Quantitative pleasing

With the end of QE, just a quick chart to reiterate that central bank bond buying doesn’t work the way one might expect.

Far from reducing bond yields, when the Federal Reserve buys bonds, it tends to make yields go up. Equally, when it stops – or says it will stop, or tapers – the yield goes down. Read more

Draghi’s true alternatives

Mario Draghi has been very clear about what would push him into the full-blown QE of buying government bonds. He faces some serious opposition from German monetary conservatives even to the less whizzy QE he’s unveiled so far, though — that of buying asset-backed securities.

Full-on QE faces legal difficulties from the ban on financing eurozone governments, as well as deep-seated opposition within Germany and major issues about which government bonds it should buy, and in what proportion. (Italy has the most in issue, so buy mostly Italian debt? Or buy in proportion to shares in the ECB? Or to economic size, meaning the biggest share would be German? Or in proportion to the size of the banking system?).

So it feels like time to explore some alternatives that have been, inexplicably in our view, ignored. Read more

Red October

Looking at the sea of red in the markets over the past two days, it is easy to be disheartened. The Dow Jones Industrial Average fell 334 points and the broader S&P 500 was down 2.066 per cent, matching the fall in Germany’s Dax 30 at pixel time.

It is worth putting the fall into context, even if valuation, complacency and the scale of crowded trades all suggest good reasons for concern. Over the past 50 years, the market’s been down this far in a day 289 times, or almost six times a year. It is nasty, but on this basis it looks normal. Read more

Occupied territory

Amid the protests in Hong Kong, a quick reminder of what a wonderful place it’s been to invest, whether in equities or housing. Strapping one’s economy to China’s growth rocket while hanging on to a US dollar-pegged currency and the rule of law was a recipe for success.

Hong Kong house prices v Hang Seng

Of course, for the multitude of investors who forget to read the warnings: past performance does not necessarily predict future results. Also, fabulous gains on property are frequently the precursor to not-so-fabulous losses on property. Hong Kongers should remember this: after the October 1997 peak was followed by a crash, it took until April 2012 for home prices to rise back to where they had been, with prices halving along the way. Read more

Maths and the FOMC

The dot plot might include two downward pointing arrows to offset the two hawks dissenting from the Federal Reserve statement today, but there’s a growing group expecting a lot of rate hikes next year.

I’ve highlighted two clusters on the Fed’s “dots” showing where they expect rates to end next year and 2016: Read more

Estados Unidos and Spanish bond yields

Those looking for excess in financial markets have lots of examples to choose from, but a recent favourite has been the Spanish bond yield: it fell below that of the US three weeks ago, and has stayed there.

QED, say the bears. Markets are massively mispriced under the spell of central banks, and Spain’s bond yield proves it.

Not so fast. True, Spain is in a dire situation, with too much debt, insanely high unemployment, deflation and an economy which became no more competitive in the past year according to the World Economic Forum, which ranks it 35th, behind Indonesia, Iceland, Malaysia and Saudi Arabia. Read more

War and markets

Amid all the debate about why geopolitics isn’t hurting stock markets, a nice table from JP Morgan Asset Management:

All figures show war-zone countries as a percentage of the world, with our emphasis:

  • 11.7 per cent population
  • 9 per cent oil production
  • 3.8 per cent foreign direct investment
  • 3 per cent GDP

 Read more

The widowmaker doesn’t care if this is nuts

Japan is the home of the “widowmaker” trade: the obviously mispriced Japanese government bonds (JGBs) which keep getting more and more mispriced until all the short-sellers have gone out of business.

JGBs claimed victims in 1993, 2003 and 2013, when yields plunged in the face of all the arguments presented by the bond vigilantes worried about the slow economy and government debt at levels unheard of elsewhere in the world.

This year was meant to be different. Frantic money-printing by the Bank of Japan last year weakened the yen and so pushed up the price of imported goods, particularly energy, while signs of consumer spending allowed shops to push through price increases. Read more

This is nuts. Where’s the liquidity?

We’ve been worried about the lack of liquidity in the bond market for yonks. Some at the Fed (though not Janet Yellen) share the concerns, and have been talking about whether to add exit charges to bond funds to prevent a potential run on the market.

Now the Bank of England has weighed in, warning investors that they are paying more and receiving less when it comes to liquidity, particularly in bonds.

Here’s a few choice comments from the Bank’s Financial Stability Report today: Read more

That was nuts. Is this the Dubai crash?

Dubai stocks went bonkers last year, along with Qatar, distorting the performance of the (anyway tiny) frontier markets index.

Locals rediscovered their lust for equities, while foreigners were excited by a potential upgrade to emerging market status and the billions of dollars of inflows from index funds that would represent. In total the index more than tripled in two years.

