The markets haven’t taken this change so well – after all, it threatens to destroy their ability to continue indefinitely extending and pretending. Our concerns are rather different than those of the market. We doubt whether M.Hollande will have the fortitude to implement the necessary transfer of wealth, which his election celebrations seemed to promise, back from the German elite to the EuroZone rank and file.

We’re also not sure that the Greek protest vote will release enough adequately focused pent-up frustration to prevent a serious blow-up sometime down the track. Nor is this just a specifically Greek or even European problem.

Globally, the last 3 decades has witnessed a transfer of wealth to too small a minority. This has left an embittered and angry majority whose voices need to be heard if we are to escape a protracted national, regional or global conflict. Both democracy and capitalism will almost certainly survive but how badly will they be damaged? How bloody will be the resolution of current day imbalances?

The one thing that capitalism needs right now is the injection of a modicum of socialism – a transfer mechanism to get us back to a more balanced global socio-economy. Without it, fascist or communist regimes at each other’s throats and nations facing each other down the barrels of millions of guns may be the only alternative outcomes.

Au revoir, M. Le Petit and good riddance! Let’s just hope that Francois Hollande is not just too little, too late. But don’t hold your breath!

One really interesting question that isn't being asked is that if we accept that Italy has got the credit rating that it now has from S&P and from the downgrade that it got from Fitch's, the issue there, presumably, is that people think that an orderly Greek exit from the EuroZone can't be organised, and if it can't, well that clearly has a knock-on effect. Perhaps Portugal is the second, then Italy, then Spain, then Ireland, and if that happens, Belgium's inevitably going to get caught up in it. We all know that France and the French banking system is where most of this debt gets held up, so to me there's a disconnect that France hasn't been downgraded in the same way that Italy has because the things that are going to impact on Italy will also impact on France, and if France gets caught up in it, then what does that mean for Germany? I don't think there's actually a AAA sovereign state in the EuroZone anymore. I think all of them should be running the same kind of credit rating because they all carry the same or very similar risk.

I don't even think Germany is AA in this situation. I think there's going to come a time when people will actually take a really good look at the Bund and are maybe going to be shorting German Bunds because of the fact that it's all so interconnected. We've got such a level of interconnectedness – there's no way you can have Italy falling over without that affecting France, and there's no way you have France getting damaged without that affecting Germany, so the idea that we've got these different levels of rating within the EuroZone is a false apprehension. Germany is not a safe haven.

The European Central Bank is continuing to lubricate the financial system through LTROs which are finding their way to perceived safe havens, but where's that money ultimately coming from? They're also buying a lot of risk assets. If you look how much of the money is flowing into periphery bonds, it had a far bigger impact on the periphery bonds than it did on the Bund yields because it's a smaller market. All we're really doing is borrowing more money. Ok so it's cheap free money, and people are talking about an extension of 5 years or more, but all we're doing is borrowing more money to pay back debt, and the reality has to kick in at some point that we have to pay back the borrowed money as well. I'm not seeing how the EuroZone is actually dealing with this from a structural perspective. We've still got all the same imbalances. Every single day we're still transferring money into a periphery that simply can't pay it. We've had all this talk about a Greek default, and everybody accepts that Greece will default, and one of the sub-texts to this, apparently, is that most of the Greek Credit Default Swaps will expire this month or next month because nobody was able to buy Greek debt insurance for the last year or so because the price has been so crazy. Will that create a structural dynamic? Will America suddenly be a lot less interested in the EuroZone when it doesn't have to back-stop all the CDSs out there? It's still going to have a big impact, and obviously China and everyone else is looking at this, but it's not a functional economy, and getting further and further in debt is making it less and less functional - kicking the can down the road, but making the problem bigger when we eventually get there.

We don't know what's going to be the trigger. Is it going to be an election in Greece from which we suddenly get a government that don't accept this mandate? There are a whole bunch of risks that could trigger this sudden push back against borrowing more money to pay back the borrowed money.”

The risks haven't gone away; they've just hidden themselves behind the ECB's printing presses.The video clip can be viewed at http://video.cnbc.com/gallery/?video=3000073359 

 

18 April 2012

And now for something completely different...

 A financial glossary

“Investors back historic Greek debt swap” - FT headline 9.3.2012.
 
