Financial Sarcasm Roundup for 02/09/16

New Hampshire voters have made up their minds tonight, mostly in favor of outsiders. I have made up my mind in favor of myself, because I can fix all of America's problems with sarcasm.

Silicon Valley startups aren't happy anymore. Unicorn employees are taking off their party hats, realizing that the unicorn they were riding to riches was a donkey in its own party hat all along. Employees who were counting on their stock options to pay for a McMansion are watching those dreams evaporate. Liquidation preferences are the well-connected VCs' way of walking away laughing at everyone who worked hard from the start. BTW, I have never seen the point of the Crunchies awards. A corporation's performance is not like a movie or pop song. The only performance that matters is the bottom line. Net income is the only award that pays bills.

Germany is lining up praise for Deutsche Bank. I recall hearing the same things from Bear Stearns and Lehman Brothers before they fell apart. It's too bad the ECB's bank stress tests weren't really stressful. Examiners could have looked under the hood at Deutsche Bank and figured out what needs fixing. Now investors need to take a look at the entire European banking sector's exposure and figure out who's sitting on powder kegs. Greek sovereign debt is the obvious first place to look, then Chinese sovereign debt, then other emerging market debt, then any rotten bananas stored in these banks' break room refrigerators.

San Francisco property owners are sitting on big bubble values. No one saw this coming, of course, after the dot-com bubble and housing bubble of the last decade. I love the mention of all-cash buyers looking for investment properties. The clueless private equity funds and assorted rich people who bought homes in The City sealed their own fates. I will buy what they abandon at bargain prices.

Voting is awesome. Medieval peasants would rebel against their lords when they didn't like working conditions. Today we have the bloodless option called elections to voice displeasure with Establishment elites. I would seriously consider voting for a candidate who formally adopts sarcasm as a campaign platform.

Financial Sarcasm Roundup for 11/09/15

More Americans might be tuned in to my sarcasm if they weren't watching Monday Night Football or some cable TV movie. I might get more traffic if I convert my periodic sarcasm blast into a Netflix series.

One asset management firm thinks Chinese debt benefits from China's recession. The tortured logic right there just baffles me. Devaluing the yuan means a yuan-denominated bond's payment stream to Western investors will be worth less, not more. Buying notes issued by Chinese real estate developers means investors are hurt more by further crashes in a very inflated sector. Some money managers just can't let go of a thesis that no longer matches reality. The next bullish bet could be on wax paper rather than yuan paper, because it easily wraps fish from the live fish market. See, this investment thesis stuff is really easy.

China and the Middle East have an insatiable appetite for natural gas. The West is converting to locally available renewable energy while the developing world becomes even more dependent on hydrocarbons from beyond their borders. Addictions typically end badly. Going cold turkey in a couple of decades won't be an option for developing countries facing bad demographics.

Many European bankers are about to be jobless. Think of the fun they can have becoming tour guides for rich Chinese and Russian expatriates. The fired bankers didn't move fast enough to raise capital cushions. Now they can raise money for the Middle Eastern refugees flooding Europe. Grab those tin cups and hit the street corners in Munich and Prague. Bank CEOs can only fake the ECB's stress tests for so long. The money they save on compensation goes into the rainy day crisis buffer.

My sarcasm is way more entertaining than whatever is on television right now. Tune in again next time for another blast from Alfidi Capital.

The Limerick of Finance for 07/12/15

Eurozone and Greece haggling for deal
Delaying has lost its appeal
France and Germany cross
Let's see who's the real boss
This stuff is about to get real

The Limerick of Finance for 05/03/15

Euro bond buying keeping yields low
Longer dated bonds now in deal flow
Creditors are such fools
Getting played like dumb tools
Buying bonds that have no room to grow

Greek Crisis Drops Off Reality Radar Into Pretend Land

Hey children!  Let's all pretend that Greece can pay its bills, Germany loves giving away money, and Europe is one big happy family.  That would make a hilarious fairy tale suitable only for the dumbest of credulous kids.  Europe's leaders are living this fairy tale right now even though they know the grown-up math will never make it work.

Tuesday's approval of Greece's proposed austerity compliance plan was a farce beyond all belief.  European finance ministers somehow gave it their seal of approval with a straight face.  Whether they were complicit in drafting it before Greece pretended to own it is a moot point.  Every responsible adult at the European financial table is now engaging in mass self-deception, national deception, and continental deception.

