The Big Bailout of the Eurozone (Another crisis coming? - Seriously)

[seafoid]

 http://www.ft.com/cms/s/0/ac187312-12cf-11e6-839f-2922947098f0.html

Under the Bretton Woods system of semi-fixed exchange rates, Germany's strategy has been to lock itself into fixed exchange rate system then seek a "real" devaluation through lower relative wages than its competitors. When the system imploded an appreciation of the D-Mark followed. The same happened in the exchange rate mechanism, a precursor to the euro created in the late 1970s. But the euro is meant to be forever. There is no longer any corrective mechanism to Germany's imbalances.

[TabClear]

Ulster Bank have sold off more loans to vulture funds.  Agricultural loans included in this tranche which could cause major issues on both sides.

  I know of a few farms that have loan issues that have been in families for generations. If the likes of a Cerberus type fund start to call in title documents like they have on business loans I don't fancy their chances in certain areas.....

[muppet]

Ulster Bank have sold off more loans to vulture funds.  Agricultural loans included in this tranche which could cause major issues on both sides.

  I know of a few farms that have loan issues that have been in families for generations. If the likes of a Cerberus type fund start to call in title documents like they have on business loans I don't fancy their chances in certain areas.....

One of the effects of this is to make it appear like there are less mortgages in arrears, because those loans sold won't show up on any of the main banks books. But it is a cod obviously.

[rosnarun]

Ulster Bank have sold off more loans to vulture funds.  Agricultural loans included in this tranche which could cause major issues on both sides.

  I know of a few farms that have loan issues that have been in families for generations. If the likes of a Cerberus type fund start to call in title documents like they have on business loans I don't fancy their chances in certain areas.....

One of the effects of this is to make it appear like there are less mortgages in arrears, because those loans sold won't show up on any of the main banks books. But it is a cod obviously.

more like cutting their losses and their books now will give a truer indication of the real position of the bank.
Ivan yeats was on this morning saying why not give the borrowere in trouble the option to buy the debts at the same 60% hair cut but if you did that why the hell should performing loans continue to perform and the real cost would be astronomical.

interesting to note from the above diagram is that it would,more or less, take all the notes and coins in the world to payoff the fed debt  pretty mind blowing that.

[heganboy]

Muppet,
there are a few serious concerns about that visualization you have there. Starting with derivatives- couldn't be wronger and working backwards- bitcoin and silver I'd agree with, as well as narrow money. Using market cap for companies is worse than half ass, and the rest is ridiculous measurement and misguided effort.

Seafoid,
you have the broad strokes of the bond market correct, for US treasuries, (and most of the other investment grade bonds but especially Treasuries - to a lesser degree munis)  however there are a few other issues you have to consider in pricing.

About to pontificate - fair warning:
***************************

A bond is essentially a promise to trade money now, for a promise of a stream of money in the future and then your money back. t-bill is the same but with no coupons, i.e. no flow just a payout of face value at the end.

Now when a company issues a bond, their credit worthiness is a factor in how much they have to promise to pay in order to get the money in in the first place. The seriously dodgy credit rating industry "certifies" the bond on a rating scale- usually AAA at the best rate down to a junk rating. Triple A pays the lowest coupon as they are the least likely to default, and junk pays a high rate as they are more likely to fail and not pay back the money.

so far so good. Now when you look at any investment you only consider the NPV i.e. you try and assess the Net Present Value (NPV) of the money. So say for example I am getting $100 in 2 years, what is that actually worth to me now. In order to do that you have to assess the risk free rate of that payment. Every borrower and lender has a different risk free rate, and there is a whole (allegedly scientific, but basically mathematically driven speculation) division of most banks that look at very complex ways to build a yield curve which they can agree is the value of payments in the future. This is the first piece of the puzzle. The second piece (or First Derivative! (you know who you are)) is the volatility surface. No matter how good your model is for predicting that future value- things change. Everything changes actually, but economists, and by implication quants, have used the idea of ceteris paribus to pretend they don't change that much. This volatility is also important, and that brings us back full circle to why there are other factors involved.

the interest rate (as per seafoid's example) is often quoted and that is a landmine in definition all on its own- but what we are really looking for is a good approximation to that risk free rate of borrowing which we can find using one of those fancy yield curves with their cubic splining and their binomials, trinomials and monte carlo simulations.

Lets take a look at the other factors.
- Housing industry, more houses sold= more mortgages = more need to hedge 30 year debt= more long term treasuries needed= higher priced treasuries (demand and supply!).
- GDP- how is the US economy stacking up against other economies= predictor for currency exchange rates
- Consumption indicators- how much are people spending and how much are they saving (note to reader- people are stupid - if you want one piece of advice- save more)
- manufacturing indicators- good for wage assessment, short term borrowing requirements, national exchange and trade signals
- the national debt- you can figure this one out.
and depending on your access to data and compute resources (and decent mathematicians, or data scientists, or predictive analytics) you can model these whatever way you want and add as many other factors as you'd like...

