Goldman Sachs doing God's work. Or something like it.

This is just so deliciously fucked up, I don't have any further comment.

Drain you of your sanity; face the thing that should not be! – On the retardedness of the inverted CDS curve

Restating your PnL? WTF!!!

We all know (or should know by now) that when the revolution finally comes all manner of folks will be put against the wall. Now, the big fear I have is that no one is going to ensure that risk managers are rounded up and get their dose of revolutionary fervor. The problem is that it’s just that is an occupation so obscure that the average neo-communist revolutionary / not-so crypto idiot with an AK-47 will simply fail to spot what reactionary fiends of the night / capitalist technocrat lackeys risk managers really are.

But why the special attention to risk managers I hear you ask? What makes them so deserving of revolutionary wrath? Well, basically because they don’t really do their job! The point of a risk managers’ existence is ostensibly to ensure that a bank’s risk book is run within parameters that ensure the risk reward ratio is acceptable and that book is actually valued sensibly in accordance with a pricing policy. And that’s exactly what I’m going to moan about today. The fun and games that kept all manner of financial type and politicians awake over the last couple of weeks have given ample illustration that these risk books are still very much marked not to some rational or even just explicable standard but basically marked to some make believe figures that ensure we all get paid at the end of the year.

The proof? Enter the retardedness that is the inverted CDS curve. Basically, in financial market parlance an inverted CDS curve is taken to be a reasonably sure-fire sign that a financial entity (i.e. the one the CDS in question relates to) is in DIRE TROUBLE and likely to IMPLODE. Why? What does that all mean? Well, a CDS curve consists of a series of points (spreads) that express the expected default risk of a financial entity between now and a future point in time. In more orderly times a CDS curve is upward sloping, that is the spreads (and with it the implied likelihood of default) increase the further your time horizon reaches into the future. Which kind of makes sense. All things being equal the second law of thermodynamics (among a few other things) would indicate that the longer something goes on the more likely things are to fall apart. So what happens when markets are in distress? The reality is that when sentiment turns against somebody (like the US Government during the unspeakably childish debt ceiling squabble in Washington DC) you’ll find it hard to execute trades with longer dated maturities. People simply don’t want to take on the risk of longer maturities. At the same time the nearer dated maturities (that you still can get a quote for) will command a higher risk premium, so the spreads will rise. Now, by convention the maturities for which you can’t get a new price will be simply be staled (carried forward from whenever you last got a quote for them) while the shorter maturities for which you still can get a quote will rise. So what can happen in this particular scenario is that you can get an ‘inverted’ CDS curve, where the nearer dated maturities have a likelihood of default that is higher than the further dated ones. Fair enough you say? You might think so; after all it would look like you are making use of the most recent data that you have to build that curve. So what’s the harm? The harm is that those curves are used to price existing CDS transactions on banks’ books and that’s just plain retarded. Think about it: the risk of a default occurring between now and a future date as expressed by a CDS spread is a non-Bayesian event. The timeline observed for the determination of a credit event (default) is continuous and once the event occurs it will trigger ALL Credit Default Swaps that are referencing this particular reference entity. So there is something deeply and disturbingly wrong with a situation where you have a curve that would imply that the one-year default risk of a company is lower than the five-year default risk of the same company. While I agree that this topic has distinct overtones of needless sophistry / intellectual masturbation about it, it actually is a pretty good indication of what is wrong with modern finance. It’s a bit like that early morning nose-bleed so prevalent among punk bankers and almost-made-it rock stars; not exactly shocking in its on right but clearly indicative of a big old problem. Something is indeed rotten.

James Hetfield totally rocks!

So, to come back to my point about why risk managers need to be brought to the front of the queue when the masses rise up against the system: What does that have to do with inverted CDS curves? It’s simple, it’s those guys that are using just those curves to value the credit books, thus plainly misstating the true value of said book (or lack thereof!). Strangely enough there is zero outcry over such egregious use of sleight of hand accounting to give the illusion of greater stability in the financial system than there really is. I doubt that is because the issue is too difficult to grasp. It really isn’t. But it is sufficiently obscure to be swept under the carpet. It’s not exactly something Robert Peston will be able to blitz the BBC Newsnight viewers with in a 90 second sound bite designed to excoriate bankers and whip incredulous middle-class viewers into a frenzy of polite incredulity. In a nutshell, if your job is to manage risk, you probably shouldn’t be in the business of downplaying the volatility of a risk book. But then again that’s probably saying more about the way incentive compensation is calculated than what is truly sane. Never mind. Move on, nothing to see here. Go back to shopping for some Apple products. 

