@Aurelija's

In the exam hangover

2012-01-29T20:10:00.001+01:00

It has been a tough week for me. Had to get away from the Markets on Wednesday to enjoy a 48-hour exam in Advanced Macroeconometrics. Pheww, THAT was en exhausting experience, I had already almost forgotten how it is to do those 48-hour take-home exams. I only had 2 of them before, but this third one was a real toughy compared to previous experiences. It is, indeed, intensive 2 days - little sleep, no sports, just coffee, tons of papers and thinking. Friday morning 4am brushing up the final pieces and - upload. The rest of the day the feeling was as if after a great party - dizzy, red eyes, no voice... lack of sleep resulted in me sleeping longer than to 6am on Saturday and Sunday. BUT IT WAS WORTH IT :)

The markets, I see, haven't changed much. The EURUSD, indeed, keeps trending up, now seriously.

Surprising? NOT at all. When everyone is so heavily positioned against EUR it doesn't take much to turn it up. It's not so much about PIIGS now, as everyone got used to the Euro cancer; it's the relative macro to be watched now. The European data, like PMIs, have showed some improvement this week. The US data has also been not bad, but the US economic surprise index has peaked, and apparently the Fed do not see a continuation of the positive news - Fed sounds to be up for more quantitative easing and low rates until 2014, and lower USD rates do not help USD much. Will that continue - the next week is crucial, with the US ISM and non-farm payrolls. If that disappoints then it may be the period of positive surprises from the US is coming to an end. This, if data is not a huge miss, may gradually lift the EURUSD further.

If the "muddling through" continues without big new shocks we are back to 2009 with plentiful liquidity and room for risky asset performance. With the EUR and USD rates stuck at the bottom for at least two years it's difficult to see how the asset managers are not tempted not chase a higher yield anywhere from US equities to Emerging Markets FX. Getting more and more bullish.

Calm before the storm?

2012-01-22T19:10:00.000+01:00

A fearless rise of the EUR we have observed in the foregone week.

This, on the one hand, was not surprising at all, given the massive overload in short EUR positions in the markets. It has, indeed, become very tricky to be short EURUSD, as the chances of a short squeeze with such positioning in the market are increasing.

But that left aside, it has not only be technical moves, but also a reflection of the overall market sentiment. The European debt auctions went well, the stock markets increased bolstered by a number of positive news from all over the world - China's positive GDP surprise, US earnings, US weekly jobs numbers...

All in all, the year-to-date risky assets are performing; just looked at a cross asset performance and everything is indeed in the green - from Greek bonds to copper to equities. The VIX keeps trending down and even the CDS of PIIGS countries are off peaks. What is it? Still holiday mood? The harsh fundamentals of the European situation haven't changed over those weeks. But the markets are more positive anyway.

The big elephant in the room, I think, is the European Central Bank, which before Christmas provided ample long term liquidity to the bank sector, thus alleviating the stress in the interbank, seen, among other things, from declining EURUSD cross currency basis. If ECB keeps doing this, and they will likely do, the markets may continue improve if unexpected shocks are absent. Now all the information on euro area problems has been digested - even the Greek default would not surprise anyone (given the pricing of Greek 2Y bonds, it's all in now...). What else could go wrong?

My impression is that the key potential negative shocks to the markets at this point could be non-European. That is, either: 1) US macro news starts to surprise negatively (surprise indicator seems to have peaked); 2) we get a geopolitical conflict of some sort in the Middle East, with the negative oil price shock.

Can the markets remain trend up - the weeks ahead will show. We've got yet another European leaders' meeting on January 30th, and the coming week will be marked by smaller meetings and talk. January 26th when the first Italian long term debt auction takes place will be a lakmus test for the market participants' immunity to European risks.

...Pushing for the euro breakdown?

2012-01-15T13:27:00.000+01:00

After a rather uneventful week came Friday 13th. And right in the middle of the day the rumor hit the market on that S&P is about to downgrade a bunch of European sovereigns. Needless to say, the markets switched to the "risk off" mode in no time. Despite of the fact that the downgrade of the euro area economies was far from a "black swan", the EURUSD took a nearly 2-figure hit...

S&P later sent out an official statement:
...Standard & Poor's Ratings Services today completed its review of its ratings on 16 eurozone sovereigns, resulting in downgrades for nine eurozone sovereigns and affirmations of the ratings on seven others.

We have lowered the long-term ratings on Cyprus, Italy, Portugal, and Spain by two notches; lowered the long-term ratings on Austria, France, Malta, the Slovak Republic, and Slovenia, by one notch...

I've never been fond of the rating agencies - they act downright pro-cyclically, always behind the curve, and always come out in the wrong time...But, that aside, I am actually somewhat surprised by their official statement on the action, seeing in it, no less, no more, but an indirect claim that the situation in the euro area is hopeless, and that the only way out is the euro area's breakdown.

Just read the excerpt from their long explanation as to why the ratings were cut:

Today's rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone. In our view, these stresses include: (1) tightening credit conditions, (2) an increase in risk premiums for a widening group of eurozone issuers, (3) a simultaneous attempt to delever by governments and households, (4) weakening economic growth prospects, and (5) an open and prolonged dispute among European policymakers over the proper approach to address challenges.

So, basically, the S&P claims that the whole thing is systemic, and all what Merkozi have been doing recently - all the discussion on fiscal austerity - is the road to nowhere. Interestingly, S&P even states that deleveraging is bad (given the current debt/GDP ratios in the euro zone, huh?!).

I thought I got the point with those 5 points already. But then the S&P made it easier with this much more explicit paragraph below:

We also believe that the agreement is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU's core and the so-called "periphery". As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues.

In this, S&P, sadly but true, gets the core of the problem out - the euro zone is doomed to failure. It is a wrong construct.

I have myself been thinking a lot about the euro zone's past and future, and the more I do the more convinced I get that the overall idea was wrong. It merged too divergent economies, where Germany served as euro zone's "China" and the southern periphery acted as the euro zone's "US". By "China" and "US" I mean the differences in propensity to save/consume. That is, Germany has been the over-saver economy, channeling its savings to Greece &co which have been willing to use the money to consume beyond their means. And since the big chunk of extra consumption came, guess where from, the over-saver Germany, everyone was happy, enjoying the "gains from trade". Germany grew on exports, Greece&co grew on domestic consumption. Statistics showed nice growth for both.

Yet, as it now turns out, this inter-temporal transfer of wealth was not pure "gains from trade". In fact, it was all illusional gains - as during the past couple of years they have, and for the next several years will be repaying back their "gains from trade". This comes in many formats: higher borrowing costs, recession, lower wages, equity losses in the financial system, no pensions for newer generations... I would not be surprised if eventually the "cost from trade" turns out to be larger than the "gains of trade" we were after when the euro zone was being created.

All in all, my mind has started to question the benefits of free trade which is so well established in our modern academia. All this is just distribution of wealth in time which, when added together, is just a zero sum game.

Apart from the economic wealth, unfortunately, there is also social wealth involved, and this in the coming years will remain a huge problem involving a lot of loss in human capital. This huge youth unemployment we are seeing in the euro zone today is nothing but a result of inter-generational wealth distribution which was, as many people would agree today, not fair. But, unfortunately, when wealth is transferred in time, only those reaping the gains are the actual decision makers.

We are all in this together.

Kicking off 2012

2012-01-07T20:40:00.000+01:00

Happy new year.

The first week in the markets was still full of the holiday mood, as many markets people were still on holiday. But in terms of market movements and data the week was nevertheless interesting. In particular, the culmination with the better than expected US job market report. The US labour market is clearly improving and unemployment continues to trend down...

...which is good news. Not only because of the fact itself, but also because of the reaction - the EURUSD fell in reaction!

This is in contrast to many previous positive surprises, where the EURUSD actually increased on the news. The fact that this time USD strengthened could be seen as a sign that the "risk appetite" is no longer a key driver of the USD, which signals less stress in the market. It is the macroeconomic reality that drives the EURUSD - the US is clearly standing on a stronger foot, hence a reflection in its stronger currency. The latter is also confirmed in the interest rate market, where the spread between the EUR and USD interest rates is moving in the USD favour...

Since the first week has not been very "liquid", it still remains to be seen how the year will start in the markets in the coming few weeks. There are some signs, including the macro, that we may get a repetition of 2009, where post-stress rally took off in Q1. Yet it may as well be that the euro area's problems come back with a vengeance hitting the markets with another wave.

Personally, I am up for the first scenario and thus up for refilling my personal portfolio with some US stocks. The only reservation I have, however, that the recent US macro improvement and related positive surprises may come to an end, since the latter was mostly due to the labour market which is, unfortunately, a lagging indicator of economic activity. If one looks at some forward looking indicators like US consumer confidence the picture is not yet consoling.

Lifelong learning

2011-12-18T19:07:00.001+01:00

It has been an extremely busy few months for me - lots of traveling, everywhere from Gdansk in Poland to St. Petersburg in Russia to the polar Tromsø in Norway. And on top of that I had ACI course in November, which I successfully finished earning the Dealer's Diploma with distinction last Friday following a 3-hour exam. After the 3-year CFA saga the ACI 2 levels this year were a walk in the park - yet, still challenging. Moreover, ACI Dealer does not overlap with the CFA heavily, as CFA is more designed for capital markets, while ACI focus is on FX and the money markets.

And that was not all for me this autumn/winter - I also took a course in Advanced macroeconometrics - cointegrated VAR - at Copenhagen University and an exam is pending January. So this beautiful blue book...

...is and for a while will be my "bible". And I truly love it. :) I know other people think I am crazy when they see me reading such stuff (e.g. on a plane), but I find the world of matrices and stochastic processes like a pastime activity, it just stimulates my mind just like running stimulates my body.

I know I am no longer "student" officially, as the master's degree issued nearly two years ago, but I am sure I will be a student all my life. When I watch my colleagues and meet other business people it seems that once people get the jobs many fall into their comfort zones and give up actively seeking new learning opportunities in a couple of years. That's wrong. In order not to get rusty one should seek opportunities to learn, turning the practice into the lifelong learning.

For me the lifelong learning continues. Apart from the vast amounts I learn at work I will continue to pick up the courses, seminars and designations on my way. Not quite decided what designation to take next (CQF or FRM?), but as a next course I have already booked a phd course in advanced continuous time finance in spring 2012. Gotta be fun :)

Apart from the knowledge that can be applied at work another big advantage with studying extra is better time management, I find. My experience shows that when the hands are full the time optimization is more successful, and hence productivity increases. And productivity is the ultimate power (ask Germans).

A must-read from Kahneman

2011-12-11T19:09:00.000+01:00

Behavioral finance has always been one of my interest areas, so when I saw D. Kahneman's new book at Amazon - "Thinking, Fast and Slow" - I had no doubt I had to get and read it asap.

In his new book Kahneman, a father of behavioral finance, explains the concepts of human thinking and behavioral biases in a new light - with examples and scientific evidence. Even to those who have heard/read about behavioral finance before the book offers many "aha" moments. It reveals flaws in our thinking and behavior, the awareness of which could make our lives much easier.

Kahneman distinguishes 2 systems of human thinking - calls it System 1 and System 2. System 1 is our intuitive/quick thinking, and System 2 is the lazy one - it requires more effort and it therefore requires power of will. System 1 is where the major human behavioural flaws are made - the system tries to build coherence, finds explanations to fit our believes, and often oversimplifies.

The law asserts that if there are several ways of achieving the same goal, people will eventually gravitate to the least demanding course of action. In the economy of action, effort is a cost, and the acquisition of skill is driven by the balance of benefits and costs. Laziness is built deep into our nature.

Kahneman discusses many behavioral biases one by one. Key focus on "status quo" and "loss aversion", which is inherent in our nature:

Loss aversion is a powerful conservative force that favors minimal changes from
the status quo in the lives of both institutions and individuals. This
conservatism helps keep us stable in our neighborhood, our marriage, and
our job; it is the gravitational force that holds our life together near the
reference point.

I loved the author's examples with the loss aversion, especially in the context of trading. According to Kahneman, good traders are those who do not suffer from the "endownment effect" (which means not willing to give up something you already own). This is proved by experiments. Good traders do not build emotional links to the financial assets owned and do not stick to their views no matter what. Flexibility is key, and unfortunately the human nature is not endowed with that - this is something one needs to learn consciously.

All in all, lots of relevant issues and good advice from Kahneman in just 1 book. It is definitely not a 1-time read, and the book can find a place in a shelf for many years - as a manual of human behavior.

US-EU diverge further

2011-12-04T13:17:00.000+01:00

Yet another week of positive news from the US macro front. The manufacturing activity clearly picks up now and the labour market is improving. All job market reports this week were broadly positive, culminating in Friday's non-farm payrolls, which again showed a decent job growth in November, so that job creation rates are now close to pre-crisis trends...

Most importantly, there were significant upward revisions for the previous months - again - which signals more can be in the pipeline.

Furthermore, unemployment rate fell again, and only half of that fall was due to the changes in labour force.

So, all in all, the US is recovering, and the economy should keep up the 2% growth rate in the coming quarters. Meanwhile, the euro area is entering the contraction phase, and now the question is not whether it falls into recession early next year, but how deep it will be - the estimates range from 0.5% to 2%. The only hope for the euro area is now that global growth keeps up momentum. The divergence between Americas and EU has been confirmed by this week's manufacturing PMIs - clearly activity is falling in the euro area and now dragging together even the Eastern Europe - even Poland and Czech Republic. In the US and Latin America, on the contrary, the activity is improving. If the American economies keep performing, this may help improve European external demand, especially on the back of weakening euro. The American growth will support China, which, in turn, will further keep up imports from the euro area.

But there will be no miracles. One way or another the world will face a slowdown in the coming quarters. It may be even deeper if the financial stress is not resolved. This week's coordinated liquidity provision by the global central banks marked, in my view, the beginning of a new round of quantitative easing. We will see more of this in the form of ECB buying purchasing more and more of the European bonds in the coming months, as nearly EUR 150bn mature in Q1 2012.

This week on the 9th yet another European leaders' meeting. But apart from forcing ECB to buy more bonds no quick solutions to the European problem can result now. Fiscal union? Yes, but it will be very difficult to arrange, given the diversities in the euro area. And even if implemented the project of fiscally united euro area will require that the new rules are implemented, enforced and the old mishaps - such as huge periphery debts - are written down, so that everything could be started from scratch.

In the meantime, investors are on a "wait and see" mode. Whoever I talk to say that they are off risk taking for now and keep the button on buying US Treasuries. So USD still is the ultimate liquidity and reserve currency, worth holding on to in turbulent times. Liquidity is expected to worsen toward the end of the year, which may cause unpredictable moves in the financial markets. Yet I am confident we will soon see more confidence underpinned by, first of all, confidence over the US economy, secondly, by fear to miss the next rally - funds need to deliver and cannot sit on cash forever.

It's all Greek now

2011-11-27T09:59:00.000+01:00

If there was a way to summarize the previous week it would be either a picture of a Thanksgiving turkey or this graph:

With the situation getting worse in Europe now even Germany is safe haven no more. As the graph shows, the tight correlation between the German bond yields and the German stocks broke down this week, as the stocks fell in unison with the bond yields rising. Indeed, with the terrible German bond auction this week and talks that Japan is dumping German bonds, the German markets are no longer protected.

But if Germany is not safe haven any more - then all Europe has gone Greek now. This is broadly reflected by the rating agency action - further downgrades of Portugal, Belgium, warnings on France which now stands to lose its AAA rating. And, despite ECB still present actively buying the bonds of the periphery sovereigns, the yields just keep rising and rising...

Unfortunately it's difficult to see at this point any solution. The quick fixes in the form of liquidity provision is not a panacea, as the recent history showed.

Sunday's Fun: Greek Gods on Financial Crisis

2011-11-20T17:41:00.000+01:00

So much pain in the Euro area that this video is just in time :) Awesome parody

EURUSD shaky downtrend in tact

2011-11-13T14:40:00.000+01:00

Another week dominated by the headlines of the European crisis. But Greece has come out off the spotlight for now - Italy is the current hot topic. The Italian bond yields shot up to over 7%, and, had it not been for the ECB's traders, they could have gone even higher.

