After an unproductive meeting Schauble looks old and befuddled, but also like someone who simply doesn’t believe in giving money for free. He is backed by the vast majority of Germans. My personal favourite was his repeat of the offer to send 500 German tax collectors to Athens.
I was going to write a blog about how Paulson has screwed his investors, but there’s plenty of time for that and something more interesting came out today.
One of the fundamental studies used to define the politics of the past few years was a 2009 book by the Harvard economists Rogoff and Reinhard (henceforth R&R) called ‘This Time is Different’. Their most politicised result – backed by extensive statistical analysis – is/was that once government debt reaches 90% of GDP growth basically drops to zero.
The conclusions are obvious: government ‘spending’ should be drastically cut to stay below that red line, and it was surprisingly influential.
How interesting that the calculations have now proven false and the selection of data itself unsound.
I always assumed economics departments were full of the same pedants that prowl chemistry labs. Apparently not – R&R conveniently provided their own data and it’s taken until now for someone to actually check their premier conclusion.
The wrong approach anyway
Unfortunately it’s basically impossible to do meaningful statistical analyses on the national data that everyone actually wants to look at. We would all love simple answers to questions like, ‘how many people do I need to fire to hit a total spending number, or should I just not bother?’
As far as I can tell this is intrinsic. For example, there have been only a handful of distinct global cycles in the past century, and each was associated with a ‘phase’ of the economy. How can you compare GDP data for a country that was mobilising for Word War 2 – prepared laboriously by hand – with today?
It is sheer folly to compress a whole economy into a handful of statistics: GDP, inflation, crude measures of weath, and expect to come up with anything actually useful.
Typically you have to ignore the basically unquantifiable effect of changing political structures and environments to come up with one relationship, say, the impact of debt on GDP.
It’s almost funny
The absurd reality that this argument was used to fire people, cut benefits, shelve investment plans and screw funding for things like basic scientific research. Ofcourse, there book was so successful as it resonated strongly with the times, and in particular a brand of conservative politics, so it wouldn’t make sense to give them too much credit.
But it would only be a mild exaggeration to say their research formed the academic bedrock of respectability for the austerity movement.
A constant irritation
The whole thing reminds me of the ‘stocks v bonds’ debate that got way too much airtime a couple of years ago. These arguments all depended ENTIRELY on your start and end point.
If markets halve over a six month period, it doesn’t matter how far you go back, you are still not going to get a meaningful answer. To put it another way, when markets double, all your results change. Even if you took an entire century of price history the problem remains.
Even the better ways of doing this kind of research are invariably dependent on the inclusion or omission of a particular decade.
There is no god hidden in the data. Things do happen for reasons though, and wouldn’t it be better to get as broad and understanding as possible, with as much granularity in the reliable data we actually have?
The whole thing depended on the kiwis
Instead, it turned out that incorrect statistics for four years of New Zealand’s history completely reversed the story.
To be fair (and I read the book years ago) it didn’t seem as they were thumping any particular bible. Unfortunately the same is not true of their supporters and the likes of Paul Ryan who earnestly paraded their research as evidence. Now the facts have changed, what will happen to his opinion?
Austerity for Losers
The moral flavour of the discussion is a little nauseating anway. Those who agree saving is prudent and profligacy immoral (and who could disagree with virtues like that) naturally support austerity, barely bothering to consider the rather numerous differences between, say, a person and a state.
Not that I have anything against Cameron et al using this to win an election – they are, after all, politicians – but I remember thinking it was kind of silly that they had backed themselves into such a corner. They could have stayed the moral party and still left themselves the wiggle room that they could now use to create something of a legacy .
The state should have cashed in on the weird markets of the day
The crisis was incredibly harmful across swathes of society. It was also an opportunity to invest as cheaply as will likely be possible in our generation, and that opportunity has largely been squandered.
Projects with marginal economics but substantial societal value could actually have been done profitably. Not only woudl that have improved things, but it would actually lower your future tax burden.
