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The Secret Sauce: A Knowledge Advantage

  
  Education
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“What is your secret sauce?

Click here to find out more!

No. 1, it’s possible, especially in inefficient markets, to gain a knowledge advantage. By definition, an inefficient market is one where hard work and skill can pay off. We can also control our psyche and emotions so that we don’t make the human mistakes that are so common. Of course the other thing is we have a philosophy of controlling risk. So that doesn’t necessarily make us the winner rather than the loser in the transaction, but it increases the probability that we engage in transactions of the sort that we and our clients want.”

There are a few ways to access better knowledge in an inefficient market.  You either have better sources, illegal information or you just simply have a superior understanding.  That’s why I always emphasize the importance of a sound top-down approach.  If you don’t understand the monetary system you’re more inclined to make mistakes in micro managing your portfolio.  You make silly mistakes like misunderstanding how the Fed operates, how QE works, how fiscal policy impacts the economy, how bond auctions works, etc etc. Misunderstanding these important macro functions has resulted in endless predictions for hyperinflation, rising bond yields, falling stock prices, etc.  But if you had a sound understanding of the system – if you had a better understanding – you sidestepped all of these predictions that were clearly wrong if you understood how the system works.

You don’t need to cheat or steal to get better information or knowledge.  Sometimes it’s a matter of putting in the effort to obtain it.

Greece 10-Year Bond Oversubscribed

  
Analysis, Economy, Education
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LONDON—The Greek government’s offering for a 10-year bond attracted around €14.5 billion ($19.86 billion) in bids and the books have closed, the head of the country’s debt-management agency said Thursday.

“We are very happy with the bid because the re-entry into the market is always challenging. It went very well,” Petros Christodoulou said. The government aimed to raise €5 billion from the offering but it was heavily oversubscribed.

The offering—timed to coincide with an improving market for Greek government debt in the wake of tough budget cuts announced a day earlier—is a move to help cover short-term funding gaps.

Lead managers are Barclays Capital, HSBC Holdings, National Bank of Greece, Nomura and Piraeus Bank SA, one of the lead managers on the deal said.

Adjusted price guidance for the new issue is now 3.00 percentage points over the benchmark risk-free mid-swaps rate, reflecting the market’s demand for a premium.

An issue size of €5 billion for Greece’s new 10-year bond “would be a good result” but not enough to fully cover Greece’s near-term funding needs, said UniCredit strategist Luca Cazzulani.

Greek bond yields in secondary markets moved up on the news. The yield spread between Greek 10-year government bonds over equivalent German government bonds widened to around 3.03 percentage points from Wednesday’s close at 2.92 percentage points.

The cost of insuring Greek sovereign debt against default also rose slightly. The price of Greece’s five-year sovereign credit default swaps increased to 3.05 percentage points, from 2.945 percentage points, representing a €10,500 increase in the annual cost of insuring €10 million of debt for five years.

Greece, the European Union’s most indebted country, will face its biggest challenge in April and May this year, when more than €20 billion of debt comes due for repayment. So far, Greece has raised €13.6 billion via the sale of Treasury bills and an €8 billion bond syndication, the Public Debt Management Agency said. Greece plans to issue a total of €54 billion in debt this year.

While Greece has been encouraged by its ability so far to raise funds from public markets, the cost of issuing new bonds remains high. The yield on 10-year Greek government bonds has risen to as high as 3.40 percentage points over equivalent German bunds, from low-double-digits before the start of the financial crisis.

Greece’s latest set of spending cuts and tax increases aims to cut the country’s gaping budget deficit by €4.8 billion or about 2% of gross domestic product, and follows pressure from the European Commission, the EU’s executive arm, which said last week that Greece’s previously announced measures weren’t tough enough.

Greek officials worry that its budget cuts won’t be enough to restore investor confidence in Greek debt unless the government receives detailed financial backing from the European Union.

Greek Finance Minister George Papaconstantinou said in Athens Wednesday that if Greece can’t rule out turning to the International Monetary Fund for assistance if Greece needs help and euro-zone partners won’t give it.

IMF financing would need approval by European countries on the IMF’s board. Most euro-zone governments have made clear they want a European solution to the Greek crisis rather than IMF intervention, to show the euro zone can handle its own problems.

