Biography
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Izabella Kaminska joined FT Alphaville in October 2008, which was, perhaps, the best time in the world to become a financial blogger. (Added bonus: there was a free breakfast trolly.) Before that she worked as a producer at CNBC, a natural gas reporter at Platts and an associate editor of BP’s internal magazine. She has also worked as a reporter on English language business papers in Poland and Azerbaijan and was a Reuters graduate trainee in 2004.

Everything she knows about economics stems from a childhood fascination with ancient economies, specifically the agrarian land reforms of the early Roman republic and the coinage and price stability reforms of late Roman emperors. Her favourite emperor is one Gaius Aurelius Valerius Diocletian.

She studied Ancient History at UCL, and has a masters in Journalism from what was then the London College of Printing.

And yes, she is also a second-generation West London Pole (who likes mushroom picking, bigos and pierogi).

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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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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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

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

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

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

RTGS, and the story of collateralised risk instead of credit risk

Craig Pirrong of the University of Houston has been concerned about CCPs concentrating risk for a very long time. But, as it turns out, he is also concerned about the role being played in system risk creation by real-time gross settlement systems.

Following up on FT Alphaville’s piece on RTGS last week — in which we broke down the connection between the shift towards a real-time gross settlement system, central banks’ fear of netting risks, liquidity sacrifices and general collateral abuse — Pirrong adds some extremely worthwhile points to the conversation. Read more

Maputo or bust?

Move over Tchenquiz.

Paul Murphy is going quids in on a grand design in Mozambique.

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RTGS, and the story of batches instead of blocks

Here begins a tale of how the Bank of England’s settlement system got broken without anyone really noticing…

On October 20 2014, the BoE suffered an embarrassing collapse of its real-time gross settlements (RTGS) system, forcing it to revert to manual processing for large payments such as CHAPs for about a day.

At the time, Bank personnel, bankers and the market in general passed the incident off as largely a technical issue, like a site falling down or a regular IT fail. Nothing to lose sleep over.

But the incident was arguably much graver than that. A long-standing RTGS collapse would have constituted nothing less than a systemic collapse of the sterling monetary market with potentially catastrophic consequences for the UK economy. Think human sacrifice, dogs and cats living together, mass hysteria. That sort of thing.

Also never pointed out at the time was how the events of 20 October 2014 linked back to the banking crisis of 2008. Read more

Why the tables have turned for MLPs

When it comes to the current bonfire of the MLPs, it’s easy to blame the carnage on the end of the commodity cycle, washing one’s hands entirely of the role played by the actual structure and promises of the products themselves.

But that would not be fair. These are and always have been poorly-thought-out high-risk products, with the end of the commodity cycle simply suspending the endless capital inflows which had hitherto disguised the unsustainable nature of the underlying investments in a no-growth environment. Read more

DTCC cuts through the blockchain hype

The Sorcerer’s Apprentice is the story of a sorcerer who learns the hard way that it’s probably not wise to leave a young apprentice in charge of your workshop.

Rather than getting on with tasks set by his master, the apprentice grows tired of having to fetch water by pail. To ease his burden, he enchants a broom to do the work for him, albeit with magic he doesn’t fully understand yet. The problem is, the broom ends up being so effective it floods the entire workshop. When he tries to intervene by splitting the broom with an axe, the Apprentice ends up with a decentralised liquidity broomchain nightmare he can’t control. Each piece becomes a whole new broom and begins to fetch water independently, now at twice the speed.

When the master sorcerer gets back he sees the chaos and unleashes his own superior magic to bring things under control.

The moral of the story is that a little knowledge can be a dangerous thing and, of course, to be careful what you wish for. Read more

Petrodollars are eurodollars, and eurodollar base money is shrinking

The world is waking up to the petrodollar reversal issue… as well as its significant liquidity impact on EM countries (i.e. NOT oil exporters, but importers). This, as we’ve explained before, is down to the contraction of petrodollar base money in the global monetary system, which acted as a sort of unofficial float for a market-controlled an international fractional reserve system.

There’s also a significant feedback loop connected to what we’ve previously described as the petrodollar vendor financing circle, wherein those who are long petrodollars extend duration by investing them in countries which redeploy them on growth projects, which create demand for commodities. Global growth-based commodity consumption, in this way, is underpinned by the availability of recycled petrodollars. Read more

Capital flow reversals and the Swiss

There’s been a recurring phenomenon at the World Economic Forum in Davos this week. If the global elite have finally found their way to a particular narrative or viewpoint — this year’s core fascinations being tech disruption, Europe’s existential crisis, the sell-off in markets and commodities and Chinese devaluations — you can be darn sure those topics are peaking.

