The Haiku of Finance for 08/04/14

Suckers for high yield
Holding bonds risking default
Guess who should go bust

Financial Sarcasm Roundup for 07/28/14

Death and taxes are certainties in life, according to folk wisdom.  Sarcasm should be an additional certainty.

Argentina moves closer to default by refusing to compromise with its holdout bondholders.  I saw this one coming.  Go read my previous Financial Sarcasm Roundups if you can't handle the truth or are too dumb to remember what I've been saying for weeks.  I note with interest the possibility that Argentinian soybean farmers may hoard their crops.  Hard assets like agricultural produce make sense in a high-inflation economy that world markets have isolated.

The IMF is letting us all know that there is no cause for alarm.  That's nice to know.  It's also nice to know that Chair Yellen acknowledged several equity market bubbles and is helping other regulators put exit gates on bond funds.  People should know these things but they prefer to remain ignorant.  Trusting some untrustworthy financial officials is going to get a lot of people hurt.

Bank of America hypothesizes that China is buying Treasuries through a European clearing firm in Belgium.  That would explain the mystery surge in Belgium's Treasury holdings that market observers noted earlier this year.  It's obvious that large holders of Treasuries will have a huge problem on their hands regardless of where they clear their trades.  They won't be able to find buyers to take large volumes in a hurry.  The Fed's bond fund gates for US investors are a message to foreign central banks.  Message received, loud and clear.

I'm pressed for time today because some Silicon Valley techies invited me to a reception down in Menlo Park.  I need to be on the road in a few minutes.  I will seek out sarcasm there but I don't expect to find much I can use, as these things tend towards proprietary discussions of business models.  I hope Models In Tech are on the scene; now those are some models I'd really like to discuss.  

The Haiku of Finance for 12/03/13

Future debt forecast
Cloudy with chance of default
Steer clear of that storm

Pricing Credit With a Global Interbank Offered Rate - GIBOR

Bankers can be as stupid as all get-out.  That should have been obvious after the recent revelations of collusion among bankers who fixed LIBOR to cook their own books and skim some quick profits.  There must be a more effective way to price short-term lending and assess credit risk among counterparties.  Let's go exploring.

Credit default swap (CDS) spreads are premiums that investors pay as insurance against the default of debt issued by an underlying company.  This is in effect a derivative bet on a company's solvency.  CDS data isn't available from conventional media sources or retail brokerages.  Investors would have to subscribe to a data service like Bloomberg Professional to get access.  That's probably a bridge too far for most folks and not every company will have debt that traders will want to exchange in CDS deals.  Companies with daily presence in credit markets need something uncomplicated and universally applicable.  I may have a satisfactory answer.

There are several widely available amalgamated borrowing rates that large investors use to price credit.  I'm thinking of LIBOR, HIBOR, SIBOR, TIBOR, and Euribor.  If I were evaluating the credit risk of a borrower, I'd use a simple average of all of these rates.  It just needs a catchy name . . . GIBOR.  That stands for global interbank offered rate.  You heard it here first.

GIBOR could even assess the health of the global financial system in the same manner as the Ted spread and LIBOR-OIS spread.  In this case, GIBOR would be the numerator and an average of several central banks' overnight lending rates (approximating a global version of a risk-free rate) would be the denominator.  A higher spread in basis points between the two means a rising price for short-term credit and increasing stress on the global financial system.

I wouldn't adjust the weight of each of the interbank offered rates by the size of their respective capital markets.  I'd weight them equally on the premise that a single overnight loan or issue of a debt security may be packaged for offer in any of those rates' jurisdictions simultaneously.  That means the issue could be immediately subject to any or all of the IBORs without regard to each market's size.  Capital markets are liquid and global.  Investment banks have the ability to reach across them instantaneously with offers.

I haven't worked out the kinks of this idea yet but it's worth a shot.  The individual IBORs are subject to manipulation but so is everything else in our modern world.  It would be much more difficult, but not totally impossible, for a participating bank to manipulate or front run all of them.  The advantage of my proposed method is that it removes credit risk from the impenetrable darkness of proprietary analytical methods or CDS data trapped in dark pools of liquidity.  Using all of the IBORs together brings credit risk into the light of day, for those with eyes to see.  Let's go GIBOR!