Mandatory Suicide

Right, in a shamelessly transparent attempt at courting controversy (or at least increase traffic a little) I have changed the comment settings for RocknRollFinance so now everybody can comment, even anonymously. Obviously, I have now crossed the Rubicon of publicity prostitution and am at the mercy of every degenerate internet troll, anti defamation league vigilante or socialist youth activist. But it sounds like it'd be more fun that way.

PS: the picture of a youthful Blackie Lawless is just for kicks.

The fifth horseman of the apocalypse; or why it'll probably pay to be on the side of the Antichrist this time round.

"The Horsemen are drawing nearer
On the leather steeds they ride
They have come to take your life
On through the dead of night
With the four Horsemen ride
or choose your fate and die"


Inflation is spooking the chattering classes! With every quarterly revision (upward, naturally) of the BoE (or ECB or Fed et cetera) inflation figures on the evening news bulletins hard working, mortgage paying, middle class wage slaves all over the ever declining and decaying western world squint a little harder at their TV sets, gnash their teeth a bit and clench their buttocks in anticipation of yet another incremental reduction of their spending power. Why, oh, why - you can practically hear them complain - is there no one doing anything about the steady erosion of our purchasing power? Why does purple sprouting broccoli cost so much more than last year? Why does no one do anything about all those foreign folks (Asians, mostly! - just savour the barely suppressed xenophobia before you move on) driving up prime real estate prices in central London? Why can I no longer afford to fuel up my over-featured and over-motorised SUV every other day with the careless swagger and pay those public school fees?


Well, I guess the answer to these question is that while it sucks to be made poorer through inflationary pressures, it is a (a) whole lot less painful than being made poorer through deflationary pressures (at least as long as that inflation rate stays vaguely in control - but more about that later) and (b) this might actually be a policy in your favour. How come? Our peerless political and economical leaders obviously have almost zero incentive to spell this out plainly (they _do_ want to be re-elected, by and large), but this debate is not really about whether making most of us poorer is something that needs to happen, but how they go about engineering this. The point being that as political, public and private entities in the majority of countries of what is commonly termed the West is so terminally over indebted that there is really no credible way to avoid some form of wealth adjustment. If you don't think so, then don't worry, reality is entirely optional given the right mix of sedatives.


One of the great benefits of living on the middle class reservation that is the EU/US/Japan megaplex is that we get to chose what currency we denominate the debt that we have taken on to pay for all those flatscreen TVs and iPads. The poor suckers that have accepted our IOUs (I.e. The hapless sovereign wealth fund managers of the People's Republic of Hypocrisy who have bought our sovereign debt) didn't get to chose. They had to make do with a selection of USD/EUR/GBP/JPY denominated paper. Now until fairly recently they didn't worry too much about that as they were never interested in letting their own currency float on the international exchange markets, after all they do want to indefinitely maintain their low cost base as a primary competitive advantage (otherwise they might have to - gasp! - in cease competitiveness through innovation). But as it turns out, fixing your exchange rate against your primary export markets ceases to be an unequivocally smart move when you end up being a significant creditor in such a currency and the debt issuer decides to debase their funky fiat currency. In fact you'll get hit twice! So, when chairsatans Bernanke and Trichet turn open the spigots of monetary policy and fix interest rates at historic lows not just for now but even for years to come your precious surplus Dollars/Euros/whatevers become worth less and less to you. In effect the creditor nation gives a subsequent discount to the goods previously exported to the debtor nations. Annoying,no doubt. However, the real kicker comes not from the depreciation of your assets (those precious sovereign debt bonds), but through the import of inflation through the back door. Sadly, for our Chinese friends, not only are the sovereign debt markets dominated by a handful of currencies that are not their own, also a lot of the world's trade in commodities is. Which is a bummer if you are a manufactured goods exporting creditor nation. Low USD or EUR interest rates will lead to increased inflation not only in developed (and over indebted) nations but also in commodity markets. And that means imported inflationary pressure back in mainland China. So, if you are on the CCP's central committee you now are facing Hobson's choice: abandon the anchor your currency (crawling, if you want to be finicky) peg and let the RMB appreciate (and thus limit the inflationary pressure through imported commodities while at the same time making your export industries less competitive) or stick with it and watch food and energy prices go through the roof.


