Global Investing

from Jeremy Gaunt:

Twisted Sister and the Federal Reserve

The Federal Reserve's "Operation Twist" has set the literary- and musical-allusion juices flowing.  It is all about the Fed selling or not rolling over short-term debt and buying long-term bonds instead in order to keep borrowing costs low.

But that is frightfully dull for economists, analysts and reporters trying to get attention for their work. So, so far we have heard:

-- "Let's Twist Again", a reference to the 1960's Chubby Checker record about the dance craze . Problem is that the second line is "Like we did last summer", and the Fed did nothing of the sort, launching plain old quantative easing instead.

-- Twisted Sister might be a contender, but the heavy metal band's big hit "We're Not Going To Take It" probably better descibes market reaction to euro zone debt-crisis policy.

-- "Twist and Shout",  a reference to the rock song covered by The Beatles, among, others.  This is better. "Well, shake it up, baby, now" could indeed be the clarion call from financial markets for the Fed to so something, almost anything. But "Come on and twist a little closer, now, and let me know that you're mine" might be going a little far.

from Jeremy Gaunt:

The unsyncopated rhythm of central banks

The European Central Bank is off and running with its tightening cycle -- raising by 25 basis points last week and talking in tongues enough to persuade markets that another hike is coming by July.  At the same time, the Fed -- despite some hawkish comments recently about QE -- isn't seen actually tightening for some time. Next year, actually.

Bank of America-Merrill Lynch is now wondering whether there is something wrong with this. " Surely one of these central banks is heading to a painful policy mistake? " it says.

Key to the question is the fact that U.S. and euro zone economics are not as far apart normally as one might think. Take growth, where there is a 0.6 positive correlation between the two across business cycles. Or inflation. The correlation there is even greater at a positive 0.75 over a whole economic cycle.

Guaranteeing against losses

It’s 2002 all over again. Wealth managers are scrambling to get their gunshy clients bank into the market by guaranteeing them there will be no losses, or at least only a few.  They did the same thing after the internet bubble burst.

With many investors still reeling from the November 2007 to March 2009 equities crash, capital protection or guarantee  plans are making a comeback. They generally work like this:

1) An asset is chosen, perhaps a basket of something.  2) A guarantee is ensured by investing a high percentage of the principal in paper — such as a discounted zero coupon bond — that returns all the principal by the end of the product’s life. 3) The remaining money from the principal pays for options up to the full amount of the principal on the underlying asset.

from David Gaffen:

Hair of the Dog Rally

The old lore about the best way to cure a hangover is with a few more nips of whatever it was you were imbibing the previous evening, commonly known as "hair of the dog."

The extension of this rally in stocks and just about every other asset identified with risk feels like a hair-of-the-dog situation. Between 2003 and mid-2008, easy flow of capital facilitated revelry in stocks, emerging markets, real estate, bonds, and high-yielding currencies.

REUTERS/Brendan McDermid

REUTERS/Brendan McDermid

When investors invariably lost interest in an asset class where valuations could no longer be denied, they flocked to another - witness $150-a-barrel oil, $1,000 gold prices, and crazy gyrations in wheat and soybeans, of all things.

from MacroScope:

Is the ECB driven by pride?

All the G7 countries outside the euro zone now have interest rates of 1 percent or less, prompting some grumbling in various financial quarters that the European Central Bank is being particularly stubborn in keeping its rates at 2 percent.

Now comes an interesting take on this from JPMorgan Asset Management which suggests the gap may have more to do with egg on the face than monetary policy. 

"There is a school of thought," it writes in a new note "that the ECB has been in a state of denial ever since it decided to raise rates last July.  An organisational behaviourist would observe a desire to preserve 'face' in the deliberate way by which the central bank has reversed its previous tightening stance."

UK economy — too gloomy to chart?

During a briefing in the London office of Societe Generale this week, Alain Bokobza, head of European Equity and Cross Asset strategy, handed out a booklet containing series of charts and graphs to explain the bank’s latest multi asset portfolio for the fourth quarter.
Chart
As he explained the outlook for the UK economy, a chart on UK growth was discreetly missing from the booklet.

“There’s no chart. It’s too gloomy to print it,” Bokobza told the participants.

Societe Generale sees inflation shooting below the Bank of England’s target of 2 percent over the next two years and has a bullish call on UK stocks as it predicts benchmark interest rates to fall to 3.5 percent in a year’s time from the current 5.0 percent.