We've Already Passed The Fiscal Cliff

I am totally sick and tired of hearing about the so-called lack of progress in Washington on avoiding the fiscal cliff.  The activity that media outlets are passing off as initial posturing prior to serious negotiations is probably nothing more than each political party pandering to its base.  Politicians want to go on record with campaign-ready soundbites favoring more unsustainable promises just before they quietly vote to do pretty much nothing.

This past election cycle revealed that neither major party is serious about cutting spending on unfunded middle class entitlements.  The leaders of both parties in Washington have sufficient political skill to engineer a legislative solution to the fiscal cliff that does nothing more than continue the status quo indefinitely.  In practical terms, I would not be surprised to learn that Congress' leaders already have a draft bill ready for voting that does nothing more than raise the debt ceiling and extend any spending sequesters for a few more months.

The euro's weakness enables temporary U.S. dollar strength, which in turn enables the Fed's unlimited U.S. government securities buying in support of unlimited deficit spending.  That's why politicians think they can get away with business as usual.  The end of the euro, whenever that happens, will begin the countdown to the end of the dollar as the world's reserve currency.  Then it will be business as unusual when Washington will have to force financial repression on America's middle class.

The United States government passed its point of no return when its debt/GDP ratio breached 100% in 2011.  We've already passed the fiscal cliff and are now in a Wile E. Coyote midair suspension, willfully unaware of our situation until gravity turns our forward momentum into a downward parabola.

The Haiku of Finance for 08/14/12

Greece delays default
Bad loans push spiral down hard
There is no fix plan

The Haiku of Finance for 05/18/12

One more Greek downgrade
Caretakers can't stop exit
End of euro near

Defense Contractors At Risk From Pension Obligations

Moody's is saying that America's leading defense contractors are at risk from underfunded pension plans.  There is little comfort in arguing that contractors' ability to bill the government for their pension gaps will reduce the risk to their balance sheets or credit ratings.  The government's ability to pay any unanticipated pension shortfalls is limited by the total appropriations for a given fiscal year.  DOD's typical practice is to reduce Operations and Maintenance spending when it finds contingency-driven costs exceeding budgeted estimates.  Paying such a sudden request for pension shortfalls will force DOD to rob money from O&M accounts even earlier in a fiscal year than it already does.  This will place any contingency operations at serious risk and force DOD to seek even more frequent supplemental appropriations throughout the year.

This unheralded DOD accounting change will add a measurable burden to the federal government's already large unfunded liabilities.  The defense industry lobbyists who pushed for this change shouldn't gloat.  Any acceleration in the U.S. government's default/hyperinflation inflection point accelerates the day when defense contracts will be paid in hyperinflated dollars or go unfunded altogether.  The defense sector has gained hypothetical relief for its balance sheet and credit rating pressures in the face of an oncoming fiscal train wreck.  

ISDA Validates Greek Default

A default is a default, no matter whether the debtor calls it a partial exchange or something else.  The ISDA finally admits as much in the Greek situation.  It didn't have much of a choice.  If the ISDA had ignored the effect of the debt swap on existing creditors, it would have called into question its reason for being.  I've always believed that credit default swaps are meaningless and even dangerous.  Banks and hedge funds use them to place directional bets with no regard for a counterparty's solvency.  The European versions of AIG, whoever they are, can now breathe easier for a few weeks knowing they can get away with more uncapitalized CDS writing.

The ISDA's decision prevents an immediate seizure of the credit markets that would have made 2008 look tame.  The equity markets are closed and have the weekend to mull over this decision.  I contended in one of my recent blog posts that Europe's approach to resolving Greece's debt would result in slow-rolling trouble for a select number of hedge funds and banks.  Dragging things out this way prevents a cascade of simultaneous defaults provided Greece remains the only trouble spot.  The rest of the PIIGS still get a vote, and when they eventually step up to bat the world's central bankers won't be able to raise enough capital to save them all.  The final option central banks can employ would thus be hyperinflation.

