“We have this imminent bond-buying by the ECB -- at least that’s what everybody is expecting -- and if euro-zone yields are falling that makes Treasury yields relatively attractive, even at these rates,” said Philip Marey, a senior market economist at Rabobank Groep in Utrecht, the Netherlands.(link)
The current state of play for selected sovereign 10 year bonds (with a minor highlight added to the FT graphic):

A scant year ago 10 year Spanish, Italian and Irish credit was cheaper than the US equivalent. And that was at a time when Euro QE was already in the air and US inflation was stirring. Today they are all dearer with only the Grexit candidate and Portugal still on EU special offer.

Come Thursday a very material ECB QE programme will likely become a reality. Switzerland 10 years have already voted: it will mean too many euros in circulation (well, certainly for the Swiss economy).

But what do they know anyway? It's not like Switzerland is a country that is particularly innovative, competitive or even a nice place to live.

In less than 48 hours Mr Draghi will take a shot at spurring them to greater effort in these areas. A devaluation in one's largest export market will be a live demo of an economic tool Switzerland should long have considered weaving into its own set of sad, obsolete and tired economic policies.

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Journalistic risk in 2014

Thursday, January 08, 2015 | 0 comments »


Reporters Without Frontiers produced this report for 2014 on the dangers of practicing their metier around the globe. France joined the top 5 yesterday on a dark, dark day and in a shockingly dreadful manner.


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Merry Christmas from OPEC

Wednesday, December 24, 2014 | 0 comments »


Nice little graphic from the US Global Investors website:

(link here to article)

Whatever OPEC says there is a feeling that the pre-shale days are done. But perhaps more on that in the New Year.

Season's Greetings to All!

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Someone took the trouble to quantify what most owners of small French business structures (ie under 250 employees) have known for a long time: they are getting a seriously bad deal compared to, erm, just about every peer one can think of.

The following table comes from the Vernimmen site (Letter 128, December 2014) and compares a business reporting the same numbers (ie turnover of €20m) in France as compared to Germany:

 
One of the key underlying points is that the French system has much higher fixed social charges (line 13 and 3 times those of the Germany peer expressed as a percentage of profit after tax). And there is never any relief for these even in times of crisis and losses (as described in the final para). Layoff costs, for example, will be borne by the firm whereas in Germany they would not be.

But the authors do not simply moan about it. They offer four concrete suggestions to at least begin leveling the playing field. It is clear enough that peers, not only Germany but also those in Scandinavia, undermine the usual anti-capital arguments for soaking small businesses. It would be a bold step for an administration with not much more to lose to give the small business sector the shot in the arm it needs.

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Money can't buy happiness...

Thursday, November 20, 2014 | 0 comments »


...but a little bit helps.



If your browser does not display the graphic the full article is here.

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Two competing – but sometimes overlapping – approaches to relative value / pairs trading are to take either a fundamental ‘signal’ view based on changes to factors such as the accounts, the economy, the CFO’s penchant for recognizing revenue early and so on; and the ‘noise’ approach whereby the trader concentrates on the divergence in value of the instruments for reasons unrelated to changes in fundamental conditions.

Bloomberg occasionally publish pairs trading ideas in the first category. Like this one for HCN/SPG. One reading suggests that it is really a macroeconomic call using the pair as a proxy and the 10 year bond yield as a trigger.

Should pragmatism be a consideration, you may wonder how to avoid over-reliance on those analysts forecasts and GDP predictions cited when applying this idea (see prior blog or this from Larry Summers for why this might be a concern). Even the yield differential heralded as an advantage depends on how the trade is set up - money neutral vs beta neutral for example - thus potentially mitigating the joy of the headline.

But onto the history. Taking the 2001 and 2007 recessions as precedents, as the piece does, the trade would have made 16% over 8 months and 35% over 18 months respectively (on a dollar neutral basis). Outside of those rather difficult-to-time periods SPG has outperformed HCN by a wide margin since 2002 (this is shown on the Indexed Prices & Spread graph below).


