peterbirks (![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
peterbirks) wrote2011-12-13 12:54 pm
peterbirks) wrote2011-12-13 12:54 pm
Distortions
An easy few quid yesterday on a euro decline, closed out last night. Although making money by trading currencies is easy, what is hard is constantly making money on currency trades (i.e., it's a nice sideline, but if you try to do it every day, the rake will destroy you). At least nine-tenths of the time that I look at currency rates I have no idea what way they will go. And even when I am fairly convinced that I DO know the way that they will go, I'm likely to be wrong, at least in the short term, about 30% of the time. Looking back, what surprises me is that I've never actually been wrong in the long term. I called the rise in sterling from $1.60 to $1.90 (in fact it reached $2.10) and I called the fall in the dollar from ¥122 (although I would have called it a day at ¥90, well ahead of the current level of ¥76).
+++++++
It's been a nice relaxing return to six-tabling, as well. A couple of days of an hour here, a half-hour there, and I'm in front for the month. This semi-retirment is serving me well, although the Pokerstars strategy still works. I admit feeling resentment that my lower status causes my play not only to get fewer FPPs outright, but even fewer FPPs relatively. One-fifth the number of hands played results in one-tenth the number of FPPs awarded.
+++++++
I'm still ill, and it's getting a bit annoying. Now I seem to have a bit of a cold, separate from my prvious illness but probably related to a generally destroyed immune system from antibiotics and illness and hurt ribs and plane flights and so on and so on. I feel as if I am getting better, slowly, but slowly is the operative word.
++++++++
I've not written anything about the Cameron debacle because, TBH, I don't think that it's all that important. Jonathan Powell's witterings (see, for example http://www.ft.com/cms/s/0/f5f2631a-2415-11e1-bbe6-00144feabdc0.html#axzz1gPvlhVOw )
appear to imply that Cameron's actions threw away 200 years of history. The Guardian ran scare stories about the threat of a "two-speed Europe".
Well, sorry to disillusion the pair, but (a) Cameron's action wasn't that important, even for the UK, in the grand scheme of things, and (b) we are already in a two-speed Europe. If you aren't in the euro and you aren't part of the Schengen agreement, what else would you call it?
What's worrying, therefore, is that this has jumped to the top of the headlines in both the UK and in Europe, when what really matters is slipping under the radar. As Stephen King (no, not THAT Stephen King -- but the chief economist at HSBC) observes in today's FT, the whole "solution" being put forward is not a solution at all -- it's a quart in a pint pot solution where only one side of the equation is being looked at. As King puts it:
Germany was the sick man of Europe after reunification. It recovered by working hard, consuming less and exporting more. It seems to imagine that greece and Portugal and italy can recover by doing the same. But this argument is fallacious. Germany exported more by lending the money to the purchasers (Greece, Portugal, etc). If it handn't lent that money, Greece would not have been able to afford to buy those nice german Mercedes and BMWs. The German people could have worked as hard as they liked and consumed as little as anything, but the German recovery would still have needed that last part of the jigsaw -- Greek buyers.
It's therefore blatantly obvious to anyone bar a fool or a German politician that the German solution cannot be applied to the eurozone writ large. For even if "the southern European nations head down the path of fiscal righteousness", who will be the buyers?
King actually raises an even more frightening prospect. To finance its own exports, germany obtained lots of foreign debt - euro-denominated but Portugal and greece (and Italy and Spain)-backed government debt. If those countries become fiscally responsible, they will stop issuing so much debt. If Germany continues to run a surplus with the rest of the eurozone (and I've seen no mention by Merkel about this not happening in future), it will have to buy something else with that surplus. This could mean that german money will head into other "safe" investments like collateralized debt obligations. These could be insured with other companies via credit default swaps. What could possibly go wrong?
The answer, for those of you now way ahead of me, is, of course, everything. And it already has, because this is what nearly brought down the US financial system in 2008.
So, as King observes, there can be no solution to the current eurozone crisis because Germany insists on looking at only one side of the balance sheet. It wants to change one side without changing the other, and yet for the two sides still to balance. That can't happen. Germany's response is that it doesn't want to hear this. So it ignores it.
