Keyboard worrier
Showing posts with label debt. Show all posts
Showing posts with label debt. Show all posts

Monday, April 13, 2015

How does Government Debt go negative?

Today came the news that short-term German government paper was following the Swiss example and turning negative, not only that but its expected that it won't be very long until the 10-year Bund follows suit.

Quizzical isn't it? Why would anyone pay for the privilege of lending someone money?

Friends and colleagues of mine, having a hunch that I know a little more about finance than they do have been asking me about this quite a bit recently and to be honest I have struggled to give them an answer they could happily digest. Well it certainly is a "new normal" and set to spread throughout the developed world as things get worse but how and why is it happening?

In short this is what Quantitative Easing has wrought. Institutions paying for the privilege of lending their money to insolvent governments. Not because those borrowers are such low risk counterparties, but rather because now real investors must compete with totally price-insensitive Central Banks hoovering up sovereign debt with freshly 'Printed' money.

If you want to understand this mechanism in a little more detail here is an excellent blog post by David Stockman who is examining a fascinating new blog by none other than the architect of this mess, Ben Shalom Bernanke.

This is the crux of his conceit:
A similarly confused criticism often heard is that the Fed is somehow distorting financial markets and investment decisions by keeping interest rates “artificially low.” Contrary to what sometimes seems to be alleged, the Fed cannot somehow withdraw and leave interest rates to be determined by “the markets.” The Fed’s actions determine the money supply and thus short-term interest rates; it has no choice but to set the short-term interest rate somewhere.
He doesn't even know what this mythical rate should be, but whatever figure he comes up with I'm sure it will be agreeable to the bankrupt sovereign states of the West.


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All original material is copyright of its author. Fair use permitted. Contact via comment. Unless indicated otherwise, all internet links accessed at time of writing. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Sunday, November 09, 2014

Spanish sovereign debt and JPM

James Higham writes (also on Orphans of Liberty):

A couple of money men I know said, in 2010, that the big issue at that time was sovereign debt and China is cited as one of the main players.

I wrote years ago about Peabody and how there was an induced grain crisis in America in the mid-1800s, out of which the eventual JPM did very well indeed and JPM is a topic upon which many on left and right do agree.

Our site’s JD wrote to someone who knows money, asking:

I don’t understand money as I wrote a few years ago here-
http://www.nourishingobscurity.com/2012/01/money/
But I was reading this today-

http://www.elmundo.es/economia/2014/11/07/545bf1f2268e3e634d8b4586.html

I can’t find any English report on this so far but it looks as though JPM are telling their clients not to buy Spanish debt. (I have never understood how or why anyone would want to ‘buy’ a debt, presumably these are the famous ‘junk bonds’ which were at the root of the recent financial problems?)

Their reasoning is that were Podemos to reach a position of power in Spain then a lot of the debt would be cancelled. Podemos are preparing an audit which will decide which debts are legitimate and which are not and the latter will be written off.

JPM in their analysis also consider the bizarre situation that PP(right wing) and PSOE(left wing) could form a coalition after the next election to prevent Podemos forming a government. I have seen elsewhere that polls suggest that if an election were called tomorrow Podemos would win!

So my question is – what are the implications of a Debt Jubilee, the Biblical idea that all debts should be written off after seven years? (Not just in Spain but everywhere) And who would lose by such a Debt Jubilee? Not me for sure, I have no debts. Rarely use a credit card and pay cash for whatever I need.

A commenter, The Hickory Wind, who lives in Spain, stepped in to observe:

I’m late to the party as usual, but anyway…

Simon Harris’s original piece is interesting and informative to anyone who doesn’t know much about Spanish politics, but those who do will recognise that he has swallowed uncritically a bit too much of the propaganda. There were two points I would have made to him, but the second annoyed me so much that I didn’t bother.

Firstly, the historical case has very little to do with the modern politcal reality, or with the justice of the cause. Even if the history is properly understood and correctly interpreted, what once was can tell you little about what should be now. It’s not that he does it badly, just that it isn’t particularly relevant.