There is a huge difference between money spent and debt swapped for an income generating asset. With the oversimplifications of R&R and their like, this is mostly ignored.
A Settled Debate
Since a number of countries took varied, almost graded approaches to the crisis, perhaps future academics will come up with the right answer to what we should do now, though by then naturally it will be too late.
Most likely they will then write a pithy book, publicise false generalisations and get the problems of their own time completely, utterly and harmfully wrong.
1. Xivvie has prone true to form and is up about 400% since I sold my entire position at around $8 last year, proving once again stop losses are the devil’s work and have no place in anyone’s strategy. Whoops.
On the flipside, the world has proven remarkably good at knocking down risk markets, so there’ll almost certainly be another chance to pile back in, though if we have a few years like 2003-2006 (likely) I’ll probably have to watch one of my favourite plays quadruple again from the sidelines.
Typically the lack of market volatility over the past year is the exact opposite of what (dare I say) everyone was predicting a year ago. Even lil Kim hasn’t been able to shake things around. The commentators gleefully stating that the Korean markets are at ‘four month lows’ completely miss the point: big picture there’s barely been a ripple.
(Kospi, Korea’s market index)
Fortunately, having watching XIV and it’s ETF cousins for some time now (of particular interest ZIV – it’s like a smoother version using futures further down the curve that inherently jump around less than the front end) and actually read their legal docs, at least I now have a firm strategy and some level of confidence to put on a position that, in my weak defence, I just didn’t have this time last year.
2. While I’d prefer it didn’t, that sort of opportunity may come relatively soon. There’s hints of the now-typical mid year slow-down in the US, Eurozone statistics are somehow managing to worsen, and there are signs wherever you look that market exposure is at extremes. This all suggests the annual Sell in May and Go Away collapse might happen once again, for what must be something like the fourth year in a row now.
3. Meanwhile the broad road-map has been playing out according to plan. The Eurozone hasn’t collapsed as the pundits predicted, and it will take far more than economic statistics to shake it now. Meanwhile the shale story played out more or less as expected, and while this hasn’t resulted in the fall in crude I was expecting, I think downward pressure is a relatively safe bet over the next few years.
Pressure on commodity prices will likely be the theme of the next couple of years, and you don’t need to be an expert to guess what impact the wave of supply will have on commodities like iron ore.
The second and third order impacts are harder and more interesting to ascertain. Most likely prices will stay low (as will inflation statistics) and those who need cheap fuel and cheap raw materials will benefit. Perhaps steel makers will finally have their time in the sun, and some of the pressure on airlines, shipping and transport companies will be alleviated.
4. To be honest though, considering the run so far, to be long in this market is not a clever move. Better to be patient and wait for a real opportunity. If you were set at much lower levels last year, or better yet, at any point in the four years preceding, that’s a different story, but this bandwagon is not for jumping.
Enough with the boring recap.
Next post: Anarchy and Bubblecrap
But for the first time in a while, I feel like walking away for the market. Something’s not right..
Let me count the ways:
1. Chinese inflation figures where high, making monetary easing that much harder
2. No mention of QE3 from the Fed.. given their communication policies, I’d say that’s now looking quite unlikely
3. Germans are talking about fiscal discipline again – as if inflation has anything to do with anything right now, or their loose talk and inopportune rate rising didn’t screw things over last year
4. Rising spanish debt yields – predicator of the annual euro slump we’ve come used to
5. Expectations for a very good US jobs number which massively underperformed on Friday.
6. There has just been a stonking rally.
Finally, the Chinese market is getting dicked, and for the past five years that has meant stay the fuck away from risk.
There’s not much to be positive about, save to hope April is a wipeout and that sets us up for a ripping second half of the year. ‘Sell in may and go away’ can’t work every year.
I’d say copper’s looking pretty exposed from here (yes that is a head and shoulders pattern)
In fact, the whole market is a head and shoulders pattern.
