January 14, 2013

Why do markets 'love' us?

Posted in Sunday Business Post · 284 comments ·
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Today, this column is going to deploy two devices that writers often use to make themselves sound very intelligent. The first is the quote from a great thinker, which has to be both witty and knowing; and the second is exposing the classical origin of a well-known word, which only a man of either great scholarship or access to Google can appreciate.

With the aid of these two tools, we will look at the recent giddiness surrounding the prospect for the Irish government bond market, which has had the green jersey brigade bellowing out the economic equivalent of Ireland’s Call with all the patriotic vigour of the West Upper ahead of a showdown with England.

So here goes. Don’t say you haven’t been warned.

At the height of the Great Depression, when financial markets were bouncing around all over the place in search of a trend, Keynes observed: “These markets can remain irrational longer than you can remain solvent.”

Keynes, the great philosopher, economist and stock market gambler, was trying to make some sense of the short-term moments of the market, which were rallying on precious little real positive data, and then selling off dramatically on – again – precious little negative data.

This meant that the markets back then were being driven by irrational sentiment. It was this sentiment which Keynes feared, noting that the rational investor, who assesses the data and tries to make investments based on real evidence, could go bust waiting for the irrational markets to validate his analysis. This is the uncertainty – or the essential hazard – implicit in the financial markets.

Armed with this observation, let’s look at the etymology of this word hazard. Hazard comes from the Arabic game ‘az-zahr’. This was a highly popular pastime of the Moors of Andalucia before the Christians decided to kick them out of Spain. (This ethnic violation robbed Spain of its Arabic and Jewish business acumen, condemning Iberia – after a brief heyday of post-colonial gold looting – to become the economic backwater of Europe.)

Az-zahr comes from the Arabic for bone because knucklebones were used as dice in one of the first rudimentary gambling games. Skeletal knucklebones were rolled – the first roll of the dice – and people gambled on which side would show up in the same way as we gamble the numbers of the dice.

So hazard or risk, the currency of financial markets, comes from the ancient Arabic game of knucklebone-rolling. There is always risk because this is what makes the financial world go round.

The financial world is driven by sentiment, which Keynes understood so well, and the optimism of a gambler is normally also a function of how his run is going and what the rest of the herd is doing. When things are going well, he gets greedy, believing that his run of good luck will last, and when things are going badly, the opposite can occur. He oscillates between greed and fear.

Now what happens when everyone is greedy and no one is fearful? Asset prices, particularly risky assets like Irish government bonds, rise, because traders believe that risk has disappeared. They therefore take positions in risky – rather than secure – assets.

What is happening in today’s global financial markets? Something odd is happening, because perceptions of risk have collapsed at a time when there is still quite a bit of economic uncertainty.

Let’s use two indices to quantify how the irrational markets are not gripped by fear but pumped up by greed.

The first is the VIX index, which measures how the markets think the next 30 days is going to pan out through measuring bets taken today on what next month is going to look like. It is widely used in markets to gauge perceptions of risk. What we see from last week’s reading is that the markets are behaving as if risk has being eliminated worldwide.

The VIX index spikes upwards when the markets are fearful and when there is lots of risk, and downwards when something happens which causes the markets to believe risk has been reduced.

In the past two weeks, the VIX index has fallen by an enormous 37 per cent. It is now at its lowest level since 1991. This means traders are taking risky positions driven by their belief that risk is low.

The other index is a lovely little index used by CNN money. It aggregates seven specific indicators of market direction from the momentum of shares themselves to the gap between junk bonds (like Ireland) and safe bonds to the ratio of put options (options to sell) to call options (options to buy).

It aggregates these together to assess whether greed or fear is dominating the irrational sentiment that Keynes warned might remain so long after the traditional investor goes bust.

And guess what? The index is now showing extreme greed. Last week saw the highest level of greed ever recorded by CNN. It means the market sees no risk anywhere, skies are blue and the future is rosy.

