Category Archives: European periphery

Selling England by the Pound

“Can you tell me where my country lies?”
said the unifaun to his true love’s eyes.
“It lies with me!” cried the Queen of Maybe
– for her merchandise, he traded in his prize.

“Paper late!” cried a voice in the crowd.
“Old man dies!” The note he left was signed ‘Old Father Thames’
– it seems he’s drowned;
selling England by the pound.

Citizens of Hope & Glory,
Time goes by – it’s the ‘time of your life’.
Easy now, sit you down.
Chewing through your Wimpey dreams,
they eat without a sound;
digesting England by the pound…

I found the title of one of the early Genesis masterpieces particularly appropriate today. It was a long time ago, but I must have listened to the music at least a hundred times. Peter Gabriel, the unequivocally Brit lead singer and flutist, who was to leave the band months after the promotional tour, suggested the title and wrote the lyrics -as (nearly) always was the case. It is a metaphorically loaded lament on the destruction of the UK’s cultural heritage. At the time, the “enemy” was Americanization -but it could very well have been directed against Germanization or Europeanization nowadays. Colossal singing for the first two minutes, followed by impeccable, but somewhat aged, British-flavored homemade rock.

The “Brexit” referendum victory was hardly a smart voteBut it was a wise vote -even if entirely for the wrong reasons. Populism, Xenophobia, Class war, and tabloid supported nationalism implicit in headlines like “I beLeave in Britain”, are hardly desirable drivers for any vote, and those emotions were key to the outcome. Of course, if you are on the lookout for some evidence of voter wisdom, it pays to remember that famous Churchill quote about the main argument against democracy (a five-minute conversation with the average voter).  That is what democracy has to offer, and it is not a prerogative of the UK voter. Look at your own country for more of the same. Democracy is one of our global problems. Up to now, nobody has come up with a palatable solution.

Some more pain is still to come, and the City has been placed in the proverbial spot between a rock and a hard place. But it was, nevertheless, a wise long-term vote. I can cite two basic motives (that most standard UK voters are not even aware of) to support the “wisdom” epithet.

In the first place, the EEC is a sinking ship, and the euro disaster that must take fault as the main cause for the inevitable shipwreck is undoubtedly not Britain’s responsibility. So, why should they tie themselves to the ship deck and go under for something they were not even a part of. The euro is a huge Ponzi scheme where exporters lend importers the money, in exchange for keeping the buying up. Everybody is happy in the short run, but layers of irredeemable debt accumulate, until the total bankruptcy of the system. You are better out of that as soon as possible. Yet it is understandable that it makes the rest of the players uneasy about their own exit before it crumbles. Still, you want to go before the vortex of the sinking ship sucks you down with it. It is not an act of cowardice, but rather an act of prudence.

20160615_out1Brits did not suggest the euro, and never wanted anything to do with it -or with the credit boom and the macro disequilibrium, it generated in the periphery. And they did not profit from it either. If anything Sterling’s PPP has always come up as expensive relative to the euro cross, for the last couple of years. That shows in their trade balance -showing a deficit not far from 5% of GDP in their trade with the rest of the Union. They not only refrained from begging any of their neighbors, but are being used by their neighbors as a convenient goods market (services, and particularly financial services, are another matter).

Decoupling and navigating away from the Eurozone is a wise financial move. The Club Med countries are a postponed bankruptcy (they were a basket case long before that anyway). It makes sense to move away, annoying as it must be for Germany -that would like others to share the problem of financing the subsidies in the south. Why should Brits cooperate? After all, it is Germany’s interest to maintain their export markets, and preclude an episode of abundant German Banks going under together with the periphery bust. Think Deutsche Bank. Continue reading

As time goes by.

The human race is an inherently emotional species. We were told that our origins are to be found in the “homo sapiens”, but, regrettably, no definite proof has been found. What’s more, anecdotal evidence piles up every day to suggest otherwise. We still have a ways to go before peak knowledge, but peak wisdom is, without doubt, something of the past. Let’s see if we can make wisdom a bullish market again, sometime after this effervescent madness settles down.

Herd behaviour, groupthink, and emotional conduct, are the pillars of our daily activities and desires. That is the main reason to be mindful of the consequences of shouting “fire” in a crowded cinema. Not one out of every ten will try to corroborate the information. Provoking stampedes is easier with humans than it is with Buffalos. Herd and human behaviour are becoming a synonym.

Politicians are aware of that, so they talk soft, and use whatever information they get from the market (well, nowadays the daily price fix of goods or investments that simulates a market), or society, to their convenience. And their convenience is “extending and pretending, as much as they can, for as long as it lasts”. They are not wise or honest, but they are not stupid either.

Politicians and Central Bankers are cognizant of the structural weaknesses of their model. They know the issues that can spoil the “extend and pretend common knowledge” game they are in:

  • Inequality and the ensuing social upheaval to cater for.
  • A domino of debt write downs, if the sustainability and thus validity of debt as an asset in balance sheets, is put to question.

How are they handling them?

