – March 7th 2015

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Beware Greeks bearing spanners February 8th 2015

“A clueless political personnel, in denial of the systemic nature of the crisis, is pursuing policies akin to carpet-bombing the economy of proud European nations in order to save them.” Yanis Varoufakis the current Greek finance minister on ECB, EU, German (take you pick) economic policy.

 This guy, and his boss Alexis Tsipras, are being portrayed in the massively manipulated “main stream press” as Marxist tyrants who will lead the Greek economy into ruin. Varoufakis’ argument is that, courtesy of the Troika, Greece is already in that condition, but the root of the problem goes back much further. To get to join the euro club in the first place “convergence” had to take place.

 By 2001, the year in which the first wave of Euroistas adopted the blighted currency as their own, even the Germans had worked out that interest rates across the member state would have to converge – to the rate enjoyed by Germany of course. Greek 10 year bond yields went from well over double digits to around 5% by the time the euro became a reality and hit a low around 3% in 2005.

 Not quite down to German levels, but borrowing costs had fallen dramatically to the point where every Greek shepherd boy was driving around in a Porsche Cayenne. German industry cannot be supported by its domestic economy, so it has to be a global exporter and by having a hand in lowering interest rates across Europe the great machine is thus fed.

 We are now rapidly approaching the day of reckoning. Like the shepherd boy the Greek government is not, and never was, in a position to repay the “generous” loans that were expeditiously foisted upon it. The correct medicine would have resulted in some serious problems for the banking system and not just in Greece. But instead of swallowing the red pill the good doctors prescribed the blue pill for loose weight fast when you buy phentermine online. and everyone happily relaxed into a state of acquiescence and denial.

 Varoufakis is now saying, not too subtly, that the German emperor has no clothes. The body language displayed at his meeting with Wolfgang Schauble was a picture! Wolfie said that they had “agreed to disagree”; Varoufakis said that, “they hadn’t even begun to agree to disagree.” He has written two books on game theory and whilst that doesn’t make him an expert, in much the same way that a doctorate in economics doesn’t bestow on him all the answers, at least he understands the rules of the game which the euronauts quite patently don’t.

 The Germans have said stick to the agreement or we stick it to you. The French on the other hand, realising that breaking the rules is usually their prerogative, have at least acknowledged that the Greeks might have a point. So the two major powers in Europe are starting to face in different directions. Then the Americans weigh in and line up with France. Not because they like the French (French fries are still off the menu State side) but because Greece – and little Cyprus – have a ton of oil and gas reserves and have always been a buffer zone in the Balkans.

 The ECB has already cast the first stone by denying the use of Greek sovereign debt (which does not have investment grade status) as collateral in loan transactions. This means that they will, for the time being, have to go down a more expensive route (translating into an additional €60 million a month in interest payments) to borrow cash to prop up their banks. If there is no agreement by February 25th then even this facility will be withdrawn and Greece could be unceremoniously booted out of the club.

 In the past, resolution of euro “conflicts” has been achieved by a mixture of fudge, obfuscation and outright lying. This time around the Germans potentially have more to lose than the Greeks so get out your books on game theory and place your bets.

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A conspiracy of central bankers – January 18th 2015

It is way past time that we had a collective noun for central bankers? So how about a “conspiracy”? Don’t believe me then read on…

Hey Mario it’s the Milky Bar Kid here and I need a bit of help. You see I have been selling chocolate for euros and seem to have accumulated rather a lot of them.

Well Kid I am rather busy right now with the Greek hummus trade warming up a bit and there’s also going to be a bit of trouble with the frankfurters in Germany. The Greeks can’t pay and the Germans won’t pay.

Then of course the whole European economy, which the unelected chocolatiers in Brussels tell us is doing fine, is heading for a deflationary bust. Your defence of the CHF/EUR peg hasn’t helped me either and this week I’m supposed to get off my butt and actually practise what I preach by announcing a humongous tranche of QE that will make everything right. And you think you have got problems Kid!