Why could this be? The answer lies in the behaviour of world’s central banks and their zero-interest rate policy. The New Year was trumpeted by the Bank of Japan saying it would print as much money as it needed to facilitate the government’s aim of raising the rate of inflation in Japan. The markets know this means trillions of surplus yen are sloshing around, so why not borrow these yen at zero interest rates and buy other assets which yield higher and pocket the difference?

All across the world, central banks are doing the same. The Fed and the Bank of England are printing as if it is going out of fashion while, in Europe, the ECB’s “outright monetary transactions” policy means the central bank will buy almost any government bonds which, in this market, is simply encouraging the gamblers to follow suit. Free for all.

What has all this to do with the recent high-fiving that the green jersey brigade has been giving each other over the fall in Irish bond yields and the flogging of some Bank of Ireland bonds?

It implies that the markets worldwide are buying anything that offers yield, and Irish bonds offer yields. But does it mean that the economy here is improving, as suggested by the spin put out by the government? Clearly not. When you roll up all debts, we are still the most indebted country in Europe. The fall in Irish bond yields is a function of the global greed indicator being close to maxed out.
When you stand back, you can see the main risk in financial markets today is that there is no risk.
The collapse in bond yields is like the peaking of the housing market here in 2006. It is driven by a tsunami of cheap money looking for a home, rather than anything real.

Given this, I am sure that Michael Hasenstab, the US fund manager who owns large sections of our bond market, is now thinking of selling. So expect more glowing utterances from him, amplified by the echo chamber of spin and media cheerleading here.

Every time you hear this chorus, you can bet your bottom dollar that Hasenstab is now thinking of selling, not buying.
“Shoulder to shoulder” and all that jazz.

David McWilliams’ new book The Good Room is out now.


  1. Tony Brogan

    Where is Ireland’s Gold? Or, does nobody give a damn?

    http://blog.milesfranklin.com/not-even-irish-eyes-are-smiling

    • joe hack

      I don’t! i have no use for it what would i do with it stick in a vault and say it’s mine mine mine mine? but it’s handy for tooth fillings and electronics

      OK I am a little curious where is it? is it somewhere in the city of London?

      bring back the tally stick the longest running currency…

      it all about the bicycle….money should be based on saddles????
      how much is gold worth? if you answer in fiat money then you are valuing gold on the man made stuff…. so that means you value fiat money more than gold????

      • Tony Brogan

        Put your savings in silver and gold coin Joe or you will live to regret it.
        Pay the vat if you have to. when silver hits $50 you will not care about the tax. When it hits $100 you will shake your head. When it hits $500 you will not like the world you are in but you will have a means to survive.Gold will likely be at $10,000.

        When the DOW rides inflation to 20,000 then gold will also be at 20,000 US dollars.

    • whatamess

      very interesting Tony!cheers

      a mere 6 tons of the stuff eh and China has at least equaled ,if not surpassed the purported holdings of the IMF and Germany!

      It makes perfect sense to me to buy gold(silver ,platinum etc) or at least it represent a significant % of one’s investment portfolio/life savings ( be it a 1,000 or 250,000 )

      if (when) things you tits up,i’m betting i will be very glad i followed your thoroughly researched advice/merits for buying (and taking possession of )gold and silver

      • Tony Brogan

        Have it where you can get at it Whatamess.In hand
        Silver too. preferably in coin.
        Others say junk silver coin with silver content.
        A little will go a long way.

  2. Tony Brogan

    The trust is evaporated

    gold and silver double?? US dollar halves, bonds collapse, interest rates jump?

    http://www.zerohedge.com/news/2013-01-14/it-begins-bundesbank-commence-repatriating-gold-new-york-fed

  3. Tony Brogan

    http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/1/14_John_Embry_-_Silver_Will_Soar_Hundreds_Of_Dollars_Higher.html

    John Embry also added: “As a Westerner, it really depresses me to think that all of our gold is headed East, and our standard of living is headed South. That’s the only reason I can think of that means being old isn’t a bad idea.”

