The Closer


- Why New Yorkers can’t find a taxi when it rainsRead more

Secular stagnation and the paradox of worth

Gauti Eggertsson and Neil Mehrotra’s latest stab at modelling secular stagnation can be found here.

It includes explanations about the role of demographics, technological displacement, the liquidity trap and the paradox thrift, toil and flexibility within the secular stagnation framework — and there’s also a really neat explanation about the effects on capital, and in particular productive capital’s tendency to depreciate more quickly than might otherwise be expected. (You know, there’s more stuff being produced than expected, so the return on investment is never quite achieved in time, due to increasingly lower barriers to entry thanks to technique.)

The flip side of that scenario, however, is that unproductive capital becomes strangely useful for dodging depreciation for as long as there is belief in the asset class; hence the tendency for bubbles to form in asset classes which can’t easily be over-produced. At least not without significant investment. Read more

Floating-rate debt is great when interest rates go down

Many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward…American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.

– Alan Greenspan, February 23, 2004 Read more

The Sage gets what he wants at IBM

A brief reminder, amid the headlines about losses for the largest shareholder in IBM, that this is what Warren Buffett said that he wanted.

Back in 2011 Mr Buffett’s Berkshire Hathaway spent about $10.9bn to buy about 63.9m shares in the group. It was the first big technology investment for the famously tech-adverse investor, and his reasons had little to do with disruption, likes, clicks or eyeballs, and a lot to do with the financials.

Happily, the Sage of Omaha explained his thinking in that year’s annual report, and how he would react were the stock price to languish. Read more

A new raison d’être for cryptocurrency, but an age old problem

Steve Randy Waldman’s latest post at Interfluidity talks about econometrics, open science and cryptocurrency. He makes the point that the real potential of “blockchain technology” is rooted in the possibility that it could one day help many different groups and movements achieve consensus for the sake of mutual discovery and progress.

There is, in his opinion, a need to create a public forum in which scientists, academics and inventors can share data and research, and in a way that allows them to shed the mal-effects of groupthink and open themselves up to public scrutiny and refutation. Read more

Real Time Gross Settlements fail at the BoE

From the BoE on Monday:

The Bank of England has identified a technical issue related to some routine maintenance of the RTGS payment system and has paused settlement while we resolve it. We are working to address this issue as quickly as possible, and restart the RTGS payment system in a controlled manner. The most important payments are being made manually and we can reassure the public that all payments made today will be processed.

What does this mean and do you have to panic?

Best consider it a BoE “blockchain” ledger fail. Read more

aMarkets Live: Monday, 20th October, 2014

Live markets commentary from 

The (early) Lunch Wrap

SAP cloud costs || Jindal raid hits shares || Intercontinental Exchange proposes Libor fix fix || Markets mixed || Greene King tops up Spirit offer || UK backs hail Mary medicine || What is Saudi up to?  Read more

Regressing to the mean in China or why if something cannot go on forever, it will stop

With a h/t to Marginal Revolution, here’s Larry Summers and Lant Pritchett on why — for the same reason the USSR didn’t overtake the US, and Shinzo Abe has a tough job on his hands — “excessive extrapolation of performance in the recent past and treating a country’s growth rate as a permanent characteristic rather than a transient condition” is a bad idea.

Most particularly where China is concerned. Read more

Tibco and Pearson: shares and shares alike

The strange story that Tibco Software and their adviser Goldman Sachs had not used an accurate share count in their financial analysis, which evaluated a $24 per share buyout offer from Vista Equity Partners, will awaken unpleasant memories for the Financial Times’ parent company, Pearson PLC.

In May 2010, the publicly-traded securities pricing company Interactive Data Corporation (IDC), which was then 60 per cent owned by Pearson, was in final discussions to sell itself to private equity firms Silver Lake Partners and Warburg Pincus. A price of $34.00/share had been agreed to but, at literally the last minute, some previously undisclosed IDC shares were discovered. Read more

Spending versus consolidation, German political capital edition

Two sets of charts from BCA Research with unclear implications:

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Further reading

Elsewhere on Monday,

- Davies: What is global market turbulence telling us?

