Yep Mario Draghi has officially joined in the central bank money printing game in which the rich win and everyone else ends up losing. We now have negative interest rates in Germany 5 year bunds and record low interest rates in France, Italy and Spain on 10 year notes. The Eurozone bond market is already heavily distorted in anticipation of the ECB purchases. So part one of the game is that investors lose income by taking negative or record low bond yields. The second part of the game is that the owners of these so called "safe" Government bonds end up making huge capital losses when the bond yield suddenly spikes up in one year to five years time (who can time these things)! Meanwhile we are being told how great it is to print €60 billion a month out of thin air to avoid deflation. I like deflation, I like lower oil prices it leaves me more money to spend on other goods than petrol and energy. I don't like inflation and a situation where people end up paying money to lend to governments that is not supposed to happen. We are in global bond market bubble the like of which I have never seen. Japan prints money like crazy and the other day had a 10 year bond yield of 0.2% (0.30% today) despite an inflation target of 2% and the biggest national debt in the world of 250% of GDP and a Central Bank printing money as fast as it can. When this bond market bubble eventually blows up it is not going to be pretty sight.
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Seems like the Davos World Economic Forum overlooked sending me an invite yet again ! LINK1 Still its a great chance for the great and the good to discuss all the ups and downs facing the world economy. There seems to be a whole variety of dicussions going on about various topics. The programme is here LINK2. Some of the stuff looks to be really interesting and the good thing is you can watch a lot of the discussion which are recorded via the internet. I have picked on one topic of particular interest to me below, The session concerns the financial system and is run by Martin Wolf and the question is . Have post-crisis reforms have made the financial system sufficiently resilient? Click to set custom HTML Its taken some time but BusinessEconomics.com is now rated in the top 1 million websites on the web. When I started it was ranked down to about 11 million, fell to 8 million then to 4 million. It then hovered at 2,5 million and then broke down to 1.5 million. It took more effort to get closer to 1.2 million and breaking through the 1 million mark is not easy but the latest ranking gives us 880,000. I suppose the long term target is top 100,000 but here is to the 500,000 mark by year end. (It gets harder and harder once you are in the top 1 million to progress). Thanks to all our advertisers, sponsors and most of all readers for recommending the site. We get over 1,500 visitors most days that 45,000 a month or 540,000 a year. We also rank on first page of google for top/best economics website, top/best business blog, top/best economics blog, best personal finance sites and many other search terms.
As I confidently predicted there would be some hedge funds facing enormous losses as a result of the Swiss Franc debacle. It seems that according to Bloomberg Everest Capital Global Fund has run out of capital suggesting its losses may exceed over $800 million ! LINK1 There are many ways it may have lost this money the most obvious is that whenever the Swiss Franc was reaching its lower limit of 1.20CHF/1EUR to sell Swiss Francs and buy Euros hoping to sell the Euros and get back into Swiss Francs at say 1.21 Swiss Francs per Euro later in the day/week/month. This is not a very profitable trade if you sell 1.2 million Swiss francs (profit is 10,000 CHF) but might be very profitable if you sell 1.2 billion CHF (profit is 10 million CHF). If however the the rate suddenly jumps to 1CHF/1EURO you then lose 200,000 Swiss Francs on the 1.2 million Swiss franc trade but 200 million Swiss Francs on the 1.2 billion trade ! Another way hedge funds can lose a lot of money is to actually use the Swiss Franc which is a low interest rate currency to finance investment in higher interest rate currencies, the so called carry trade. If you borrow 12 billion Swiss francs to invest in Euros at 1.20CHF/1EUR then you have 10 billion Euros to play with but if the rate suddenly changes to 1CHF/1EUR then you can suddenly be sitting on a 2 billion Swiss Franc loss OUCH! So something like a combination of the above two has probably occurred in this case. This will not be the only hedge fund in trouble there are plenty of so called macro funds that may have been doing something similar.
Seems like some forex brokers are in big trouble as a result of the unexpected appreciation of the Swiss franc. Alpari in UK is closed, FXCM in the US has big problems as does Excel Markets in New Zealand. The problem is a lot of their clients were betting on a depreciation of the Swiss franc which was right on its lower bound of 1.20CHF/1EUR so they would make profits if it moved to say 1.21CHF/1EUR. The movement to 1.00CHF/1EUR means that many of these retail players will have lost vast sums and may not have sufficient funds to pay the losses (some of these big losing clients will nonetheless be forced to sell their houses down the road !). This is the early fallout I still expect to hear stories of some big losses in some hedge funds and some banks over the next week or two. Nice bloomberg video below discussing these brokers problems. Wow we have not seen a day like this in the foreign exchange market for I would say over 20 years !!! The Swiss National Bank (SNB) had in September 2011 indicated that it would not tolerate a Swiss Franc - euro parity of below 1.20CHF / 1 EUR and importantly indicated that it would be prepared to buy unlimited quantities of Euros by printing unlimited quantities of Swiss Francs if necessary to ensure that rate was not breached - in Economics we call this non sterilized foreign exchange intervention and it is highly effective. This can be seen by the fact that following the September 2011 announcement the Swiss Franc moved from 1.10CHF/1EUR to above the 1.20CHF/1EUR within seconds of the announcement and the 1.20CHF/1EUR level has not been breached for over 3 years since that announcement. But this morning at 9.30 the SNB announced it was no longer prepared to intervene to maintain the 1.20CHF/1EUR and within seconds it was trading as low as 0.75CHF/1EUR quite amazing when a rigged market finally blows up. It has since moved to moved back to 1.02 CHF/1EUR as the following candle chart below indicates. Each candle below represents 5 minutes of trading ! There are going to be huge losses and profits for some traders and hedge funds and those losing parties could be in real trouble...expect further turbulence over the next few days this is a really big story ! This could well be the chart of the year !!! For those interested I have published a brief article on this today in TheConversation LINK1
I suppose these days based on income (and probably wealth) I must clearly be somewhere in the middle class spectrum and probably somewhere in the top half of that spectrum. I have over time become very concerned about the disproportionate share of the top 1% not so much out of envy as for the fact that the increase is just becoming more and more self perpetuating . I also fear for the undue influence this elite is having on the design of policy and the implications for democracy. We were told by Margaret Thatcher that the wealth of the top would trickle down and benefit us all. But there is a nice BBC series suggesting that rather than trickle down the middle class is getting squeezed and the wealth may actually be trickling up ! There is quite a lot of economic data to support the Trickle up theory and so I think this makes the series a must watch. The first in the series can be watched below. Oh we do live in a crazy world. Thought I would do a light hearted post to start the year off. It seems that some multi-billion dollar oil magnate Harald Hamm wrote out a cheque to his former wife for $974,790,317.77 and she is not at all happy ! LINK1. Apparently it can earn her $93,000 a day in interest...She was married to him for 26 years so the settlement he offered works out at $102,717 per day for every day of the marriage plus I think she probably had quite a nice lifestyle during that period as well. ITS A CRAZY WORLD WE LIVE IN. Also how on earth someone accumulates $18 billion is quite some achievement still seems that all that cash does not preclude you having some ups and downs like the rest of us.
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AuthorThe author of this blog is Keith Pilbeam who is currently Professor of International Economics and Finance at City, University of London. Archives
February 2021
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