So far, so good.  The few hundred central bankers, finance ministers, and their staffs running this show have done a masterful job slowing down this collapse.  It remains a collapse, because the Greek state pension funds that were forced to take cramdowns won't be able to meet their payouts for years even if government employees agree to further cuts.  That will make for a fun electoral season in Greece, with political beliefs previously thought long gone preparing for resurrection.  Remember Communism?  How about extreme nationalism?  Turn back the clock to the future.

Speaking of turning back the clock, Daylight Savings Time starts tomorrow in the U.S.  

Full disclosure:  No positions at all in any of this nonsense.  

ISDA Ignores CDS Trigger From Greek Default

There are no surprises in the transition from the rule of law to the rule of money.  Those who possess money decide how contract law will be interpreted and enforced.  The ISDA determined that Greece's debt exchange with forced principal cramdowns and term alterations does not constitute a default.  This gross misreading of CDS terms is purely intentional.  This will prove fortunate for some counterparties whose CDS payouts will not be triggered.

There is no need to wonder why some international financial leaders are supremely confident that Greece's bond swap will succeed.  They had little doubt that the ISDA would render a friendly decision.  There is little doubt that global financial elites will keep ignoring rules and laws they find inconvenient.

Consider how American policyholders would feel if insurance companies decided that this week's losses from storms and tornadoes did not constitute loss events.  The insurance companies, in a nation subject to the rule of law, would face class action lawsuits from aggrieved homeowners who would win big settlements.  In neofeudalism, the insurance companies would survive because the losses are limited to a small number of policyholders in politically unimportant areas.  The insurers would also be able to send goons to threaten any policyholders who complain.

The ISDA's decision is not far removed from something a king would do to a feudal subject just for sport.  Expect more lawlessness from financiers who pay to write laws.  

The Haiku of Finance for 01/27/12

Fitch cuts Euro grades
Risk of leaving eurozone
More ratings cuts loom

Greece Sets Its Own Hard Deadline For Default

Imagine a homicidal maniac who points a weapon at his neighbor's house and dares the police not to shoot him.  Now imagine a tiny country taking the same approach with an entire continent.  Greece is giving its friends in the eurozone exactly three months to give it more bailout money or it will abandon the euro.  Perhaps the neighborhood maniac analogy is overdrawn.  After all, the worst that could happen to Greece is immediate  forced austerity and a return to a currency with far less buying power, plus a lockout from the international bond market lasting for several years.  The damage to the eurozone would be far greater.

Greece's prospective departure from the eurozone would break a taboo against leaving the currency union.  Larger European economies would follow suit in short order; Italy and Spain are the next leading candidates to return to their native currencies.  The more important result is the immediate 50-70% debt writeoff that Greece's creditors would be forced to swallow.  European banks could no longer kick the can down the road for months on end in the hope that indefinite bailouts will continue.  The daisy chain from a Greek default, to European bank defaults, to insolvency at American banks holding European bank debt, to a failed U.S. Treasury bond auction from capital-starved American banks would be swift.  

This announcement from Greece marks the first hard deadline set by the only party that really matters - the one with its finger on a debt trigger.  The trigger-puller has a target rich environment with U.S. high-yield bonds already expected to see a rise in defaults even when interest rates remain at record lows.  The technocrats running Greece are not couching their threat in language designed to placate local politics.  They are fulfilling their Eurocentric mandate by speaking truth to power in Brussels.  

The Haiku of Finance for 10/11/11

Greek debt hard default
Hurts Europe and Germany
Maybe for the best

The Limerick of Finance for 09/25/11

If Europe's rescue fund does expand
It will give Greece a big helping hand
But it may be too late
Italy just can't wait
Its default would break up Euroland

The Limerick of Finance for 07/24/11

Now deficit talks just broke down

Debt default is the talk of the town
Treasuries aren't risk free
Just how much, we shall see

Dollar will lose reserve status crown

Deficit Talks Crash, May Crash Markets Too

I'm not prone to apocalyptic thinking.  Life goes on for most of us no matter what unpleasant surprises come along.  Here's a surprise that won't make life better for Americans.  Bipartisan deficit cutting talks have broken down, and the financial markets are starting to price in the possibility of a U.S. debt default. 

