A different direction
Sep. 29th, 2011 03:00 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksThree news items in the past 24 hours have made me wonder whether all this attention on Greece and the eurozone politicians might actually be diverting our attention away from what really matters in the short term.
First there was this article:
http://www.reuters.com/article/2011/09/28/indonesia-economy-debt-idUSL3E7KS1NJ20110928
in which Indonesia's government made a rare plea to state-owned insurers and banks not to sell government bonds. Apparently there has been something of a wave of foreign-led selling of emerging-market bonds.
Foreign investors sold US$1.58 billion of Indonesian government bonds from Sept. 16 to 26, reducing their ownership by about 3.5pp to 32%
State firms have also been asked to prepare funds to buy bonds if needed, under a "bond stabilisation fund".
Then there was this article in City AM
http://www.cityam.com/news-and-analysis/fpc-eurozone-crisis-could-freeze-credit
in whch the Financial Policty Committee warned of the risk of "a significant disruption to financial stability" through a falling-off of the supply of credit.
Finally there was this article:
http://www.lloydslist.com/ll/sector/finance/article380935.ece?utm_source=twitterfeed&utm_medium=twitter
where a Norwegian banker said that the supply of credit to shipping had fallen off a cliff.
The conclusions from these three pieces is clear; contagion isn't a threat. It is already underway. We just haven't noticed. And the reason that we haven't noticed is because we have been worrying about the wrong thing -- the stability of the European banking system. It's not the stability of the European banking system that we need to be concerned about; it's the derivative of that. It's the fact that people are worried about the stability of the European banking system that is what should be concerning us. Because credit is already drying up. Emerging market investments are being scaled down. Lending to businesses is getting tighter.
This is a replay in spades of the post-Lehman collapse. In 2008 Goldman Sachs and Morgan Stanley, two investment banks that were not really in any trouble, suddenly found themselves in trouble just because counterparties were worried that they might be in trouble. It took serious action on the part of the US government (through the creation of TARP) and some ready cash from the Japanese to reassure the counterparties.
Now it's happening again. There's a lack of transparency floating around and this is increasing risk aversion and an unwilingness to give credit. Banks that have capital just want to ride out the storm. The problem is, by trying to just ride out the storm, they make the storm worse. In fact, a "storm" is the wrong metaphor, unless blocking up the windows somehow made the wind blow stronger and the rain fall harder, because that's the situation at the moment.
The big difference between the post-Lehman credit crisis and the current crisis in waiting is that, back in 2008, the "toxic assets" were mortgages, and sovereign debt was created to solve the problem. As I said at the time, this just meant that sovereign debt would be the next target. Now that this has come to pass, we are in a situation where the toxic assets are sovereign debt itself, so you have a situation where to restore conference you have to create "safe" sovereign debt to replace the toxic stuff.
That might be what happens; And, if it does, it only stores up a bigger problem for later on. If the structural weakness of the weak economies isn't solved (they spend more than they produce), then the German voters are right -- using German bunds as a back-up for eurobonds, or putting a pan-European guarantee (probably with US, Japanese and Chinese backing, TBH) in place, might solve the imminent credit crisis, but it won't solve the underlying structural problem.
However, this could well be a case of "one problem at a time". If a liquidity crunch is coming -- and the above stories seem to indicate that it is -- worrying about such abstract things as "are the Italians spending too much?" will obviously take less priority than "will the banks be able to open on Monday?"
Al of this actually makes me contemplate a complete stock sell-off in the expectation that I will be able to buy the stuff back at 25% off in a year or so's time (a FTSE return to 3800 or thereabouts is quite possible given the above scenario). The only three things that are stopping me are laziness, the fact that the money at stake isn't that significant (potential gain of about £7k, minus dividends foregone) and my atrocious track record in the past when it comes to timing stockmarket declines.
+++++++++
In a shock-horror rsult, I actually ran good on Stars for 300 hands last night. A flopped set beat a half-stacked four-card flush with overcards and some kind of backdoor straight draw, and then AQ beat a short-stacked JJ in a Blind vs Blind situation. Live tournament players probably wouldn't see this as even worth mentioning, but it actually turned an EV of minus $10 into a result of plus $70. This is why so many tournament players think that they run bad. They remember the 80% hands that they lose, but not the sequences of 68% to 80% hands that they win. Just five lots of AA vs an underpair on the trot, all-in each time of with full $100 stacks, would turn an EV of $0 into a result of +$200.
