Friday, 6 January 2012

Boring. Economists. Hungary.

Yesterday I found that the US and the European markets were sort of boring. The stories of the impending collapse of the world as we know it are not really having a lot of traction and it tends to reduce volatility quite a bit. There was a French 10-year auction which drew “better-than-feared” demand and the 10-year yield only rose a few basis points. Spanish and Italian bond yields had increased and they fell as the French auction did well. All very normal, and while not headline stuff, quite important. As long as we do not have hiccups we remain on course for a revaluation of risk assets. Origo’s risk indicators continue to improve.

Geopolitical choking point
Do not underestimate the potential trouble brewing in the Strait of Hormuz. 40% the world’s oil (traded) supplies pass through this narrow straight. The place has for years been recognised as a major “choke point” in case of international crisis (the other main choke point is the Strait of Malacca). We are less than one year from the completion of a major pipeline that would dramatically reduce the importance of the Hormuz, since oil tankers would not any longer need to pass there in order to load up with oil.

So now  Iran is trying to use a last chance to threaten the Western world with closing the Hormuz. The purpose is to blackmail USA and Europe into lifting a trade embargo on Iran, imposed because of Iran’s nuclear ambitions. Major preparations for a confrontation is already on its way. Iran will likely try to use “swarming” with small, light vessels that will hard to catch by the US Fifth Fleet, based in Bahrain. Iran may also mine the Strait. The US, on the other hand, is apparently preparing a drone defence. This could accelerate in a very nasty fashion, particularly as both Iran and the USA have serious geopolitical interests at stake.

I will not guess how much oil prices could increase. But it would be enough to slow down growth here.

Economists and money
The American Economic Association has published new ethics guidelines for academic economists. AEA is the association of research economists in the USA and has hosts of foreign members, too.

Now this venerable institution demands that its members disclose their economic interests when writing academic articles. That is good news, since economists have a tendency to pass off their points of view as science, even when they are highly politically charged. About time, one could say, since financial analysts have had to comply with similar rules for years.

Personally, I am more worried that one of the best sites for jokes about economists has been closed. Where will we now go to find wise words like these?:

There are two types of economists:
- those who cannot forecast interest rates, and
- those who do not know that they cannot forecast interest rates.

Hungarian Horntails
Hungary’s conservative government has taken some major steps in a rather worrying direction. Having won a 2/3 majority in parliament, the government has fired the president of the supreme court and announced a constitutional reform that appears to reduce the protection of civil liberties. That kind of stuff is usually not the worry of the financial markets.

But the Hungarian government also wants to reduce the independence of its central bank by granting the government the right to hire and fire the banks council almost at will. That has brought the EU Commission and IMF out of their seats. Hungary received emergency loans three years ago and asked for a second bail-out in November 2011. IMF and the EU Commission appear ready to withhold the help unless Hungary guarantees the independence of the central bank.

If this situation ends in a stalemate we may well have a Hungarian government default. Since Hungary is not in the Euro, it should not affect the markets. Unless of course, foreign (ie. EU) banks holding Hungarian debt have not yet made provisions.

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