The Haiku of Finance for 05/31/23

Vote on debt ceiling

Markets await the outcome

Everything at risk

Financial Sarcasm Roundup for 02/12/16

I had a busy day today. Important things demanded my attention. I read a whole bunch of very interesting material. I barely have time for sarcasm right now, but I make time.

The Federal Reserve's chair does not wish to be blamed for stock market turmoil. What a bunch of hooey. The Fed's ZIRP has done more to misprice securities valuation than anything else it has done in its history. Normalizing rates sooner would have depressurized the stock market without all of this pain from unsustainable gains. Other central banks took off with variations of the Fed's approach and now we see China's collapse hurting other markets. Way to go, banker gnomes.

Europe's sovereign debt market is seriously stressed. I wouldn't be surprised if some random announcement from one of the PIIGS' finance ministers makes the whole tamale implode. Suckers bought European government bonds and will soon eat their losses. The ECB's dollar swap line agreements with the Federal Reserve were an open secret among Transatlantic bankers in the last crisis. The rest of us won't find out for years just how much credit the Fed has given the ECB to support its bond purchases now.

I just did a Google search of "leveraged ETF" to see that these stupid products are more popular than ever. Investors chasing these things and advisers pushing them obviously can't do the math on daily leverage calculations. The best hope for sanity is a market crash that wipes out the 2x-3x bullish ETFs combined with a credit crisis that destroys the liquidity of bearish ETF sponsors. Brokerages programming their robo-advisers use passive ETFs without leverage for darn good reasons.

I should be busy tomorrow. I continue to ignore losers who demand my attention because I only have room on my calendar for winners.

The Limerick of Finance for 01/17/16

Davos gathering is on edge
Market turmoil is harder to hedge
Some elites are in shock
Populists broke the lock
Long-held notions are tossed off the ledge

The Haiku of Finance for 07/13/15

When nations collide
Creditors destroy debtors
Pain of a country

Financial Sarcasm Roundup for 06/30/14

Sarcasm is all around us, much like the Force in the Star Wars saga.  It permeates everything.  All living creatures, inanimate objects, and natural phenomena contain sarcasm.  I only address sarcasm in the finance sector.

China removed its foreign currency interest rate cap in Shanghai.  That tells me just how excited the PBOC is about enticing foreign investors to prop up Chinese banks.  I've covered China's precarious shadow banking system and fragile WMPs in past articles.  Foreign investors chasing cash yields in China are suckers.  Most conventional analysts will celebrate this move as a successful innovation pioneered in the Shanghai FTZ.  They have to cheer on the remaining China bulls in the West.  Anyone who forgot the sky-high cash yields available in Cyprus prior to that country's crisis will ignore similar conditions in China.  

A US federal judge blocked a payment Argentina was scheduled to make to US bondholders.  Sovereign immunity usually prevents these types of maneuvers from creditors but savvy US hedge funds have figured out how to use lawfare to extract full payments from Argentina.  The risk these hedge funds take is that blocking a partial payment to all of its bondholders, both exchangers and holdouts, will push Argentina to default.  I cannot know whether the holdouts relish the prospect of competing investors in the exchange group getting hurt first, but the thought of hedgies salivating at the chance to destroy competitors is the type of behavior I expect from people used to getting their way.  Argentina wouldn't have to worry about committing half their currency reserves to debt service if they hadn't messed up their economy so badly with hyperinflationary policies.  Buying debt from countries with a history of default and mismanagement is a fool's game but many fools on wall Street are determined to play it.

The BIS warns central banks that they must end their freewheeling experiments with money.  The bank gave the same warning last year and hardly anyone caught it - except me, of course.  I even mentioned the BIS's graphics during my talk at the San Francisco Money Show in 2013.  The BIS also helpfully names China as the country leaving its borrowers most vulnerable to rates.  Go back up to my comments on China's interest rate liberalization to see why they want to attract deposit money so badly.  The IMF in particular has made it a point to ignore warnings while it pushes the ECB into stimulus beyond its legal mandates.  Central banks playing catch-up behind rising real rates will demonstrate their impotence to stop either higher rates or currency devaluations.  There's even a helpful BIS warning about PIIGS home bias for sovereign debt, which will of course come back to haunt those countries when the next crisis hits their banks with more sovereign debt defaults and currency devaluations.  

The preppies and trust fund babies running most Wall Street firms all read the above news items to look busy.  They don't grok the insights or reduce their exposure to obvious threats.  That's okay.  I want them all fired and bankrupt when the pro-cyclical policy dysfunctions I've cited above destroy their AUM.  The BIS is correct and a lot of stupid people are wrong.  

