Where will all the new money come from?

THIS POST IS A YEAR IN THE MAKING.

Wipe our Debt
Wipe our Debt (Photo credit: Images_of_Money)

We discovered it unpublished in our web archive today and as the theme is still very relevant today, we decided to publish it:

Today’s brief analysis of US Treasury Yield curves and the Debt profiles of both the USA and Italy highlights the enduring question in the title of this post.

The first graphic highlights one important issue.  We chose 2 August 2011 versus 17 February 2012 as key dates to compare the US Treasury Yield curve.  If we cast our minds back to 2 August 2012 two key facts emerge:

  1. This was the D-Day of the US Debt Ceiling vote
  2. The US still had a Triple A credit rating

Image

The key take-away from the Yield Curve comparison is that even with a ratings downgrade, the US is actually able to borrow new capital at a lower rate of interest 6 months on.

However, to pour a bit of realism into the analysis, we highlight two interesting Debt profile graphics below.

Image

The first one is the USA Treasury Maturity curve (admittedly 6 months out of date), highlighting when the current debt will need to be redeemed or rolled over.  The second is the Italian Bond Maturity curve.  You will notice just how similar the USA and Italy Debt Maturity profiles are.

 Image

From this comparison, the critical question currently for us is:

Where will all the new money come from to roll over the debt maturing during the next 3 – 12 months?  QE is one option, but investors still need to be convinced that their capital is safe and relatively risk-free.  It is the Risk-free equation (or investor risk appetites) that needs to be explored in more detail.

theMarketSoul ©2012

PS. Off course QE was the option and still remains so, for the moment…

An orderly leap into Chaos?

It is a timing thing

When the Euro zone Debt driven financial crises – yes, it has been dragging on for a little while now; lurching from one convulsion to the next tremor – is headline news across most traditional newspapers in Britain, it is worth pausing briefly to consider the overall ‘management efforts’ of the European leadership and senior bureaucratic establishment and the potential outcomes.

€2 commemorative coin Euro Zone 2007 50th Anni...
€2 commemorative coin Euro Zone 2007 50th Anniversary of the Signature of the Treaty of Rome Français : Pièce commémorative de 2 euros de la Zone Euro en 2007 pour le 50e anniversaire de la signature du Traité de Rome (Photo credit: Wikipedia)

The interesting point to observe today is the development of the crises from one of ‘consolidated rhetoric’ to save the Euro zone and Euro project, to a slow and it now seems inevitable conclusion that certain ‘none performing’ members will have to leave the Euro monetary union. This ‘orderly exit’ is now overdue because the political will, fiscal consolidation and Euro zone wide risk sharing necessary to ensure continued membership, on an equal footing, has been and is being rejected by the electorate as incumbent political leaders and governments stumble and fall as each political reflection point at the ballot box looms.

What is not being openly discussed?

What is currently not part of the popular discourse is the fact that the risk has moved on from a political, credit and market risk to one of a social or socio-economic dimension.  Because ‘austerity proper‘ has not yet begun to bite and embed itself firmly in the economies of most European countries, as part of the process of climbing the stairway on the upward leg of addressing the mountain of sovereign debt built up over the last few years, nobody has really, except for Greece (and a blip in August 2011 in Britain), had to deal with large-scale and continued civil unrest.  Yet, this is exactly the scenario we need to prepare for as a few conversations we have been having with analysts and pundits has openly started raising this spectre as another risk factor to add to the volatile cocktail we are already expected to swallow.

The next step?

Graphic "When Greece falls" presente...
Graphic “When Greece falls” presented by Dutch government on 21 June 2011, speaking of European sovereign debt crisis (Photo credit: Wikipedia)

Is a full-scale exit by the weaker Euro zone nation states on the cards and the possibility of a wholesale devaluation of the Euro? Well, that depends on where the financial and fiscal power and discipline lies and we believe that most observers of the European Debt Crisis known the instinctive answer to that question…

A final thought is to start preparing yourself for debates and contingency planning around a disorderly exist by weaker Euro zone members.  And have large-scale civil unrest as part of the scenarios you need to consider…

theMarketSoul ©2012

The Roman denarius was debased over time.
The Roman denarius was debased over time. (Photo credit: Wikipedia)

Some Questions for Europe

After the conclusion to what some pundits called a ‘tumultuous week’ for Europe (week ending 11 May 2012), we still find ourselves asking some important questions.

Europe Simulator
Europe Simulator (Photo credit: wigu)

We all know that the question is not around what growth, where growth or why growth.  The fundamental question in Europe now is:

How Growth?

For way too long Europe and its leadership had taken its eye off the growth ball.  They had taken their eye off that ball focussing instead on creating the conditions for a ‘stable’ internal market, forgetting that it was all actually centred on competitiveness and growth creation!

