Who trades where? – pondering out loud

Just a quick note. Which I must warn you is to be read or ignored as ‘pondering out loud’.

Is it me or is something happening in the Bond market that hints at broader changes?

This morning a German government bond auction for €5 billion in 10 year bonds, failed.  In normal times that would be pretty epic. They priced up their bonds, took them to market and no one was interested. They offered €5 billion’s worth and got bidders for only €3.61 billion. The German Government had to buy the rest.

So it seems that ‘super safe in times of volatility’ is just not the logic being used. The real logic is, I think, that low interest rates held down for so long now, to ‘save’ the banks from a swift death by insolvency, are instead killing them slowly, and everybody else with them.  It’s not volatility that is killing the markets it’s not getting any return. So the only answer is to find something risky and buy it.

You see in a very real sense Germany’s bonds are so safe they’re worthless. Worthless as an investment that is. They are ‘great’ in much the same way as a sock under your bed is ‘great’ – as a cash-storage device.

So what is happening? Well on the day Germany can’t sell its bonds comes the news that Sofina, a Belgian investment company that has never before issued a bond and is thus unrated (it is a long established company however), tried to raise €250,000 with a bond plus warrants issue and found it was sold out  several times over in the space of 90 minutes.

Why? Different investors?  Could be. Shorter maturity? quite possibly.  Over all this issue looks to me to simply give a higher return quicker.

Next question. Why wouldn’t the company, if it needs €250000 simply get a loan, from its banks?  Why issue bonds  that come with warrant for stock which will therefore dilute the stock?  I am no expert but this looks a little odd to me.

Could it be that the banks are simply not lending because the rates they can charge are, as we just noted, too low to make much profit? And are bond investors sick of stuffing their money under their mattress in an old German sock?

There are just not enough places to invest as opposed to store, capital. And the longer this is true the more badly all players in the financial world will really need to find a return somewhere. Carry this logic forward far enough and it begins to turn things upside down. For example money managers can simply shut a fund if it is not making a return, rather than take unreasonable risks. Several finds have shut recently citing this very logic. Not great business but it is an option. Whereas, pension funds, who should be the most cautious, cannot simply shut. That is not an option for them. Neither is not getting a return. So Pension Funds might eventually – and eventually might be starting around… now –  find themselves being the ones who just have to start buying riskier products in order to find any return at all.

Weird? I think so.

I wonder if the familiar patterns of what money flows to which markets is changing.  Retail investors have been moving out of the stock market for well over a year now. They seem to have moved in to ETFs. I have written on the dangers ETFs present, before. I won’t repeat the arguments here. I will note the flurry of very recent ETF closures due to simply not making enough money.

I think retail investors have fled from the markets and in to ETFs in a bid to escape the predatory high speed, machine driven, algo traders. The stock market is simply broken. It is not what it was. It does not work as it once did. It does not do and cannot do the job it still claims to. That is to provide a level and fair playing field in which capital can be invested by all with the same chance of prifit and success. If you still believe that and are still playing. Good luck. You’ll need it.

The algos will front run your trades and pluck you like a turkey.

I think a lot of the larger money has moved from stocks to bonds and currency trading. Often together as a dual strategy. This money is not quite like the traditional bond market money. This new money, coming from places and from people who were used to trading stocks, who are looking for more rapidity and return. Bonds used to be a less volatile place for slightly slower money. Not any more. Volatility has moved house. Or at least bought a second home on Bond Street.

I suspect Pensions and Insurance are now looking for risk that they used to be able to shun. And companies are turning away from the front door of banks where they used to get loans and instead selling bonds to the market where the stock money is now looking to buy bonds.

I think the banks are lending to the traders who are playing in bonds and currency as well as trading there themselves.

All in all I think the bond market and the other markets as well are changing in quite profound ways. And I don’t think the changes are temporary.

OR I could be an outsider talking through a wee little hole in the top of his head. Either way I felt like pondering aloud.

 

23 thoughts on “Who trades where? – pondering out loud”

  1. Pondering on your ponderings:

    “I think the banks are lending to the traders who are playing in bonds and currency as well as trading there themselves”.

    You probably nailed it right there. There is no such thing as “investing” any more – the markets are now just a casino. Traders don’t earn a bonus for “investing” anymore; it is now ALL about quick profit.

    The problem is that these idiots have not thought about where they are going to “invest” their bonuses. In what currency? Where? The sad truth is that there is no way out of the bubble they are blowing for themselves – and the rest of us.

    It is very worrying that Germany was unable to sell its bonds. Did you have to tell us that?

