Facts and figures about Greece

Simon Johnson serves up a grim but realistic report:

...Every 1 percentage point rise in interest rates means Greece needs to send an additional 1.2 percent of GDP abroad to those bondholders. 

What if Greek interest rates rise to, say, 10% – a modest premium for a country which has the highest external public debt/GDP ratio in the world, which continues (under the so-called “austerity” program) to refinance even the interest on that debt without actually paying a centime out of its own pocket, and which is struggling to establish any sustained backing from the rest of Europe?  Greece would need to send at total of 12% of GDP abroad per year, once they rollover the existing stock of debt to these new rates (nearly half of Greek debt will roll over within 3 years). 

This is simply impossible and unheard of for any long period of history.  German reparation payments were 2.4 percent of GNP during 1925-32, and in the years immediately after 1982, the net transfer of resources from Latin America was 3.5 percent of GDP (a fifth of its export earnings).  Neither of these were good experiences.

On top of all this Greece’s debt, even under the IMF’s mild assumptions, is on a non-convergent path even with the perceived “austerity” measures.  Bubble math is easy.  Hide all the names and just look at the numbers.  If debt looks like it will explode as a percent of GDP, then a spectacular collapse is in the cards.

Addendum: Paul Krugman comments.

Lies and truth on sovereign CDS

It’s not just the NYT: now the BBC is printing “explanatory” articles about credit default swaps which are simply wrong. Check out the factbox:

Government bonds come with an insurance policy, called a credit default swap (CDS).

Hedge funds have been buying up vast quantities of CDSs linked to Greek bonds in the hope or belief that Greek government will either default on a bond interest payment, or have its credit rating lowered.

This is because in both cases, the seller of the CDSs – typically banks or insurance firms – would have to pay a penalty fee to the buyer of the CDS contract.

Is there anything here which is actually true? No, bonds don’t “come with” a CDS attached. No, there is no evidence of hedge funds (or anybody else) “buying up vast quantities of CDSs linked to Greek bonds”. No, a downgrade of Greece would not result in the seller of the swap having to pay out on it. And no, a swap payout is not “a penalty fee”.

The important thing here is not the inaccurate reporting so much as it’s the way in which heated political rhetoric has been unquestioningly accepted by journalists who simply don’t have a grounding in this stuff. If a lie can get halfway around the world before the truth has got its boots on, this one has circumnavigated the planet twice while the truth is still slumbering in bed. No one wants to be seen as defending banksters, so even those who should know better are happy to stay complicit in the lies.

That said, I was invited to a media lunch hosted by Loomis Sayles today, and I took the opportunity to ask David Rolley, their international fixed-income guru, whether CDS had been or could be used for nefarious purposes. And he unhesitatingly said yes, on both counts, saying that Brazil, for one, has paid as much as $1 billion in extra funding costs thanks to hedge fund types who use CDS to drive up the country’s bond spreads ahead of new issuance.

Of course, the hedge funds in question are likely long Brazilian debt anyway, so a ban on naked CDS wouldn’t prevent that kind of activity. In fact, they’re trying to get even longer Brazilian debt, and trying to manipulate the price at which they’ll be asked buy it on the primary market. So I wouldn’t necessarily say that they’re trying to destroy the country. They’re just trying to get a bit more out of them, in terms of interest payments.

Still, that kind of activity — front-running new issuance in the CDS market — is undoubtedly a little bit distasteful. I just don’t think that it deserves to be talked about people expressing “the hope or belief that the government will default”.

(HT: Coldwell)

Fastest Mutual Fund Cash Depletion Since 1991

“It’s not a red light, but it’s a flashing yellow light that the strongest part of the rally is probably over. There’s not as much buying power out there.”

-Jerome Dodson, president of Parnassus Investments

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This is a datapoint worth keeping an eye on:

“Equity mutual funds are burning through cash at the fastest rate in 18 years, leaving them with the smallest reserves since 2007 in a sign that gains for the Standard & Poor’s 500 Index may slow.

