Tag: finance

It would appear there is one thing the USA is still exceptional at (given snowboarding is off the table)…

 

 

Source: Investors.com

via Zero Hedge http://ift.tt/1doTbQq Tyler Durden

It would appear there is one thing the USA is still exceptional at (given snowboarding is off the table)…

 

 

Source: Investors.com

via Zero Hedge http://ift.tt/1doTbQq Tyler Durden

It seems Janet has some work to do on her "communications". Judging by today's follow-through on dismal retail sales data (and a miss for claims), stocks, bonds, and gold screamed higher (and the USD lower) suggesting an increasing crowd does not believe the QEeen's "stay the taper course" meme. The S&P 500 rallied 25pts off early lows – practically in a straight-line, dislocated from JPY-carry, dislocated from bonds, and coupled almost perfectly with gold after Europe close. Nasdaq is up 6 days in a row and back near multi-year highs (+1.5% in 2014) as "most shorted" stocks were ripped 2.5% higher intraday. Gold closed back above $1,300 (outperforming on the week and since Taper); Treasury yields tumbled 6-7bps; and the USD Index dropped 0.5% led by EUR and GDP strength. VIX traded under 14% briefly. Bad news is great news once again. This is the Nasdaq's best 6-day run in 27 months.

 

 

The Nasdaq bounced perfectly off its 100DMA and has rallied 6.8% in the last 6 days – its best run since December 2011…

 

This morning saw Nasdaq open right at unchanged for 2014 and found support…

 

As "most shorted" stocks were crushed higher…

 

QE-maven Materials and Discretionary and Homebuilders are leading the way off last week's lows as they anticipated Yellen printing to oblivion… but she didn't!!

 

But stocks decoupled from USDJPY and bonds – and found a new friend in gold…

 

Commodities all rallied today with Gold outperforming…

 

And Treasuries (espeially the long-end) have almost recovered all the post-Yellen losses…

 

FX markets were more volatile with EUR and GBP strength dragging the USD Index lower…

 

 

Charts: Bloomberg

via Zero Hedge http://ift.tt/1gcpYJ3 Tyler Durden

The ongoing exodus from Mt.Gox – a major Bitcoin exchange – amid withdrawal halts, has seen a massive $150 spread open up between it and other exchanges. Having tumbled by over 50% in the last 2 weeks, Mt. Gox pricing is back at levels first seen 3 months ago. This chaos (and the ongoing ‘finger-pointing’ over who is to blame) had led Mt.Gox CEO Mark Karpeles to come out swinging in the following interview…

 

Mt.Gox price for Bitcoin has collapsed…

 

Leaving the exchanges with very different prices…

 

Mt Gox chief executive Mark Karpeles – whom some internet forum commenters have angrily criticized after the exchange blamed a flaw in Bitcoin software for a potentially serious security issue – has been in contact with Forbes with a response to the criticisms.

Via Forbes,

FORBES: Was Mt Gox’s coding to blame, and are other exchanges having the same problem?

Mark Karpeles: First, you need to understand that the Bitcoin implementation we use in MtGox was created back in 2011. The bitcoin client is not meant to handle the kind of load MtGox has and was having more and more troubles, lagging and crashing. We created our own implementation to solve those issues and to offer a better flexibility to our customers.

Over time Bitcoin changed and started implementing changes that would require people using previous versions of the software to upgrade. While we followed most of those update[s] we were more and more busy and couldn’t keep up with all the changes.

With bitcoin 0.8.0 (released 19 feb 2013) a breaking change has been included that would prevent transactions to be accepted if their signature did not include the right number of zeroes in front of the signature values (in an effort to reduce risks of transaction malleability). We did not notice this change but a few of the transactions we were sending would become invalid because of this.

Due to this fact we started being more transparent on the transactions we sent, and provide a publicly available list of pending transactions. Nobody was however able to tell us what went wrong at that time. Since only a few transactions were affected anyway we didn’t give it much attention (recently we were able to look more into this and fix this issue).

