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When to catch a falling knife: EM edition

From Nomura’s Nordvig and Sahni:

There are probably two conditions needed for the EM sell-off to halt. First, we need US rates to stabilize. Second, we need redemptions to work their way through the system. Now that US equities are showing signs of turning, it is possible that US rates are going to stabilize. However, we worry that the EM flow story could have momentum of its own (and there could be a wave a further equity outflows too). For context, high-frequency EPFR mutual fund data show that, as of last Wednesday, we had only unwound a very small portion of the cross-border flows into EM from the US and eurozone that occurred between September 2012 and May 2013 (i.e., since the OMT announcement). Specifically, only 10-20% of post-OMT EM equity flows from the US and eurozone, and less than 5% of the post-OMT EM bond flows have been unwound so far (Figure 2). In addition, the absolute scale of these flows can be very large, as overall BOP data show that there have been a total of more than $250bn portfolio outflows from the eurozone and almost $150bn outflows from the US during this period (Sep 2012 – Mar 2013). The BOP numbers include DM flows as well, but we estimate that a sizeable 40% of the eurozone flows were to EM. Thus, we are wary of catching the falling knife by trying to time the end of this position washout.

That said, it is difficult to compare EM sell-offs with past blowups given that reserve positions are generally bigger, and funding has increasingly been in local currency, along with the fact that inflation risks (and pass-through) are smaller. Hence, we would not want to extrapolate the EM weakening into infinity (although quite a bit of commentary is now in this direction), and will look to use these moves as entry points to add to our preferred EM exposure, once markets settle.

(David)

Jun 9

Drunk Swiss bankers? (and the CIA)

He described as formative an incident in which he claimed CIA operatives were attempting to recruit a Swiss banker to obtain secret banking information. Snowden said they achieved this by purposely getting the banker drunk and encouraging him to drive home in his car. When the banker was arrested for drunk driving, the undercover agent seeking to befriend him offered to help, and a bond was formed that led to successful recruitment.

From the Guardian’s revelation of its Prism whistleblower, Edward Snowden.

Jun 6
Tech sector industrial production since the recession.
(Cardiff)

Tech sector industrial production since the recession.

(Cardiff)

Jun 6

If it needs to be said…

From HSBC’s Steven Major:

The six stages of G4 QE: Fed not even at stage 2 yet Tapering, if it were to start, would be stage 2. As stage 1 represents the initial buying of assets by the central bank, the next stage is about adjusting the speed of purchases. If QE is a car, then the accelerator (gas pedal) was pushed in late 2008 (see Figure 3) and it was the rate of change that mattered. When taking the foot off the accelerator, the car naturally slows down: so it is with QE. We should not confuse slowing down with going into reverse…

The Bank of England and ECB are at stages 3 and 4 respectively. Following the car analogy, both have slowed to a stop – ie they are no longer making new purchases – but there are important differences. Having bought GBP375bn gilts the BoE is actually maintaining its position by reinvesting the coupons and redemptions as they come in (see Figure 4) and provide a taper example from 2009. This is akin to holding the car on the clutch, which makes it fairly easy to move forward or backwards. The ECB is currently moving backwards, at stage 4, but this does not exclude the possibility of a new round of easing, which would take the process back to stage 1….

No G4 central bank is anywhere near stage 5 or 6 The ECB’s position is still not to be confused with an exit strategy and, stretching the car analogy, this would be like rolling back down the hill to where you started, slipping the clutch that was being held in stage 3. A stage 5 exit would mean putting this car into reverse and to a central bank this would mean decisively reducing the size of the balance sheet by selling assets and letting the level of reserves in the banking system return to a more normal level. No central bank is currently doing this and in our opinion it remains a long way off, maybe something for the next decade. Economic growth levels remain too low in the G4 countries and the outlook for the recovery is fragile. These would be enough reason to maintain the stimulation but falling inflation and a growing risk of deflation argue for maintaining the stimulus for longer

(David)

Jun 6

A bumper crop of euro high yield

That chart from Credit Sights shows 2013 heading for the euro-denominated high yield issuance record. Already, enough has been shoved out to make 2013 the second strongest, with €32.4bn. 

The finger in the air nature of the annualised ghost box is acknowledged.

(David)

Unusually for WSJ stipples, the Grumpy Cat stipple actually looks like Grumpy Cat. (Via WSJ)

Unusually for WSJ stipples, the Grumpy Cat stipple actually looks like Grumpy Cat. (Via WSJ)

ANGLO-SAXON

Explanation

In English, the term ‘Anglo-Saxon’ is generally used to describe ‘a member of any of the West Germanic tribes (Angles, Saxons, and Jutes) that settled in Britain from the 5th century AD’.
Also, particularly in America, it is used to denominate white people, usually of the Protestant faith (‘WASPS’), thus excluding large swathes of the population of that country. It follows that there is no such thing as an Anglo-Saxon country, or, as in the example below, an Anglo-Saxon agency or Anglo-Saxon capitalism. Furthermore, the Anglo-Saxon language ceased to exist in the 12th century (I am ill-informed about Brussels, but the last known speaker in Luxembourg was St Willibrord, 658-739). This term is particularly inapplicable (and, I gather, irritating for those concerned) when used to describe the Irish, Scots and Welsh, who partly base their national identities on not being Anglo-Saxons, and verges on the ridiculous when used to include West Indians.

