Posts

Crypto-tulips

Image
Here is a very familiar financial bubble, in pictorial form:


And this is what it looks like, charted:



In those days, of course, tulips at least had to be able to flower. But things have changed since then.

There are three key stages in the lifecycle of a financial bubble:

The "Free Lunch" period. A long, slow buildup of price distortion, during which investors convince themselves that rising prices are entirely justified by fundamentals, even though it is apparent to (rational) observers that they are buying castles built on sand.The "This is nuts, when's the crash?" period. Everyone knows prices are far out of line with fundamentals, but they carry on buying in the irrational belief they can get out before the crash they all know is coming. Speculators pile in, hoping to make a quick profit. Prices spike. The "Every man for himself" period (sorry, FT, I couldn't find a reference for this one). Prices crash as everyone runs for the exit. This can h…

Asymmetric herding

Image
Ten years ago today, Chuck Prince, then chief executive of Citigroup, dismissed fears of a financial crisis. “When the music stops, in terms of liquidity, things will be complicated," he said in an interview with the Financial Times in Japan. "But as long as the music is playing, you’ve got to get up and dance. We’re still dancing".

He wasn't dancing for long. Less than a month later, the first bank failed. Over the weekend of 27th-29th July, IKB Deutsche Industriebank AG, one of Germany's key "Mittelstand" lenders, was bailed out by a consortium of German banks after credit markets refused to provide it with liquidity. The music had stopped. 
The reasons for IKB's failure are now all too familiar. Anxious to diversify beyond its traditional core market of German small and medium-size businesses, IKB had set up an SPV called Rhineland Funding Capital Corporation. Rhineland issued US dollar-denominated commercial paper, and invested the proceeds in…

The Worst Political Storm In Years

Image
A year ago, I attempted to look beyond the shock of the Brexit vote and its associated economic disruption, and see into the distant future. I saw a completely different political paradigm, though I could not discern its shape. And I saw a possibility that, like Hong Kong in 1997, the fears of economic disaster would prove baseless, and Britain would have a bright future, though one which I could not imagine. I called on everyone to try to make Brexit work:
Not for a long time has the future been so uncertain. In the short-term, there will be pain. But in the longer-term, the future could be exciting. I did not vote for this, but this is what my compatriots chose, and I accept their decision. So this is what we - collectively - have chosen. Now we must embrace it, fully. For only by committing to our post-Brexit world can we have any hope of making it work. While we hanker after the past, and try to find ways of hanging on to it, we remain condemned to a stagnant future. Risk is life…

When vultures cooperate

Image
Rather to my surprise, the Co-Op Bank has had a reprieve - well, perhaps more like a stay of execution. Even more surprisingly, this has come from what many would regard as a most unlikely source. The American hedge funds that rescued the bank back in 2014 are about to rescue it again, with a little help from their friends and relatives. "Vulture funds" are behaving most unlike vultures.

Four months ago, the Co-Op Bank put itself up for sale. Unable to comply with the capital plan agreed with the Prudential Regulatory Authority, and apparently unable to persuade its hedge fund owners to cough up any more funds, it tried to find a "white knight" - ideally, a bank with deep pockets and an interest in UK high street banking. There appeared to be several potential buyers: the TSB, Virgin and CYBG, the owner of Yorkshire Bank and Clydesdale Bank, were all cited as possibilities. But in the end, no-one was willing to take it on. The deadline for the sale came and went, …

The newly dreadful state of the Union

Image
Last Thursday's election was a shock. It was appalling for the Tories, extraordinarily encouraging for Labour and something of a "meh" for the Liberal Democrats and the Greens. And it was dreadful for nationalist parties. UKIP was completely wiped out, ending up with no seats at Westminster and a hugely reduced share of the poll. The SNP lost seats, and even Plaid Cymru did less well than it had hoped. Nationalism, it seems, is dying down. Well, in the UK, anyway.

Faced with a disastrous result, any half-decent party leader would step down. To his credit, Paul Nuttall, the UKIP leader, did exactly that. But not Theresa May. Dear me, no. In the last two days, we have discovered the lengths to which Mrs. May will go to retain her hold on power.

The Tories' desperate reach for power

Lacking an absolute majority, the Tories had no choice but to try to form some kind of alliance with another party. Their previous coalition partners, the Liberal Democrats - fingers still b…

A beautiful death

Image
My mother, Joy Cooke, died last Wednesday, 24th May, at the age of eighty-seven. It was a peaceful end. Beautiful, in a way.

Mum had been ill for a long time. She had vascular dementia, triggered by an accidental morphine overdose after an orthopaedic operation in 2013. She also had COPD, brought on by a lifetime of smoking. For the first year of her slide into the oblivion of dementia, she was cared for by my father. But in August 2014, after she became doubly incontinent and both physically and mentally frail, he had to admit that her care was too much for him. She went into a nursing home that specialised in the care of those with dementia. There she remained until her death.

I wasn't there when she died. But I had been to see her earlier that day, along with my father and my youngest brother, Tim. She was very weak: though she reached out to each of us in turn to hold our hands, her grip was feeble. Sadly, she who had smiled so much during the last four years had lost her abi…

Squaring the circle on immigration

Image
It had to happen. Amber Rudd, the Home Secretary, has refused to commit to a net migration target. Facing a barrage of complaints from the hospitality industry about potential staff shortages post-Brexit, Rudd appears to be softening the government's line. She told BBC Radio 5Live's Pienaar's Politics:
"My personal view is we need to continue to bring immigration down. I want to make sure that we do it in a way that supports businesses.” So what way might that be, then? After all, her boss is on record as saying she thinks net migration should fall to the tens of thousands. Currently, it is in the hundreds of thousands: according to the latest ONS statistics, net migration for 2016 was 273,000 (net inflow), of which 164,000 was from outside the EU. Even if immigration from the EU stopped completely after Brexit, it would not be enough to bring net migration down to levels Theresa May considers "sustainable". The UK would also have to impose much more dracon…