Monday, November 12, 2012

Moral Petards

A US partial holiday today is being used as an excuse for quiet markets so micro-numbers are of little interest today. But the past week has seen some interesting news stories that TMM think are building into a theme.  

Nanny State relaxation -  Two US States legalise the recreational use of  weed and then Denmark scraps it's " Fat Tax"  on foods. TMM would like to think that this was a move away from the nanny statedom of  "Thou shalt not consume things that you like that I think are bad for you (and I don't like anyway,  but that could all change daily by Daily Mail edict)

Shoddy BBC Journalism -The BBC Director  General resigns over shoddy Journalism. Yip diddly doo, perhaps someone will soon ask if shoddy journalism stretches into some more benign, though equally misbalanced, reporting of other subjects and hopefully we see a move away from styles that  haven't improved since we wrote this . However the backlash of the moralisers over Entwistle's "Goodbye" payment is typically unthought out. "He's only been in the job 54 days". That post yes, but he's worked at the BBC for 23 years. So that's, what, 2 1/2 weeks pay for every year served? Not THAT excessive over the UK legal statutory minimum for redundancy of 1 1/2 weeks per year.   

Figurehead caught fiddling with his author. TMM won't mention his name as he probably still has lots of friends reading this blog (under a mountain somewhere), but he has caught a version of Lance Armstrong disease.  Symptoms being an institutional figurehead trusted to be the pillar of the establishment/sport  found with a midriff resembling a toroid  caused by the blast from their own petard, having just been hoisted with it . As our Doc friends would say "A lot of it around at the moment" . 

4 ways of avoiding this outcome

1) Don't do it.
2) Don't get caught.
3) Write a computer code to do the job instead of you, make sure it has no human traits, then retire anonymously to Las Vegas (or Zurich in the case of UBS) and party up hard until you die of your own excesses or the algorithm fails. In which case deny it was your idea and point to a 25yr old quant.
4) Don't be a pompous arse stipulating lists of your own moral codes that you will then trip yourself up on. But make sure you don't damage anyone else in the process. Preferably start with, "Hey, I have few codes of conduct but will get the job done. Am I hired or what?". Berlusconi wrote the manual and  Financial Institutions got away with this method pre 2008 until they started spreading the equivalent of STDs to their best friends.  

But there is a theme running through all of the above stories. Whilst popularist policies such as freedom of choice we support, pillars of the establishment are now having their credentials examined in such a detailed manner (whether by social media or FBI agents) that we see these pillars falling around us. All well and good, but our worry is that edifices we actually need are being pulled down faster than they are being rebuilt.

Banks - Moral lepers in the populace eyes, but the populace has not yet found an alternative to their perceived evil. 

BBC - Most trusted news source in the World (was) and now with a news department in shatters. Where do we turn ? Murdoch? really? Was it worth it?  

The UK West Coast Main Line tender - What started as a moral crusade against Branson (= big corp.) vs "tax payer money" (= little man), turned out to be a dumbed down civil service error own goal and remains a mess.

Lance Armstrong / Petraeus et al - All brought down harder and faster by moral hypocrisy.

 On one hand we want our leaders, institutions and figureheads to be more understanding and representative of society's massed average, warts and all, and yet we also want them to be super-human in their own lives.

Is this a growing paradox that will either result in a mass dumbing down of service, ability and responsibility with strong leadership and policy succumbing to the twitterati? Or will the masses, having destroyed all around them, start to compromise on their "moral" demands in return for some pragmatism. 

For now we watch with interest the latest moral lynching of companies that legally pay their tax somewhere with a lower tax rate and sincerely hope that society is not going to do its own "Petraeus" and trip itself up on its own moral rectitude.


Saul Bollox said...

The General broke the most important rule of all. Don't nail a nutter. He's lucky she didn't go Glenn Close on him, he could have lost his Privates.

abee crombie said...

re: Armstrong. There was some chemist on TV saying he went back and tested some old olympic results (94 possibly) with new testing technologies. He didnt want to publish reports because the results were just too big.