-

A translator at the European Court of Auditors sets Brussels-ese gloriously straight. (H/T @SpiegelPeter and @bopanc - see also Real Time Brussels earlier)

(Joseph)

Fobor fail du jour

From Bloomberg:

Russia canceled an auction of ruble bonds for the first time since October as waning expectations of a central bank interest rate cut sent yields rising.

The Finance Ministry planned to offer 33.6 billion rubles ($1.1 billion) of December 2019 OFZ bonds in today’s auction at a yield range of 6.33 percent to 6.38 percent. The yield rose two basis points, or 0.02 percentage point, to 6.44 percent today, the highest in almost two weeks, after jumping six basis points yesterday.

Russia is not Rwanda… Awkward. 

(David)

There’s also a disturbing cultishness to the Bitcoin community, where everyone is as bullish as can be. “Someone is going to get rich this year,” Peter Vessenes, the executive director of Bitcoin, said in his opening keynote. The Bitcoin documentary that was teased at the conference is called The Rise and Rise of Bitcoin. Everyone was talking about how the price was only going up. Bitcoiner Tuur Demeester, the author of a financial newsletter, gave a talk in which he projected a number of scenarios in which the price of a Bitcoin could exceed $1,000, such as hedge funds committing 1 percent of their portfolios. “That’s why I think the risk-reward ratio is extraordinary,” he said. “Everyone should own at least a few Bitcoins.” He did not discuss any scenarios which might cause the price to fall.

- From Verge. "Because it’s math. You can’t kill math” (Joseph)

Apple Operations International, facts (?) du jour

Compare (Apple’s testimony to the Senate permanent subcommittee on investigations, on Monday):

Apple pays an extraordinary amount in US taxes. Apple is likely the largest corporate income tax payer in the US, having paid nearly $6 billion in taxes to the US Treasury inFY2012. These payments account for $1 in every $40 in corporate income tax the US Treasury collected last year. The Company’s FY2012 total US federal cash effective tax rate was approximately 30.5%. The Company expects to pay over $7 billion in taxes to the US Treasury in its current fiscal year. In accordance with US law, Apple pays US corporate income taxes on the profits earned from its sales in the US and on the investment income of its Controlled Foreign Corporations (“CFCs”), including the investment earnings of its Irish subsidiary, Apple Operations International (“AOI”)…

Contrast (the subcommittee’s report on ‘offshore profit sharing’):

Offshore Entities With No Declared Tax Jurisdiction. Apple has established and directed tens of billions of dollars to at least two Irish affiliates, while claiming neither is a tax resident of any jurisdiction, including its primary offshore holding company, Apple Operations International (AOI), and its primary intellectual property rights recipient, Apple Sales International (ASI). AOI, which has no employees, has no physical presence, is managed and controlled in the United States, and received $30 billion of income between 2009 and 2012, has paid no corporate income tax to any national government for the past five years…

(Joseph)

The deflation gang

We’ve written about it before but it bears repeating. China and Japan are ganging up to send deflation abroad and, in doing so, boost asset prices.

From Deutsche’s Alan Ruskin on Tuesday:

Firstly, China is a disinflationary force not only on the commodity side, but on the non-commodity goods side: US import prices from China declined -0.1% in April, and were down 0.9% y/y. Secondly, and more recently, import prices from Japan have declined sharply and are down 1.3% in the last 3 mths alone. This of course fits with USD/JPY having a significant disinflationary impact in the US. In the global context, Japan is having a dual influence - directly reducing import prices abroad, while the BOJ global liquidity boost, some of which leaks abroad, tends to help asset prices. I still regard the recent global disinflation theme as a major factor supporting asset inflation, as Central Bank’s remain accommodative for longer.

Push out deflation which allow more liquidity to be pushed out by central banks which flows into assets.

(David)

The bottom line is the titans are working from the wrong playbook. We’re all, to varying degrees, slaves to our experiences. Their formative experiences, almost to a man, were in the early 80s. This is when they built their knowledge and assembled their financial playbooks. They learned words like Milton Freidman, money multiplier, Paul Volcker, Ronald Reagan, and the superneutrality of money. Above all, they internalized one dictum: real men have hard money.

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Another must-read from Mark Dow.

(Joseph)

May 9

Meanwhile, in China prop trading is taking off

While much of the west outlaws it.. 

The country’s securities regulators have handed a boost to this business by cutting the capital that brokers must hold against their prop trading activities and expanding the kinds of assets in which they can invest.

More:

The broader industry saw similar patterns, making more than one-fifth of its revenues, or Rmb29bn, from securities investment income in 2012, according to data from the Securities Association of China. This was a huge rise from the Rmb4.9bn it made in 2011, which amounted to just 4 per cent of total revenues.

Source: China brokers boost prop trading profits - FT

May 7

But a Financial Times analysis of last year’s tips [at the Ira Sohn conference] shows decidedly mixed results. An investor who followed every top idea from the 12 speakers last year would have made 19 per cent, less than the 22 per cent gain available from a passive index fund tracking the US stock market.

-

Dan McCrum and Arash Massoudi

(Cardiff)

May 7
— The Minneapolis Fed on the ripple effects of the Bakken oil boom
(Cardiff)

— The Minneapolis Fed on the ripple effects of the Bakken oil boom

(Cardiff)