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In 1873, a British Physician named Sir William Gull used his diagnostic skill to term a severe eating disorder that seemed to plague those experiencing a neurotic loss of appetite as anorexia nervosa. A condition that has become one of the most pertinent medical and social disorders of modern times with an estimated 1-2% of the westernised young female population experiencing the tell tale signs of the disease at any one time. The condition itself is one of the strangest phenomena in nature, counterintuitive to our primordial need to hunt and gather as much food as we can, some individuals feel the need to starve their body of the vital energy that it requires. The human body's reaction to this activity is to burn away excess fat deposits before moving onto our muscle proteins that provide the vital ability for our bodies to function. Moreover, when taken to its eventual conclusion, these proteins become so depleted that the heart begins to fail.
Much like food for the human body, trading volume and money movement represent the essential fuel to keep the financial sector functioning and overtime a deficiency of these vital ingredients can lead to a heart attack of a very different nature. Like it or not, the financial sector represents essential fuel to the global economy with an almost unparalleled skew towards more developed nations where society nears the conclusion of demographic transition. Hard-lined socialists may call us prostitutes to the industry; capitalists may say that our reliance is merely a function of the free market economy. Whichever you choose to believe, the substantive point does not changed, the industry makes up a substantial proportion of global GDP and provides both direct and indirect employment to millions. When this fuel is sucked from the system, it does not provide the sort of fast hitting effect of Cobra but rather the slow constriction of a Python.
After spending over two millennia and billions - if not trillions - of dollars studying the atmosphere around us, I find it amazing that we are still terrible at predicting future weather patterns. Weather, like finance, is a dynamic system. What one person opines or sees in data, another will see the converse opposite. Think about August of last year, Gold bugs and debt skeptics felt that they were seeing the beginning of an impending debt spiral whereas value investors, all over the planet, scooped up stock due to their belief in the intrinsic value of securities supported by both historic valuations and multiples. Just like weather, one strategy will not triumph over another unequivocally. Over long periods, those with a value orientation have tended to fair well, whereas those who have correctly picked market downturns have made vast sums over short periods. Lorenz, the godfather of Chaos Theory, would have likely found that these convexities create the preconditions for Chaos. Chaos, and its related fields, examine how the effect of small occurrences dramatically affect the outcome of seemingly unrelated events in the future.
"Banks have turned into gigantic gambling institutions. You never know what you own. I wouldn't touch them if you pointed a gun to my head"
Bill Fleckenstein - Fleckenstein Capital
In 1903, a young Italian man by the name of Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi (Charles Ponzi to you and I) arrived upon American shores aboard the SS Vancouver. With dreams of becoming one of the worlds super elite, Ponzi swiftly moved from being a dishwasher to the Branch Manager of Banco Zarossi in Montreal (which ironically turned out to be already running a "Ponzi Scheme" far before Mr Ponzi's arrival).
Fast forward eleven years, including a brief spell in Atlanta Prison, and Ponzi was ready to launch his greatest scheme of monetary fraud. In lay terms, Ponzi set out to arbitrage International Reply Coupons between Italian and US rates using investor money. However, after running into a wave of red tape, Ponzi realised that the impressive returns that were being promised could simply be paid out of fresh money as long as he could secure a consistent flow of fresh investor capital. A Ponzi Scheme if you will.
If we re-evaluate part of the penultimate sentence…"could simply be paid out of fresh money as long as he could secure a consistent flow of fresh investor capital"…we get to the point of today’s email: Confidence. More specifically, confidence in Sovereigns.
“Optimism is the faith that leads to achievement. Nothing can be done without hope and confidence.”
At this point, I would like to ask how a Ponzi scheme differs from the modern sovereign bond market? If the primary activity in government bond markets is the refinancing of existing debt, are we not in a Ponzi scheme of our own? By this, I mean that Modern Governance and Treasury is based upon the idea of securing a consistent flow of investor capital to meet payments of the existing principal. Is it not?