  4. SMOKEY

    Filet of Filly!
    Now they can use that as the headline.
    I have a feeling this will impact heavily on the frozen burger industry at the worst possible time.
    That said I have never purchased them myself, frozen burgers seems so crass. I just never trusted them to be of good quality. Even though Im sure some are.
    Here is a great recipe if you want a killer homemade burger
    1/2 tsp each of following
    onion salt
    black pepper
    garlic powder
    smoked paprika
    chili powder
    and 1 1/2 Tbs of Heinz ketchup
    1/4 ea of a finely minced onion and green bell pepper
    add this to 1 lb of lean steak mince from your butcher and mix thoroughly.
    Can be grilled or pan fried for a delicious burger
    Enjoy!

  5. bonbon

    Note the reference here to ECB and bonds – very important. Liam Halligan, chief economist of Prosperity Capital Management in London, has repeatedly called for Glass-Steagall in Britain’s Daily Telegraph.

    Dissent Growing About Hyperinflationary Money-Printing as Risks from “Quantitative Easing” Grow

    Jan. 15, 2013 (EIRNS) — Dissent is growing in financial policy circles in London and elsewhere about the copious “quantitative easing” money-printing operations which have prevailed since 2008, at the same time that public support is growing for real, Glass-Steagall-standard banking regulation. In his column of Jan. 12, Daily Telegraph commentator Liam Halligan wrote that “[r]ecently, I’ve seen signs, at least, that the conventional wisdom is starting to crack, not only on QE, but ring-fencing too…. There are indications, that the economics profession is coming to its senses and the pro-QE consensus is starting to shift.”

    Halligan wrote that at a roundtable discussion on QE at the Centre for Policy Studies in Central London last week, in addition to Andrew Sentence, a former Bank of England Monetary Policy Committee member who has long been “raising the alarm on QE, … other top ‘dismal scientists’ are now voicing serious concerns about the dangers of more monetary stimulus…. When I argued that QE was just a ruse to debase Western currencies and was causing genuine anger among the governments of large emerging markets that have lent us money, several fellow discussants were literally nodding from the waist in agreement.”

    There has long been significant dissent on QE in the City of London, a long-term senior financial analyst told EIR today, but now, there is a growing shift against money-printing from those who had previously supported it.

    This is going on as the situation in the Eurozone is hanging on little more than the illusion that the European Central Bank would continue QE: the ECB has been “massaging expectations” that it would return to buying European sovereign debt ever since ECB head Mario Draghi’s speech last July — but has actually not purchased any bonds since before that speech was delivered!

    Essentially, the ECB is testing just how much it can get away with, without showing anyone the cash, the analyst said.

    This smoke-and-mirrors game is now being tested in the “tricky negotiations” over Cyprus. Should Cyprus, a tiny nation of 1.1 million people, be forced to pull out of the euro, things could unravel very fast, the analyst said. The euro is high — now at 1.30 to the U.S. dollar — and this is costing the EU economies a lot in terms of exports.

    At the same time, there are indications that Japan’s new government may step in with a big bailout for the Fed over the coming months. The new Shinzo Abe government wants to drive down the yen, since Japan has been seriously losing out to other East Asian manufacturers, especially South Korea, in exports to third countries, and could do some heavy money printing to devalue the yen. The Bank of Japan could be issuing about 50 trillion yen — $558 billion — over the next six months to pour into U.S. Treasuries, the analyst said.

    • bonbon

      “The ECB has been “massaging expectations” that it would return to buying European sovereign debt ever since ECB head Mario Draghi’s speech last July – but has actually not purchased any bonds since before that speech was delivered!”

      That contradicts some statements in the lead. Looks like Enda et al are being have great expectations.