- Credit kleptocracy and China’s bezzle.

- European banking stress tests — pour encourager les autres?

- What has happened before will happen again. And we’ll have forgotten.  Read more

The 6am London Cut

Markets: Asian markets started the week on a buoyant note following a last-minute rally in US equities on Friday. “Markets ended last week on a more positive note with equities recovering some ground, but it is probably too early to conclude that we are back into the time of steady and healthy risk appetite,” analysts at Crédit Agricole said. “As such, high volatility will likely remain the story for now especially as expectation on monetary policies shift back and forth.” (FT’s Global Markets OverviewRead more

It takes $200bn per quarter to feed the machine

As usual Matt King et al at Citi’s credit research team breaks things down to the key fundamentals.

Here’s the chart that tells a thousand stories: Read more

Guest post: One virtual account number to rule them all

By David Birch, a director of the secure electronic transactions consultancy, Consult Hyperion. He is an internationally-recognised expert in digital identity and digital money.

The Financial Conduct Authority (FCA) has just launched an investigation into the Current Account Switching System (CASS) that the UK banks were forced to implement a year ago. Interestingly, though, they are also reviving an idea that the Independent Commission on Banking (ICB) put forward three years ago, that of porting bank account numbers across institutions.

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Dear ECB, see Hamlet, Prince of Denmark, Act III, Scene II…

Landon Thomas and Jack Ewing of Dealbook have happened across a delicious leak of ECB council minutes, running from May 2012 to January 2013.

Here’s the ECB’s response:

The E.C.B. neither provides nor approves emergency liquidity assistance. It is the national central bank, in this case the Central Bank of Cyprus, that provides E.L.A. to an institution that it judges to be solvent at its own risks and under its own terms and conditions.

In this specific case, there was full consensus in the governing council on the need to get assurances from the Central Bank of Cyprus that this bank was solvent. The solvency was confirmed explicitly by the Central Bank of Cyprus, which also confirmed the proper valuation of collateral after an intense dialogue between it and the E.C.B.

The E.C.B. was not the supervisor and fully relied on the assessment of the Central Bank of Cyprus. Therefore to draw conclusions about the E.C.B.’s future banking supervision role on the basis of E.L.A. to Cyprus is tendentious.

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Oil sell-off, the Goldman view

Ever the market-moving contrarians, Jeff Currie and team at Goldman came out with a note on Thursday doing for oil markets what Bullard and Haldane have been doing for markets in general.

When it comes to the oil price decline it is, they say, too much too soon. And, critically, the issue is on the expectations side NOT on the current market supply side:

The recent sell-off in oil has been mostly driven by positioning based upon expected fundamental shifts as opposed to currently observable shifts. While looking into 2015 we have sympathy for these medium- to longer- term bearish views that have driven prices lower, we believe it is too much too early. Prices have also likely overshot to the downside particularly as the lower we go the tighter the near-term balances become. This leaves us near-term constructive despite being bearish as we look further out.

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Markets Live: Friday, 17th October, 2014

Live markets commentary from 

In which Haldane warns of the path to the weak side

It may have a David Lynchian “who killed the economy?” title, but in reality Andrew Haldane’s latest speech sees the chief economist of the Bank of England come over all Jedi master. Another sign of the Jedi economic reality we are living in.

As Haldane’s dualistically themed remarks note, he’s feeling a great disturbance in the economic force:

On balance, my judgement on the macro-economy has shifted the same way. I have tended to view the economy through a bi-modal lens. And recent evidence, in the UK and globally, has shifted my probability distribution towards the lower tail. Put in rather plainer English, I am gloomier. That reflects the mark-down in global growth, heightened geo-political and financial risks and the weak pipeline of inflationary pressures from wages internally and commodity prices externally. Taken together, this implies interest rates could remain lower for longer, certainly than I had expected three months ago, without endangering the inflation target.

