Tag: finance

Another perspective on the Volcker Rule via Colin Burgess of Sterling International

…

It is no secret that the banks have fought very hard to prevent Volcker from taking effect but it looks suspiciously as though it is now game over and the industry in which we are working will, if it is introduced in the format which is proposed, never be the same again.

I am still of the generation which came into banking because we were not smart enough to get a proper job. The cream of the graduate population either competed for a slot on the British Antarctic Survey or for one of the highly prized positions as a graduate trainee in marketing with one of the principal consumer or pharma groups. The big queues at the graduate job fairs were at the stands for Shell, BP, Unilever, Proctor and Gamble, Coca Cola or Kodak. Banking was for those left over and who neither wanted to join the army or enter the church. Bank shares were for boring pension funds and figured somewhere with utilities, in as much as any of those were listed and not still in public ownership.

Luckily for me, I defaulted into a twenty five year period when banking lit up like shooting star. Deregulation of markets and the creation of so called “products” based on mathematical modelling drove the industry forward and even the smallest boats rose with the tide. Wall Street and the City found themselves full of people who believed that they were worth what they were being paid and the queue of those who wanted a part of it stretched all the way to Oxford and Cambridge and to New Haven and the other Cambridge. If you had a PhD in astro-physics or theoretical chemistry, you simply had to be perfectly qualified to advance in banking. My degree in politics and modern history might have helped me get a slot on the reception desk, no more.

Alas, the growth of the derivative markets along with relatively generous capital rules helped to boost bank earnings and with that their ability to lend. Lending led to growth which fostered further lending and further growth and the miracle of rising living standards which took off in the late 70s/early 80s under Reagan and Thatcher but which was funded more by easy borrowing as it was by higher productivity was up and running.

“Ordinary people” could aspire to possessions they had never been able to dream of before and in their hubris they never appreciated how much they were paying in fees and interest in order to buy the goodies they packed into the house which, in the end, they bought as well.

The culture of estimating how much debt service one could afford was born and with it the culture of worrying how one could ever repay what one had borrowed died. And the banks, bless them, encouraged the nonsense. That’s right; if you don’t ask borrowers to repay, you reduce the risk of default. Simples!

The entire socio-economic model is now built on this and, whether right or wrong, it demands a very different sort of banking that the “pay 3% on deposits and lend them at 5%” kind of industry which I came into and which prevailed until the late 1970s or early 1980s.

Volcker seemingly wants to go back to the world he oversaw as Chairman of the Federal Reserve but Pandora’s Box has been opened and it can’t be sensibly closed, post factum. Bond markets are not equity markets and they don’t always have buyers and sellers afoot. Bonds tend to be all bid or all ask and the efficiency of the market is based on the banks’ ability to act as a huge reservoir taking up the slack in both directions. This is not a matter of simply playing the intermediary – bond markets need much, much more than that in order to function in a manner which protects the ultimate investors’, that’s the savers’ and policyholders’ interests.

Minimum clip sizes of 100,000 units or more have driven small private investors out of direct participation bond markets and into institutional funds but these need forms of liquidity which the Volcker Rule risks effectively out-lawing. Sure, many of the trading patterns of the first decade of the century were reckless and crazy but higher capitalisation rules have taken care of most of this. Volcker risks over-egging the pudding and, to mix my metaphors, killing the goose that lays the golden egg.

I have no doubt that investment banking in general and fixed income in particular are still overpopulated and rife with people who still believe that a job in the industry is a free ticket to get rich quick. However, banks and brokers are in the natural Darwinian process of right-sizing and to do that they don’t need the Volker Rule. Yet, it is difficult for people outside our industry to truly understand all the mechanics and drivers within it and if they are fuelled by the desire to perform populist legislative acts which they can carry to the hustings or, as Americans say, to the stump, then even less. I see trouble ahead if Volker is passed and a decade in getting it right again. Liquidity, the holy grail of markets, is possibly about to be sacrificed on the altar of ignorance and fear.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/66nf5VlkcHU/story01.htm Tyler Durden

Another perspective on the Volcker Rule via Colin Burgess of Sterling International

…

It is no secret that the banks have fought very hard to prevent Volcker from taking effect but it looks suspiciously as though it is now game over and the industry in which we are working will, if it is introduced in the format which is proposed, never be the same again.