Here's a trumpet blast of reality for any Europeans still asleep.  Greece has no intention of ever paying its debts or fulfilling its austerity promises.  Athens' capitulation to the troika's new bailout terms was a feint to stop Greek bank runs.  The Tsipras regime knows it will run out of money but needs another few weeks or months to turn disorderly starvation into something that does not lead to civil unrest.  Europe knows it will never see its banks made whole after a Greek default.  The ECB needs the next few weeks to figure out how to front-load as much quantitative easing as possible into Greek bonds.

Childish fairy tales are now okay for grown-ups.  European parliaments will sleep for the next four months telling themselves a bedtime story of prompt Greek payments, generous German taxpayers, and kindly central bankers.  The hard wake-up will be a surprise thunderstorm breaking in the middle of the night.

The Haiku of Finance for 02/20/15

Greece and Europe deal
Extend just to talk again
Celebrate nothing

The Haiku of Finance for 02/16/15

Greece left the meeting
No deal at all for Europe
Almost no time left

Financial Sarcasm Roundup for 02/16/15

Stock markets march on despite Europe's woes, and Americans roll over on Presidents' Day.  Sarcasm has a role to play amid such madness.

Japan says its recession has ended.  I do not believe that for a New York minute, or a Tokyo minute if you prefer.  Japan's official economic statistics are about as reliable as the politically gamed stats from US agencies.  Revisions in the next quarter can invalidate Japan's claim to be out of the woods.  US statistical revisions do that all the time to our own country's economic numbers.

The European Union is finally moving towards a capital markets union.  They should have done this years ago when Greece and other weak economies gained admittance to the eurozone.  Now it's too late.  The zone's likely shrinkage means the benefits of a future capital markets union will be confined to the strong economies that remain in the euro after the weaklings are kicked out.  Germany and its northern friends can handle this by themselves.

Greek PM Tsipras promises his country will be completely different in six months.  LOL!  His citizens have no idea what's coming.  Recent polling shows they really believe they can both stay in the euro and get a better debt deal from Europe.  America no longer has the lock on low-information voters now that ordinary Greeks have weighed in.  Here's the hard slap of reality.  The Greek finance minister stunned today's Eurogroup meeting by flatly rejecting their negotiating position in record time.  Europe can now either take the Greek red lines seriously and open the ECB's quantitative easing floodgates, or give Greece the boot.  Greece will then be different, alright, and a lot sooner than six months from now.

I will make one more comment about today's national holiday.  Presidents' Day used to be two different holidays celebrating the birthdays of George Washington and Abraham Lincoln.  It went from two days to one day for some gawd-awful reason.  IMHO it should not be a national holiday because most Americans can't pick either of those two gentleman out of a lineup.  Americans have too many days off anyway.  National holidays just encourage laziness.  Get back to work.

The Limerick of Finance for 02/15/15

Greek exit contingency plan
It pays to have one in the can
Athens won't agree
They want money free
Europe should have eased like Japan

ECB Kicks Greek Central Bank Between Its Legs

The financial news out of Europe gets more enjoyable all the time.  The ECB is not accepting any more Greek IOUs.  I'm pretty sure Germany turned up the heat as an opening negotiating tactic.  The effect is to force the new Greek government to keep its austerity and reform pledges.  Athens' opening gambit of pledging to renege while "negotiating" has just backfired.

The Greek central bank is not the US Federal Reserve.  It cannot print its own currency to buy domestic bonds.  It may only offer euros to buy its own government's debt or the private debt of its domestic banks.  Greece cannot print euros, so as long as it is confined to the euro it must force bank depositors to accept cramdowns as part of any bank recapitalizations.  Forced buy-ins won't go over well with Greeks who remember what happened to depositors in Cyprus banks.

I recently predicted that either a Greek exit from the euro (aka Grexit) or an ECB-driven bailout were the two most likely options.  I still do not believe the Greek government will back down from its political pledge to end austerity.  Europe just kicked the Bank of Greece where it hurts.  The bank will have trouble walking for a few days, until it is forced to announce a bank recapitalization plan that starts a run on Greece's private banks all over again.

