The brokerage firms such as Merrill Lynch have conducted a survey among the global fund managers and all have reached a common conclusion: the investors are afraid the most about "Geo-political" crises. The Geo-political crises are namely the shooting down of the Malaysian passenger aircraft over the Ukraine, Israel's actions in Gaza which could create reactions in the Muslim world. While all these have been realized, the spot market has reacted weakly to them. In the derivative markets which provide an insurance against such risks, a complete insensitivity is raging. This insensitivity is called complacency syndrome and the actual mental state has become the threat number one to the capital markets. Complacency is a windfall for the states such as Turkey which are following nonsense economic policies. Bubbles will soon begin to take shape in the world capital markets. Then what could end this complacency and when will it occur?
The world is crawling. ISID's victories in Iraq and Syria are causing thousands of mujaheddin to come to the region and the actions of Israel in Gaza is causing a reaction in the Muslim world with an increasing pace. In such an environment, if a 9/11 type terrorist attacks repeat, one should not be surprised. Also, the ISID which has repulsed the Iraqi army should be expected to undertake an offensive towards Baghdad and Kirkuk in which case, it will create a panic in the Brent oil market.
According to the Western states, the Malaysian passenger aircraft was shot down by the East Ukrainian separatists with the missiles and tactics provided by Russia. Accordingly, we may see the announcements of new sanctions against Russia which will target the energy and financial sectors. Putin will not stand empty-handed; the world is drifting towards a new Cold War.
But the reaction given by the financial markets to the shocks that could potentially change the history of the world is very weak and transient. When the crises abrupt, the markets sell a day or two, and then continue their journey to the peaks of 2014. This apathy is understandable in the spot market. Even if the large funds understand the medium-term risks, they cannot explain them to the customers to whom they are making sales without the reflection upon the economic parameters. Because the "Geo-political" issues are raising uncertainty about the future, one would expect the investors to purchase insurance in the futures and options markets. Perhaps what is happening in the Middle East and Ukraine did not change my expectations of a positive return on shares but I can say that the uncertainty as to my expected return has increased. I would protect my portfolio by buying puts and by shorting the index futures. Furthermore, the premium to be paid for such insurances is historically low. But the investment funds are not tempted by these insurances, and if they did, we would have seen jumps in the volatility indices, mainly in VIX.
That's what we call behaving as if there were no imminent and obvious risks. There are several reasons for such complacency. First, there is the common perception that the Fed and ECB will preserve the the financial system in case of an occurrence of adverse shocks. Second, financial asset prices other than "junk bonds" are not very expensive.Third, the world economy has an accelerating momentum and the investors think that the Geo-political crises will not suffice to curb this momentum.
It is very easy to predict the consequences of complacency. For a few weeks, the S&P 500 and other global stock exchanges will test new highs with the coming of strong sales and profit figures compared to the past. Then re-acceleration of the world economy will be priced in the marketplace. When October is reached, this complacency will turn into a bubble i.e. speculative pricing in the critical financial markets. In October, with the official start of the Fed's exit from QE and/or the heavily indebted Euro-zone states are such a bad shape that not even ECB will be able to save them is understood, a disturbance will begin. As the prices are too high, panic sales will follow in case of a bad news or a slight shock.
Of course, the markets will anticipate this, thus the panic sales may start in September but may be delayed until the end of the year. But one thing is for sure: the result of any complacency has always been a bubble and a financial crisis and in the process, we are now very close to point of no return.
Tuesday 22 July 2014
Sunday 13 July 2014
ARGENTINA'S FOREIGN DEBT: THE TANGO WITH DEATH
ARGENTINA'S FOREIGN DEBT: THE TANGO WITH DEATH.
We see statement ads appearing in the American newspapers. One days the Argentine Government publishes a statement with the following heading: "A handful of vultures is rendering Argentina insolvent and thus threatens the world economy." The following day, you can see a statement coming from the investors who are accused of being vultures as follows: "We are not vultures. This is our investment and there is a court resolution regarding it. We want to have our rights on it; because the Argentina's Government does not accept us as interlocutors, they are risking the world system."