Greece is rated A2 by Moody’s Investors Service and BBB+ by Standard & Poor’s Corp. and Fitch Ratings Inc.

Rogoff Sees Sovereign Defaults

  
Economy, Education
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rogoff01

Feb. 24 (Bloomberg) — Ballooning debt is likely to force several countries to default and the U.S. to cut spending, according to Harvard University Professor Kenneth Rogoff, who in 2008 predicted the failure of big American banks.

Following banking crises, “we usually see a bunch of sovereign defaults, say in a few years,” Rogoff, a former chief economist at the International Monetary Fund, said at a forum in Tokyo yesterday. “I predict we will again.”

The U.S. is likely to tighten monetary policy before cutting government spending, sending “shockwaves” through financial markets, Rogoff said in an interview after the speech. Fiscal policy won’t be curbed until soaring bond yields trigger “very painful” tax increases and spending cuts, he said.

Global scrutiny of sovereign debt has risen after budget shortfalls of countries including Greece swelled in the wake of the worst global financial meltdown since the 1930s. The U.S. is facing an unprecedented $1.6 trillion budget deficit in the year ending Sept. 30, the government has forecast.

“Most countries have reached a point where it would be much wiser to phase out fiscal stimulus,” said Rogoff, who co- wrote a history of financial crises published in 2009. It would be better “to keep monetary policy soft and start gradually tightening fiscal policy even if it meant some inflation.”

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Another Massively Interactive European Chart

  
Analysis, Economy, Education
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With all chart porn these days focusing on Europe, the Economist may have outdone itself with this combo set of all key financial and economic statistics for European countries.

Here is the caption provided by the Economist:

 
 

EUROPE is damned if it does and damned if it doesn’t, fiscally speaking. Fears that Greece’s debt crisis presage similar episodes elsewhere in the euro zone—notably in Portugal and Spain—have sent sovereign-bond yields for several southern European countries drifting higher, and have fuelled fears about the exposure of Europe’s banks to indebted governments. Attempts to rein in the public finances may calm bond markets but they also risk weakening growth, which makes life more difficult for exporters in places like China and America, and spells trouble of a different kind for the banks.

The interactive graphic above underlines some of the problems that the European economy faces. In 2009 only Poland of the 27 countries in the European Union managed to record positive growth. Although many countries have now returned to growth, it is generally anaemic. In many countries unemployment rates have not risen as much as you might expect given the depth of the crisis—there are times when making it hard to fire people has some advantages. But the flipside of labour-market rigidity is that the unemployment rate may be “sticky”, because firms have less need to hire as recovery takes hold. That will keep demand growth subdued.

Mediocre growth rates are more of a problem for some countries than others. They spell particular trouble for those that have high levels of debt and that do not have the option to devalue their currencies. That explains why Greece was first to lose the confidence of the markets: with a public-debt-to-GDP ratio of 115% and a budget deficit of 13.6% in 2009, it was the euro zone’s outlier country. Other countries are now scrambling to avoid Greece’s fate. Ireland, another heavily indebted euro-zone member, embarked on austerity early; Portugal and Spain, whose problems stem as much from levels of external and private debt as from government borrowing, have had their hands forced. Others still are pruning before the markets exert real pressure: Britain’s debt has the longest maturity of any EU member but it is still aiming to get its finances in order within four savage years.

Full chart after the jump

Lessons from Lehman: ‘Don’t Panic’

  
  Education
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WEEKEND-READINGWarren Buffett is not called the ‘Oracle of Omaha’ for nothing.

‘Be fearful when others are greedy, and be greedy when others are fearful’ is good investment advice looking back at the turmoil of September 2008.

The demise of Lehman Brothers five years ago marked the start of a truly fearful six months for investors. Only in March 2009 had risky asset prices fallen far enough for bargain-hunting buyers to begin picking up equities and lower-quality bonds.

On the anniversary this weekend of Lehman’s collapse, those investors who stayed the course in equities and junk bonds can afford a smile. The S&P 500 index has gained 50 per cent.

They have done well, though alternative bets made in 2008, such as buying a New York City taxicab medallion, have done even better. (more…)

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