Full disclosure:  Bearish position on the euro; long put position against FXE.  

Greek Debt Game Theory

Greece's new leaders run a nation whose sovereign debt is about 175% of its GDP.  Most of the Syriza party's cabinet are untested in senior leadership roles.  Entering negotiations with ambit claims is probably beyond their ability.  The European troika should take them at their word when they say that Greece cannot afford to pay its debts in full.  This understanding sketches out the boundaries of a high-stakes Prisoner's Dilemma.  Game theory can help us understand the dilemma's probable outcomes.

The probable end state of most Prisoner's Dilemmas is the defection of the party who first realizes the advantage of abandoning a compromise solution.  The first to defect maximizes their own self-interest.  The classic formulation of this dilemma presumes that the two primary parties do not know each others' intentions.  The European troika and Greece's Syriza know each other's intentions exactly, so an immediate defection from a negotiated solution is not likely.  The problem is that Syriza's absolutist campaign rhetoric leaves little room for a negotiated solution.  Electing amateurs who have never strategized or negotiated beyond a marketing campaign places a crisis-riddled nation at a distinct negotiating disadvantage.

The troika's bankers and economists have obviously considered several scenarios, including a Greek debt default and exit from the euro.  Their negotiating position includes consideration of the cost to Europe of Greece's untenable positions.  Greek Prime Minister Alexis Tsipras has until the Feb. 12 EU summit in Brussels to telegraph any softening of his demands for lifting austerity.  He has stated a willingness to "negotiate" but has not budged on his commitment to reinvigorate the Greek welfare state.

Game theory indicates several possible outcomes if we assume the Greek position is fixed.  One set of scenarios should include some form of renewed European generosity that is insufficient to meet Greek demands.  Another should include hard European demands that Greece adhere to its debt covenants if it wants a loan lifeline after Feb. 28.  The least likely scenario is Greek capitulation to any demand, even a temporary one, to secure said lifeline.  A turnabout acceptance of austerity would shatter Syriza's governing coalition and prompt snap elections again.

The likely range of outcomes under game theory is thus some sort of Greek default that prompts the country's withdrawal from the euro.  Europe's leaders have calculated this cost and believe it to be manageable, but they are tempting fate by inviting Greece to negotiate.  The public statements of both EU and Greek leaders indicate that this is the full range of policy outcomes, yet one outcome is also a possibility.  Systemic stability has emerged as an overriding policy consideration on both sides of the Atlantic since the 2008 financial crisis.  Printing euros to maintain a unified eurozone is the most powerful option available to Continental leaders committed to a unified currency.

The negotiations may be mere political theater if the troika is sufficiently confident that ECB monetary stimulus can paper over Greece's problems long enough for a renewed bailout to push the country into growth.  The math gets complicated depending on how enthusiastic economists are for the effects of debt on growth, but the philosophy is not complicated at all.  The ECB quantitative easing timetable can immediately shift to accommodate bond purchases that support further Greek bailouts,  The cost of that option is the decimation of the euro's buying power against the US dollar.  Brussels has yet to indicate whether the cost of the euro's dismemberment or the cost of its devaluation is more tolerable.  Mr. Tsipras' conduct in Brussels will trigger Europe's choice.  Alfidi Capital judges a Grexit to be just as likely as a quantitative easing bailout.

Full disclosure:  Bearish on the euro; long put position against FXE.  

The Limerick of Finance for 01/25/15

Greek leftists have won their big prize
Euro watchers cannot feign surprise
Throw doubt onto debts
Bond shorts will place bets
Pricing yield for some time won't be wise

Euro Drop Brings Woe to Europe

The euro's precipitous decline reflects more than financial market nervousness over Greece's political stability.  Persistent structural weaknesses in much of Europe's constituents feed the euro's fragility.

The European Central Bank (ECB) watches the euro's unfolding crisis with alarm.  Its most recent reforms allow it to act more decisively in setting monetary policy, much like the US's Federal Reserve.  It can now move swiftly to unleash quantitative easing that can flood the Continent with new credit that supports the euro's nominal value.  The deluge remains a simple-minded central banking solution to a complex problem that only the liquidation of bankrupt debtors has ever solved.

