Wednesday, 18 January 2012

Mario. Yields.Economic news. Gross.

Super-Mario II
No, not Mario Monti but Mario Draghi. In a testimony to a committee of the European Parliament he is quoted to have said that “As regulators we should learn to do without ratings. Or at least we should learn to assess creditworthiness in a way in which ratings or credit rating agencies are one of the many components of our information”.

I could not agree more. I have even been quoted for saying so: There is no alternative to doing your homework. Even if it implies that you will have to read up on what creditworthiness means. Or to employ staff that know.

On Monday, I quoted S&P’s musings in their reasoning for the downgrade of France. It was an unashamed judgement of the shortcomings of the European initiatives to shore up the Euro. The fact that I agree with their judgement should not take the attention away from the fact that it revealed one crucial fact. The ratings agencies are as much political players as they are analysts or indeed paid marketing agents. Draghi’s words should be taken to heart and the ratings should be taken as “one of the many components”.

I am happy to see that S&P’s downgrade was largely ignored by the markets.

French bond yields fell at the auction Monday, a Belgian auction went well, and even Greek bond yields fell Italian and Spanish two year yields have stabilised and 10-year yields declined. I interpret this as a resounding proof that ECB’s 3-year loans are having the desired effect for now. The stock market is picking up the baton.

German bonds (and other “Safe haven” assets) are worrying me. If suddenly bonds from other countries are perceived as being not-so-risky and if even Portugal manages to sell a small amount of 10-year bonds, what will happen to German yields? It does not take a genius to see that one of the world’s most overvalued assets would be in for a rough time if investors drop their obsession with avoiding risk.

If you are ultra-long in these assets despite their ridiculously low yield, take care that you will not suffer the same fate as the (almost) proverbial frog in the water being brought to boil.

The frog story is proven to be a myth. The losses on your bottom line will be real.

World Bank economic forecast
The less thinking part of the financial press will today dedicate too much space to the World Bank’s economic forecast. WB expects global growth of 2.5% in 2012, down from last forecast’s 3.5%. The previous forecast is from June 2011, so most of the downgrade merely reflects the economic development since then. If the European banks break down and the euro-zone enters a deep depression, it will lead to a global recession, according to the WB. That has no news value whatsoever. I notice that the World Bank does not assign a subjective probability to neither the main scenario nor the doom scenario. Do read the report, but take it as a history lesson rather than anything forward-looking.

Good news amid too much gloom
We, Origo, my business partners and I, want to have it on the record that the European recession is a fact here and now, and we are beginning to pull out of it. Some people appear to agree with us (the stock markets, just to mention a few). ZEW’s data for German investor and analyst expectations rose for the second month running. It was the biggest monthly increase in 20 years of data.

Market rumours now report that the negotiations on Greece’s restructuring will result in a haircut of 68% - it appears to be a good number – for Greece, at least. An anonymous source said that “a lot of brinkmanship is going on”. Sounds about right. Playing this one right may hand a big Ka-Ching to those who blink last. Why else should hedge funds have gotten in there recently?

Sometimes I wonder what it really takes to have one’s name mentioned in the headlines. I do my best by being mean and sarcastic. PIMCO’s Bill Gross managed to get a headline on Bloomberg for telling the obvious truth that some institutional investors have rules according to which they will be forced to sell bonds that are rated lower than a certain threshold. That may lead to a sell-off. Toe-curling stuff. I promise myself not to quote Bill Gross again until he makes a correct call on US Treasuries.

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