The Haiku of Finance for 03/18/13

Cyprus bailout theft
Precedent for more stealing
Nothing is safe now

Cyprus Bank Deposit Levy and Natural Gas Bonds

Cyprus' president has pledged to cover the value of its imminent savings deposit levy with an equivalent value of natural gas bonds.  It's hard to say whether Cypriot savers should take this promise seriously without some analysis of its viability.

Let's use the European bailout sum for Cyprus of US$13B as a proxy for the amount of savings about to be confiscated from Cyprus' resident depositors.  I need a proxy because I have no idea how much the government of Cyprus will actually collect from this levy.  The natural gas revenue needed to back the bonds that would make savers whole would likely come from the Aphrodite field.  Title to this field is unclear; Turkey has made a competing claim for the sovereign right to control drilling.  There is currently no pipeline from Cyprus to either Turkey or Crete which could deliver the gas to market; that would cost US$1B to build and Cyprus has no money.  Building a $10B LNG terminal is ten times as unlikely, because Cyprus is still broke.  The energy supermajor that ends up building it will get the lion's share of the revenue from the gas field as compensation for its costs and will have to deal with the likelihood of being shut out of other projects in Turkey.

The lack of drilling and delivery infrastructure means that no Aphrodite gas will go to Europe until 2018 at the earliest.  A lot can happen with the price of natural gas in five years.  The wide availability of shale gas in the U.S. will keep the price down in North America.  Europe's need for gas is met mainly by Russia, and Gazprom can adjust its rates at will to pressure Russia's neighbors.

There is no single European energy market and the price of natural gas by country varies widely.  The caloric value of natural gas is about 1000 BTU per cubic foot (cf), so this gives us a way to find the value of the Aphrodite field if we have a single market price.  I will use the U.S. price because the CME trades the Henry Hub futures market in natural gas, giving this particular commodity some price predictability for several years.    BTW, that's the instrument that global hedge funds will use to speculate on gas prices and that energy producers will use to hedge delivery contracts.

The current U.S. natural gas Henry Hub spot price is $3.72 per million BTUs.
The Aphrodite field contains an estimated gross mean average of seven trillion cubic feet (i.e., 7 tcf) of natural gas, according to Noble Energy.
Math:  ($3.72 / 1M BTU) x (1000 BTU / 1 cf) x (7 tcf) = $26.04B total present value

The good news for Cyprus is that the total value of their natural gas discovery is about $26B, twice the value of what Cyprus is expected to receive in the bailout.  This begs the question:  Why didn't Cyprus just pledge the value of its gas field as collateral for the bailout instead of giving in to Brussels' demand that they shake down depositors?  Brussels may trust cash up front more than the expected future value of gas revenues, given the competing sovereign claims and lack of infrastructure.  A bird in hand is worth two in the bush.

The savings levy itself is not quite a done deal until a majority of the fractious Cypriot parliament votes for it.  This will be fun to watch.

Financial Sarcasm Roundup for 12/03/12

My sarcasm spews forth in a torrent of verbiage.  It will cease when I am no longer alive.  No one can silence me; many have tried and none were successful.  I am genius personified.

The fiscal cliff nonsense continues unabated and the non-Beltway media personalities hyping this non-event can't see through the smoke.  Republicans say they want big cuts in Medicare and Social Security.  That position is for the benefit of home audience voters, just as the President's opening offer of massive tax increases on the rich was for the benefit of his party's base.  The intractability of both sides' positions isn't a signal that they can't agree.  They have agreed to disagree for years while raising the debt ceiling time after time.  The dollar's reserve status and the Fed's bond buying have enabled this charade to continue.  Whatever 11th-hour legislation is needed to keep kicking this can has already been drafted and merely awaits some signal from both parties' Congressional leadership that they've "given up" on negotiations.  The can-kicking bill will then fly through a joint session at warp speed and the President will sign it with a wink and nod.  Presto, crisis avoided.  Our elected leaders have done this many times before and are practiced hands at getting it done.  They will continue this behavior until the bond market rejects dollar-denominated sovereign debt.

Europe's leaders have obviously been taking notes on how to avoid solving fiscal problems.  The Continent's finance ministers are coming up with some very creative ways to pretend to bail out Greece.  Athens continues to oblige them with creativity of its own.  I believe Greece will have no difficulty forcing some hedge funds to disgorge the Greek sovereign debt they own at far less than 30% of face value.  All of the cards are on Greece's side in this game; Greece can walk away from buyback talks and immediately tank the secondary market for its debt.  Athens can risk panicking its EU/IMF creditors for a few days because that's all it will take to force hedge funds back to the table.  The half-life of a hedge fund's margin call is a lot shorter than a European finance minister's conference call.  Quite a few hedge fund managers are about to learn that they were too smart for their own good.  The only winners might be the ones who took out short-duration CDS spreads in hope of a blowout.