Not bad. But 2 trade entry data points is not a trend.

The noise approach (here lend some rigour with cointegration) would have used far smaller holding times inside both those recessionary periods. Taking the August 2007 to March 2009 meltdown, for example, an uncomplicated strategy (backtest graph below) would have traded 4 times for a total gain of 17% (and an average return on capital invested per trade of 4.2%). The total holding period of 2 months means, once annualized, that ‘noise’ beat ‘signal’ by over 4 to 1.

Horses for courses - the ideal approach tends to combine both.


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Three econometricians are out hunting. They spot a stag. Given this is a story about economists let us assume it is a deaf stag.

The first econometrician aims, fires but misses to the left by a metre. The second econometrician takes aim, fires and also misses - but by a metre to the right. 

The third econometrician does not take aim or fire. Exultant, he cries out "Nailed it!"

Visually this joke appears thus:


 

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This from Goldman Sachs' Top of Mind Global Macro Research report of 25 Jun, 2014:


Although the detail within the GS report is balanced this shorter and sharper piece from the FT's Underground Economist distills the debate with no great loss of message.

(And that Professor Bloom paper the FT cites is here)

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If only Mr. Rogoff had waited a couple of weeks before reviewing Mr. Piketty's opus here the result might have been far more entertaining (as well as thought-provoking).

Why? Mr. Piketty got the R&R treatment from the FT this week (right here, you may have to register to see). Some of the criticism is about data sources; some is about data adjustments; and some concerns data selection. But the underlying question is about the combination of these and their subsequent interpretation.

The New York Times captures that last point when commenting on this graphic from the FT piece written by their economics editor, Chris Giles:


Citing the FT piece the NYT says:

Speaking of Britain, for example, Mr. Giles writes, “There seems to be little consistent evidence of any upward trend in wealth inequality of the top 1 percent.” He further writes that if one incorporates the different British data into numbers for Europe as a whole, and weights by population instead of weighting Britain, France and Sweden equally, “there is no sign that wealth inequality in Europe is rising again.”
That is a damning conclusion, and if it holds up to scrutiny, would significantly undermine the case Mr. Piketty mounts. But Mr. Giles himself writes that “while this post is clear about what is wrong with Piketty’s charts, it is much less certain about the truth.”

Mr. Piketty remains in Zen-mode so far.

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More anti-bank developments reported here by Dealbook featuring, amongst others, Preet Bharara the US attorney in Manhattan. It was Bharara who took down Galleon and saw that Rajaratnam got jail time. 

After that conviction Bharara said:

“The message today is clear — there are rules and there are laws, and they apply to everyone, no matter who you are or how much money you have.”

Now he (and others) are seeking to walk the talk by bringing criminal charges against two foreign banks operating in the US.

Tough ask? Law breaking and deception by banks have only been met to date with non-deterring fines that do nothing to change behaviour.

Citigroup 'misrepresented' subprime exposure ($75m fine); Barclays 'processed transactions' (for over 10 years) for some of the same sanctioned nations BNP is now up for ($298m fine); and there are assorted other US and non-US banking examples that went through the American legal system in similar vein. Limp fines despite reams of emails (for example) incriminating individuals at these banks. 

Removing a banking license is the nuclear option and one that it is hard to see ever being applied in the current environment. So clearly a range of punishments between the nominal fine on one hand and complete crucifixion on the other are needed.

Additionally it would be a pleasant surprise if prosecutors were able, from time to time, to find a human being to prosecute (although some did draw fines too at Citigroup) alongside the corporation. That inability has caused judges in some cases to refuse to sign the settlements (initially) insofar as the law granted them the leeway to so act. But they did make a point of berating prosecutors for negotiating timid settlements.

Now there is an apparent change of heart and strategy. Still, it remains hard not to have the thought that some banks simply have better lobbyists than others.

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