  2. It wouldn’t surprise me; David Harvey argues fairly persuasively in the Enigma of Capital that asset bubble blowing is primarily a feature of societies in which too much is being saved (which is of course a function of taxation and inequality levels) relative to the amount of investment money needed, and that the turn to the stock markets itself is basically a move born of desperation, because besides govt bonds, only stock and real estate markets have the volume/mass required to absorb all that unnecessary money on which people expect returns.

    (There is an argument to be made here, I think, that deficit-spending by mature economies is good because it allows savers possibilities of investing their money in ways that do not increase systemic instability, such as investing in RE and dotcom crap can.)

    Anyway, once the stock markets take another leg down I’m sure bonds will start selling again.

  3. “You see in a very real sense Germany’s bonds are so safe their worthless. Worthless as an investment that is. they are ‘great’ in much the same way as a sock under your bed is ‘great’ – as a cash-storage device.”
    When they start charging you money to keep money in their bank, as Germany is going, putting money under the mattress is not a cash storage device, it is self-defense. And when, as in the U.S., the banks pay savers .1% APR while charging cardholders 20% (what ever happened to usury laws?), doing so at least proves you are not Rodney Dangerfield

  4. The optimist in me likes to think this is a glimpse through the looking glass into a better future. I hope he’s right 🙂

    The insolvent banks have abandonned any pretence of genuine investment loans into SMEs, so the real economy is finding new ways of getting investment. At the larger end it’s as you’re describing here, but further down the food chain we’re seeing crowd sourcing and increasing numbers of investor options.

    Once truth gets stranger than fiction – the actual algo driven events over last few years are weirder than anything Robert Harris wrote for The Fear Factor – then in the end any vaguely rational investor must change their game.

    Who knows, Credit Unions might also grow here and building societies attract savers back too.

    Hope you’re right 🙂

  5. In 1988, a young economist out of Harvard, Larry Summers wrote a verbose paper entitled “Gibson’s Paradox and the Gold Standard.” In the paper, Summers explains that when the real interest rate is positive, the gold price will not increase and even decrease as parties will prefer fiat currency that increases in purchasing power and pays interest. However, when the real interest rate is negative, the price of gold will increase as parties will seek to preserve their purchasing power. Gold serves as “the canary in the coal mine” for all fiat currencies. When the price of gold rises, this is the prime signal that the currency is being debased.
    Summers mentor Robert Rubin had been using gold in the carry trade while at Goldman Sachs, with the Japanese yen, which had been paying interest rates up to 14% for many years.
    Rubin of course was Secretary of the Treasury prior to Summers and had a strong dollar policy which was maintained by suppressing the gold price. Summers continued this practice and so have successive Secretary’s.
    This could not last forever and now there is a US shortage of gold bullion. Note; the US Treasury, the Fed and it agents at the Wall St banks have combined in this maneouver for many years, they are all short gold and the fiat US dollar is about to be exposed as an’ Emperor without clothes. The faith in fiat is bust.
    To re-iterate an old saying .’At all times & all places, gold is money and a true reflecton of value’.
    Paper at present, whether currency or bonds is heading for worthless. Watch the precious metals, the Central banks are running out of bullion to suppress the true value, The banks are short on bullion and it is in the end the only true store of wealth as it has also been a true currency for millenia.
    This may be the reason, the bond sales are unsuccessful, the banks are diverting their paper money to buy bullion or preserving it to move in the bullion market during dips.

  6. Daniel, forgive me but that sounds very unrealistic in the current situation. Fiat money is just too big to be converted into gold, at any price. The sheer size of the global economy requires enormous, sophisticated fiat money. The problem seems to me that we have lost faith in the markets. They were our gods for many years. Now those gods are tarnished. But I don’t see gold as being the one true god. Yes we need a new god, but gold is not it.

  7. There are just not enough places to invest as opposed to store, capital. And the longer this is true the more badly all players in the financial world will really need to find a return somewhere.

    Yes, the ‘finance industry’ has shot itself in the foot, in the sense that beyond fraud and cheating and scamming, which go on all the time, the ‘industry’ rests on ‘growth’, no matter where that ‘growth’ comes from. Without the growth (skipping the quotes for now), fleecing is all that is left, and that can only stretch so far, work for some time, squeeze out profits for a while.

    They are literally like the Mafia, in the sense that the Mafia can exist as long as the landscape in which it operates is semi-stable, a system that trundles along with Gvmts. collecting tax (etc. etc.) and it can, thru threats, intimidation, blackmail, plunder the system to some degree, for some not-too-large amount. The Mafia exists only because it is a minor parasite on the present system. It cannot take over or become too powerful or organize, as then its profits would evaporate. So it never tries to do that and puts up even quite cheerfully with Gvmt. crack downs.