So, yes, ECB is currently the buyer of last resort for the European debt which fewer and fewer are willing to hold. The problem is - neither does ECB want to continue doing this. I heard numerous comments on Thursday and Friday from ECB members, claiming basically that this what they are doing is not going to solve the crisis, and that they are not going to do it for a long time anyway.

On the other side of the Atlantic Ocean things get better and better every week, with the week behind being no exception - the jobless claims, consumer confidence data came out better than expected. This actually helped lift the EUR/USD up on Friday.

While in normal times good macro news from the US would help the USD strengthen, in these nervous days the USD index serves as the risk appetite indicator - thus USD strengthens on "risk off", and, vice versa, weakens when things seem to go better - not least if that good news comes from the US (and implies monetary policy easing is no longer needed).

But looking at the interest rates, the spread between 2Y EUR and USD interest rate swaps continues to move in the USD favor, thus actually showing the fundamentals are reflected in the markets. The EUR/USD trend is thus fundamentally in tact. The only problem is, however, that the volatility is huge - and those "risk off" strengthenings of the USD are followed by disproportional weakenings once risk gets "on" again. Overshooting is the name of the game for now.

Another Italian bond auction tomorrow. Another week of testing ECB's willigness to act as a lender of last resort. And Tuesday - another piece of data, preliminary euro are GDP, will probably once again show the region is in deep trouble macro-wise. If data comes weaker than consensus expect - USD may strengthen in figures again.

HBR on habits of successful people

2011-11-10T18:50:00.000+01:00

A very interesting audio cast from Harvard Business Review - on what successful people do differently, here.

Very useful insights, I find. Something new as well - for example, the notion that the will power can actually be trained as a muscle. That is, if you push yourself to the limit regularly, you actually get used to that at it becomes less "painful".

Another interesting observation - on the power of NOT. When people set goals they sometimes put them in the restrictive form - e.g., don't smoke or don't drink or don't overeat. Say to yourself "don't think about it" as suddenly that something becomes all you think about. Our psychology makes us actually want to go against the restrictions. So the best way to set goals is to do it in an affirmative way - eat more healthy, climb the mountain, etc. That is, sound the goals as pleasant as possible.

Perseverance is another key feature of successful people. According to the author, successful people make incremental changes, but do it continuously, step by step, with a decent amount of "realistic optimism".

So it's all easy... except that it's not :)

All we need is jobs

2011-11-06T19:01:00.000+01:00

Unfortunately the cheer over the "solution" to the European problems just a week ago turned into complete political chaos, with Greece even calling for a referendum on euro only later to take the words back. The European leaders are still vehemently looking for somebody to fill the coffers of the trillion EUR financial stability fund, and so far - in vain. Funnily, the rumour has it that even the German Bundesbank was asked to give their gold as collateral today... ha. So, at the moment, complete political chaos, and, on top of that, ECB's new president Super Mario slashed the interest rates, thus basically repeating the scenario of 2008 and actually even putting a mark on Trichet's reputation. Is this the beginning of the end?

While the European crisis is on and roaring, some positive signals come from the other side of the Atlantic ocean. The US non-farm payrolls report on Friday came, while in line with expectations on the surface, surprised me positively. Over 100k revisions in new employment over the past few months may actually signal that further upward revisions are coming - statisticians often stay "behind the curve" upon turning points.

The US has already been surprising positively on the macro front recently...

And if things keep going better as they do, the recent equity market losses will soon be recouped. The current market is macro-driven, and the graph below is the good example of this relationship. All we need is jobs!

Are we there yet

2011-10-29T17:12:00.000+02:00

A joyful week for the markets - the meeting of the European leaders led to immediate euphoria across the board, with equity markets gaining up to 4% in a day. This paper from the meeting was something that the markets had long waited - and it did not disappoint. Merkel and Sarkozi hadn't lied when they several weeks ago promised a "comprehensive" plan for solving the euro area problems. This is it - 50% writedown in Greek debt, bank recapitalization to 9%, increasing the European bailout fund to EUR 1.4 trillion up from just over EUR 400bn now. Sounds big, on the surface.

While the markets did take it with optimism, it is not yet certain whether this is the silver bullet yet. After all, thinking about each solution from the plan in isolation, it turns out that many details are still missing.

For example, the 50% writedown in the Greek debt - is that enough to make the Greek debt "sustainable"? Apparently not. Even with this seemingly drastic haircut the Greek debt to GDP ratio will exceed 150% for years, only to stabilize at ...still above 120% by 2020. This hardly sounds sustainable. Secondly, the writedown itself poses lots of question marks. For example, the fact that it will be "voluntary" - how will this work in practice? And, will this event be treated as a "default", triggering the CDS market? If not, does it mean that the CDS market is dead - that is, people buying Greek debt and CDS on top are not protected from the haircut?

As regards the recapitalization of Western European banks - ok, they are given now 9 months to shore up their Tier 1 capital ratios to 9%. For that they need to go out and sell some equity. Will there be many willing buyers? Somehow I doubt it. If the banks do not succeed raising the capital ratios via equity issuance, then what is left basically is reduction of the balance sheet, which will end up in reduced lending, maybe even sell-off of some assets in the Central and Eastern Europe. Hardly this is something that will positively affect the already troubled European economy in the coming year.

And turning to the European Financial Stability Fund (EFSF). It sounds nice they increase it multiple times. But then - how they are going to achieve it? One part will come from guarantees of the Western countries. But does it really smell good - remember, France is already threatened to lose its AAA rating by rating agencies. This will ultimately reduce the rating of the fund. So much of the "guarantee" - it hardly helps when the guarantors cannot live up to their pledges. The second part of the bailout fund will come from establishment of the special purpose vehicles where the European leaders expect China, Brazil, Russia and other large sovereigns to contribute. Without them having promised anything for today the expansion of the EFSF is just words and promises.

One more big problem with the plan of the European leaders is that it poses some moral hazard risks. Now that Greece is being helped, other countries may require "pari passu" conditions. In the markets this may mean spillover effects to other countries. Unfortunately, that negative sentiment was already observed yesterday when after poor results of the Italian bond auction the yields topped 6%...

If this becomes a trend, then we are back to where we started from.

Last but not the least, the sentiment in Europe is worsening, with the Germans being unhappy to finance the European periphery, and the periphery hating the Germans for imposing the tightening of the belts. The latter may be seen from how the Greeks portray the German Chancellor in street posters these days...

Growing adversity risks splitting the euro zone at some point anyway.

We will see how things will develop in the euro area. Meanwhile the eyes will also turn to the US economy, which will as well affect the risk sentiment in the coming weeks. The economic surprises have been positive for the US in the recent few weeks. Among the recent ones - the GDP came out slightly better than in previous quarters. An interesting development - the US consumers are reducing their savings rates...

...which hopefully is a good thing, showing the US consumers are getting more comfortable shopping. But reduction in the savings rate may also be worrisome if wages do not keep increasing. With the unemployment stubbornly high the wage pressure is low. So, the only hope now is the US labour market keeps improving - this we will find out after the next Friday's non-farm payrolls report. If positive, it may help further support the risk appetite in the global markets - something that the stressed European sovereign bond market is in crucial need for now.

Another cool piece from Lewis

2011-10-22T20:10:00.000+02:00

Michael Lewis - he failed to disappoint again, exceeding my expectations with his fabulous new book "Boomerang: Travels in the New Third World".

This is his true journey - to Iceland, Ireland, Greece, Germany and the US - where Michael Lewis meets different people who have been involved in the recent crisis, sharing their views, non-public experiences and different perspectives. Lewis interviews different characters - from such public figures as e.g. Greek Prime Minister Papandreou or Schwarzenegger, the former governor of housing crisis hit California, to common people like a firefighter in the US' town that went bust on the day the US was downgraded. The story is written the Lewis style - a lot of detailed descriptions about places and people make you feel as if you are watching the Travel Channel rather than reading a book. Also, the feelings of the interviewees are exposed - e.g. how Schwarzenegger felt about being unable to change the system, how Papandreou reacted to the information on actual Greek deficits revealed and so on.

The story is spectacular and just as Lewis' previous book "The Big Short" reveals many details of the recent few years' episodes that have never been made public. Moreover, the book tries to find the deeper cultural causes that could explain what happened - why Iceland's bank system exploded, why Ireland's miracle turned sour, why Germany ended up owning the toxic US assets, why many cities in the US are on the brink of extinction...

All in all telling about Lewis' books is a challenging task. It's simply not possible to retell the story - one just needs to read it. For that matter I even took some notes on the way, so as to keep some of the more interesting moments alive for longer.
"What they wanted to do with money in the dark varied. Americans wanted to own homes far larger than they could afford, and to allow the strong to exploit the weak. Icelanders wanted to stop fishing and become investment bankers, and to allow their alpha males to reveal a theretofore suppressed megalomania. The Germans wanted to be even more German; the Irish wanted to stop being Irish. All these different societies were touched by the same event, but each responded to it in its own peculiar way."

About Greece:

“The average government job pays almost three times the average private-sector job. The national railroad has annual revenues of 100 million euros against an annual wage bill of 400 million, plus 300 million euros in other expenses. The average state railroad employee earns 65,000 euros a year. Twenty years ago a successful businessman turned minister of finance named Stefanos Manos pointed out that it would be cheaper to put all Greece’s rail passengers into taxicabs: it’s still true.”

“The second day on the job I had to call a meeting to look at the budget,” he says. “I gathered everyone from the general accounting office, and we started, like, this discovery process.” Each day they discovered some incredible omission.<...> “At the end of each day I would say, ‘Okay, guys, is this all?’ And they would say, ‘Yeah.’ The next morning there would be this little hand rising in the back of the room: ‘Actually, Minister, there’s this other one-hundred-to-two-hundred-million-euro gap.’”

On how Germans got sucked:

"Extremely smart traders inside Wall Street investment banks devise deeply unfair, diabolically complicated bets, and then send their sales forces out to scour the world for some idiot who will take the other side of those bets. During the boom years a wildly disproportionate number of those idiots were in Germany. As a reporter for Bloomberg News in Frankfurt named Aaron Kirchfeld put it to me, “You’d talk to a New York investment banker and they’d say, ‘No one is going to buy this crap. Oh. Wait. The Landesbanks will!’” "

And one final relevant comment to the current discussions in the markets:

"The German government gives money to the European Union rescue fund so that it can give money to the Irish government so that the Irish government can give money to Irish banks, so the Irish banks can repay their loans to the German banks. “They are playing billiards,” says Enderlein. “The easier way to do it would be to give German money to the German banks and let the Irish banks fail.” Why they don’t simply do this is a question worth trying to answer"

To sum up: a must read.

More positive now

2011-10-15T15:49:00.000+02:00

The optimism on the global markets which started last week continued well into this week. "Risk on" was seen everywhere - S&P +6%, Emerging Market currencies over +2%, implied volatilities down and...most importantly, EURUSD left the shorts squeezed.

I was myself very bullish on the USD two weeks ago, but my conviction hot hit after the positive US job market report last Friday. A good follow-up to that was yesterday's US retail sales data, showing consumers are not willing to scale back purchases at all. Since the expectations and outlooks dominating in the markets are gloomy beforehand such even slightly positive news can create euphoria. The same goes to the euro area's debt problems - everyone just got fed up with the politicians procrastinating and took Merkel's and Sarkozi's words the week before for granted. The solution is coming - and it's just a few days away - that's what the G20 message this weekend also sounds like. And that's exactly due to the anticipation of uncertainties resolved that the markets rallied this week.

I'm more positive now. I think the expectations for the global economy have been scaled down too much now and we are set to get some more positive surprises. I don't believe in any recession coming and expect the European leaders to deliver a strong solution to support their banks after an orderly default of Greece. Luckily we still have places in the world where money is plentiful - BRIC economies are at the fore expressing willingness to boost the IMF coffers if needed.

And I think Mr Bill Gross makes a second mistake this year by betting now on lower US yields. Look at the 10-year Treasury yields - already moving higher on risk appetite returning.

The more positive we get, the higher the yields. Given the monetary policymakers are willing to accept more inflation rather than deflation, the risks are skewed to the upside.

The "new normal"

2011-10-09T20:08:00.000+02:00

Banks are facing tough years ahead. The November issue of Bloomberg Markets has a good summary on what is going on in the industry...

The massive slashing of jobs reminds of the gloomy Lehman times. Except for...now the job cuts are not temporary. It's a structural change. It's the new normal, marked by the introduction of new regulations in the bank industry. Among the key - the new Basel rule requiring to increase the core reserves from 2% to 7%. Sitting on this much of cash is immensely costly. And that cost will be borne by us all - not only the banking industry, but also the businesses and consumers, which will see the borrowing costs increasing.

Let's brace ourselves for slower growth ahead.

Michael Lewis on The Daily Show

2011-10-05T21:09:00.000+02:00

The author of "Liar's Poker" - Michael Lewis - is now back with a new book called "Boomerang", which I cannot wait to read.

Lewis shares his ideas with Jon Stewart on The Daily Show - watch this fun in two epizodes.

"Europe has turned into this bizarre episode of the Sopranos."

The Daily Show
Get More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

No lights yet

2011-10-01T16:30:00.000+02:00

The Economist is always good at summarizing the state of affairs:

The European democracy is just not getting us closer to solution fast enough. All the harm that has been done to the markets so far due to procrastination is, in my view, a big chunk of what we would have paid if, say, Greece was allowed to default already last year.

While the costs are inreasing, the means to pay them are not. A global slowdown is in full swing, with now even China's industry contracting. Fed's Bullard this weak said that the decrease in inflation expectations is worrisome (read: deflation might be just around the corner). I met a few large corporate treasuries this week, and all they have in mind is pure worry - how to keep the sales growing, how to maintain funding, how to get as much USDs as possible...

Politicians are in the meantime thinking about how to finance their budget holes. The EU is planning on a Tobin tax on financial transactions:

The proposals would levy at a rate of 0.1% on the exchange of shares and bonds and 0.01% on derivatives. The commission said the tax could raise €57 billion a year and would begin from 2014.

Some countries experiment even further than that. Like, for example, Denmark has launched a... "fat tax" as of today!

Butter, oils, and high-fat dairy products will see the biggest price increases; products with more than 2.3% saturated fat will be taxed 16 kroner per kilogram ($2.90 USD) of saturated fat. Shoppers should be ready to pay up to 30% more for a pack of butter, 8% more for a bag of chips, and a liter of olive oil will cost 7.1% more than usual.

Fighting obesity? Premature deaths? Honestly, keep aside that cheap marketing, dear politicians. We all know it's just about getting some extra money to shore up the public finances.

Unfortunately, I have a hunch this is just the beginning. In the "new normal" of zero or even negative growth we will see more of the "new taxes" down the road...

Lights off.

Another lost decade?

2011-09-24T19:05:00.000+02:00

After a relaxing and entertaining previous week in Stockholm I was thrown back to the harsh reality of the financial markets this week - the most chaotic week so far during the past few months. Sufficient it is to look at the stock markets - Chinese Hang Seng lost over 9% in a week, the US' S&P over 6%, and even the German DAX lost close to 7%.

Things are getting worse much faster than expected - this week Fed officially acknowledges that the economic slowdown is not due to temporary factors, and that the risks for much more pain ahead are high. On the other side of the Atlantic ocean the Greek drama continues, with the Greek finance minister saying that 50% debt write-down is one of the options for his country. Meanwhile, even the euro area's growth engine - Germany - loses its shine as the closely watched industry indicator - PMI - disappointed. Next Monday's Ifo will likely be along the same lines.

The most worrying thing about the situation is not that we are heading toward a double dip. It's rather a fact that we did not get back from the 2008- recession in the first place - especially looking at the US job market. The deleveraging continues and the zero-interest rate world is here to stay for a few more years to come - at least. The deja vu moments emerge now that even ECB, having raised the interest rates earlier this year, might be considering a cut as early as within the next few months.