Then what is the problem? Argentina could not pay the bonds maturing in 2001 and became somehow insolvent. Then in 2005, a debt restructuring agreement was made with the bond holders. A further restructuring of the debt had been made in 2010. It was a bond stock worth about 100 billion dollars. And the interest rate was too high. With the first restructuring, an agreement had been reached with 76% of the bond holders in 2005. They took their new bonds and retreated. Then in 2010, the number of investors with whom an agreement had been reached attained 93%. But the remaining investors refused to enter into agreement. These bonds had been accumulated by some vulture funds. Recently, the U.S. Supreme Court announced that the Argentina's Government had to reach an agreement by paying an interest for the period without agreement too as well as for these bond holders. When Argentina saw the bill put before her by the court, she said "that's too much!". And that is precisely when the war of ads begun.
Why did it happen? For a very simple reason. The payments to the bond holders were being done through Mellon Bank of New York in New York. Because the transaction was taking place in the United States, the American courts could come into play quite easily. Because the U.S. dollar was a reserve currency, the American law was valid everywhere.
But another news came forward. The French Finance Minister Michel Sapin gave a statement where he stated in a romantic fashion that the reserve currency characteristic of the U.S. dollar should be brought to an end. The French Minister was quite unhappy about the 9 billion dollar fine given by the American courts towards BNP Parisbas. BNP Parisbas had performed transactions with Soudan and Cuba without respecting the sanction decisions taken by the American Congress. Transactions effectuated against the sanction decisions brought 9 billion dollars fine. BNP Paribas accepted this fine. There was nothing left to Michel Sapin other then complaining. The big French bank blatantly did not respect the American sanction. That was the first mistake. More importantly, the French Government did not determine even on its own the transactions that were contrary to the sanction. And that was the second mistake and it was a severe embarrassment.
The sanction comes out from the American Congress. The American Courts rule for fines to the ones who do not comply to it. And the French bank said "yes" to it. And the only thing that the French Minister can do is to complain about it. As a matter of fact, there is nothing that he can do. Why not? Because the world keeps on working with the U.S. dollar. The world has about 10 trillion U.S. dollar of reserve currency. 60% of it is constituted of U.S. dollars. The remaining is acting like a dwarf: their trading volume do not beyond billions of dollars. China's money is kept in the depositories of the United States. Why is everybody investing in China where there no law? Because its money is kept in the United States. If a problem arises, you open a lawsuit, obtain a freezing of the assets and then make the necessary collection. BNP Paribas is paying its fine. Argentina will try to reach a compromise with the bond holders with whom she did not reach to an agreement. The resolutions of the American courts are going to be applied and Argentina will be forced to comply to them one way or the other...
If successful, all these things could make us think that one should expect a similar development regarding the other populist Latin American countries such as Chile, Venezuela etc. The aim would be nothing more than the destitution of the populist governments and their replacement with liberal governments. Let's see what's going to happen...
We see statement ads appearing in the American newspapers. One days the Argentine Government publishes a statement with the following heading: "A handful of vultures is rendering Argentina insolvent and thus threatens the world economy." The following day, you can see a statement coming from the investors who are accused of being vultures as follows: "We are not vultures. This is our investment and there is a court resolution regarding it. We want to have our rights on it; because the Argentina's Government does not accept us as interlocutors, they are risking the world system."
Then what is the problem? Argentina could not pay the bonds maturing in 2001 and became somehow insolvent. Then in 2005, a debt restructuring agreement was made with the bond holders. A further restructuring of the debt had been made in 2010. It was a bond stock worth about 100 billion dollars. And the interest rate was too high. With the first restructuring, an agreement had been reached with 76% of the bond holders in 2005. They took their new bonds and retreated. Then in 2010, the number of investors with whom an agreement had been reached attained 93%. But the remaining investors refused to enter into agreement. These bonds had been accumulated by some vulture funds. Recently, the U.S. Supreme Court announced that the Argentina's Government had to reach an agreement by paying an interest for the period without agreement too as well as for these bond holders. When Argentina saw the bill put before her by the court, she said "that's too much!". And that is precisely when the war of ads begun.