Cash dropped to 3.6 percent of assets from 5.7 percent in January 2009, leaving managers with $172 billion in the quickest decrease since 1991, Investment Company Institute data show. The last time stock managers held such a small proportion was September 2007, a month before the S&P 500 began a 57 percent drop, according to data compiled by Bloomberg.”

I have no idea what the velocity of this drop means — the speed at which mutual fund cash drops is not something we’ve researched previously.

Any thoughts?

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Source:
S&P Rally Slowed by Fastest Cash Depletion Since 1991
Lynn Thomasson
Bloomberg, March 8 2010
http://www.bloomberg.com/apps/news?pid=20601087&sid=aPidmY6Nga30&

Advice to a Young Market Participant

“I’m rapidly losing faith in this whole game, Barry.”

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I received a disturbing email from promising young man who works at a well known shop. He expressed his frustration with the entire absurdity of his job, with Wall Street, and with the ridiculousness he sees swirling all around him.

My reply to him follows:

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XXXXXXX,

I cannot restore your faith or improve your morale (Only you can do that). What I can do is share with you what I have learned over two decades, and perhaps in these words you might find some small comfort.

Yes, there is an insanity to the markets that can make you mad if you let it. Instead, learn to see the delightful absurdity of it all. Revel in the stupidity, learn to read when the ‘wisdom of the crowd’ turns into an angry mob. Find some Zen in the foolishness of others.

Step back and look for the variant perception . . . then wait for it to become a money maker.

Consider this was an issue from 1996 or 97 until the collapse in 2000, and from 2005 to the collapse in 2008-09. It is a 3 or 4 or even 5 year time lag between the earliest inklings of recognition of mass stupidity/insanity, to any eventual collapse.

Time is always on the side of the patient. Study, learn, absorb all you can. You are waiting for the next opportunity to make your bones, your fortune, your reputation. It will come along eventually — if you wait for it and are in a position to take advantage when the moment arrives. As Pasteur said, “Chance favors the prepared mind.”

You must become a philosopher, a historian, a statistician, a trial lawyer, and a psychologist when looking at Mr. Market. Simply reading the data and trying to trade/invest off of it is a sucker’s game. The noise so totally outweighs the signal that it is easy to get caught up in distractions. For the vast majority of investors, dollar cost averaging into Indexes — then forgetting about it til retirement — is their best bet. Its not my favorite strategy, but anything else is too complex for mom and pop to work for them.

But you work in the business, and your clients want/need to outperform, so you must give them something value added. You need to be able to comment on the madhouse — and you can do so acerbically, mockingly, derisively at times — while recognizing, acknowledging, and waiting for the technical set up to bet against the crowd.

The saying goes “The trend is your friend.” The smart money adds ” ‘cept the bend at the end.” The momo crowd, the lemmings, the mad money all pile onto that trend as the trees grow to the sky. Especially at the end — that’s when the weight of the sheeples, the johnny-come-latelies ultimately pressures that tree, and is what causes that deadly “bend at the end.”

You must learn patience, young grasshopper. You must have faith that EVENTUALLY, the sorta kinda, almost efficient market will figure it out. That is when money returns to its rightful owners. There will be long periods of time when the blowhards, the jackasses, the arrogant, the ignorant will be eating better than you. During the dot com bubble, the dumber you were, the more money you made. Many of those who understood how silly things were missed out on the boom.

But this state of affairs is temporary. Eventually, the knaves starve to death under the oppressive force of their own ignorance. Be patient. The day of reckoning is often surprisingly late in its arrival, but it will not be denied. The beast must be fed.

Trust me when I tell you, its worth the wait . . .

Poslano od dare prek Google Bralnika:

Investing with a Steep Yield Curve

Here is the data in chart form separating returns into times when the yield curve was relatively flat (less than 1%), moderate (1-2%), or steep (more than 2%)....

Surprising (to me) is not the outperformance of REITs during periods in which the yield curve is steep (steep yield curves are good for banks, which means in normal times they are more willing to lend [this time may be different warning]), but the STRONG underperformance of commodities and gold during these times (I figure most of the times that the yield curve was steep over this period was during downturns when the Fed was adding liquidity or in other words disinflationary periods, which aren't good for commodities).

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