The second point, the one that made me switch off, was when he described the Popular Party as extreme right. This sis a serious falsehood for someone who is claiming to inform a distant public of an important local matter, and he must surely know that it is false. The PP is partially and indirected descended from some remnants of the old Falange, in much the same way that the Socialist party is descended from a Trotskyist Socialist Workers party (they still have it in their name), but one is mainstream centre right and the other centre left, and they have been throughout their periods of government in democracy. For someone who claims to be an experienced commentator on Catalan affairs to suggest otherwise is little short of a direct lie.

I enjoyed your reply, but you underestimate the historical strength of Catalan identity, although it is true that it has been deliberately whipped up in recent years by politicians who used it to gain a power base, and have now painted themselves into a corner. It is only partly based on language. There is also a sense of a different historical path, which is not entirely correct, but identity is not about truth, and a sense that many of the other regions of Spain (especially Galicia, Extremadura and Andalucia, are completely foreign to them, in their people and their culture, as well as their history.

Incidentally you are wrong to dismiss the Catalan language as just a dialect of Spanish. Although it is easy enough for a Spanish speaker to understand and to learn, it belongs to the Gallic family of Romance languages, which split from the Iberian group 1,000 years ago, and it has a rich literature and tradition of its own dating back to the middle ages. Anecdotally, some of the books that inspired Don Quijote’s madness were Occitan tales of chivalry, still extant.

I think I have droned on enough now, so thank you for your patience

Which gets away a bit on the question of Spanish debt itself but sets the overall scene and on that basis, its inclusion here is argued. Thus, the other party in this collusion of three bloggers, Sackerson, had this piece up at his place, about corruption in Spain, which still does not get us any closer to the issue of JPM’s advice.

This reply from Sackerson is in no way personal advice but touches on the general world situation as he sees it:

There are, I understand, hedge funds speculating in sovereign debt. There’s a City adage “two views make a market” and if they can buy bonds cheaply and guess right then they make a fortune if the government honours its obligation – I understand buying British bonds during and after Waterloo was the foundation of the British Rothschild fortune.

One twist I read about recently was a fund buying sovereign debt that was to be defaulted (partly or wholly) and then using international law to enforce it in full. We are in a time when the rich are making law to suit themselves.

Of course, the speculators could be wrong, but if you’ve previously made a personal fortune in bonuses who cares if the firm goes down? This appears to be the story of the banks.

Goldman Sachs were caught some time ago giving advice one way to their smaller investors and the other way to large and favoured clients. I stopped reading the financial press when none of them foresaw the great financial crisis.

The world is interlinked with finance, debt and speculation. The total value of derivatives – side bets to you and me – appears to dwarf the GDP of the world:

http://en.wikipedia.org/wiki/Derivative_(finance)#Size_of_market

I am no longer sure what money actually represents, since it’s backed and limited by nothing at all.

The point has been made – by Australian economist Steve Keen, among others – that instead of bailing out banks, the money should have been given to the people to bail them out, because with less debt they would spend more and create jobs for each other.

A debt jubilee sounds great; except that pensions use government bonds to shore up their guarantees to pensioners. And what would happen to house prices if, say there were no mortgages any more? It’s like trying to predict the outcome of a massive barroom fight.

I found this from JPM to its private clients [pdf]

… which seems to confirm that advice JD read that they gave.

Pause for a moment and note that we are divided by language so much. For example, on the Amanda Knox issue, the reason America believed one thing was that their sources were all from one camp, in the English language. However, those reading italian had an entirely different view. Ditto with the bin Laden SEAL killing. Those reading Arabic have an entirely different view to those reading only English.

There’s a piece of advice in that – to really know what’s going on, accepting that the MSM globally is in captcha, to know other languages or to access machine translations is most helpful. Going to a Spanish blogger on these things and getting a machine translation does often given a different perspective.

The major financial press is not all that helpful. Bloomberg reports that Black Rock is buying Spanish short-term [early October, 2014] but that still doesn’t touch on sovereign debt.

Why should JPM advise that way when S&P had advised that it wasn’t all that bad, Spain’s sovereign debt as an investment, in May, 2014?