  • Inequality and poverty have to be kept at bay. Entitlements and welfare are the drug that masks the symptoms of a notoriously unfair society. They can’t afford to mark them down to market (tell society that there is no way that the actual economic output will be able to finance those future costs, and has to lower them).
  • Debt has to be perceived as sustainable, so they have to print to death, and preserve the ZIRP and NIRP environment that keep the financial costs of the unpayable debt as low as possible. Printing also collaterally serves the purpose of helping finance the subsidies and welfare they need in order to ward off public protest and violent mass behaviour.
  • Markets have to be tamed (read supressed), to prevent their instability, and continue to keep alive the positive message embedded in the common knowledge game: CB’s will assure us endless prosperity no matter how much they have to print, or NIRP around. Or do whatever it takes.
  • Volatility and risk premiums should be outlawed, and while they are at it, supressed in practical terms.

Versailles 1919Greece is the poster child for the developed world.  In a nutshell, the second Versailles treaty in history is the victory of the policies that protect the second issue (debt sustainability), versus policies that protect the first (subsidies and entitlements well above society’s means). It’s not that one flank is more strategic than the other. The real Greek drama is that debt sustainability is in the interest of creditors, while fairness and social peace is in the interest of common people. Needed to know who would prevail?

It is to be expected that, in exchange for conceding to “extending and pretending” the sustainability of Greek debt, creditors are aware that they will have to give the mob some “bread and butter” in order to feed them, and pay for the maintenance of the status quo. Let’s hope there is still some memory cells left in German brains. I doubt it. Human memory is short lived. I expect no more than a few token financial aid kits. It would be the same result, the other way around, because magnanimity and wisdom usually pair together, and we are definitely short of them both, regardless of who happens to be at the top of the food chain at that particular time in history. Continue reading

Timing the top.

Kobe Bryant

Kobe Bryant

The challenge of a life time. Now I know how Kobe Bryant feels, when his teammates hand him the ball with just a few seconds left on the shot clock. With no time left to create a better choice, he just has to get lucky on a miracle shot.  Financially speaking, after years of market manipulation -if not outright deception- by central banks, it’s really now, or never. Last chance to make big money with this new, last super bubble of the lot.

Oh yes, there will be a market after this top, but it will be an illiquid one, with limited chances of making big money. Cleaning up this credit bubble is going to take a long, long time. This next top is, as Warren Buffet would put it, the fat pitch we should have been waiting for. I know most batters have been swinging at pitches lately, and they made money with this market in the interim. Good for them; but I disagree with the risk-reward targeted. Risk didn´t materialize, but it was there all the time. Unlike in baseball, there is no penalty for being patient in investing. As I grow old, my patience improves daily. Nothing else does.

This top is going to be “the mother of all tops”. And it will come, as sure as night follows day. It is keeping me awake some very long nights. As Herb Stein stated,“If something cannot go on forever, it will stop.” ¿When? In order to get the three points from the Kobe Bryant last nanosecond shot (make money shorting the next market top), we need luck, and even then, a lot of aspects around the trade have to be perfect.  Two elements have to be right: precise timing, and determining if the first top will be in bonds, or stocks.

Of course, all aspects to consider, interact between themselves, in order to make things as complex as possible. The market is a bitch. First and foremost, precise timing is crucial. A correct predefinition of the macro aggregates to watch, simplifies the problem enormously (if correct!). Then there is noise to account for, and behavioral market player considerations. The POMO desks of the Central Banks manipulating everything they can, as much as they can, for as long as possible, are also to be considered. And it’s a dog fight. It will be their last stand in the current credit expansion. Continue reading

Follow the money

Pocos años antes de su muerte, en una entrevista reproducida por la prensa económica, alguien preguntó a Milton Friedman sobre la evolución futura de los precios bursátiles. La respuesta fue cortante y clara: Follow the Money.

Visto lo visto, y a salvo eventos que rompiese el “common knowledge game”, centrado en el put público y simultáneo de la mayoría de los bancos centrales de occidente, el consejo del amigo Milton fue bueno de verdad. Sigue la creación de dinero. Compra cuando se crea masa monetaria, y vende cuando y donde se contrae. Obviamente ese consejo no funciona en los Minsky moments, o en un momento de pánico por un cambio estructural en el common knowledge game, pero funciona en todos los demás (que son mayoría).

Si alguien gestiona carteras profesionalmente, y tiene que pagar la hipoteca mensualmente (los mantenidos o rentistas son caso aparte), no debe obviar este magnífico consejo. Funciona casi siempre, y cuando no funciona todos están en el mismo barco. Y ya se sabe, haya pasado lo que haya pasado, el evento era un “black swan”. Hay que ver lo que se ha extendido esta raza. A la que hay una corrección profunda de los mercados, nadie la pudo prever: era un cisne negro! Cómo no va a aumentar la población de cisnes negros. Cualquier otra opción de conducta financiera por el “asset allocator” siempre comporta un “career risk” que es del todo inaceptable. Como dijo el entonces “príncipe” de Citibank, “While the music is playing, you´ve just got to get up and dance”.

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