Central banks and the next bubble
Central bank balance sheets are expanding at what some say is an alarming pace. Can this cause the next bubble to form and burst?
JP Morgan estimates G4 (U.S., Japan, euro zone and Britain) balance sheets are now around 24% of GDP combined, with around 11% of GDP comprising bonds held for monetary purposes.
“The recent pace of balance sheet expansion is the fastest since the immediate aftermath of Lehman, largely down to the ECB. The increased BOJ purchases, more QE in the UK, and 200 bln euros upwards of increased ECB lending from this month’s LTRO together point to a further $600bln+ rise in G4 central bank balance sheets this year, to around 26% of GDP.”
Outside G4, Switzerland is a country which saw a massive expansion in its central bank balance sheet. And because of its huge holdings, its balance sheet has been very volatile.
The Swiss National Bank suffered a loss of 21 bln francs last year — its biggest ever — due to currency interventions to weaker the Swiss currency. It expects to swing back to a profit of 13 bln francs this year.
Its acting chairman Thomas Jordan himself admitted: “Our profits have been and will be very volatile … because our balance sheet is four to five times as big as it was five years ago.”
Euro periphery: Lehman-type shock still on cards
.jpg)
The passing of Greek austerity measures is fuelling a rally in peripheral debt today with Italian, Spanish and Portuguese yields falling across the curve.
However, one should not forget that peripheral economies are still under considerable risk of becoming the next Greece — rising debt and weak economic growth pushing the country to seek a bailout — as a result of tighter financial conditions.
Take this warning from JP Morgan:
Financial conditions have deteriorated far more in peripheral Europe than in the core. The drag from this on peripheral GDP is akin to that seen following the Lehman crisis.
JP Morgan uses analysis based on quantifying the impact of financial market developments and monetary policy actions on economic activity. The main variables the analysis uses is: the three-month LIBOR rate, the yield on investment grade corporate bonds, the spread of high yield corporates over that of high grade, real equity returns, the change in the real exchange rate and bank lending standards for businesses as reported in loan officer surveys.
According to JP Morgan’s calculations, the 838 basis-point rise in the peripheral HY spreads implies a drag of -2.2 percent of GDP relative to what it would otherwise have been, had the HY spread unchanged.
from Summit Notebook:
Time private bankers got professional
It's hard to imagine that a banker who represents multimillionaires would be anything but professional - but a top executive at a leading global bank thinks that's precisely the wealth management industry's problem.
"There is so much mediocrity in the industry we have to raise the bar here," said Gerard Aquilina, vice chairman of Barclays Wealth, at the Reuters Global Wealth Management Summit in Geneva.
To Aquilina's way of thinking, private bankers need the same "institutional rigor" as investment bankers in the way they operate. To this end the bank is looking to pursue only top-quality hires.
"Our strategy is not to be the hoover that comes and hires willy-nilly, we want to be much more selective," said Aquilina -- perhaps an ironic view given Barclays acquired thousands of investment bankers from the ashes of the fallen Lehman Brothers last year.
But he and his colleagues are so sure of their position that he said they are working on developing MBA-level courses with some unnamed top universities on private banking, especially as they see fewer and fewer interns turning up their noses at the prospect of a three-month rotation in the private banking shop.
from From Reuters.com:
How has the credit crisis affected you?
The demise of Lehman Brothers a year ago sparked a collapse in financial market confidence and set of a series of reactions that have spread hardship into the four corners of the globe.
Reuters News has charted the key events and their impact in "Times of Crisis" -- a major new multimedia production on Reuters.com. (See it here.)
We'd like to add the experiences of Reuters readers. So, if you or your family have been affected by the events of the past year then use the comments section below to share your story.
I had been a college graduate for 3 months when Lehman collapsed. Since then, I’ve gotten a better job with better wages, improved my living standard, and paid off the credit card debt I accrued in college.If the recession had come a year or two later, I probably wouldn’t have been as cautious starting out and I would be feeling the effects more than I am.
Americans going abroad again
U.S. investors have started to go shopping abroad for assets for the first time year.
According to UBS, the proportion of mutual funds’ portfolios held in foreign assets rose to 24.5 percent in May from the 23 percent level they kept until then.
From 2002-2008 U.S. mutual funds sharply increased their exposure to overseas assets, going as high as 26 percent in mid-2008 from 12.5 percent. After the collapse of Lehman Brothers they have cut back to 23 percent.
“U.S. investors have begun to return to overseas markets as risk assets recovered in Q2 2009. This has undermined the dollar. But if market sentiment becomes risk averse again in H2 2009 then US investors are likely to curb their dollar diversification once more,” the Swiss bank says in a note.
from MacroScope:
Who do you blame for the credit crisis?
Greedy bankers are routinely blamed for the credit crisis but one British-based poll of -- well, financiers -- spreads the blame more widely.
Gary Jenkins, head of fixed income research at Evolution Securities, wanted a more specific scapegoat and ran a poll of about 200 mostly fund managers and investors asking them to pick their credit crisis culprit. Former U.S. Federal Reserve Chairman Alan Greenspan was the clear winner, picking up 35 percent of the votes. He has been widely criticised over the past year for low interest rate policies that helped fuel the credit boom.
Former U.S. president Bill Clinton also figured quite prominently with about 10 percent of votes, and British prime minister Gordon Brown got quite a few.
Some bankers were singled out, including Fred Goodwin, former chief executive of Royal Bank of Scotland and Richard Fuld, the head of collapsed Lehman Brothers.