Not sure this Spanish govt advice is helpful. Nor this.

Perhaps this will help:

The European Central Bank bought covered bonds for the first time since President Mario Draghi unveiled an asset purchase program last month.

The ECB acquired short-dated French notes from Societe Generale SA (GLE) and BNP Paribas SA as well as Spanish securities from other lenders, according to two people familiar with the matter who asked not to be identified because the information is private. Draghi said he intends to expand the bank’s balance sheet by as much as 1 trillion euros ($1.3 trillion) to stave off deflation in the euro area.

Policy makers are under pressure to take action as euro-area inflation slowed to 0.3 percent in September and the International Monetary Fund said the region has as much as a 40 percent chance of entering its third recession since 2008. Growth will reach 1.3 percent next year, slower than he 1.5 percent pace predicted in July, after a 0.8 percent gain this year, the IMF said Oct. 7.

“From today we will begin to know how aggressive the ECB will be in bidding for bonds,” said Agustin Martin, head of European credit research at Banco Bilbao Vizcaya Argentaria SA in London.

It’s blindingly obvious I’m no money man but am, I think, a reasonable political thinker. Podemos represents a cry for help from the Spanish and may be behind the Catalan call of ‘let’s get out of this mess now’. Whether their leadership has been promised funding upon Spanish break-up [don't forget the Muslim push into Spain as well, history revisited] is an unknown.

Podemos is left wing academic intellectual. As such, it is ignorant and it’s only solution is to nationalize. Not playing by the international money rules does seem attractive to many Spaniards – see their polls and is the leftwing alternative to what Nigel is doing over here.

The difference is that things still have to be financed over there, even nationalized, e.g. public sector salaries and a wildly freefall Spanish currency is not going to help with that – at least such a thing has not helped before [see Russia 1997/8, through which I lived in that country].

Nigel’s solution is to stay within capitalism but trade with other countries free of the EU toxicity. And the notion that Europe would cease trading with the UK is not borne out by stats on inwards and outwards movement of money – the UK is still attractive as an investment. Only the unelected “leadership” of the EU is trying to talk up the opposite.

Therefore, in the light of Podemos and the possibility of nationalization, JPM is ambivalent but cautious. Most major players say go short for now and see what happens.

Which still doesn’t answer the question of who owns Spain or will in the near future.
 

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All original material is copyright of its author. Fair use permitted. Contact via comment. Unless indicated otherwise, all internet links accessed at time of writing. Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for unintentional error and inaccuracy. The blog author may have, or intend to change, a personal position in any stock or other kind of investment mentioned.

Wednesday, November 25, 2009

Breaking News - "Debtman" sunk

The following extract has been taken from news agencies, though Internet reception is currently poor on account of flooding and there may have been some scrambling of information. For the full story, click here.

British 'Debtman' Gordon Brown ditches in Atlantic

Not Philippe Naughton

The British political adventurer Gordon Brown found himself in deep water today after a failed bid to make the first long-range economic flight using a debt-powered wing attached to his back.

Brown, 58, planned to fly 7 years from the 2008 Credit Crunch to the 2015 General Election, at a speed of almost £120 million per hour, a flight that should have taken about 80 months.

Only a year into the flight, however, the British "Debtman" disappeared from TV feeds. Live pictures shortly afterwards showed him up to his neck in it, swimming around beside his Parliamentary pension golden parachute, while the IMF prepared to winch him to safety.

The reason for his failure was not immediately apparent to anybody except the blogosphere, but the British premier seemed to be unhurt and waved at a passing TV crew.

Sunday, November 22, 2009

My hero!

Banks: "parasites... financial bastards... should never have lent the money in the first place... bankrupt them... nationalise them... cancel debt... or the economy will die... never-ending Depression."

Straight-talking Aussie economist Steve Keen, talking to teeth-clenched grinning, gonzo (but still on the money, in my opinion) "Wall Street are terrorists" Max Keiser.

