Saturday, December 31, 2011

First Strike

During the Cold War was called "First strike" the first blow in a hypothetical nuclear confrontation because of its devastating power left virtually unresponsive to the enemy.

Among the strategies of Mutual Assured Destruction (MAD) is probably the most emphasizes the escalation in the number of nuclear weapons as only having a considerable number of vectors are able to maintain some capacity to respond to a "Second Strike".

Yesterday we had a "First Strike" economy in Spain. The battery of measures taken by the newly appointed Council of Ministers of Rajoy leaves little doubt of his character. Designed to demolish the morale of the Spanish middle class (which contributes about two thirds of effort), warning that only the "beginning of the beginning" (that is hard to use biblical phrases like this to warn the pseudo Apocalypse come), clears little doubt that had that election campaigns are purely propaganda.

In media can't advertise a product that has a different use than advertised or contains elements different from those contained in the explanation. We fined for misleading advertising. Instead, political parties play, without exception, to promise heaven and deliver instead, at least, purgatory.

Nobody doubted that further measures were needed to control the deficit, but we expected more. Those who have announced so far are more of the same, for it was not necessary to change the government.

Direct reading of that can only prolong the recession and have zero impact on unemployment in the short term, undermine the private consumption and reduce investment.

Have endeavored to give a horse a purgative to cure indigestion. They are using nuclear weapons and may not have learned that Von Neumann already predicted that conflicts with nuclear weapons summarized in equation 1 + 1 = 0.

Happy New Year 2012 (despite everything).

Wednesday, December 28, 2011

Efficient markets

A long time ago that financial markets are no longer efficient markets, to be should have a number of essential elements such as the participation of a large number of buyers and sellers, information handy to everyone and equal conditions access to markets and effective regulation to prevent conflicts of interest.

Regarding the number of buyers and sellers has been watching the gradual professionalization, which means a significant reduction in the number of independent investors as compensation for its replacement by an elite of managers. Investment funds, including hedge funds, are the current major players in the market function.

With regard to information has never been easier to access it and has never been so complicated as well, clearing the dust from the chaff, we have not only better information more noise. Something similar to what happens on television, the emergence of more channels has not only improved the level has increased crying.

In relation to equal access, the ever more numerous automatic trading programs (HFT) will fit trends, creating volatility where there is none to his orders, immense in amount and speed of execution, since they are machines those who shoot, make the most possible where there is nothing. So, ordinary mortals do not have anything to do about it, it is impossible to follow a trend because they are custom made machines.

The latter would not be so simple if there is background volume, but as it has driven out the small and medium investors, the game is between the tables of the large international brokers and managers who possess the technical and financial capacity to do so.

Regarding the law, what to say?, the collapse of 2007 seemed to gain momentum in this regard, but again everything has been watered down, the industry is always ahead of the legislator, is faster in the adjustment and pays much better .

Today the Ibex have fallen by 2% for no apparent reason except that you ignore a possible new war, this time with Iran.

The year has ended and the profitability of portfolios and funds will not improve in these four days left, to waste this year.

Large hands are always taken advantage of their privileged position, but now are moving earnestly, now just play with marked cards.

Tuesday, December 20, 2011

Closing the books

Approaching the end of the year and is not expected to unravel the enigma about the future evolution of Ibex. We reamain within the lateral pattern with the "good" news that the media seem to be holding and we could have an upward bounce during the first weeks of January to the area of ten thousand.

Indicators, nevertheless, remain positive, so for now we continue to neutral in the short to medium term. We will have to wait for the breakdown of some of the important areas.

The only truth is that the great lateral movement that the market started in 2009 remains virtually intact, but the encouraging news is that, if sustained, we are at the bottom of it.

Friday, December 16, 2011


Europe during the Middle Ages lived the scourge of the Inquisition, were times of religious persecution in which to prove that there wasn't demoniac was a difficult undertaking, since it had to survive the "judgments of God," torture by the which could only be saved by divine intervention, as it was physically impossible to save.

Something similar happens to us today, countries can not escape the inquisition courts organized by the rating agencies.

Just today, the governor of the Bank of France, also is a member of the ECB, has once again questioned the objectivity of the above agencies to the new threats that have been announced with great fanfare. Threats, curiously, raged just before the EU Summit and after the covenants laid down by them.

They are responsible for continually sabotage any progress, however minimal, putting everything into question. It also states that agencies have a bias because they "forget" that the UK is probably worse than their European counterparts former (the UK are not Europe).

This afternoon, S & P has also lowered the rating to 10 Spanish financial institutions, including CaixaBank, Sabadell and Popular.

Not content with the reduction has already warned that in the next four weeks can drive them to downgrade again.
What has changed in 4 weeks? Why does this leak? What do they know or do not know?

The following table represents the historical probability of default depending on the rating assigned.