No light seen ahead any time soon, and the question is - how long the situation will continue. Zero interest rates, no growth, falling stock prices, deleveraging - sounds like Japan since early 90s.

I think the risks that we end up in the Japan's "lost decade" are high. Now many people think so. There are some "buts", however. I read a lot about the Japanese experience, and if someone asked me "why we are not facing Japan's lost decade" at the moment I would point out the following things.

1) Urgency. The Western leaders showed more timely response to the crisis - vast fiscal, monetary easing were thrown fast and in a coordinated fashion.
2) Japanese were big savers - in 80s-90s the savings rate was around 14-18%. Westerners are not - neither by figures nor by mentality. US savings rate increased during crisis but still remains at below 5%.
3) Japanese "zombie" banks limped on for years - they didn't write down the bad assets. Many bad Western banks - Northern Rock, Lehman, etc - were let go, and many had to write down the toxic stuff.
4) Labor market flexibility. Japan was slow to lay off workers (part of the culture "jobs for life"). The Western world, especially the US, did not hesitate - thus the companies increased efficiency (and hence profitability) fast.
5) Japan faced ageing problems then. The Western world, especially the US, is relatively young, still.

So, I guess, everything relies on the consumers now - whether they will keep spending instead of putting away money for the 'rainy day'. The latter tendency may cause a deflationary spiral. An then we will end up in the lost decade - or more - for sure.

Sweet dreams.

About the limits

2011-09-18T21:17:00.000+02:00

Back from an awesome week in Stockholm, which finalized with the Stockholm half-marathon 2011.

If half a year ago someone had said that I would participate in this I would have probably laughed in the face. But things change - never say never. I ended up running those 21,098 meters together with thousands of other running enthusiasts on a Saturday afternoon.

I was strictly against marathons when I started to practice running regularly last year. For me running was first of all a means to keep fit and a means for transportation (run 5k to work and back). Running over 10k all at once seemed to me like a way to voluntarily hurt your own body - self destructive. But then, having talked to a few people who tried long distance running, I got tempted - they said there was more to the long runs than just (over)using your body.

And they were right. The excitement experienced around the half marathon race across the beautiful Stockholm on a sunny Saturday was unique. Thousands of people, crowds cheering, music...

The first 10k came easy to me since I am used to that. In fact I was even trying to restrain myself from going to fast the first 5k - the adrenaline rush was so huge that I felt I could have flied. Thanks God I didn't - would have easily failed the race just like a few hundred of others who stopped in the middle and never got to continue.

It was my first half marathon, and the first time I was determined to run the whole distance without a single stop - that was basically the goal. And even though I never used the energy drinks and thought I would not need any sugar on the way, I had to change the plans when around the 13k I started to feel dizzy and the ground started to feel like dough. A few sips, a piece of sugar...and on...the run after the 15k mark got really exhausting and the mind was constantly solving the dilemma "to stop or not to stop". I knew - if I stopped I would not be able to continue. Even a slow-down seemed like a risky proposition. So I went on maintaining a steady pace. The most important thing was not to stumble when crossing other people. Turning the head to the right or left became too dangerous - the coordination got worse - so I just kept watching straight ahead.

The 15-18k were most challenging. But as the 19k mark got crossed energy came back again. And when the 20k was behind it felt like another adrenaline rush - and here the crowds appeared, the music got louder, and...the Finish line just across the bridge. Even though the body felt weak I managed to raise hands while still running.

These final 200 meters is exactly why the race was worth a while. Suddenly the realization comes that you DID it and that's the best feeling ever. 1:52 of pure running completed. Mind over body - the mission accomplished. Now I agree with those who earlier told me - it's impossible to explain in words, one just needs to try it.

De fault

2011-09-10T15:04:00.000+02:00

This is it. The markets are braced for something scary now. It's September, and thus it would not be a surprise given a long history of crises.

Another tense week on the markets. ECB and Fed were unanimous in their assessment for the respective economies - a disaster. The Swiss Central Bank declared a currency war by setting a limit on how strong the CHF can go. The German court said the package to Greece was illegal.

The most fun came on Friday when the rumour of the Greek default spread around the trading floor. Soon after comes the news - German economist J. Stark resigns from ECB board. The markets took it as a bad sign...

The funny epizode was when soon after the rumours on Greek default emerged Greek finance ministry said it's total rubish. And just minutes after another piece of news hits the wires:

"Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said."

Germany preparing the "Plan B" spells trouble. They hereby publicly acknowledge that the risks are real. The denial from the Greek officials is natural - none of the governments that ever defaulted wanted to admit failure in advance!

The bleeding in the markets was coupled with widening CDS spreads - now the markets are officially ready for the Greek default, seeing over 90% probability of that happening. It will of course affect all markets - European bank equities fell sharply. The stress is also obvious from the money markets, where the 3M Euribor - OIS spread widened to 0.83%, up from around 0.13% earlier this year. Again everyone is hoarding liquidity, not knowing who is the next shoe to drop - this situation is sooo similar to what we had in 2008.

The G7 meeting this weekend will obviously deliver some solution to liquidity pressures. Here is what they said in their statement:

"There are now clear signs of a slowdown in global growth. We are committed to a strong and coordinated international response to these challenges."

More important now is whether Greece default is imminent as the rumours suggested. It appears so. ECB is in a deep conflict as to whether continue buying the PIGS bonds, which is not their responsibility by definition. Honestly, I have never ever seen Trichet so angry when this question was touched upon on Thursdays conference! And Germany's representative Stark leaving is yet another sign of conflict.

The core of the problem is that Greece doesn't want austerity and Germany doesn't like it. Unlikely they will remain in the same union. On top of that, Greek debt is at unsustainable levels and it will have to be deflated at some point - why not now, when the markets are extremely bad anyway, and procrastinating may eventually result in more losses to everyone.

The big question mark is the future of euro. There are three options: 1) the euro is demolished completely; 2) the euro is left with the "good" members with Germany at the core, while PIGS return to their own currencies; 3) and the euro is left with the "bad" members like Greece, while Germany returns to Deutsche Mark.

In my opinion, a complete collapse of the euro is the least likely scenario. It took years to build institutions around it, thus it will be a huge loss to miss it all. The "bad" members retaining the euro and devaluing against Deutsche Mark is feasible, yet - thinking longer term, the idea of the euro zone is tarnished with euro being a shitty currency. I thus think the second option - PIGS returning to their currencies and devaluing - is most likely of these. The euro then will continue exist with the strongest members like Germany, the rules to the euro zone will be revamped and strictened.

The most funny outcome of my ad hoc thoughts of the potential scenarios is...that the euro will actually strengthen if Greece defaults and leaves the euro area, maybe followed by other weak states. I'm sure the German euro now in the world would become one of the strongest currencies.

Getting only worse

2011-09-03T08:39:00.000+02:00

We have reached the bottom and we are digging. The current global situation is full of deja vu moments from the previous years' experience. Just like this time in 2010 we are wondering whether we are headed for the double dip in the global economy. We are getting signals of a potential quantitative easing #3 round on the way. We are panicking over the situation in the euro area. The Emerging Markets are starting to talk "curreny war" again. ECB, having done some tightening, is reconsidering the policy moves.

This week's economic data was downright sad. The global manufacturing PMIs are in the contraction zone or on the brink of it. Yesterday's non-farm payrolls report from the US was the last straw - we are stuck at historically high unemployment rate and there is no job creation going on at all. Zero jobs in August - dysmal.

The US Treasury yields reacted to the news with yet another drop - the US Treasury 10Y yields now lying below 2%. If it were not for the S&P downgrade we would probably see the levels lower.

The US is now basically in the Japan's situation with a potential to be stuck there for a long time. Fed said they will discuss policy measures in the 2-day meeting later in September, but, honestly, what else can they do? The horrible macro news are making the quantitative easing by themselves - with such a negative macro perception in the markets unlikely we will see rates higher in the near term, especially now that Fed explicitly said they are not touching Fed funds rate before 2013.

All in all, deep trouble, and we are in that together. There will be more sad news in the labour market before long.

Summer holiday over

2011-08-29T20:38:00.000+02:00

It has been a loooong holiday. So long the Danish holidays are. 7 weeks per year - a dream of those who don't like their jobs. For me the 3 weeks I had was more than enough. Could I stay away from the Markets? No, I couldn't completely. When I found out that S&P downgraded the US on the first day of my holiday I realized that the Markets will not hold any holiday while I'm off :) Gladly, I had my smartphone and checked it once in a while just to make sure I am not missing anything.

And what happened during those 3 weeks is a further downgrade in the global growth forecasts, postponement of interest rate hikes from the central banks in major economies to the Emerging Markets and...we are back to QE talks once again. Deep in my heart I do not believe we are getting QE3, though my colleagues argue for it. Read Bernanke's lips - he hinted that Fed has done it's job by now, they will hold rates low for a loooong time, and (maybe) it's fiscal policymakers who have to stop politicizing and help the economy?

Holiday - Spain, Barcelona. Plenty of sun, warmth, sea was the best I could get after the sleazy Danish summer. I hate lying on the beach, so spent time actively. Visited Torres' vineyards, ancient Roman winter residence Tarragona, have spent an evening at Barcelona's Dancing Fountains, made a wish at a Virgin of Montserrat mountain, rode Europe's largest roller coaster Dragon Khan in Port Aventura wonderland, to name a few :)

As an analyst looked around the economic situation, and must say, if not tourism the region would do pretty bad. The bus driver said people are crying - no jobs, no money - and asked me to help find job in Denmark, as if situation here were a lot better. Lots of houses are for sale at quite reasonable prices. Tourists - loooots of them from Russia. Another big chunk from the UK, some Germans and French. That's whom the region should thank for the export of tourism services.

Back to Denmark. Welcome back wind and rain. But I have some energy reserves which should help fight the autumn mode :)

Here we go, US

2011-08-06T20:52:00.000+02:00

What an exciting start of my holiday - with the US' downgrade as the first news in the morning.

S&P didn't take long. What was meant to be "before October" turned out to be August. Ironically, it happened just a day after the Obama's birthday and after the super bad week in the global stock markets. The only good thing is that S&P came out after the market hours - this will give some time for the market participants to rationalize the moves.

As for the US - little doubt they will see some widening in the credit premia. Yet, as I argued a week ago, nothing drastic should happen. For bond traders the US is still AAA, given Moody's and Fitch rating.

That said, the S&P move is well justified. US doesn't deserve the AAA rating given the budget deficit of over 9%, debt close to 100%/GDP alone. And the recent political "show", which was also also noticed by S&P:

The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.

The only issue I have with S&P is that they are behind the curve already. Just as they were during the crisis. And such procyclical actions do not help solve problems but exacerbate them.

Will the US come back to AAA? It has a chance. We had many cases of lost AAAs which managed to recover...

But with the current US' situation it could take many many years. If they are unlucky, then we are getting another "dinozaur" like Japan within the next decade.

A great motivational speech from a Goldman guy

2011-07-31T17:30:00.000+02:00

Came across a very inspiring and thought provoking speech recently delivered by Gary Cohn, who is COO of Goldman Sachs, to students at the Kogod School of Business.

Some excerpts I liked most:

"Upon graduation, believe it or not, I had no job. I had no interviews. I had no prospects. I had no worries. What I did have, I had passion. I had enormous passion. I had passion for financial markets. I had fallen in love with financial markets. So, like every one of you, I did the only smart thing to do, I moved back home and started having a great time enjoying my life, until that one, early Monday morning at 6:30 a.m. when my father walked into my room and turned on my lights. I had been in bed for about an hour, I think, and said, ‘what are you going to do with the rest of your life.’ I ironically told him, ‘you’re looking at it.’ That did not go over very well in my house."

“Keep yourself motivated. You’ve got to be motivated, you’ve got to wake up every day and understand what that day is about; you’ve got to have personal goals—short term goals, intermediate goals, and long term goals. Be flexible in getting to those goals, but if you do not have goals, you will not achieve them. You are competing. Every day you are competing and every day you are playing to win. So remember, wake up every morning and figure out how to win.”

“You stand out by asking the questions, whether they are smart, whether they are dumb, but you have to have that desire to learn...Those that have the desire to learn will stand out. Those that work hard will stand out. The old adage that hard work will get you what you want is 100 percent true. Work hard, ask questions, and take risk. If there is one thing out of this on how to stand out, it's taking risks.”

As regards the goals, my mentor recently gave me an advice as to how to be more systematic and explicit about own goals - map them on the "vision board"! The vision board is a kind of a large piece of paper where one literally glues his dreams - just find them in magazines, cut them out, or draw yourself - and clip the "vision board" in your room. This way they become part of your daily life, hugely increasing commitment.

The US downgrade looming - implications

2011-07-30T09:10:00.000+02:00

Another dramatic week. From Greek drama to the US debt drama. August the 2nd is the deadline for raising the debt ceiling for the US in order to avoid default.

But the debt ceiling is just a technicality. Just as a bailout in Greece's situation does not solve the >100% debt/GDP problem, so the US avoiding technical default does not eliminate the core of the problem - the country runs debt of nearly 100%/GDP, and it isn't going to disappear. Even to maintain the debt at such levels would require substantial effort, as is evident from the debt sustainability equation:

f = (r-g) * D/GDP

f - fiscal balance
r - real interest rate/borrowing costs
g - GDP growth rate
D - debt

The US' growth numbers came out yesterday - a miserable 1.3% growth in Q2. The real interest rate is around zero. So the US can afford only 1.3% in fiscal deficit in order to keep the debt at current levels - i.e. 100%/GDP. But, guess what, they run deficits exceeding 8% now. And 100%/GPD is not the level you want to fix your debt at anyway - if you have read Reinhart and Rogoff's "This time is different" you probably know that around 90% is the threshold for debt - above this threshold the debt starts to negatively affect growth. Slower growth itself will put the US in the situation where the even higher fiscal balances are needed to sustain debt (g in the formula). And simultaneously higher debt will put the real cost of funding at risk (r in the formula) - and the latter is exactly what the markets are now nervous about.

Yes, the major issue now is not the debt ceiling, but the US' debt sustainability - and this is exactly why the rating agencies have put the US under negative watch. S&P said 50% chance for a downgrade within 3 months - meaning the US risks losing its AAA "safe haven" status. And the markets now are primarily worried about how this will affect the US assets - US Treasury yields and the US dollar. This has been in the center of discussion in the past week.

There is unfortunately no clear answer as to how the US' downgrade will affect the US rates and USD, as we have not had a very close historic precedent. We had some similar examples, though - when the Japan got downgraded from AAA in the late 90s the yield spreads relative to the US Treasuries and German bunds went up, the yield curves steepened, and the yen...strengthened (on repatriation). Now I hear many analysts argue that the US rates will behave accordingly, but the USD will weaken. Will this be so?

I have little doubt that the long term US interest rates will increase somewhat on the downgrade, yet I do not expect a dramatic effect there. First of all, if one looks at CDS across different ratings, it appears that the transition from AAA to a few notches down of AA- increases the CDS, from around 50-60bp to 80-100bp.

Secondly, if one wanted to run upon the downgrade of the US ratings, it would not be a matter of a few hours. The numerous portfolios that have rules as to allocation will take time to reshuffle. But then, will there happen a massive exodus, after all? The US is in a privileged position of the world's reserve currency, and when you think hard...are there many alternatives?! No, there aren't, in fact. Nearly 60% of the AAA debt is US':

...so there is a limited volume of alternatives to where one can run. And, after all, is it worth it? The remaining AAAs, except for maybe Germany, are not in a much better shape considering long term fundamentals.

Thirdly, against the general impression that China owns the US Treasuries, the US government debt is primarily owned by residents, as only 30% is foreign ownership. And Fed can always handle the residents' supply, if needed.