The European ministers' negotiating leverage with Greece is also deteriorating.  The credit ratings of their bailout funds are in perpetual jeopardy.  Greece knows it can force further downgrades just by making some aggressive noises about noncompliance.  The mechanisms' credit ratings downgrades do not mean Europe's bailout artists will be unable to borrow.  The Federal Reserve's unspoken arrangements will see to it that the funds' coffers are filled, with the U.S. central bank demanding a higher risk premium as appropriate compensation.  This is why the European ministers hold the weakest hand in these multilateral negotiations.  They are simultaneously subject to Greek threats of nonpayment and American threats of higher costs for dollar swaps.  The financial media reports the tips of icebergs.

Sometime next year I'll be laughing very hard at a lot of broke money managers who went long Greek bonds, long the euro, long China, long U.S. housing, and long other things.  I just continue to marvel at how high the ruling elite can stack its house of cards.  They're quite skilled but not omnipotent.

The Limerick of Finance for 09/30/12

Euro leaders face heavy unrest
Unity will be put to the test
Countries that have no cash
Will see their bonds crash
It's no plan to just hope for the best

Germany Converts To Pro-Euro Push

Well, color me surprised.  Germany has just pulled out all the stops in favor of saving the euro, with every wing of its ruling elite throwing in behind the currency.  Frau Merkel has reversed her iron-clad austerity posture and given the signal for Germany to dig in behind the single currency.  The EU is moving ahead with continent-wide bank regulation, impossible without German concurrence.  Even the judiciary is falling into line, with the German constitutional court removing some serious legal obstacles to Germany's endorsement of the European Stability Mechanism.

What in the world is going on?  What made Ms. Merkel change her mind?  And what kind of pressure did she put on the rest of her government to do so?  Somehow all of the stars have lined up to enable Germany to keep underwriting the inability of Greece, Spain, and Italy to meet their sovereign debt payments with real cash flow.  Perhaps Germans are now more afraid of losing their export markets than they are of losing their credit rating.  Perhaps they've even forgotten what the Weimar Republic hyperinflation did to their country and its place in the world.  Or perhaps, as hinted in the article about Ms. Merkel's attitude change, she got sick of U.S. meddling after too much shuttle diplomacy from Tim Geithner and friends convinced her that U.S. support from dollar swaps and other methods aren't worth the geopolitical price Germany would have paid.

I can't wonder about motives; I should now consider effects.  A speedy downgrade in Germany's sovereign credit rating is now likely, which will make it more expensive to borrow sums that support further loans to deadbeat countries.  The Germans are about to learn what national-level vendor financing on subprime credit terms will do to the vendor nation's economic viability.

The euro has some life left in it, only because Germany is now willing to sacrifice its own precious fiscal solvency to keep its southern export markets afloat.  The crisis is delayed once again, with final resolution (and dissolution) now postponed into 2013.  I've gotta hand it to these Germans.  They have forestalled a short-term crash in the euro, exchanging it for a much more painful crash later and ensuring their own finances will be severely hurt.  That is a very high price to pay for another year or so of strong current account inflows.  

Rhetoric And Reality In 2012

I've listened to what the major party candidates have said in the past couple of weeks.  They deserve our attention and respect.  I do respect their intentions for America, but understanding their plans requires me to parse the rhetoric from their convention speeches.

The main themes I heard from either party touched the grievances of the middle class in an America increasingly bereft of upward mobility and income security.  The Republicans tout seriousness about balancing the federal budget, but it's easy to find independent analyses of how the numbers don't add up.  The Democrats remind us of the automobile industry's bailout but ignore the financial loss the federal government still incurs.

The rhetoric about saving Medicare for future recipients is necessary for votes but mathematically impossible without serious benefit cuts and cost controls.  The rhetoric about making college affordable is useless in an age when more unqualified students take on crushing debt loads and then settle for low-paying jobs.  This rhetoric will set voters up for inevitable disappointment.