This meant however that some of our invalid transactions were listed publicly, making it rather easy for someone with bad intention to alter these, hence the reason why many people claim there was an issue in our code. Now, transaction malleability does not affect only us, and while it might be more difficult to affect exchanges using regular bitcoin[s], it remains rather trivial.

Is there anything the Bitcoin Foundation can do to help solve this problem?

The Bitcoin Foundation has hired Bitcoin Developers for the purpose of promoting Bitcoin use. I guess the most puzzling part is why this issue hasn’t be[en] solved since 2011.

What constructive steps are both the Bitcoin Foundation and Mt Gox taking together to resolve the issues, and to have everything working at its best for the future?

We have proposed a solution that would allow people sending bitcoins to track sent coins no matter what happens in terms of malleability (a solution that can be applied quickly and without breaking anything), and the Bitcoin developers are preparing ways to prevent modified transactions from being relayed by the network (which will take a lot of time and may break some bitcoin custom clients).

There is obviously no perfect solution in this world, however this is how things are as of today.

Note that our announce[ment], while unfortunately upsetting a lot of people, allowed other exchanges to be much more cautious when faced with failing transactions, and most likely helped a lot of people understanding and dealing with the problem.

via Zero Hedge http://ift.tt/1gcpYc4 Tyler Durden

Submitted by F.F. Wiley of Cyniconomics blog,

From budget projections released by the Congressional Budget Office (CBO) last week:

CBO now expects that output will fall slightly short of its potential, on average, even after the economy has largely recovered from the recent economic downturn.

Translation:

We’ve thrown in the towel on our long-time assumption that the economy never again falls into recession.

Shocker: the business cycle lives!

Not only did the CBO acknowledge the cycle, which we suggested might be a good idea here, here, here and here, but they built in recession effects using an approach we recommended.

We grossed up the CBO’s projections partly with an estimate of the average effects of automatic stabilizers. Lo and behold, Appendix E of the new report links budget projections to the average effects of automatic stabilizers.

What’s more, the CBO slashed its figures for potential output. The two changes together added over $1 trillion to projected debt in 2024.

We’ll be presumptuous and pretend that someone at the CBO read our research before implementing the new approach. Our blog may not be the main reason (or even part of the reason) for the change, but please don’t burst our bubble. Let’s say we’re 99% responsible for the CBO’s discovery of the business cycle.

We’ll even give our mole in the Ford House a name: “Jefferson Smith,” after the Jimmy Stewart character in “Mr. Smith Goes to Washington.” As you’ll guess if you’ve seen the movie, we’re assuming Mr. Smith is earnest, hard-working and wants to do well by the taxpayer.

Even more importantly, he wants us to acknowledge the tentative steps toward reality in last week’s report.

So, geeky bloggers full of unsolicited advice, you should be happy now, right?

Well, actually no.

Sadly, the extra $1+ trillion in debt is dwarfed by adjustments that still need to be made.

To show why the CBO remains way too optimistic, we’ll start with the new unemployment rate projections:

The CBO’s long-term assumption of 5.5% is where the new recession “allowance” comes into play.  If not for the nod to the effects of automatic stabilizers, we’re told that the long-term rate would be about 0.25% lower.

Questions for Mr. Smith:

Why such a tiny change? Consider that the new long-term rate is still below the “Great Moderation” average from 1984 to 2007. Didn’t we learn that the economy’s performance over that period was illusory?

Next, we compare unemployment rate projections to the CBO’s assumptions for 3 month Treasury bills:

Call us cynical, but it’s hard to imagine unemployment falling continuously through an interest rate jump to 3.7% in 2018. There are good reasons to expect a poor economy after interest rates rise, and especially after a trend that persists for several years. But don’t just take our word for it. To gauge the effects of large, sustained rate changes, we compared the change in interest rates for every 12 quarter period since 1945 to the change in the unemployment rate over the following year:

Here’s an interpretation of these results, lifted from “M.C. Escher and the Impossibility of the Establishment Economic View” (where we shared a similar analysis with the same conclusions):

While the results speak for themselves, I’d be remiss if I didn’t add qualifiers. For one, the sample sizes fall as you move from left to right across the charts. [See technical notes post.] Moreover, history doesn’t always foretell the future; this time could be different.