We see such blatant ignorance of simple mathematics in all walks of political life. A blatant example is cases of rape. Although one can say that one particular case of rape is "particularly serious", one cannot say that any case of rape is less serious than any other -- all rape is equally bad. When Ken Clarke made the simple mathematical point that if one case of rape is more serious than most, by definition those other cases were less serious than the one that was more serious, he was villified. But this is not a moral judgement. People get relativism confused with absolutism. Just becaose something is "less serious" doesn't mean that you are saying that it is "not serious".
Let's return to the less emotive area of economics. If you want the previously "bad" bits of the EU to become responsible, to consume only as much as they produce, then by definition the "good" bits of the EU will have to either consume more or produce less. But germany can't see this. It wants to carry on producing more than it consumes within the eurozone, while all of the other countries only consume as much as they produce. Clearly that's impossible.
No-one is even looking at this issue. Because all of the "solutions" have been piecemeal, so one is saying "but what will Germany do with its surplus if it can't lend it to the Greeks and the Portuguese?"
As such, every single pronouncement that we have seen by the likes of Barroso, Merkel, Sarkozy, Draghi et al just doesn't even address the fundamental issue, and I suspect the reason why the fundamen tal issue is not being addressed is because at least three of these people know that the fundamental issue is insoluble. You just can't get a quart into a pint pot, no matter how much you juggle the liquid around before trying to get it in there.
__________
+++++++
It's been a nice relaxing return to six-tabling, as well. A couple of days of an hour here, a half-hour there, and I'm in front for the month. This semi-retirment is serving me well, although the Pokerstars strategy still works. I admit feeling resentment that my lower status causes my play not only to get fewer FPPs outright, but even fewer FPPs relatively. One-fifth the number of hands played results in one-tenth the number of FPPs awarded.
+++++++
I'm still ill, and it's getting a bit annoying. Now I seem to have a bit of a cold, separate from my prvious illness but probably related to a generally destroyed immune system from antibiotics and illness and hurt ribs and plane flights and so on and so on. I feel as if I am getting better, slowly, but slowly is the operative word.
++++++++
I've not written anything about the Cameron debacle because, TBH, I don't think that it's all that important. Jonathan Powell's witterings (see, for example http://www.ft.com/cms/s/0/f5f2631a-2415-11e1-bbe6-00144feabdc0.html#axzz1gPvlhVOw )
appear to imply that Cameron's actions threw away 200 years of history. The Guardian ran scare stories about the threat of a "two-speed Europe".
Well, sorry to disillusion the pair, but (a) Cameron's action wasn't that important, even for the UK, in the grand scheme of things, and (b) we are already in a two-speed Europe. If you aren't in the euro and you aren't part of the Schengen agreement, what else would you call it?
What's worrying, therefore, is that this has jumped to the top of the headlines in both the UK and in Europe, when what really matters is slipping under the radar. As Stephen King (no, not THAT Stephen King -- but the chief economist at HSBC) observes in today's FT, the whole "solution" being put forward is not a solution at all -- it's a quart in a pint pot solution where only one side of the equation is being looked at. As King puts it:
.
"The eurozone deal will fail because it offers no explanation of how the German current account surplus will be recycled if the southern European nations head down the path of fiscal righteousness"
Germany was the sick man of Europe after reunification. It recovered by working hard, consuming less and exporting more. It seems to imagine that greece and Portugal and italy can recover by doing the same. But this argument is fallacious. Germany exported more by lending the money to the purchasers (Greece, Portugal, etc). If it handn't lent that money, Greece would not have been able to afford to buy those nice german Mercedes and BMWs. The German people could have worked as hard as they liked and consumed as little as anything, but the German recovery would still have needed that last part of the jigsaw -- Greek buyers.
It's therefore blatantly obvious to anyone bar a fool or a German politician that the German solution cannot be applied to the eurozone writ large. For even if "the southern European nations head down the path of fiscal righteousness", who will be the buyers?
King actually raises an even more frightening prospect. To finance its own exports, germany obtained lots of foreign debt - euro-denominated but Portugal and greece (and Italy and Spain)-backed government debt. If those countries become fiscally responsible, they will stop issuing so much debt. If Germany continues to run a surplus with the rest of the eurozone (and I've seen no mention by Merkel about this not happening in future), it will have to buy something else with that surplus. This could mean that german money will head into other "safe" investments like collateralized debt obligations. These could be insured with other companies via credit default swaps. What could possibly go wrong?