I am still of the generation which came into banking because we were not smart enough to get a proper job. The cream of the graduate population either competed for a slot on the British Antarctic Survey or for one of the highly prized positions as a graduate trainee in marketing with one of the principal consumer or pharma groups. The big queues at the graduate job fairs were at the stands for Shell, BP, Unilever, Proctor and Gamble, Coca Cola or Kodak. Banking was for those left over and who neither wanted to join the army or enter the church. Bank shares were for boring pension funds and figured somewhere with utilities, in as much as any of those were listed and not still in public ownership.

Luckily for me, I defaulted into a twenty five year period when banking lit up like shooting star. Deregulation of markets and the creation of so called “products” based on mathematical modelling drove the industry forward and even the smallest boats rose with the tide. Wall Street and the City found themselves full of people who believed that they were worth what they were being paid and the queue of those who wanted a part of it stretched all the way to Oxford and Cambridge and to New Haven and the other Cambridge. If you had a PhD in astro-physics or theoretical chemistry, you simply had to be perfectly qualified to advance in banking. My degree in politics and modern history might have helped me get a slot on the reception desk, no more.

Alas, the growth of the derivative markets along with relatively generous capital rules helped to boost bank earnings and with that their ability to lend. Lending led to growth which fostered further lending and further growth and the miracle of rising living standards which took off in the late 70s/early 80s under Reagan and Thatcher but which was funded more by easy borrowing as it was by higher productivity was up and running.

“Ordinary people” could aspire to possessions they had never been able to dream of before and in their hubris they never appreciated how much they were paying in fees and interest in order to buy the goodies they packed into the house which, in the end, they bought as well.

The culture of estimating how much debt service one could afford was born and with it the culture of worrying how one could ever repay what one had borrowed died. And the banks, bless them, encouraged the nonsense. That’s right; if you don’t ask borrowers to repay, you reduce the risk of default. Simples!

The entire socio-economic model is now built on this and, whether right or wrong, it demands a very different sort of banking that the “pay 3% on deposits and lend them at 5%” kind of industry which I came into and which prevailed until the late 1970s or early 1980s.

Volcker seemingly wants to go back to the world he oversaw as Chairman of the Federal Reserve but Pandora’s Box has been opened and it can’t be sensibly closed, post factum. Bond markets are not equity markets and they don’t always have buyers and sellers afoot. Bonds tend to be all bid or all ask and the efficiency of the market is based on the banks’ ability to act as a huge reservoir taking up the slack in both directions. This is not a matter of simply playing the intermediary – bond markets need much, much more than that in order to function in a manner which protects the ultimate investors’, that’s the savers’ and policyholders’ interests.

Minimum clip sizes of 100,000 units or more have driven small private investors out of direct participation bond markets and into institutional funds but these need forms of liquidity which the Volcker Rule risks effectively out-lawing. Sure, many of the trading patterns of the first decade of the century were reckless and crazy but higher capitalisation rules have taken care of most of this. Volcker risks over-egging the pudding and, to mix my metaphors, killing the goose that lays the golden egg.

I have no doubt that investment banking in general and fixed income in particular are still overpopulated and rife with people who still believe that a job in the industry is a free ticket to get rich quick. However, banks and brokers are in the natural Darwinian process of right-sizing and to do that they don’t need the Volker Rule. Yet, it is difficult for people outside our industry to truly understand all the mechanics and drivers within it and if they are fuelled by the desire to perform populist legislative acts which they can carry to the hustings or, as Americans say, to the stump, then even less. I see trouble ahead if Volker is passed and a decade in getting it right again. Liquidity, the holy grail of markets, is possibly about to be sacrificed on the altar of ignorance and fear.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/66nf5VlkcHU/story01.htm Tyler Durden

Following yesterday’s epic, grotesquely illegal smashing the close in the VIX, we decided to have some fun 10 minutes before the close, and, in jest, summoned the VIX Smash Hulk. To our complete lack of surprise, he appeared.

