Global financial system implosion begins

[brogdale]

..and the Swiss have moved their base-rate to -0.75...they really must have been expecting a significant flow into the CHF after the ECB's QE.

 

[treelover]

The Swiss National Bank have this morning effectively 'left' the Eurozone, to which they had pegged the ChF for the last three years, and floated with a consequent surge. Some commentators are seeing this as a reaction to being tipped off by the ECB that the expected Euro QE is going to be bigger than the markets forecast...and hence the SNB would not have had the resources to match.

Quite big stuff...apparently.

In very simple terms, what does this mean for the global econonomy, but especially Europe?

 

[brogdale]

In very simple terms, what does this mean for the global econonomy, but especially Europe?

I really wouldn't claim to be able to forecast tbh...but to some commentators it looks like an indication that the ECB are going to have to splash a large dose of QE about to avoid increasingly deflationary pressures in the EZ...and the Swiss wanted out before the SHTF.

Spanish 'inflation' = -1.0, as of yesterday.

 

[Barking_Mad]

Are we dead yet?

 

[ferrelhadley]

Are we dead yet?

Valar morghulis.

 

[toblerone3]

Valar morghulis.

.

 

[brogdale]

Are we dead yet?

....in the long run?

 

[yield]

I really wouldn't claim to be able to forecast tbh...but to some commentators it looks like an indication that the ECB are going to have to splash a large dose of QE about to avoid increasingly deflationary pressures in the EZ...and the Swiss wanted out before the SHTF.

Spanish 'inflation' = -1.0, as of yesterday.

Three days out, Bundesbank striving to put limits on ECB money-printing
Reuters Mon Jan 19, 2015

Although the Bundesbank's position within the ECB carries huge weight because Germany is the bloc's biggest economy, its allies are few in number on the 25-strong Governing Council.

The Germans are still haunted by the hyperinflation of the 1920s. There's that theory about deflation precedes hyperinflation.

Six years on and still on life support.

Boss of UK hedge fund Weavering convicted in fraud case
Reuters Mon Jan 19, 2015

Magnus Peterson, 51, was found guilty of eight counts of fraud, forgery, false accounting and fraudulent trading after a 12-week trial that tested the jury's grasp of financial markets. The fraud over a six-year period cost investors $536 million (£354.3 million).

New Oxfam report says half of global wealth held by the 1%
The Guardian, Monday 19 January 2015

Quantitative easing has increased wealth inequality.

 

[yield]

Germany moves into deflation as global bond prices point to deepening slump

Alan Ruskin, a strategist at Deutsche Bank, told the Financial Times: “It was less than a year ago that negative interest rates were still largely a footnote in a dog-eared history book about 1970s Swiss monetary policy. Either bonds are mispriced and large losses loom for investors, or we have a big problem on our hands.”

Original FT article "Bonds: Caught in a debt trap" behind a paywall

 

[teqniq]

Original FT article "Bonds: Caught in a debt trap" behind a paywall

Not a paywall, more of a semi-paywall. You can register and get to see (I think) 3 free articles a month.

 

[teqniq]

UK fund manager predicts stock market plunge during next recession

One of the UK’s most successful hedge fund managers has warned that the world is on the cusp of an economic downturn that will be “remembered in a hundred years”.

Crispin Odey, the founder of London-based Odey Asset Management, told clients in a letter that he expects major economies to enter a recession that will “devastate” stock markets. He predicted that the European Central Bank’s €1.1tn (£730bn) bond-buying programme announced last week will disappoint markets and will not stave off a slump.

He concluded: “We are in the first stage of this downturn. It is too early to see what will happen – a change of this magnitude means the darkness and mist is very great. This down cycle is likely to be remembered in a hundred years.”

Warning that central banks have run out of financial firepower, he added: “We used all our monetary firepower to avoid the first downturn in 2007-09, so we are really at a dangerous point. If economic activity far from picks up, but falters, then there will be a painful round of debt default.”

He pointed to slowing growth in China alongside falling commodity prices and incomes in emerging markets. “The shorting opportunity looks as great as it was in 07/09.”

Odey also predicts that markets will take more note of politics this year. “This time around, the problem we have as well is that politics will start to rear its head and we are left to deal with politicians who are increasingly critical of the capitalist system’s ability to allocate capital,” he said.

