Australia less bubbly than it looks?

Australia has a lot in common with other rich English-speaking countries, but unlike them, it basically missed the global financial crisis. Was that good luck, or a temporary postponement of the inevitable?

We’ve considered the case before, but we were struck by a recent speech by Glenn Stevens, the governor of the Reserve Bank of Australia, which spends considerable time on this question. Read more

Executing Trader Sarao

Craig Pirrong, Streetwise prof and futures trading expert, delves into the case of the Hounslow Spoofer, and like us, smells a rat.

For one thing, notes Pirrong, the official complaint doesn’t offer much in the way of detail on the execution strategy. It’s all very well alleging that Sarao spoofed the market with bogus orders, but none of this explains how he actually made money from the strategy. Especially given that the numbers presented don’t seem to add up. Read more

The benefits of naked shorting – Update

On the topic of supposedly malign market behaviour, remember how naked short selling was one of the bogey-people-things which nearly destroyed the financial system?

Dick Fuld gave naked short sellers (who sell stock without first borrowing it and so may “fail to deliver” the sold shares to the buyer) a share of the blame for the failure of Lehman Brothers on his watch in 2008, and the following year the Securities and Exchange cracked down on “abusive short sales”.

Well, here’s something to bookmark for the next crisis:

we do not find any evidence that Fail to Delivers caused price distortions or the failure of financial firms during the 2008 financial crisis.

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About that Wunderbund….

FT Alphaville would like to recall a post series entitled “Wunderbund,” which purported to follow the 10 year German sovereign benchmark bond all the way to a yield of zero.

We come out with our hands up. This was clearly the wrong call.

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Saving Trader Sarao

Picture the scene in the London borough of Hounslow on Tuesday lunchtime, as police moved in to arrest one Navinder Singh Sarao, holed up in a humble end-of-terrace post-war semi.

There’ll have been prior discussion of the possible need for a special forces sniper overwatch. Someone will have remarked on the security implications of having a man like this, with a Muslim-sounding name, apparently living so close to one of the world’s major transportation hubs, airliners passing just a few hundred feet overhead every 90 seconds or so on their way to Heathrow.

Because Sarao stands accused of declaring Jihad on the S&P Futures market, the Apple Pie of American finance. Read more

Markets Live: Wednesday, 22nd April, 2015

Live markets commentary from FT.com 

SOE you’ve actually defaulted?

Alternatively: SOE, do we have credit pricing in China?

Click for the (Mandarin) notice sent by Baoding Tianwei on Tuesday, informing bondholders that it would be missing a $14m interest payment and thus making it a rare Chinese corporate default. Like Kaisa. But not like Kaisa. Because Baoding’s also part of a state-owned company, China South Industries. Read more

Further reading

Elsewhere on Wednesday,

- Ashoka Mody on the IMF’s big Greek mistake.

- Today in the political economy of Thomas the Tank Engine: The dysfunctions of Sodor Railways.

- And how, obvs, “the great trick of Sir Topham is to employ engines who essentially evoke the image of the New Soviet man in the service of a proto-capitalist, semi-feudal enterprise.

- Of course, it’s also “no wonder Sir Topham… made enough money to buy himself a peerage.”

- Krugman weighs in on John Taylor. Read more

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A British futures trader was arrested for allegedly contributing to the2010 “flash crash”, when the Dow Jones Industrial Average plunged more than 600 points in a matter of minutes. Navinder Singh Sarao, 37, had been operating out of a suburban house under the approach path to Heathrow airport. US authorities are trying to extradite him to stand trial in Illinois. (FT)

He was charged with one count of wire fraud, 10 counts of commodities fraud and one count of spoofing – a form of market manipulation that involves putting in an order and swiftly withdrawing it before the trade takes place in order to trick others into making the trade. Michael Mackenzie explains how futures trading crashed stocks back in 2010. (FT) Read more

The CFTC’s alleged flash crasher

Though note the causal chain in the CFTC’s press release for its complaint against trader Navinder Singh Sarao — of the Hounslow suburb, Heston…

The CFTC Complaint Alleges that Defendants’ Manipulative Conduct Contributed to the Market Conditions that Led to the May 6, 2010 Flash Crash Read more

FT Commodities Summit: No-one saw the oil slump coming

Some highlights from the FT Commodities Summit, which is taking place in Lausanne, Switzerland this Tuesday and Wednesday.

Oil production is becoming more of a manufacturing activity Read more

What is Slater & Gordon?

In 1935 Bill Slater and Hugh Gordon started a Melbourne law firm to serve local union members. Eighty years later the impetus is broadly the same, to offer decent legal services at an affordable price, but the ambition has changed. If regulators approve the takeover of Quindell professional services, Slater & Gordon will, by some distance, be the largest personal injury law group in both the UK and Australia.