Athletes use dope, banksters are greedy, women love men in power, and most hedgies aint worth the 2/20 afterall. Rinse and repeat

Leftback said...

Asian bond investors are starting to see US as the new Japan, apparently this is becoming consensus:

USTs the new JGBs?

It's all very sound and ever so reasonable, this argument, which makes LB go.... hmmmm...... the parallels are really not that perfect. After all, Japan never came out and did unlimited QE without end, did they?

Bernanke's thesis all along has been based on two basic tenets: 1) that BoJ simply did not ever do enough QE and always wimped out at the faintest whiff of inflation or yen weakness, and 2) in the infamous helicopter speech, what BB was actually implying is that to finally escape the liquidity trap, a central banker must be prepared to appear verging on lunacy in order to persuade people that the money in their pockets will indeed be worth less tomorrow. Hence we end up with unlimited QE until the US actually reaches escape velocity.

There is a great book to be written on this issue alone.

Secret..Sauce said...

Bosivian JGB has led to many a fine ending. No doubt Treasury trysts will end as well.

marcusbalbus said...

re the right honorable Petreus: modern america is no better than the loonies under the fast bastard tudor burning all the papists at the stake.

Leftback said...

MM readers are all too familiar with that ultimate Wyddowmakker, shorting JGBs, it has rarely led to a Happy Ending. Will JGBs blow up now, and be replaced by USTs, or are the dynamics of these two markets actually not strictly homologous?

From LB's perspective there are just so many extra Risk Premia currently factored into USTs (Grexit, Spanic/Spank Failure, Fiscal Cliff, Lakshman Achuthan's Invisible Recession, US corps Margin Squeeze, Chinese Hard Landing) and each of these has lowered yields at the long end by a significant amount, say between 20-50 bps for each at the long end. The same is true for gilts and bunds.

Add in another 20 bps for Santa Claus taking the wrong turn from the North Pole and we might yet see a low of 2,50% on the long bond. Yet the fact remains is that each and everyone of these premia may prove to have been unwarranted, especially in a world where TMM's Non-Predictions hold sway.

Even the unwind of one or two of these 20-50 bps is going to cause a little gastrointestinal disturbance among the most recent longs and if several of the Non-Events were to Unoccur within a limited time frame, along with the end of Operation Twist at the end of the year, then we might see a very very sharp yield spike indeed. I reckon there could be as much as 200 bps of Risk Premia in the long bond. The Fed will be happy to sell Ts and buy MBS, just to keep the spread as tight as possible.

Anonymous said...

Secret Sauce 606, I would propose a different short version of BOLIVIAN.

Herds inexplicably grab garbage securities: balls out short on margin.

Yes, indeed ... HIGGS BOSOM (it is a slow day is my only excuse)


Secret..Sauce said...

Cute acronym.

Don't get me wrong, long Treasury is a terrible investment (although not all risk premia are for naught) but short 20+ years of duration is a sick trade, especially given who is on the other side. Just sayin'.

abee crombie said...

higgs bosoM.. nice.

LB i see your point why TSY is not JGB but I just dont see who all these sellers will be to push yields really high. Sure 50bps or even 150, but I dont see yields spiking anytime.. alas even a 50bps move at these low rates is still a good % return.

Also I'm not sure so there is much spec money in 30years.

Leftback said...

LB is laughing. Why so? Well, b/c in April 2010, he was the sole voice here suggesting that a 3.9% 10y might be a rather tasty buy. At the time, everyone and their uncle in the Real Money and punting community thought we were out of our very small mind..... it fell to 2.50% from there.

So, with that in mind, let's examine the present situation....

"but I just dont see who all these sellers will be to push yields really high"

First, we want to stress that we are NOT one of those bond market collapse loonies. Yields aren't going REALLY high, like a 4% 10y. Nope. Just talking about unwinding of some of the fear trades. Now, at these low levels, even +50 bps counts as a spike in yields. From here, this would be a very good thing.

