“There ain’t no room for the hopeless sinners,
who’s hurt all mankind just to save his own,
have pity on those whose chances grow thinner
’cause there’s no hiding place from the kingdom’s throne.”
The sentiment is aptly described in this song but also in Niall Ferguson’s book, “War of the World.” In the book, Ferguson explains that European bond markets were initially unfazed at the start of World War I. They traded at a steady valuation, even as the troop trains were heading for the front.
Today there was more finger-pointing at the Germans for their continued stance on fiscal austerity and the enormous current account surplus sitting in Berlin’s bank accounts. There was increased concern about Italian banks and the threat of zombie institutions plagued by non-performing loans. But the ECB’s QE policy maintains the market’s lust for 10-year Italian notes yielding 1.47%. What’s even more disconcerting for sovereign bond buyers is in July 2012 when Italian 10-year notes were suffering under the threat of the end of the EU, the yield was above 7% and the Italian debt-to-GDP ratio was 123.3%. Today, at considerably lower yields, which makes debt servicing costs minimis, the debt-to-GDP ratio has grown to 132.7%. Growing debt-to-GDP ratios while servicing costs drop is a problem plaguing France, Spain, Portugal and most certainly Greece.
The debt situation in Europe worsens by the day even as the ECB manipulates borrowing costs lower. This issue will be further complicated in June when the ECB begins purchasing investment grade corporate bonds. Many global corporations are rushing to raise cash in Europe through bond offerings aware that the ECB will be pushing rates ever lower. Let’s raise cash in the EU and do stock buybacks in the U.S. However, if the EURO GOES HIGHER THE COST OF BUYING BACK THE DEBT WILL INCREASE. It seems that the globalization of capital in the extreme will present Mario Draghi with some unintended consequences. The ECB is taking failing assets onto its balance sheet to compensate for the risk involved. (This is a situation that is also plaguing insurance companies and pension funds.) The failure of markets to correctly price risk, as warned by Jeremy Stein, is providing fuel for the debt train. Patience for all who buy a cheap ticket.
***Tomorrow the Bank of England will announce its interest rate decision. There will be no change as Mark Carney will hold off until the Brexit issue is resolved. The uncertainty of the market’s reaction will keep volatility high as this qualifies as a low probability, high impact event. The FOOTSIE and GILT markets remain very calm in the face of the fear mongering from the “stay” crowd.
***Also on the U.K.: Queen Elizabeth was caught on camera calling the Chinese diplomats rude on a recent visit to Britain. It seems that Chinese policy makers complained about many things when President Xi Jinping visited. I will remind her highness that wearing jewelry paid for with the profits from creating millions of Chinese opium addicts may also be deemed as rude. Everyone has their own historical timeline. Now, we can get on with dealing with the world’s genuine problems? I have a TRAIN TO CATCH.
Tags: ECB, EU, Europe, France, Germany, Italy, Mario Draghi, Portugal, QE, Spain, U.K.
May 11, 2016 at 9:13 pm |
It’s said Queen Victoria made more money than Capone and El Chapo combined.
May 12, 2016 at 5:37 am |
“And why beholdest thou the speck that is in thy brother’s eye, but considerest not the beam that is in thine own eye?” Matthew 7:3
May 12, 2016 at 9:00 am |
Rates, Bonds, Bond Markets, impacts of these on Equities, Pensions, Annuities (makes me QC [quietly chuckle] to myself as I even type it) – what is a poor pensioner to do?
Understanding this might be worse than living in ignorance, but I’m not made that way.
Surely, if rates somehow remain this low or proceed lower, Insurance companies, thus annuities and pensions will crater; equities might rocket higher for awhile, but then the Govts will save the pensions by printing cash causing gross and quick inflation which will crater equities, and benefit only governments/central banks. I might be a lunatic… but ?
May 12, 2016 at 9:22 am |
El Con — “Understanding this might be worse than living in ignorance,” As the saying goes, I wish I had a nickel for every time that thought crossed my mind.
May 12, 2016 at 9:59 am |
El Con–if you were made that way this blog would not be for you as 2+2 would always equal four
May 12, 2016 at 11:25 am |
Welcome to Rod Serling’s vortex of the surreal.
May 12, 2016 at 9:20 am |
Yra–Nice historical point re Opium trade. The Western Elite still can’t grasp that Eastern historical perspectives are measured in centuries and not election cycles.
May 12, 2016 at 9:57 am |
Joe–absolutely.I have raised the “supposed conversation ” between Kissinger and Choi En Lai in 1971 when Henry the K asked Chou what he thought about the outcomes from the french revolution and Chou purportedly said it was too soon to tell–this is tough for people who live quarter to quarter to digest
May 12, 2016 at 11:06 am |
Opium addiction – Was someone twisting their arms? Just wondering how some folks make these personal choices and how that reflects on their ingrained ancestral sense of values.
There’s no such thing as business ethics, nada.
Supposedly in the US, heroin is easy to manufacture in the backyard shed (say what?), how one synthesizes opium (desire, method, etc.) baffles me as well.
Did I mention, there’s no such thing as business ethics?
May 13, 2016 at 6:09 am |
hicken–I think you need to read up on the Opium wars as Britain pushed cheap opium into China in an effort to undermine its huge current account surplus before making that comment—I know you are a student of world history so I just wanted to remind her majesty are rudeness–for her majesty is a pretty nice girl burt she doesn’t have a lot to say
May 13, 2016 at 11:12 am
Yes Yra, forgive what potentially appears to be a knee-jerk response, perhaps my excuse is I tend to think in conceptual terms.
I have studied the subject specifically due to personal curiosity, inclusive of attempting to filter out spin. I was lead to the conclusion that society itself, is responsible for developing defensive mechanisms thus should not so easily embark on a path of allowing special interest groups to dictate values.
If at any time in history Asian culture was guilty of running a negative trade surplus, this is perhaps the only example.
May 12, 2016 at 6:11 pm |
yra could you write everyday? fantastic stuff.
May 13, 2016 at 6:06 am |
david–i try to write most days because this is a blog meant to create and find focus on global macro trading ideas–but some days the news and ideas are too repetitive—I would advise you and all my readers to go back and read the previous six years of blogs to see how many are still relevant to today–but thank you for the kind words
May 14, 2016 at 11:35 pm |
50-year bonds at 3.45%, over subscribed. Now that’s some choo-choo train! 🙂
May 16, 2016 at 6:01 am |
Chicken–the ridiculous pricing of credit in a world of central bank arrogance is the true zero bound as it seems to know no bounds.Anybody of buying long term debt in a world where the aim is inflation creation is desirous of losing money or else just a “fiduciary” for a pension fund