There is no intent at present, in Washington or elsewhere, to resolve the federal government's untenable fiscal condition.  The fiscal cliff at the end of 2012 is the last opportunity for our national leaders to accept the necessary short-term pain that will preserve whatever shreds of credibility that U.S. currency and sovereign debts have in the eyes of the world.  Whoever is President in January 2013 can attempt to navigate the country over that cliff and prepare it for the long, hard slog afterwards that leads to a balanced budget.  The alternative is business as usual, which IMHO will postpone fiscal sanity until after a hyperinflationary depression has made further tricks impossible.  That outcome is an event horizon beyond which something unfamiliar to our national character can emerge, to our collective detriment.

Forget the charges of gender wars and missing birth documentation.  Rhetoric doesn't matter.  Reality is unavoidable.  A balanced budget would be as real as it gets for America.

CBO Sounds Off On Fiscal Cliff

In case you weren't aware that the U.S. government is in poor financial condition, the Congressional Budget Office issued a new warning that automatic fiscal discipline will cause a recession in 2013 unless Congress passes a sensible deficit reduction effort.  Warnings like this are easy to turn into political cannon fodder but miss the larger implication of fiscal discipline.  The patient must take the medicine at some point, and it is better to do it immediately than postpone treatment into the indefinite future when the consequences will be even more severe.

The Fed's propensity to act in the absence of Congressional action is now more pronounced.  The Fed issues ever clearer statements of intent and there is now silence from anti-inflation hawks.  The last two rounds of quantitative easing had progressively diminishing effects.  If QE3 is launched before the November elections, the equity market pop might last a few months but fundamentals like factory orders and consumer confidence won't move much.  Agricultural commodity prices are already high thanks to a record U.S. drought, so juicing price inflation with no corresponding wage growth will not bode well at all for the holiday shopping season.

Europe offers us an abject lesson in crisis non-resolution.  The Continent's geopolitical power suffers as its sovereignty crunch continues without firm solutions.  The decisive answer for Europe is to remove incompatible countries like Greece from the currency union.  A decisive answer for America would be a fiscal agreement that is serious about deficit reduction.  A firm agreement can fall short of the penalty imposed by a fiscal cliff but must be serious enough to show equity markets that the U.S. possesses leaders willing to risk short-term pain for long-term solvency.  

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 07/20/12

Spain bond rates go up
Despite German payment vote
No bailout will work

Financial Sarcasm Roundup for 07/09/12

Prepare yourselves.  I'm about to spew more bile on the business world.  Here we go.

One Eurocrat wants to outlaw Libor manipulation in the wake of revelations from Barclays et alia that they were playing games with interest rates to avoid going bankrupt.  Outlawing interest rate manipulation by bankers would be kind of like outlawing the breathing of air.  It's what bankers do.  It's such a natural state of affairs that central bankers give it a wink and a nod.  Here's a better idea:  Instead of restricting Libor's bidding process, make it transparent by putting in on the European Central Bank's website in real time.  That way no one's in the dark.  

Europe has more to worry about than fallout from this Libor debacle, like how to pay bondholders while sticking it to their taxpayers.  A bunch of Continental ministers are going to meet one more time to pretend to solve their countries' insolvency woes.  I think they just get together for the great food and champagne, and to reminisce about past World Economic Forum junkets where Bono hectored them on economic development.  Germany knows that Spain and Italy can't afford to raise more debt but they don't want any net importing countries kicked out of the euro.  That's Germany's problem in a nutshell, and that's why every German politician of note has been using double-talk to stall for time.  The "Davos culture" of transcontinental elitism may survive in salon format but its inability to solve real world problems makes me wonder whether it's worth going that far just to eat steamed lobster.  

Meanwhile, here in America, things are also going down the tubes.  The Administration wants to extend tax cuts for the bottom 99%.  That's okay but I wish it could be accompanied by serious tax code simplification.  It's smart politics to get this out of the way now so raising the debt ceiling doesn't get hung up by Election Day.  What's not okay is that corporate earnings are about to get a lot worse if pre-release guidance is accurate.  This isn't just the usual CFO parlor game of lowering expectations just to beat Wall Street's estimates.  There are real headwinds now from slowing European growth, Chinese inflation, and anemic job growth here in the U.S.  I don't pay attention to Wall Street analysts anyway but they should pay attention to me.  

Finally, Dr. Doom weighs in on the approaching perfect storm.  This storm has been brewing through decades of debt-induced overspending, infrastructure malinvestment, and unsustainable middle-class entitlements.  I say bring it on.  My Alpha-D portfolio can navigate the mightiest of macroeconomic winds, unlike the asset allocations of many whiz-kid hedge funds that will probably be wiped out.  Many fortunes were made in the first Great Depression by people who stayed solvent and bought at the bottom.  