As regards the USD, the perception at this point is that the USD will weaken upon the downgrade. I'm not quite sure. It's no secret that when risk aversion increases in the markets the USD benefits. Would it be different if the US got downgraded? I do not think so. Remember the Lehman times - the crisis which started in the US. Despite the latter fact the USD strengthened as the risk aversion increased. The USD demand increased due to funding needs, causing the USD basis swaps to widen against all other currencies and USD strengthen across the board.

This may potentially happen this time around, as the USD still remains the key funding currency. And the fact that it has also become loved by speculators for the same funding purposes in the recent few years only underscores the argument - massive repatriation would strengthen the USD on impact.

Let's see what future brings.

Herding in financial media signals market moves

2011-07-23T08:42:00.000+02:00

It's a quite well-known phenomenon that when positioning becomes too heavy on one or another side the chances for a turn in the trend increase. So-called contrarians always look for these indicators - like peaks/troughs in prices or lows/highs in implied volatilities (e.g. VIX).

Behind the positioning is the people's decisions and thinking, and that's what actually precedes any market moves. What could form these opinions is the media. In an interesting study researchers found that when the financial media becomes too converged, that is, using the same nouns and verbs / phrases, this signals that the markets are getting overheated.

"Our analysis shows that trends in the use of words by financial journalists correlate closely with changes in the leading stock indices -- the DJI, the NIKKEI-225, and FTSE-100,"...

"By plotting the distributions of words used in financial articles published online between 2006 and 2010 into a computer model, we were able to identify what we call 'verb convergence' and 'noun convergence -- where the language used by financial journalists shows converging agreement."

"Our study shows that reporters converge on the same language -- 'stocks rose again', 'scaled new heights', or 'soared' -- as their commentaries became more uniformly positive in the lead up to the 2007 crash."

Basically it means that complacency leads to changes. And it's fair to assume that complacency shows up first in what we think and talk about. Price realization itself is just a result of convictions. Hence, the knowledge of what people think is a good leading indicator.

Unfortunately, knowing what everyone thinks in the markets is not that easy. Personally, I try to read as many as possible comments in the financial media and look at the positioning in the "consensus" calls - whether there is diversity enough.

The one tool which is available to all is Google Trends - it shows the frequency of the use of specific words and phrases, thus can also help determining what people think. For example, the concern over the "double dip", which was last summer's top story, recently popped up again after the first miserable US' job market report, as also seen from the search and news references of the phrase "double dip"...

On personal branding

2011-07-17T13:47:00.000+02:00

Stumbled upon an interesting piece in Harvard Business Review, starting with a situation familiar to me:

It was 8 a.m. on a Tuesday, and I stumbled into my local coffee shop. Laptop in tow and shaking off jetlag, I steeled myself for the onslaught: replying to the hundreds of emails that had built up while I'd been on a luxurious 12-day vacation to Spain. Like many professionals, I have a complicated relationship with holiday — coveting the idea of relaxation, while dreading the idea of being out of touch. (Even with absurd data roaming rates, it's hard to resist the siren call of email.)

The trip had been incredible — the best of Barcelona, Madrid, and Marbella — but I returned feeling guilty and slightly panicked. What had I missed?

I'm guessing many people encounter similar feelings when they are engaged with work. In August I will have a holiday for 3 weeks - first such a long holiday since school years - and now I am already thinking how I will survive without the markets, and whether on not to take the laptop and the mobile phone with to Barcelona... Got a strong order from my mentor not to :-)

Anyhow, coming back to the article, it touches upon the personal branding, discussing how to become indispensable. The advice given revolves about being actively present in the social media, getting other people talk about you even when you are not present and try to appear "cool".

I do not think that it's worth the time to consciously think about how to present yourself and trying to show off. Hence, I sometimes do not understand people whom I hardly know asking me to write a recommendation for them. I always said actions speak louder than words.

Inflation everywhere

2011-07-15T21:07:00.000+02:00

What a week - the sky was falling all over. The game between the US and the euro area turned into a who-is-less-ugly competition. The euro area is struggling with debts, sucking now Italy in as well, while the US is risking losing its "riskfree" brand - the AAA rating - if the debt ceiling is not reached in the coming few weeks (...what an unusual ceiling they have, though - it's raised every time when reached...).

Even Bernanke this Wednesday sent some hints about potential QE3, thus cheering the markets for a while. But not for long - Thursday evening Mr. Bernanke goes out and says that they are NOT ready to do it just yet because...the situation is quite different now. Inflation is climbing and its expectations are already at Fed's target levels, he said.

Indeed, today's inflation figures showed that deflation fear is a thing of the past.

Overall prices increased 3.6 percent in the 12 months ended June, the same as the year-over-year gain in May. The core CPI rose 1.6 percent from June 2010, the most since January 2010

So yes, inflation is back.

Speaking of inflation - I've just read another interesting piece on inflation. Interestingly, even education experiences inflation:

Apparently people are getting more and more A's, at least judged from the US' history:

The bad news about grade inflation is that the grade system loses its purpose. But the good thing about it is that graduates appear on a more equal ground when looking for a job after studies, so that it is not grades, but other factors that determine who gets tha job and who doesn't.

Doom and gloom, or jobless stagnation

2011-07-09T08:07:00.000+02:00

We have reached the bottom and now are digging the hole - at least so it appears from the yesterday's all important non-farm payrolls report from the US. The jobs in June rose a meager 18k, far below what had been expected and far below what is needed for recovery, which is at least 200k/month. The job market is in a really bad situation, and that is evident from a glimpse to the graphs like...

historically high - but still further rising unemployment rate...

highest ever duration of unemoployment...

What is the root of the weak growth? Well, given the weakness in the recent months' manufacturing activity, it is no wonder that employment growth in this sector stalled - and this could be at least partially due to the supply chain problems after the Japanese earthquake and adverse weather conditions.

The sad news that it is not the production sector alone which stagnates. Job cuts in the financial sector are back again, with 14k cuts last month alone...

From street to Street...and now we are hearing QE3 again...

Austerity accepted...officially

2011-06-29T19:25:00.000+02:00

Exciting day on the markets, where everyone was awaiting the Greek vote in parliament on the austerity package. It was widely expected to come through, yet the nervousness was still high on the markets. This can be illustrated by the immediate sharp fall in the EUR/USD when the news that somebody voted NO popped out on the screens.

It was a very short term reaction, and, at the end of the day, EUR/USD is back trading to where it did just prior to the vote. No doubt, however, the move squeezed a lot of traders on the way :)

Anyhow, the austerity is blessed, and it seems that Greece is getting money now, and thus will avoid the default in the coming few weeks. Yet, the Greek drama is far from being over - in fact it is just beginning right there on the streets, where protestors are literally setting the Ministry of Finance on fire, as CNBC reports...

So, it is still a big question mark on whether this deal on paper will actually materialize into a round of measures agreed.

The EU conflict

2011-06-26T08:15:00.000+02:00

A great article in the German Der Spiegel, discussing the dilemma's of the current situation in the EU.

The lost generation of angry people out in the streets...

"I finished school more than a year ago," says Sagarra. "There were more than 50 of us who graduated with degrees in physics here in Barcelona. Only one person found a job. One of more than 50. I speak several languages and I'm a physicist, and I'm living in the room where I lived as a kid."

"At first, you get part-time jobs in Portugal -- because you're young. Then, when you hit your mid-40s, you don't get any jobs at all -- because you're old

The periphery is critical toward the core...

She says that she always liked the European idea, but that she now has the feeling that a European idea or identity no longer exists. What does exist, she points out, is European money and a European economy, dominated by the wealthy north, by countries like Germany. "The way I feel about Europe is that I am a second-class European," says Gil.

The Greeks, he says, bought their washing machines, their cars and their traffic lights from the Germans. The only reason the Germans are doing so well, he says, is because the Greeks exist. "Now they're doing their next deal with us."

But the core is not happy about helping the periphery...

"Because I think it's unfair that countries that keep their finances in order, like the Netherlands, should pony up for others that live beyond their means. The protests and the outrage on the left, these are just smoke screens to cover up unrealistic demands. Why should a Dutch worker pay for a Greek protester, someone who doesn't produce anything, who contributes nothing to Europe?"

And the ultimate question - is the EU going to survive?

...two crises are unfolding at the same time in Europe today. On the one hand, there is the debt crisis faced by individual nations. The second crisis, and the more dangerous one, is a crisis of meaning. Do Europeans -- the citizens and their political elites -- even want the historic project of a European Union anymore?

Next week on the 28th the Greek parliament votes on the austerity programme which has already blessed by EU/IMF. If the programme doesn't go through - we will have chaos in the markets. But even if it does - we will see a lot of resistance from the Greeks demonstrating on the streets. They are not the kind of people to give up. This helps me believe that slow and painful deflation will not be the way out of this crisis. Something's gotta give.

ACI Dealer Certificate - check

2011-06-20T20:27:00.000+02:00

It was a heavy week for me - I was relatively away from the markets and even had to skip one party because of the exam I took today - the ACI Dealing Certificate. I had a 3-day course last Tuesday-Thursday with Markets International Limited, which was pretty intensive - 9am to 5pm, then 3-4 hour homework right after. And then - the whole weekend with a hundreds of pages and exercises (so glad it rained!).

The curriculum covers the FX and money markets, repo and some of the fixed income markets, risk and code of conduct. It differs thus somewhat from the CFA which focuses primarily on the capital markets, so, I though, the ACI Certificate would be a good addition to my collection :) and knowledge, of course.

I nailed it! Now I am a certified dealer, sort of. The exam attendant (it was held in a computer center) was surprised I was so early and impatient (was there 8am, even though booked for 9am). But she was even more surprised when she saw my result - she asked "do you know how many people fail this exam?". I said - no :) I think it's a good exam and I recommended my colleagues to do it, so I put my big study compendium on the table as soon as I got back to work. I said - your turn. (: I am after the Dealer Diploma now - which is the ultimate level of proficiency within ACI.

Sunday's Fun: Meaningless phrases

2011-06-19T18:38:00.000+02:00

Market analysts often use some "smart" phrases to spicy their talk when giving interviews and commenting something. They are often overused and even misused - for example, the phrase "black swan" is now often being used to describe the events that are not at all unexpected. But it's not the only one of the kind - Business Insider collected a bunch of simple often used phrases that, given a deeper thought, are meaningless. Here is a few:

"I'm cautiously optimistic."

Why it's meaningless: It's too general to mean anything. It could have accurately described any market outcome in history, merely by adjusting the unspecified time frame. (If you were "cautiously optimistic" in 1929, you were "cautious," which was good, and you were also optimistic, which was also good. Eventually, the market recovered!)

"We're constructive on the market."

Why it's meaningless: Because being generally optimistic about the market over some unspecified time period is no different than being generally optimistic about life over some unspecified time period: Odds are, whatever happens, life will go on and the world won't be destroyed by an asteroid. And, besides, you're not even saying you're "optimistic." You're saying you're "constructive." That can mean anything!

"Stocks are down on 'profit taking'"

Why it's meaningless: Traders buy and sell stocks for dozens of reasons. And for every seller, at any time, there is a buyer on the other side of the trade. Whether or not the seller is "taking a profit"--and you have no way of knowing--the buyer is at the same time placing a new bet on the stock. So collectively describing market activity as "profit taking" is ridiculous. Any trade, at any time, in any market, can be described as "taking a profit" or "cutting a loss" or "bargain hunting" or "filling out a position," and so on. You have no way of knowing what's actually going on, and there's always someone on the other side of every trade. But no one will ever prove you wrong!

"More buyers than sellers"

Why it's meaningless: In every trade--every one--there is exactly one buyer and exactly one seller. You cannot buy a stock without having someone sell it to you. To say that the market or a stock is going up because there are "more buyers than sellers," therefore, is not just meaningless, it's wrong. What is actually happening when a stock or market ticks up is that the next buyer is willing to pay more for the stock or market than the last buyer was. What is actually happening when the market or a stock goes down, meanwhile, is that the next buyer is not willing to pay as much for the market or stock as the last buyer was. There are never "more buyers than sellers" or "more sellers than buyers." There are simply different price levels at which a buyer and a seller are willing to trade.

"Take a wait-and-see approach"

Why it's meaningless: It means nothing. How long are you going to wait? What are you waiting for? Why, when what you're waiting for finally arrives, won't everyone else see it at the same time and bid prices up or down? Why will the future be any less uncertain tomorrow, or next week, or next year, or whenever it is you're planning to "wait-and-see" until? What are you waiting for?

The Social Animal - comment

2011-06-13T19:10:00.000+02:00

A weird book I just got through - "The Social Animal: The Hidden Sources of Love, Character, and Achievement" by D. Brooks.

The book was weird to me because it was the first time I got to read such an attempt to combine science and fiction. This is a story about two characters - Harold and Erica - following their lifetimes from early childhood to marriage to death. Along the way D. Brooks employs the Gladwell-style analysis, engaging the reader with the results of experimental pshychology, explaining why people behave as they do in particular life situations. It gives room for self-reflection. Among the topics discussed, for example, what role emotions play when making decisions, the importance of emotional intelligence for the success in career and personal life, etc.

The book is hefty (450 pages), but it's not heavy in content - a good mix for people interested in science (pshychology), but also enjoying stories. For those interested purely in science - rather go with Gladwell or Lehrer. For me Lehrer's "How we decide" is still one of the best books in psychology and neuroscience ever read.

Another hit to employment

2011-06-11T09:06:00.000+02:00

A scary graph, reminding that the things are still wayyy far from normal in the US economy...

The recent job-creation figures were dismal, as unemployment rate rose further.

It's not only the manufacturing sector that got hit by the disruption in the supply chain in the aftermath of the earthquake in Japan. The services suffer too. Within the sector, there are plenty of stories about a new round of layoffs in the financial industry:

...Barclays Capital, Goldman Sachs, Bank of America, JPMorgan Chase and Morgan Stanley currently are among those financial institutions either weighing staff cuts or actually paring payroll as they struggle to rein in costs and eke out profits in a choppy market...

...layoffs today at Barcap hitting Equities at all levels from MD and down. All areas hit, especially sales and trading. MD who’d been there 25 years got the boot, too...

Yep, it's a bit of a deja vu with the just-after-lehman period. The optimism got back and the end of 2009/early 2010, yet it was sonn flushed with a cold shower. QE2 increased optimism somewhat, yet it is finishing soon, and we haven't moved much forward still. The recovery is just painfully slow and it seems like nothing can be done about this, except for being patient.

OPEC cracks

2011-06-08T18:48:00.000+02:00

A super interesting OPEC meeting today, where the organization was expected to agree on the increase in oil production, finished with no such decision, sending the oil prices nearly 3 dollars higher.

Saudo Arabia wanted the oil production quotas to be raised, while Venezuela, Iran, Algeria said no. The first such a meeting break-up in decades! If that were not enought Saudis still signal they may do as they see fit:

“Saudi Arabia is committed to supplying the needs of the market regardless of the disagreement”

Is this the end of OPEC as we know it?

If yes, then we are in a standard Prisoner's dilemma from the Game Theory. Everyone in a cartel has motivation to raise production, but agree not to. So, if one member chooses to do this...we end up in a more competitive situation which would result in lower oil prices. Of course, the price collapse would be prevented by the supply side limits, as the actual oil reserves are being questioned even in Saudi Arabia. Yet still, the break-down of OPEC would be a serious downside risk to oil prices.

"Soft patch" or another dip ?

2011-06-03T14:49:00.000+02:00

The recent week data was hell. One after another came bad US macro news pieces - consumer confidence, jobs, industrial production figures... most was below expectations. Today the final straw - the single most important non-farm payrolls report, showing nearly three times less of new jobs created last month than expected (after the expectations had been revised down during the week).

If you now look at "economic surprise" index it's obvious that the US made a dive toward the negative side in the past couple of weeks.

But it's not only the US. Other major (G10) economies have also surprised on the negative lately.

The core of the negative surprises, in my eyes, lies with the global slowdown in the industrial production, as nearly all Purchasing Manager Indices (PMIs) showed significant falls.