  6. bonbon

    The repeated references in the lead, to “fear”, “greed”, “irrationality”, is uncanny. This is exactly what Bernard Mandeville (author of the Hell Fire Clubs in Ireland), and the inspiration for von Hayek – wrote in his tome “Private Vice, Public Virtue”, otherwise known as the Fable of the Bees and the Grumbling Hive. From these vices shall spring forth spontaneously the General Welfare, an economy. It is amazing the grip this has on people’s opinions.

    DMcW states the obvious (to any alert reader) “But does it mean that the economy here is improving, as suggested by the spin put out by the government? Clearly not.”

    Of course not. Mandeville’s swindle, praised by Hayek as the most brilliant, is now apparent to all except some unwilling to accept “The Path of Hayek, Scientist of Freedom, Has Come to an End.” – Julian Simon’s obituary of von Hayek in 1992.

    • Tony Brogan

      This obituary is likely as biased as you bon bon
      Published in yeyt another Larouche propaganda publication

      Fusion Magazine

      Morris Levitt was the editor-in-chief as of 1979, but by the mid-1980s the job was taken over by Steven Bardwell, and by 1986 it was Carol White. Marjorie Mazel Hecht was the managing editor. By 1980, it claimed 80,000 subscribers.[11]

      [edit] 21st Century Science and Technology

      21st Century Science and Technology is a quarterly magazine established in 1988 following the federal government’s closing down of its predecessor Fusion Magazine (1977 to 1987). It has the same editor and material as Fusion.[67] The last hard copy issue of the magazine published was the Winter 2005-2006 issue. Subsequent issues are available in electronic PDF format only. The magazine deals with a variety of issues, including criticism of claims of anthropogenic global warming, promotion of the use of DDT[68] and support for an alternative to the standard atomic theory, based on the “Moon model” of Robert James Moon.[69] Notable writers include: J. Gordon Edwards, Zbigniew Jaworowski. According to Science and other sources, it is published by supporters of Lyndon LaRouche.[70]

      I quote, “it is published by supporters of Lyndon LaRouche”
      Objective commentary? Unlikely. More likely a hatchet job.

      • bonbon

        Since we are dealing with scientific principles including of economy, these are excellent sources for serious consideration.

        To deal with Adam Smith and empire, one must deal with reductionism, radical positivism, and the attack on science by empiricism. Economics is only one affected sector, biology, physics also.

        • Tony Brogan

          All you do is pile one LaRouche paper on another. You have no original thinking process of your own. you answer no questions nor ever debate in a logical fashion.

          • bonbon

            Julian Simon’s very thorough expose of Hayek’s economics is well worth reading. He chose an obituary to do that. Jeffrey Steinberg goes much further.

            On original discoveries, we humans replicate an individual’s scientific discovery, that’s what civilization is all about. Then we go ahead with more. You can replicate Ampere’s uniquely original discovery, and especially Kepler’s uniquely individual discovery of universal gravitation.
            Economics principles such as the relative potential population density, are uniquely individual, yet in a mode that goes to Leibniz physical economics, with Riemann’s method. Civilization.

    • bonbon

      The obituary and interview above should be considered essential reading for Austrian School’ers, interesting stuff appears. I do not know why it seems to upset some.

      Hayek’s lectures at the LSE are also available.

      But I begin to see many are not taken in anymore with either Keynes nor Hayek. It does help in this situation to clear the fog, and Hamilton is the best way to do it. It gives an adult sense of perspective, and brings a lot of unquestioned beliefs and tactics to the the table for all to see. One such tactic being Adam Smith’s Moral Sentiments, repackaged as, really I must say, a superstitious “spontaneous” economy. This rather weak tactic is hidden behind a gold facade to fool the suckers most of the time.

  7. Markets are Illusions

    Ryanair has today proven after it has revealed new bases in Morocco to mainly service increased destinations to and from France from Morocco .

    This company has had conflict of expansion in France due to the enormous controlling power of the Enarchy ( the aluminae of Ecole National Administratif ) . Ryanair has had No Success in establishing Any Base in France .

    Ryanairs policy has been to extend the market of sovereign France to include Morocco and this amalgym to act as a single strategic activity centre as a whole.

