Alphachat: Michael Pettis on the Chinese economy, plus the US election and conservative talk radio

Alphachat is available on Acast, iTunes, and Stitcher. Read more

Thought for the weekend

Hard to accept that these imbeciles represent the people in our government.

Tweet, by Martin Shkreli, pharmaceutical entrepreneur

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“It’s the stocks, not the shocks”

Jaime Caruana, the general manager of the Bank for International Settlements, and the former boss of the Bank of Spain, gave an important speech Friday, which, among other things, highlights the radically different frameworks economists use to evaluate what’s going on.

In textbook macro models, economies grow at some “trend” rate based on productivity on population growth, except when occasionally buffeted by “shocks” in different directions such as an oil price spike or a tax cut — shocks that fade in importance over time as economies “naturally” return to their “trend”. In these models, policymakers should focus on boosting productivity, which improves the trend path, and establishing institutions that smooth out the impact of the shocks when they occur by temporarily shifting resources to those most affected. Little else matters. Read more

Digital money, negative rates as Gosplan 2.0

UBS’s Paul Donovan offered some thoughts earlier this week on the unintended consequences of negative rate regimes, which — whilst interesting — stimulated a different thought in us related to data.

Here’s the comment, see if you think you know what we’re getting at…

Moving rates negative for some depositors and to zero for other depositors may create some real world distortions. If there is a greater incentive to hold money in physical form rather than electronic form, then the composition of narrow money (i.e. cash and cash substitutes) may alter. Rather than relying on electronic money, physical money will be used for everyday transactions. This is not entirely costless, as there is a security risk in storing cash under the mattress (historically the security risk was one of the key reasons for the creation of bank accounts in the first place).

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Petrodollars as the new vendor-financing feedback loop of hell

FT Alphaville readers will not be strangers to the argument a ballooning petrodollar float over the last decade set alight an emerging market export feedback loop, one of dot comedy vendor-financing proportions. Or how encumbered petrodollars have played an important role in the counterintuitive side-effects of a drop in the price of oil.

The analysts at Citi are on the case as well, calling it “Oilmageddon — death by circular reference”.

Here’s the thrust of their argument set out in a note published Friday (our emphasis):

It appears that four inter-linked phenomena are driving a negative feedback loop in the global economy and across financial markets: 1) stronger USD, 2) weaker oil/commodity prices, 3) weaker world trade/capital flows, eg petrodollars, and 4) weaker EM growth. This cycle then repeats.

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Camp Alphaville: coming soon to New York?

The AV team is thinking about bringing a version of Camp Alphaville, the topsy-turvy finance and economics festival that we host every summer in London*, to New York City in the autumn.

For those who haven’t attended one of our events in London, Camp Alphaville is designed to be infused with a property that most finance conferences find anathema: fun. Read more

Markets Live: Friday, 5th February, 2016

Live markets commentary from 

Further reading

Elsewhere on Friday,

- Sewage spies.

- How super PAC donors hide behind shady LLCs.

- The feel-good female solidarity machine.

- GMO on animal spirits and venture capital.

- The NIRP quiz. Read more

In the absence of a press release, Keurig Green Mountain edition…

“Oh, didn’t you see it? I put it right on your desk, just inside the timeshare brochure, under that pile of papers.”

Click to enlarge
Keurig Green Mountain Coffee Roasters, manufacturer of single serve coffee pods, published quarterly results on Monday by filing form 10-Q in the normal manner. Breaking with tradition, however, there was no announcement or press release.

Who cares, you might ask, as Bart Becht’s JAB Capital and friends have agreed to buy the group in December. Which is probably the reason, not the 9 per cent drop in sales compared to the same period the year before. Read more

The online lending lie

Online lending, marketplace lending and peer-to-peer lending all refer to the same thing, in order of decreasing accuracy, but regardless of what prefix you use, the semantic assumption is that companies like Lending Club and Prosper Marketplace are lenders. In fact, they both go to great lengths to avoid being judged that way by state regulators, even as they pose to consumers as providers of credit.

Although collaboration with banks is the new theme du jour for fintech, online lenders in the US have long clung tightly to banks in order to sell loans that would otherwise be illegal. This is the online lending lie, an unresolved problem full of legal ambiguity that has been prodded by the US courts but not tackled in its entirety. Read more

The lifecycle of a fintech startup

Whether it’s crypto currency or peer-to-peer, the lifecycle of a fintech start-up can be roughly summarised as follows:

Phase 1
Fintech startup creates a tool using engineering logic borrowed from information technology methodologies, tries to go it alone. Read more

Markets Live: Thursday, 4th February, 2016

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Swiss banks rolling down hills gather no bids

Credit Suisse at pixel…

Something to do with it reporting its first annual loss since 2008, perhaps? Read more

The NIM force awakens

Eeeeeee Eeeoooeeeooo, Eeeeeee Eeeoooeeeooo, Eeeeeee Eeeoooeeeooo, Eeeeeee Eeeoooeeeooo, Eeeeeee Eeeoooeeeooo, Eeeeeee Eeeoooeeeooo, Eeeeeee Eeeoooeeeooo

We have a patient coming … Read more

FT Opening Quote

Shell profits have slumped with the oil price, AstraZeneca sales are stalling, the Bank of England is set to hold interest rates. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here. Read more

Further reading

Elsewhere on Thursday,

- The “leverage attack can be seen in the way banks, the home of leverage, are being attacked and in technology which is leading the way down to the point of Unicornicide.”