Production is still expanding in most places (above 50), yet another drop of the similar size would already leave us in the contraction zone.

Where does it come from?

Well, optimists say this is a temporary issue. It may have something to do with the lagged effect of the disruption in the global supply chain due to the disaster in Japan, as many plant production was halted as a result. Another thing, the PMIs were already in record high territory, so a slowdown is just a natural cyclical phenomenon.

Unfortunately, the markets got quite panicky over the news. The reflection of expectations on the economy is all in the benchmark bond yields - here we saw a downward move, speaking of more pesimistic outlook for growth.

The EUR/USD also turned higher, reflecting USD weakness. USD weakness with retreating oil prices doesn't sound good.

We have already seen the correction in the equity markets, yet in longer retrospective the trend is still up.

The QE2 is finishing at the end of July, and with such bad macro news many are already thinking "QE3". I don't think it's likely at all. But given such expectations prevail in the markets it makes sense to add some duration to the portfolio for the near term.

Sunday's Fun: Amy Poehler speaks to Harvard graduates

2011-05-29T17:06:00.000+02:00

Gotta watch this! :)

Saturday's Fun - No you can't!

2011-05-28T17:10:00.000+02:00

Got from a colleague. Self-explanatory :)

How to be powerful?!

2011-05-21T11:06:00.000+02:00

Just show power! According to the new study from the research team at University of Amsterdam, powerful people are those who break the social rules:

When people have power, they act the part. Powerful people smile less, interrupt others, and speak in a louder voice. When people do not respect the basic rules of social behavior, they lead others to believe that they have power...

Basically by behaving as if you are allowed to do this way makes others believe that you really are - ain't it funny...
"Norm violators are perceived as having the capacity to act as they please" write the researchers. Power may be corrupting, but showing the outward signs of corruption makes people think you're powerful.

That's why men often seem to be more powerful than women - women are simply more discreet :)

Back from Moscow

2011-05-20T11:39:00.000+02:00

Back to silence, peace and quiet - Copenhagen. After a week in the crazy-never-stopping-always-in-a-rush-hour - Moscow.

It was my second time in Moscow, and, in contrast to the previous one in autumn, this time I experienced more of the problem with the traffic in the center of the city. As my friend and colleague has put it, drivers need to have nerves removed just as appendicitis in order to be able to have a car in the city :) The only time when the car flow calms down a bit - it's 4am in the morning, when the last party-party people get finally tired, and the first early business people do not start to head for work yet. Personally, I think this kind of situation is a pure economic loss. Eg in a day where I had to visit 3 different places I spent some 3-4 hours in the traffic jam. That's basically half of the work day! I guess Russians need to consider the >100% of the car value tax, which may help solve the problem as in Denmark. :)

Otherwise Moscow is very nice - even more so in Spring, when there is some greenery in the background of the beautiful historic downtown. It is very different from Copenhagen. Lots of rich people and fancy cars, lots of posh restaurants and clubs for business people. Prices speak for themselves - a small piece of steamed fish in a restaurant cost RUB 1700 (EUR 43). My friend rents a modest 1-room flat away from the public transport for RUB 35,000 (EUR 880). Meanwhile, many people still do not have access to high salaries - eg I got to know that the starting salary for an analyst in the Central Bank of Russia is RUB 28,000 (EUR 700) - good luck covering the rent!

Oh well, time to get some rest now. Another trip on the agenda - Norwegian fyords next week.

Meeting pundits - the takeaway

2011-05-14T08:41:00.000+02:00

Had a great chance this week to participate in presentations of a few prominent people. In particular, Wolfgang Munchau from EuroIntelligence, A popular FT columnist, economist Francois-Xavier Chauchat from Gavekal Research, and J. Stiglitz, who... I guess there is no need to present :)

The first two talked in the seminar dedicated to the EMU crisis. All in all, the conclusions were that we are not going to see a restructuring in the euro area - though 85% of investors, according to Bloomberg, expect Greece to default.

According to Mr Munchau, default is not an option because politicians are afraid of potential consequences. No one wants another Lehman - and thus there is no political will to take the chances. Most prefer the "muddle through" scenario, with small local crisis, a drop of money once in a while.

Yet that said, everyone agrees that Greek debt is not sustainable. One needs to run decent fiscal surpluses just to keep the debt at levels just bad as they are now. The only way out of this is growth - and this is a difficult task to achieve with significant fiscal tightening.

Going forward the EMU needs to be reformed, because with the current legal framework it does not accomodate any crisis situation, with all its "no bailout", "no default" etc clauses...

Mr Chauchat agreed with Mr Munchau's reasoning, and talked about investment implications of EMU 2.0 (the new normal of "muddling through"). He made a point that investors become more and more resilient to new bad news from PIGS, thus the initial reaction after Greek bailout last year was excessive. Hence, there is value in PIGS bonds. Chauchat said it makes sense to invest in PIGS' bonds, yet...hedged with the long term German bunds. If everything goes fine, then the PIGS yields will decline, German remain stable. In case of a scary scenario, PIGS' position will lose, but German bund yields will go to 1%, thus compensating for some losses.

In a seperate seminar J. Stiglitz talked more about the US, and the crisis with the label "made in US". His presentation focused on the measures to fight the crisis, and his key point was that austerity is not an option. Mr Stiglitz said that unemployment bears a much larger cost that just a loss of money - it's also a loss of dignity, self-esteem... Thus government should try help by spending - yet spending wisely. Mr Stiglitz said that the way out of crisis is growth led by investments, which government would help to finance. Why government? Because it can borrow at just 2% - so it makes sense to invest in projects that may yield 10% or even 40%.

Of course, it's easier said than done - but probably the best way for PIGS and other indebted countries is just to grow their way out of the debts, helped by stronger governments. Time will show whether this will be the path chosen. But for now - feel like refilling my portfolio with some special bonds :)

Interview classics - "tell me about yourself"

2011-05-08T20:41:00.000+02:00

I have heard about many job interviews from my friends, and the most frequent question in each case has been - "tell me about yourself".

Apparently there is a whole strategy on how to nail this question down, according to HR specialists.

1. Focus on what the interviewer wants to know
2. Think about what others say about you
3. Put some color behind “go-to” words
4. Keep it short
5. Practice makes perfect

I participated in a job interview myself last week - as an interviewer, - and this question naturally popped out. I think it is really a good one, since it's so open and gives room for an interviewee to express oneself. It also reveals a lot about the person. I personally think it's boring to start and talk chronologically about your life. Also, what amused me last week, it's not a good idea to start talking about your hobby (eg playing football). It would be also stupid to brag a lot. I would go for a description of personal qualities - what kind of person one is, based also on what other people have said to you about you. It would never hurt to prepare for this task in advance...but not to the extent of learning the text by heart, so that it would sound unnatural.

USD is back?

2011-05-07T08:13:00.000+02:00

What a week! It took just one guy - President of ECB Trichet - to pronounce the "monitor very closely" instead of the expected "strong vigilance" to send the EURUSD from above 1.48 to below 1.46 in no time. What a power! Time and again the markets show how it happens when everyone becomes so complacent and certain. At the point of least resistance the markets strike back.

And, as always happens, there is always something that feeds the follow through after such major shifts - the good US jobs market report figures, coupled by rumours that Greeks are considering the exit from the EMU - and here you are, the EURUSD dropping further to 1.43.

Amazing move in just a few days. Is USD back? Not necessarily. US still has the lowest interest rates, and Fed governors are still stubbornly sticking to the view that inflation is not a risk yet. Like another study from Fed this week, concluding that commodity price increases are irrelevant for longer term inflation:

This public policy brief examines the relationship between trend inflation and commodity price increases and finds that evidence from recent decades supports the notion that commodity price changes do not affect the long-run inflation rate.

That being said,the markets have shown a correction mood by the sell-off in equities and commodities this week. In the risk averse environment USD is still King. The reason for panic is the upcoming end of the QE2 in June - asset managers may try front-run in an attempt to avoid uncertain reactions once the QE2 is finished. On top of that, summer is nearing, and everyone probably has the catchphrase "sell in May and go away" at the back of their minds.

Even with no spike in risk aversion, EURUSD has more chance to go lower now - psychology. Those who still keep longs in EURUSD from lower levels are in pain now. They are very sensitive to any news that could send EURUSD down - thus in effect the market focus should shift to these particular news. That could be anything related to PIGS - again. It could also be more hawkish Fed.

Next week will show.

Who works longest in the world?

2011-05-03T18:36:00.000+02:00

Surprise surprise - it's not Japanese. According to the recent OECD report, Mexican people are leaders among OECD countries, with an average of 10 hours of work per day. Despite the general impression of them as a "manana" culture!

On the other end of the league table...guess who? It's Belgians, working just 7 hours, on average. And, another surprise surprise - Danish people are working nearly as few hours. Oh lazy population, and what I am doing among them, I wonder (:

Motivation - power of small gains

2011-05-01T09:19:00.000+02:00

A great article in May's Harvard Business Review deserves a note. "The Power of Small Wins" elaborates on what drives people at work. And the very core is the "progress principle", which is short and sweet:

Of all the things that can boost emotions, motivation, and perceptions during a workday, the single most important is making progress in meaningful work. And the more frequently people experience that sense of progress, the more likely they are to be creatively productive in the long run.

While it seems obvious, it is still overlooked by many, or not explicitly understood. People need to feel that they make the difference - at least a small one - to be motivated to work. The article argues that small gains could be even better. Large goals are overwhelming, and sometimes could lead to exhaustion. "One step at a time" is more sustainable.

Just an example from daily work - say, one has a very big and important task to do, comes in in the morning, and ... doesn't start the work day with the task. One rather thinks "let's start by checking emails" - because by checking emails we get small, albeit faster satisfaction from the sense of accomplishment.

The reasoning is very in line with what I read in Ariely's book "The Upside of Irrationality".

Saturday's Fun: US economy in one pic

2011-04-30T07:44:00.000+02:00

Pictures speak louder than words :) US economy in one picture...

Source: RCS

Capital flows to Asia - not there to stay

2011-04-29T21:37:00.000+02:00

An insightful graph from IMF's new Asia Outlook - private capital flows to Emerging Asia...

At first sight the recent inflows do not seem too high by historic standards - IMF also concludes that Asia had seen larger inflows in the previous few decades...

As a share of regional GDP, net capital inflows peaked at about 4¼ percent of GDP in the last quarter of 2010, against 6¾ percent in
both the second quarter of 1996 and the first quarter of 2004.

But there is another problem - the composition of the flows. And the "bank and other private flows" have never been larger. These are the so-called "hot money" - today they are in, tomorrow they are out. And they will be out, starting at some point this year already, when Fed starts to tighten the monetary policy. Gone will be the days when USD played the financing currency in the "carry" trades globally.

Unfortunately, this concerns not only Asia - I bet flows to other Emerging Markets have been of somewhat similar pattern, thanks to cheap credit and QE2 for the dessert.

Holiday over - back to CPH

2011-04-25T19:27:00.000+02:00

As always, all pleasant things don't last long - a week of holiday in Lithuania is finished as of today. A week is just what I needed to recharge.

Some people cannot get enough of holiday. Others prefer not to work at all - like Nassim Taleb, who in his new book "The Bed of Procrustes" says...

Those who do not think that employment
is systemic slavery are either
blind or employed.

Karl Marx, a visionary, figured out that
you can control a slave much better by
convincing him he is an employee.

There is no intermediate state between
ice and water but there is one between
life and death: employment.

With this kind of attitude finding a job would definitely be a challenge :)

Back - and gone

2011-04-15T19:48:00.000+02:00

Yesterday night got back from Czech Republic - was on a seminar in Prague. 3 days, 9am to 5pm, pure fixed income learning.

The seminar was very good, organized by Moneco and Basispoint. They have several courses - the one I was on was called Fixed Income Trading, Investing and Hedging. The material of the course covered many topics, from general products to advanced strategies in fixed income, both bonds and derivatives. Theory was accompanied by simulations in spreadsheets. The lecturer Søren Braes - is a Dane, with 25 years of experience in fixed income. He is currently involved in developing the zero-coupon interest rate model for ECB.

Prague itself is a fantastic city. I only had evenings to have a walk around, but what I saw was just amazing - the nature itself - lots of green, hills, and the architecture. It seems like Czech Republic is quite advanced - and not as cheap as you could expect a CEE country to be :).

All in all, learning is fun. Yet it is also tiring - also the travelling part. Start to feel like getting fed up with airports.

No need to unpack the luggage fully, as the airport is waiting for me tomorrow again - home sweet home, I'm coming.

Citi's advice for career women

2011-04-10T15:30:00.000+02:00

Funny. An interviewee at Citibank apparently stole a piece of paper from HR's desk, which lists 10 ways how women sabotage their careers :)

The overall advice is to be more assertive, self confident and apologize less. Just DO it.

The list would probably help most women, but, I am guessing, not only women - some men may also be prone to some of the weaknesses (:

Central bank talk

2011-04-09T07:47:00.000+02:00

An interesting week. The central bank week, I would say, with most markets focused on comments from Fed and ECB.

A hike from ECB - done, as expected. The phrase "monitor very closely" suggests another hike in either June or July. When asked whether it is a start of the series of interest rate hikes, Trichet said they haven't decided yet - a stronger statement compared to last time, when they said it was NOT a start of the series of hikes.

Some think ECB is risking to make the mistake of 2008, when soon after the hike, provoked by oil price increases, they started cutting rates big time.

As regards Fed - lots of comments, but the key people remain on the dovish side. Bernanke reiterated this week that commodity price rises will be transitory. How does he know? Does he control the global commodity prices? Well, maybe - some part of it, the speculative one, which is driven by Fed's ultra accomodative monetary policy. The most funny thing is Bernanke's saying that "if my assumption is wrong", they will act on it. The problem with that, Mr. Bernanke, that if the assumption is wrong - it might be too late. Inflation genie will be out of the bottle. The long term yields will rise more than wanted.

In any case, the markets seem to believe the central bankers - oil prices increases are inflationary for ECB, and deflationary for Fed. ECB looks at headline inflation, while Fed looks at core inflation (ex. commodities). ECB has inflation mandate, while Fed has both inflation and unemployment. Thus, the differential between 10Y-2Y USD interest rate spread and 10Y-2Y EUR interest rate spread, which are good cyclical indicators, correlates well with the oil prices.

Apparently we need to listen to them carefully. One of the Fed members, Lockhart, said this Friday:

"We would have to explain that well in advance in order not to disrupt markets and not in a way to give incorrect guidance to markets"

So, it seems like we will get the code words well in advance. QE2 ends in June - it will be time to shift the talk. And when Fed starts to raise interest rates, ECB's rate changes will be nothing compared to that - remember, we come from 1% rate of ECB and 0.25% rate of Fed. It's a much longer way for Fed rates - and USD will eventually benefit from that.

WSJ - on the sleepless people

2011-04-05T19:06:00.000+02:00

Just read a great article in WSJ, talking about the people who don't need much sleep.

Few people believe me when I say 5-6 hours is sufficient. Many laugh when I say sleeping is a waste of time. Probably nobody would think it's normal to get up at 6-7 on Saturday and Sunday :) I cannot remember the time when I woke up later than at 10 am - even after the New Year celebration, which may last to 6 am, a morning must be in the morning for me. And - no coffee at all.

Now read this:

For a small group of people—perhaps just 1% to 3% of the population—sleep is a waste of time.

Natural "short sleepers," as they're officially known, are night owls and early birds simultaneously. They typically turn in well after midnight, then get up just a few hours later and barrel through the day without needing to take naps or load up on caffeine.

They call it hypomania :) ha

A few studies have suggested that some short sleepers may have hypomania, a mild form of mania with racing thoughts and few inhibitions. "These people talk fast. They never stop. They're always on the up side of life,"

To date, Dr. Jones says he has identified only about 20 true short sleepers, and he says they share some fascinating characteristics. Not only are their circadian rhythms different from most people, so are their moods (very upbeat) and their metabolism (they're thinner than average, even though sleep deprivation usually raises the risk of obesity). They also seem to have a high tolerance for physical pain and psychological setbacks.