______________
First there was this article:
http://www.reuters.com/article/2011/09/28/indonesia-economy-debt-idUSL3E7KS1NJ20110928
in which Indonesia's government made a rare plea to state-owned insurers and banks not to sell government bonds. Apparently there has been something of a wave of foreign-led selling of emerging-market bonds.
Foreign investors sold US$1.58 billion of Indonesian government bonds from Sept. 16 to 26, reducing their ownership by about 3.5pp to 32%
State firms have also been asked to prepare funds to buy bonds if needed, under a "bond stabilisation fund".
Then there was this article in City AM
http://www.cityam.com/news-and-analysis/fpc-eurozone-crisis-could-freeze-credit
in whch the Financial Policty Committee warned of the risk of "a significant disruption to financial stability" through a falling-off of the supply of credit.
Finally there was this article:
http://www.lloydslist.com/ll/sector/finance/article380935.ece?utm_source=twitterfeed&utm_medium=twitter
where a Norwegian banker said that the supply of credit to shipping had fallen off a cliff.
The conclusions from these three pieces is clear; contagion isn't a threat. It is already underway. We just haven't noticed. And the reason that we haven't noticed is because we have been worrying about the wrong thing -- the stability of the European banking system. It's not the stability of the European banking system that we need to be concerned about; it's the derivative of that. It's the fact that people are worried about the stability of the European banking system that is what should be concerning us. Because credit is already drying up. Emerging market investments are being scaled down. Lending to businesses is getting tighter.
This is a replay in spades of the post-Lehman collapse. In 2008 Goldman Sachs and Morgan Stanley, two investment banks that were not really in any trouble, suddenly found themselves in trouble just because counterparties were worried that they might be in trouble. It took serious action on the part of the US government (through the creation of TARP) and some ready cash from the Japanese to reassure the counterparties.
Now it's happening again. There's a lack of transparency floating around and this is increasing risk aversion and an unwilingness to give credit. Banks that have capital just want to ride out the storm. The problem is, by trying to just ride out the storm, they make the storm worse. In fact, a "storm" is the wrong metaphor, unless blocking up the windows somehow made the wind blow stronger and the rain fall harder, because that's the situation at the moment.
The big difference between the post-Lehman credit crisis and the current crisis in waiting is that, back in 2008, the "toxic assets" were mortgages, and sovereign debt was created to solve the problem. As I said at the time, this just meant that sovereign debt would be the next target. Now that this has come to pass, we are in a situation where the toxic assets are sovereign debt itself, so you have a situation where to restore conference you have to create "safe" sovereign debt to replace the toxic stuff.
That might be what happens; And, if it does, it only stores up a bigger problem for later on. If the structural weakness of the weak economies isn't solved (they spend more than they produce), then the German voters are right -- using German bunds as a back-up for eurobonds, or putting a pan-European guarantee (probably with US, Japanese and Chinese backing, TBH) in place, might solve the imminent credit crisis, but it won't solve the underlying structural problem.
However, this could well be a case of "one problem at a time". If a liquidity crunch is coming -- and the above stories seem to indicate that it is -- worrying about such abstract things as "are the Italians spending too much?" will obviously take less priority than "will the banks be able to open on Monday?"
Al of this actually makes me contemplate a complete stock sell-off in the expectation that I will be able to buy the stuff back at 25% off in a year or so's time (a FTSE return to 3800 or thereabouts is quite possible given the above scenario). The only three things that are stopping me are laziness, the fact that the money at stake isn't that significant (potential gain of about £7k, minus dividends foregone) and my atrocious track record in the past when it comes to timing stockmarket declines.
+++++++++
In a shock-horror rsult, I actually ran good on Stars for 300 hands last night. A flopped set beat a half-stacked four-card flush with overcards and some kind of backdoor straight draw, and then AQ beat a short-stacked JJ in a Blind vs Blind situation. Live tournament players probably wouldn't see this as even worth mentioning, but it actually turned an EV of minus $10 into a result of plus $70. This is why so many tournament players think that they run bad. They remember the 80% hands that they lose, but not the sequences of 68% to 80% hands that they win. Just five lots of AA vs an underpair on the trot, all-in each time of with full $100 stacks, would turn an EV of $0 into a result of +$200.
______________
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