When Andrew Grech took over as managing director in 2000 Slater & Gordon was still a partnership. It incorporated the following year, then listed in 2007, and he has bought more than 50 law firms to get to this point. “We’re not megalomaniacs; none of us set out to become bigger for its own purpose”, he told FT Alphaville. Rather, size is a means to offer specialist legal services to the greatest number of of clients at a reasonable price.

Still, industry roll-ups come with risks, the company is the only listed law group of size and legal accounting can be opaque. One way to assess the success of all the consolidation is to ask a question: what would happen if Slater & Gordon stopped buying law firms? Read more

China’s stalled catchup?

Some more sentences about China, this time from BNP Paribas’ Richard Iley:

It has been a near unshakeable axiom that China’s economy is on a pre-determined flight path to overtake the US and quite quickly become the world’s biggest economy. But China’s rapid nominal compression combined with the end of RMB appreciation vs. the USD and the solid c.4% nominal GDP growth in the US economy mean that, for the first time in a decade, China’s catch up with the US has stalled. Q1 GDP data is not yet available for the US economy but, assuming a cautious 2.5% annualised increase, helpful base effects would still leave nominal GDP at c.4.5% y/y. The US has therefore almost certainly grown faster than China’s in USD terms over the last year for the first time in well over a decade (Chart 5 & 6).

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FT Commodities Summit: US oil independence to bust dollar-pegs

The FT’s Martin Wolf led a stellar panel on the global economy and the outlook for commodities featuring China expert Michael Pettis, BP’s group chief economist, Spencer Dale (formerly chief economist at the Bank of England), and Goldman’s chairman of global natural resources Brett Olsher.

As one might expect there was a difference of opinion on the panel about China’s future growth path. Goldman’s Olsher said he was confident that China would be able to maintain 6.5 per cent to 7 per cent growth in the near term, whereas Pettis suggested that even 3-4 per cent should be considered a successful adjustment. Read more

Markets Live: Tuesday, 21st April, 2015

Live markets commentary from FT.com 

Marketplace lenders and the Chinese path to a gift-card economy

Most of us know it as shadow banking. Others refer to it as non-bank lending. But a whole new nomenclature — “market-based financing” — is growing in popularity, making the whole thing sound a lot less shadowy, rightly or wrongly.

Nathan Sheets, Under Secretary for International Affairs at the Treasury, in any case urged us to call it that when he spoke about the phenomenon in a speech earlier this year, a sentiment that has also been echoed by the Financial Stability Board.

We refer to this because a similar rebranding effort is currently going on in the world of P2P lenders, many of whom now prefer to be described as operating in the sphere of “marketplace lending“. Furthermore, some analysts we’ve spoken to don’t consider P2P lenders to be shadow banking institutions at all. Some simply call this new source of financing “internet funds”. Read more

Of free floats and nutty markets in China

Today in sentences about China you might want to pay attention to, from Macquarie:

In our view, the real level of margin finance leverage in China’s markets is actually already much higher than all the historical examples that we can find (ie, for which the data is available to us).

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Countdown to lift off

Expect much jaw-jawing over the consequences of rises in US interest rates, pencilled in for the end of this year, or maybe the start of 2016. It will be a data dependent decision to be taken by Janet Yellen and her colleagues at the Federal Reserve, after all.

Questions include whether the financial world is ready for the scale and pace of subsequent rises in interest rates, and if there will be a general freak out in markets where policy tightening is a distant memory.

Put BCA in the low probability of freak out camp.

The risks that outflows from bond mutual funds and ETFs could cause a sustained market disruption are overstated, in our view.

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Dispatches from the 2015 FT Commodities Summit

FT Alphaville is in Lausanne, Switzerland, for this year’s Commodities Summit. The conference is taking place at the Beau Rivage — a hotel so good that John Oliver has even expressed a desire to have intimate relations with it — and the opening keynote from Ning Gaoning, chairman of China National Cereals, Oils and Foodstuffs Corporation (COFCO) is about to begin.

Here are some scene setter pics: Read more

Further reading

Elsewhere on Tuesday,

- Of NY’s pension pot: “When you’re that big, it’s fair to ask why you’re paying external managers at all.”

- Crowding in and the paradox of thrift.

- Greece, where an irresistible force is about to meet an unmovable object.

- “Corzine is a guy who lives and breathes the motto “Each Time A Door Closes, A Bigger, More F*cking Awesome One Opens.” If he hasn’t had it tattooed across his lower back yet, it’s only because he’s still settling on a font.”

- Pity the poor, unloved, elite.  Read more

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Gazprom is next in the pipeline for Margrethe Vestager, the EU’s competition chief. She plans to accuse the Russian energy company of illegally abusing its dominant position in Europe’s gas market by thwarting competition and pushing up prices in central and eastern Europe. (FT)

Charges have been ready since the end of 2013 but the case was delayed by the Ukraine crisis. The FT looks at how the case, which could inflame already difficult relations with Moscow, began with Europe’s biggest ever antitrust raid in September 2011. Read more

Quoth the Raven steps out of the shadows

When we first looked at pyramid scheme law, we set out to get away from the personalisation of the debate about the legitimacy of a multi-level marketing business selling protein shakes around the world. Bill Ackman versus Carl Ichan and George Soros is ultimately a sideshow while government agencies conduct investigations into Herbalife.