The national economies of Spain, Greece, Italy, and even France continue to suffer from severe competitive deficiencies.  All are saddled with high taxes and complex regulations that make their economies less competitive.  Their exports would suffer without Germany's willingness to allow its creditworthiness to support their profligate borrowing.  That profligacy partly drives the ECB's plan to buy European sovereign debt.  It also leads to a vicious feedback cycle of debt-driven sovereign spending, credit-enhanced consumer spending, and currency inflation that will demand still more quantitative easing.

European banks have unfortunately started down the road of paying negative interest rates on deposits.  Charging depositors for the privilege of holding savings in cash accounts feeds the euro's deflationary trend by slowly taking the most liquid form of money out of circulation.  Deflation gets a bad rap from central bankers, but the eurozone's high level of indebtedness means a deflationary spiral makes it harder for private-sector debtors to pay their bondholders.  The ECB knows that European corporations can't afford to be sanguine about deflation, hence the increasingly loud financial sector chatter for a more inflationary monetary policy.

The European unity experiment is under more stress now than at any time in its history.  Lithuania's entry into the currency union is in no way a counterbalance to Greece's potential exit; the difference is measured in hundreds of billions of euro-denominated debt that could instantly evaporate.  The ECB would be well advised to delay its planned QE past this month's Greek elections.  It would otherwise swallow worthless Greek bonds whole.

Full disclosure:  Long put against FXE.

The Haiku of Finance for 10/26/14

Euro banks fail stress
Hard to believe they got well
Some need billions more

The Limerick of Finance for 09/07/14

Draghi goes for new Europe boost
His own bank does not rule the roost
Central banking demand
Finally forced his hand
He can't control what he has loosed

Financial Sarcasm Roundup for 08/11/14

I have yet to find a financial expert on the Internet who is more sarcastic than me.  David Stockman's Contra Corner comes pretty close but he doesn't do haiku.

Russia thinks it can win a sanctions war against the West.  America sends a paltry amount of exports to Russia but Russia imports a huge portion of its food.  The Russkies will be hard pressed to find substitute exporters in Asia and Africa, unless of course they want to eat boatloads of rice.  The good news is that fewer Russians will get drunk on vodka if they have to eat their potato crops instead of ferment them.

Europe doesn't like US high yield bonds anymore.  The phrase "impending selloff" is really cute.  That is exactly what triggered pricing chaos in the financial markets back in August 2007 as an early warning that fixed income securities were mispriced and illiquid.  A whole bunch of shaky US companies are going to watch their cash reserves dwindle as investors turn down their junk bonds.  stock prices.  Watch out below.

China's moderate inflation stats got the West's attention.  The West ignores the low quality of China's source data, focusing on headline numbers.  Wall Street still does not comprehend the extent of fictionalization in Chinese economic statistics.  Even surveys of economic activity from private media outlets are suspect.  "Forget it, Jake, it's Chinatown."

The US Treasury is reconsidering its view of MLPs.  The Kinder Morgan restructuring may be a prescient move to get out ahead of any future regulatory rollbacks.  America's tolerance for proliferating tax shelters is reaching an apotheosis.  It was fun while it lasted but Uncle Sam needs to broaden the tax base in ways that don't frighten major donors.  Word will eventually trickle out to upper middle class tax donkeys through their tax accountants.

The best item above is the high yield debt warning from Europe.  I will be overjoyed to watch a whole bunch of yield-chasing hedge funds implode when they can't sell their synthetic securities.  Bring it on.

Financial Sarcasm Roundup for 08/04/14

There is sarcasm . . . and then there is SARCASM.  There's more of the latter on this blog than the former.

Portugal's central bank pulled Banco Espirito Santo out of the fire by sticking its bad assets in a separate entity.  I don't think they got the memo from US and UK regulators that shareholder cramdowns don't need a good bank / bad bank split as long as the back office processes keep working.  The Portuguese plan is okay if it prevents any further troika bailouts.  Consider this a test case for a rescue that doesn't spook depositors as much as the Cyprus bank crisis.

The Federal Reserve is having serious difficulty finding an exit from its stimulus policy.  The public focus on interest rate targeting is the Fed's deliberate misdirection.  The real source of trouble is the Fed's bloated balance sheet.  Chair Yellen can't unwind those asset-backed holdings without forcing up short-term rates, crashing the demand for bonds, and freaking out non-US central banks.  No one wants to face the nightmare scenario of a Fed bankruptcy, but the current policy's non-exit flirts with such an outcome.