BANK, n. Bottomless cavity in the ground that sucks in money and the unwary.
I had quite a bit of money but then I put it in the bank.
 
BOND, n.  A profitless contrivance used for catching the gullible or feeble-minded.
That pension fund is 100% in bonds now.
 
BROKER, adj. A comparative descriptive state for a client of a Wall Street bank.
He didn’t exactly have a lot of money before he started dealing with Goldman Sachs. Now he’s even broker.
 
BUBBLE, n. Fundamental prerequisite for a functioning Anglo-Saxon economy.
We need a new bubble to replace the ones we had in dotcom and property.
 
CENTRAL BANK, n. Lobbyist for commercial banks well versed in alchemy.
 
CURRENCY, n. Largely intangible substance with an inherent property that tends to instantaneous evaporation, the destruction of life and the permanent impairment of wealth.I had money once but then I exchanged it for currency in a moment of madness.
 
DEFAULT, n. Semi-mythical celestial occurrence that passes by Earth every 76 years.
I was worried for a second about that Greek default, but I realise there’s nothing to see now and all is well.
 
FEDERAL RESERVE, n. A wholly owned subsidiary of Goldman Sachs.
The Federal Reserve voted to give a few more billion dollars to Wall Street.
 
GREECE, n. An undesirable or unfortunate happening that occurs unintentionally but results in harm, injury, damage and colossal loss of wealth. And profits for Goldman Sachs. Did you see Greece ? Sheesh.
 
HORLICK, n. Progressive and insufficiently appreciated investment visionary.

HOUSE, n. In most countries, simply a place to live. In Britain, a theoretically infinite source of perpetual tax revenue for deluded Lib Dems.¹ (¹This is tautological. – Ed.)
 
INVESTOR, n. Plucky protagonist admired for brave deeds and quixotic struggling who is about to get shafted by Wall Street interests.I was an investor in euro zone sovereign bonds but then everything went Greek.
 
JAPAN, n. Where hopes of profit go to die.
 
KEYNES, n. Slang: Vulgar. Disparaging and offensive. That joker Posen is a complete Keynes.
 
POLITICIAN, n. Someone better informed than you about how to spend your money.

RATINGS AGENCY, n. A professional entertainer who amuses by relating absurd and fantastical tales. That ratings agency’s credit assessment was so funny, I had to change my trousers.
 
RESTRUCTURING, n. Statutory rape.
Those bondholders are undergoing a voluntary restructuring – you might even call it a ‘credit event’.
 
ROGUE TRADER, n. Unprofitable proprietary trader. (Hat-tip to Killian Connolly.)
 
SOCIETY, n. The process whereby wealth is diverted from taxpayers to banks.
 
TAXPAYER, n. Simple-minded dolt too foolish to be working for the government.
 
US GOVERNMENT, n. Another wholly owned subsidiary of Goldman Sachs.
We seem to be running out of Goldman Sachs alumni here in the Treasury. No, wait, we’ve still got hundreds of ‘em.
 
VINCE CABLE, n. (No longer in technical use; considered offensive) a person of the lowest order in a former and discarded classification of mental retardation.
Don’t be a Vince Cable – get down off that wardrobe and come and eat your tea !

“So we're still here a year/two years later, and we're still talking about the same thing, but what's the fix? The fix is that there is no fix. All the structural problems are still there, and the can has been kicked a little bit further down the road. The third bailout package is going to go through. If you look at the distress in Europe right now, we know some people who work in distressed debt who were in Europe and they were expecting to pick up a lot of work at the end of last year. There were Greek banks that were literally on the brink in December, but then we had all the remedial action that was taken in December. These guys have now come home and are saying there are better opportunities now in Asia right because the amount of liquidity that's flooding the European markets is going to paper over all the cracks there for months to come, so in terms of liquidity, all it's done is to keep the game going. We've seen defaults, but we've got the restructuring in place; we've got $3.2 billion in CDSs being paid out, but that is a relatively small number. One thing that has to be said about this whole game that's been going on for the last year or two is that the CDS pay out number would have been much higher six months ago or a year ago. A lot of the CDSs have expired. People couldn't re-new them because the cost of insuring was so high, so they kept that going until it became $3.2 billion, which is a much more manageable number – it's a relative drop in the ocean for the various banks that are on the other side of that, so that can be done now without any impact on the US system. That's not the only reason they've being doing it, but they've been essentially kicking the can further down the road because they just don't want to face up to the issue of having to totally re-structure.Last time I was here, I mentioned Iceland as somewhere that had taken a whole bunch of pain and devalued its currency. Since I was last here, Iceland is the only place I know of that's had a credit rating upgrade from Fitch's due to the fact that it's now growing again. The whole thing in Europe, since 2008, has been about delaying the pain and kicking the can further down the road. That's been true of everywhere; it's been true in the States and the UK and in Japan for the last 20 years or so, but in Europe, it's much more obvious because the fragmentation is so great; the imbalance is so great between the core and the periphery that we're really seeing all this imbalance, but the structural problems are still there. The distressed debt guys don't need to be hanging around Athens any more because there's enough liquidity, but nothing has changed in the structure, so all the imbalances are still on the line.