 

But the thing is: the data makes perfect sense. Higher interest rates have obvious effects on risk taking and debt service costs. It stands to reason that the economy won’t just sail through the large rate hikes needed to restore historic norms.

 

If anything, the charts likely understate the future effects of rising rates, because today’s debt levels are far higher than average historic levels. Any normalization must also include a wind-down of unconventional measures such as quantitative easing, which presents additional challenges.

More questions for Mr. Smith:

Considering the data in Chart 3, why does the CBO expect the unemployment rate to fall in 2019 after an assumed 3.4% interest rate jump over the prior three years? Why is it expected to fall in 2018 and 2020 after interest rate increases of 2.9% and 2.2% in the preceding three year periods?

Before you answer, though, understand our perspective on the rote explanation that projections beyond 2017 are based on “trends in the factors that underlie potential output” rather than “forecasts of cyclical movements in the economy.”

The CBO might as well write: “We only forecast ‘good’ cyclical movements – hence our long-standing prediction for a robust recovery – not ‘bad’ cyclical movements.”

The aggressive recovery assumption for the next four years just doesn’t jive with a meager recession allowance for the remainder of the projection. As shown in Charts 2 and 3, the worms crawl out when you look at the effects of interest rate changes, while Chart 1 shows that the long-term unemployment rate of 5.5% is too low.

Another question for Mr. Smith:

Why not balance the assumed recovery with the payback that invariably occurs after the economy heats up and interest rates rise?

Here’s how that might look:

Here are the key assumptions behind the recession scenario:

• From 2014 to 2017, it’s exactly the same as the CBO projection. (Hence, optimistic.)
• The unemployment rate then jumps by 0.8% in 2018, 1.1% in 2019 and 0.8% in 2020, based on CBO interest rate projections and the history shown in Chart 3.
• By 2024, the unemployment rate falls back to the post-1970 average of 6.4%. (For discussion of reasons to exclude the ‘50s and ‘60s from the average, see “7 Fallacies About the Lengths of Things.” Or, just poke around economics chatter for a Beveridge curve chart as well as the increasingly mainstream view that jobs market fundamentals are nothing like they were fifty years ago.)

Back to Mr. Smith:

Remember those “find the next number in this progression” problems from grade school? Well, let’s say you’re looking at the last 60 years of unemployment rates and using the same “find the next number” approach to guess the next 10 (as in Chart 4 above). Isn’t the chart’s green line a better answer than the red line?

In our last chart below, we show that the CBO’s budget outlook depends quite a lot on Mr. Smith’s answers to our questions. More precisely, the unemployment rate assumption has a huge effect on budget deficits:

Notice that we split the red line in two to show the effects of the CBO’s recession allowance, with the dashed red line representing the old, “recessions don’t exist” approach. The recession allowance has little effect on its own. Although the CBO attributes over $1 trillion of extra deficits in this year’s report to changes in economic assumptions, other changes had greater impact.

The bigger issue is what might happen in a genuine recession. As shown by the green line, we’re projecting the recession scenario to add $2.2 trillion to total deficits through 2024. (Again, see our technical notes post for details.)  Needless to say, it’s a budget killer.

We could go on to show effects on public debt, but we’ll save those for our next update of “The Chart That Every Taxpayer Deserves To See,” which will show that other ways of making CBO projections more realistic have even larger effects than the recession scenario.

In the meantime, maybe the CBO would consider a staff screening of “Mr. Smith Goes to Washington,” and in particular, the Lincoln Memorial scene?