Too much needless bureaucratically driven regulation, not creating the sustainable conditions for growth, but rather the spiral into debt driven oblivion…and therefore leading to the volatility and the instability we currently experience!

So the choice now comes down to how do we drive growth, in the face of an electorate that favours public sector driven growth, rather than private sector led growth.

It must make common (or at the very least common enough) sense for private sector growth incentives being created, rather than debt fuelled public sector or even Keynesian focused supply side stimulus. But no, the discourse in Europe has not been around stimulating demand by creating the conditions for competitive led export fuelled growth!  Instead, the in-fighting and constant politicking around balanced budgets and debt to GDP ratio targets and endless pacts to patch the patient with half-baked policy sticky plasters has contributed to exactly the opposite outcome the leadership tried to create in Europe, namely a stable platform for internal market competitiveness.  They forgot about the world changing outside the ‘Chinese wall’ of an expanded 27 member union.

And now the electorate has firmly rejected the austerity programmes, in both Greece and France, because they have not been educated in the dangers of public sector excesses.  Nobody in Europe (except for maybe Sweden) realised that giving the “Engine of Growth”, namely enterprise and entrepreneurs an incentive to create businesses and employment opportunities, is actually tax reductions and not increases, combined with tempering public sector growth and reducing labour market inflexibility.  Most European countries have youth unemployment; the hungry, tech-savvy and street smart under 25’s, running in double digits, of anywhere between 15 – 50%, depending on which country or statistics you want to believe…

We beg you Europe

For the sake of yourselves and the rest of the world, we beg you Europe (and off course we mean the leaders of Europe) to think about the following key growth criteria, as part of any ‘Growth Pact’ you might negotiate in the coming months:

  1. Reduce the size of your bloated public sectors
  2. Introduce private property ownership incentives and pension reforms
  3. Lower your punitive tax rates
  4. Reform your burdensome and needless regulation, opting for streamlined market driven regulatory stabilisers
  5. Introduce labour market reforms and encourage flexibility and mobility
  6. Encourage and actually treat your citizens like the responsible ‘conduits of growth’ and employment creators they are and can be
  7. Encourage personal and community based accountability
  8. Be tough on crime, but fair on punishment and reform

And above all believe, think, do, act and (if you must) enact economic GROWTH!

theMarketSoul ©2012

The Return of Risk?

Department of Treasury Seal
Department of Treasury Seal (Photo credit: woodleywonderworks)

We take a brief look at two interesting Treasury Yield curves today.

The first Yield Curve takes a snapshot view of the yield curves at the end of Q1 2011 and Q1 2012.
What is very noticeable is the fact that the overall yields for the end of Q1 2012 is significantly lower than a year ago. Taking a look at the at the 5 year T-Note yields as an example, the spread between the end of March 2011 (5Yr T-Notes at 2.24% ) and the end of March 2012 (5Yr T-Notes at 1.04%) was 1.20% down. The question is what factors drove down the ‘risk-free’ rate on US Treasuries?

However, turning our attention to the second graph below, indicates a slightly different perspective; and hence the title of this post. Has and is risk returning to the capital and stock markets to levels we previously experienced?

Not quite, is the short answer, because the spread between 31 December 2011 (0.83%) versus the 1.04% rate at the end of March 2012, only indicates an uptick of 21 basis points in the yield rate. The significance is not the percentage spread, but rather the direction of movement and we will continue our analysis at the end of Q2 2012 to establish whether the direction in Q1 2012 will be maintained into Q2 and beyond.

The final question to ponder is this:

Are we finally seeing the corner turned, or are there still significant risks in the global economy and sovereign debt markets to cause a few further after shocks in the months to come?

theMarketSoul ©2012

Panic in the Cars of Britain?

With apologies to The Smiths; the original version of the song Panic’s lyrics reads something like this:

“Panic on the streets of London / Panic on the streets of Birmingham / I wonder to myself / Could life ever be sane again?”

Panic (The Smiths song)
Panic (The Smiths song) (Photo credit: Wikipedia)

Or is this the beginning of what we will call ‘Austerity Anarchy’?

As a case study in behavioural economics goes, the last week in March 2012, in the UK must go down as a classic…

United Kingdom
United Kingdom (Photo credit: stumayhew)

What sparked the ‘run on petrol and filling stations’ is not the aim of our analysis, but rather the deeper underlying cultural psychosis affecting Austerity Britain.  However, the austerity is not driven by the current revenue expenditure austerity, but rather the culture of Investment Austerity over many decades that has created a supply chain time bomb in the UK.

There is generally a severe lack of investment in any form of storage capacity.  Not as a risk management concept, but rather as a pure short sighted cost management issue.

Yes, land capacity is limited on a small (in places patchily overcrowded; especially down in the South East of England) island and the cost of owning a vast storage network must seem prohibitive; yet having so little risk management or rather ‘buffer’ and shock absorption capacity available must be the vast hidden opportunity cost ‘time bomb’ waiting to derail a sustained or sustainable short run upturn in the economy?