    The finance industry, on the other hand, sees itself as so powerful that it is ready to destroy the ecology it exists on, thru insane hubris or the idea that profits can always be made, with its leaders assuming a halo of invulnerability (Ranch in Patagonia with prime beef, fresh water, sex slaves, to throw up an image) which is a sort of protective mental shield.

    Failure need never be paid for in any real sense (beyond being thrown out with a good bonus) — criminality and risk-taking are marks of superiority, the Uber Mensch who is above it all. That applies to ‘rogue traders’ and established elderly gents with supposedly
    impeccable CVs….

    And if all breaks up – those are the risks, the threat only serves to push the coke or amphetamine laced lower personnel to further daring actions.

    1. The sick reality of Greenspan’s hero Ayn Rand’s vision of the free individual in a free society promoting rational egoism over altruistic ethics. The Markets are God.The great modern inspiring myth of those Uber Mensch 3 Card trick traders.

      The present day Pardoners and Summoners of the modern Canterbury Tales…

      “Two characters, the Pardoner and the Summoner, whose roles apply the church’s secular power, are both portrayed as deeply corrupt, greedy, and abusive. A pardoner in Chaucer’s day was a person from whom one bought Church “indulgences” for forgiveness of sins, but pardoners were often thought guilty of abusing their office for their own gain. Chaucer’s Pardoner openly admits the corruption of his practice while hawking his wares.[30] The Summoner is a Church officer who brought sinners to the church court for possible excommunication and other penalties. Corrupt summoners would write false citations and frighten people into bribing them in order to protect their interests. Chaucer’s Summoner is portrayed as guilty of the very kinds of sins he is threatening to bring others to court for, and is hinted as having a corrupt relationship with the Pardoner.[31] In The Friar’s Tale, one of the characters is a summoner who is shown to be working on the side of the devil, not God.[32]..”
      http://en.wikipedia.org/wiki/The_Canterbury_Tales

  8. Having observed events over the last four years as an interested onlooker, I’d like to put an idea to David and the regular posters on this forum as a potential way out of the crisis:

    How about a ban on currency convertibility for speculative purposes and only restrict this to trade and productive investment (however we may define this point). This would prevent speculative attacks and hot money flows on national currencies (as China and others have done) which, after all, is what all national governments ultimately fear?

    According to Helleiner’s ‘Nation States and the Re-emergence of Global Finance’ the first post war moves to full currency convertibility coincided with the first major economic crises and recessions of the post war period from the 1960s onward. The last currencies to be made fully convertible in major industrial powers were the last to experience major recessions, devauations and re-evaluations – West Germany, Japan, South Korea. This, among other policies, also allowed them to become today’s industrial giants.

    This has got to be the main reason why China’s economy hasn’t slumped yet after a massive building program of infrastructure that now lies unused – in effect, through limiting convertibility and currency speculators on the Yuan China has successfully ‘hobbled’ the money markets malign social influence in the interests of immediate social human need.

    Then we can think about taking away monopoly control of the creation of credit from private banks (reinstitute the ‘corset’ of the 1960s which placed strict limits on credit creation) which many of us support on this forum and give it to a national investment corporation for public projects etc rather than leaving it open to the markets.

    Is there an ethically legitimate argument for allowing currency speculation to exist and destroy national economies – I can’t think of one. Otherwise I fear we have 10-20 years of stagnation on our hands.

    I can’t think of any other way out of this slump.

    What do you think?

    1. Hello Penny Bloater,
      Sorry for the delay replying.
      I agree with you that currency speculation is a blight. One can make the argument for some trading in currencies as teh only way of valuing them in a floating currency system. A simple way of discouraging specualive trading is to simply make it less lucrative. A transaction tax would work.

      The bank lobbyists will bleat about loss of profit etc but it is just bleating.

      Certainly we do have to take teh power of creating money out of thin air away from the banks. But it is easier to say than to do. The banks ‘create money’ – inflate teh money supply actually by inflating teh supply of credit. When they make a loan. You can restrict this function by making banking full reserve whch would stop fractional banking dead.

      Or you can stop short of this and simply restrict teh amount of credit they can create by applying laws and limits to leverage. This was teh situation from teh Great Depression until around 2000 when the limits were lifted first in Europe and then in the US. This lifing of leverabge limits was a major component in the creation of the crash.

      Over all what is most frustrating about our present situation is that there are steps which could be taken which would do a great deal to prevent any repeat, and they are both clear and achievable. Achievable in the sense of able to be done with the political will in place. What prevents us at present is the fact that our political system is no longer fit for purpose.

      First all sides of our poitical system have become intellectually captured by a financial view which has failed. Even if it had not failed it is dangerous when one diea captureds the whole debate.

      Second, there is abundant reason to look suspect that many of those who join the cry of ‘There is no alternative’, do so not because they have thought about it, but because the presnt system, diasterous as it clearly is for the many, benefits the few and those in charge are ‘the few’.