Still, inevitably perhaps, the debate has become personalised, and the “Herbalife is a pyramid scheme” camp is sometimes presented as an organised campaign where short selling hedge fund Pershing Square pulls all the strings.

Hence a new blog from Quoth the Raven, a frequent writer on the topic of multi-level marketing who has abandoned his anonymity to leave no room for innuendo. Meet Chris Irons, a working class Philadelphian, a Liverpool FC fan, and a blogging finance guy who did his own work and happened to come to the same conclusion as a famous and successful fund manager. Read more

Secret Camp Alphaville 2015 discount code

You’ll have to be quick to take advantage of this.

The early bird half price ticket offer for Alphaville’s annual finance festival in London (July 1 in the grounds of the HAC) expired on Sunday.

But an email extending the £99 offer to members of the Long Room went out late, on Monday, with this discount code… Read more

The default position: wait two and a half years

Deutsche Bank’s annual study of defaults has landed. Thoughts on how the next cycle for corporate borrowers might be affected by flatter yields curves below, but first a reminder of just how little money has been lost to bad debts since 2009.

We can’t overstate how low overall defaults are. The 2010- 2014 cohort is the lowest 5-year period for HY defaults in modern history (quality adjusted). To protect for default risk in BB and Single-B rated bonds over this period, investors would have only required 27bps and 94bps respectively. Current EUR/USD BB spreads are 301/350bps and Single-Bs 598/527bps. Indeed in CDS, Crossover now has 10 full years of default history. The peak 5 year default period was the 12% seen in Series 8-10 (late 2007 to late 2013). Relative to its ratings, average default risk for this index should now be around 20%. So this reiterates that recent history and average history in default terms remain remarkably far apart.

 Read more

Markets Live: Monday, 20th April, 2015

Live markets commentary from FT.com 

A policy put and a call in China?

Not an unhelpful way of looking at this weekend’s moves in China — the largest RRR cut since 2008 on Sunday following ropey growth data and a move to rein in the stock market, via more room for shorting and less room for leverage, on Friday — from Citi with our emphasis:

We reiterate H [shares of mainland Chinese companies traded on the Hong Kong stock exchange and denominated in Hong Kong dollars] preference over A [shares of Chinese companies listed on either the Shanghai or Shenzhen stock exchanges], following the 100-bp RRR cut and CSRC’s margin trading rule enhancement over the weekend. The “economic policy put option”, i.e., easing bias if economy weakens, is in line with our views post 1Q15 GDP. The RRR cut, more significant than expected, suggests urgency to ease and provides Rmb1.3tn liquidity. Our economists now expect two more rates cuts and two more RRR cuts ahead in 2015. MXCN gained 1% on average following 50-bp RRR cuts historically. For the gov’t A-share equity policy stance, however, we think an “equity policy call option”, i.e., tightening bias if equity surges, seems emerging given the high leverage and reasonable valuation

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Further reading

Elsewhere on Monday,

- Oh look, Varoufakis met Buchheit.

- Krugman on Greece and sunk costs.

- Game (theory) of Thrones.

- And the Night’s Watch as the perfect central bank for Westeros? Read more

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Hundreds of refugees are feared dead after an overcrowded boat tipped over off the Libyan coast. This was the worst maritime disaster of its kind in the Mediterranean and has increased pressure on EU countries to prevent further incidents. (FT)

Italy last year shut down its patrol of the Mediterranean and the EU launched a more limited mission in November. The Italian government has persistently asked the EU to increase funding for the patrol but there is no consensus to do so, with many European governments feeling pressure from anti-immigration groups. Read more

Law professors come up with zany plan to ruin your retirement

Here’s a weird idea (emphasis ours):

Pass a law that restricts the holdings of mutual funds and other institutional investors. The law would be very simple. Currently, employees and employers get tax advantages when employers set up retirement accounts for employees. The government regulates the types of funds that employers may offer to their employees. The government should direct employers to offer only mutual funds that do not own a significant number of shares of more than one firm in a specific industry. In other words, mutual funds would be allowed to own shares of only a single firm in any specific industry, but could invest in as many industries as they wanted.

For example, a mutual fund could own shares in United or Delta or Southwest, but not more than one airline. The same mutual fund could also own shares in GM or Ford or Tesla, but not more than one car manufacturer. By owning shares in different industries, mutual funds could continue to offer the diversification benefits that investors value them for. But because mutual funds would not be allowed to own shares of firms in the same industry, they would have no incentive to encourage firms not to compete on price.

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Guest post: The Euro and the IMF Now

Here’s former IMF staffer Peter Doyle , with some bold advice from the wings of the IMF Spring meetings…

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