I’ve had a pretty good run since december (well, less good after the past couple of days) but now face the age old dilemma with all the tricks for the unwary and general mindfucks contained within: hold them or fold them.
The ECB has adamantly refused to take the single, simple step that would solve the crisis overnight: printing cash and buying sovereign debt. Last week Mario Draghi, whilst once again refusing to contemplate such steps on principle, rather cagily announced that eurozone banks could borrow effectively unlimited amounts at cheap, below market rates.
While on the surface in the tradition of his austere, ideological and rather mistaken German predecessor, this could in fact be a sly move from the recently installed Italian: for eurozone banks could use the cheap cash to buy their own nation’s debt at their own government’s auctions.
The next six months will certainly have their share of thrills. From February to April, Italy needs to borrow 150 billion euros alone, whilst over the course of next year the Zone’s total funding is 800 billion. It’s worth taking a look at the existing firepower from the ‘timid’ steps taken so far (these came from TMM who offer more detail and better writing):
1. The EFSF has 250 billion euros at its fingertips. If it can find a lender (not Chinese, perhaps ECB?) this could potentially be leveraged to 750 billion.
2. The ECB is purchasing 5 billion euros of sovereign debt a week, which comes to around 250 billion a year.
3. European Stability Mechanism has capacity of around 500 billion, from July 2012.
4. IMF has 300 billion – the recent summit offered lending of 200 more.
Obviously using the IMF is far from ideal: under default the fund gets paid first, making remaining debt worth less and less, causing a feedback loop where IMF assistance actually worsens yields, making debt levels more unsustainable, locking countries further out of markets and so on but all that aside, using the existing arsenal we are finally getting to the point where 2012’s funding looks manageable, especially with a little arm-twisting of real money pension funds, insurance companies and the like who have to turn up and buy at auctions anyway.
Now add in the fact Mario Draghi will allow the banks to buy sovereign debt at yielding 6-7% and park it at the ECB with only a mild yield haircut, and all of a sudden things are a whole lot less scary.
Across the globe a eurozone blowup is held up as the major risk to global growth, leading companies and investment managers to hold extremely high levels of cash. If the feared blow-up doesn’t actually occur, that cash can’t stay on the sidelines forever. Buy the fucking dip.
There is nothing more irritating than someone being deliberately ‘out of consensus’ and priding themselves on their own bravery. Right now, heroes from the commentariat are jumping over themselves to declare the death of the eurozone, the end of the euro and the descent of the continent into fascism, madness and apocalypse. This is only a mild exaggeration.
For the eurozone to break up, a politician would have to wilfully make that decision. Since pulling your country out of the eurozone is, in fact, the worst case scenario, it is hard to envisage this making sense to anyone.
Leaving the Zone would mean swapping an entire nation’s cash into a new currency overnight, in a simple step wiping out far more wealth than any increase in taxes or mass sacking of civil servants could manage. If Greece left, responsible money managers would have to assume the same outcome was on the table for Italy, Spain and Portugal, sparking a rapid race to pull cash from those countries and dump it in German deposits. Such a sudden withdrawal of funds would send those countries entire banking systems insolvent overnight.
In the leaving nation there would be chaos, perhaps nihilism and anarchy. All contracts denominated in euros would be under question, and all hiring, investment and swathes of commerce would halt until the dust settled.
But the effects would be more dire than that. Borders would close as transporting cash out of the now-pariah nation would likely be made illegal, shattering one of the Zone’s more inspired achievements. Reactionaries across the spectrum would surge in influence, as anarchists to neo-fascists would offer simplified, fundamentally incorrect yet convincing narratives for the calamitous times.
There was quite a scary moment in September when governments in Rome and Athens fell in the same week – it looked like economic affairs had finally bubbled into the political instability so many feared. And what did we get? Reasoned technocrats in power and the fall of one of the more ridiculous leaders of our times.
The fearless commentators chiding politicians for their timidity and adherence to clumsily constructed Zone law, are simultaneously predicting the same will cause all of the above by pulling the trigger on the entire continent. Chill out.