Hidden or in the economists parlance ‘Opportunity Cost’ is generally not an item on any policy maker’s agenda, yet in it lies the ‘unintended consequences’ element that so seldom gets factored into the equation.  Yet opportunity cost highlights the risk element we have to factor in.  And in this sense we use the word RISK in its proper intended format, namely a quantifiable probabilistic evaluation of the downside of a transaction.  Yes, threats are more closely aligned to ‘unintended consequences’ and are the issues we can only subjectively be aware of, but cannot quantify with any degree of accuracy.

Risk Management road sign
Risk Management road sign (Photo credit: Wikipedia)

Hence, ‘Austerity Anarchy’ is what we believe an angst and siege mentally is, when decision-making (or rather calculus driven decision-making) gets ‘suspended’ and the irrationality of “mankind’s mind” and the mainstream misinformation distribution takes over, creating PANIC in Little Britain and the commentators at theMarketSoul ©1999 – 2012 ask themselves:

I wonder to myself;  could life ever be sane again?” – with thanks to The Smiths

 

theMarketSoul ©2012

Trust, Risk and stifled Innovation

In the light of the recent Citigroup’s settlement of mis-sold Hedge Fund investments, we issue this brief opinion piece on the interactions of Risk, Trust and Innovation:

Citigroup

We don’t think it is so much about TRUST or trusting institutions anymore but has always been about Caveat Emptor (Buyer beware).

No investor can or should trust institutions without conducting their own due diligence and risk profile / risk appetite assessment first.  In the past investors could possibly rely on professional ‘trusted’ advisors to help then navigate the due diligence part, at least in theory.  Risk and risk appetite assessment was the more tricky part and not even the professionals had sophisticated enough tools to help their clients through this quagmire landscape.

In some recent papers, researchers argue that ...
In some recent papers, researchers argue that the return from an investment mainly results from exposure to systematic risk factors. Jaeger, L., Wagner, C., “Factor Modelling and Benchmarking of Hedge Funds: Can passive investments in hedge fund strategies deliver?”, Journal of Alternative Investments (Winter 2005) (Photo credit: Wikipedia)

We believe this is the unintended consequence of over regulation or an over regulated environment.  Relational trust has been eroded in favour of ‘legislative trust’ and therefore the impersonal ‘hand of public scrutiny’ is supposed to protect the innocents.

Trust
Trust (Photo credit: elycefeliz)

We need to ensure the pendulum swings back to a happy balance between relationship and legislative trust, unburden ourselves from the over regulated and expensive compliance environment we have allowed to engulf and overwhelm us, not adding any value, but stifling innovation instead.

theMarketSoul ©2012

 

Source Article: http://www.garp.org/risk-news-and-resources/risk-headlines/story.aspx?newsid=44034

A Disconnected World – The Information Age Irony

As economic beings we are extremely ‘short-sighted’ by nature. We don’t fully appreciate the differences and interactions between the short-, medium- and long-term.

English: Watt's steam engine at the lobby of t...
Image via Wikipedia

It was Burns & Mitchell (1946) who tried to measure the economic cycles. Today there are four broad classifications of business cycles as follows:

  • Kitchin cycle (3 – 5 years) – The rate at which businesses build up their inventories
  • Juglar cycle (7 – 11 years) – Related to Investment flows into Capital such as factories and other capital means of production
  • Kuznets cycle (15 – 25 years) – Period between booms in corporate or governmental spending on large scale Infrastructure projects, such as rail, roads, etc.
  • Kondratiev wave / cycle (45 – 60 years) – The ‘super-cycle’ referring to the phases of capitalism.  Crises such as the Great Depression and the current Financial & Sovereign Debt driven contraction.

But the Information Age has undermined these cycles? Or only undermined our understanding of these cycles?  That is the key distinction we need to draw.

Are there any longer-term term cycles, which are beginning to contract with advances in Technology.

The Dark Ages (lets say from the collapse of the Roman Empire) until the enlightenment lasted around 1,000 years.  The Enlightenment (approximately 1650s) through to the First Industrial Revolution (from mid 1700’s to mid 1800s) lasted around 200 years.  The Second Industrial Revolution (driven by electricity from around mid 1800s) lasted another 100 years.

Another view of the bridge
Image via Wikipedia

The Third Industrial Revolution, or rather the Digital Revolution is the COMPUTER or DIGITAL AGE.

However, interesting this brief synopsis of economic history is, the actual relevant issue is recognising the length of the TRANSITION period between these ‘Leapfrog’ Technological advances.

We are not very good (yet) at recognising, never mind managing these tectonic shifts in the economic landscape.

Is this were we found ourselves today?

English: Plot of growth of exponential economi...
Image via Wikipedia

theMarketSoul ©2012