So when it comes down to it the price of a bond however it is based on how likely the issuer is to continue making those payments "my word is my bond" and how valuable those payments are to the individual who buys them at the time of valuation

In essence though, all of these can be modeled reasonably successfully, but the 2 biggest factors we haven't touched yet, and they are actually much harder to model accurately are political influence and marketing

1. political influence:
uneducated misguided corrupt dumbasses with no economic background in real life (aka politicians) have been the implementors of the all government budget and debt programs to make good on their asinine claims of what they will do when they are elected. i.e. Greece- we're going to default. Trump- we're gonna buy em back. Trump- forgot to tell you how great I am. Bush, no new taxes, Obama, self reliance for energy. Putin, I'm invading everyone. Boris, we're leaving, Cam, we're staying. All of these jackasses make big promises with the flimsiest of informational background, lots of shitty opinions and no idea of the ramifications for their economy.*

2. Marketing
educated misguided corrupt dumbasses wth no economic background in real life (aka academics) have been propagating half baked assumptions in public in the schools and in the press about the worlds economy for the best part of 4000 years. And when you combine those dickheads with the dickheads in point 1 you make for a scenario where it becomes shockingly difficult for someone outside of the system to get a handle on what's really going on and no one in the system wants those outsiders to see, because odds are they'll see how bad a job they are doing- bring on the robots I say.

And that's how you price a bond!

*************************************

* if you want a stable progressive economy there are a few rules- rule 1 is look after the people (all of the people- not just the ones that elected you- or your mates).
However should you be about to govern somewhere- please try the following and publish the data be transparent on its collection- it'll help trust me!:

be transparent about where you're spending the money we are giving you and why. i shouldn't need to ask- you should be telling me.


• facilitate ease of access to quality education for all residents (not just one group citizens or otherwise)
• implement a progressive simple tax system for personal and corporate taxes
• commit to significant government funding of quality infrastructure
• implement a safety net for worst off - with an incentive based route out of the net
• Provide ease of access to healthcare for all
• Facilitate or provide ease of borrowing for innovation
• Implement and adhere to strict rules on corporate governance and finance
• Implement and adhere to strict rules on political finance and lobbying
• Implement and adhere to strict rules on political finance and lobbying
• Implement and adhere to strict rules on political finance and lobbying (maybe 3rd time lucky for the aspiring politician)
• Implement strict term rules on all political positions, career politicians are of no use to anyone, neither are business folks using political office for personal gain. You got a political job, it should be you taking one for the team, thanks and now you're done- go back to your old life, appreciate your help- no you can't have any of my money to get elected again.
• Very strong enforcement of law on all of the above by non political appointees
• Well funded neutral and quick transparent legal system that facilitates the above


If that is too complicated- go back to rule 1, and don't pay consultants to tell us how you're looking after our best interest even though you're looking after yourself and your mates at our expense.

[muppet]

Great post Heganboy. I'd vote for you (which proves your 'people are stupid' point nicely  ).

As for my visualisation, it does say Money & Markets, thus derivatives, market cap and property are probably fair game.

[seafoid]

Great post Heganboy. I'd vote for you (which proves your 'people are stupid' point nicely  ).

As for my visualisation, it does say Money & Markets, thus derivatives, market cap and property are probably fair game.

muppet in the big short there is an interesting point about the flaws in derivative pricing. The black Scholes method assumes continuity in pricing whereas now it is much more stop start with central banks calling the shots and no growth.

[muppet]

Great post Heganboy. I'd vote for you (which proves your 'people are stupid' point nicely  ).

As for my visualisation, it does say Money & Markets, thus derivatives, market cap and property are probably fair game.

muppet in the big short there is an interesting point about the flaws in derivative pricing. The black Scholes method assumes continuity in pricing whereas now it is much more stop start with central banks calling the shots and no growth.

You think the Central Banks know what all of the OTC derivatives add up to? Warren Buffett is still referring to them as 'weapons of mass destruction'. I don't recall any legislation in Ireland to force individuals or banks to publish data on, for a Sean Quinn example, CFD exposure. Maybe I missed it but I honestly can't recall.

I don't know how accurate the info below is but they provide a link and financially literate people can check it out:

"....I have shared the following numbers with my readers before, but it is absolutely crucial that we all understand how exceedingly vulnerable our financial system really is.  These numbers come directly from the OCC's most recent quarterly report (see Table 2), and they reveal a recklessness that is almost beyond words...

