There are now real signs that sovereign bond markets and yields are in real bubble territory. Since 2007 we have more than doubled the of sovereign debt to over $23 Trillion while the average yield on that debt has fallen from 3.28% to 1.34%. Link.  In normal times, the precise yield on sovereign bonds is determined by the maturity of the debt, the credit rating of the issuer , the supply of the debt and the willingness of the market to buy that debt. More recently, with the huge amount of Quantitative Easing (QE) going on, central banks have played an important role by buying sovereign bonds. This in addition to the extraordinary bond buying by the Peoples Bank of China and other central banks that have bought US dollar and Euro denominated sovereign bonds due to foreign exchange intervention and record high oil prices have helped to keep sovereign bond prices artificially high and therefore yields artificially low. Despite all the QE and associated printing of money bond yields have also been helped by the "fear factor" of another major downturn in the economies and stockmarkets.

Well a word of warning - printing of money leads to inflation and higher bond yields. Also when the last buyer is in, the market place often turns nasty. I think we are going to see a rout in the bond market in the next 3 to 12 months and it won't be pretty.

Just found this amusing story about the life of an investment banker. Hours are long 100 plus not uncommon Link. Don't have to be that clever just put in the hours. Reminds me of a funny story I was once giving a lecture and was being rather critical of the investment banking industry and its role in the financial crisis. One of the student's who worked in investment banking got upset with me and told me how her friends in the industry were working very hard and very long hours. My reply was rather simple and to the point I said I wished they worked far less hours given the havoc they have caused! You can't measure the value of someones work by the quantity of hours worked, it is the quality of the output that matters. Maybe if they worked less hours then better decisions would be made...working excessive hours does not necessarily help the decision making process.

Well what can one say! After the recent  report by Britain's Parliamentary Commission on Banking Standard that argues that the three top executives James Crosby, Andy Hornby and Dennis Stevenson that ran the failed HBOS bank had a division of the bank guilty of "very serious misconduct," one of them has volunteered to give up his knighthood and 1/3 of his ridiculous £600,000 pension. Lets remember there was £35 billion of corporate loan losses, £15 billion in Irish and Australian losses and £7 billion of bad debts from its Treasury Department = £57 billion in total, requiring £20 billion taxpayer bailout. The fact that he will still have a £400,000 pension remains outrageous.

As for Andy Hornby. who became CEO of HBOS, he had no prior background in banking having run Asda supermarket. No doubt people were impressed with  his MBA from Harvard. But why put someone in charge with no banking experience in charge of a bank ? - I think supermarkets and banks are very different animals. Is having a boss who has no knowledge of the business a good idea? Also that Harvard MBA and case method they are so proud of using needs a good looking at. Many of the failed banks in the US and UK were run by former Harvard MBAs link1  link2. What happened to him after the HBOS failure? Well guess what he got a nice £1 million a year little earner as CEO at Boots plus a tidy annual £240,000 a year pension for life for just 9 years service!.

In a capitalist system people are supposed to be rewarded for success and not for monumental failure. Until we stop this kind of nonsense, I fear we will pay a heavy price in the future. A successful capitalist system requires that the well run companies succeed and expand while the failed companies are wound down. Instead we have spent the last 5 years allowing failed banks to continue to operate and pay huge bonuses and salaries funded by taxpayers and businesses that have suffered in the worst recession in living memory. In particular, we need to concentrate the country's scare public finances on reducing youth unemployment which is currently over 22%, the younger generation need a better deal out of the system than this and other countries are giving them.

 

Just found a nice link to a series of old but nonetheless very insightful articles in the Washington Post into how Moody's and Standard and Poors make easy money out of companies who feel its better to cough up the cash or risk a downgrade ! Link Of course, they have not done a great job in rating CDOs and Mortgage backed securities during the credit crunch either. There has to be a better system than the issuer pays model that is currently used. Over the counter Credit default swaps reveal some very useful and timely information on the risk of default since the price of the premium rapidly rises once a firm is perceived to be in trouble. If CDSs were to be traded on exchanges rather than the over the counter market then liquidity and pricing transparency would improve sufficiently so as to make the credit rating oligopoly unnecessary. Another advantage of using exchange traded credit default swaps would be that the prices would change as a result of the views of many market participants, rather than a very small group of analysts that have incentives to over rate an issue to keep the client who is paying for the rating happy.

Not really sure I understand how bitcoins are mined and how the computer code that created them works- see bitcoin.org and to be honest that's why I would avoid them. Classic signs of a bubble (i) starts appreciating in value and is so bought by speculators hoping to make a profit (ii) is intrinsically worthless (bit of computer code) (iii) relies on the greater fool theory only worth buying if there is a greater fool willing to pay a higher price in the future (iv) most importantly in the final phase accelerates upwards in price at an increasing rate to compensate for the risk of a price collapse. Still as an economist its nice to watch a bubble in action. In the dutch tulip bulb mania link people exchanged their houses to buy a diseased bulb ! Bitcoins were worth 2 cents on 14 July 2010 now trading at $120 at time of posting. I suspect the bit coin bubble will run for a bit more the mania phase normally lasts around 4-6 months...its become mainstream the last week or so....watchout for the $1000 top in the market - price at time of posting $120!!! Watch them trade at Tradehill.com in real time link