In the past month it’s all gone wrong, and strategist Andrew Howell at Citi has a good reason why: the performance of Dubai, represented by the MSCI UAE index, looks very much like the out-of-control price inflation represented by the Nasdaq during the dotcom bubble. Read more

Irrational exuberance, Janet Yellen and the stock market

Janet Yellen says share valuations remain within “historical norms”.

Two words: “irrational exuberance”. Read more

Rothschilds look for $30tn capitalism fix

There was no bald supervillain stroking a white cat, but other than that the City of London hosted a conspiracy theorists’ perfect scenario yesterday: a meeting organised by the Rothschilds, sponsored by the Rockefellers and with managers of $30tn, or more than a tenth of all financial assets worldwide, in the room. Even the British royal family was represented, essential for any decent conspiracy, although usually Prince Philip is preferred to the Prince of Wales.

Perhaps there were shape-shifting reptilians present, as per David Icke. But if so, they were keeping their heads down: rather than discussing how to rule the world, the focus was on “inclusive capitalism”. Read more

What Google could get for $30bn

Google has a $30bn warchest to spend on foreign acquisitions, or so it’s told regulators. If it decided to spend the cash in one go the options for what it could buy* are rather limited.

There are only seven companies outside North America (we skipped Canada, rather unfairly) valued between $29bn and $30bn:

  • Philips has to be top of the list, as the only technology company on the list. Beard trimmers would be a natural fit for the Silicon Valley behemoth, but medical equipment and lightbulbs not so much.
  • Nordic banks Swedbank, DNB and SEB could provide Google with a solid platform to launch its own currency.
  • Investor is out of the question: a Stockholm holding company with a wide portfolio of Swedish minority stakes, it would only be useful if Google planned to go a whole lot further and buy up every Swedish blue chip (currently worth a bit less than twice Google).
  • East Japan Railway is a bit low-tech for Google; the problem of self-driving trains has already been solved, after all.
  • Compass Group brings the most obvious cost savings: the British catering giant already runs the canteen at the Googleplex (“I liked the sandwich so much I bought the company,” Larry Page didn’t say). Perhaps Google could apply its innovative approach to rethink lunch.

 Read more

Two-fifths of a dotcom crash

Anyone who invested during the 2000 dotcom bubble knows that the inflation of internet stocks last year was nothing like on the scale of the last mania. But just how much smaller was it?

Well, the popping so far this year suggests it was about two-fifths the size…

2014 v dotcom crash Read more

Again, on Japanification

Following Izzy’s charts from Credit Suisse, here’s an update of my favourite measure of how Europe’s turning Japanese.

This chart shows eurozone inflation since the region’s crisis against Japanese inflation from the bursting of its bubble. The offset puts the peak of 1990 where the eurozone was in 2011, when the US near-default started a panic which threatened the survival of the euroRead more

The real fragile five

Morgan Stanley invented the “fragile five” last year as a way to spot the pressure points in emerging markets with US monetary policy set to tighten. This year Brazil, India, Indonesia, South Africa and Turkey have mutated into the “fabulous five”, at least according to HSBC, as their currencies shed their pariah status.

The fragile five were big and matter a lot. But for the true fragile five, look to sub-Saharan Africa, reckons Sam Vecht, a fund manager at Blackrock. Here’s his comparison of current account deficits, using IMF data from January: Read more

Cheap date index says steer clear of sterling

Forget PPP-adjusted GDP. Deutsche Bank is trying to make international currency comparisons sexy with its Cheap Date index, part of its annual look at global price trends.

How much does it cost to take your loved one out? DB’s statistics wonks probably aren’t getting any, judging by the way they construct their index, which involves a date at McDonald’s and doesn’t even include flowers:

We have defined the “cheap date” as follows: cab rides, McDonalds burgers, soft drink, two movie tickets, and a couple of beers. Please note that in our last update we had included sending a bouquet of roses in the activities for a date. This year we have removed it as it was skewing the comparison.

File that excuse away; it might be useful next Valentine’s Day.

The index shows London as the most expensive place for a cheap date. True cheapskates should take their paramour to India: Read more

Takeovers, jobs and the capital markets

The attempt by US drug company Pfizer to buy AstraZeneca, the crown jewel of Britain’s pharmaceutical industry, has prompted entirely predictable reactions.

There is outraged huffing and puffing from the left and from vested interests about the loss of the UK science base. Even the FT has joined in with the pseudo-dirigism more usual in the Guardian or Le Monde, calling for an independent assessment of takeovers which might damage UK science… Read more

China, the US, and PPP: a pretty poor parallel

Much is being made of China being about to pass the US as the world’s biggest economy — and of China’s fight to massage down the figures.

