Complacency vs Volatility
Guest post by Macro Story;
Hard to believe how complacent the equity market is right here. Wednesday the central banks announced a coordinated foreign currency swap program to bypass an interbank system that is no longer functioning. Let me repeat that “an interbank system that is no longer functioning.”
Ill informed market participants take that to mean the Federal Reserve is printing money and bailing out Europe and the dash to own equity, risk assets begins. At the same time the cost to insure that investment as measured by the vix and the implied volatility falls.
Reminds me of the adage of how market reaction to the initial FOMC statement is always wrong. So if the FOMC announcement causes a spike in the SPX give it time and that move will reverse itself. Uniformed investors unfortunately do what they are told by people who are just as uninformed and love to shoot first and aim next.
So amidst the backdrop of many large banks some larger than the GDP of their own country are possibly days from failing, the third largest bond market in the world no longer self funding and China having to reverse monetary policy as the threat of slowing growth is now greater than inflation and people see that as an opportunity to take risk. Apologies for such a long sentence.
Did The Corporate Psychopaths Create the Global Financial Crisis?
Anybody that has worked in the Finance Industry has stumbled across at least a dozen psychopats. Many times, they are the people calling the important decisions, they are the managers, the ones making the decisions. We have certainly encountered several of these split personalities, and seen them demonize organizations over the years. Often charismatic, they tend to “impress” people, but the end product is often a ruined corporation, while the Psychopathic directors move on to enjoy life with big wallets. The question is, are the psychopats responsible for the Financial Crisis? Courtesy Jessie. Below academic research on the subject, by Boddy;
This short theoretical paper elucidates a plausible theory about the Global Financial Crisis and the role of senior financial corporate directors in that crisis. The paper presents a theory of the Global Financial Crisis which argues that psychopaths working in corporations and in financial corporations, in particular, have had a major part in causing the crisis. This paper is thus a very short theoretical paper but is one that may be very important to the future of capitalism because it discusses significant ways in which Corporate Psychopaths may have acted recently, to the detriment of many. Further research into this theory is called for.
Chart Update
With markets in mean reversion heaven, where investors witness sell offs followed by huge “coordinated” moves up, many hedge funds are feeling the pain. With markets having had a “lost” year. The US indices are pretty much unchanged (not USD adjusted), while the Europeans have had a rather negative performance. Time to check out some important charts, and levels to look out for. Will Ben & Co push through those resistance levels? We are once again aproaching the 200 day moving average….
The Federal Reserve’s Foreign Exchange Swap Lines-remember why they did it last time?
Remember the last crisis, some years ago? Well, back then Fed introduced the famous “swap lines” in order to take stress out of the funding system. As some banks saw increasing difficulties of funding themselves, Fed decided to bail out the world, just like yesterday. Further insight into how it was last time, but all is good now, as this time is different. From the NY Fed back in 2010;In response to these market disruptions, the Federal Reserve in December 2007 estab- lished the Term Auction Facility (TAF) to provide funding to U.S. banks through its role as lender of last resort. While the TAF addressed domestic dollar funding pressures, the Fed recognized that the new facility was unlikely to alleviate dollar funding pressures overseas, since interbank lending was effectively frozen.
Central Planners Act
Many “shocked” by the Bazooka yesterday have been asking us about what actually happened yesterday? Simply put, we got a coordinated response by the central banks, in order to prevent the crisis. This will not help the debt burden and the economy of the EZ. After the Lehman collapse, nobody wants to see the same scenario again. Therefore the move yesterday should be seen as short term help so banks can continue to lend to each other. The Guardian has put together a set of Q&A explaining some of the action yesterday. Click here.
Further reading on the central banks bonanza by the Economist;
Some words by Mario Draghi
Draghi’s introductory statement. Hinting new rate cuts?
As you know, the ECB’s monetary policy is constantly guided by the goal of maintaining price stability in the euro area over the medium term. And when I say this, I mean price stability in either direction. This applies to both the setting of official interest rates and the implementation of non-standard measures.
This autumn, tensions in financial markets have intensified again with very adverse effects on financing conditions and confidence. Downside risks to the economic outlook have increased. The weaker degree of activity is moderating price, cost and wage pressures. It is in this context that the ECB decided to reduce its key interest rates by 25 basis points in early November 2011.
Dysfunctional government bond markets in several euro area countries hamper the single monetary policy because the way this policy is transmitted to the real economy depends also on the conditions of the bond markets in the various countries. An impaired transmission mechanism for monetary policy has a damaging impact on the availability and price of credit to firms and households.
This is the very important monetary policy reason for the ECB’s non-standard measures. But of course, such interventions can only be limited. Governments must – individually and collectively – restore their credibility vis-à-vis financial markets.
Tensions in sovereign bond markets have been accompanied by stress in the banking sector given the financial interlinkages between governments and banks. The ECB has taken several measures in 2010 and 2011 to ensure that banks continue to have access to funding sources. This has enabled them to continue lending to firms and households.
News That Matters
Ft.com
China’s manufacturing sector contracted in November, marking the first decline since February 2009, the FT reports. The official purchasing managers’ index (PMI) fell to 49.0 in November from 50.4 in October, http://ftalphaville.ft.com/thecut/2011/12/01/774641/china-pmis-go-negative/
Asian markets retained their gains on Thursday on the back of the previous day’s central bank liquidity moves, despite poor manufacturing data from China. The wave of central bank action around the world to avert a liquidity crisis cheered financial markets on Wednesday but highlighted the depth of international concern about possible economic turmoil in Europe,http://ftalphaville.ft.com/thecut/2011/12/01/774701/markets-remain-bouyant-on-liquidity-move/
Zynga, the fast-growing online game maker, plans to value itself at as much as $10 billion in its forthcoming IPO, says NYT Dealbook, citing two people briefed on the matter. The company plans to file an amended prospectus on Friday with an estimated price range of about $8 to $10 a share, http://ftalphaville.ft.com/thecut/2011/12/01/775001/zynga-said-to-seek-10bn-ipo-valuation/
Japan’s two biggest carmakers warned that the record strength of the yen could drive more car manufacturing overseas and called for more aggressive official intervention to push the currency lower, reports the FT. http://ftalphaville.ft.com/thecut/2011/11/30/774551/toyota-and-nissan-call-for-more-action-on-yen/
Latest comments