An Accelerating Trend

While the euro itself has recovered a bit from its worst levels in recent sessions, euro basis swaps have fallen deeper into negative territory. In order to bring the current move into perspective, we show a long term chart below that includes the epic nosedive of 2011. We are not quite sure what the move means this time around, since there is no obvious crisis situation – not yet, anyway.

A negative FX basis usually indicates some sort of concern over the banking system’s creditworthiness and has historically been associated with euro area banks experiencing problems in obtaining dollar funding. This time, the move in basis swaps is happening “quietly”, as there are no reports in the media indicating that anything might be amiss. Still, something is apparently amiss:


1-euro basis swapsParty like it’s 2011: Three month, one year, three year and five year euro basis swaps – click to enlarge.


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When we left you yesterday, we were trying to connect the bloated, cankerous ankles of the US economy to the sugar rush of its post-1971 credit-based money system.

Today, we look at the face of our government. It is older… with more worry lines and wrinkles. But whence cometh that pale and stupid look?

That is also the result of the same advanced diabetic epizootic that has infected American society.


sheriff-and-stills-1200Moonshine production facility in the 1920s …

Photo credit: University of Washington Library Digital Collections


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A Currency Disappears Into the Memory Hole

After the excitement caused by the collapsing Russian ruble last December, the ruble has seemingly been forgotten. The financial media have certainly fallen silent on the topic. Luckily, we haven’t forgotten about it. We first mentioned the the fact that the ruble might potentially represent an opportunity on the very day it made what has (so far) been its low, and posted a brief update three days later (see “The Russian Rubble”[sic] and “The Ruble Rebounds” for details). Although there were and still are obvious risks due to oil price weakness, geopolitical concerns and general emerging market worries, panic-like declines in currencies very often price in future risks as well. As we noted in these previous missives:



It ain’t worth much, but it’s worth more than at the end of last year …


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Shabby Immensity

Today, we continue mouth wide open … staggered by the shabby immensity of it … a tear forming in the corner of our eye.

Yes, we are looking at how the US economy, money and government have changed since President Nixon ended the gold-backed monetary system in 1971. It is not pretty.

We already know about the money. Since 1971, it’s been a credit-based, not a gold-based, system. The pre-1971 economy had three key characteristics:

1) It was healthy – Industry made things and sold them at a profit

2) It was fair – Financial progress was fairly evenly distributed.

3) It was solvent – The US was a creditor, not a debtor, nation.



Cartoon by David Horsey


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Risks and Opportunities

Investors started off 2015 with a slow global economy, low oil prices, a strong Dollar, and a deflationary Europe with great uncertainties on the progress of the US economy and the recent launch of Europe’s quantitative easing. The question is, what opportunities lie ahead? This article highlights the main topics covered in an interview between Mr. Frank Suess, CEO and Chairman of BFI Capital Group, with the globally renowned Swiss fund manager, Mr. Felix Zulauf. Mr. Zulauf currently heads Zulauf Asset Management, a Switzerland-based hedge fund and has forty years of experience with global financial markets and asset management. He has been a member of the Barron’s Roundtable for over twenty years.


Zulauf-S-640x360Felix Zulauf, Swiss fund manager and long-standing member of the Barron’s roundtable

Photo credit:


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A Mafia State?

Western donors and lenders have stuck a huge chunk of money extracted from their taxpayers into Ukraine to help its fledgling new government to survive. It is open to question how democratic this new government really is. For instance, following the introduction of the so-called “lustration law”, approximately 1 million Ukrainian citizens are legally barred from participating in politics, reportedly on account of past transgressions. One could well see this as an attempt to deal with the corrupt past, but the intentions of the law seem dubious due the fact that those affected by “lustration” are to a man opponents of the current government.

Moreover, the reportedly free and fair elections that were held after the coup were marred by the fact that would-be contenders who could have been regarded as a supporters of the ethnic Russian population in the East were all excluded from participation (this was before the introduction of the lustration law). In addition to that, it was obviously not possible for residents of the territories held by the separatists to actually vote in the election. Not that they seem particularly interested in Ukrainian elections anymore. As far as we can tell, the civil war has bred so much hate among civilians who were unable or unwilling to flee from the Donbass, that most of them no longer regard their region as a part of Ukraine.


o-POROSHENKO-facebookPetro Poroshenko, “our inside man in Ukraine”.