    Their actions have proven many things including how a foreign corporation can control within a sovereign country from outside in a location that is complimentary to the market as a whole.

  8. joe hack

    on Germany gold fears????????

    The BRICS countries appear to be succeeding in removing the dollar as a reserve currency with the rise of China’s Renminbi (or even the euro) as an alternative to the dollar will the Russians win the cold war using USA tools (The Cold war part two)

    The rule of law? money can only be built on trust if people don’t trust it they don’t use that is clearly happening now with the dollar and USAs (euro)policy’s.

    Gold will not fix it- trust will — it makes no difference if it is gold or sand or paper or the Tally Stick. the system that the brics use is more sustainable than what we have………………
    I have not seen David write about this?

    • bonbon

      As we found out about Al Capone, trust was not quite the way to go. Law was. With the lawless meth adicted hilbillies as Taibbi writes, now moved in, only the law will get them out. The 500 police raid on Deutsche Bank, who came back for more a week later, is the way to go, trust me.

    • Tony Brogan

      If nothing else is trusted anything then then gold is all that is left.Maybe silver.
      All nations are goin to gold except the few in the west. Germany, France and Italy know and have gold. US will steal all in their posession claiming that any other claims on the gold can not be proven.

      Ireland will never see their 6 tonnes unless they get it now.

    • They are ratcheting up the fear by saying that pensions and benefits could be affected. Maybe the ATM’s will stop working too no doubt haha

      • joe hack

        Mr.D yep this is not new news Obama was all over the media with it

        Maybe the Germans are taken their gold home to send political message to the USA or to certain groups within it….

        • Depends what groups in particular joe. The Zionistas are getting their arses booted right now and Americans are asking just who the hell is running their country. It seems that it is run by an elitist Jewish cabal. Don’t take my word for it as there are plenty of Americans warning the world. Not all Americans are idiots

          Mr Obama is not the government and is only keeping the chair warm and he is a sideshow compared to what is really going on. Kennedy was a sideshow and the people behind the grassy knowl proved it. Dark forces run the EU, IMF and Central Banks and to deny it to be infantile and wanting to believe the consumer boom ads of the 1950s with endless promises of a safe, ‘normal’ and wholesome life

          Seems to me that there are groups everywhere all professing to stand behind some glorious leader in the pursuit of some noble ideal. Even here in Ireland

          I am suspicious of groups and anything to do with them. I’ve never been a member of a group in my life and the clubs and societies part of my application forms remain blank. What school did you go to?

          Fuck off!

          We used to have gangs and firms in Glasgow and being part of a firm was one way to stay alive and send a message that you are not be messed with

          The boys who came from families who had a ‘good room’ were more likely to be seduced into joining some infantile brotherhood that would ensure their brains turned to mush permanently

          And that is about all I have to say about it

          • Aye. What school did you go to pal?

            Answer – a school with teachers and blackboards prick.

            Why what fucking school did you go to?

            Lol. Little boys and their silly gang loyalty.

            You have to laugh joe

            Have a great day

      • bonbon

        Mr. Lew will replace Geithner soon, and he is a complete austerity freak. All they want to do is make a mega Greece – they are all enthralled by the success of the ECB.

        After 9/11 they are out to remove the USA as a nation-state.

        I think they have forgotten Lincoln’s Gettysburg address that “government of the people, by the people, for the people, shall not perish from the earth.”

        The EU has removed this in Europe, the USA is threatened.

  9. molly

    Well come to the new Ireland under kenny/ Gilmore and the troika .
    The country of soup kitchens and people searching in skips for fire wood to try to keep there family’s warm,now tell these people they have to pay a property tax,what a sad bunch of tossers we have running this banana republic.