 

We tweeted…

 

paging @VIXsmashHulk

— zerohedge (@zerohedge) December 10, 2013

 

 

And so it became…

 

BUT!…. for the second day in a row, stocks would not play ball (and JPT carry did not manage to ignite momentum either)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/d-WgsbizGDg/story01.htm Tyler Durden

At 4:15 pm Eastern, DoubleLine’s Jeff Gundlach will be discussing the economy, the markets and his outlook for the future and the best investment strategies in a time when not even the Fed knows what they will do. We wish him good luck. Readers can register for the webcast at the following link, while for those stuck with phones can dial-in at (877) 407-6050 or (201) 689-8022 international.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/JXhuEMLAlHA/story01.htm Tyler Durden

At 4:15 pm Eastern, DoubleLine’s Jeff Gundlach will be discussing the economy, the markets and his outlook for the future and the best investment strategies in a time when not even the Fed knows what they will do. We wish him good luck. Readers can register for the webcast at the following link, while for those stuck with phones can dial-in at (877) 407-6050 or (201) 689-8022 international.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/JXhuEMLAlHA/story01.htm Tyler Durden

Between new lows, new highs, advancers, decliners, lagging volumes, and stalling momentum, technicals have signaled another Hindenburg Omen (following Friday's) as the cluster builds once again. While it may not have lived up to its ominous name in the last year of liquidity, it highlights market anxiety and internals are growing more concerned… still believe the taper is priced in? Strength in Treasuries and gold (and silver) suggest safe-havens are being sought after. VIX is on the rise once again (and its most inverted in over 2 months); and even JPY carry traders (which dragged stock lower tick fgor tick with EURJPY once again) reduced exposure.

 

2nd Hindenburg in 3 days…

 

as carry traders sent stocks lower…. fun-durr-mentals…

 

Gold and silver surged…

 

As did bonds amid a seeming safety bid…

 

And VIX is its most inverted in 2 months…

 

and some context over the last 3 days…

 

Charts: Bloomberg

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/J5MR5mLpaMg/story01.htm Tyler Durden

The topic of whether central banks have destroyed the global business cycle to the point where all we have is phase jumps from one bubble to another (with an intervening depression in the interim) where central banks inject record amounts of new debt-created liquidity to cover up the credit excesses of the most recent bubble, has gained prominence following the recent comments by none other than the almost-Fed head Larry Summers who advocated the creation of an even bigger asset bubble to push the economy onward and upward. Below we present some much more sober and rational thoughts on this topic by Deutsche Bank’s Jim Reid.

Do we need bubbles for growth?

The worrying feature of the DM economy over the last decade or so (and perhaps longer) is that it seems that we’ve needed to pursue ever looser policy to enable us to hang on to what has actually been lower and lower trend growth. However the consequence appears to be that markets have moved from bubble to bubble. On the slowing growth front, Figure 7 tracks real GDP growth by decade for the G7. It’s quite clear that growth has been on a declining trend now for several decades with this century’s growth being very disappointing across the board in spite of very accommodative monetary and fiscal policies and the inflating of at least two major asset bubbles around the globe.

Since 2000, the US has outperformed all but Canada across its G7 peers but has averaged only 1.9% real growth. As for the rest of the G7, the average growth rate over the same period has been 2.2%, 1.7%, 1.3%, 1.2%, 1.0% and 0.3% for Canada, UK, Germany, France, Japan and Italy respectively.

Even though the US is the relative star performer in this cohort (ex Canada) this remains one of the weakest US recoveries on record and one that continues to disappoint to the downside. As regular readers know we like to monitor nominal GDP in this cycle due to the requirement to erode the still substantial debt burden. On this measure this is the second-weakest US recovery since our data begins in the early 1920s (Figure 8). The weakest was the rebound after the 1929 crash that turned into the Great Depression. Figure 9 then shows that this slowdown is a global problem. The 5-year rolling nominal GDP growth number is now at its lowest level for 80 years.

Are we now finally going to revert back to pre-crisis levels of growth or are we going to appreciate that a) the trend rate of growth for DM economies has slowed markedly (perhaps due to demographics and other structural issues), b) that current inflation is becoming dangerously low but financial market liquidity dangerously high and that c) current policies are not having as big an impact on growth as hoped or expected (i.e. we’re possibly in a liquidity trap).

We think that something structurally has changed since the GFC, a change that seems destined to continue to hold back growth in the near-term and more worryingly has lowered the longer-term trend rate of growth. In the absence of structural reforms, a lack of appetite for debt restructuring and no ability to pursue more aggressive fiscal policy, the temptation will be strong globally to continue to throw liquidity at the problem which is likely to continue to have more impact on asset prices than the actual economy. Bubbles could easily form which could ultimately be the catalyst for the imbalances that will likely lead to the next recession or crisis. So to avoid bubbles we possibly need the US and global economy to have a stronger year and for activity to withstand the impact of tapering and the inevitable higher yields that this combination would bring. The jury is still out as to whether this can happen though and it might be that the US needs very low yields by historic standards to maintain a recovery. It might also be the case that the rest of the world needs low US yields too. 2014 will be a test of this.

