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
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
Two sets of charts from BCA Research with unclear implications:
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
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 Overview) Read more
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
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.
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.
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.
Live markets commentary from FT.com
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.
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
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
A chart from Citi on the occasionally epic length of some auditing relationships on the back of the Tesco messiness:
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 Overview) Read more
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
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. …
Alibaba this week…
The calm after Wednesday’s one-day storm is downright weird. No?
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
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.
Deutsche’s George Saravelos isn’t entirely convinced by the calls for QE4/QEmore rattling through our inbox from those on the receiving end of this correction.
Those looking to the Fed to save the day are looking at the wrong place. First, unlike the September 2013 non-taper, US rates have rallied and American data surprises are close to their highs. Second, this is not about the US but the rest of the world. Bunds and gilts have rallied 9-10% this year compared to a 6% rally in USTs. This is about global, not American fears. It is about how the world transitions away from Fed-driven liquidity (QE winds down this month) to the rest of the world.
Live markets commentary from FT.com
Eight minutes of wonder for the S&P 500.
Let’s call it the Alibaba indicator, with thanks to BofAML’s Thundering Word:
The S&P500 index peaked at 2019 roughly 8 minutes after the Sept 19th launch of the Alibaba IPO.
Or QEinfinity continued we suppose.
From Deutsche’s Jim Reid the morning after the liquidity crisis before:
With all this going on one wonders what probabilities you’d get that the Fed actually does QE again before it raises rates. I’m sure if you’d have suggested this a month ago many would have thought that there was more chance of Elvis being found living a relaxing retirement on the moon.
So says, at least, Sebastien Galy from SocGen on Thursday.
As he notes: Read more
Elsewhere on Thursday,
- “Because banks are magic, and if you look too hard at how the magic happens, you might stop believing in it…”
- The risk that will bite you next is NOT the one that bit you last.
- A market postmortem and a view of the afterlife.
- Gates on Piketty. Read more
Markets: The global equity market rout spread to Asia, driving Japanese stocks to their lowest level in six months, although declines elsewhere in the region were more muted. The Nikkei 225 sank 2.3 per cent, dropping below the 15,000-mark to hit 14,724 before coming back a touch. The yen was steady at Y106 against the US dollar. Concerns about the global economy sparked a “flash crash” in New York trading, driving US 10-year Treasury yields below 2 per cent for the first time since May 2013 as trading volumes soared — a record $924bn in US government debt changing hands throughout the session, according to ICAP data.. The S&P 500 lost as much as 3 per cent before closing the session down 0.8 per cent. “The liquidity crisis many had waited for is unfolding. Theoretically it is an absence of speculators willing to absorb risk,” wrote Soc Gen’s Sebastian Galy. (FT’s Global Markets Overview) Read more