      It is my personal feeling that if we have not passed the point at which civilized debate and change ceases to be a possible route to change, then we are very close to it. At some point those with vested interests in the status quo will not and feel they cannot reverse without facing catastrophic losses themselves. In that situation the ruling elite nearly always prefer to see Rome burn, and plan to escape the conflagration, rather than share their power and wealth in an attempt to solve the situatoin for all.

  9. I cant speak for the bond market but you are dead right on the stocks …the algo bots making trades at thousands of times a minute are destroying the stock market for the average investing punter. Hopeful investors used to find a likely company with prospects and be able to make money if or when the company found oil. But now the bulletin boards of popular AIM oil explorer “not for widows and orphans” share punters are full of market manipulation stories, paranoia about pump and dumps and high speed trading playing the SP like a violin. Meanwhile the City free papers are full of adverts for spread betting to lure in the chancers.

    Capitalism it seems is eating itself. The old justification of investment in a company’s future is overlaid with huge amounts of pure casino gambling.

    But as for bonds wont banks just get their taste for risk buying back into Italy and Spainish bonds at what are still very high rates…? Or is that just too risky to sell to their oversight committees even with the ECB?

  10. To Pat Flannery,
    I do not advocate a Gold STANDARD , Pat. That has been tried as per the Bretton Woods agreement, 50-71. and was not successful.
    What I was saying is that ,when fiat currencies become hyper-inflated , the only true measure and preservation of wealth lies in something solid ,ie. Land, Gold.Silver etc.
    I believe this is why this crisis is so long drawn out. The banks are making a wealth grab, via bullion, privatisations of sovereign utilities. Electric power generation.gas,water ,transport. etc.
    This is why the screws are on Greece, Ireland,Spain etc. This is the ongoing financial Coup de’tat of nation states.

    1. That’s pretty much my take on it though I’d say it’s far less about gold and much more about land/property/commodity. This is money that wants to earn rent and the best way to do that is to own what everyone needs.

      Once they have enough(if that’s possible), or the system impodes, they don’t care about having to action massive write offs, restart, and all that. Because they’ll have the assets and we’ll all be paying them rent.

      By they i’m referring to the mix of wealth holders and the decision makers that are either one and the same or the latter are in the pockets of the former. They are quite happy to see depravation on a tremendous scale in order to build their financial fortresses. To be fair ‘happy’ probably isn’t the right word, these are sociopaths and they just don’t care, probably don’t even give it a thought.

  11. I found this site today, Gladstones Library. its on my list now of potential week end breaks,

    This blog on what Gladstone might have made of the financial cris led me to the site. Actually the Ruskin quote.

    David Griebers debt the first 5000 years is included in the collection and some Gsalbraith still looking at the index.

    Anyway I thought it might appeal to some of Davids regulars too.

    Have a lovely Sunday.

    Roger

    http://www.gladstoneslibrary.org/capitalismcollection/

  12. I should qualify that (!)

    There needs to be a meaningful way to express our exasperation, and voting for a MEP simply isn’t it. The Zeitgeist movement might be a bit wacky/culty, but they think big, way way outside the box, and that is the kind of approach we need, IMHO.

    A “big bazooka” approach, to quote that vacuous, cretinous excuse for a human being.

    The system is absolutely gamed, the banks create money and we get upset when some of their wackier greedier schemes go wrong – so what? The bottom line is America will go to war with anyone and even the Chinese are wary of that – hence the dollar’s reserve currency status. They won’t give that up without one hell of a fight.

    My own view is that we should challenge the legitimacy of money creation by the banks in the courts – there is no consideration in any conventional “loan” – the bank has not exchanged anything of value by creating credit on their accounts.

    Jerome Daly vs First National Bank of Montgomery. It has been done before…

    1. The Dakly case is interesting I have read the various transcripts un happily it is a small case that was comprehensively killed as any sort of precedent by a more senior court.

      There are some bigger cases coming together b’now in the States and in Scotland.

      HGere are two links for starters. I am myself in touch with the Scottish law firm examining a case I have with the
      UK ombudsman with a bank that is being chaklwenged for shabby practices in Scotland.

      http://www.nationalmortgageinvestigation.com/banks-dont-lend-money

      http://www.mbmcommercial.co.uk/financial_services_disputes_blog?id=112

      I also have been in touch with Ben at positive money

      http://www.positivemoney.org.uk and the institute of public finance in thev US

  13. Thanks for the links Roger, appreciated.

    I’m aware the Daly decision was subsequently over-ruled and that is no great surprise given its implications.

    Has anyone else read “The Grip of Death” by Michael Rowbotham? I gather it’s a key text for Ben at Positive Money.

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