Argentina is in default on its sovereign debt, and ISDA ruled that credit default swap owners can trigger their contracts.  This is a preview of what awaits US Treasury CDS holders given the Fed's problem in my paragraph immediately above.  The smart hedge funds that purchased CDS on Treasuries with record-low credit spreads will make out quite handsomely.  The dumb ones still fixated on interest rate arbitrage are picking up nickels in front of a steamroller, with one shoelace already under the roller.  Hedge funds that bought Argentinian CDS are about to find out if they got luckier than the funds that sued for larger bond settlements.

These news items bring back memories of my days as a financial advisor, reminding me of why I don't perform that function anymore.  I prospected some real idiots who thought they could dictate market returns to me before selecting investment products.  That mentality isn't limited to individual retail investors.  People running big funds and central banks think that way too, as the articles above illustrate.  These people are going to get their big fat rear ends handed to them in the next US market crash.  

The Limerick of Finance for 08/03/14

Portugal's central bank has a plan
Put a bad bank into a tight can
Europe's banks are so bad
Funds that bought them are mad
Their returns will not leave them one fan

ECB Negative Rates Paint Europe Into Corner

The world has had an entire day to process the ECB's decision to impose negative interest rates on European banks.  Any bank keeping deposits at the ECB is playing a losing game.  Banks that have no choice must make up their losses with massively cheap lending or arbitrage games in other areas.  I expect some banks to test the waters by charging their retail depositors negative interest on savings accounts, forcing them to spend and invest.  That's how these policy errors play havoc with citizens' lives.

This move has severe philosophical implications.  Negative interest rates magnify the time value of money by turning cash into a wasting asset.  Combined with inflation, which has been a nonzero value for most of Europe's postwar history, negative rates accelerate the debasement of consumers' purchasing power.  Europeans are now forced to immediately spend their earnings or invest them in assets whose risk profiles lie outside what would normally be their portfolio's efficient frontier.  The ECB has just laid waste to modern portfolio theory.

The ECB has stepped into darkness and the world's financial markets are not registering an iota of care.  US equity indexes are at record highs and the CBOE VIX volatility measure is comatose.  Investors worldwide are lounging blissfully unaware of this decision's risks.  Negative rates on bank reserves will force banks to lend cheaply.  If they're borrowing short, they risk exposure to an ECB policy reversal or a surprise drop in the euro's value.  The cheap lending will accelerate monetary velocity, which will massively magnify any rise in Europe's rock-bottom inflation rate.  Europe has painted itself into a corner.  It will make a mess on the way out.

Financial Sarcasm Roundup for 04/14/14

I am seriously pressed for time this week.  Someday you'll find out why but I don't care to disclose it today.  Suffice it to say that I'm doing something very important in the short term.  I can still make a minimally sarcastic effort.

Japan hints that Europe should follow its example in fighting deflation.  I say Japan is nuts for saying this and Europe is nuts for taking it seriously.  Deflation isn't so bad if it forces indebted businesses into bankruptcy so more efficient businesses can take charge.  The generation that comes of age in a hyperinflationary Japan or Europe will never forgive the modern leaders who destroyed their national currencies.

American shareholders are demanding that their companies acquire for growth.  They do this because they are stupid.  They should instead ask for huge special dividends to get that cash back.  The few hundred corporate CFOs in the country who sit on trillions of dollars of uncommitted cash know how insanely high any NPV would have to be in these pumped markets to justify any acquisitions.

I've read a bunch of brief news items lately about what nouveau riche twentysomethings want from a financial adviser.  It's all really impressionistic and contradictory stuff, but the general sense is that today's young rich enjoy throwing money away and want advisers to praise them for throwing even more away.  The cleverest and most dishonest advisers will step up and take as much as they can in fees while praising these young idiots for their nonexistent brilliance.  I will enjoy watching these preppies and their advisers starve in the gutter.

The most sarcastic thing I can say today is that people in Japan, Europe, and America are all getting a lot dumber about money.  I am living on the wrong planet, or the wrong time period on the right planet.