People might rightly ask why the best and brightest minds of the ECB and the IMF got together with the Greek government and come up with a comprehensive roadmap for growth to compensate for the austerity and pay down the deficit, but there's a such a political premium on the EU structure, and so much of that is built on there being a Euro. Greece will always have these problems while it remains tied to the same currency as Germany. We're always going to have this export of wealth to Germany and this export of debt to peripheral countries. Whenever you've got countries that are at different levels of competition and development sharing the same currency, that imbalance is always going to happen, so unless people give up on the pipe-dream of the Euro, and unless they accept that there is some way to have some kind of European Union that is able to prevent any more European wars or global wars that originate in Europe, unless they figure they can do that without a single currency, we're always going to have this situation. If we wrote off Greek debt completely and started off with a zero-debt stock, we would still have the same flow problem; we would still have the fact that Greece is getting more and more in debt every single year. Even with the best projections that the IMF and ECB are putting in place right now, even with Greece starting to grow again, which I just don't see happening given the current constraints, in ten years time, they're saying that Greece is going to be at 120% of debt to GDP, and that's just not sustainable, and that's the best case scenario, so why won't the brightest minds do it? - I think they won't do it for political reasons. I think they just won't give up on the Euro. Everybody's now flogging a dead horse with the Euro, and the Euro either needs to be scrapped or totally redrawn, and the only countries that should be sharing a common currency are those that share the same level of competitiveness.

Nouriel Roubini has been talking about what he calls a democracy deficit. He says that Europe has a whole bunch of deficits and one of them is a democracy deficit. The researchers at GEVKOW have come out and said that Germany has achieved in 2012 what it couldn't achieve in 1945 in that they've managed to re-draw the map of Europe. Everybody's now having to accept German economic theory, German monetary policy, and in some cases even German imposed governments. Germany is footing the bill, but they're the ones who lent everybody the money to buy German goods. This is a vendor financing deal that's gone horribly wrong. I can't see how we can sustain this. I think we have to write off bad debts and accept that that money shouldn't have been lent. Ultimately, Germany is the one that carries the can here, so what's the trigger event? We don't know. It could be something that happens inside Europe; it could be something that happens outside Europe. Everybody's worried that from Greece, the action will move to Portugal, and then on, but Greece should have been manageable. I can't believe they managed to make such a Greek drama out of Greece, which is one of the smallest economies in Europe, but they did. Portugal is a relatively small economy that should be manageable. What on earth is going to happen when they get to somewhere like Germany? France has got this 500 billion Euros of exposure, and one thing that everyone seems to forget is that the US is Italy's second largest creditor. The States has got $300 billion Dollars of exposure in there. Everybody's carrying the can if Italy goes wrong, and I can't see how we can avoid that, so this carries on until Italy goes wrong.”

The video clip can be viewed at http://video.cnbc.com/gallery/?video=3000076709

Unless, of course, Spain, where electors are voting against austerity with their ballots, goes wrong first – notwithstanding that Portugal or Ireland could be the spark that lights the highly incendiary Euro-debt contagion flame. It ain't over until it's over... even if it's gone quieter for a while. 

11 April 2012

Better Late than Never...

