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Good riddance to Quantitative Easing !

10/29/2014

Well finally the Fed is stopping it's asset purchase programme LINK1 they have been interfering and distorting global financial markets by printing $3.7 trillion dollars in the last 6 years. God knows what crappy assets they have purchased (in yellow) and dodgy mortgage backed securities (MBS) they have overpaid for ! Of course, the effect has been to artificially distort bond prices and push US stocks to record highs. Now we have the tricky time to see if the economies and markets can cope without the Fed's "easy money". 3.7 trillion dollars is $11,762 for every single US citizen including the kids ! ($3,700,000,000,000/317,000,000 population) or $19,554 every second based on a 6 year period. I worry about the future problems that the Federal Reserve has created as the government and corporations have used the low interest rate period to borrow like nobody's business. Some companies (Zombies!) that are basically a load of crap have been able to borrow at ridiculously low yields due to the hunt for yield. Share buy backs have been rife in the United States as firms borrow money to buy back their own shares to push up the earnings per share. In good times this works, but in bad times debt still has to be paid putting company profits at risk. Time will tell but I have a suspicion all this is going to end badly. The Wall Street Journal has a nice page showing the central bank balance sheets as a percentage of GDP and the effects of low interest rates on inflation and unemployment LINK2

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Forex rigging fines could total $41 billion

10/21/2014

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In a previous post I mentioned that the Forex rigging fines could be large LINK1
- well just how large is becoming apparent. Citigroup yesterday came up with estimates of as much as $41 billion LINK2 globally with Deutshe Bank paying up as much as $6.5 billion. Theere is an excellent Bloomberg analysis of the state of play of the investigation looking at the various countries and the various agencies conducting the investigation into this huge scandal LINK3. If true these fines will easily exceed the LIBOR fines and rightly so. My main concern is who is paying the fines. As usual it will be predominately shareholders that suffer but in my view such fines should come directly out of the bonus pools of the chief executives, managers and traders of the banks. This is the only way to ensure that there is collective responsibility. In addition the traders and any collaborators need to be taken to court and if necessary sent to jail. It is no longer acceptable to just fine the sharelders - the people in these banks are trusted to run their organizations in a professional and ethical way by both shareholders and society. No excuses we need to clamp down hard and use the full force of the law !

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Welcome back Market Volatility

10/15/2014

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Look we had June-August a period of extended low volatility with the VIX at record lows I warned in my earlier posts this would not last LINK1 and that stock prices were in danger of taking a hit. Well the VIX has moved from 10/11 to over 30 on an intraday day basis today. Stocks have not crashed merely corrected. More interestingly bond yields have been falling and were all over the place today 2.22% on the 10 year bond yesterday but yields crashing to as low as 1.86% at one point today before recovering to 2.10%. All this is coinciding with the ending of Quantittative Easing this month by the Federal Reseve. The real crisis is not yet in play, this period of volatility will last a month or two. Expect markets to remain volatile with large swings both down and upwards (i.e 1% plus stock moves). The real crisis will be when bond yields start rising rapidly from their excessively low rates that we are currently witnessing. I believe this will play out from march 2015 onwards see my recent bond yield analysis LINK2. By the way, there is a huge property bubble in certain major cities across the globe and I expect large fall in house prices as bond yields go up ! Nice coverage of todays crazy movements in the bond market below.

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Basel lII and a potential $870 billion shortfall for 27 international banks

10/14/2014

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The Basel Accords have a long and not very distinguished history ! They were supposed to avoid Bank crisis but may well have part of the blame for the crisis.

Back in 1989 we had the Basel I Accord which was the first global banking accord and it meant that major international banks were supposed to hold 8% of their risk weighted assets (mainly loans) in capital so they could absorb losses without having to go to the taxpayer in times of crisis. Unfortunately the risk weighting system was very poor property loans were regarded as "safe" requiring less than 8% capital and guess what that drove banks into making property loans and guess what property markets in countries like the UK got overheated and then crashed 1992. Ffollowed of course by the subprime debacle in the United States - So lending to subprime people is safe???.

Next Basel II came along in 2004 with implementation by 2006. Many banks had argued with regulators that their sophisticated mathematical modelling of risk meant they could hold less than 8% of risk adjusted assets (eg: Value at Risk models). Hence Basel II allowed some banks to use Internal Risk Based Management (IRBM) models to hold less capital than the required 8%. Guess What we learnt from the 2008-10 crisis? Banks don't have a clue how to manage risk ! Also Basel II said nothing about liquidity and t was as much about a liquidity crisis as a solvency crisis.

