Source: The Automatic Earth
Jack Delano Thirst Stops Here: Durham, North Carolina May 1940
I should maybe start off by saying that we’ve seen so many blatant lies lately we might want to be careful what we label a ‘lie’ and what not. I want to point out a bunch of things that are perhaps more misinterpretations, or just different interpretations, than blatant lies. But the difference between the two is often paper thin and slippery. I just simply noticed a few issues on which opinions vary, for whatever reason. And it doesn’t always matter whether that originates in innocence, ignorance or purposeful deceit.
First, I was my impression lately that everyone could agree the lack of volatility in the financial markets was not a good thing. That we don’t have actual markets if and when these don’t reflect what happens in the economies they ‘represent’. That plane loads full of central bank largesse makes price discovery impossible, so nobody knows what anything is worth anymore.
Which is a bad thing, because you can’t tell whether you’re buying something really valuable or of you’re being ripped off. Ultra low interest rates enable individuals and companies to purchase certain things at such low prices, and at so little risk even if the underlying risk is massive, that everyone’s view gets distorted.
An individual can buy a home or a car at an ultra low rate that (s)he could never have bought otherwise, and that they will default on overnight when rates rise. Do that car and that home have the value paid for them in the situation distorted by the low interest rate? Not when rates go up they don’t, and rates can only go up from here.
Ultra low interest rates also allow companies to buy back their shares, and engage in all sorts of mergers and acquisitions, even if their balance sheets wouldn’t let them with higher rates. We’ll get to see yet, and soon, how corrupting and perverting the past 10-20 years of central bank policies have been. Not just the Fed, China and Japan have done more than their share too.
One thing that’s certain is the policies killed off volatility. Something investors may hate, but something without which markets can’t function. This lack of volatility has created fat paychecks for some, and years of added misery for the rest. Someone always has to pay. And in the end it’s always the men in the street who do.
Last week, volatility came back. And it’s here to stay. US/EU sanctions against Russia, combined with the unproven – and likely unfounded – accusations they are based on, make sure of that. Throw in the continuing Fed taper, and the dollar demand it will cause, and you got a situation the world won’t come out of for a while. The market’s no longer Mr. Nice Guy.
Anyone who had a return of volatility on their bucket list – and there were many – can cross that one off now. You’ll have so much volatility you’re going to wonder what you were thinking when you wished for it. Anything you saw last week was nothing compared with what’s ahead.
Predictable financial markets that set records against the backdrop of deteriorating real economies were never seen as long term viable, but the speed at which the tables turn will catch most of us off guard. As this silly CNBC bit proves:
Just as life guards warn not to swim in water you don’t know, does the same apply to guardians of funds, as the markets they’re being asked to trade look murky and unfamiliar? Central banks haven’t made decision-making any easier. Is the Federal Reserve still buoying asset prices to nurture recovery, or is it turning into a monster of the sea as it slows asset purchases and considers interest rate hikes? Historians know it is never a smooth ride as rates climb. “The number of times that the Federal Reserve has hiked interest rates without a negative economic or market impact has been exactly zero,” said Lance Roberts of STA Wealth Management.
What a load of baloney. As if a central bank’s task is to help investors make money. As if anyone has the right to demand that. People sure get used to things soon. What they mean is actually not ‘drowning in uncertainty’, but back to what it should have been all along. Where investing is a risk, not a handout. Where investors can lose their shirts, not taxpayers. Well, a lot of shirts will be lost, but taxpayers will still be on the hook.
But what a strange perception of reality that article demonstrates. Like a baby crying when its silver sugar spoon gets taken away.
Another issue in which points of view vary widely is that of the Argentina bonds. There is a sort of consensus in the western press that Argentina did it all to themselves, that they engaged in irresponsible government policies, and did so for the umpteenth time. The crucial issue at this point, from where I’m sitting, is whether the vulture funds led by Paul Singer’s Elliott bought credit default swaps to cash in even bigger on an Argentine default. Something Elliott representatives have denied in front of a judge.
The government in Buenos Aires seems convinced that was a lie. And has asked the Securities and Exchange Commission to investigate. But what are their chances there? The ISDA, the international body that decides whether something is a credit event, has ruled Argentina’s failure to pay its creditors is. It is of course at least a little suspect, or is that just unfortunate(?!), that the Elliott fund is on the board of ISDA, along with JPMorgan, Morgan Stanley et al. What’s impartial about that?