Despite last month's bailouts, the peripheral European economies should still leave the EZ as they should have done three years ago and why the ECB's LTRO funding mechanism, while reasonably successful the first time, is not a long-term solution, as I recently told Money Channel -  

“You can only stop downgrading Greek bonds when it gets to 100% haircut, and we've seen this gradual write off of Greek debt over time – 30% haircut, 50% haircut, 70%, and now the 30% that's left is getting stretched over 30 years and torn in such ways that it's not really worth 30%. I think that the real problem here is that the recent Fitch downgrade highlights the fact that we keep bailing out Greece time after time after time, and yet none of this is really making any difference to Greek fundamentals, and Greece is actually getting in a worse and worse situation all the time. If you ask the people on the streets in Greece, they don't seem to feel that their situation is improving. Greece has got one of the longest lasting and deepest recessions in history now. This has been going on for three years and we've got a really sharp rate of contraction every year, and yet all that's happening is that the ECB and EuroZone core are saying that we need more contraction and more austerity, but there comes a point where it's just impossible to keep reducing people's standard of living any further and to keep applying more austerity. As we've always said, that will end up being the breaking point.  

Greece should have left the Euro three years ago, so should Ireland, so should Spain, so should Italy, probably everybody except Germany should have left the Euro and then it wouldn't be the Euro, it would have been back to being the Deutsche Mark. The reason that they didn't is because politicians generally will always make the easy choice, and usually that means they won't make the right choice. We've seen that, not just in Greece, but all over Europe and in America. In all these places, people have kicked the can further down the road and into the future. The problem is that every time they kick the Greek can now is not really travelling that much further down the road. It only seems a couple of months ago we were talking about the last Greek bailout, and we'll be here again in a couple of months talking about the next Greek bailout, and because the problems have got that much bigger and because the problems all the other EuroZone countries have got bigger and bigger as well, it has just increased the chance that once something goes wrong with Greece, it goes wrong with the entire EuroZone. People said that Greece was never going to default, but I think it's now widely accepted that Greece has defaulted in effect because it can't afford to pay back the debts it's got. 

Italy and Spain are not at the haircut stage yet. The haircut is the second stage of it. If you look at the EuroZone crisis, we think there are a number of stages. The first stage is when you can't go and raise enough money. When you get shut out from the capital markets, you can't raise the money you need to keep paying the bills. We first saw that happen with Greece and Ireland, then with Portugal – it couldn't go the capital markets and its debt was entirely being bought by the ECB, no one else. Italy and Spain have also got into that same situation. What happened in December is very interesting because the first round of the LTRO, which is basically the ECB doing quantitative easing, what we saw there was that the ECB went and forced half a trillion Euros into the market. It basically went and put that cash into the market and it bought bad assets, bad bonds and bad sovereign bonds, and that had an interesting effect because at about the same time, there was roughly the same amount of money that was being parked with the ECB every single night on overnight deposits by banks who just didn't trust any other banks in the Euro system. If you're a French bank and you've got a surplus of cash at the end of every night, normally you would go and lend it to another French bank that has a deficit of cash over night, and they'll pay you an overnight interest rate on that. We got to the stage in December where French banks didn't trust any other French banks, so they were putting their surpluses on deposit with the ECB. When LTRO number one came out in December, this influx of half a trillion Euros of credit into the system from the ECB also encouraged the banks to actually go and put their own money back into the system. They realized that if the ECB was putting half a trillion Euros of cash in there, then the banks were all going to be able to survive a little longer, so half a trillion at that stage actually had the impact of about a trillion Euros, which is why some people were surprised at the extent of the impact that this had on the capital markets – we saw a really strong capital market rally.” 

With diminishing returns, each time you do this, it becomes less and less affective each time – the periphery should now abandon the fated Euro project. Better late then never!  

30 March 2012

Wit of a Banker

The Global Financial Crisis and the general population's increased ability to access and understand information has resulted in not only a general backlash against bankers, but also increasing numbers of people questioning not only how safe their money is and what it's being used for, but even to question the very economic, political and social fabric of society.

RBS (which, as I'm sure you're aware, is 83% owned by the taxpayer and is being kept on life support with billions of pounds of their money) has been forced to make another humiliating climb-down after advertising itself as 'the only bank in town' when, in fact, it turns out they have actually pulled out of a couple of towns where they really were, up until that point, the last bank in town.

