The euro may be riskier than you think

Alasdair Macleod – 27 February 2015

Finance ministers in the Eurozone appear to have had a free lesson in game theory from Professor Yanis Varoufakis, the Greek finance minister. At the time of writing Greece’s future in the Eurozone is far from secured, but it appears that Greece has achieved something.

He gave his fellow finance ministers a deal they dared not refuse, though it still has to be ratified by some parliaments, including Germany’s today. Varoufakis almost certainly understands that the Eurozone is in a weaker position than the bureaucrats and finance ministers themselves believed. It was important for them to become aware of this reality, which was central to his approach. It appears that under the Lisbon Treaty, Eurozone states cannot expel Greece: she can only leave with everyone’s unanimous agreement, including her own. And they probably didn’t realise that Continue reading The euro may be riskier than you think

Global economic outlook – update

Alasdair Macleod – 20 February 2015

As recently as 9th January I wrote an article suggesting that 2015 would turn out to be the year of the slump. The title ended with a question mark, but today we are closer to removing it in favour of a definite statement.

In recent weeks, it has become clear that key economic blocs are indeed heading for a slump, including but not limited to China, the Eurozone and Japan (allowing for the distortions of her aggressive money-printing). Between them they account for nearly 40% of global GDP. We know this because of the collapse in commodity prices, which is reflected in a global shift of preference in favour of the US dollar. Continue reading Global economic outlook – update

Gold And Russia

Gold & Russia
Article on

18 February 2015

In late November I wrote an article suggesting that it could be in Russia’s interest to put the rouble on a gold exchange standard. The salient points were the Russians could easily make it stick, inflation would be tamed, and importantly Russia would divorce herself from the currency war being waged against her by her NATO enemies. The immediate consequence of such a move would almost certainly drive gold prices higher, if only because bullion banks would be forced to reconsider their short positions, in the knowledge that Russia would probably become a more aggressive buyer to build her reserves.

This move would be very good for Russia, if you understand Austrian economic theory, but would be judged reckless by mainstream macroeconomists. So it is obviously a prerequisite that President Vladimir Putin’s advisers would have to lean strongly towards sound money theories, if they are to advise such a move. Whether or not this is the case we do not know; the only thing we can do is look at the evidence and try to see things fr Continue reading Gold And Russia

Unemployment and groupthink

Alasdair Macleod – 13 February 2015

On Friday 6th February the American Bureau of Labor Statistics (BLS) released its employment estimates for January, which being better than the market expected, caused Treasury bond yields to rise and precious metals to be marked sharply lower.

Earlier that week Jim Clifton, Chairman of Gallup wrote “The official unemployment rate as reported by the US Department of Labor is extremely misleading.”

His comments attracted notice, not least because Gallup is an independent company whose business is statistics. Furthermore, it is unusual for a senior business figure to criticise a government department so openly. His basic point is that if you are unemployed and have stopped looking for work in the last four weeks you are no longer classified as unemployed.
Furthermore if you perform a minimum of one hour of work in a week and are paid at least $20, you are deemed to be employed. And so on. Continue reading Unemployment and groupthink

Sovereign Bonds

Alasdair Macleod – 6 February 2015

Today’s obvious mispricing of sovereign bonds is a bonanza for spending politicians and allows over-leveraged banks to build up their capital. This mispricing has gone so far that negative interest rates have become common: in Denmark, where the central bank persists in holding the krona peg to a weakening euro, it is reported that even some mortgage rates have gone negative, and high quality corporate bonds such as a recent Nestlé euro bond issue are also flirting with negative yields.

The most identifiable reason for this distortion of free markets is bank regulation. Under the Basel 3 rules, a bank with sovereign debt on its balance sheet is regarded by bank regulators as owning a risk-free asset. Unsurprisingly, banks are encouraged by this to invest in sovereign debt in preference to anything else. This leads to the self-fulfilling second reason: falling yields. Central bank intervention in the bond markets through quantitative easing and commercial bank buying leads to higher bond prices, which in turn give the banks enormous profits. It is a process that the banks wish would go on for ever, but logic says it doesn’t. Continue reading Sovereign Bonds