 Read more

The (early) Lunch Wrap

BoE’s Haldane favours a delay in interest rate rises || Rolls-Royce shares tumble after profit warning || BoE lashes out at EU bonus cap rules || Putin, Poroshenko agree to enforce Ukraine ceasefire || Google overtakes Goldman Sachs in US political donations || Jimmy Choo shares flat after London launch || Markets Read more

Unfreezing Ukraine and the Bosnian endgame

Ukraine has elections on October 26, and much of the attention ahead of them has focused on the potential for the country to freeze, politically and literally.

The view we’re hearing from those who have watched this closely, however, is a bit different. The idea that Donetsk, the centre of pro-Russian conflict in the East of Ukraine, could become a new Transnistria, the strip of Moldova trapped in a sovereignty conflict, is the wrong one.

Indeed, we hear it misses a central fact of the recent conflict that is not well understood. There was a war, and Ukraine lost. Read more

Familiarity breeds what again?

A chart from Citi on the occasionally epic length of some auditing relationships on the back of the Tesco messiness:

 Read more

Further reading

Elsewhere on Friday,

- It’s a mirage, not an oasis.

- “There are manipulative strategies, and there are good strategies, and it is not easy to tell them apart.”

- The four Italians sketch.

- Monetary policy with interest on reserves.

 Read more

The 6am London Cut

Markets: Asian equities were mixed following another choppy day on US markets, with the price of oil rebounding and a flight into the safety of US government debt also easing. The US dollar was largely steady against major rivals and Asian currencies were mixed. In the New York session the S&P 500 fell as much as 1.5 per cent before closing virtually unchanged at 1,862, regaining some poise in the wake of this week’s asset sell-off. That left it 7.4 per cent beneath a record closing high struck four weeks ago but well clear of Wednesday’s six-month low of 1,820. Encouragement for US equity bulls also came from a further retreat for the CBOE Vix volatility index from a three-year intraday high struck on Wednesday. (FT’s Global Markets OverviewRead more

The Closer


- Anti-Semitism is bad for your investment portfolio and interest rates don’t affect business investment Read more

The real reasons why the US Treasury’s debt maturity has been rising

Depending on whom you ask, the lengthening maturity of US government debt is either a smart response to unusually loose financial conditions or an unhelpful countervailing force to Federal Reserve policy.

Either way, the assumption is that the chart below (from page 23 the Treasury’s most recent Quarterly Refunding Report) reflects the deliberate choices of policymakers rather than anything else: Read more

Bullard: FOMC should consider “a pause on the taper”

From the transcript of St Louis Fed president James Bullard’s interview with Bloomberg Television:

I also think that inflation expectations are dropping in the U.S. And that is something that a central bank cannot abide. We have to make sure that inflation and inflation expectations remain near our target. And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December. So… continue with QE at a very low level as we have it right now. And then assess our options going forward. …

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This is nuts. When’s the real crash?

Alibaba this week…

The calm after Wednesday’s one-day storm is downright weird. No?

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The real disruption at the heart of banking

The FT’s John Gapper follows up our mythbusting finance 2.0 post with some extremely wise points on what technology land is missing when it comes to “disrupting” banking.

The key point being, banks have already been disrupted! There’s not much positive value left to transfer, unless, of course, you’re prepared to work in the shadows or outside the regulatory climate that has been especially devised to segregate the sort of risk that is still intolerable to the system:

Mr Andreessen believes non-banks will manage to work around regulations. There may be something to this – it is striking that my energy supplier offers a higher rate of interest on deposits than my bank – but neither regulators nor the public will tolerate shadow retail banking for long if something goes wrong, as it tends to do

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The “I told you so” trade in credit is to wait and see

Who doesn’t like to start the day with a nice hot cup of vindication? There will be plenty of time to recognise those who have been warning about a lack of real liquidity and the chance of real volatility later. For now the question is what to do?

Credit strategist Alberto Gallo of RBS, who has been on team no-liquidity for a while, says wait and see.

What do we do now? We wait a bit longer. Our high yield macro-spread model shows cash should trade at around 500bp in € vs 400bp currently. European high yield spreads are still below last year’s tantrum levels, while US HY spreads are just getting there (508bp). Compared to previous bull market selloffs, this isn’t a short one – but could still last for a while longer.

 Read more