Our base case is that the world needs low yields and high liquidity given the huge amount of outstanding debt that we’re still left with post the leverage bubble and the GFC. There’s still too much leverage for us to believe that accidents won’t happen with the removal of too much stimulus. If we’re correct, we may see a reaction somewhere to tapering and this in turn may force the Fed into a much slower tapering path than it wants.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/jZJPeljHCfc/story01.htm Tyler Durden

The topic of whether central banks have destroyed the global business cycle to the point where all we have is phase jumps from one bubble to another (with an intervening depression in the interim) where central banks inject record amounts of new debt-created liquidity to cover up the credit excesses of the most recent bubble, has gained prominence following the recent comments by none other than the almost-Fed head Larry Summers who advocated the creation of an even bigger asset bubble to push the economy onward and upward. Below we present some much more sober and rational thoughts on this topic by Deutsche Bank’s Jim Reid.

Do we need bubbles for growth?

The worrying feature of the DM economy over the last decade or so (and perhaps longer) is that it seems that we’ve needed to pursue ever looser policy to enable us to hang on to what has actually been lower and lower trend growth. However the consequence appears to be that markets have moved from bubble to bubble. On the slowing growth front, Figure 7 tracks real GDP growth by decade for the G7. It’s quite clear that growth has been on a declining trend now for several decades with this century’s growth being very disappointing across the board in spite of very accommodative monetary and fiscal policies and the inflating of at least two major asset bubbles around the globe.

Since 2000, the US has outperformed all but Canada across its G7 peers but has averaged only 1.9% real growth. As for the rest of the G7, the average growth rate over the same period has been 2.2%, 1.7%, 1.3%, 1.2%, 1.0% and 0.3% for Canada, UK, Germany, France, Japan and Italy respectively.

Even though the US is the relative star performer in this cohort (ex Canada) this remains one of the weakest US recoveries on record and one that continues to disappoint to the downside. As regular readers know we like to monitor nominal GDP in this cycle due to the requirement to erode the still substantial debt burden. On this measure this is the second-weakest US recovery since our data begins in the early 1920s (Figure 8). The weakest was the rebound after the 1929 crash that turned into the Great Depression. Figure 9 then shows that this slowdown is a global problem. The 5-year rolling nominal GDP growth number is now at its lowest level for 80 years.

Are we now finally going to revert back to pre-crisis levels of growth or are we going to appreciate that a) the trend rate of growth for DM economies has slowed markedly (perhaps due to demographics and other structural issues), b) that current inflation is becoming dangerously low but financial market liquidity dangerously high and that c) current policies are not having as big an impact on growth as hoped or expected (i.e. we’re possibly in a liquidity trap).

We think that something structurally has changed since the GFC, a change that seems destined to continue to hold back growth in the near-term and more worryingly has lowered the longer-term trend rate of growth. In the absence of structural reforms, a lack of appetite for debt restructuring and no ability to pursue more aggressive fiscal policy, the temptation will be strong globally to continue to throw liquidity at the problem which is likely to continue to have more impact on asset prices than the actual economy. Bubbles could easily form which could ultimately be the catalyst for the imbalances that will likely lead to the next recession or crisis. So to avoid bubbles we possibly need the US and global economy to have a stronger year and for activity to withstand the impact of tapering and the inevitable higher yields that this combination would bring. The jury is still out as to whether this can happen though and it might be that the US needs very low yields by historic standards to maintain a recovery. It might also be the case that the rest of the world needs low US yields too. 2014 will be a test of this.

Our base case is that the world needs low yields and high liquidity given the huge amount of outstanding debt that we’re still left with post the leverage bubble and the GFC. There’s still too much leverage for us to believe that accidents won’t happen with the removal of too much stimulus. If we’re correct, we may see a reaction somewhere to tapering and this in turn may force the Fed into a much slower tapering path than it wants.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/jZJPeljHCfc/story01.htm Tyler Durden

Submitted by Tim Price of Sovereign Man blog,

For practitioners of Schadenfreude, seeing high-profile investors losing their shirts is always amusing.

But for the true connoisseur, the finest expression of the art comes when a high-profile investor identifies a bubble, perhaps even makes money out of it, exits in time – and then gets sucked back in only to lose everything in the resultant bust.