The uncomfortable undertone to the above is that almost no-one was worrying about any of the above this time last year.

Of particular interest in that context: Why did the global elite miss probably the most significant capital reversal flow story of our time? And its effect on oil producer states and emerging markets? Read more

Cyberhacking as the next systemic banking risk

We all know how subprime lending triggered the Global Financial Crisis of 2008. We also know how faced with only two options — financial meltdown or the transfer of state wealth to the banking sector — governments felt they had no choice but to save the system at a cost to the taxpayer.

But could something as innocuous as shoddy password management or a data breach lead to a very similar set of circumstances in the not too distant future?

A group of experts gathered at the World Economic Forum at Davos to talk about cyber-resilience seemed to think that, yes, yes it could. Read more

Blockchain hype storms Davos

Now that Satoshi is a “Davos man”, does that make him “The Man”?

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Davos: Historians dream of fourth industrial revolutions

Davos Day One. The historians are breaking down the significance of the fourth industrial revolution.

They’re talking about AI, robotics, IoT, self driving cars, 3D printing, quantum computing and whether such things really will equate to a new industrial era — the new ‘new economy’ thesis if you will.

The fourth industrial revolution, Harvard’s Niall Ferguson notes, is distinctive because of its exponential rather than linear pace, not only changing what and how we do things but also potentially who we are.

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Prepare for the Post Pax-Americana era, says Citi

Students of the Roman Empire will know all about Pax Romana. (Though, mind you, so will readers of Isaac Asimov’s Foundation series.).

The concept can be summed up as follows: peacetime makes people and economies lazy. So much so that governments take their eye off the ball. The state grows lax with its defences. The bureaucrats forget their purpose. Overt tolerance leads to unmanageable internal dissidence, dismissed as unimportant until its too late. Borders become threatened. Et cetera, et cetera.

It is, in other words, the paradox of peace.

In its new Global Political Risk report, Citi analyst Tina Fordham and team draw on how the post-Second World War period created a Pax Americana equilibrium for much of the world. Within the US protection framework (the vast array of international agreements and organisations that guard the system), those economies which subscribed to the American value system were able to flourish. A period of great wealth and prosperity followed. Read more

Scaling, and why unicorns can’t survive without it

Mike Hearn, a key developer in the bitcoin eco-circus, quit bitcoin on Thursday. He did so with much fanfare.

As is the norm these days, he shared his reasoning, angst and rage in a Medium blog post, saying that he quit due to a schism in the community about how to scale bitcoin.

FT Alphaville met Hearn last year in an off-the-record encounter with a bunch of hedgies, who were sounding him out on whether or not bitcoin had legs as an investment. Hearn himself struck us as very reasonable. He was down to earth, pragmatic and totally open about the challenges bitcoin was facing. He was, nevertheless, still optimistic.

Seemingly, that is no longer the case. Read more

Guessing Uber down to six decimal places

A nice scoop for Bloomberg on Uber’s potential private market valuation, as per documents provided to potential wealthy investors in the ride-hailing business by Morgan Stanley and Bank of America. Of note:

“Given the Company’s sustainable competitive advantages, large market opportunity, and growth prospects of the Company, the Investment Team believes that the pre-money equity valuation for the Company of $62.5 billion or $48.772228 per share is reasonable,” the offering says.

No concrete financials per se, but there are a number of perturbing risk factors presented for the yet-to-be profitable business. Read more

China’s crude oil price exposure

We don’t think of China as an oil producer. And yet, it very much is.

China’s oil production in 2014 amounted to about 4.2 mbpd in 2014, according to BP statistics — equal to that of Canada’s production at 4.2 mbpd in 2014 and nearly double that of Nigeria’s at 2.4 mbpd.

Then, of course, there’s the mark-to-market value of China’s strategic petroleum reserve, which the country has been building up for years. We don’t know the actual size of the SPR because the numbers are not public, but oil experts say it stands close to 100m barrels, with a sizeable portion of the reserve built up during the $80-$100 per barrel price era. Read more

Calling home the petrodollars!

While the world contends with the consequences of shrinking petrodollar flows, Emad Mostaque at consultancy Ecstrat provides an interesting take on the potential benefits of such reversals for petro sovereign Saudi Arabia.

Tl;dr: It’s a blessing in disguise because it forces the kingdom to restructure its economy and reduce its dependency on foreign labour and hydrocarbon receipts.

As Mostaque explains, to-date Saudi Arabia’s rulers have supported a social contract with the populace wherein the state offers a level of employment surety through the public sector and benefits, while almost all of the private sector workers are foreigners without settlement rights: Read more

If and when Uber drivers unionise…

What makes Uber such a disruptive force in the taxi market?

