Bipolar Markets

For the financially astute (i.e. capable of decoding self contradictory messages) the current market environment is the closest thing to free Ferrari's that may have ever been seen. To Joe Public who cannot comprehend why constant bad/mediocre economic data is an absolute godsend to financial markets it is all rather bewildering. To those who are striving to remain ironic it is disturbing... and to the few who are literal it's manic-depressive

Systemically important banks cannot be a little bit solvent

Tracking risk appetite across bipolar asset markets

WEDNESDAY MARCH 20, 2013       11:16:00 GMT

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In the unfolding Cyprus on the brink saga a comment yesterday (March 19th) by the governor of the country's central bank struck a discordant note. He claimed that when the island's banks re-open (when that might be still remains unclear at the time of writing this) there was a suggestion that distressed deposit holders might withdraw 10% of their deposits. It is unclear where that percentage estimate came from but the suspicion is that the number was just plucked out of thin air. The reliability of such an estimate raises an issue that can be summarized as follows:

When circumstances become critical there is no longer a continuum for trust -> distrust or solvency -> insolvency. After a certain tipping point there is a dramatic discontinuity in the willingness to consider mitigating factors or compromises in the judgments we make. We may start out, if transactions are small and inconsequential, in overriding any discomfort that we may be experiencing about having to make a critical decision as to whether to trust the solvency or ability of counter-parties to honour their obligations. However once we move beyond a certain threshold and when more critical circumstances (the risk that one's life savings might be lost) present themselves to us there is absolutely no propensity to tolerate doubts or mistrust. The discontinuity a jump from a linear to a non-linear method of weighing up the risks/benefits of having trust in a counter-party (or bank). Beyond a certain threshold the decision making and willingness to accept a certain degree of “fuzziness” and to fudge the issue becomes an all or nothing proposition.

As an example, in September 2008 counter-parties that were dealing with Lehman Brothers completely lost trust in the company, refused to fund it in the money markets, and quite rapidly the overall market realized that the company was insolvent. Traders and investors were no longer prepared to tolerate self-serving statements from the company’s CEO and its management team that its balance sheet was sound and that it could fund itself. There was a total breakdown in trust of the company’s declarations regarding its financial position. In such circumstances, there are no degrees of solvency – a company, especially a bank, either is solvent or it is not – there is no halfway house. It is this unwillingness to tolerate any ambiguity regarding solvency that explains why companies can be full of employees in opulent offices one day and then bankrupt the next with the employees walking out of those same opulent offices with cardboard boxes with their hastily packed personal possessions.

The real catch 22 for the Cypriot central bank and the chances that a white knight (ECB, Russia) might ride to the rescue was neatly summed up in this remark which came from FT Alphaville's insightful commentary this morning. Alluding to the iconically absurd Monty Python sketch about a deceased parrot the article raises the real question mark about the survivability of Cyprus as on offshore financial haven.

Already risk managers in London are sending internal mails quietly removing Cypriot counter-parties from acceptable trading lists. As go the deposits, and the trading entities so go the jobs in law and accountancy. Even if the system survives, the sector looks very vulnerable. No, Cyprus The Financial Centre is not resting, it’s shuffled off this mortal coil, run down the curtain and joined the bleeding choir invisible.

The article's conclusion has a question which should resonate through Berlin Brussels and Moscow

Why bother to protect foreign deposits if they’re on their way out already?

Newspaper circulation in America

Every picture tells a story and the two below are striking illustrations of the impact of digital media.

Two Black Swans

Intellectual courage

A trend in political commentary and op-eds which I have noticed recently is when discussing candidates or policy initiatives the opinion makers and commentators will devote a lot of attention to what are often called "Unfavorables". It may be that this has been part of the political landscape for an extended period and that I have just taken it on board, but whether it is a new development or not is not really the point that I am making.

If a candidate or the proponent of a new policy objective becomes overly influenced by the desire to avoid strong unfavorable reactions there will almost certainly be a watering down or neutering of the proposition that is presented. Very often too the resulting policy will be lacking in decisiveness and effectiveness. To cite just one current example, there is unquestionably political cowardice in the UK government's current approach to aviation capacity and the need to decide on a way forward i.e. a third runway at Heathrow or a new hub airport in the Thames Estuary among other possibilities.

When a person has decisive views and if policies are presented as hard edged it is almost invariably the case that there will be strong opinions expressed by those who are favorable to the views and equally by those who are unfavorable. It is also the case that it is often only in the fullness of time that it becomes possible to determine on the merits of the views or policies. A classic example of this must surely be the outspoken views of Winston Churchill regarding the threats posed by Nazi Germany in the 1930's when most of his contemporaries were convinced that a policy of appeasement was the right way to conduct diplomacy within Europe.

Willingness to face strongly hostile reactions to one's view and to argue forcefully for them, if firmly held, is a sign of intellectual courage. It is sadly lacking in the political realm today.