As we just crown off the first month of our final twelve according to the Mayans, one of the most important events in Finance is upon us. Q4 GDP? Q4 Results? Christmas Sales Figures? No, No and No. I am, of course, referring to the season where individuals from all walks of finance are found in bars across the world either drowning their sorrows or reaping the rewards for another well remunerated year. Bonuses, are by their definition, an extra reward for achieving what can be considered "above the norm" financial results; despite the practices of many of the leading banks throughout 2007-2008. But..But..We had to retain the best talent I hear echoing around the room. A rhetoric that the ordinary Anglo-European finds very hard to stomach.
"Out of Control"
UK Prime Minister David Cameron on Bank Bonuses
The media and public bashing of the bonus culture that surrounds the financial sector and its quantitive nature is nothing new. However, given the events that have unfolded over the last five years, individuals all over the planet have a right to vent there frustration. Whether you blame lackadaisical policies by Governments, extreme risk taking by financial institutions, personal greed or general naivety for the housing crash - the effects have impacted us all in some form or another. A quick rewind of the tapes would quickly remind us of all the soon-to-be pensioners that piled their nest egg into property in the hope of crystallising a long term rental yield or capital gain only to find, in some circumstances, over fifty percent of their net asset value being destroyed during the crash. A very bitter pill to swallow. One, that is made exponentially worse by news that many of the Wall Street and City of London elite are taking home seven figures for their efforts this year.
Ever since Captain Ben turned his printer off in March of last year, the world has been a wash with rumours of when the latest round of "easing", or more simply "fiat currency printing", will occur. Seen as some form of financial saviour, the process of monetary printing has managed to successfully inflate markets and provide the appearance of policy success. However, as we all know, not even the bearded superman can stop the impending global recession that will be started by debt of profligate European nations. Not that the print-o-nomic society that we live in has realised this yet. At this point, I think it would be unfair to point the finger solely at Dr Bernanke as the folks over at the Bank of England, the Bank of Japan, The Swiss National Bank, the ECB (oops!) and a old Zimbabwean man by the name of Robert Mugabe whose HP Laserjet has been pumping out fiat for almost two decades now should also be named.
"Those jobs aren't coming back"
Steve Jobs when asked by Barack Obama about the return of Apple's US Manufacturing
To digress for a second. When there is a sell off in the global markets, the first activity that that we tend to see is the acquisition of vast quantities of US Treasury bonds. Endorsed by Little Timmy, these bonds are seen as the safest asset out there despite there being over $15 trillion of them. Strange if you ask me, but some things you just have to accept. In troubled times, yields take a proverbial nose dive towards the pivotal zero real yield benchmark where, even then, some investors are still prepared to purchase the "super secure" instruments. Its fine though, it's not like the US has a debt problem is it? Anyway, back to printing.
In 2008, a former mainstream journalist by the name of Nick Davies wrote a book called Flat Earth News. In the book, Davies explores the idea that the bulk of published news comes from a very finite number of sources, yet these stories become so widely published that readers make the assumption that they are completely valid. For instance, Davies quotes that only 12% of the stories that we read in the media are original - and that was only from the sample that he could obtain. Coupled with this concept is the ongoing process of media amplification. A term that is likely to be very new to the majority of you. Behind the idea of media amplification is the paradigm that "important" news becomes over-published, or in alternative terms, stories that would be highly unlikely to be published in the press are included to amplify the impact of the underlying rhetoric.
"Whoever controls the media, controls the mind"
So what does all this have to do with the markets? Well, when one takes a broad look across current published discourse, it is clear that the topic of European profligacy and insolvency dominates almost every headline. However, in the background, some really key events and stories are being under-published despite their normal market impact. For instance, during yesterdays trading session, the Bank of England purchased £1.7bln worth of 10+ year gilts which drove the spot rate for sterling significantly higher and provided extra "liquidity" to the market. The under-reporting of this meaningful Central Bank intervention from the BOE is just one of a number of events that are going vastly under-reported. Moreover, I believe that the effect of this will be an even greater dislocation in what can only be described as a counterintuitive market fuelled by hopium. Heard much about the US debt debate this week? I don't think so.
When contemplating what I was going to write about for the first instalment of this weeks' market comment, I thought I had it cracked. However, by 2pm on Friday, my original subject matter had to be put on the back burner so that I could explain exactly what just happened. By what, I am referring to the mass cull of Sovereign Credit ratings across the Eurozone and the profound effects that it will have globally despite what Mr Sarkozy may opine.