Now we have Basel III and the idea is that Banks hold far more capital say 16% to 20% of the risk weighted assets plus they have a liquidity buffer and so can survive for long periods without access to the capital markets. The problem with this is that it will mean banks have far less funds to lend and this may mean economies fail to get the credit needed for economic recovery. Also banks need to raise huge amounts of capital to meet the capital adequacy and liquidity requirements at a time when people are not interesting in lends to banks or buying their shares (due to the huge losses in the previous crisis). Also banks are tending to buy government bonds which are regarded as low risk to reduce the riskiness of their assets. But what if the government bond market blows up then these supposedly safe assets would fall in value (as yields rise) meaning large losses for banks? Bloomberg has a nice story about how 27 International Banks may need to raise as much as $870 billion the meet the new Basel III rules if a 20% capital adequacy requirement is imposed (or $375 billion if a 16% requirement is imposed LINK1

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More fines on the way in Forex rigging scandal !

10/8/2014

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The forex rigging scandal has not yet really hit the headlines in a big way as no bank has yet been fined and the investigations are ongoing. Clearly there is, I understand, a massive investigation going on and some major banks are likely to be found guilty of manipulating at least temporarily to some extent forex rates to their own advantage. As such this would be a major scandal on a par with or even worse than the LIBOR rigging scandal. Bloomberg has a nice story outlining the current state of the investigation LINK1 . Something like 12 banks are likely involved in the scandal and already 25 traders have been suspended. This is a $5 trillion a day market and the idea that at some points certain rates were manipulated at least temporarily means that the fines are likely to be huge...watch out bank shareholders !

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Good Luck at Janus Bond King Bill Gross

10/6/2014

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One of the biggest stories of the past week has been the departure of Bill Gross the so called "Bond King" from PIMCO the largest Bond Fund Management Group in the world it is also part of the German Group Allianz which also has interests in insurance a property LINK1 and LINK2. When Bill Gross started PIMCO in 1971 it had jut a few million of Assets under Management (AUM) and since then has become the world's largest bond fund with in excess of $2 trilllion AUM. Over this period Bill Gross has managed to get you returns about 1% per year better than most of his peer group (on average). I think that basically its all rather a big non story...sure he had a good performance but the guy is clever and jumping ship before the bond bubbble bursts. At least at Janus he will be able to short bonds which would be difficult to do at PIMCO (other than as a hedge) the 32 year bull market in bonds is coming to an end and I would not want to be managing bonds over the next decade in a rising interest rate environment bonds fall in price. I constantly remind my students of the massacre in bonds that took place in the 70s when bond fund that bought bonds with 4-5% yields in the late 60s and early 70s got slaughtered as bond yelds rose to over 15%. Here is Bill Gross side of the story LINK3

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Warning signs in the Leveraged loan market !!

10/1/2014

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According to LeveragedLoan.com "A leveraged loan is a corporate debt instrument arranged by one or more investment banks and syndicated to a group of commercial banks and non-bank investors." It seems that this market is getting out of control there are far too many loans being made to poorer quality companies with very few restrictions (so called "covenant lite" issuance). The Federal Reserve is getting increasingly concerned about the rapid growth in volumes and values of these loans and rightly so - see Bloomberg story LINK1
Of course the Federal Reserve by keeping interest rates artificially low through Quantitative Easing and providing too much liquidity is partly to blame as investors take ever increasing risks in their hunt for yield. This means banks could be holding a lot of debt that blows up on them down the road if these low quality issuers get into trouble resulting in another financial crisis. According to Bloomberg the banks have arranged about $430 billion of U.S. leveraged loans sold to investors so far this year alone. The other issue that is of concern is that these high yield debt instruments lack liquidity so if a financial crisis comes along then it will be very difficult to get out of the bonds without taking a very large loss........BUYERS BEWARE! Nice video of trends in this market below.

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Good riddance to Quantitative Easing !

Forex rigging fines could total $41 billion

Welcome back Market Volatility

Basel lII and a potential $870 billion shortfall for 27 international banks

More fines on the way in Forex rigging scandal !

Good Luck at Janus Bond King Bill Gross

Warning signs in the Leveraged loan market !!

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