"They encounter obstacles, they just pick themselves up and try again," Dr. Jones says.

The funny thing - if you doubt you are one of them, there is an email ;)

Are you a short sleeper? For more information on the genetic study, contact Dr. Jones at chris.jones@hsc.utah.edu

Smelling default?

2011-04-03T08:10:00.000+02:00

First birds in the sky, rumouring that IMF is pushing for the Greek debt restructuring.

The International Monetary Fund (IMF) is privately pushing Greece to restructure its debt soon in view of the unsustainable fiscal burdens it is carrying, marking a change of course, German magazine Der Spiegel reported.

Without citing any sources, it wrote on Saturday that high ranking IMF officials were recommending this to European governments due to Greece's current debt pile that is roughly one-and-a-half times its entire annual economic output.

The yields moved higher last week again. The short term Greek debt yields, now above 15%, are already pricing in the default probability.

The question is not "if", the question is "when". Under the current plan, where the European Financial Stability Fund (EFSF) is to be replaced by European Stability Mechanism (ESM) in 2013, there is a room for an "orderly" default of the new debt - if a country is deemed insolvent. But that's only from 2013.

Does it make sense to drag things to 2013? The old debt will not disappear. ECB and the stability funds can facilitate - help with the liquidity problem. But they don't help with the solvency problem. From the IMF simulations I saw, even the strictest fiscal tightening would not help Greece reduce debt below 150%/GDP within the next few years. They have no chance to "grow" out of the problem, as the economy is going to contract under the burden of fiscal tightening in order of 2-5% of GDP. Economy contracting, interest rates positive and growing - the debt servicing costs will explode. There is no chance to get a lift from foreign demand - without their own currency, devaluation is not an option.

Creating all kind of pacts and rules for the euro zone doesn't help - the problem with the current euro area crisis is not the lack of rules. It's the lack of commitment to those rules - and subsequent enforcement. Why don't they just openly admit that, bear the cost of the past mistakes without any postponement, and start things from scratch?

Back from Poland

2011-04-02T08:54:00.000+02:00

Back from a 2-day business trip to Poland. Lots of impressions, but also exhausted after having spent many hours in plains and airports. Domestic flights were not super convenient and slightly turbulent.

I have been to Poland before, but the last time I was there I travelled from Lithuania. Now, since it was from Copenhagen, I noticed several "cultural" differences.

1) Traffic. No bicycles, numerous cars, traffic jams. Even in the airport the busses taking from plane to the plane and back were waiting in line several times. Different from Denmark. Thanks to such huge car taxes here, a bicycle is a more feasible transport vehicle. I guess, it all leads to less stress.

2) People. Men are very very polite toward women: let them go first through the door, serve food, offer to pay bills and even get offended if rejected. I had already forgotten how it feels to be the "weak" gender living in Denmark. Here everyone is equal. I think I like that more. Otherwise Poles are very friendly people, always helping, kind.

3) Food. Tried sushi in a restaurant - I don't know, whether it was just bad luck, but it tasted very bad, super dry rice, crab fingers complement the raw fish. I got also fed up with the only "refreshment" on a LOT-Polish airlines plane being the "Nestle" coconut wafer bar. Other places where I had a chance to eat - all salads are very filling, with lots of mayonnaise; potato and meat are key ingredients. Here in Copenhagen we have more chance to get some real green salads - lots of grass all around :)

I guess the conclusion is - it's nice to be back to Copenhagen. Now just need to recover the energy lost somewhere in the Polish air.

Tuesday's Fun: less is more?

2011-03-29T18:53:00.000+02:00

When the economy is still weak, retailers are wary of raising goods prices, as they fear reduction in revenue, if consumers are price sensitive. But there is an alternative - instead of changing the price, some have resorted to changing the quantity of goods sold, trying to trick consumers into buying less for the same price!
For Lisa Stauber, stretching her budget to feed her nine children in Houston often requires careful monitoring at the store. Recently, when she cooked her usual three boxes of pasta for a big family dinner, she was surprised by a smaller yield, and she began to suspect something was up.

“Whole wheat pasta had gone from 16 ounces to 13.25 ounces,” she said. “I bought three boxes and it wasn’t enough — that was a little embarrassing. I bought the same amount I always buy, I just didn’t realize it, because who reads the sizes all the time?”

Apparently the consumers are more price sensitive to price changes than to quantity changes.

“...companies try to do it in such a way that you don’t notice, maybe keeping the height and width the same, but changing the depth so the silhouette of the package on the shelf looks the same. Or sometimes they add more air to the chips bag or a scoop in the bottom of the peanut butter jar so it looks the same size.”

That is damn smart, I never really thought about that. The good thing about these changes, though, is that we consume less - some help for those who tend to over-consume at times :) Less is more!

ERASMUS and labour mobility

2011-03-27T13:43:00.000+02:00

An interesting new study, done by M. Parey and F. Waldinger, to a large extent explains why I am in Denmark right now :) The study investigates relationship between going on exchange (ERASMUS programme) during the study years and the probability of subsequent employment aroad. The result shows that studying abroad significantly raises the chances of ending up working abroad after graduation:

We find that studying abroad significantly increases the likelihood of working abroad after obtaining their university degree. Graduates who have studied abroad are about 15 percentage point more likely to work abroad after graduation.

I guess many students feel a little bit uncertain about going on exchange during the study years - especially if it's the first time experience of living abroad. Yet having tried that, it's much more easy to think about doing it again after graduation. Moreover, with some knowledge of the country, language and network, getting a job abroad becomes somewhat easier.

I my case - ERASMUS revealed me a new world. I would probably be still in Lithuania right now if it was not for this opportunity to experience living in Denmark. Having tried once, it was difficult to resist to come back. And here I am.

Oil and global growth - no stress!

2011-03-26T14:51:00.000+01:00

Energy has been leading the commodity price gains recently. Since the oil prices took off above USD 100/bbl. there has been a noticeable increase in talk on oil price effects.

Many papers and notes I have seen so far pinpoint negative implications of oil price increases on global growth. The rationale? Well, simple. First of all, higher energy prices mean higher bills for consumers - not only at the gas station, but also elswhere where energy plays any role in the production chain - from food production to services like travelling and even hairdresser's. Secondly, higher oil prices negatively affect business and consumer sentiment - see the results of, for example, the Ifo survey yesterday, or that of Michigan index of consumer confidence. Retreat. Clearly oil played the role.

Overall estimates I have seen would point toward a 0.1-0.3 percentage point reduction in US and euro area growth per year given a persistent 10% rise in the oil prices.

I am a bit sceptical, though, toward conclusions that increasing oil prices will meaningfully negatively affect global growth.

First of all, oil price increases do not destroy wealth. They just redistribute wealth from net oil consumers to net oil producers. In the short run this money ends up in oil producer coffers, of course, but within a quarter or so this money starts to flow to net oil consumers - as producers start to purchase goods globally, thus improving the oil consumer exports. This alone already contributes to GDP growth in oil consumers. Similar positive effects with a lag reach also via financial channel, as oil producers scale up investments - buy financial assets of oil consumer countries, thus effectively lowering the borrowing costs for governments, firms and eventually consumers. Of course, the ultimate effects are difficult to estimate - but they are there, and they are clearly positive. And the more globalized the world gets the larger and faster they should become.

Secondly, the nature of the shock to oil prices is relevant. It can be supply side driven and the demand side driven. Oil production disruptions has been a rarity in the past decade, and the recent turmoil in the Middle East is one of such episodes. Yet note that even before the prices spiked here in the past few months, before even the turmoil in Egypt, the oil prices had already reached around USD 95/bbl. And if it was not for the fears over production, what was it behind the oil price rise toward USD 95/bbl? It's the economy, stupid.

Here is a figure from San Francisco Fed, showing that in the long run it's global industrial production that determines the commodity price trend.

And no surprise, it's the Emerging Markets that have been, and will be driving this trend for years to come.

Yes, sure we will see price volatility and corrections in oil and other commodity prices going forward. Yet these will not derail the longer term gradual trend up - and that trend will be driven by global demand. In that case there will be no reason to fear over global growth, as oil prices will be just a reflection of increasing economic activity around the world.

Where do you see yourself in 5 years?

2011-03-23T19:19:00.000+01:00

That's probably the most typical question in a job interview one can get. At least that's what I often hear from my friends when they tell their experiences looking for a job.

How to handle this question? :) My intuitive response would be ambitious and would likely involve position. Yet this might not necessarily be the best way. Here is an extensive article on that which may be of use to some. These are the key principles to remember:

Do:

First, do the contemplative work to develop a personal answer to the question
Understand what the interviewer is trying to gather from your response
Shorten the timeframe of the question so you can give a more specific and reasonable reply

Don't:

Make up an answer you don't believe in
Provide a specific position or title; instead focus on what you hope to learn
Feel limited to answering the narrow question asked — broaden it to communicate what you want the hiring manager to know about you

I still think this question about "5 years" is a bit too forward looking. It would be more fun to get a question "where do you see yourself in 10 minutes" :)

The Law of Adaptability

2011-03-20T10:25:00.000+01:00

It is surprising sometimes to observe how the Markets are able to adapt to things. Like EUR strength recently, despite peripheral downgrades and yields shooting up. Like even Japan's nuclear disaster toward the end of the previous week, when the markets started to ignore the negative news flow.

This is because the Markets are a social creature, and as such we need to understand human psychology behind.

I've just finished reading another fantastic book of D. Ariely - "The Upside of Irrationality" - where in one of the chapters he talks exactly about this human feature to adapt to things, get accustomed to both the good and the bad. Just like our bodies get used to cold water when we jump into the sea/lake, we do get used to our environment.

D. Ariely calls this "hedonic adaptation". It is exactly what lies behind our failure to enjoy the good things for a long time - like the games we win, exams we get over and...goods we purchase:

By failing to anticipate the extent of our hedonic adaptation, as consumers we routinely escalate our purchases, hoping that new stuff will make us happier. Indeed, a new car feels wonderful, but sadly, the feeling lasts for only a few months. We get used to driving the car, and the buzz wears off. So we look for something else to make us happy: maybe new sunglasses, a computer, or another new car. This cycle, which is what drives us to keep up with the Joneses, is also known as the hedonic treadmill. We look forward to the things that will make us happy, but we don’t realize how short-lived this happiness will be, and when adaptation hits we look for the next new thing. This time, we tell ourselves, thing will really make me happy for a long time.

D. Ariely gives advice on how we could use this knowledge to maximize our utilities. As a rule, people like to disturb annoying experiences (e.g. studying for the exam, cleaning the room...) but prefer to enjoy the pleasant experiences without breaks. The hedonic adaptation principle would suggest that we should do EXACTLY the different thing - do the annoying stuff asap, while introducing breaks into the pleasant experiences to make them last longer (at least make us feel happy about them longer).

The moral of the story? You may think that taking a break during an irritating or boring experience will be good for you, but a break actually decreases your ability to adapt, making the experience seem worse when you have to return to it. When cleaning your house or doing your taxes, the trick is to stick with it until you are done. When reducing consumption, you should move to a smaller apartment, give up cable television, and cut back on expensive coffee all at once sure, the initial pain will be larger, but the total amount of agony over time will be lower.

And here is an illustration - an example of how to space shopping time in order to get maximum pleasure from it. Valid for the shopping lovers :)

The same would apply for any pleasant - unpleasant activities.

So, to cut the long story short - do NOT PROCRASTINATE doing boring stuff, and enjoy the fun stuff GRADUALLY.

Saturday's Fun: when things go wrong...

2011-03-19T13:44:00.000+01:00

...remember - they could be worse :)

Source: H. MacLeod. Evil Plans: Having Fun on the Road to World Domination

Michael Lewis on disaster in Japan...from 1989

2011-03-16T18:36:00.000+01:00

Michael Lewis, the author of the legendary "Liar's Poker", had described the potential effects of earthquake aftermath in Japan. And it's not now - he wrote a lenghty piece in 1989, called "How a Tokyo Earthquake Could Devastate Wall Street and the World". Here is the copy - have fun reading.

Shortly, the described development of events as follows: the earthqake destroys Tokyo stock exchange, Western insurance companies are sold off globally, Japan liquidates foreign holdings and US bonds collapse...

Afraid to think so, but it seems like things are not unlikely to develop this way. If so, "happily ever after" is the unlikely ending.

All in Red

2011-03-15T19:09:00.000+01:00

Who could have thought a week ago that such a "black swan" event will hit the financial world.

The Markets got in panic big time today, after the reports of situation worsening in Japan's nuclear power plans. Everything seems now of secondary importance to the Markets - debt problems in euro area, conflict in the Middle East. Now everyone just talks Japan, the consequences, the estimates, the expectations for the Japanese and global economy, the implications on the global financial markets...

What yesterday seemed like a problem of Japanese equity markets, today took in the whole world - from China to US stocks fell by 2-3%. Japanese stock markets are hammered, having lost nearly 20%, most in 2 days ever since 1987.

I am tempted to buy some exposure to Nikkei or Topix at these levels. But still not sure about the timing - am a bit restrained by the thought that further bad news might hit the market. Unfortunately, it is still to early to announce the end of the crisis, as nuclear plants are still not under control, and the Nature might bring some more surprises - we just had another 6.2 strengh earthquake hitting Japan. March 19 is the day when the Moon will be closest to the Earth in two decades, thus the risk of catastrophies is still high.

As another investment implication, I see demand for commodities increasing big time down the road - first of all metals, needed to rebuild Japan, then energy (oil, gas, coal), needed to replace the loss of nuclear power capacity. Now the nuclear energy is being questioned around the globe. Germany announced closing down seven reactors. Russia is "reassessing" the nuclear strategy. More scepticism toward nuclear power will surely arise.

It feels bad to think about how to profit from the situation. But that's a natural instinct, I guess. Survival of the fittest.

Grieving over Japan

2011-03-13T15:42:00.000+01:00

And here comes the Nature, and shows who is the boss on this Earth. The largest economic power, most technologically advanced Japan - on its knees.

Source: Reuters

It has been a sad few days.

Some economists say - it's no big deal, it will create more economic activity in Japan, the construction sector will boom ... - but it's hard to be so cold blooded to the disaster of human beings over there. Major losses might never be recovered.

It seems paradoxical that this nature disaster happens exactly now, when they are fighting in the Middle East, the world has not recovered after the economic crisis, the euro area is being torn apart as a political union... It made me remember for a while the 2012 - doomsday scenario. I've never really been into these theories, but the year 2012 as the armageddon somehow got hooked into my head - probably from the movie under the same name, "2012", where the end of the world is portrayed.

Today in business media I stumbled upon Nostradamus predictions, and got surprised - it appears he really got some things forseen well, even the terrorist attack on the twin towers in New York.

"Earthshaking fire from the center of the Earth
Will cause tremors around the New City.
Two great rocks will war for a long time,
Then Arethusa will redden a new river."

And here is a potential prediction for future disaster.

"The sloping park, great calamity,
Through the Lands of the West and Lombardy
The fire in the ship, plague and captivity;
Mercury in Sagittarius, Saturn fading."

Someone interprets it as an earthquake. I also saw some predicting World War III.

I am still sceptical - these are very vague things to me. But who knows. When such disasters are happening in the world, it takes so little to turn things for the worst. A human hand made - atomic bomb, nuclear disaster - or a nature delivered - earthquakes, asteroid - could make the human race disappear just like dinozaurs 65 million years ago.

PIGS again - sleepless Friday night for European leaders

2011-03-12T08:28:00.000+01:00

Wow, what a surprise. Seems that the European leaders managed to actually do something during the Friday night. Their meeting was planned, but the markets didn't expect any meaningful decisions before the summit on March 24-25.

Here is what was agreed by midnight:

1) The lending capacity of the European Financial Stability Facility - the bailout fund, as we know it - will be extended from current EUR 250bn to EUR 440bn.
2) The fund will be allowed to intervene in the primary bond market. That is, buy new PIGS government bond issues.
3) Greece got the repayment schedule for its debt extended from 4,5 to 7,5 years.