Where to start? Where to start? Well, whilst the ratings are a significant blow to the ego of a certain brown-haired little French man, the market - at least the rational participants - had been expecting such a move for a couple of months now. The team at Zerohedge even seemed to joke about the matter on Twitter weekly. It seemed that every Friday the hope filled equity markets would be thrown into turmoil by a "downgrade rumour", only to find the murmurs unfounded and for participants to resume their hope fuelled rally on Monday morning. However, this time, the new "i've grown a pair" S&P decided to actually follow through with the threats and warnings that have been emanating for months. A move that we should all applaud. Someone had to bring things back to reality.
"A man in debt is so far a slave"
Ralph Waldo Emerson
Those following the Sovereign bond yields or viewers of the mainstream press could have been fooled into thinking that things were actually on the up. On Wednesday, Germany successfully managed to auction off their 5 year bonds at a record low yield (by the end of the trading day) of 0.74% with a healthy bid-to-cover of 2.8 which, compared to a couple of shaky previous auctions, is a move in the right direction. Despite the low yields suggesting a bearish formation going forward, the primary focus was on the elusive bid-to-cover that reflected a strong uptake of the new debt. Roll on Thursday and the ever delusionary Spaniards manage to issue both 3 year and 10 year debt at significantly better levels than expected which, of course, sent the equity markets in pandemonium. Were saved. Hoorah! Later that afternoon, Mr Draghi bought us back down to the real world with a sobering speech warning of the threats that still exist in the Eurozone but was quite clear that the measures HE has put in place seem to be working. (We will elaborate next paragraph). To add a cherry to the already glorious week for the Eurocrats, even Italy managed to secure the first 4.75bn Euros of funding it needs this year. Just another 305bn Euros to go then. No sweat.
Every year the folks over at Merriam-Webster's Dictionary award the coveted prize of "Word of the Year". Initially devised using a myriad of statistics, the award is now determined using an online poll devised by the popular internet dictionary and encyclopaedia company; which yields truly fascinating results. (Well to me anyway). Over the last four years, we have seen what I would refer to as intrinsically Finance related words take the crown (Pragmatic, Austerity, Admonish and Bailout) versus distinctly unrelated semantics from the preceding years. This includes the likes of the word "Blog" and "w00t". (for those wondering what exactly w00t is - it is the noise made when expressing joy - think whoop whoop!)
Anyway, I digress. This development towards a greater lay focus on the activities of the Finance world is hardly paradoxical. The actions of corporations, Governments and individuals alike have had, by the most part, lasting detrimental effects on the global population since the real-estate Ponzi exploded through the later half of the last decade. However, it is the winner of Merriam Webster's 2010 Word of the Year competition that brings me to the real point of this weeks first note. The word in question is: Austerity. Or, according to Wiki, the process of "deficit cutting, lower spending and a reduction in the amount of benefits and public services provided". A concept that the political powers of the US seem unable to get their head around.
Since the its first publication in Towards New Education in 1930, the word Globalisation has been on the lips of every individual with socio-economic interest globally. We now live in a world were it is not just our lineage that may transcend borders but instead almost every facet of our lives. Billed by some as the greatest advance since the Industrial Revolution and by others as the most un-equitable transition in our history, Globalisation has truly revolutionised our lives - and within this process, we have started to see subcultures of Globalisation. For instance, in the last 10 years, we have experienced a social media revolution that has bought us all closer together and made us far more interconnected. As a society, we have opened up our doors to sharing information, thoughts and feelings openly across the single biggest development of them all, the Internet.
"The internet is becoming the town square for the global village of tomorrow"
Despite the fantastic cultural and economic advantages that the utilitarian many may experience, the process of Globalisation comes at a cost. In essence, we now all rise and fall together. The idea of economic independence in modern society is a fallacy and those who may come close are described as extreme or dictatorial, and those who don't want to share are no longer invited to the party.
- Tick By Tick Comment - Anorexic Volume
- Things That Make You Go Hmmm - 1st April
- Tick By Tick Comment - Time to Ask Who not Why
- Tick By Tick Comment - A Sovereign Ponzi
- Tick By Tick Comment - The Bonus Dilemma
- Tick By Tick Comment - Treasury Smoke Screen?