Monday, October 19, 2009

Lessons from history

The Debt Offensive began in 2007: Charlie hit us with everything he had. Cadres of underpriced risk were tunnelling under our lines, popping up when least expected and decimating our defences. We fought back hard, dropping cash from the Hueys, first $700 billion, then trillions, but it was no use. Sure, we beat him back for a while, took down a few banks; but the public couldn't take seeing it all on TV. It was the turning point. We had lost the will to win.

Friday, October 09, 2009

Two to note

1. Charles Hugh Smith reflects on something that's been nagging me for quite a long time, namely, the seeming impossibility of measuring "real" prices. Everything is relative to something else.

2. The Contrarian Investor's Journal fairly succinctly shows that the USA is fast approaching a debt level so high that Uncle Sam won't be able to service the payments. However, I think it may be time to separate actual here-and-now debt from notional debt in the form of medical and social security undertakings. Surely the latter will be revised radically, voluntarily or perforce.

Thursday, September 17, 2009

The night they raided Minsky

Australian economist Steve Keen summarises Hyman Minsky's Financial Instability Hypothesis, which is that you get bubble after bubble, each time increasing the debt, until the process simply cannot continue and all will be catastrophically revealed.

So he's another forecasting and fearing systemic collapse - like Marc Faber and Max Keiser recently - and now Karl Denninger.

As the Dow heads for 10,000, the FTSE soars above 5,000 but gold seems now to be consistently drifting beyond the $1,000 breakwater, I feel of the bankers, traders and politicians, as Talleyrand said of the Bourbons, that "They have learned nothing and forgotten nothing."

Sunday, September 13, 2009

20:20 hindsight and the coming stock collapse

Look at this fascinating interactive graphic from the New York Times, about the shrinking and swelling of the major US financial firms. They may not have seen it coming, but boy can they see clearly in the rear-view mirror. (htp: Barry Ritholtz)

So, is all well again?

Denninger thinks not. To get back to where we were in 2000, either debt has to be slashed (this isn't the path chosen by the powers-that-be over the last couple of years) or GDP and incomes have to soar (how? Who are we suddenly going to sell loads more to?).

Given a choice of the impossible and the merely unpleasant, it looks as though there must be a large-scale default sometime - either of actual debt, or of current and/or future government-provided benefits (or both).

In the meantime, the monetary pumping may erode the dollar's value and cause a highly misleading leap in nominal stock prices. Like I said yesterday, I think we could be looking at a re-run of the mid-70s to 1982. I remember an old financial adviser colleague reminiscing about the stockmarket "boom" of 1974, but he didn't mention the inflationary context, which is what concerns Marc Faber - the fundamentals are still all wrong.

Monday, September 07, 2009

Every little thing's gonna be all right

Dr Mark Perry reckons it's all been on the up-and-up since 1929. Yes, production has become more efficient over time. But can it be quite as rosy as it seems, when the last quarter-century has seen an explosion of debt?

Sunday, September 06, 2009

UK public debt worse than USA

It's reported in the Press that UK national debt will reach c. £1 trillion by the end of the year, and when the Office of National Statistics adds-in the cost of bank bailouts to Lloyds TSB and Royal Bank of Scotland, the total should be £2.5 trillion. This will make our position worse than that of the United States, as shown in the graph below.

Saturday, August 15, 2009

I see a bad moon rising

... sang Creedence Clearwater Revival. And as Panzner points out, inequality and growing poverty are factors that destabilise society.

He reproduces a graph (see below) that shows inequality is now higher than it was just before the Crash of 1929. The line also suggests that the rich do get hurt when the economy goes down - but they still do very well compared to the "ordinaries":
See where the least inequality came? Around 1980 - just when "it was decided" that lending and debt should take off and power a generation-long series of bubbles. Please see below my graph from June, which shows that political conservatives can be far from conservative when it comes to handling the nation's finances:

Saturday, August 08, 2009

Bubble 3

It's getting to the point where things go worryingly quiet. First we had a speculative and debt-fuelled stock market bubble; then ditto a housing bubble; and now that the US/UK governments have swallowed the grenades of debt instead of throwing them over the firing-step, a government finance bubble.