The answer, for those of you now way ahead of me, is, of course, everything. And it already has, because this is what nearly brought down the US financial system in 2008.
So, as King observes, there can be no solution to the current eurozone crisis because Germany insists on looking at only one side of the balance sheet. It wants to change one side without changing the other, and yet for the two sides still to balance. That can't happen. Germany's response is that it doesn't want to hear this. So it ignores it.
We see such blatant ignorance of simple mathematics in all walks of political life. A blatant example is cases of rape. Although one can say that one particular case of rape is "particularly serious", one cannot say that any case of rape is less serious than any other -- all rape is equally bad. When Ken Clarke made the simple mathematical point that if one case of rape is more serious than most, by definition those other cases were less serious than the one that was more serious, he was villified. But this is not a moral judgement. People get relativism confused with absolutism. Just becaose something is "less serious" doesn't mean that you are saying that it is "not serious".
Let's return to the less emotive area of economics. If you want the previously "bad" bits of the EU to become responsible, to consume only as much as they produce, then by definition the "good" bits of the EU will have to either consume more or produce less. But germany can't see this. It wants to carry on producing more than it consumes within the eurozone, while all of the other countries only consume as much as they produce. Clearly that's impossible.
No-one is even looking at this issue. Because all of the "solutions" have been piecemeal, so one is saying "but what will Germany do with its surplus if it can't lend it to the Greeks and the Portuguese?"
As such, every single pronouncement that we have seen by the likes of Barroso, Merkel, Sarkozy, Draghi et al just doesn't even address the fundamental issue, and I suspect the reason why the fundamen tal issue is not being addressed is because at least three of these people know that the fundamental issue is insoluble. You just can't get a quart into a pint pot, no matter how much you juggle the liquid around before trying to get it in there.
__________
no subject
Then the only problem is generating a trade surplus with the rest of the world.
no subject
The difference from the North/South divide in England is that we are a trading nation. In other words, the surplus-generating south can spend that surplus on "foreign stuff".
What is happening in germany is that the surplus is being spent (or, rather, was being spent) on Greek, Italian, Spanish and Portuguese bonds, held by German financial institutions, rather than on Spanish holidays or Spanish holiday homes owned by German individuals. Germany did, and still is, allocate most of its surplus to euro-denominated financial instruments. If it hadn't, then Greece would not have been able to get itself into the mess that it is in now.
This imbalance doesn't exist in England, where (a) there has for decades been governmental redistribution through the creation of jobs in the deficit areas -- this had the effect of recirculating tax money from the surplus generating south to the loss-making north, and (b) mobility of labour alleviates the problem, at least in part.
Now, you are right, a fiscal and political union would ease the problem, but unless Germany brings its consumption/production misfit into some sort of balance, that problem won't be solved.
I'm becoming increasingly convinced that there is no fundamental solution to the problem, because the problems outside Germany are greater than the surpluses inside Germany. So, even if Germans do consume more, a structural imbalance remains that can only be solved by countries such as France easing its massive social security liabilities. Since the Germans are showing no inclination even to admit that their surplus generation is part of the problem (they still utter the mantra that everyone should start generating a surplus -- the quart into pint pot argument, because they want them to do this without stopping their buying of German goods), I don't see any solution ahead.
What would be nice would be if the rest of Europe DID get its act together, and thus more than decimated German exports as a result. That, at least, would bring home to the German people that the whole thing is a two-way street.
PJ
Distortions
(Anonymous) 2011-12-13 11:49 pm (UTC)(link)In the real world, I have just watched the last bit of Newsnight - reminded me of the divergence of unit labour costs since the Euro's foundation. How will unit labour costs in the Med countries be cut by the 30-40% required? Without this there is absolutely no hope. I believe the Irish (and the Baltics - although they are outside the Euro) have cut wages in absolute terms but will that really happen in Southern Europe?
Pete N.
Re: Distortions
Yes, one can just imagine how transfers from Germany to Greece to pay for unemployment benefits would play out with the German electorate, but this is part of the complete incomprehension of the nature of the problem that is endemic to the German electorate and quite possibly also a view genuinely (nis)held by German politicians.