An early example is the case of Sir Isaac Newton and the South Sea Company, which was established in the early 18th Century and granted a monopoly on trade in the South Seas in exchange for assuming England’s war debt.

Investors warmed to the appeal of this monopoly and the company’s shares began their rise.

Britain’s most celebrated scientist was not immune to the monetary charms of the South Sea Company, and in early 1720 he profited handsomely from his stake. Having cashed in his chips, he then watched with some perturbation as stock in the company continued to rise.

In the words of Lord Overstone, no warning on earth can save people determined to grow suddenly rich.

Newton went on to repurchase a good deal more South Sea Company shares at more than three times the price of his original stake, and then proceeded to lose £20,000 (which, in 1720, amounted to almost all his life savings).

This prompted him to add, allegedly, that “I can calculate the movement of stars, but not the madness of men.”

The chart of the South Sea Company’s stock price, and effectively of Newton’s emotional journey from greed to satisfaction and then from envy and more greed, ending in despair, is shown above.

A more recent example would be that of the highly successful fund manager Stanley Druckenmiller who, whilst working for George Soros in 1999, maintained a significant short position in Internet stocks that he (rightly) considered massively overvalued.

But as Nasdaq continued to soar into the wide blue yonder (not altogether dissimilar to South Sea Company shares), he proceeded to cover those shorts and subsequently went long the technology market.

Although this trade ended quickly, it did not end well. Three quarters of the Internet stocks that Druckenmiller bought eventually went to zero. The remainder fell between 90% and 99%.

And now we have another convert to the bull cause.

Fund manager Hugh Hendry has hardly nurtured the image of a shy retiring violet during the course of his career to date, so his recent volte-face on markets garnered a fair degree of attention. In his December letter to investors he wrote the following:

“This is what I fear most today: being bearish and so continuing to not make any money even as the monetary authorities shower us with the ill thought-out generosity of their stance and markets melt up. Our resistance of Fed generosity has been pretty costly for all of us so far. To keep resisting could end up being unforgivably costly.”

Hendry sums up his new acceptance of risk in six words: “Just be long. Pretty much anything.”

Will Hendry’s surrender to monetary forces equate to Newton’s re-entry into South Sea shares or Druckenmiller’s dotcom capitulation in the face of crowd hysteria ? Time will tell.

Call us old-fashioned, but rather than submit to buying “pretty much anything”, we’re able to invest rationally in a QE-manic world by sailing close to the Ben Graham shoreline.

Firstly, we’re investors and not speculators. (As Shakespeare’s Polonius counselled: “To thine own self be true”.)

Secondly, our portfolio returns aren’t exclusively linked to the last available price on some stock exchange; we invest across credit instruments; equity instruments; uncorrelated funds, and real assets, so we have no great dependence on equity markets alone.

Where we do choose to invest in stocks (as opposed to feel compelled to chase them higher), we only see advantage in favouring the ownership of businesses that offer compelling valuations to prospective investors.

In Buffett’s words, we spend a lot of time second-guessing what we hope is a sound intellectual framework. Examples:

• In a world drowning in debt, if you must own bonds, own bonds issued by entities that can afford to pay you back;

• In a deleveraging world, favour the currencies of creditor countries over debtors;

• In a world beset by QE, if you must own equities, own equities supported by vast secular tailwinds and compelling valuations;

• Given the enormous macro uncertainties and entirely justifiable concerns about potential bubbles, diversify more broadly at an asset class level than simply across equity and bond investments;

• Given the danger of central bank money-printing seemingly without limit, currency / inflation insurance should be a component of any balanced portfolio

• Forget conventional benchmarks. Bond indices encourage investors to over-own the most heavily indebted (and therefore objectively least creditworthy) borrowers. Equity benchmarks tend to push investors into owning yesterday’s winners.

In the words of Sir John Templeton,

“To buy when others are despondently selling and sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.”

So be long “pretty much everything”, or be long a considered array of carefully assessed and diverse instruments of value. It’s a fairly straightforward choice.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/mUtNgD9OI1M/story01.htm Tyler Durden

Much has been said about Bitcoin: an alternative currency; a “honeypot” scheme by the central banks and Feds to capture excess cash, punish the rebellious and track abusers of money laundering laws; a revolution against fiat. Perhaps one other word may be used as well: “distraction“?

 

 

(h/t @Not_Jim_Cramer)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/XToGkEpLKtg/story01.htm Tyler Durden