The €306m (£228m) Odey Pan European fund, for which the letter was written, has achieved a rate of return of 15% in the year to 23 January.

 

[yield]

Bailed-out banks set for windfalls as distressed debt markets recover
Independent. Monday 02 February 2015

Mr Thompson cautioned that there is still €2 trillion in unwanted loans sitting on the books of banks across Europe. Despite the amount potentially available, Mr Thompson said that pricing was going up, because it is being matched by demand and the ability of institutions to finance deals.

"€2 trillion in unwanted loans"? How many of those will the ECB buy with its €1 trillion Quantitative Easing scheme?

Croatia wipes out the debts of thousands of its poorest citizens in 'fresh start' scheme
Independent Sunday 01 February 2015

Although the program is expected to cost up to 210 million Croatian kuna ($31 million), according to Austrian press agency APA, the Croatian government expects economic long-term benefits that will outweigh the short-term investment.

Prime Minister Zoran Milanovic has convinced multiple cities, public and private companies, the country's major telecommunications providers, as well as nine banks to clear some of their citizens of their debt. The government will not refund the companies for their losses.

I hope the idea catches on.

 

[lambro]

UK fund manager predicts stock market plunge during next recession

An economic downturn that will be remembered in a hundred years?

Dafuq?

I'll just stay in more.

 

[Patteran]

The Swiss National Bank have this morning effectively 'left' the Eurozone, to which they had pegged the ChF for the last three years, and floated with a consequent surge. Some commentators are seeing this as a reaction to being tipped off by the ECB that the expected Euro QE is going to be bigger than the markets forecast...and hence the SNB would not have had the resources to match.

Quite big stuff...apparently.

Good piece by John Lanchester about the CHF in the London Review of Books this month.

 

[yield]

Good piece by John Lanchester about the CHF in the London Review of Books this month.

And then there’s the other thing, where, having drawn a line in the sand, you realise it was a mistake, and you can’t defend the line any more, or you can no longer be bothered, or you just change your mind, or something, so you wave your arms and say ‘Fuck it’ and walk away.

That’s what the SNB did on 15 January, when it abandoned the currency peg. The action was taken with no advance warning, not even to other central banks or the IMF.

They rocked the boat.

 

[yield]

Draghi’s Negative-Yield Vortex Draws in Corporate Bonds
Bloomberg 03/02/15

Zero Coupon

Borrowers have yet to test negative rates in the new issue market. Instead of having a negative coupon, borrowers could opt for a zero-coupon bond with a price above par, according to Frank Will, head of covered bond research at HSBC Holdings Plc in Dusseldorf.

“If you hold a bond to maturity and it has a negative yield that means you will get back less than the price you paid for it,” said Mahesh Bhimalingam, head of European credit strategy at BNP Paribas SA in London. “However, if it goes more negative you could benefit from gains in the price.”

Falling prices and stubbornly high unemployment encouraged ECB President Mario Draghi to embark on an unprecedented plan to buy 60 billion euros of assets a month for at least 19 months. The euro area’s annual inflation rate fell to minus 0.6 percent last month, matching the biggest decline in prices in the history of the single currency, according to data published by Eurostat.

‘Fantastically’ Overpriced

The stimulus program has encouraged traders to take massive concentrated positions in “fantastically” overpriced markets, according to Paul Singer, the billionaire founder of Elliott Management Corp.

“Today’s trading levels of stocks and bonds reflect ‘thumb on the scale’ valuations driven by persistent and massive government asset purchases and zero percent (or lower!) short-term policy rates, as well as an essentially unlimited tolerance for risk,” Elliott wrote in the firm’s fourth-quarter letter dated Jan. 30, a copy of which was obtained by Bloomberg News.

There is now as much as €1.5 trillion of eurozone government debt that matures in more than a year paying negative yields, and QE is to blame
Telegraph 04 Feb 2015

On Wednesday, Finland issued €1bn-worth of five-year bonds. Nothing so remarkable about that. Except these bonds will pay out an interest rate of -0.017pc: Finland has become the first country in the eurozone to issue five-year debt with a negative yield, meaning that, in effect, investors are paying for the privilege of holding it.