Some action from leaders was urgently needed, indeed. This week we saw a dramatic uprise in speculations about potential bailouts and restructurings. The government bond yields tell the story.

Especially the short term yields shooted up. Look at the term structure of e.g. Greek government bond yields - the short term yields rose beyond the 10Y and 5Y yields, pointing to the expectation that restructuring is due at some point in the near future.

There is also expectation that the bailout for Portugal is being discussed now. It will be interesting to see what Monday brings.

Friday's Fun: the biggest bubble of all times

2011-03-11T19:00:00.000+01:00

Guess what? :)

It's world's human population!

That looks like a good investment, doesn't it?

We are currently around 6.9 billion people living in the world. According to the UN, the human population could double by 2100!

Well, in light of the current affairs - the cracking political unions (euro area), the turmoil in the Middle East, the earthquake in Japan... - it's tempting to actually doubt that we will ever expand this much on this Earth. I guess the expanding human population would only intensify and make such occurrences more frequent - war vs each other, war vs nature.

What comes up must come down. The human population is no exception to Newton's law.

Stuff and security

2011-03-06T21:38:00.001+01:00

A piece of new research reveals an interesting phenomenon - apparently the more secure the person feels, the less he values his possessions.

People value possessions, in part, because they afford a sense of protection, insurance, and comfort ...But what we found was that if people already have a feeling of being loved and accepted by others, which also can provide a sense of protection, insurance, and comfort, those possessions decrease in value.

The most interesting conclusion would be that people who collect things actually those who feel insecure.

These findings seem particularly relevant to understanding why people may hang onto goods that are no longer useful.

I used to collect stuff when I was younger. But in the last few years I noticed the pattern of getting pleasure from getting rid of things. I don't know whether it has to do with security, but at least I feel more free. On the other hand, freedom probably implies less need for security :)

I guess the same would work for a living place - people who are comfortable changing places and living not in "your own" house or flat are those who feel most secure.

U-turn in Trichet's talk

2011-03-03T19:01:00.001+01:00

What a day! I was sitting watching Trichet's press conference after the rates decision, and couldn't believe my ears. He used the code-phrase "strong vigilance" on prices increases, sending shockwaves across the markets. This phrase historically meant we are just 1 MONTH away from ECB hiking interest rates. Moreover, Trichet explicitly said that the rates might be raised in the "next month".

As a result, EURUSD went through the roof.

All EUR rate curves were also lifted, and from pricing just 2 hikes this year I see expectation of 3-4 hikes priced in now.

So. What does it mean?

First of all, it means that ECB is fully committed to their inflation target. Currently inflation is above 2%, and that's clearly not comfortable for them. They are ready to do whatever to keep their target.

Secondly, Triched said that the growth risks are "to the upside" and that the monetary policy is "VERY accomodative". So, it's not only about inflation. They also think that euro area growth rates are reasonable to be able to raise the interest rate level.

That being said, Triched also said that the rate hike next time should NOT be interpreted as the beginning of interest rate hiking cycle - that is, we might see one or two increases and a pause. Or, if the oil prices fall and inflation stabilizes we might not get any hikes at all. This message from Trichet implies that they still are worried about growth and don't want to rush things - the hike would come primarily for the sake of prevention of second round effects from commodity prices.

What's the future of EURUSD from here? Admittedly, I underestimated how fast ECB could come out with the interest rate hike decision. Meanwhile, Bernanke remains downright dovish despite all the good macro data we get from US - this week as well, ISM, ADP employment, today's jobless claims... Tomorrow's non-farm payrolls should also be much better, given the catch-up from winter-delayed employment.

Overall I think ECB will not rush hike rates - even if they start it next month. They still have the periphery dragging behind and lots of political issues related to that. In principle, by just sending hawkish comments ECB has already achieved tightening of monetary conditions - via rates and stronger EUR, which helps cheapen imported commodity prices. Meanwhile, Fed key rates are at much lower levels, and the economy is more coherent - so when they start hiking, they have more to go. That, I think, will help USD to regain losses against EUR. Now that ECB hike is already priced in for April, in fact, any news against it would press EURUSD down in the short term.

Tuesday's Fun: 10 types of crappy interviewees

2011-03-01T18:26:00.000+01:00

If you ever have been to a job interview, you might recognize yourself in the comics below. If you do - it unfortunately means you are one of the "crappy" interviewee types, according to The Oatmeal :)

Sunday's Fun: Work-life balance

2011-02-27T18:12:00.000+01:00

The easiest way to solve the work-life balance issue is to lose it all :)

Source: New Yorker

USD conundrum - it's oil, stupid

2011-02-26T10:19:00.000+01:00

In the past few weeks the tensions in the Middle East escalated, causing an increase in risk aversion across the markets and sell off in equities.

Usually such epizodes translate into the run to "save haven", and USD has been regarded as such for years. Not this time, though. As the equity markets were bleeding the USD was weakening! EURUSD was just going up and up. What happened? Has the USD lost the "safe haven" status?

Not yet.

One of the obstacles for USD to strengthen was the oil prices shooting up. It has been a "rule of thumb" for years now that USD and oil correlation is negative - that is, higher oil prices are consistent with weaker USD, and vice versa.

Why this relationship exists - many explanations. Fundamentally it can be explained, for example, that the higher the oil prices, the worse the current account balance of the US, the weaker its currency. Practically, I guess, this relationship is self-reinforcing by the automated trading: market players take it as a rule, so large deviations are soon "arbitraged away". As far as I know, there is no lead-lag relationship between USD and oil. They just trend together. Or, cointegrate, the economists would say.

Some people questioned the USD status as the "safe haven" currency this week. That is odd. You can see that it hasn't from eg narrowing US T-bond yields - a classic example of how in times of turmoil demand for US paper increases.

Of course, it's not just about oil, the action we have seen this week. It would be a mistake to miss such things as the row of hawkish comments from ECB, making the yields move up in the EUR favour. These guys really sound like they are ready to raise the benchmark rates within the next 6-month time. At the margin it makes EUR more attractive.

Food price bubble - or not yet

2011-02-22T20:15:00.000+01:00

There has been a loooooot of discussion about the rise in commodity prices recently, especially food, the prices of which took off in Q4 last year. Food prices have been one of the triggers to the turmoil in the Middle East as well - the tipping point.

Today we are hearing that the food prices are retreating somewhat:

Grain prices plunged on the Chicago Board of Trade as protests in North Africa and the Middle East threaten to slow demand for supplies from the U.S., the world’s largest shipper of corn, soybeans and wheat.

Many say it has been a bubble. Should we call it a day for the food price rise?

Well, if history is of any use, the recent rise is nothing spectacular - compared to the previous most recent epizode.

We are just not there yet.

The next Trichet

2011-02-19T15:43:00.001+01:00

Just a week after Germany's Weber refused to run for ECB presidency later this year, The Economist is discussing another potential candidate - head of Italy's central bank Mario Draghi.

Why him? Because he has a good mixture of experience in government instututions, central banking and private sector. Surprisingly, the latter was in...Goldman Sachs, which makes the brows move :) Another detail - he is an Italian! Which makes Germans doubt over how price stability goals will be maintained.

“Mamma mia!” screamed Bild, a German tabloid. “For Italians, inflation is a way of life, like tomato sauce with pasta.”

Well, an Italian is not a German, of course. But at least some of the prejudice can be proved wrong by yesterday's example. ECB board member - Lorenzo Bini Smaghi - who is also Italian, said ECB will have to consider raising rates before long as inflationary pressures mount, with this comment sending EUR up against the USD.

So, Italians CAN be hawks, after all :)

Still, having an Italian on top of monetary policy leadership will not be something that Germany will easily succumb to, I believe.

Quote of the day from Greenspan

2011-02-19T08:09:00.000+01:00

Alan Greenspan, former US Fed chairman, who lowered the US base rates to 1% prior to the financial crisis, has something to say now. Here is his reflection on the crisis from his interview in NYU Stern yesterday. After the "fateful" day in September 2008 when Dow Jones collapsed by 6.98%...

"The morning after we learned of the news ...I was able to look myself in the mirror and say, 'Hey, not bad.'"

Heroic undertones :)

Putting US debt into perspective

2011-02-15T18:43:00.000+01:00

Apparently all the world production is not enought to cover the US debt. A fun video, indeed :)

US gov bond yields - getting there

2011-02-13T20:41:00.000+01:00

Pictures speak louder than words.

Or - food for thought ;)

Seeing is believing

2011-02-13T08:16:00.000+01:00

If you think that all the information surrounding you the brain assesses critically, think again.

Scientific experiments showed that the "by default" state of human mind is actually immediately believe whatever our senses come across:

Believing is not a two-stage process involving first understanding then believing. Instead understanding is believing, a fraction of a second after reading it, you believe it until some other critical faculty kicks in to change your mind.

There is tons of information around us every day which we don't give a thought about. And it the brain meets the information it was not aware of previously, then the first reaction is to take it for truth.

Here are the 5 behavioral biases accompanying this phenomenon:

Correspondence bias: this is people's assumption that others' behaviour reflects their personality, when really it reflects the situation.
Truthfulness bias: people tend to assume that others are telling the truth, even when they are lying.
The persuasion effect: when people are distracted it increases the persuasiveness of a message.
Denial-innuendo effect: people tend to positively believe in things that are being categorically denied.
Hypothesis testing bias: when testing a theory, instead of trying to prove it wrong people tend to look for information that confirms it. This, of course, isn't very effective hypothesis testing!

Ain't it scary? Just thinking about all the media and advertising. But also about the scientific knowledge and research pieces from "experts". And think about our impressions about people - if we see someone self-confident telling the story we automatically believe it is truth, whilst when someone is nervous, our first impression is "knows nothing", even though nervousness does not necessarily mean that.

Dollar is back?

2011-02-12T08:52:00.000+01:00

It feels like after a few weeks of correction the EUR/USD is turning in favour of USD, as a couple of factors contribute to that:

1) Risk aversion - or at least uncertainty in the market about tensions in the Middle Eeast, with the focus on Egypt.
2) Germanys Bundesbank President Alex Weber announcing he won't run for ECB Presidency - which means we won't have EU's biggest hawk in ECB leadership - which means interest rate hikes in euro area might be postponed.
3) US macro data continues getting better and better, with this weeks initial jobless claims data being no exception.
4) Remembering PIGS problems again, as Portugal comes into spotlight with new highs in government yields and subsequent rumours that ECB is purchasing its bonds on the secondary market again.
5) Reallocation of assets, as Emerging Market funds have been bleeding in the past couple of weeks in favour of the US assets.

And last, but not the least - technically we are ripe as well.

So long, EUR!

Weekend watch

2011-02-06T07:40:00.000+01:00

Here is an entertaining video from annual The Russia Forum held this week, where such pundits as Roubini, Taleb, Faber, among others, discuss the investment opportunities for the years ahead, and the biggest risks.

Taleb (speaks second), as usually, is in his style :) He right away doesn‘t agree with the first speaker Rubini, who compares California to Greece. Taleb says California is not Greece, the US is Greece - with one difference: Greece has IMF.

Taleb also recommends to avoid US Treasuries at any cost. ... „Ignore rallies shmallies, all that..” - he says. And he actually likes EUR better than USD. According to him, "EUR has Germany. USD has nothing."

At the end of the video all speakers give 1 investment they would put all their money into for 10 year time. Again, Taleb is non-conventional: “I would buy a piece of land which can grow something what I can eat... in Lebanon". Why in Lebanon? Because Lebanon is very politically "volatile", so the probability of big moves is less than in the countries where there is absolute stability.

Watch yourself, it's fun. And if that's not enough, here is more video's from that forum.

Can't remember? Get some sleep

2011-02-04T19:21:00.000+01:00

I've always been amazed how effective a good night's sleep is for getting you remember things. My first encounter was at school, when, for example, learning poems by heart: in the evening it often seemed that you just couldn't make it, but then in the morning you got up and could perfectly tell the poem.

Here is yet another recent piece of scientific evidence about importance of sleep for brain activity and memory, based on an experiment:

The researchers set up two experiments to test memory retrieval in a total of 191 volunteers. In the first experiment, people were asked to learn 40 pairs of words. Participants in the second experiment played a card game where they matched pictures of animals and objects -- similar to the game Concentration -- and also practiced sequences of finger taps.

In both groups, half the volunteers were told immediately following the tasks that they would be tested in 10 hours. In fact, all participants were later tested on how well they recalled their tasks.

Some, but not all, of the volunteers were allowed to sleep between the time they learned the tasks and the tests. As the authors expected, the people who slept performed better than those who didn't. But more importantly, only the people who slept and knew a test was coming had substantially improved memory recall.

And the conclusion is - sleep is an important part of the learning process.

"Our results show that memory consolidation during sleep indeed involves a basic selection process that determines which of the many pieces of the day's information is sent to long-term storage," Born said. "Our findings also indicate that information relevant for future demands is selected foremost for storage."

Far Asia impressions

2011-02-02T19:41:00.000+01:00

What a January! The second half of it spent travelling - Helsinki, Stockholm, and today back from Almaty, business and financial center of Kazakhstan. Just now realize how far from Denmark it was, how close to China.

There is 5-hour difference between here and there, so was not possible to avoid the jet lag. The first experience was kind of funny and sad - the taxi drivers at the airport were almost jumping on you asking to get a lift. And eventually the taxi driver we chose turned out to a mistake: a 10-minute distance from the airport to the hotel "Holiday Inn" where we stayed took almost 2 hours, as the taxi driver couldn't find the place, though kept repeating "oh, now I remember where it is!". Eventually got to the place after 2am local time. Guess, how easy it was to get up next morning at 7am, considering it was 2am Copenhagen time.

Another surprise waited at the hotel. The room turned out to be too hot in the direct meaning of this word. Nearly a sauna. Turned on the conditioning - nothing. Opened the window - still hot, as the room heating system started to generate more warmth. And it was not just my room, all of them. Air was so hot inside that the mineral water over the bar turned hot as tea, and the chocolate standing beside melted fully. As we realized afterwards, the local people are used by the hot temprerature, as the hotel's receptionists simply didn't understand what the problem was in the first place.

People in Amaty reminded Chinese from complexion. All speak Russian, but only some English - and only business people. Women dominate in the leadership roles, have many seats in boards as a rule. People on the streets were very nice, willing to help and show where things are. In general the atmosphere in the city still reminds the Soviet times a lot, despite the newly built business centers. And though they seem to be proud of themselves as a nation, they also like the "Western" trends, I noticed. Some things are adopted, some nearly look like copied. I had many times though "I have seen this before" when walking around the city.
E.g. the burger place, called "Kind Burger", reminded me of the "Burger King" restaurant chain we have.

One cafe's sign looked very familiar as well, reminded of the "Starbucks".

And there were some more fun details along the way, just like this nice bench.

The good thing about the place was food. All the restaurants visited were fantastic. I didn't try the core of the local cousine - it is horsemeat based. But the local fish was so great, while the vegetables and fruit were beyond comparison to the plastic we eat here. And the decorations inside were also masterpieces.

All in all, a fantastic trip. Bit jet-lagged still, but at least had a chance to sleep in the Lufthansa plane, which, I discovered, was so much better than SAS in terms of space and service.

Career in Markets - passion or craze

2011-01-29T14:13:00.000+01:00

If you think you have seen or heard of a "career" woman, try this - a 40-year old Irene Tse, now taking the JPMorgan's CFO position:

In 2005, when she was 34, Tse said she that at Goldman, she had worked 80-hour weeks for the past 10 years. And she typically got out of bed two or three times every night just to check bond prices in markets around the world...And Tse is an animal -- it's obvious she's one of the top women on Wall Street right now.

Apparently the woman has passion for work:

"I can count on the fingers of one hand the number of days in my career when I didn't want to come to work...Every day I wake up, and I can't wait to get here."