The Advertising Standards Authority were alerted to the possibility of the adverts being misleading following complaints from the public, and after looking into the matter, consequently banned the commercials.

This follows hot on the heels of the RBS Chairman, Stephen Hester, bowing to public and political pressure and giving up his £963,000 bonus, and previous Chairman, Fred Goodwin, being stripped of his knighthood for being at the helm and steering the bank to the brink of total collapse.

28 March 2012

Outlook and Solutions 

I recently gave both CNBC and Money Channel the same economic outlook and investment solution: 

“Investors ought to be looking at where currencies seem to be heading right now. At this part of the economic cycle, we think there are three assets that are strategically appropriate assets to invest in - one of them is gold, which we've been invested in for about eight years now. We think we've made most of the money we're going to make on gold. Again as we've said before, we think that fair value for gold in today's market is around $1,600, $1,700, $1,800 range. We think the time to buy gold is in the 14/1500s, and we were very happy to sell gold when it reached around $2,000 last year. 

That doesn't mean that gold can't go above that, and probably a realistic exit point for gold, again, as we've said many times before, is something like $2,500, maybe $3,000 maximum, but the danger is that if you leave it too late, we're expecting gold to come crashing down to something like $1,000 or maybe even less and to stay there for the next twenty years or so because that's how long it's going to be until we move into the situation where we have fairly rapid inflation. We'll probably have a fairly gentle inflationary recovery from the deflationary period we're in now, but it's probably twenty years from the bust until we see gold start to look like an interesting asset again. So, gold has been an interesting asset. There's still some mileage in it but try and make sure you know where the exit door is. Treasuries bills and fixed interest again have been a very interesting asset for the last twenty years, but again, try and make sure you know where the exit doors are, but one thing that's likely to come together is that we're likely to see this peak in gold prices and treasury-bill prices coincide with a collapse in equity markets and risk assets, as we've said in the past, and currencies are likely to get very much caught up in that, so in the longer term, we've got a view that the Baht should get stronger against the Dollar. It's a much more attractive currency; growth rates are far higher in South East Asia; all the demographic reasons that support currency strength are much stronger in South East Asia. Also, if you look at the debt levels, Thailand has nothing like the debt constraints that America has right now, so in the longer term, the Baht should quite clearly strengthen against the US Dollar. Now, that won't happen in a straight line. There will be a whole number of things that could interfere with that trend, not least, politics, which is always a problem, but at the moment, they seem to have more political problems in America than we do in Thailand, so maybe that's something to be grateful for. 

I think that one of the key things, though, if we look at the world from a Thai Baht perspective is that when we enter into the last phase of the crisis as it were, (and like anybody else I don't know if it's going to happen this year or next year - all I know is that we believe it's absolutely certain to happen at some stage), America's debt has to be dealt with at some point. Europe's debt at some point has to be dealt with. Japan's debt has to be dealt with, and that really means a big crisis resulting in an equity market collapse. We're expecting equity markets to fall by at least 30%, possibly 40% globally – in the States but in Thailand as well, but at that point, in a liquidity crisis, a market panic and a market collapse, we're also expecting there to be a real flight to the US Dollar. It's the easiest currency to buy. Wherever you are in the world and whatever you're selling, the US Dollar is the easiest currency to go and buy. In 2008, we gave a prediction at the start of that year that we saw Baht moving back up. During 2007 the trend had been the Baht moving down from the low 30s and possibly slightly lower, and we gave a prediction at the start of that year that we saw the Baht would move up to something like 35, but it actually went up to around 36. We think that the 2012/2013 period could well be a repeat of that, so when we get really mired in the depths of the crisis, when we see equity markets come crashing down, when we see the gold price peak, at that point, we wouldn't be surprised to see the Baht weaken to something like 35 or 36, maybe even worse than that, against the US Dollar, so for investors who are looking to exploit currency opportunities, whilst the Baht is undoubtedly, over time, likely to keep getting stronger against the Dollar, there is this short-term tactical opportunity to look out for of something like a 20% gain in the US Dollar or a 20% fall in the Thai Baht. When that happens, that's really the time to be loading up on Baht and Baht assets. At that stage, the Thai currency is looking like a very interesting proposition, and we also expect that at that stage, the SET is going to be at something like 650, and that's a really good time to be loading up on the SET as well.”