- Summers on Gordon: “I wish that I could convincingly rebut his claims.”

- Being late-shamed by Lululemon founder Chip Wilson.

- What Republicans and Sanders get wrong about Wall St, leverage edition.

- “Actually, I think I came in first,” said Trump, obviously. Also.  Read more

FirstFT – Brexit and BoJo, Syria stalemate and another London

PM David Cameron expected to win late backing of London’s mayor in his fight to keep Britain in the EU Read more

More real and (inflation-adjusted) fun with the NIPA tables

In our previous post, we looked at which sectors of the US economy tend to be responsible for contractions in real output. After toiling away in table 1.5.2 of the National Income and Product Accounts, we produced this chart:

Despite accounting for less than a fifth of economic activity on the eve of the last downturn, changes in spending on residential construction, business investment in equipment, and household consumption of durable goods accounted for basically all of the decline in real GDP, just as they did in 1973, 1980, and 1990. Read more

Floating cash and carry rates, and the GO SLOW tanker phenomenon

The world is a confusing and tangled web of interconnections. One such set of interconnections relates to the cost and storage of commodities and how it feeds into the wider economy.

For years we’ve made a simple point: the return on commodities is pretty indicative of the natural rate of return. When the return on money beats the return on holding commodity inventories, commodity companies are encouraged to drawdown on inventories in a bid to turn them into higher yielding monetary holdings. All of which has two effects.

In the first instance this encourages a liquidation effect. Commodity prices fall as the market scrambles to swap oil for cash reserves. In the second instance it reduces the amount of buffer commodity stocks in the economy, because holding anything other than emergency reserves is considered a capital cost. Read more

Japanese banks don’t like something

Macro Man might just be on to that something here…

That green line heading down and away from the rest (which you shall see more easily after some enlarging via clicking) is the performance of Japan’s banks since the BoJ went negative last week.

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Markets Live: Wednesday, 3rd February, 2016

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Pens down, class, and debts off the books, please

Readers interested in higher education funding and off-balance sheet sovereign debt might want to take a look at this story from Monday, by the FT’s Thomas Hale:

Cardiff University has sold the lowest yielding higher education bond in British history, as the allure of rock bottom borrowing costs continues to entice universities into global capital markets.

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FT Opening Quote

Hargreaves Lansdown’s assets under management have risen to a record despite difficult markets for investors, ChemChina is set to acquire Syngenta for $43bn, Luxembourg is seeking to acquire minerals from asteroids. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here. Read more

Further reading

Elsewhere on Wednesday,

- Larry Fink, secret clubs of investors, and the buyback debate.

- Goldman: “there are broader questions to be asked about the efficacy of capitalism.”

- The Fed wants to know how banks would handle neg rates.

- “We have two distinct spaces here. Market space and central bank space and they are diverging at the fastest pace I have seen in a while.”

- Muppet investors… literally.  Read more

FirstFT – The UK’s new EU deal, US fortifies eastern Europe against Putin and Luxembourg’s asteroid mining plan

David Cameron releases the outline of a long-awaited reform deal he said would deliver the ‘substantial change’ he wants for the UK’s relationship with the bloc Read more

Markets Live: Tuesday, 2nd February, 2016

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Sloppy spreaders

The FCA has posted one of its “Dear CFO” letters to the UK spreadbetting/CFD sector. It follows a review across ten firms which (surprise, surprise) found various areas of concern.

Would-be investors in CMC Markets, whose float closes on Thursday, might take particular note. They are, after all, being invited to help Peter Cruddas and his wife Fiona, along with Goldman Sachs, take more than £200m off the table…

Click to read.  Read more

Why humanity’s Rorke’s Drift falling to computer Zulus matters

Right, get your affairs in order, tell your family you love them and take a long walk in a peaceful park, because surely the End of Days is nearly upon us.

Go, an ancient Chinese board game and pretty much the last one to resist the onslaught of computers that have already thrashed us at chess, Super Mario and Jeopardy, has finally succumbed. Google’s artificial intelligence outfit DeepMind has developed a computer that last year in secret beat a professional Go player, according to a Nature article released last week. Here’s Deepmind’s Demis Hassabis crowing over his machine’s triumph: Read more

Corporate bond yields and the cold pull of negativity

With a h/t to Tracy Alloway…

Here’s the dark — once implausible, now almost inevitable — future of European corporate yields from Deutsche’s Jim Reid, with our emphasis:

Incentives are a great thing in life and there is starting to be chatter as to what the incentive is to buy Euro corporate bonds at a negative yield if it ever happens. It may well be tested very soon as one consequence of the recent ECB/BoJ hint/action has been the strong rally in global fixed income.

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FT Opening Quote

BP profits have halved due to the slump in oil prices, Sainsbury and Home Retail Group say they have a deal, TalkTalk has put the cost of the cyber attack it suffered at up to £60m. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here. Read more