Investors are playing to give nations and corporations loans.

 

[yield]

Meet “eBond” McQuown (80), bond market revolutionary
Bloomberg View.February 3, 2015

His latest handiwork is a hybrid security that embeds a credit-default swap, the derivative that helped push the global financial system to the edge of ruin in 2008, in a corporate bond.

By joining the two securities into an instrument called an “exchangeable bond,” or eBond for short, McQuown says companies will be able to transform junk-graded debt into the equivalent of AAA-rated notes.

And he’s hoping it will help him take advantage of possibly the biggest imbalance he’s seen in a career that stretches back to the dawn of quantitative investing — a looming liquidity crunch in the $8 trillion U.S. corporate bond market. McQuown says reinventing the corporate bond to make it less risky should make it easier to trade.

“The market is bumping into its own boundaries,” McQuown says, “and this has created a necessity for solutions.”

The eBond evokes a long line of inventions that were supposed to tame the markets but instead wrought havoc. In 1998, hedge fund Long-Term Capital Management needed a $3.6 billion bailout from 14 global banks after its mathematical models for government bond arbitrage blew up following Russia’s default. Ten years later, a raft of mortgage-backed securities meant to neutralize risk crashed much of the world’s economy.

“When you look at this corporate eBond, it’s strikingly similar to what was done with mortgages,” says Angelides, a Democrat who was California state treasurer from 1999 to 2007. “Credit-default swaps were embedded in mortgage-backed securities with the idea that they’d be made safe. But the risk wasn’t insured; it was just shifted somewhere else.”

McQuown and MacWilliams counter that soon CDSs will not pose the systemic threat they did in 2008. Back then, they were traded between two parties in an unregulated and unaccountable system.

To bring the $19 trillion CDS market out of the shadows, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 mandated that most of these securities be traded through exchanges and processed by clearinghouses that guarantee settlement and record every transaction in a database open to regulators. The SEC is writing rules to implement the measure.

They "transform junk-graded debt into the equivalent of AAA-rated notes." Worked so well before.

 

[yield]

Is Denmark facing a speculative attack?
Cnbc. Friday, 6 Feb 2015

Denmark's policy makers certainly aren't rolling over for the market.

"We have an unlimited supply of our own currency, the kroner. And we are going to do whatever it takes to defend the peg," Lars Rohde, Denmark's central bank governor, told CNBC.

His comment echoes a seminal moment in the euro zone crisis, when European Central Bank (ECB) President Mario Draghi said in 2012 that the bank stood ready to do "whatever it takes" to preserve the European monetary union, a declaration that drew a line under the region's credit crisis and bolstered market sentiment.

On Thursday, Denmark's central bank cut its benchmark interest rate deeper into negative territory -- to negative 0.75 percent, matching the Swiss National Bank (SNB). It's the Nationalbanken's fourth interest rate cut in a bit less than a month. That followed Copenhagen's unusual step of cancelling the country's bond sales for the year to stem further inflows; the country's financing needs for 2015 have already been met.

"The reason why Switzerland and Denmark are both behaving aggressively against the euro is because traders in Europe are putting a lot of pressure on it, arguably to test policy makers' resolve to come to a resolution on Greece and some of the fault lines in Europe around risk-sharing," Rebecca Harding, CEO at Delta Economics, said via email Thursday, before the Nationalbanken's latest rate cut.

"Defending the peg is an expensive policy and the Danish Central Bank has had to build up considerable reserves to do this," she said. "The key question is whether or not, even by suspending sales of government debt, it can afford to continue to do this. The jury is out on that."

In January, Denmark's foreign-exchange reserves climbed to a record high 564.1 billion kroner after foreign-exchange intervention of more than 106 billion kroner in the month. That compares with a 40 billion kroner increase in reserves in November 2008 during the Global Financial Crisis and a 20 billion kroner rise during the worst of the 2012 Greek crisis, Bofa's Sharma said in a note Tuesday, calling the latest increase "staggering."

"That followed Copenhagen's unusual step of cancelling the country's bond sales for the year to stem further inflows."

 

[treelover]

In 1998, hedge fund Long-Term Capital Management needed a $3.6 billion bailout from 14 global banks after its mathematical models for government bond arbitrage blew up following Russia’s default.