Photo credit: Geert Vanden Wijngaert / AP


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Lying About Health Risks

For decades tobacco companies have denied that there was any connection between smoking cigarettes and certain rather life-threatening illnesses, such as lung cancer. Mind, we are certainly not among those who believe that smoking should be restricted by government coercion just because it is unhealthy. We also have a lot of reservations about the fines tobacco manufacturers were forced to pay to government, which struck us as nothing but an old-fashioned shake-down.


reaganchesterfieldsRonald Reagan in his younger years, promising to poison all his friends for Christmas


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Does the Dollar Hold Enough Attraction to Break Out and Hold at Higher Levels?

Now is the time to begin looking at the US dollar’s re-ascendance in a different light as we approach 1:1 against the euro. Shorter term we have to expect some possible panics around flat global growth in the face of a strong dollar. Historically, as we saw in the 1980s in Latin America, US dollar rebounds lead to blow-ups among the weaker global credits, just at the point where the dollar begins a breakout not seen in decades. But, times have also changed and we should expect this round of the dollar beating up some countries to slow earlier than perhaps what we saw in the days of the symbolic Reagan induced fall of the Berlin Wall.



Photo credit: Bloomberg News


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House of the Rising Stock Market

Last week was bad for the dollar, but good for US stocks. On Friday, the greenback capped its worst five days of trading in four years. The Dow rose another 168 points – or nearly 1%.

This took place after Madame Yellen, proprietress of the House of the Rising Stock Market, said she would neither be patient nor impatient about raising rates.

Investors drew the obvious conclusion: She has no idea what she is doing. Until she finds a clue, or is startled out of her paralysis by events, it is business as usual.

The piano player will keep his head down. The bartender will keep the liquor flowing. The cardsharps will keep pulling aces out of their sleeves. And the girls upstairs will continue plying their trade.


Yellen-cheap-moneyThe proprietress of the House of the Rising Stock Market on her yacht, gazing at easy money for as far as the eye can see …

Cartoon by Paresh


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Sarkozy Makes a Comeback

To everybody’s vast surprise, UMP/UDI, the alliance of conservative parties led by former French president Nicolas Sarkozy, has made a comeback in local elections over the weekend, getting approximately 31% of the vote, against slightly more than 25% received by the runner-up, Marine Le Pen’s Front National. Mr. Hollande’s socialist party managed to hold on to 20% of the electorate, which if not much else, compares quite well with Mr. Hollande’s own recent approval ratings.

This was only the first round of voting in most districts – where no party was able to garner an absolute majority, the winner and the runner-up will face each other in a second round run-off election on March 29. The voting results in the first round have definitely confounded expectations. In the weeks preceding the election, polls suggested that the Front National would garner 29% -31% of the vote and UMP/UDI only 25%. So although Ms. Le Pen continues to score very well (the result slightly exceeded the FN’s performance in the European elections), in this election her party has actually been among the losers, at least in relative terms.

Not surprisingly, the election result has revived Mr. Sarkozy’s presidential hopes and is likely to keep his potential rivals in his own party at bay for now. There are several hopefuls (such as Alain Juppé or Francois Fillon), who would have liked to step into Napoleon’s shoes and become caliph instead of the caliph, so to speak.


Steve Bell's If … 10.07.2014Comeback boy: Although embroiled in scandals, Ersatz-Napoleon still knows who he wants to be …

Cartoon by Steve Bell

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Policy Adjectives

The big news this week was that the Fed dropped its pledge to be “patient” in raising interest rates. The Fed wants to get the market used to the idea of higher rates sometime in the not so distant future.

But just so you are clear on how valuable this “forward guidance” is, Fed chief Janet Yellen later told reporters, “Just because we removed the word patient from the statement doesn’t mean we are going to be impatient.”

Patient and impatient are not the only possibilities. In between is a vast space in which one can get things done, but without being in a hurry about it. Besides, we can think of many other adjectives that far better describe Yellen’s position – fearful, ignorant, conceited, arrogant, trapped …


BN-GB582_yellen_G_20141217162234The markets in thrall to Ms. Yellen’s language games

Photo credit: Bloomberg


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Thank God It’s the “Lucky Country”, and Good Thing it’s not a Bubble …

We have previously written about the many extant housing bubbles in the world, which are a result of the incessant monetary pumping by central banks (see: “A Tale of Two Bubbles” for details). Recently Australia’s big banks published a study in which they strenuously deny that one of the biggest housing bubbles the world has ever seen is actually a bubble. This is no surprise, because when – not if – this bubble implodes, Australia’s financial system will be in major trouble and the “big four” Australian banks are going to have a front-row seat. As “The Australian” reports, the “banks are dispelling housing bubble fears”. Not surprisingly, their arguments sound eerily similar to those of the NRA in the US shortly before the demise of the significantly less enormous US housing bubble.