Here’s the setting: Stewart’s Mr. Smith takes a seat on the floor near Lincoln’s statue, dejected and determined to abandon his stand against Washington’s dishonest ways. The beautiful Jean Arthur, playing Smith’s assistant, lurks behind the columns. She finally walks over to him, sits down, and delivers the classic, Hollywood kick-in-the-butt speech.

She convinces him that he can’t quit, because he has “plain, decent, everyday, common rightness, and this country could use some of that… so could the whole cock-eyed world…”

“It’s a forty foot dive into a tub of water,” she says, “but I think you can do it.”

Could it be that the CBO’s Mr. Smith has the same “common rightness”? That he’ll make the “forty foot dive” to battle Washington’s resistance to inconvenient truths?

Those are our final questions, and we look forward to answers in future CBO reports.

via Zero Hedge http://ift.tt/1meqvzj Tyler Durden

Submitted by F.F. Wiley of Cyniconomics blog,

From budget projections released by the Congressional Budget Office (CBO) last week:

CBO now expects that output will fall slightly short of its potential, on average, even after the economy has largely recovered from the recent economic downturn.

Translation:

We’ve thrown in the towel on our long-time assumption that the economy never again falls into recession.

Shocker: the business cycle lives!

Not only did the CBO acknowledge the cycle, which we suggested might be a good idea here, here, here and here, but they built in recession effects using an approach we recommended.

We grossed up the CBO’s projections partly with an estimate of the average effects of automatic stabilizers. Lo and behold, Appendix E of the new report links budget projections to the average effects of automatic stabilizers.

What’s more, the CBO slashed its figures for potential output. The two changes together added over $1 trillion to projected debt in 2024.

We’ll be presumptuous and pretend that someone at the CBO read our research before implementing the new approach. Our blog may not be the main reason (or even part of the reason) for the change, but please don’t burst our bubble. Let’s say we’re 99% responsible for the CBO’s discovery of the business cycle.

We’ll even give our mole in the Ford House a name: “Jefferson Smith,” after the Jimmy Stewart character in “Mr. Smith Goes to Washington.” As you’ll guess if you’ve seen the movie, we’re assuming Mr. Smith is earnest, hard-working and wants to do well by the taxpayer.

Even more importantly, he wants us to acknowledge the tentative steps toward reality in last week’s report.

So, geeky bloggers full of unsolicited advice, you should be happy now, right?

Well, actually no.

Sadly, the extra $1+ trillion in debt is dwarfed by adjustments that still need to be made.

To show why the CBO remains way too optimistic, we’ll start with the new unemployment rate projections:

The CBO’s long-term assumption of 5.5% is where the new recession “allowance” comes into play.  If not for the nod to the effects of automatic stabilizers, we’re told that the long-term rate would be about 0.25% lower.

Questions for Mr. Smith:

Why such a tiny change? Consider that the new long-term rate is still below the “Great Moderation” average from 1984 to 2007. Didn’t we learn that the economy’s performance over that period was illusory?

Next, we compare unemployment rate projections to the CBO’s assumptions for 3 month Treasury bills:

Call us cynical, but it’s hard to imagine unemployment falling continuously through an interest rate jump to 3.7% in 2018. There are good reasons to expect a poor economy after interest rates rise, and especially after a trend that persists for several years. But don’t just take our word for it. To gauge the effects of large, sustained rate changes, we compared the change in interest rates for every 12 quarter period since 1945 to the change in the unemployment rate over the following year:

Here’s an interpretation of these results, lifted from “M.C. Escher and the Impossibility of the Establishment Economic View” (where we shared a similar analysis with the same conclusions):

While the results speak for themselves, I’d be remiss if I didn’t add qualifiers. For one, the sample sizes fall as you move from left to right across the charts. [See technical notes post.] Moreover, history doesn’t always foretell the future; this time could be different.

 

But the thing is: the data makes perfect sense. Higher interest rates have obvious effects on risk taking and debt service costs. It stands to reason that the economy won’t just sail through the large rate hikes needed to restore historic norms.