Well Mario I guess one too many cuckoos have flown your nest then! The gnomes over here are getting rather restless about the size of my balance sheet and the quality of the chocolate and there doesn’t seem any point in both of us trying to run mission impossible so I am going to pull the plug on the peg and let’s see if that helps at all.

Kid I thought it was the Brits that did the complete fruit and nut case thing when it came to monetary policy? You know green shoots and ramping rates three times in a day. Now you know I’ve been wanting to massage our beloved euro down, but do you have any idea what will happen if you do this? It will start behaving like the drachma or dare I say it the lira and you’ll just end up with more Russian laundry into the bargain. The rouble is rubble, the swissie’s been rolled and the euro will be toast – French toast quite likely.

Mario you worry too much, leave that to your mama. You tell me all your banks have reserves coming out of their ears so a little currency vol won’t play much havoc with their nice cosy VaR numbers and when you have told the Wideman at the Bundesbank that you are going to let the Greeks go hang, which should of course bury that nasty undemocratic socialist Tsipras’s chances in the election next Sunday, then you can take all this crappy euro paper off me I can start buying something useful like …oh I don’t know…gold…

Kid that sounds like a plan. Ciao good buddy. Super Mario signing off until Thursday when all the milky bars will be on me!

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Any volunteers? January 12th 2015

2015 has started much as 2014 left off which should come as no surprise as markets care little for arbitrary changes in dates after all; so no predictions!

Oil is one of many unknown variables including the fate of Greece the strength of the dollar the flight of Abe’s third arrow relations with Russia and the greater Chinese slow down. Then of course we have elections in the UK which will be interesting in the debate but almost certainly inconclusive in the outcome. It has been suggested a coalition government might be formed between Labour, the Scottish Nationals and UKIP; if so I’ll be catching the first flight to somewhere a long way off.

The central banks still appear to be in control; well they seem to think so. Now he is no longer in that particular club Alan Greenspan thinks things look a bit “risky”. Well risk is what investing is all about after all, but what is this elusive “particle” orbiting our portfolios? Some would have you believe that it’s all about volatility. If it goes up and down a lot the ride will be bumpy but you stand to make a lot more money than in something that gives you a smoother ride.

Looking back over the last 30 years or so that smooth ride would have been government bonds and for most of that period returns would have been better than equities. So a low risk portfolio should be stuffed full of them right? Yes indeed if your risk model looks purely at long term historical data and ignores where we are in the journey. But markets have an enormous propensity to make us look like fools. This time last year the predictors were saying, to a man, that sovereign debt was hugely expensive and due a very significant correction as rates were bound to rise weren’t they? If there is one data series that is consistently called incorrectly this is it – perhaps a reason why the largest component of the derivatives mountain is in interest rate futures!

So in the UK a gilt tracker would have made you nearly 15% against a pretty much flat equity market and the 10 year gilt now resides at a scanty yield of 1.6%. Over in Europe the 10’year Bund is at 0.4% and everything under 5 years duration pays a negative yield. Yes investors are willing to pay a premium just to get their money back!

As the 10 year Treasury yield shows, we have come a long way in the interest rate journey and whilst further gains are possible can yields go much lower. If we are going Japanese, and the Germans already are, then of course they can. Ten years ago, having 50% in investment grade bonds in a portfolio for a cautious investor would have been eminently sensible especially with one’s attention in the rear view mirror, but today?

The major unintended consequence of government and central bank intervention since Volcker’s stand against inflation has been to generate its nemesis; deflation. With interest rates near zero in the major economies, there is nowhere for rates intervention to go to provide a stimulus. Strangely the answer must be higher interest rates. We will then see some “creative destruction” which is what the financial system needs to reset and start a proper economic cycle, but with the investment banks, who stand to lose the most, controlling the strings (just how do you think the US Budget bill got changed to allow banks’ derivative positions to be included in subsidiaries covered by FDIC insurance? ie the taxpayer covers their losses) we need stronger hands at the tiller than a coalition of “politicians” or a lame duck president.

We need somebody with balls and I don’t mean the second fiddle in the Ed Miller band…any volunteers?



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