It didn't have to be this way. Politicians could have bit the bullet the bullet in countless ways but grandstanding for next year's elections was more important.  World War I started with a similar series of strategic miscalculations.  Now the global bond market will find out just how risk-free Treasuries really are.  Mutual funds and state pension funds that have to sell off Treasuries in anticipation of a ratings agency downgrade will be the first dominoes in a worldwide cascade. 

The long-dreaded run on the U.S. dollar is almost here. Brace yourselves.

Europe Chooses To Ignore Greek Reality

Central bankers and financial regulators must think they're living in an alternate universe where arithmetic doesn't apply.  The EU and IMF have agreed to release loans to Greece after all, with no discernible progress towards even minimal controls on that country's profligacy.  Continental regulators are doing their part to aid and abet this insanity by ignoring the gaping holes a Greek bond default will blow in European banks.  Stress tests are nothing but meaningless finger drills. 

Europe is really pushing its luck.  These moves give the trans-Atlantic ruling elite more time to sell off their remaining insider holdings under the guise of routine diversification.  Just listen to those golden parachutes unfurling in the breeze with plenty of room to spare.  China undoubtedly watches this action with dismay, regretting its decision to go long European sovereign debt in pursuit of a political lever.  The recent cyberattacks on the IMF appear in a new light now.  Was the IMF warned to prop up European debt or else face the wrath of Asian traders and cyberwarriors?  Stay tuned for the next chapter in a centuries-old drama. 

Greece Rating Cut, And The First Domino Is Tipping

S&P just cut Greece's sovereign debt rating to triple-c, and that is not at all the kind of Triple Crown race you'd want to win.  At least the Greeks beat the other PIIGS to the bottom, so they should get a prize of some sort (maybe a Grecian urn with the ashes of their country's economy stored inside). 

This shouldn't be funny.  There's nothing funny about the coming Greek default and the chaos it will cause when it pulls down European banks that hold Greek debt.  There may be something funny about Greek chaos reducing oil prices just as certain OPEC members are preparing to raise production.  Any prop traders who recently bought CDS swaps on Greek debt or went long oil futures are going to get burned badly in short order.

The first domino in the chained collapse of European equity markets and the euro itself is about to tip over.

The Limerick of Finance for 04/17/11

The debt limit will soon be raised
And the bond market will be amazed
Bond buyers will run
Debt default won't be fun
Citizens ignore this, they're unfazed

Deficit Commission Hints At Pain To Come

The blue-ribbon panel charged with giving Uncle Sam a way out of his indebtedness hasn't quite finished its report but its leaders are launching their biggest trial balloon yet:

A proposal released Wednesday by the bipartisan leaders of the commission suggested cuts to Social Security benefits, deep reductions in federal spending and higher taxes for millions of Americans to stem the flood of red ink that they say threatens the nation's very future. The popular child tax credit and mortgage interest deduction would be eliminated.

Such clear thinking is rare in Versailles-on-the-Potomac, which is precisely why these proposals won't be adopted until the bond market forces America into action.  Cut the child tax credit?  Joe Six-Pack will be mad that he's no longer being subsidized to bring more squealing mouths into the trailer park.  Eliminate the mortgage interest deduction?  No way will the homebuilders lobby tolerate that.  Cancel Grandpa's Social Security and Medicare?  Run that by the AARP and watch the TV ads scare the bejeezus out of everyone at the old folks' home. 

Americans will react to this with a snore but that's okay because our rulers know us all too well.  They'll print money until one day when annual inflation is at 25% and Grandma's Medicare Part D isn't enough to pay for her meds.  When that day comes, we'll need a new enemy to distract us from our problems and provide a ready rationale for sacrifice.