In a related article in Euroweek, Jenkins also had a unique culprit -- Bill Gates of Microsoft. None of the maths behind structured credit could be done without spreadsheets like Excel, Jenkins reckons.
So who do you think is to blame?
(Reuters photo: Kevin Lamarque)
Reuters Funds Summit: A financial Chernobyl
The mood in the asset management industry is ”very cautious, very realistic but not pessimistic” after the financial industry’s “Chernobyl” of Lehman Brothers collapse, according to Europe’s fund industry chief.
Peter De Proft, director general of the European Fund and Asset Management Association (EFAMA) told the Reuters Funds Summit, that the mood was now more optimistic. At least, certainly more so than 4-5 months ago.
Lehman Brothers, though, was Chernobyl. ”Boom, it was the atomic bomb,” De Proft said, adding that many in the financial industry, including asset managers, appeared “shell-shocked” at the time.
Now he sees more optimism and backs it up with preliminary EFAMA data showing net inflows into investment funds in January, reversing the trend of outflows seen in the last quarter of 2008. Not huge, but positive, he says. February, meanwhile, was “presumably positive or break-even.”
But De Proft was under no illusion that it will take time for investors to venture back in big time. Then again, if you were a fund manager, what else could you bee but optimistic?
(Reuters photo: Andrew Winning)
With better regulation will come safer investing for all.
Michael Nolan Raleigh
Bowling for Whistleblowers
Attention Wall Street whistleblowers: your banking job might be at risk, but here’s your shot at Hollywood stardom.
The Academy Award-winning filmmaker is looking for “brave” financial industry insiders to help him make his next film which will focus on the financial crisis – or what Moore calls “the biggest swindle in American history.”
“Based on those who have already contacted me, I believe there are a number of you who know “the real deal” about the abuses that have been happening. You have information that the American people need to hear, “ Moore said on his website.
He called on those working for banks, brokerage firms or insurance companies to “participate in the telling the greatest crime story ever told” by contacting him.
The director, who took on the gun lobby in Bowling for Columbine in 2002, the Bush administration in his controversial 2004 documentary Fahrenheit 9/11 and the U.S. healthcare system in his 2007 polemic Sicko, pledged to protect the identities of those who step forward.
Moore says the unnamed film – currently in production – will shed light on the “abuses” that have led to crisis, which has claimed Wall Street giants Lehman Brothers and Bear Sterns and prompted a government bailout worth hundreds of billions of dollars.
“I just can’t say much right now. I’m sure you can understand why. One thing I can tell you is that you’re gonna like this movie when I’m done with it,” he says.
I just found out today that my bank has charged me a total of $115 since Feb 2007 for not having automatic savings. When I cancelled automatic savings, they did not mention there would be service charges every month. I cancelled the automatic savings because they would transfer money out of my checking, putting me in the red just before I had to pay bills, and then they would charge me for the overdraft they did.
The banking industry is diseased, and it needs to be dealt with.
Going back to Quakers?
In these troubled times, go back to basics.
Theo Zemek, AXA Investment Managers‘ global head of fixed income, says investors should adopt “Quaker investment policies” – sober and safe investment strategies that can be explained to their grandmothers.
“Anyone who utters the word ‘hedge’, after all these CDS (failures), ought to be taken out and be shot,” the 25-year markets veteran told a media briefing.
“This is the scariest market I’ve ever seen in 25 years. The world of complex instruments, credit guarantees… That world is very much an ancient history… It’s a darn tough market. Who is left standing among our counterparties?”
Zemek said she overheard commuters on the train discussing the new preference for simplicity in investment strategy and citing Goldman Sach’s chief global economist Jim O’Neill as saying: “Anyone who thinks they understand what’s going on is guaranteed to be an idiot.”
AXA IM’s parent company AXA said last week that it has a non-material equity interest and credit exposure in Lehman Brothers (collapsed) and AIG (bailed out).
Last wisdom from Lehman Brothers
“Dear readers, let us begin this week’s missive by acknowledging its partial incompleteness. For understandable considerations, there are some capital market situations that we cannot discuss. We thank all our readers for their support and look forward to continuing to provide you with timely analysis.”
This is how Lehman Brothers’ strategists began their last ever weekly research note, published on Saturday – only two days before the U.S. investment bank collapsed.
In the 146-page research, Lehman strategists argued that bonds are performing well in September thanks to rising risk aversion and financial institution uncertainties.
“September already shapes up as a splendid month for bonds, thanks to the usual seasonal elevation in risk apprehension accompanied by special amplification through financial institution uncertainties,” wrote strategists at Lehman.
Ironically, Institutional Investor magazine named Lehman Brothers as its top All-America fixed income research team for a ninth straight year on Tuesday.
“September has been a prosperous month for credit risk shorts,” Lehman strategists noted. “With third-quarter earnings for some financials coming out this week and the rest of major corporates over October, with the global economic outlook wilting, and with a hyper-risk sensitive capital market regime in effect, we will maintain our predilection toward short credit exposure.”
Little did they know that their own bank’s collapse would reinforce their argument. Investors dumped risky assets across the board, including equities and credit, sending government bonds sharply higher as Lehman filed for bankruptcy protection and Bank of America agreed to buy another Wall Street giant Merrill Lynch.
Will Lehman’s subsidiary’s be dragged into their bankruptcy?, specifically, Aurora Loan Services?
