Sunday, October 26, 2014

Will the stress tests be another European own-goal?

European regulators can’t seem to make up its mind what to do about its zombie banks. Should we be honest about how deep in shit they are, bail in the creditors and get on with life? Or should we just lie and how that the banks can somehow magically raise equity and fix things themselves (or at least be someone else’s problem)?

Perhaps part of the conundrum is that the politicians want to win the next election (being Europe, there are important elections all the time, especially in Germany) and thus want to keep the status quo. Newly (unelected) ECB regulators probably want things to get fixed sooner rather than later, so better put out the dirty laundry now before they can get blamed for it.

The problem with the semi-honest approach is that it has all the downsides of a real stress test, but none of the upsides of just covering things up.

Once you separate the weak banks from the herd, the wolves will be out and governments will be forced to bail them out. Essentially information from ECB gives a playbook to hedge fund to get this process started.

Then we’re back to 2012, and everyone will be shocked that no one bothered to fix anything when we had the chance.

Wednesday, October 22, 2014

Is China going to collapse already?

If I had to bet on a black swan, my bet would be on China. The country has defied all experts in continuing down an absolutely insane strategy combining massive mal-investment, shadow banking debt growth, and GDP-metric chasing. They’ve been able to make this work long enough to make skeptics give up and just think that China is different somehow.

At the same time, there has been a massive looting effort by the elite to pull out as much wealth as possible, preferably leaving their less-connected countrymen and foreign investors holding the bag when everything goes to shit.

Each time I think that things are going to fall apart, the country amazes me by doubling down and adding another crazy layer of financial engineering that holds things together for a bit longer.

The latest crazy is their own version of “crowd-funding”, which promises returns of 40% to participants:

“Crowd funding” is the newest craze in property investment. A villa is advertised for, say, RMB 5 mln, with shares in its purchase selling for RMB 300 each. Buyers get returns higher than they can achieve in the money market—5-8%—along with promised capital gain. The return is generally said to be from rental income, although there is reason to be skeptical that such renters exist. The offers are filling up in minutes, and some sites are advertising that funders earned 40% in just 30 days.

I suppose the fact that the country seems to have gone to a pure Ponzi-scheme funding model should be ringing alarm bells somewhere.

Of course, the theory is that what goes on in China, stays in China. To which I wonder, if things really get bad there, exactly where the rest of the world is going to find replacements for the $2 trillion in exports on short notice?

At least it would solve the no-inflation problem…

Sunday, October 19, 2014

Volatility, low interest rates and stock market valuation

Imagine the case of a stable company that was paying out a 10% dividend each year. If enough people could borrow money cheaply and buy shares in the company, the price of the company would get pushed up, and the effective dividend % would decrease accordingly.

How much of a premium people would want to have to own this company has a lot to do with the volatility of the stock price. If you borrowed money to buy the stock, a big movement could wipe you out before the price has a chance to recover.

Stock prices, until last week had become very stable, which pushed up the valuations.

This is why I’m not very optimistic about short term stock market return. Even if prices went back to where they were last month, someone needs to pay for additional volatility that people forgot was there…

Friday, October 17, 2014

Brussels tells Spain cancel abusive mortgage clauses, not modify them

A while ago, the European Court of Justice ruled that many of the clauses normally put into mortgages by Spanish banks were abusive, and thus not enforceable. Instead of respecting this judgment, the Spanish government passed a law that allowed judges to modify these clauses to make them slightly less abusive.

With the current Spanish approach, banks don’t have anything to fear by continuing to put in the maximally abusive language possible, since in the worst case a judge would reduce this to the maximum that would be permitted by law.

Eg,if the mortgage promised to sell your first-born son into slavery if case of default, the judge would say “well, slavery is illegal, but if it was legal and the value of a slave for 40 years was 10,000 euros per year, then you owe 400,000 euros”.

In what seems like a very common sense legal opinion, the attorney general of the European Court of Justice made clear that the Spanish judges have the obligation to cancel abusive mortgage clauses entirely.

Thursday, October 16, 2014

One of the best articles I’ve read on how to value a bank

From Bloomberg view:

So if you count the changes in value of some of Bank of America's assets (along with the fees and interest and so forth that are more straightforwardly "income"), you get income of positive $168 million, or negative $70 million, depending. If you count the changes in value of some more of those assets, you get negative $636 million. If you count the changes in value of all of Bank of America's assets, you get a number that hahahahahahaha come on, you are not going to find in any accounting statements, that is crazy. That is the most secret of secret sauces, plus it's not like Bank of America knows that number either.

The follow up question would be, given the amount of flexibility in defining whether the bank is making money, how bad do things have to get before they go and ask the government for a bailout?

Given how much of the European rescue of 2012 was accomplished by accounting changes and promises that were never delivered on, what is going to be left once these optimistic assumptions get tested?

Maybe we’ll find out soon.

So much for the crisis being over…

Here we go again. And to think we were about to offer to buy a house... some renegotiation is in order.

It’s great though that the Spanish government made such good use of the last year to make the necessarily fixes to the Spanish economy and stabilize the banks.

Oh wait, they didn’t. Too late now…


Sunday, October 12, 2014

What to do if you think you have Ebola (according to the Spanish government)

The Spanish Ministry of Health wishes to inform you of the protocol to follow if you believe you might be infected with Ebola:

  1. Kill your dog
  2. Look on the internet to find the protocol to follow in case of Ebola infection, because the only thing we could think of was killing your dog.

(Thank you Polonia)