Just hear some snippets of the Barroso speech, which represented all that was wrong with the EU. He referred to the UK proposal on exceptions on the financial service tax as one which "as presented, was a threat to the internal integrity of the market". Now, what the fuck does THAT mean? Well, it means nothing apart from "we didn't like it".
Further observations on the views of Powell, the LibDems, and so on, that the result on Friday will be a disaster for the UK. Sterling has risen by nearly 2% against the euro since Friday night. If the implications for British trade were anywhere near as bad as Powell believes, this would not have happened. Either the markets have got it wrong, or Powell has. I know what side my money is on.
PJ
Re: Distortions
Fitch last night downgraded four Italian insurers, with Generali being dumped down by two notches. Its reasoning was that the insurer had too much sovereign debt on its books. The problem is that, if an Italian default occurs, the theory is that you can pass on this loss to life policyholders (this is why life assurers' theoretical exposure to sovereign debt is in practice less than it looks). In practice, such a default would drop generali's return on life policies (endowment policies as we call them) to below the minimum guarantee. Generali would be liable for any top up. This is precisely the problem that hit Japanese life assurers.
Bad times ahead. Maybe I should reduce my $/€ target from $1.25 to something like $1.07.
PJ
Re: Distortions
PJ
Re: Distortions
But when the provincial governments' bluff gets called, all hell is going to break loose.
As you say, it's all getting very Mercantilist, isn't it? I have some theories about this, from a historical rather than an economic perspective, which I might end up embarrassing myself by blogging on.
Meanwhile, (a) you are seriously going to have a lot of interesting stuff to write on at work, aren't you? and (b) you're the expert, and I kind of go along with the $/€ line, but from the evidence of the past few months there seems to be absolutely massive inertia on the € side, and an equally massive political volatility on the $ side.
I think, really, the $/€ market is the sort of place where you need to have quite a lot of BBs in the stack, exceptionally large cojones, and most importantly of all the ability to wake up at 3am in the morning on the back of an automated news pager (how quaint of me) and slap money down on an instant arbitrage position.
But then again, it isn't my game. Definitely frightening, though.
Re: Distortions
PJ
Re: Distortions
"Well, Mr Sharky, you have to do this and that and the other, and to be honest we don't much care as long as you can settle your position.
"Now, we're all gentlemen here, although I'm a little worried about Rosie DuBois III in the pink frock over there, who may or may not have been named after Theodore or Franklin ... Anyway. We all believe in proper casino rules.
"Always settle your account before you leave the building.
"Oh, and also: if you really, honestly, need to honk a cartful of cocaine to do your job ... could you at least join the smokers under the fire escape?"
Re: Distortions
PJ
They _Pay_ People For This?
You are of course unspeakably correct on the "throwing 200 years of diplomacy away" bollocks.
You are, by inference, unspeakably correct on the corollary, which is that everybody and their Beloved National Auntie is desperately trying to ignore the unfortunate truth, and what the hell, cretinous mud-slinging and headlines can't hurt, can they?
You are correct in that Germany will never, ever, subtract that additional pint. (I believe I argued with Nicholas Whyte a year or two ago that it was an essential ingredient. Still, I don't expect that anybody much listens to Nicholas, either.)
I'm sorry, but I despair of this country. Whichever way you look, and whoever you listen to, we're fucked. It's down to survival, mate. Translate your poker skills into gambling against Euro nutters (various French banks come to mind, although it would be unfair to leave the Germans out), and you could at least ride the crisis out.
But, to more important things. Spending my week in the Hole of Hell, as I do (last week was Clerkenwell and the number 38 bus, which was blessedly disease-free compared to the Tube), may I recommend a Hot Toddy?
Not with Rum, obviously. But I think you could concoct such a thing with lemon juice and cloves and whatever Tate & Lyle black treacle your current diet plan allows. A quick snort of tabasco and I think this might help.
Well, it worked for me. But then again I've missed out the horse tranquilisers that the River Cafe normally insists upon.
Pah! Those people are agricultural, and know nothing of City life.
Re: They _Pay_ People For This?
Re: They _Pay_ People For This?
I have done, ever since I first set eyes upon it. Strange, that.