JPMorgan Chase

Total Assets: $2,573,126,000,000 (about 2.6 trillion dollars)

Total Exposure To Derivatives: $63,600,246,000,000 (more than 63 trillion dollars)

Citibank

Total Assets: $1,842,530,000,000 (more than 1.8 trillion dollars)

Total Exposure To Derivatives: $59,951,603,000,000 (more than 59 trillion dollars)

Goldman Sachs

Total Assets: $856,301,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $57,312,558,000,000 (more than 57 trillion dollars)

Bank Of America

Total Assets: $2,106,796,000,000 (a little bit more than 2.1 trillion dollars)

Total Exposure To Derivatives: $54,224,084,000,000 (more than 54 trillion dollars)

Morgan Stanley

Total Assets: $801,382,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $38,546,879,000,000 (more than 38 trillion dollars)

Wells Fargo

Total Assets: $1,687,155,000,000 (about 1.7 trillion dollars)

Total Exposure To Derivatives: $5,302,422,000,000 (more than 5 trillion dollars)

Since the United States was first established, the U.S. government has run up a total debt of a bit more than 18 trillion dollars.  It is the biggest mountain of debt in the history of the planet, and it has grown so large that it is literally impossible for us to pay it off at this point.

But the top five banks in the list above each have exposure to derivatives that is more than twice the size of the national debt, and several of them have exposure to derivatives that is more than three times the size of the national debt..."

http://theeconomiccollapseblog.com/archives/warren-buffett-derivatives-are-still-weapons-of-mass-destruction-and-are-likely-to-cause-big-trouble

[seafoid]

The 1% are spinning furiously that it has nothing to do with them

http://blogs.wsj.com/economics/2016/05/23/its-not-the-economy-stupid/

[muppet]

The 1% are spinning furiously that it has nothing to do with them

http://blogs.wsj.com/economics/2016/05/23/its-not-the-economy-stupid/

That article says nothing remotely like what you suggested. So who is spinning?

[seafoid]

The 1% are spinning furiously that it has nothing to do with them

http://blogs.wsj.com/economics/2016/05/23/its-not-the-economy-stupid/

That article says nothing remotely like what you suggested. So who is spinning?

You must have read a different article. It says the Republican voters leaving the party for Trump have nothing to do with economic issues . That is fanciful

[seafoid]

3 things are happening

1. Central Banks are unable to generate inflation and growth so their models are all wrong
2 debt continues to be pumped into a debt saturated global economy
3 Interest rates continue to fall

The lower interest rates go the higher the present value of debt and the wealth of the richest 1%


http://www.ft.com/cms/s/0/92ccee5e-0345-11e6-af1d-c47326021344.html":The Atlanta Fed's GDPNow model estimates first-quarter GDP growth at just 0.3 per cent. This extends the long-running conundrum of punchy jobs growth combined with damp GDP data, Mr Bullard said, adding his bank's model had been repeatedly indicating that 3 per cent growth was "just around the corner" and this was not happening. "

http://www.ft.com/intl/cms/s/0/368ef430-1e24-11e6-a7bc-ee846770ec15.html
"For the first time since 2012, cash, short-term investments and liquid long-term investments slipped below debt maturities due over the next five years, Moody's found.
Total debts rose nearly $850bn last year to $6.6tn, a separate report from S&P showed, which put overall cash levels in the US at a slightly higher $1.8tn. While cash had increased by about $600bn over the past five years, obligations surged by $2.8tn.
The increased leverage has been concentrated in smaller and lower quality groups that took advantage of record-low borrowing costs spurred by stimulative monetary policy. "


http://www.ft.com/intl/cms/s/0/368ef430-1e24-11e6-a7bc-ee846770ec15.html
"Investors have pointed to the drop in sovereign debt yields as they buy up corporate bonds, with nearly $10tn of debt trading with a negative yield."

[muppet]

The 1% are spinning furiously that it has nothing to do with them

http://blogs.wsj.com/economics/2016/05/23/its-not-the-economy-stupid/

That article says nothing remotely like what you suggested. So who is spinning?

You must have read a different article. It says the Republican voters leaving the party for Trump have nothing to do with economic issues . That is fanciful

You think it says ordinary people are backing Trump because they are moving away from the 1%?

Trump is the 1% personified.

[heganboy]

Economics cannot really explain why rapid growth in living standards coincided with so much political upheaval, just as it cannot explain why long periods of stagnation, as Japan has endured since the 1990s, are met with relative equanimity. Economics can't explain why Britons may leave the European Union when the preponderance of evidence is that membership has made them richer. It can't explain why Republican voters backed insider Mitt Romney in 2012 when unemployment was 8% and an outsider, Mr. Trump, this year when unemployment is 5%. Why have Republicans warmed to Mr. Trump's hard line against illegal immigration when the number of illegal immigrants has been dropping since 2007? Why have Democrats cheered Mr. Sanders' promise of government-run universal health care when the number of uninsured is at an all-time low?

So this is a missive from "an economist" Greg Ip at the journal.

I'm going to recommend that you read from the authors perspective and replace the word economics with "I" you might be closer to the truth. Economics explains all of it...

[seafoid]

Why bond yields matter

A bond yielding 5% over 10 years has a value of 100 when the yield is 5%. Should the yield fall to 1.84%, which is the current US Treasury 10 year yield, the value of the bond jumps to 128.6. Assume ever more debt is created and US yields go to zero. The value of the bond is now 150. What is the point of investing in the real economy when the magic of debt generates such returns? Say even more debt is created and yields go to minus 2%. The bond is now worth 178.