 

If anything, the charts likely understate the future effects of rising rates, because today’s debt levels are far higher than average historic levels. Any normalization must also include a wind-down of unconventional measures such as quantitative easing, which presents additional challenges.

More questions for Mr. Smith:

Considering the data in Chart 3, why does the CBO expect the unemployment rate to fall in 2019 after an assumed 3.4% interest rate jump over the prior three years? Why is it expected to fall in 2018 and 2020 after interest rate increases of 2.9% and 2.2% in the preceding three year periods?

Before you answer, though, understand our perspective on the rote explanation that projections beyond 2017 are based on “trends in the factors that underlie potential output” rather than “forecasts of cyclical movements in the economy.”

The CBO might as well write: “We only forecast ‘good’ cyclical movements – hence our long-standing prediction for a robust recovery – not ‘bad’ cyclical movements.”

The aggressive recovery assumption for the next four years just doesn’t jive with a meager recession allowance for the remainder of the projection. As shown in Charts 2 and 3, the worms crawl out when you look at the effects of interest rate changes, while Chart 1 shows that the long-term unemployment rate of 5.5% is too low.

Another question for Mr. Smith:

Why not balance the assumed recovery with the payback that invariably occurs after the economy heats up and interest rates rise?

Here’s how that might look:

Here are the key assumptions behind the recession scenario:

• From 2014 to 2017, it’s exactly the same as the CBO projection. (Hence, optimistic.)
• The unemployment rate then jumps by 0.8% in 2018, 1.1% in 2019 and 0.8% in 2020, based on CBO interest rate projections and the history shown in Chart 3.
• By 2024, the unemployment rate falls back to the post-1970 average of 6.4%. (For discussion of reasons to exclude the ‘50s and ‘60s from the average, see “7 Fallacies About the Lengths of Things.” Or, just poke around economics chatter for a Beveridge curve chart as well as the increasingly mainstream view that jobs market fundamentals are nothing like they were fifty years ago.)

Back to Mr. Smith:

Remember those “find the next number in this progression” problems from grade school? Well, let’s say you’re looking at the last 60 years of unemployment rates and using the same “find the next number” approach to guess the next 10 (as in Chart 4 above). Isn’t the chart’s green line a better answer than the red line?

In our last chart below, we show that the CBO’s budget outlook depends quite a lot on Mr. Smith’s answers to our questions. More precisely, the unemployment rate assumption has a huge effect on budget deficits:

Notice that we split the red line in two to show the effects of the CBO’s recession allowance, with the dashed red line representing the old, “recessions don’t exist” approach. The recession allowance has little effect on its own. Although the CBO attributes over $1 trillion of extra deficits in this year’s report to changes in economic assumptions, other changes had greater impact.

The bigger issue is what might happen in a genuine recession. As shown by the green line, we’re projecting the recession scenario to add $2.2 trillion to total deficits through 2024. (Again, see our technical notes post for details.)  Needless to say, it’s a budget killer.

We could go on to show effects on public debt, but we’ll save those for our next update of “The Chart That Every Taxpayer Deserves To See,” which will show that other ways of making CBO projections more realistic have even larger effects than the recession scenario.

In the meantime, maybe the CBO would consider a staff screening of “Mr. Smith Goes to Washington,” and in particular, the Lincoln Memorial scene?

Here’s the setting: Stewart’s Mr. Smith takes a seat on the floor near Lincoln’s statue, dejected and determined to abandon his stand against Washington’s dishonest ways. The beautiful Jean Arthur, playing Smith’s assistant, lurks behind the columns. She finally walks over to him, sits down, and delivers the classic, Hollywood kick-in-the-butt speech.

She convinces him that he can’t quit, because he has “plain, decent, everyday, common rightness, and this country could use some of that… so could the whole cock-eyed world…”

“It’s a forty foot dive into a tub of water,” she says, “but I think you can do it.”

Could it be that the CBO’s Mr. Smith has the same “common rightness”? That he’ll make the “forty foot dive” to battle Washington’s resistance to inconvenient truths?