- Tick By Tick Comment - Flat Earth News
- Tick By Tick Comment - Downgrades Downgrades Downgrades
- Tick By Tick Comment - Austerity
- Tick By Tick Comment - Globalisation
- Things That Make You Go Hmmm - 19th February
- Things That Make You Go Hmmm - 6th February
- Kaufman Interviews Bill Gross about the Situation in Greece
- David Einhorn - Greenlight Capital - Jan 2012 Letter
- Towards the Paranormal - Bill Gross (Pimco)
- Religare Research - Boom Time in the Middle East?
- Things That Make You Go Hmmm - 8th January
- Things That Make You Go Hmmm - 28th December
- CEBR - Brazil GDP Overtakes UK GDP
- IceCap AM - December Presentation
- Dallas Fed - Economic Outlook Knife's Edge
- Things That Make You Go Hmmm - 18th December
- Hayman Capital - December Investor Letter
- To Have and Have Not - Double Line Funds
- Richard Koo - The Balance Sheet Recession
- All I want for Christmas is….
- Natural Gas - The Ticking Time Bomb?
- Euro Quote - Mohamed El-Erian
- Keynesian defines the UK, USA and soon to be Eurozone
- Things That Make You Go Hmmm - 4th December
- Kyle Bass' Hayman Capital - November Investor Letter
- How long will it last this time?
- How thin equity volume is misrepresenting just how bad it is
- John Mauldin on the World Economy and Alternative Investment
- JP Morgan Asset Management Survey Points to Expectation for More Quantitive Easing
- More Manufacturing in the US and UK….political dream or feasible proposition?
- Quote - Bill Ackman of Pershing Square on Value Investing
- Bloomberg Heavy Hitters - Discussion of the Global Economy with Bill Gross and Larry Fink
- European 5 Year CDS Continues to Widen on "Safe" Countries Despite the Ban on Naked Positions
- The Economist - The Most Popular Discussion Topics
- Inflation Adjusted Charts That Make Your Heart Sink
- FOMC Minutes and Silver
- Things That Make You Go Hmmm - 20th November
- How low can you go…?…Jefferies
- Hungary goes to the IMF….again
- The funny side of Europe
- Are cracks showing in the German Banks?
- Chart of the Day from Citigroup
- One Line Market Updates
- Quote of the Day - Kyle Bass
- Kyle Bass Interview on BBC's HARDtalk
- Six weeks in the life of EURUSD
- Things That Make You Go Hmmm - 13th November
- Behind the smoke screen of Europe - Hungary is slowly falling to pieces
- Our wilful blindness over the Lehman Collapse
- Tick By Tick Portfolio Update +3.05%
- Kyle Bass on The Risk Free Rate, Europe and Game Theory
- BOJ - How to lose a couple of Trillion Yen
- The UK Recruitment Bubble
- LCH Raises Italian Debt Margins….Markets Initiate Game Over Sell Off for Europe
- They Think It's All Over - It Is Now
- Diana Olick Reports on US Mortgage Defaults
- Bill Gross explains the Separation between Macro Policy and Corporate Earnings
- Things That Make You Go Hmmm - 7th November
- Nuclear Power Generation Post-Fukushima Thomas Drolet
- Quotes…The Good, The Bad and The Ugly
- CME Raises Futures Margin Requirements to 1
- Discussion of Bill Gross' Recent Comments about the Equity Markets
- The Oil Drum Explores the Idea of Growth Limitation through the Energy Markets
- Full Bernanke Speech Video 2nd November 2011
- LCH Clearnet Change the Goal Posts
- Barroso and Van Rompey's Letter to the G20 Summit
- Things That Make You Go Hmmm - 30th October
- The sketch that "saved Europe"
- Time to Focus on the Big Boys….Did I hear you say Italia?
- Rogoff Points Us Back to Reality on Europe
- United Nations Human Development Index Predictions….Greece at 13 by 2030….Optimistic
- The Swedish Housing Bubble - A Notable Statement from Riksbank
- Todays Financial Times Deutschland Headline
- Happy 25th Birthday - The Deregulatory Big Bang
- If Greek CDS doesn't pay out - The Eurocrats not only leveraged the ESFS but all the banks in the process.