“Amid fears that record low rates are laying the ground for problems, the Australian Bankers’ Association will today release a ­report arguing there is “insufficient evidence” of a speculative bubble, adding that the banks have not added to the price surge by relaxing lending standards.

After assessing the past 25 years, the paper, “Key truths on housing in Australia”, finds that the biggest driver of prices is mortgage rates falling below 5 per cent, and plays down the impact of foreign buyers. It also backs a Reserve Bank study this week that shows the highest debt loads are held by wealthy, less risky borrowers.

But the ABA does concede that houses are expensive relative to rents and “current rates of return may be economically viable only if expectations of further price gains are fulfilled”.

Also, prices have become more expensive relative to purchasing capacity and buyers should view “with a critical eye” claims that the structural housing shortage is massively driving the market. The major banks have repeatedly dismissed a bubble in their most lucrative asset class, and the ABA says it is important to “get the facts on the table” and not just focus on the recent bull market, particularly in Sydney.

“House prices in Australia are currently in a period of strong growth. (But) there is insufficient evidence to conclude that house prices are unsustainably overvalued or that Australia is currently experiencing a speculative ‘bubble’,” the report says.


Since the market stirred to life in mid-2012, Sydney is up 35 per cent — far outpacing the 23 per cent increase in the patchy broader market, including capital cities like Perth that have begun going backwards, according to CoreLogic RP Data.”



sidney shack
Anecdotal proof that there is “insufficient evidence of a bubble” in Australia’s housing market: this shack on Edith Street in Sidney sold for $980,000 in May of 2014. The cottage has been uninhabited for 20 years. The walls that have not disintegrated are covered in graffiti and the house is littered with rubbish. The backyard features the remnants of an outdoor toilet, with rubbish strewn about amid patches of weed, which are the only vegetation. Size of the property: 278 sqm. (~2,992 sqft.)

Photo credit: Attila Szivasi


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“Oh”, or Aiming for a Career on Wall Street

Fátima, our new 10-year-old English-language student, is a stranger to modern economics… as well as to vernacular English.

“What do you think of central bank policies?” we asked.

“What’s a central bank?”

“It’s the bank that provides money to the other banks.”

“Where do they get the money?”

“They create it out of nothing.”


“Would you like some money from the central bank?”

“I guess so.”

Fátima must be aiming for a career on Wall Street.


yellen teaching draghi how to print money funny photoRecent developments indicate he’s got it …

Cartoon via


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How to Blunt the Absence of a Sentence

Wall Street’s Kremlinologists were not baffled for long. Shortly after the FOMC statement was released, the US dollar tanked and everything that wasn’t nailed down soared in price. Essentially the FOMC has repeated the exercise it first engaged in when it removed the phrase “considerable time” from its statement to replace it with the word “patient”, only in a slightly more wordy manner this time. Essentially, the monetary policy statement was as dovish as it could possibly be in light of the corner Fed board members have talked themselves into with their vaunted communication policy.

The differences between the January and the March statements can be seen at the WSJ’s statement tracker. Apart from an outright assurance that there won’t be a rate hike in April, it was mentioned that the timing of a possible hike thereafter remains uncertain. The remainder of the statement reads a bit like a long lament over the economy’s refusal to obey. Somehow, all the pumping that has occurred thus far hasn’t had much of an effect. Obviously, there was no indication that any of the board members realize that money printing is actually undermining the economy.

Photo credit: Andrew Harrer / Bloomberg / Getty Images


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Putting the Hurt on Labor

Interest rates have been falling for over three decades. Conventional economics has two things to say about this. One, inflation expectations are falling. Monetarists believe that the interest rate is set based on bond traders’ predictions of future price increases. Two, if employment and GDP are weak, then the central bank should increase the money supply. By increasing the money supply, it will cause rising prices, and somehow that causes workers to get hired. Federal Reserve Chair Janet Yellen wrote a paper defending this absurd claim (which I criticized).




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