Why did it happen? For a very simple reason. The payments to the bond holders were being done through Mellon Bank of New York in New York. Because the transaction was taking place in the United States, the American courts could come into play quite easily. Because the U.S. dollar was a reserve currency, the American law was valid everywhere.
But another news came forward. The French Finance Minister Michel Sapin gave a statement where he stated in a romantic fashion that the reserve currency characteristic of the U.S. dollar should be brought to an end. The French Minister was quite unhappy about the 9 billion dollar fine given by the American courts towards BNP Parisbas. BNP Parisbas had performed transactions with Soudan and Cuba without respecting the sanction decisions taken by the American Congress. Transactions effectuated against the sanction decisions brought 9 billion dollars fine. BNP Paribas accepted this fine. There was nothing left to Michel Sapin other then complaining. The big French bank blatantly did not respect the American sanction. That was the first mistake. More importantly, the French Government did not determine even on its own the transactions that were contrary to the sanction. And that was the second mistake and it was a severe embarrassment.
The sanction comes out from the American Congress. The American Courts rule for fines to the ones who do not comply to it. And the French bank said "yes" to it. And the only thing that the French Minister can do is to complain about it. As a matter of fact, there is nothing that he can do. Why not? Because the world keeps on working with the U.S. dollar. The world has about 10 trillion U.S. dollar of reserve currency. 60% of it is constituted of U.S. dollars. The remaining is acting like a dwarf: their trading volume do not beyond billions of dollars. China's money is kept in the depositories of the United States. Why is everybody investing in China where there no law? Because its money is kept in the United States. If a problem arises, you open a lawsuit, obtain a freezing of the assets and then make the necessary collection. BNP Paribas is paying its fine. Argentina will try to reach a compromise with the bond holders with whom she did not reach to an agreement. The resolutions of the American courts are going to be applied and Argentina will be forced to comply to them one way or the other...
If successful, all these things could make us think that one should expect a similar development regarding the other populist Latin American countries such as Chile, Venezuela etc. The aim would be nothing more than the destitution of the populist governments and their replacement with liberal governments. Let's see what's going to happen...
Wednesday 9 July 2014
ECONOMIC PREDICITIONS UNTIL THE END OF 2014
ECONOMIC PREDICITIONS UNTIL THE END OF 2014
Following the declaration of Bernanke in previous May stating "I think we may exit QE", the emerging markets faced two small crises. Since the middle of March, the risky assets, i.e. stocks, emerging markets' F/X, and the bonds across the world have witnessed a strong rally. What will happen for the remaining of this year? Will the emerging markets face a major crisis or will they continue to see a rally?
The rally may continue until the end of September in the risky markets. In order to have a change in the guidance of the Fed which fuels the risk appetite in the markets, one needs a rise of 3% in the wages which in turn cannot materialize in the short term. The ECB may perform an additional QE during the period of September-October. Thus, we have a substantial liquidity present in the markets. The world economy has left behind the state of hibernation and the overall recovery has spread. 3Q profits from companies are expected to exhibit good performance. Valuations are expensive, but the "fury" or "bubble" stage is not present for the time being. There is still a large amount of cash present in the global funds. Volatility indices are in the bottom of the latest 5- to 7 years and with the exception of geo-political crises, there are no reasons for its rise for the time being. The momentum is very important in the financial markets: the momentum of the rally of 2Q is expected to continue in 3Q.
What is going to happen in the last quarter of the year?
