FOMC rate decision today. It might be slated as the most important event of the day or even the week but, let’s face it, nothing unpredictable or shocking is going to come out of it.
Unless, of course, we were to find out at 2pm EST that they had either cut or raised rates by 25bp, before which time hell will have had to frozen over. Next!
A few days ago I got a call. Those acquainted with my LinkedIn profile – which I’m pretty sure nobody is as the main readers tend to be headhunters and as far as they’re concerned I fell off the planet on my 50th birthday – will know that for a number of years I’ve acted as a non-executive director for a company called Katmai Capital Advisors, a small commodities hedge fund that thought submitting itself to regulatory discipline would be a good thing, especially once their track record was good enough and long enough to go touting for external investors’ money.
MiFID
Last week the principal called me and asked how I’d vote if a proposal were to be put to the board to cancel FCA registration and to revert to being a private fund. “Why so?” I asked as though I didn’t already know the answer. “MiFID II, too expensive to comply with, too arduous reporting requirements, simply too much bloody effort and for what, in exchange?”. Since then I have had the same conversation with more than one small firm.
Imagine football if Fifa were to insist that at every ground there were to be floodlights, that every game had to refereed by a professional arbiter and that a rescue helicopter had to be on standby at all times. Whither the pub sides, the scratch Saturday morning kick-about or even the plethora of local village football clubs? Spending a quarter of a billion pounds on players in one single summer transfer window, as Manchester City or Chelsea will have done, is one thing but what will this do for the rich tapestry of enthusiastic individuals which cements the foundations of the game?
I have long argued – and I mean going back to the depths of the financial crisis – that sauce for the goose is not necessarily sauce for the gander and that although liquidity and transparency might go hand in hand in the equity space, in bond markets they are pretty much mutually exclusive. Nine years on nothing has occurred that has changed my mind. It has been a while since the subject of liquidity mismatch was on everybody’s lips and although this pervasive phenomenon is no longer front page news – the 2013 “taper tantrum” threw up a lot of the issues – liquidity mismatch is alive and kicking and sitting in the corner ready to pounce. And if you really believe senior bank executives when they “warmly welcome the clearer pathway created by new regulation”, then you’ve obviously forgotten the meaning of hypocritical and politically expedient brown nosing.
MiFID too
I spoke yesterday to one small brokerage, which is also faced with the MiFID regime and although the added financial costs are not exactly existence threatening, the burden of reporting threatens to take up so much management time that there will be little left to service clients and generate revenues. That, in case the regulators have forgotten, is the principal purpose of running a firm, not keeping them in public sector salaried and pensioned jobs and making sure that they never again can be (quite rightly) accused of having sailed into a financial crisis, eyes wide shut as they did in 2007/2008.
The problem last time was not that there wasn’t enough regulation but that the private sector had hired all the best brains from the public sector to interpret it and to find the loopholes. During and after the crisis, regulators were able to bring on board some very good but redundant Wall Street operatives. Most of these have since been taken back by the banks, leaving behind a complex regulatory framework that is short of people able to use anything more subtle that a wooden mallet to see it implemented.
Some of the small firms might be nothing more than the pond life they are seen as but how many proud bluefin tuna, Atlantic salmon or lobsters do you think can survive in distilled water? Rant over….for now.
Greece monkeys
Back in the “real world” Greece returned to the bond markets with its long-heralded issue, which turned out to be a €3bn five-year transaction. At 476bp over October 2022 German Obl it looks hugely attractive if you’re either happy to believe that this time it will be different or you can’t resist. The 4.375% is pretty generous but given the past history investors should be more concerned with the return of capital than with the return on capital.
That said, the Hellenic Republic has been very canny in also framing this as an exchange offer against the 4.75% 2019s outstanding, which means that it can present the bond to a sceptical IMF as an extension of existing debt as much as new borrowing. The lead group of BNP Paribas, Bank of America Merrill Lynch, Citigroup, Deutsche Bank, HSBC and Goldman Sachs is as strong a one as could be assembled – only JP Morgan is missing from the docket – without going silly. Nice trade, guys.
According to Greek finance minster Euclid Tsakalotos, the outcome was “better than we expected” although in a world that is willing to lend lonesome Argentina US$2.75bn for 100 years, selling €3bn five-years for Greece, with all of the eurozone backing up behind it, is as close to shooting fish in a barrel as one can get. I have as yet not heard any numbers as to how many of the €4bn-odd of the outstanding 2019s were tendered and thus how much new money was raised but perception is reality and as long as all the headlines read “Greece returns to global bond markets with blow-out issue”, it’s mission accomplished.
Finally, our old friend oil continues to defy gravity with Brent closing last night at over US$50 per barrel. The latest explanation is the fall in inventories but this is the driving season so if you want to impress me, tell me something I don’t expect. Methinks there’s a lot of momentum in the trade along with the inevitable capitulation trades by bleeding and festering short positions. Once the last short is covered and the cars are back in the drive, we can take another look at the downside…maybe. All the while the VIX index had its ninth successive sub-10 close last night and it’s hard to imagine the 10th not following on. We’re either living in a new risk paradigm or markets have been on the happy powder for too long. I know what I think about it. How about you?