  10. molly

    Question
    How many people out there who basically have forgotten about the government ,
    Who could not careless about the way the country is run.
    People Who feel powerless and have being sickened about the way this country has and is being run.
    People who just look after themselves not in a bad way in a survival way,is this the reason why there is no mass protests on the streets.
    A friend of mine done five hours in prison because he would not pay a couple of parking fines and he said he will be paying no property tax and he said its about time the Irish people woke up,I think people are just lying low.
    When I look at who’s running things and who’s in opposition things look very grim and I am sure I am not alone in my way of thinking .

  11. Grey Fox

    257 comments!!!
    You got people animated with this article David, maybe because it was quite good, well done lad!!!

  12. Tony Brogan

    The call for a phony platinum coin was stupid, however, the market increase of the gold price for the major gold holding nations could balance their external debt, making a giant move towards balancing their national balance sheet. A move in price high enough could even do that. Now you know why Euroland and other central banks are buyers of gold.

    - Jim Sinclair, In The News Today, January 15 2013

  13. bonbon

    The “markets” will not love us when we pass Glass-Steagall back into law, but who cares.

    For a clear point-by-point chat about the bills now on the table Paul Gallagher on Glass-Steagall.

  14. bonbon

    Interesting reference to “rolling the bones”, there by DMcW. Perhaps DMcW is describing the denizens of the Ridotto of Venice?
    The Modern AngloDutch Empire:
    its Origins, Evolution, and Anti-Human Outlook

    Excerpt:
    In 1638, simultaneous with the creation of the Amsterdam speculative market, the first government sponsored gambling casino in European history opened in Venice — the famous Ridotto. Not surprisingly, Venice had been the center of European gambling since at least the 13th century. In 1229, the election of a doge was determined by a throw of dice. Open gambling flourished during the Carnival season, which often lasted from October through March. During the 14th century the development of card games emerged first in Venice and spread from there to other cities. Venice also pioneered in the creation of private lotteries, which then were copied throughout Italy and in France and Flanders. But it was casino gambling that made Venice unique. Casino gambling was invented in Venice. In fact, the word casino first appears in Venice. By the mid 16th century numerous private gambling houses, known as ridotti, were operating throughout Venice. Towards the end of the century many of these ridotti had changed from places where individuals gambled against each other, to establishments where bettors played against the “house,” the method still in use in presentday Las Vegas.
    In 1638 the Venetian Grand Council voted to establish the first government owned gambling house in Europe. Known simply as the Ridotto, it was housed at the San Moise Palace which was owned by the Venetian nobleman Marco Dandolo, a descendant of the leader of the fourth crusade. At the Ridotto, aristocrats, prostitutes, pimps, usurers, degenerate gamblers, and many foreign visitors rubbed shoulders. All wore masks to protect their identity. In addition to the gambling, a room called the “Chamber of Sighs” provided a place for sexual liaisons. More than a gambling hall, the Ridotto functioned as an ideal tool for the corruption and blackmail of foreign guests. Of the many thousands who frequented it’s gaming tables, perhaps the two most famous were the Venetian spy Giacomo Casanova, and the speculator John Law.

    • bonbon

      Even more surprising :
      In 1526, 34 years after Columbus’ first trans-Atlantic voyage, the Spanish Dominican scholar Francisco de Vitoria was appointed the Chair of Theology at the University of Salamanca in Spain. For the next 20 years, Vitoria recruited a group of followers, who produced a vast body of work encompassing theology, economics, natural law and jurisprudence. Taken together, these individuals and their writings became known as the School of Salamanca. The epistemological influence of the Salamancans was pervasive, even into the 18th century, ironically, largely in the Protestant north.

      More recently, interest in the Salamanca School has been revived, primarily through the efforts of the Von Mises Institute, and other free-trade fanatics of the Austrian school of economics. The only modern work on the school, Marjorie Grice-Hutchinson’s School of Salamanca, actually contains a dedication to Frederick Von Hayak.

      —-
      Well, well, DMcW does refer to Spain’s self- destruction in the lead, correctly, but this is even more revealing – the Spanish origins of free-trade means the Austrian School is the School of Salamanca !

  15. dwalsh

    am i allowed post?

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