Risks will increase geometrically as the end of the year nears. In October, asset purchases of QE of the Fed will stop. Markets will inevitably ask the questions as to the increase in interest rates once again as well as the time of the dose and how long it will last. While market players will be searching for the answers for a while, a profit taking is quite possible. How much inflation will cause the global growth? With the looming rise in food and oil prices while the output gap is closing around the world, central banks constituting the reserve currencies may be forced to withdraw the previous optimistic discourses. At the end of Q3, the financial assets will see a bubble in their prices and even in a small shock wave will set the stage for a hard sell.
The most fortunate of financial assets:
The Japanese and the emerging markets' shares are among those highly recommended. Both have historically low P / E averages.
What are the most hated assets?
U.S. and Euro-Zone (EU) "neighboring countries" (Greece, Portugal, Italy, Ireland and Spain) government securities premiums are excessive. The very low returns cannot be explained by economic or political developments. These assets are kept afloat with the generosity of the central bank and the carry-trade.
Euro, gold, and oil prices will trade how?
No one will earn any money in 3Q. It is likely that the EUR/USD will decline in the short term. But there are formidable barriers to the rise of the Euro; ECB does not want it. Thus, the EUR/USD will trade in the band of 1.35-1.40 during 3Q. This situation will provide a partial support to the gold and oil. The retreat of the gold till 1.000 USD/ounce has become a sort of a dream now. The gold is expecting the inflation to surface in the United States after which it will make its major move. The biggest support for the gold stems from the fact that the United States' real interest rates will remain very low for years to come. The reasonable goals for the gold in 3Q would be a trading zone of 1.350-1.400 and a year end target of 1.450. The decline in the oil prices is caused by the supply dynamics; for example, the United States has risen to the position of number one producer of oil after Saudi Arabia within two years. The world economy will never reach its previous power which sent the Brent barrel's price to 140 USD. The Brent oil may trade 100-110 USD but one has to consider the geo-political risks. The scary scenarios would be the failure to achieve a peace agreement between Iran and P5+1 and ISID's jihad in Iraq inspires terror and sabotage in the oil-producing centers of the Arab world.
Sales in the emerging markets will begin in October:
The Presidential election in Turkey do not cause a threat but the economic policy that Erdogan is going to apply in this position will look more like a time bomb. Professionals such as Babacan and Simsek will not be present in the new cabinet. The government will undertake a rapid economic growth campaign by forcing the Turkish Central Bank. We shall see a renewal in the rise of the current account deficit and inflation. With the Fed going out from the QE which will ignite the escape of the speculative funds, the Turkish Central Bank will be forced to raise its interest rates again. Turkey's dream will end by the end of this year and the nightmare will begin.
What are the greatest dangers facing the world?
Clear risks are no longer seen on the economic front. Dangers such as the failure to improve the economic growth and the transition to the deflation in the EU are present but they will evolve very slowly and the investors will adjust their positions by anticipation. But the political arena is a brewing pot. The war in Iraq may soon become a battle ground encompassing the whole Middle-East. Does Russia have another objective after the defeat in Ukraine? Will Argentina and Venezuela, which are the problematic countries of Latin America, have a balance of payments crisis which in turn will shake to the ground all the emerging countries? Will the dispute between China and the other regional countries over the continental shelf turn into an armed conflict? And the most important question: will the fundamentalist Islamic terror that took roots again in Afghanistan and Iraq, undertake a new tragedy of 9/11?
Following the declaration of Bernanke in previous May stating "I think we may exit QE", the emerging markets faced two small crises. Since the middle of March, the risky assets, i.e. stocks, emerging markets' F/X, and the bonds across the world have witnessed a strong rally. What will happen for the remaining of this year? Will the emerging markets face a major crisis or will they continue to see a rally?