Those are our final questions, and we look forward to answers in future CBO reports.

via Zero Hedge http://ift.tt/1meqvzj Tyler Durden

Following the 20% devaluation of Kazakhstan’s currency on Tuesday, the nation has quietly drifted into a very un-safe scenario. As the following clip shows, tanks and Humvees are lining the streets around Almaty as stores are closed and food is running desperately short. Local accounts note that the people are growing increasingly indignant. At a mere 192bps, the cost of protecting Kazakhstan sovereign debt from default (or further devaluation) seems cheap in light of this.

 

 

Tanks and Humvees lining the streets around the largest city in Kazakhstan…

 

Kazakhstan CDS remain notably cheap…

via Zero Hedge http://ift.tt/1bsVqnb Tyler Durden

Today’s AM fix was USD 1,290.25, EUR 943.65 and GBP 774.93 per ounce.
Yesterday’s AM fix was USD 1,286.50, EUR 942.84 and GBP 778.47 per ounce.   

Gold climbed $1.00 or 0.08% yesterday to $1,290.90/oz. Silver was unchanged at $20.20/oz.

Gold is marginally higher in dollars after the dollar fell versus other major currencies. It remains near a three month high. It is looking well technically and from a momentum perspective and appears capable of breaking above the $1,300 level. This should lead to gold rising sharply to test the next level of resistance at $1,365/oz.

Asian and European stock markets have resumed their downward slide today which should support gold. In Asia, this ends a five-session winning streak for stocks which had been built on relief that the U.S. Federal Reserve would maintain its ultra loose monetary policies.

Gold in US Dollars, (Monthly) 20 Years – (Bloomberg)

The “personal pensions savings” of the European Union’s 500 million citizens could be used to fund “long-term investments” to “boost the economy” and help plug the gap left by banks since the financial crisis, Reuters has reported (see News) after seeing an EU document on the matter.

The EU is looking for ways to wean the 28 country bloc from its heavy reliance on bank financing and find other means of funding small companies, infrastructure projects and other unspecified investment.

“The economic and financial crisis has impaired the ability of the banking and financial sector to channel funds to the real economy, in particular long-term investment,” said the document. The Commission will ask the bloc’s insurance watchdog in the second half of this year for advice on a possible draft law “to mobilize more personal pension savings for long-term financing.”

An objective stress test of the euro zone’s biggest banks could reveal a capital shortfall of a whopping  770 billion euros (more than $1 trillion), a study by an advisor to the EU’s financial risk watchdog and a Berlin academic has found.

Another crisis seems likely given the poor financial state of many banks and this is likely to trigger depositor  bail-ins rather than bank bail outs.

This study and others published ahead of the EU stress tests, whose results are due in November, are important because they set the expectations against which markets will judge the credibility of the ECB’s attempt to prove its banks can withstand another crisis without taxpayer help.

Download our Bail-In Guide: Protecting your Savings In The Coming Bail-In Era (11 pages)

via Zero Hedge http://ift.tt/1bsV2VN GoldCore

Submitted by Bryan Taylor via Global Financial Data,

Yields on United States 10-year bonds rose above 3% at the beginning of January.  The yield on the 10-year had reached its lowest point in history in July 2012 at 1.43% as a result of the Fed’s policy of Quantitative Easing.  Since then yields have doubled as markets have incorporated the impact of the Fed tapering their purchase of U.S. Government securities. This raises the question, how high could interest rates go from here?  Could interest rates move up to 3% per quarter? U.S. interest rates were that high back in 1981 when the yield on US 10-year Treasuries hit 15.84% and 30-year mortgage rates hit 18.63%.
              
What about 3% per month?  That works out to 42% per annum compounded.  Although interest rates have never been that high in the United States, they have been that high in other countries. The yields on 3-year bonds in Mexico were over 50% back in the 1990s.  Other countries, mainly in the developing world where inflation was more common in the 1970s to the 1990s also experienced double or triple digit interest rates.