I didn't know that there had been such substantial bail outs before, it really is a fucked up system.

 

[treelover]

He is one of the best connected fund mangers in the City, married to Nichola Pease, who has run a rival fund management firm and is a descendant of the founders of Barclays Bank. His previous wife was Rupert Murdoch’s eldest daughter Prudence.

Self made man then...

btw, thought I had heard his name before, Odey, big donor to the Tories.

 

[treelover]

UK fund manager predicts stock market plunge during next recession

Some great comments/insights, btl, not least here there will not be a welfare state to cushion the blows.

 

[treelover]

I don't think it takes a genius to predict that the Chinese bubble has to burst. Money lent on the basis of cronyism and corruption on an industrial scale. The only thing that has kept the whole facade up has been continued massive growth. Once this slows the scaffolding fails and the whole lot comes down. It will make the collapse and fallout of the Japanese economy in the early 90's look like a hiccup. Prepare for the worst. Of coarse it will take our bankers, their tame economists and our Politicians by complete surprise.

from btl.

If the Chinese economy crashes that would have a massive impact on the U.K economy, not least the University sector, which currently is floating on millions from Chinese fee paying students.

 

[not-bono-ever]

I didn't know that there had been such substantial bail outs before, it really is a fucked up system.

prretty sure it had several nobel prize winners on its board- myron black- he of Black-Scholes

 

[not-bono-ever]

http://www.bbc.co.uk/news/business-31249907

Greenspan predicts Grexit

Greenspan must be one of the smartest people around- yet argueably has a terrible record at his job

interesting snippet from his Wiki if you are not familiar with him

http://en.wikipedia.org/wiki/Alan_Greenspan

"n 1977, Greenspan obtained a PhD degree in economics from New York University. His dissertation is not available from the university[14] since it was removed at Greenspan's request in 1987, when he became Chairman of the Federal Reserve Board. In April 2008, however, Barron's obtained a copy, and notes that it includes "a discussion of soaring housing prices and their effect on consumer spending; it even anticipates a bursting housing bubble".

 

[yield]

The global financial system stands on the brink of second credit crisis
Telegraph 09 Feb 2015

The world economy stands on the brink of a second credit crisis as the vital transmission systems for lending between banks begin to seize up and the debt markets fall over. The latest round of quantitative easing from the European Central Bank will buy some time but it looks like too little too late.

Spoiler: Mizuho's Steve Ricchiuto on CNBC

"There is no acceleration in underlying economic activity,"

 

[gosub]

http://www.telegraph.co.uk/finance/...tical-damage-if-Greece-forced-to-default.html

 

[yield]

How central banks have lost control of the world
From engaging in 'competitive easing' to provoking international currency wars, have we finally reached the limit of what monetary policy can achieve?
Telegraph 17 Feb 2015

This co-ordinated central bank action is reviving the "ghosts of the 1930s", according to investment bank Morgan Stanley.

 

[not-bono-ever]

http://www.telegraph.co.uk/finance/...tical-damage-if-Greece-forced-to-default.html

interesting article, I like this bit:

"The Eurogroup insists that the primary budget surplus be raised from 1.5pc of GDP in 2014, to 3pc this year and 4.5pc next year. As Nobel economist Paul Krugman says, they want to force a country that is already reeling from six years of depression - with the jobless rate still near 50pc - to triple its surplus for no other purpose than paying off foreign creditors for decades to come. They are doing to Greece what the Western allies did to a defeated Germany at Versailles in 1919: imposing unpayable and mutually-destructive reparations on a prostrate nation."

oof!

 

[brogdale]

interesting article, I like this bit:

"The Eurogroup insists that the primary budget surplus be raised from 1.5pc of GDP in 2014, to 3pc this year and 4.5pc next year. As Nobel economist Paul Krugman says, they want to force a country that is already reeling from six years of depression - with the jobless rate still near 50pc - to triple its surplus for no other purpose than paying off foreign creditors for decades to come. They are doing to Greece what the Western allies did to a defeated Germany at Versailles in 1919: imposing unpayable and mutually-destructive reparations on a prostrate nation."

oof!

Yep.

 

[Bernie Gunther]

I wonder how the UK one would look if London were treated separately to the rest of the country?