I guess many people would think she is crazy. I think she is a very happy woman who was able to find meaning in this life, choosing to do what she loves to.

And here is her career advice:

“There is no one set of skills that makes a good trader – some of the best are literature majors, while others are mathematics geniuses,”...“If they have one thing in common, it’s a willingness to be a student of the market.”

Some happy, some not - QE effects

2011-01-28T19:16:00.000+01:00

Here we are with yet another positive surprise from the US macro front - GDP grew 3.2% y/y in the final quarter of the year. While it's a bit below the expected 3.6% y/y, the underlying figures are extremely good, as the so-called "final sales" jumped 7.1% y/y, which is strongest ever since 1983! Consumers led the gains.

Meanwhile, in another part of the world - Egypt - we have people rioting over increasing food prices. And the negative moods are spreading around the region...

Record food prices may fan social unrest and fuel inflation beyond North Africa as thousands of people take to the streets of Cairo to denounce President Hosni Mubarak, delegates at the World Economic Forum said.

“This protest won’t end in North Africa; it will spread in many countries because of high unemployment and increasing food prices,” Hamza Alkholi, chairman and chief executive of Saudi Alkholi Group, a holding company investing in industrials and real estate, said in an interview in Davos, Switzerland.

And it has negative implications for the markets. The 5y CDS for Egypt have skyrocketed from just 70 earlier this week to 370 now. The stock markets around the world plunged. Ironically, the oil prices are pushing even further.

So, yes, while the easy monetary policy helped the US to "come back" as they quote it in the today's reports, it has also lifted the commodity prices to record highs, causing unease and unrest in the regions most sensitive to food price increases. And if the reaction we observe now in the markets continues, the negative effects will reach the US and the rest of the developed world in a boomerang via correction in the stock markets and thus negative wealth effects to the US consumer.

Regulating car speed - in a fun way

2011-01-23T20:25:00.000+01:00

The Fun Theory competition, where people create fun ways of how to change socially bad behaviour, has its winner! It's a simple and amazing idea, based on human incentives: the car drivers exceeding speed limits pay fines into a pool of money which is a lottery meant to reward those who drive according to speed limits! Watch this...

Double motivation - cool idea. The only immediate reservation I have about this is that the government does not get the money - fines. But then, on the other hand, if the mechanism improves driving quality, then there is much less need for goverment costs, at least in the form of police.

Career planning - no need?

2011-01-22T08:07:00.000+01:00

Back to Copenhagen from a week of seminars in Helsinki.

One of the most remarkable was the advice from a top top guy, member of Executive Management of the largest Nordic bank. He adviced never to plan career in advance, always be open to opportunities and take them when they come up. Working in a large company switching areas, departments and roles is actually a very recommendable thing, according to him. He never had a dream to be a big boss - it just came along, and there is no formula of success for that.

This was a thought provoking thing to me, as a have many times before heard that you need to have clear goals, targets and plan things. Switching jobs often is regarded as a lack of focus, being unstabe and uncertain of what you want to do, being unable to finish what you started.

Apparently you only need to do your job well - whatever position given - and go with the flow.

Sunday's Fun: Bernanke targets stock prices?

2011-01-16T19:56:00.000+01:00

A funny short video from earlier this week - Bernanke is asked about the effects of QE2. Reporter says - look, yields have increased... So the target was kind of not achieved (remember they wanted to keep the yields lower for an extended period by the QE2 programme). And listen what Mr. Bernanke replies: but the stock prices have increased! :)

Watch yourself.

Wind of change, or just a noise?

2011-01-15T09:17:00.000+01:00

Seems like the market sentiment has turned this week in the currency market.
EUR/USD, which was on a falling trend since autumn, showed some upward movement this weak.

The positive sentiment toward EUR was first built as a result of better than expected bond auctions in Portugal and Spain, Wednesday and Thursday, which relieved some tension over the debt problems in the euro area's periphery. Some public comments and rumours, e.g. that Germany agrees to broaden the support fund, also helped. Credit spreads eased.

But then the key rule changer this week was ECB's chief Trichet, who delivered the decision over the interest rates on Thursday. Rates unchanged, but the tone was different.

We consider that inflation rates could temporarily increase further... going back to price stability by the end of the year...
...We are permanently alert. We are never pre-committed not to move interest rates

And that spooked the markets. EUR/USD turned up alongside rising EUR rates -reflection of expectation in the markets that the turn interest rate cycle nears.

Whether it really does is a point of discussion. The thing is, currently inflation worldwide is primarily driven by food and energy prices, since the latter increased significantly as of lately. Will this kind of inflation - the supply side rather than demand side - be enough for the ECB to take measures? I don't think so. They will still want to see strength in the economy. While Germany will perform, it's hard to see any sign of improvement in the periphery.

On the other hand, the EUR/USD trend was also helped by softish - on the surface - US data. Like Friday's retail sales or consumer confidence, coming out worse than expected. Still, given a careful look, the retail sales report was not so bad, marking a healthy increase in sales for 6th month in a row.

Most importantly, it seems that FED is also seeing the recovery signs in the economy - and might consider scaling down the QE2, as it sounds from the Lacker's speech late Friday:

While the outlook may not have improved enough yet to warrant adjusting our purchase plans in the near- term, I anticipate earnest re-evaluation as economic developments unfold in the months ahead

One of the reasons is that they achieved what they aimed for with the QE2 - inflationary expectations have increased, as the FED data shows.

So, FED's monetary policy tightening might also be not so many miles away as many assume, and the short term rates will react to that, which will drive the rate differential to the USD benefit.

Employment chances across EU

2011-01-13T20:30:00.000+01:00

Looking for a job in Europe? Well, here is a summary table from The Economist suggesting the employment opportunities:

Apparently, Spain, Lithuania, Latvia are worst destinations for job seekers now, as there almost each fifth in the labour force is jobless. So competition could be tough. Meanwhile, in the Netherlands, Luxemburg, Austria chances could be higher.

Denmark lies just in the middle. But, from anecdotal evidence, finding a job here is not at all easy - especially for the newly educated.

Difficult times, indeed. But could be for the better, as competition forces more action from us, the lazy creatures by nature.

Economic freedom: Denmark vs. Lithuania

2011-01-12T18:41:00.002+01:00

It turns out, I am currently living in one of the Top-10 most economically free countries, as it follows the new estimates of The Heritage Foundation:

Denmark, if you break down the score, is the most "free" according to the "business freedom" metrics. Actually, almost on the top of the list. "Business freedom" is basically lack of barriers to establish own enterprise.

Denmark’s regulatory environment allows the processes of business formation and operation to be among the world’s most efficient and dynamic. The business framework is highly conducive to innovation and productivity growth.

Sadly, however, fiscal and government freedom is very low here. No freedom from taxes, unfortunately :/

And here how Lithuania looks in comparison.

We have low taxes there (fiscal freedom). But more struggle establishing own business.

You cannot have it all, as the saying goes. Something's gotta give.

Here we are again...- or back to PIGS problems

2011-01-10T19:28:00.001+01:00

No respite. The New Year has just started, and the euro area problems didn't take long to come back into focus. Sovereign yield spreads are widening to new records. In anticipation of the sad scenarios, the euro is falling further. Talks abound in the markets that the currency will be finished by the end of the year.

Portugal is rumoured to be discussing the bailout plan. The key test for them will the the upcoming bond auctions - starting this Wednesday.

Portugal hopes to raise new funds in a bond auction Wednesday, despite a market selloff in recent days that pushed the interest yield on Portuguese 10-year bonds above 7% Friday, the highest level since the euro's creation. Economists said such high borrowing costs are unsustainable for the country, which is struggling to rein in its debts amid chronically low economic growth.

If they fail to sell their debt at reasonable yields, then the bailout plan talks will escalate further, and it will come very soon. Next meeting of euro Finance ministers is scheduled for January 17th - that's when we will probably get some clarity and potential deal on the table.

First was Greece, then Ireland, now Portugal...I guess the next on the list is Spain. And Spain is a fat cat to deal with - that's when the key test for the euro zone's stability comes.

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P.S. "The euro game is up?" - a related video 4fun, in case you missed it...

US jobs negative

2011-01-08T08:33:00.000+01:00

Despite the fabulously good ADP employment report earlier this week, the most important monthly non-farm payrolls report was a miss and a thus a cold shower to the markets.

True, the unemployment rate declined...

...yet no way this is good news, since the participation rate also declined...

That is, discouraged people are moving out of labor force, which is denominator when calculating unemployment rate.

Unemployment duration is now at record highs.

...and so is the long term unemployment...

So, the labor market, while improving, still has a long way to go. We will probably see unemployment rate increasing again before it gets lower, since upon recovery more people will likely come back to labor force.

Overall situation worries the US FED. Yesterday's Bernanke's testimony was yet another chance to point this out:

...A “moderately stronger” expansion in 2011, helped by consumer and business spending, doesn’t immediately change the “persistently high unemployment” that threatens the recovery...

First 2011 moves in markets

2011-01-05T19:58:00.002+01:00

Finally the markets have shown some action this year. Today's US jobs report (ADP survey) has not only beaten analyst expectations, but did so big time - triple the forecast (297k new jobs created vs. 100k expected), with the highest increase in services sector on record!

The reacion in the markets was sudden, large and positive.

The USD gained across the board, including EUR...

The US long term rates have increased/Treasury bond prices declined...

...and the stock markets picked up.

Now all eyes are on Fridays non-farm payrolls report. Heaven forbid, if data surprises on the negative side, as after this week's data most analysts have adjusted expectations upward.

But, all in all, today's reaction in the markets to better macro news - dollar strength, bond weakness and stronger equities - shows a healthy expectation that the US economy is on the improvement path. And now it's not just one or a few single data points - the data has been consistently good for several months now.

The "aha" effect, or why it's fun to be an analyst

2011-01-04T18:43:00.000+01:00

Finally something that I believed deep down in my heart (without realizing it consciously) I found put black on white by the scientists. The "aha" effect - or the feeling of satisfaction after the problem is solved! :)

...experience during or subsequent to problem solving attempts in which problem-related content comes to mind with sudden ease and provides a feeling of pleasure, the belief that the solution is true, and confidence in this belief.

The first encounter with this feeling for me was doing maths at school - every time the problem is solved a sudden wave of satisfaction follows, the more so the harder the problem was. That's why I favored maths and in general more exact sciences than the "blah blah blah" stuff.

Surely this "aha" effect is one of the biggest motivators for a job where you can learn new things every day, just like that of an analyst in the financial markets, where problems are so multiple that you can use your whooooole life for figuring out the right answers :)

Life without "aha" moments is a mistake!

Back to reality - anno 2011

2011-01-02T20:32:00.000+01:00

This is it! The holiday at home is finished - ohh how fast it came and went, seems like just yesterday I was packing Christmas gifts and trying hard to fit them all in the luggage.

The perceived speed of time change, as always, is directly related to the perceived quality of time used. Time back home is always fun, but Christmas holiday time at home is just fabulous - my loving family and puffy cat, tons of snow everywhere, live Christmas tree, finger-licking-good mom's food, funny play at the theatre and "Swan lake" ballet, sauna pleasures... All such elements combined make the winter holiday time worth a while.

The year 2010 is also behind. I don't know how others feel, but for me the first days of a new year are always a bit overwhelming. As if it is a new page in your life - completely blank. Nothing's there yet, and you have so many ideas how to fill them that you don't know where to start.

Although it's a bit sad that the holiday is over and the year 2010 is behind, at least I feel happy I am not the one who does not want to come back to work on the first monday of 2011. How the Markets will develop this year is still to be seen - and being able to watch it, contemplate, learn and take part - work cannot be more fun than that :-)

So, let the New Year begin!

Ho, ho, ho

2010-12-24T12:37:00.000+01:00

After the most challenging trip ever (thnx to weather) - home sweet home! I guess it's time to forget markets for some time and do something completely different, starting with cooking :)

This is the most fun Christmas wish I've read this year - sent by the Polish Ministry of Finance - a quote from the Bible:

Let no debt remain outstanding, except the continuing debt to love one another, for he who loves his fellowman has fulfilled the law.

Merry Christmas!

China bailing out EU - sounds reasonable

2010-12-22T18:13:00.000+01:00

One of the more interesting news today was rumours that China is willing to help bailout the euro area.

The officials, who declined to be named, said Wang Qishan, a Chinese vice-premier, had given assurances that China would step up support for European stabilisation efforts “if necessary”. Mr Wang made the pledge during the third annual China-EU High Level Economic and Trade Dialogue, held in Beijing on Tuesday.

This is just what I thought could happen eventually. Euro area in debt, US in debt, Japan in debt...where is the money? Of course, it's China, sitting on over 2.5 trillion dollars of foreign reserves. And it's China's number the IMF will dial when there is an acute need for a substantial money amount.

But even without any acute cases, I think China joining in the rescue efforts would be a win-win situation. It would bring some stability to the euro area, as China's money is REAL, and not the paper guarantees which the current bailout package is based on. And for China, investing in bonds with yields of PIGS countries is much more attractive than earning the nearly zero yields on the US Treasuries.

Long term yields won't stop

2010-12-19T13:47:00.000+01:00

This week we reached record highs on the US yield curve steepness - the spread between 10Y and 2Y government bond yields crossed 2.90%. And when I say "record" I mean that - the spread hasn't been this high ever since with the data I have, which is 30 years back...

It seems tempting to enter the trade where you could receive this differential, isn't it?

But not so fast. Because this time might be different.

This upward trend in the spread recently has been mainly driven by the long end of the curve, the 10Y yields, increasing. The question is WHY they picked up in the past few months - that I contemplated last weekend, saying that the yields have increased after the FED started to comment on possible QE2 in the beginning of autumn. The second boost came from the US government decision to extend tax cuts a week ago.

But why would these 2 steps from US government would increase the government bond yields? There are many explanations, and, as I argued last week, there are both inflation and economic growth expectations in the nominal yields, and it seems that the former has been the dominant one in the past few months. That said, there is also the government credibility premia implied in the yields, and that is something tied to inflation. If FED pursues QE2 and extends tax cuts, it means likely government debt increases and potential money debasement down the road.

Note that the US yield curve increases have largely been cointegrated with the PIGS debt increases since September - and hardly the latter was due to the good economic growth prospects of the euro area periphery countries, which are set for a good portion of fiscal tightening in the years to come. Also, note that the most recent increase in the US 10Y yields after the US tax extensions last week was also followed by a reversal in local downtrend of PIGS 10Y yields.

So, that's why this time might be different - the yields might be picking up on inflation and government credit premia. The US government debt is large and increasing, and this will be difficult to sustain. So the long term yields, reflecting the premia for that, might as well increase further, while the short end of the curve will be low due to the easy monetary policy.

Time and again, I will repeat that the "safe" government bonds are probably the most risky medium-to-long term investment one can make.

Nassim Taleb talks crisis, Davos

2010-12-18T08:29:00.000+01:00

One of the most funny guys to listen to is Nassim Taleb, the author of "Fooled by randomness" and "Black swan". This time he makes some comments on crisis and drops some critique on Davos conference.

According to him, Davos is about „...chasing succesful people who want to be seen with other successful people...that‘s the game...it‘s not productive...“

He was there before, but he says: „ ...I had a feeling I was wasting my time there... I do so much better staying at home by fireplace and I have my notebook, and I have my library...“

Cannot wait to get my hands on his new book, "The Bed of Procrustes".

Friday's Fun: How the Irish Bailout Package Works

2010-12-17T18:07:00.000+01:00

A funny story travelling around about the current affairs :)

It is a slow day in a damp little Irish town. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit.

On this particular day a rich German tourist is driving through the town, stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night.

The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher. The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer.

The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel. The guy at the Farmers’ Co-op takes the €100 note and runs to pay his drinks bill at the pub. The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him ‘services’ on credit.

The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note. The hotel proprietor then places the €100 note back on the counter so the rich traveller will not suspect anything.

At that moment the traveller comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money, and leaves town.

No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism.

And that, Ladies and Gentlemen, is how the bailout package works.