Is it its app technology?

Or is it the fact that its business model transfers the ball and chain costs of capital, vehicle rental and maintenance, risk, tax and insurance costs over to taxi drivers, who often don’t appreciate the all-in operating costs until they’re far too invested in the scheme?

Perhaps, alternatively, it’s because the notoriously “asset light” taxi company pays scant attention to local licensing rules or regulations and sometimes even likes to spy on where its customers are going.

Or maybe it’s because Uber disregards the laws of supply and demand by having an entirely open-ended policy with regards to the size of its driver network.

Or perhaps still… it’s because the app removes awkward cash transactions from the process and in the same instant removes the potential for a tip or a “keep the change” additional earnings opportunity for the driver. Read more

To Noble-y go where no commodity trader has gone before

Noble Group chairman Richard Elman has increased his stake in the beleaguered commodity trader in an attempt to offset the ill effects from last week’s downgrade of the company’s credit rating to junk status by S&P.

As of last Friday, Elman holds 22.1 per cent of the company, up from just below 22 per cent according to Reuters.

Not that Elman’s move has helped to shore up the CDS or the bond yields, which on Monday were testing levels last seen in 2008 when rival Glencore 1-year CDS soared to 2283.05. Read more

Still waiting for one FTT tax to bind them all, ex Estonia

In case you missed it, late last year Estonia rumbled the European Union’s plan to implement a financial-transaction tax. It essentially refused to sign on to the legislation despite the agreement of 10 other EU finance ministers to do so.

The move, of course, demonstrates why it’s so hard to implement industry standards internationally on a top-down basis. Unilateralism understandably prevails whenever there’s a risk that national competitiveness might be compromised.

That’s especially the case when a jurisdiction sees its future tied to making itself accommodating to the financial sector, and even more so when that accommodation is focused on welcoming digital innovation in a capacity which encourages speed, accessibility, high turnovers and affordability... Read more

Fintech paradoxes, blacklist edition

One of the reasons we’ve been sceptical about fintech’s capacity to greatly improve on the current (increasingly unscaled) financial system is that it’s inherently paradoxical. Finance isn’t like other capital goods, which can be mass produced to the advantage of everyone.

To the contrary, some might argue, the value of finance is derived from its ability to properly ration goods (someone else’s current wealth) to the most productive and honest actors in society — who have already earned those access rights to goods or promise to earn them in the future — and withhold them from the least productive bad actors. Read more

A limit to share buybacks?

Matt Levine at Bloomberg likes to track people who are worried about share buybacks.

Here’s a chart for his compendium by way of Matt King of Citi’s global credit view on Thursday: Read more

~$250bn less unsecured financing for financials, says Credit Suisse

The Fed rate-hike may have been priced in by the market, but what are the chances the market really priced in the effects of the rate-hike on the plumbing of the financial system, in particular with respect to the initiation of the unlimited RRP facility?

A report from Credit Suisse’ Global Rates Strategy team provides food for thought on Thursday.

For example, while we’ve already discussed the prospect of safe-asset starved MMF funds deploying en masse to the RRP facility, there’s an important nuance to be noted with respect to the winner funds and the loser funds in this new money-market paradigm.

From CS (our emphasis):

We expect that government-only money market funds are likely to see an inflow of $600bn-$1tn, while institutional prime funds could lose between $300-$500bn over the course of the year.

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Reserves, outflows, CNY depreciation, oh my

The man who knows about the size of central bank reserves needed to defend domestic economic stability says this on Thursday at an economic forum in Sri Lanka (via Bloomberg):

“China has a major adjustment problem,” Soros said. “I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.”

Which is apropos because, via Reuters, on Thursday:

China FX reserves fall $512.66 bln in 2015, biggest annual drop on record – RTRS

BEIJING, Jan 7 (Reuters) – China’s foreign exchange reserves, the world’s largest, fell $107.9 billion in December to $3.33 trillion, the biggest monthly drop on record, central bank data showed on Thursday. The December figure missed market expectations of $3.40 trillion, according to a Reuters poll. China’s foreign exchange reserves fell $512.66 billion in 2015, the biggest annual drop on record. The value of its gold reserves stood at $60.19 billion at the end of December, up from $59.52 billion at the end of November, the People’s Bank of China said on its website. Gold reserves stood at 56.66 million fine troy ounces at the end of December, up from 56.05 million at end-November.

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A case of post ‘Fed-hike’ traumatic stress disorder for markets?

The rate hike was all priced in. They said.

But might everyone who made this purchasing decision just before Christmas live to regret it?

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