I started this blog two years ago, because I thought precious few people sniffed what was in the wind - though I've since discovered that there are quite a few, mostly in the US, who did. I don't know why the UK is so poor at this, unless it's to do with not being used to retaining much of our income. Or a hangover from aristo-landlord days, of pretending to be uninterested in money but always expecting it to be there when needed.

But where can I go from here? There's not much point in continuing to cry iceberg when the ship's side is ripped open. Both Karl Denninger and James Kunstler are saying today that the disaster is far from over, the difference between the two being that Denninger still believes in fixing it with due legal process and decisive action, whereas Kunstler has no such hope and almost looks forward to the final scene because it will usher in a postmodern bucolic age and restore human values. (Kunstler's latest echoes what I've said recently, about drawing some cash for just in case.)

I feel like the Chinese philosopher who dreamt he was a butterfly and when he woke, was not sure whether he wasn't a butterfly dreaming he was a Chinese philospher. The sun shines (beautifully today), I have my teaching to prepare for September, I am proceeding with my plan to revive my IFA business. And yet these projects seem insubstantial, a soapskin full of emptiness.

For now, I have to go on with the assumption that Denninger is right - that when it gets bad enough, tough action will be taken and we'll pull through. That's the horse I'm backing. For I don't believe the proto-Marxist fantasy that a better society will rise out of a collapse, especially not on an overcrowded island like the one where I live.

Off on my hols again next week; and when I get back, time to tackle real life.

Thursday, July 23, 2009

Out of their depth

The first serious, sensible, important piece I've seen from Toby Young, and it's a corker. He reflects on the well-heeled but louche and rackety Bullingdon Club, of which David Cameron and Boris Johnson were members:

... the theatrical element of Oxford's secret clubs and societies, the fact that so much of their activity seemed designed to dazzle and mystify bemused onlookers, is precisely what makes them such ideal training grounds for British public life.

... you don't have to be to the manor born to become a member of Britain's ruling class - or even particularly clever. You don't need charisma or sexual confidence or a sense of entitlement. All you need is the wherewithal to pretend to be someone who has these qualities. Provided you can do a reasonable impression of a person with the right stuff - and provided you wear the right uniform - that's enough to propel you to the top.

... The discovery that all these young pretenders make when they take their seats at the Cabinet table, or become QCs, or pocket £100million on a complicated land deal, is that the people at the very pinnacle of British society - the people pulling the levers of power - are exactly like them.

There is no such thing as the real McCoy, just a bunch of schoolboys parading around in the contents of the dressing-up box. They don't feel like frauds, because everyone else in this elite little club is as fraudulent as they are.

And when all is well, they get away with it. But when it comes to an emergency, a crisis needing skill, grit and sacrifice?

My father served his 25 in the British Army, and my mother used to say, "Thank God for civilians," i.e. the experienced people that would come in on callup when war broke out. Doubtless it's different now, with our much reduced and far more battle-experienced Armed Services, but in my father's career he met more than a few "educated idiots." Does the current crop of politicians and bankers have what it takes, including the moral fibre, to get us out of this mess? Or when it gets too tough, will they jump, like "Lord Jim" Blair, leaving us to our fate?

We're going to find out sooner than we'd like, if Denninger is right. He's looking at new Treasury debt issuance of $235 billion in the next week alone, and is busily folding his kitchen foil into a helmet:

Folks, this is how you get detonation of a nation's monetary and political system. Timing the "event" it is not easy, but the certainty of outcome given this sort of outrageously irresponsible activity is not in doubt.
I'm increasing my stock of things that "will never go to zero" and keeping my ear to the ground. The "short the phone book but make sure you get out fast before you get trampled" moment approaches - mark my words.

Sunday, July 19, 2009

Locking the doors

The dethroning of the US dollar as the international trading currency is under way. New bonds issued by the International Monetary Fund in the form of "Special Drawing Rights" are related to a basket of currencies, thus diluting the dollar element and reducing America's opportunity to cheat the world by devaluation.

The same article describes a Chinese proposal to start issuing bonds denominated in renminbi, so that if the dollar does drop against the Chinese currency, all that will happen is that the dollar cost of the capital debt will increase.