We hate to side with Chinese statisticians, but at the very least Beijing may well be right to play down the comparison in its local media.

Here are a couple of surprises which come out from using similar adjustments to the PPP calculations used to show China’s economy is bigger (using the IMF’s World Economic Outlook database)…

  • In 1980, Greece and Gabon (which was in default on its debt from 1999 to 2005, but has lots of oil) were ranked above the UK for PPP-adjusted GDP per person. Before adjustment they were about a third poorer.
  • East Timor, on the IMF’s 2014 estimates, is ranked as richer on PPP-adjusted GDP per capita than Poland, Estonia or Hungary – and is ranked only 1.4 per cent poorer per person than Portugal, its former colonial master. It has discovered oil, boosting GDP. But before the PPP adjustment, GDP per capita is put by the IMF this year at $4,669 vs $14,166 a head for Portugal.

 Read more

April returns: Russia, Greece, bleh

Here’s a quick update on returns in April and the year so far, courtesy of Jim Reid at Deutsche Bank.

A few surprises: British stocks were the place to be in April, while Greek shares did worse than Russian shares – at least in local currency terms. (Click chart to enlarge)

April asset returns  Read more

Libor: Do you get what you pay for? [Updated]

As brands go, the London Interbank Offered Rate – Libor – is right up there with Enron and Lehman Brothers.

So it might come as a surprise to the poor souls forced to track the level of Libor on a daily basis that the new compilers are demanding $10 a month for what used to be free for users of terminals such as Bloomberg and Reuters to look at. Read more

Turning Japanese

In addition to John Authers… please welcome James Mackintosh, the FT’s Investment Editor, as an Alphaville blogger. Like John, James has written for us before, on everything from fair value accounting to EM hot money.

Economists have been worrying about Europe turning Japanese. Investors seem to be more concerned about Japan turning European: for the first time since IBES started compiling forward price/earnings ratios in the 1980s, Japan is cheaper on this widely-used measure than Europe (as this chart shows): Read more

The hot money speaks on emerging markets

Efforts by emerging market governments and central banks to shut out hot money to protect their economies are doomed to fail – or so says the hot money.

Bart Turtelboom and Karim Abdel-Motaal, who run the emerging markets hedge fund at GLG, now part of Man Group, represent $1.6bn of the “hot money”, politely known as portfolio flows, which has been causing such angst in emerging markets. Read more

Distress delays Devonshire’s distressed debt debut

There’s been a lot of irony in the credit crunch, from Gordon Brown’s efforts to borrow our way out of a debt problem to the attempts to force banks to lend while increasing their capital requirements.

On a smaller scale, there is a fair bit of irony in a distressed debt specialist having to delay the launch of his hedge fund because of financial troubles at his service provider. Read more

Third Point turns to gold

Dan Loeb finally has a target who can’t argue back. The manager of Third Point, the New York hedge fund, and writer of famously rude letters to corporate management he doesn’t like, has plonked a big chunk of his $1.48bn offshore fund into gold, which now makes up the fund’s single biggest holding.

Mr Loeb is far from alone in moving into gold amid widespread worries about the debasement of currencies by central banks expanding the money supply in an effort to combat deflation. New York-based Greenlight Capital’s David Einhorn made his first move into the yellow metal late last year, as Bloomberg reported, while a wave of other funds have since put at least some of their money into gold. Read more

Wishful thinking at the banks

The marketing departments at troubled banks obviously have their fingers crossed that they will still have a job – and are letting their hopes filter through into their copywriting.

Consider these pieces of junk mail, which plopped through the letterbox on Saturday: Read more

Pesto vs. McFall

This should make for fun TV: Robert Peston is to face off against John McFall, Labour chairman of the Treasury select committee, next month.

The Treasury select committee raised the question of whether journalists should be muzzled to protect financial stability when it started its inquiry last month into the causes of the banking crisis. Read more

BlueGold coins it

It is always hard to be sure who has the best-performing hedge fund, but London’s BlueGold looks like it could be the winner for last year.

With a rise of 210 per cent, tripling investors’ money, the oil and commodities specialist set up in February soared ahead of rivals – most of whom lost money. Read more

Madoff to Holland: that’s €51-€60 each please

The Madoff loss by the nationalised Dutch arm of Fortis could be €850m-€1n, Fortis Bank Nederland said yesterday.

The bank had been lending to funds which invested with Madoff, the bank said in a statement. Read more

Harbinger of (a bit more) doom

Harbinger monthly losses carried on in November, even though the mega New York hedge fund – owned by Birmingham, Alabama-based Harbert Management Corp – had switched to be net short the market.

Harbinger dropped 6.8 per cent in November, leaving it down 23.2 per cent for the year so far, according to a letter to investors last week. Read more