As you can see is corporate and municipal bonds. The level of "investment grade" is lost below BBB.

The rating is assigned to CaixaBank A to S & P assigned a default rate of 3%.

Importantly, in the worst cases, the default rate for speculative assets, junk bonds, is 42.35%. Less than half, so not quite understand the panic generated by any redevelopment except that the problem is that nothing seems to add up.

Cumulative Historic Default Rates (in percent)
Rating categories
Investment Grade
Non-Invest Grade

 One last fact, these are the probabilities of the bonds issued by municipal entities and corporate that have historically had actually default experiences. In the case of countries, should we assign the same probability or is even smaller?

In Spain we are talking (AA-) of a lower default probability of 1.50%. Does it explain the spread is likely to be paid in relation to German bonds?.

Wednesday, December 14, 2011

Discounting expectations

We are now tuck the end of this year and the markets are not likely to change his sad journey. The lack of clarity in the European policy adds uncertainty rather than reduce it.

How is it possible that only four days after closing a highly controversial summit, Merkel is dispatched with a statement contradicting the statement? What are then the Summit?

Somebody say that they were mere expectations and forward markets to discount something that was not closed yet, but we are so in need of good news or perhaps, only in news.

We were only a few days without bad omens, we might think with a little more clearly, we might even stop to think.

Wednesday, December 7, 2011

Moral hazard

I would like to highlight several recent article, first is an interview with Juergen Stark, ECB chief economist resign shortly to disagree with the policy of the ECB. The other is the article published by Nobel Prize Stiglitz and a statement (rather than paper) from the French president Giscard d'Estaing on the visit to Europe by U.S. Treasury Secretary Timothy Geithner.

In the first, Stark, says basically that the ECB should ask for help since this is a moral hazard. If allowed to help governments "sinners" will not have his "punishment", so in the future does not adequately correct the imbalances. You may forget that they are special circumstances which have focused on certain countries to this situation, except for Greece, other countries have a growth problem, not debt. The markets believe that they are not paid for what they believe incapable of generating income to the debtor countries, not why your debt is exorbitant.

Stglitz reminds us that debt levels have been caused by an excess of liberalism in the financial markets, taking advantage of deregulation have failed to properly quantify the risks. The states have borrowed to save the financial system from collapse result of the greed (greed is good) of some and the overconfidence of others.

Giscard makes the counterpoint of classical Europe, that of the "grandeur". Who are the Americans to teach us? We know sink alone.

At a time when we discuss the role of the ECB contradistinction precisely with the Federal Reserve and the myth that expansion policies with recession generate long-term inflation. The curve of U.S. 10 years should be through the roof in that case. Why markets continue to provide cheap money to the Americans with current account deficits have? Trust ¿?.

How can we generate in the euro zone that trust?

Tuesday, December 6, 2011

Standard & Poor's

S&P (Standard & Poor's) as well as Moody's and Fitch Group are risk rating agencies. Develop and regularly publish the credit rating of stocks and bonds, as well the sovereign risk debt issuers. 
S&P is owned by McGraw-Hill group.

So far nothing that is not abnormal, we have a company that helps along with two other at investors to know what the compensation to be required for the purchase of assets issued by governments and businesses. Criteria are based on macro and micro. If an economy is in recession, produce less, consume less and therefore earn less in taxes.

Economists use elasticity to explain how prices are adapted to the reality of things. The government revenues are highly elastic, lowering the activity immediately moves to the amount that is collected, however, the other side of the equation, the costs are quite inelastic, there are some items that can be cut effectively with fairly easily but the most important, require a period of accommodation. These are measures that affect many people, teachers, doctors, policemen, judges to put the best known, who nevertheless have their rights. A quick measure is to reduce payroll, but the cut, not being excessively high payroll, is relative. The savings must come from the rationalization of the use of resources more efficient and requires planning, ie time.

On the one hand, the adjustment is immediate (income) and not the other (expense). As they are also measures that affect people, leaders are reluctant to take action based on assumptions. The optimum would take action before they occur is anticipated that the event will happen. If the measurement is taken when we're in recession, the first effect is procyclical, so that, finally, just what we wanted to avoid getting worse. When revenues fall and spending increases, and want to maintain the level of activity and welfare of an economy, there is debt, and that has a cost, interest rates; and one limit, the capacity allocated by the market's to return loans (based on ratings).

The strength of S&P and other agencies is the fact that their values ​​are taken into consideration by the governments themselves, by the monetary authorities and the markets to set interest rates. A greater risk of default higher interest rates required to economies.

S&P has warned tonight in a statement that in the coming days, if possible before the summit on december 9th, it will issue a new downgrading the ratings of all countries in the euro area and most likely will be downgraded to all.

What gives us a new note which tells us that things will go wrong (we know) and just the very issuance of the note will actually cause things to go worse (and we fear)?