James Saft

By James Saft

(Reuters) – Beware central bankers selling euros employing false analogies.

European Central Bank President Mario Draghi invited us last week to believe a string of unlikely things when he compared the euro’s travails to the supposedly impossible flight of the bumblebee.

The news that drove markets upward last week, however, was Draghi’s pledge to “do whatever it takes” to preserve the euro, wording that investors interpreted as flagging another round of bond purchases of weak euro zone nations in the secondary market.

Perhaps more striking was the following flight of entomology: “The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does,” Draghi told a conference in London on Friday.

“So the euro was a bumblebee that flew very well for several years. And now – and I think people ask “how come?” – probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis. The bumblebee would have to graduate to a real bee. And that’s what it’s doing.”

By James Saft

(Reuters) – With risks of a U.S. recession mounting, it is shaping up to be a hairy summer for investors.

The recent run of U.S. economic data has been disappointing, with weak employment and manufacturing numbers. The Economic Cycle Research Institute’s four-week moving average of its key gauge has now been negative for eight straight weeks, and consumer spending is down for the third month in a row. Moreover, and more crucially, government spending reductions pose a threat, both this year and next.

Secondly, the United States, at the very least, will have to contend with deflationary waves from Europe for the foreseeable future.

By James Saft

(Reuters) – It doesn’t get much worse than a state like, say, Spain, borrowing money through a lottery.

Well, maybe actually it does, as Spain’s state-owned lottery is seeking a 6 billion euro ($7.3 billion) loan from a syndicate of international lenders to fund its contribution to a bailout pot for cash-strapped regional governments.

That’s right, Spain’s solution to its debt problem is leveraging up its lottery. The only thing that would make this scheme more emblematic of Spain’s desperation is if the plan was to plow the 6 billion euros back into tickets for the annual Christmas draw — El Gordo — and live happily ever after on the winnings.

By James Saft

(Reuters) – After four years of failure, Italy and Spain have opened yet another pointless front in Europe’s war against reality.

Spain and Italy both introduced short-selling bans on Monday, reacting to steep falls in their stock markets and as confidence slipped in their ability to repay their debts, prop up their banking systems and tend to their economies while remaining within the euro currency.

While only a fool could look on recent history and say that markets must always remain untrammeled, the instinctual urge to suppress reality by stopping investors from acting in their own perceived best interests is usually counterproductive.

By James Saft

(Reuters) – It just might be time to rethink that global diversification strategy.

New research shows that the chances of a global stock market crash have increased 15-fold in the past two decades, implying a crash about every two years.

That’s something to think about, given that international diversification has long been sold to investors as the next best thing to a free lunch.

July 19 (Reuters) – If there is one thing more worrying than
leaders avoiding the truth it is when they start to speak it.

Unusually frank comments from German Chancellor Angela
Merkel on Wednesday came, within this context, as quite a
surprise:

“We have not yet shaped the European project in a way that
we can be sure that everything will turn out well, we still have
work to do,” Merkel said in an interview posted on her Christian
Democratic Union party’s website.

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

(Reuters) – Never mind that our largest banks are too big to be allowed to fail, they show every sign of being too big for investors.

By now anyone committing capital to the largest banks must do so with the understanding that they aren’t just risky and volatile, but often badly managed and highly likely to produce further scandals in which insiders gain at the expense of everyone else in the capital structure.

For bondholders, the largest banks at least come with an implied backstop from governments, but shareholders have no-one else to blame for their woes but themselves.

By James Saft

(Reuters) – Since 1994, according to the New York Federal Reserve, 80 percent of U.S. stocks’ excess returns occurred in the 24 hours before scheduled announcements by the Federal Open Market Committee.

There can be no single data point that better explains the madness of official monetary policy in its interaction with financial markets.

As explained in a recently updated paper by New York Fed economists David Lucca and Emanuel Moench, an enormous proportion of the equity risk premium – the extra return investors get for holding stocks – occurs in the window directly around Fed policy announcements.

By James Saft

(Reuters) – It may be better to think of the outbreak of negative interest rates as simply another weapon in an ongoing and global low-grade currency war.

It’s not that negative interest rates – under which investors pay for the privilege of lending money – are not driven partly by terrible growth prospects and a rising threat of deflation.

They are, but they are also the manifestation of monetary policy that says, in essence, to global investors: “don’t let the door hit you on the way out.”

July 5 (Reuters) – If you are not prepared for negative
interest rates, you may have left it too late.

The European Central Bank on Thursday cut interest rates by
25 basis points to a record low 0.75 percent, and ECB chief
Mario Draghi acknowledged afterward that actual negative
interest rates are part of his arsenal.

Following suit shortly thereafter the Danish central bank
cuts its own rates by 25 basis points, a move that took a
secondary certificate of deposit rate to -0.20 percent. That’s
right, some Danish savers will now be paying their central bank
for the privilege of lending it money.