As the Telegraph reports, Argentina has chosen the attack, it accuses the vulture funds, the court appointed mediator, the judge and the US government and threatens to take the case before the and the International Court of Justice.
Argentina will ask the US markets watchdog to probe two hedge funds involved in its $1.5bn default, saying that they used “fraudulent manoeuvres” to make “incredible profits”. Cabinet chief Jorge Capitanich has said he will urge the Securities and Exchange Commission to act after the unnamed funds allegedly made money from “privileged information”. [..] Mr Capitanich also called on “bondholders, trustees and clearing agencies” to take legal action against what his country has labelled “vulture funds”.
Last week, a US judge told Argentina to stop spouting “half truths” about its second default in 12 years and return to talks with bondholders. The South American nation has repeatedly denied it has defaulted, blaming the US government for stopping it agreeing a deal with creditors that would draw a line under its last default in 2002. “Let’s cool down any idea of mistrust [and] let’s go back to work,” US District Judge Thomas Griesa, who has jurisdiction over the bonds after Argentina agreed to hold talks under New York law, said on Friday.
He also ordered President Cristina Fernandez de Kirchner’s government to return to the negotiating table with bondholders, adding that the disparaging remarks should stop because nothing will eliminate Argentina’s obligations to pay bondholders – a fact that its government is ignoring.
Argentine officials deny the country has defaulted because they deposited $539m for creditors in a bank intermediary. But Mr Griesa blocked that deposit in June, saying it violated his ruling that Argentina must first pay $1.5bn to settle its dispute with holdout investors first. “To say that Argentina is in technical default is a ridiculous hoax,” Mr Capitanich said after last week’s deadline for talks had passed. He accused Judge Griesa of acting as an “agent” for what the country has labelled “vulture funds”.“There’s been mala praxis here by the US justice system, for which all three branches of the government are responsible. Argentina has tried to negotiate in good faith,” he added.
Mr Capitanich has previously warned that Argentina is considering calling for a debate at the United Nations and launching an appeal at the International Court of Justice in The Hague. “We can’t hold any positive expectations because [Mr Griesa] has always held the view of someone who is partial,” Mr Capitanich said on Friday. Mr Capitanich also announced on Monday that Buenos Aires has formally asked Mr Griesa to dismiss the mediator in the case, Daniel Pollack, accusing him of failing to be impartial.
Isn’t that cute? Depending on the beholder, where would you personally think the lie is?
I noticed a third intriguing case of differing interpretations this morning with regards to the failed Portuguese bank Espírito Santo, and its bail out by the government in Lisbon with EU funds. First, Bloomberg has this, an an article whose title magically changed to “What Crisis? EU Rules on Banks Lauded as Right After All” during the day, as if to hammer in their satisfaction a bit more.
Portugal’s rescue of Banco Espirito Santo SA may have eased some doubts about Europe’s banking industry by showing investors how the European Union’s thinking has evolved on handling failing lenders. The decision shielding some creditors spurred a rally in bank stocks and Portuguese assets yesterday by demonstrating authorities were able to shutter a bank without sparking a fresh bout of market tensions that have roiled Europe since 2009.
Instead of forcing losses on unsecured depositors and other senior creditors, as was required of Cyprus, Portugal is following Spain’s gentler approach that focused losses on junior debt and stockholders.“This is bad for the bank’s shareholders and creditors, but it’s good for the wider banking industry,” said Stefan Bongardt, a European banking analyst at Independent Research GmbH in Frankfurt. “Everyone knows the rules of the game now and that draws uncertainty out of the market.” The yield on Portugal’s 2-year bonds closed at a record low yesterday.
“The systemic euro crisis is over,” Holger Schmieding, chief economist at Berenberg Bank in London, said in a note to clients. “While the euro zone still has issues, it now has a well-oiled machine to deal with them. The vicious contagion risks, which were the hallmark of the euro crisis, can be kept at bay.” The Bank of Portugal unveiled a €4.9 billion ($6.6 billion) bailout over the weekend that will leave shareholders and junior bondholders with losses, while sparing senior creditors and unsecured depositors. Banco Espirito Santo, once the country’s largest lender by market value, will be split in two, with depositors and healthy assets joining the newly formed Novo Bank while bad loans and junior creditors stay with the old bank until it can be shut down.