The rally may continue until the end of September in the risky markets. In order to have a change in the guidance of the Fed which fuels the risk appetite in the markets, one needs a rise of 3% in the wages which in turn cannot materialize in the short term. The ECB may perform an additional QE during the period of September-October. Thus, we have a substantial liquidity present in the markets. The world economy has left behind the state of hibernation and the overall recovery has spread. 3Q profits from companies are expected to exhibit good performance. Valuations are expensive, but the "fury" or "bubble" stage is not present for the time being. There is still a large amount of cash present in the global funds. Volatility indices are in the bottom of the latest 5- to 7 years and with the exception of geo-political crises, there are no reasons for its rise for the time being. The momentum is very important in the financial markets: the momentum of the rally of 2Q is expected to continue in 3Q.
What is going to happen in the last quarter of the year?
Risks will increase geometrically as the end of the year nears. In October, asset purchases of QE of the Fed will stop. Markets will inevitably ask the questions as to the increase in interest rates once again as well as the time of the dose and how long it will last. While market players will be searching for the answers for a while, a profit taking is quite possible. How much inflation will cause the global growth? With the looming rise in food and oil prices while the output gap is closing around the world, central banks constituting the reserve currencies may be forced to withdraw the previous optimistic discourses. At the end of Q3, the financial assets will see a bubble in their prices and even in a small shock wave will set the stage for a hard sell.
The most fortunate of financial assets:
The Japanese and the emerging markets' shares are among those highly recommended. Both have historically low P / E averages.
What are the most hated assets?
U.S. and Euro-Zone (EU) "neighboring countries" (Greece, Portugal, Italy, Ireland and Spain) government securities premiums are excessive. The very low returns cannot be explained by economic or political developments. These assets are kept afloat with the generosity of the central bank and the carry-trade.
Euro, gold, and oil prices will trade how?
No one will earn any money in 3Q. It is likely that the EUR/USD will decline in the short term. But there are formidable barriers to the rise of the Euro; ECB does not want it. Thus, the EUR/USD will trade in the band of 1.35-1.40 during 3Q. This situation will provide a partial support to the gold and oil. The retreat of the gold till 1.000 USD/ounce has become a sort of a dream now. The gold is expecting the inflation to surface in the United States after which it will make its major move. The biggest support for the gold stems from the fact that the United States' real interest rates will remain very low for years to come. The reasonable goals for the gold in 3Q would be a trading zone of 1.350-1.400 and a year end target of 1.450. The decline in the oil prices is caused by the supply dynamics; for example, the United States has risen to the position of number one producer of oil after Saudi Arabia within two years. The world economy will never reach its previous power which sent the Brent barrel's price to 140 USD. The Brent oil may trade 100-110 USD but one has to consider the geo-political risks. The scary scenarios would be the failure to achieve a peace agreement between Iran and P5+1 and ISID's jihad in Iraq inspires terror and sabotage in the oil-producing centers of the Arab world.
Sales in the emerging markets will begin in October:
The Presidential election in Turkey do not cause a threat but the economic policy that Erdogan is going to apply in this position will look more like a time bomb. Professionals such as Babacan and Simsek will not be present in the new cabinet. The government will undertake a rapid economic growth campaign by forcing the Turkish Central Bank. We shall see a renewal in the rise of the current account deficit and inflation. With the Fed going out from the QE which will ignite the escape of the speculative funds, the Turkish Central Bank will be forced to raise its interest rates again. Turkey's dream will end by the end of this year and the nightmare will begin.
What are the greatest dangers facing the world?
Clear risks are no longer seen on the economic front. Dangers such as the failure to improve the economic growth and the transition to the deflation in the EU are present but they will evolve very slowly and the investors will adjust their positions by anticipation. But the political arena is a brewing pot. The war in Iraq may soon become a battle ground encompassing the whole Middle-East. Does Russia have another objective after the defeat in Ukraine? Will Argentina and Venezuela, which are the problematic countries of Latin America, have a balance of payments crisis which in turn will shake to the ground all the emerging countries? Will the dispute between China and the other regional countries over the continental shelf turn into an armed conflict? And the most important question: will the fundamentalist Islamic terror that took roots again in Afghanistan and Iraq, undertake a new tragedy of 9/11?
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