Have a nice day!  :-)

The Haiku of Finance for 06/06/12

Spain, Greece almost broke
Fed swap lines ready to loan
Ben wants to push "go"

Hot Summer 2012 Looks Like Economic Annihilation

Holy canole, things are starting to slide.  Spain gave the world a gentle hint today that it can no longer borrow in world bond markets and would pretty please like Germany to put its good credit behind eurobonds. You'll have to speak up, Spain, because Germany is still pretending not to hear you give notice of default.  They get that way sometimes.

Germany is also going to get an earful from Greece, again.  The Greeks are one month away from going broke, again.  The death spiral of austerity has a firm grip on Greece and cuts in government spending are generating positive feedback loops that are sinking the economy and tax revenue.  I've had personal experience drinking German beer and Greek ouzo and can attest that both are sufficiently strong for the leaders of those respective countries to self-medicate their way through tough times.

Germany should stop listening to these deadbeats anyway.  Its economy is really hurting now that its client states can't afford to buy German-made stuff after implementing their austerity measures.  Oh well, less German beer exported means more German beer available at home for volks to self-medicate.

The G-7 pledged to do something.  Their finance ministers have burned up lots of frequent flier miles and free long distance minutes this year with no progress toward getting Europe off the floor.  I'll hazard a guess that they agreed to let the Fed do the heavy lifting since Europe can't get its act together.  The only things I need to know are the size of the Fed's dollar swaps with leading European banks and whether the U.S. will push some inflationary transmission mechanism onto the U.S.'s systemically risky banks.

Speaking of systemically risky U.S. banks (and you know that turn of phrase is one of my favorite segues), the TBTF banks still don't take risk seriously.  The OCC can't figure out whether JPMorgan's risk management controls are real or imaginary.  The controls are probably as real as you can get when writing them with a stick on a wet clay tablet.  TBTFs won't have much time for controls anyway if they get busy pushing hyperinflated dollars into weird new loan programs for Americans.  All the Fed needs to do is give the banks the "go" codes.  The Fed is already thinking about whether things are bad enough to require QE3, Operation Twist, or whatever.  Helicopter Ben can't wait.  The Fed's June meeting can't come soon enough for him.  Hyperinflation is the most likely policy option with Washington too paralyzed to enact the requisite tax and spending fixes.

I really have to hand it to those hedge fund managers who were stupid enough to go long the euro, European sovereign debt, European bank shares, U.S. sovereign debt, and U.S. bank shares in 2012.  These preppies take stupidity to a whole new level.  

The Limerick of Finance for 06/03/12

Germany wants EU plan that's bold
Spain's in debt and chimes in as it's told
This plan just won't fly
Voters need to ask why
Fiscal union is what they'll be sold

The Probable End Of The Euro

Plenty of market commentators are all over the trouble Greece is giving the euro.  Even the EU's leadership is now openly admitting the need to prepare for Greece's departure from the Eurozone.  The strongest remaining Eurozone nations will face difficulty selling debt if they continue to insist on backstopping their deadbeat neighbors.  Witness Germany's new zero-interest bonds; investors' tolerance for zero interest won't last long if Germany can't let Greece leave its cage.  The EU has probably already laid contingency plans and so has the Fed, but the rest of us not in the know won't hear about them until after they're executed.  My best guess is that the next round of EU / IMF financing will bypass Greek banks entirely and go to Spanish and Italian banks exposed to the sovereign debts of their respective countries.  This is a risky bet that Greece (and maybe Portugal and Ireland) can be triaged from the euro.  Future financing rounds have probably also incorporated dollar swap lines from the Fed, which of course we won't hear about either until this next crisis is long past.

I'm not staking my own capital on any question of whether the EU can afford to let any of its southern economies leave the currency union.  I'd rather focus on the effects outside Europe.  Any shock to the euro from sovereign defaults and bank runs on the Continent will make the U.S. dollar look pretty dog-gone good as a reserve alternative.  That sunshine will last until whatever fiscal cliff in the U.S. - from expiring tax cuts, sequestered spending, and what not - sparks a run on the dollar worldwide and a spike in U.S. short-term interest rates.  The U.S. may hit its fiscal cliff in early 2013 or may muddle through for a while longer, as the Eurozone has done to my continual amazement.

I have no plans to go anywhere near U.S. stocks or bonds in anticipation of this mess.  My preferred hiding places are going to be the currencies of countries with fairly low debt-to-GDP ratios, specifically Canada, Australia, and New Zealand.  

The Haiku of Finance for 04/18/12

IMF gets cash
More countries throw money in
In time for Spain's crash