- Boomerang: The Meltdown Tour Michael Lewis
- The Ultimate Un-Hedgable Bubble
- Juniper Networks - Flash Dash
- Quote of the Day - Michael Lewis (Boomerang)
- New York Times - The Global Web of Debt (Click to Enlarge)
- Forget about Europe, is it time to pick up some US CDS?
- Things That Make You Go Hmmm - 23rd October
- Financial Times Deutschland - Poll Results
- Clown of the Day - Ron William from MIG Bank
- Italian 10yr Hits 6% Danger Level for the First Time Since ECB Bond Purchase Announcement
- Chart of the Day - Merkel Ruins Gaddafi's Big Day in the Oil Market
- Colonel Gaddafi killed in Libyan Custody…We wonder what the European Court of Human Rights would say about that...
- The EU reaches deal to ban naked Short Selling….CDS prices to head stratospheric!
- Is the Risk Free Rate redundant due to Sovereign Insolvency?
- Credit Suisse - Impact of Short Selling Bans in Europe
- Word of the Day STAGFLATION
- Kyle Bass on Troika and Europe
- The Ernst & Young ITEM Club Slashes UK Growth Force from 1.4% to 0.9%
- Had enough of Treasuries? Check out Dim Sum Bond ETFs
- Pew Institute - 10 Essential fiscal Charts
- Things That Make You Go Hmmm - 16th October
- Why Occupy Wall Street is SO much bigger than you think
- Zerohedge is reporting a $74bn outflow from Treasuries in the last 6 weeks. Click the charts for more.
- Dexia CEO Pierre Mariani beats Gordon Brown in our worst trade of all time rankings
- Facts of the Day
- MUST WATCH Kyle Bass of Hayman Capital tells it how it is...
- Grant Williams (TTMYGH) - A Masterclass on Debasement and Gold
- Skepticism over the effectiveness of QE hits the mainstream press
- Zerohedge - Pimco is betting that the Fed buy Mortgage Backed Securities and they are betting BIG!
- Clown of the Day - Chad Morganlander
- Earning season is upon us….and so far things aren't "too" bad
- UPDATED: Jobs Jobs Jobs
- Why QE should work but doesn't …and the case for increasing interest rates
- Zerohedge reporting that another US housing catastrophe is lying in wake
- Former Apple CEO Steve Jobs Dies Aged 56
- Image of the Day…..Did you say more Debasement?
- Tick By Tick Recommendations Update +2.29%
- Blink and You'll Miss it….The Enstar Flash Crash
- iPhone 4S - Arbitrage 2.0
- Are Financials staring into the Abyss?
- Forget about Treasuries….where can you put your money?
- One to watch - Jack Ma____One to Buy - Yahoo! Inc
- George Soros - How to stop a second Great Depression
- Chart of the Day - Doug Short points to Negative Equity Growth in Developed Markets since 2000…and we haven't even deleveraged yet
- A message in a bottle
- Chart of the Day - Corn Falls 22% in September
- Research in Motion….IP Acquisition or Going to Zero?
- Morgan Stanley CDS heads Stratospheric
- Quote of the Day - Jean Claude Juncker
- European Consumer Confidence Drops off a Cliff in September
- Zerohedge and Reuters point to more QE after operation twist fails to wet the appetite of investors
- Chart of the Day
- Morgan Stanley - A Panorama of the European Debt System
- Quotes of the Day - Attila Szalay-Berzeviczy
- Rare Footage of the May 6th Flash Crash …Tick By Tick
- And the winner of the worst Gold trade ever goes to….….Gordon Brown
- Did Gillian Tett Call the Delta-1 Meltdown?
- Has Europe Just Sentenced Its Financial Sector to Death
- Europe's Term Asset-Backed Lending Facility Explained
- Chart of the Day
- The Simple Problem with Europe - TTMYGH
- EURUSD - Possibly The Worlds Most Irrational Currency Pair
- Capitalism Defined
- Commodity Margin Hikes
- Tullet Prebon Strategy Insights
- US Debt Visualisations
- Global Update
- What Happened to Fundamentals?