Over My Shoulder | Mauldin Economics

Over My Shoulder

Ben Hunt: “Cat’s Cradle”

July 9, 2016

This piece from Ben Hunt rhymed with other things I'm thinking. Here's how Ben introduced the piece in his email to me:

Today’s note, “Cat’s Cradle”, tries to make sense of the message I hear everywhere today: we’re stuck. The Fed is stuck. The ECB and the BOJ are stuck. The banks are stuck. Corporations are stuck. Asset managers are stuck. Financial advisors are stuck. Investors are stuck. Republicans are stuck. Democrats are stuck. Something’s gotta give. 

Game theory is best known for competitive games like Chicken and Prisoner’s Dilemma, but it’s the cooperative games based on Common Knowledge and focal points that really make the world go round. Unfortunately, when governments undertake emergency actions and extraordinary policies, they obliterate the focal points that make our cooperative games of investing and market making possible. Specifically, extraordinary monetary policy has obliterated the focal points of price discovery, and extraordinary regulatory policy has obliterated the focal points of liquidity. While it’s only natural to feel a keen sense of resignation under these circumstances, a reaction that Fed Governor Jim Bullard put into words with a scathing indictment of FOMC forward guidance last week, it’s better still to start a new conversation about how to invest here in the Silver Age of the Central Banker.

Download - salient-epsilon-theory-ben-hunt-cats-cradle-june-21-2016.pdf

Anatole Kaletsky: “Nothing is irreversible, except death”

July 8, 2016

Anatole Kaletsky is an unrepentant europhile. He would love to change the Brexit vote. I offer this as an OMS not because I agree but because "exit" is going to be an ongoing theme in Europe and Britain. And both sides to Brexit now have buyer's remorse. The question is, can Europe change? Can it change enough to make a difference to its ultimate survival? That is an interesting wager. Self-preservation is a powerful force.

Download - 160706_Kaletsky.pdf

Gavekal: The Options for Italy

July 6, 2016

This is a very good summary of the issues surrounding Italian banks. This threatens to seriously disrupt the entire EU if not dealt with in some type of precedent-setting manner. Business as usual will create a banking crisis of significant proportions. Everyone recognizes this but the parties are still trying to get their own way.  The EU Commission is playing at brinkmanship. Exactly one of the things that the British were upset about.

And just now, as I was about to hit the send button with this, George Friedman has chimed in with:

Our forecast is that Europe is institutionally incapable of dealing with this crisis. In fact it has done everything possible to exacerbate the crisis by trying to block Italian government efforts to stabilize the situation.  So for us the question is two-fold.  At what point does this destabilize other holders of Italian paper?  That's the minor issue.  The major issue is what happens when Italy is effectively forced to act outside the rules of the EU, which it has.  That is what the Italian exit and others look like.  They don't leave; they simply don't pay any attention to Europe.

Also factor in the IMF finding that Deutsche Bank represents the single most dangerous systemic threat in the world.  The German economy is much more unstable than people think; and as Austria's election showed, the Germanic world retains deep anti-European feelings as well.

I think we are entering “the zone,” and Britain is the least of the problems.  Politically, Austria and Italy are the major issues that the EU can't deal with.

Download - The_Options_For_Italy.pdf

The Liscio Report, June 2016

June 16, 2016

This is from my friend Phillipa Dunne, who writes for The Liscio Report. They track state sales and income taxes and the labor markets and issue occasional reports and this monthly letter. It's a tad wonkish, but it's good to see the trends as they develop. The country is slowing down… slowly.

Download - TLR_6_13_16.pdf

Bloomberg: “There’s a Seismic Change Coming to Money Markets”

June 14, 2016

It had been a little bit since I actually looked at the yield curve, so I went to Bloomberg online. (I don't have a real Bloomberg terminal, as I actually do zero trading and there is all the information in the world that I can really use on the Bloomberg website. And if I need information from a Bloomberg terminal, I have so many friends who can get it that I can't see why I should spend $25-$30,000 a year).
 
All that unnecessary information aside, in the process of looking at bond rates I came across this article buried deep in the back side of Bloomberg. It's about finding a substitute for LIBOR rates.
 
Did you know somebody was actually looking at replacing LIBOR? I didn't. And it seems they are making progress. It's not bug-free and there are issues, and it's not even going to be adopted within the next two years (my guess), but I can actually see this coming to a trading floor and contractual obligations near you.
 
Since many of us are continually doing contracts based on LIBOR, it might behoove us to start writing in something that says we will use LIBOR or whatever the generally accepted equivalent is, with something about smooth transitions. I can't imagine they would do something that would deliver a shock to a practice that is so intrinsically important to the markets and contracts; but then again, they've done a lot of things that I couldn't imagine. Sometimes it pays to look way out over the horizon and wonder what the heck these sons of B’s are actually doing to us.
 
Short article but worth putting on the back burner of your brain.

Download - Theres_a_Seismic_Change_Coming_to_Money_Markets_-_Bloomberg.pdf