The Impact of Hyperinflation
              
Interest rates at that level can only occur because of inflation.  The problem is that as inflation rates rise, they become more unstable and unpredictable.  Consequently, the maturity of debt instruments shrinks as the uncertainty increases.  Annual interest rates become meaningless, and the maturity shrinks to months or days.

What about 3% per week?  At this level, the compounding of interest rates takes over.  An interest rate of 3% per week works out to 365% per annum.  Interest rates rose significantly beyond even this level during the German hyperinflation of 1923.  The interest rate charged at the Berlin Stock Exchange in October 1923 hit a high of 7950%, the equivalent of 9% per week.
              
Although this interest rate is high enough to even make a Payday Loan store blanch, it didn’t even come close to compensating for the inflation that occurred in October 1923. The monthly inflation rate in Germany during October 1923 was 24,380%, which far exceeded the 45% monthly interest rate implied by the 7950% interest rate the Berlin Stock Exchange charged. During that month, the US Dollar exchange rate went from 242 million Marks to the USD on October 1, 1923 to 100 billion Marks by November 1, 1923.

Investors and Speculators Get Wiped Out

At these levels of hyperinflation, interest rates become meaningless.  When prices are rising at the rate of 30% per day, as occurred during Germany in October 1923, fixed-income assets are completely wiped out by the inflation, and no one will deposit or lend cash that will become worthless in a few days.  During hyperinflations, the future ceases to exist and cash becomes the only medium of exchange as the value of assets with a maturity over a few days is completely wiped out.

Interestingly enough, government bonds rose in price along with inflation during 1923 in Germany.   The German 3% bond paying 3 marks in interest actually traded for 37 million Marks in September 1923, right before the inflation came to an end.  This provided a yield on the bond of less than one-ten millionth of a percent (i.e. 0.0000001%).  The price on the bond had risen from 475,000 Marks just one month before, and a chart of the stock is illustrated below.

Why, you might ask, would someone pay 37 million Marks for a bond that pays 3 marks in interest?  The answer is easy, speculators were hoping that once the inflation was over, the government would redeem the bonds at their inflation adjusted value.  The people buying the 3% Perpetuities of Germany thought the government would revalue the bonds providing them with both a hedge against hyperinflation as well as a huge profit.

The government, however, had a different point of view.  What is the point of having a hyperinflation if you don’t at least wipe out your government debt?  By October 1923, the German government was issuing 100 Billion Mark (100,000,000,000) banknotes (equal to 100 Trillion Marks by US measurement), and when the government finally did convert the currency from old Marks into Rentenmark, it took 1 trillion old marks to get a new Rentenmark.

What about government bonds?  What happened to them?  Did the speculators reap a windfall from the revaluation of the currency?  Of course not.

The German government decided that all outstanding bonds would be redenominated at one-tenth Pfennig on the Mark.  In other words, a government bond that had originally been issued at 100 Marks was now worth 10 Pfennig.  In effect, investors lost 99.9% of their investment.  The price of the bond traded up from there to reflect higher interest rates after the inflation was over with, but the difference was small.

The German bonds also traded in London where the price reflected the devaluation of the currency.  The value of the bonds on the London Stock Exchange fell from 100 Pounds to 5 shillings (25 pence), a loss of almost 99.9%. 

This proves two things. First, markets are efficient.  The net price in Berlin after the inflation and in London after the devaluation ended up the same.  Second, don’t try to outsmart the government who deals the deck of cards.  You will lose.
 

via Zero Hedge http://ift.tt/1jCuGD7 Tyler Durden

Not Bonds (which are rallying to their low yields of the day – and have almost removed the entire post-Yellen move)… Not USDJPY (which entirely disconnected from stocks when Europe closed)… but Gold… ding ding ding… is your new correlation pair du jour…

 

 

Charts: Bloomberg

via Zero Hedge http://ift.tt/1jCuFyX Tyler Durden