Second, if we do see a +50-100 bp spike, you will really start to see sellers, believe me, and once the ball starts rolling, it might not stop for a while. This is in the nature of all crowded trades/mini-bubbles. A (+100 to 200 bps) steepener would be good, it would promote risk taking and economic activity. The Fed would keep the housing market stable by pinning the mortgage rate to the 30y Treasury.

Third, "given who is on the other side", remember that the Fed will stop buying the long bond in January, in order to buy MBS, and that takes a big customer away.

Fourth, as with QE1 and QE2, the Bernank DOES NOT WANT LONG END YIELDS DOWN HERE, what he wants is the short end pinned and the yield curve to steepen, in order that punters will pursue risk, and banks can once again make easy money.

Look, Tony Crescenzi of PIMCO explained the above quite elegantly in the weeks following the QE2 announcement while markets dithered, and of course eventually yields backed up by +100 bps. Economics is not physics, but liquidity pumped in has to go somewhere and some of it usually ends up going into the right places.

To put it another way, WHAT ON EARTH IS THERE LEFT to drive long end yields lower? Markets are currently assuming that US, Europe, China and Japanese economies are all going to be a stinking pile by the middle of 2013. There isn't a whole lot more out there to slow down, is there?

A steepener is just what we need. The more, the better, within bounds. The economy isn't credit-constrained any more, nobody is bothered by rates being a bit higher, except for homebuyers. It's not credit that's the problem, the economy is paralyzed by demand constraints and tax rate uncertainty.

Leftback said...

Great long term chart here. Long bond popping out of its long-term trading channel. It's a whole new paradigm, bond prices have reached a permanently high plateau. Trees growing to the sky.

Long Bond Long-Term Chart

LB really loves long-term charts, so useful. Now, we're not going crazy, we are just talking about a bit of a reversion, say, back to the bottom of the upward trading channel over the next, say, 3-6 months. Somewhere in there, a few fixed income noobs will find out, yes, you can lose money in bond funds.

Hotairmail said...

The corporation tax issue is very easy to resolve. Get rid of it. Doesn't work today. Directors have to ensure they pay as little as possible but then come up against invective from the court of public opinion.

Replace it with a tax on sales revenues in the country of purchase. If profits are about 10% of revenues and corp. tax 10% of profits, I make that about taxing 1% of gross revenues.

I should really be running the country.

Polemic said... a bit generalist. Would clobber efficient low margin high volume bizz at expense of high margin low volume. A bugger for petrol stations a boom for lawyers.

Anonymous said...

I'm with you LB.

Once twist has untwisted we should see some steepening at the back end. Certainly worth a punt even if only to catch the odd 50-100 bp move, take profit and short again.

Anonymous said...

C Says'
I'm not as bearish on govt debt as LB probably because I am also not as bullish on equity either.2013 for me is going to be a tough margin year for equity in general.If that is even remotely the case then there is not going to be a sizeable trigger out of govt debt.I also do not believe we can adequately quantify/forecast this data in any case so the room for error is likely to hurtful for either camp.
Oh I expect FC resolution will get a kneejerk covering rally with a corresponding effect in govt debt.Through that though I suspect to see a reluctance for portfolios to reallocate towards risk in any meaningful way.
2013 the year of slog.

Anonymous said...

C Says'
You want some safe haven.Perhaps it's now japanese equity because the action there is so iffy I'd have to money on them to be actively supporting it.

abee crombie said...

ok LB I see your points. To me 50bps in the long end isnt a drastic fundamental change, more positioning.A move up to 3.4% would seem like the target. 30yr yield daily Chart kinda looks like the Yen at the beginning of this year

I also wonder if the Bund and Schatz will start to sell off as well. The fear trade is in those markets more, IMHO