The bank of the Holy Spirit, it turns out, has been a private and family led disaster for decades, and allegedly not always this side of the law. And that bail out, too, in a completely different take from what Bloomberg says, smells of last year’s sardines, says Ambrose Evans-Pritchard in a hard hitting piece. And not just him either:
Portugal’s rescue of Banco Santo Espirito has left taxpayers on the hook for large potential losses, sparing senior bondholders in the first serious test of the EU’s tougher rules for bank failures. The controversial €4.9bn bailout over the weekend set off a relief rally on the Lisbon bourse, with bank stocks soaring.
It also set off a political furore as opposition parties accused premier Pedro Passos Coelho of bending to the banking elites. “We live in a democracy, not a bankocracy. It is unacceptable for the prime minister to take money from the salaries of workers and pensions, and funnel it to a private bank,” said Catarina Martins, leader of the Left Bloc.
European officials pledged last year that taxpayers will never again face losses from a bank failure until all creditors and unsecured depositors have been wiped out first. They seem to have backed away at the first sign of trouble, opting for soft terms rather than the draconian measures imposed on Cyprus.
The EU’s new “bail-in” rules do not come into force until 2016, but it was assumed the broad principle would be followed. Portugal’s decision to protect senior bondholders is incendiary in a country already near austerity fatigue. The rescue comes three weeks after the central bank said Espirito Santo’s problems were safely contained. Carlos Costa, the central bank’s governor, said Lisbon was forced to act after the crippled lender revealed shock losses from exposure to the Espirito Santo family empire.
He accused the management of “fraudulent schemes” involving the rotation of funds across the world to deceive regulators. “International experience shows that schemes of this kind are very hard to detect before they collapse,” he said. The rescue raises fresh doubts about the underlying health of the banks as Portugal grapples with debt deflation and a private and public debt burden near 380% of GDP, the highest ratio in Europe.
The plan splits Espirito Santo into a bad bank that retains the toxic assets, and a Banco Novo for normal depositors. The state will inject €4.5bn of public money, dipping into EU-IMF funds left over for bank recapitalisations. This will raise Portugal’s net debt by 3% of GDP. Mr Passos Coelho said the money would be recouped when the new bank is sold off, insisting that there will be no extra costs for the taxpayer. Other Portuguese banks will have to cover any shortfall through a resolution fund.
Megan Greene, from Maverick Intelligence, said this is wishful thinking: “The losses could be much larger than people think. This is eerily similar to what happened in Ireland, and I think taxpayers will end up footing the bill.” Frances Coppola, a banking expert at Pieria, said the plan fails to tackle moral hazard and will come back to haunt the Portuguese state. “Those who brought down Banco Espirito Santo will walk away with the proceeds, and ordinary people will pay,” she said.
João Rendeiro, former head of BPP bank, said the collapse of Espirito Santo will do far more damage than claimed. “The economic impact is gigantic. It could lead to a contraction of GDP by 7.6%. I don’t know of any parallel to this in our economic history,” he said.
Mr Passos Coelho took a major gamble by going for a “clean exit” at the end of Portugal’s EU-IMF Troika programme in April, refusing to accept a backstop credit line. He brushed aside warnings from the IMF, worried about debt redemptions over the next two years. He insisted that the country is safely out of the woods, able to borrow cheaply from the markets without having to accept dictates from Brussels.
It’s like a game of spot the differences, isn’t it? Given the evidence, I’m inclined to give Ambrose the game. An initial $6 billion in EU taxpayer funds (and perhaps more), a potentially much higher number from the Portuguese people, and an economy that could lose as much again as it did in the depths of the crisis. Plus, obviously, regulators who’ve been asleep for many years, not exactly a confidence booster either. But still, what was Bloomberg thinking when they published their take?
We’re going to see a lot of spectacle and theater as the Fed and PBoC are forced to wind down their insanity. And we’ll see tons of different interpretations coming from all angles. As you’ve seen from what happened and happens in Ukraine, and from so many other events, you can’t trust your governments or media to tell you the truth. There’s a lot of plain dumb asses among them, and even more lying bastards with agendas. So keep your eyes and your nose open. A lot of things will look good at first sight but come with a nasty odor.
TLB recommends you visit The Automatic Earth for more great articles and pertinent information.