The Supreme Currency 1999-2012

Notice how the Fiat, Citroen and car with the Spanish flag behind the limousine, are having to be pushed along.

By Patrick Blower in The Daily Telegraph, December 31, 2011

Sovereign debt in 2011

Excluding the usual suspects at the bottom of the table, sovereign debt outperformed, by a considerable margin, most global equity indices.

Eurosystem balance sheet heading to Euro 3 trillions

Long and low and the outlook for bond price volatility

When thinking about bond price volatility it might be useful to have the image of a crocodile in mind. Modified duration (MD) - where the maths is not that challenging but need not detain us here - is a measure of the approximate sensitivity of the price of a bond to a given change in interest rates - say one percent.

The highest MD is to be found with low coupon bonds with a long time left to redemption, and a mnemonic for the notion of long and low that I have found useful is the image of the crocodile.



With the yield on 10 year UST's below 2% and 30 year UST's below 3% as we close out 2011 those portfolio managers that are stuffed to the gills with the aforementioned paper had better be hoping that interest rates continue to decline since they will be getting the best bang for their bucks if rates are going down. But then again one of the last places to be should interest rates begin to climb will be in high MD bonds.

Just to elucidate further, high duration and high beta are often considered together from the perspective of asset allocation. Just as high beta small cap equities are not a good place to be during a significant stock market correction, long and low UST's might just bite the hand that's feeding them when (eventually) rates start moving higher.

How to get a job at Royal Bank of Scotland

Young Paddy bought a donkey from a farmer for £100. The farmer agreed to deliver the donkey the next day.

The next day he drove up and said, 'Sorry son, but I have some bad news. The donkey's died.'

Paddy replied, 'Well then just give me my money back.'

The farmer said, 'Can't do that. I've already spent it.'


Paddy said, 'OK, then, just bring me the dead donkey.'

The farmer asked, 'What are you going to do with him?'

Paddy said, 'I'm going to raffle him off.'

The farmer said, 'You can't raffle a dead donkey!'

Paddy said, 'Sure I can. Watch me. I just won't tell anybody he's dead.'

A month later, the farmer met up with Paddy and asked, ' What happened with that dead donkey?'

Paddy said, 'I raffled him off. I sold 500 tickets at £2 each and made a profit of £898'
The farmer said, 'Didn't anyone complain?'

Paddy said, 'Just the guy who won. So I gave him his £2 back.'

Paddy now works for the Royal Bank of Scotland.

Ultra high incomes: agency/principal neglect

Martin Wolf wrote an interesting piece in the FT on the growing gap between those with median incomes in both the US and UK and the super wealthy. One of the most perceptive remarks he makes is as follows:

People will disagree over why rising inequality matters and what should be done about it. I suggest it matters most, at least in the high-income countries because it both undermines hopes for any reasonable degree of equality of opportunity and cements the inequalities in power that have, in turn, allowed the preservation of a wide range of privileges, particularly in taxation.

These outcomes should matter even to those who have no concern for equality of outcome. I would add that some – perhaps a great deal – of the ultra-high incomes at the top are almost certainly the fruit of rent extraction facilitated by a breakdown in the control exercised by principals – outside investors – over their agents – corporate executives and financiers. Huge rewards then are both unjust and inefficient.

EFSF chief sounds confident about sufficient funding...doesn't he?

Al Jazeera has a substantial and candid interview with Klaus Regling, the EFSF chief, which is well worth watching. I came away with the sense that, although he stated early in the interview that the facility has more than enough firepower to handle potential crises from Italy and Spain, as the questioner kept probing about the possibility of downgrades from the CRA's for the major guarantors of the EFSF, his confidence in the adequacy of the facility's funding became much less reassuring (even to himself).

Also worth referencing back to this piece here from July.

Should we be more or less comfortable that the stability facility is up to the task now? See what you think after watching Mr. Regling.

New fiscal pact for EZ

Will those states within the EZ that exceed the new limits on budget deficit to GDP (apparently set at 0.5% but who knows) be able to borrow the money from Germany (or the ECB) to pay the fines?

The EMU monetary convergence myth exploded

The chart below reveals more clearly than endless obtuse verbiage what is going wrong for those EZ states that are committed to using a "foreign" currency i.e. the euro.

Good news for those who like Swiss francs...there are now a lot more of them!

The only major country within Europe which is neither a member of the EU or the EEA is the euro's biggest supporter.



Source The Swiss National Bank

"It means what I choose it to mean"

'You don't know what you're talking about!' cried Humpty Dumpty. 'How many days are there in a year?'
'Three hundred and sixty-five,' said Alice.
'And how many birthdays have you?'
'One.'
'And if you take one from three hundred and sixty-five what remains?'
'Three hundred and sixty-four, of course.'
Humpty Dumpty looked doubtful. 'I'd rather see that done on paper,' he said.
Alice couldn't help smiling as she took out her memorandum book, and worked the sum for him:
365
1
----
364
----
Humpty Dumpty took the book and looked at it carefully. 'That seems to be done right —' he began.
'You're holding it upside down!' Alice interrupted.
'To be sure I was!' Humpty Dumpty said gaily as she turned it round for him. 'I thought it looked a little queer. As I was saying, that seems to be done right — though I haven't time to look it over thoroughly just now — and that shows that there are three hundred and sixty-four days when you might get un-birthday presents —'
'Certainly,' said Alice.
'And only one for birthday presents, you know. There's glory for you!'
'I don't know what you mean by "glory",' Alice said.
Humpty Dumpty smiled contemptuously. 'Of course you don't — till I tell you. I meant "there's a nice knock-down argument for you!"'
'But "glory" doesn't mean "a nice knock-down argument",' Alice objected.
'When I use a word,' Humpty Dumpty said, in rather a scornful tone, 'it means just what I choose it to mean — neither more nor less.'
'The question is,' said Alice, 'whether you can make words mean so many different things.'