You see, the big unspoken about inflation is not that it sucks for all, but that it sucks a lot harder if you are poorer. And that's where this is all beginning to make sense. Joe Bloggs in Sampletown USA will whine about gas costing him 5 bucks a gallon. But if he is _really_ under pressure and still needs to drive fro his daily commute he _can_ go and buy himself a flipping Fiat 500 instead of that Ford F150. Whatever the Chinese equivalent of Joe Bloggs in rural China is probably won't find that so easy. If you spend 90 percent of your income on food and fuel, then doubling the price of staples like say wheat actually is a bit more of an issue. Oh, and please spare me comments about how disaffected youth rioting in London shows that there is real poverty in the west too. Of course, there is. But it's pretty insignificant. The motivation behind rioting because you can't afford some Nike AirMax is not quite the same as when you riot because YOU ARE STARVING! some monetary policy, eyh?


Now, I understand that this is a pretty sweeping arc and it presupposes all sorts of machiavellian machinations and reptilian cold bloodedness on the part of the monetary policy committees of the western world, to a degree that makes the Rothschilds look like amateurs and will make Ayn Rand devotees wet themselves with delight. And on the balance of probabilities whatever they come up with is more likely to be cock-up than conspiracy. But if I can thin like that, I should imagine, so can they. Am just saying...


Off to the pool now!

Dumb, dumber, short selling ban

Consider the following: Brazil and Azerbaijan are playing a world cup match. Half-way through the second period (apologies for the Americanism, I’m trying to avoid repeating “half”) Brazil is up 3-nil. So far, so ordinary. Sepp Blatter, however, has big plans for expanding FIFAs footprint in Asia and desperately needs to increase the attractiveness of the beautiful game to the descendants of Ghengis Khan so he can make even more money in bribes. Ergo, the rules of the game get changed and from the 70^th minute onwards Brazil is disallowed a goalie. Miraculously Azerbaijan overcomes all the odds and secures a stunning victory over Brazil after 90 minutes of play. Does that sound like a reasonable story? If yes, then you don’t need to bother continue reading. If, however, you think there’s something rotten in the twisted logic that informed the sudden rule-change then I suggest you turn your attention to the latest act of dirigisme lunacy put in place today.

Sure, a selective short selling ban (focused on “systemically important” banking stock) in a number of European countries seems to have lessened the vigor with which markets eroded the share prices of said banks for the moment. It also demonstrates a comprehensive failure of regulatory bodies and lawmakers to comprehend what they are dealing with. As I might’ve pointed out previously, the whole point of a market is to determine the price of a particular asset given current circumstances as appraised by any number of participants in that market. Consequently, prices can move up as well as down. Not exactly an earthshattering realization one might think (google that phrase and you get approximately 20 million hits for that). Alas, it would appear that that’s not the plan of our betters. No one is allowed to take the view that certain banks are overloaded with toxic debt and are better jettisoned. Well, you are allowed to, but ONLY if you have previously bought them and are willing to crystalize a loss when you sell them for less than you previously bought them. Strangely enough, not a lot of pension fund managers want to do that. Realizing losses is a great way to get yourself fired or worse, forfeit your bonus! Those other who might have caught on to the fact that all is not well without making a stupid investment first are just not allowed to play. Basically the logic goes: if you are smarter than the others (or just willing to put your money on betting against the herd mentality) you are not welcome to play here. This market is for conformist idiots only! Obviously, this escaped the attention of just about everybody, seeing that until now that particular rule didn’t really exist. So far the football simile holds up. Sadly, for the regulators / Sepp Blatters of the financial world this is where the comparison runs out of steam. Why? Unlike a football game there’s not time limit on how long a game runs in the markets. You might be able to secure Azerbaijan’s win over Brazil by rigging the rules of the game because in the end Brazil will run out of time. In markets, however, each day is a re-match. Even if you get to rig the rules on a daily basis, at some point you (the rule rigging regulator, that is) will run out time. The point being that short sellers are not a problem in themselves, but rather a symptom of an underlying vulnerability in the assertion that current stock prices are not incorrectly reflecting the true value of a company. Yes, sure, think of them as the carrion bird of the financial world. But that’s exactly my point. They will come and pick at a carcass, but they are not the ones who will kill the damn cow in the first place! If the cow were healthy, they wouldn’t get to feast and they’d move on. Now, no one really wants the cow dead, but in the end there is no point pretending it’s still alive. But understanding that, clearly seems to be off the agenda for the time being.

Back in black!

I'm back! Well, sort of. I hope to be more regular going forward. Failing that, I'll just try to be not entirely absent. Feel free to doubt my commitment.

The sands of time...

...are clearly slipping through my fingers. I _will_ be back shortly!