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Wednesday, 13 December 2017

Skeleton staff schizophrenia

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  • Peters 475px June 2014

Nostalgia to the fore during the dog days of summer.

It’s hard for old-timers like myself not to feel a little nostalgic this morning as it is the first time since we entered the industry when there was no US Treasury bond with a double-digit coupon on the slate. On Saturday, the grand old 10⅝% August 15 2015 bond expired and with that event went lots of “do you remember’s. Yes I do. What’s more, at a time when the big word on the lips of bond strategists is “super cycle”, it’s good to remember that bull markets can happen at all kind of interest rate levels.

The August 1985 long bond – in those days the 10-year was the baby cousin of the 30-year and the long bond trader was Wall Street’s Number One alpha male – with its 10⅝ coupon was followed at auction in November by a bond with a 9⅞% coupon, a full ¾ of a percentage point lower. What wouldn’t money managers who are scrambling around with 3% 30-year bonds give for those good old days?

Please permit me to mix my metaphors in noting that the summer lull is now in full swing; today we formally enter the dog-days of August as the final fortnight of the month sees both buyside and sell-side desks running on the most skeleton of skeleton staffs.

That does, however, not mean that the rest of the world has gone to sleep. There is still plenty of news being made; there is simply a lack of jumpy people who think they need to buy or sell on every headline and the ones who do seriously risk falling into air-pockets. Well, I guess that’s up to them.

Oil slipped a bit further on Friday although the CRB Index, that old chestnut, crept back up above US$410. There is notable schizophrenia in the markets with both bulls and bears having plenty of sustenance. There is plenty of economic data on both sides of the pond which support the view that, although growth is not spectacular, it is there and in sufficient size not to threaten to turn negative in the either the short or the medium term.

The eurozone reported on Friday Advanced Q2 GDP at +0.3% quarter-on-quarter and +1.2% year-on-year. Despite a negative report on CPI for July, the annualised figure was steady at +1.0%.

Abenomics nonsense

On the flip side, Japan with its Abenomics nonsense ripped in this morning with appalling Q2 GDP numbers. QoQ, the economy shrank by 0.4% which leaves its annualised shrinkage, QoQ, at –1.6%. Arrows, my foot!

Perhaps the most shocking part of the release was the Private Consumption component of the GDP figure which fell by 0.8%. Evidently, Hiroshi Six-Pack doesn’t believe Abe-san’s promises anymore and, having run out of kitchen sinks to throw at the economy, the Prime Minister’s popularity ratings are falling faster than economic output. The stock market, on the other hand, is still on fire with an annualised return of over 34% and a year-to-date performance of over 18%.

This number is deceptive and ought to be treated with caution for the Nikkei is heavy on large exporters who have benefited from the persistent yen weakness.

But there is a lot more to Japan than Toyota and Panasonic. For a truer and more comprehensive snapshot, the Bank of Japan’s quarterly Tankan Survey is a valuable source of information.

Due to circumstances beyond my control, I missed the July release although I can well imagine that the picture drawn will have laid the foundations for what today’s numbers went on to reveal. The demographic time-bomb continues to tick, arrows or no arrows, and until young Japanese couples discover that making babies is more fun than controlling the refrigerator from their mobile phone, things will not improve.

These are of course generational issues and even if the birth-rate were to double or triple (which it won’t), it would take 20-odd years for the effect to be truly felt. I have lived through one of those generations and can well recall when the papers and the TV news were full of questions as to why we couldn’t be more like the Japanese. Hmmm.

Back to Greece

Back in Europe, the Eurogroup has done what we all knew it was going to do in that it waved through the €86bn bailout package for Greece. Haircuts are still ruled out, but Greece can barely be expected to meet its future obligations any more than it can meet its current ones.

It looks as though loan repayments will have to be extended. Talk is of pushing the new ones, currently benched at 32½ years out to 60 years – let the grandchildren deal with it rather than the children. Obviously it’s all a load of rhetorical codswallop and I do wish they’d just get on, convert the Greek debt mountain into a portfolio of zero-coupon perps and be done with it.

That said, Spain’s Podemos is spooking around in the background and nobody knows what might happen in this autumn’s general elections if the Greeks are given too many concessions.

What is striking, though, is the way in which St Mario, the patron saint of bankrupt countries, has in the past few months significantly lowered his and the European Central Bank’s profile and has handed the baton to the politicians.

Perhaps the embarrassment caused by Benoit Coeure’s involuntary indiscretions have played a part in ECB reticence, but, one way or the other, the central bank has repositioned itself well away from the political line of fire.

Coeure, meanwhile, has let it be known that he will no longer speak at bank-arranged conferences. Well, I doubt there will be many of those in the next two weeks and all we can do is to wait to see what comes out of the Jackson Hole off-site.

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