It occurs to me that such extra security for lenders may help interest rates to remain lower than they otherwise would be. So the threat to borrowers is not that interest rates will increase, but that debt outstanding will continue to feel heavy, since inflation won't lighten the burden. In fact, the burden of foreign debt could get worse, if the dollar weakens in this new foreign-currency-mortgage era.

Another factor, which may be a deliberate strategy with an eye to the above, is China's own expansion of credit. If monetary inflation goes global - including in the East - then there's less hope that Western businesses could use relative currency devaluation to increase the demand for their goods and services. Manufacturers here will still be unable to compete and debt will grow. Our creditors will own us - we'll "owe our soul to the company store".

It's time to grasp the nettle - bust the banks who got us into this, have a tremendous clearout of debt from the system, reset wages and prices at lower (more internationally competitive) levels, get the people back to work and shrink the dead weight of government and its dependants.

That, or see what's left of our wealth leak away, and then suffer all the above as well - at even lower levels of per capita assets and income.

Doubtless the politically-favoured option is the latter - "Let it all happen on someone else's watch, after we've made ourselves into the New European Aristocracy and gone to our country estates." This would be a mistake. The palace of Versailles didn't protect Louis XVI, nor Waldsiedlung the East German communist elite.

Thursday, July 16, 2009

The East is [in the] Red

Here's an interesting one: the Contrarian Investor reckons a credit bubble could be brewing in China.

For now, a cloud no bigger than your fist on the horizon; but sometime... This is how we ourselves started, back in the 80s.

Wednesday, July 15, 2009

We own you

The Big Picture selects several articles for us on US debt.

This one points out that to balance the US budget with borrowing, new bonds must be sold totalling 3 times the amount issued last year. Bearing in mind that there's less money around, and that people are getting nervous about America's credit rating, inflation and the value of the dollar on the international market, it seems very unlikely that this new debt auction would succeed; and if it did, it would have to be on the basis of higher interest rates, to factor-in the various increased risks.

Alternatively, it's time for the repo man - with a twist. Nassim Taleb and Mark Spitznagel suggest that banks could take part of homeowners' equity in exchange for lower interest rates. But if houses continue to decline in price? I bet the banks have thought of that, so if such a scheme were introduced, they'd want a bigger share than most homeowners would be willing to give them. My guess is that when houseowners realize that the market isn't going to turn soon, there'll be more voluntary bankruptcies and doorkeys in the post. That, plus rising and lengthening unemployment could set off the domino chain.

But returning to the Sprott analysis, note that late last year, 28% of US debt was foreign-owned. Look out for some form of debt-for-equity here - if not the sale of equities, then in the form of favours and concessions. He who pays the piper calls the tune.

Sunday, July 05, 2009

Where did the funny money go?

A few days ago, I charted American public debt in the 2oth century. I also wrote to the Spectator (they didn't publish) to point out that Ronald Reagan and the Bushes were far from conservative when it came to fiscal matters, and that this did not result in benefit to the average American.

Now I come across a graph that makes it plain:

I suppose much the same happened here in the UK. So that's why we got all those posh-cooking and property-in -Provence TV programmes. We were encouraged to dream about the top echelon, not try to join them. As Eva Peron said, "I am taking the jewels from the oligarchs for you"; but somehow we never got to wear them ourselves. Not unless we went into hock for them.

This Wiki entry on the Gini coefficient remarks "Overall, there is a clear negative correlation between Gini coefficient and GDP per capita; although the U.S.A, Hong Kong and Singapore are all rich and have high Gini coefficients." Perhaps there is going to be a reversion to the standard international model: a poorer USA with a high Gini coefficient. Or (same source) a reversion to the social stratification of 1929:

"Gini indices for the United States at various times, according to the US Census Bureau:


1929: 45.0 (estimated)
1947: 37.6 (estimated)
1967: 39.7 (first year reported)
1968: 38.6 (lowest index reported)
1970: 39.4
1980: 40.3
1990: 42.8
2000: 46.2
2007: 46.3"

This blog projects a Gini convergence between the USA and Mexico - perhaps it makes sense, on the reversion-to-mean basis: