[Premium] Daily commentary: On free money for the German government

Not a lot to say today but I do have a lot of links. The stories today are all the same, which is why I don’t have a lot to add.

One story to note is that the German government is now borrowing 2-year money at zero percent. This tells you that the Germans continue to benefit from Europe while the periphery does not. The prevailing narrative as to why this is so is because the Germans are frugal and conservative and the peripherals are not

Don’t Fight the Last War: Lessons from the Battlefields of Risk Management

Our brains are not calibrated to deal with the unexpected. Most of us believe we are good risk managers but in reality we are not. Most of us trust that risk can always be quantified and expressed through some fancy modelling whereas, often, it cannot. The world is not normal, yet universities continue to teach our young students the wisdom of Markowitz and Sharpe which brought us modern portfolio theory and, more specifically, the capital asset pricing model. Garbage In, Garbage Out, as they say. One of the fundamental assumptions behind modern portfolio theory is that asset returns are normally distributed random variables. The return profile of US equities fairly closely matches that of a normal distribution with the exception of large negative returns. They have come about more frequently than one would or should expect

Chart of the day: Life insurers won’t meet nominal return targets

JPMorgan recently performed a study on the composition of portfolios managed by life insurance companies. The study looked at the top 20 life insurance firms using their regulatory filings. These are the portfolios set up to support projected policy claims. The reason it is important to measure the composition and the changes in such portfolios is that life insurance firms manage $1.9 trillion in assets. Here is the current breakdown

[Premium] Housing bubbles in Austria and Germany?

Since the Great Financial Crisis began, Austrian house prices have zoomed at a pace well above the rate of inflation and the rate of rentals. The price action and other anecdotes make this sound suspiciously like a bubble. The same has happened in Germany on a lesser scale

Ludwig von Mises on Austrian Business Cycle Theory

Yesterday, John Carney at CNBC had a nice little post comparing Hyman Minsky’s Financial Instability Hypothesis with some of the thinking by Friedrich von Hayek behind Austrian Business Cycle Theory. John rightly points to this passage as “a theory about banking as an endogenous destabilizer of the economy.” And this certainly fits with the Minsky view of the world. von Mises takes the view that it is in having “bank notes without gold backing or current accounts which are not entirely backed by gold reserves, the banks are in a position to expand credit considerably”. Nevertheless, whether you believe the genesis of the credit expansion is Federal Reserve interest rate policy, animal spirits, fiat currency or fractional-reserve banking, what should be clear is that it is the lower rate of interest that creates the credit growth. The question is whether this lowering of rates is beneficial over the long-term. Vom Mises argues it is not

Bill Gross on his expectations for QE3 and more

The following transcript and video is courtesy of Bloomberg TV where Bill Gross spoke to Margaret Brennan today, telling her that he thinks the Fed will go Qe3, but that it will shift to mortgage backed securities when Operation Twist ends in June. He doesn’t limit his commentary to the Fed and QE3. There’s a lot more here. Enjoy

Global economic themes

Warren Mosler presents some macro economic themes that will have implications for the investing and business climate

Bill Gross on Risk Seeking Return and Safe Carry

Bill Gross is out with his monthly commentary. Because his points are central to the discussion of policy and markets right now, I am going to write this weekly newsletter commentary outside the paywall. The major question is about how to invest in a world that levers much more slowly in total, and can delever sharply in selective sectors and countries. Gross has some answers and I have some comments on the macro backdrop

It’s a Dead-Man-Walking Economy

In an interview with Louis James, the inimitable Doug Casey throws cold water on those celebrating the economic recovery

Interest rates at lows as long Kondratiev wave cycle comes to an end

Kondratieff waves are these supercycles that a lot of people have been talking about in the context of the great leveraging that led to crisis in developed economies. We appear to be at the end of one of these waves in bond markets according to some anaylsts

[Premium] More on financial repression

This is a silver level post which continues some thoughts from the daily commentary on the effect of low nominal and real rates. Martin Wolf’s latest commentary at the FT features prominently

On Spain, Spanish banks and Spanish local elections

The LTROs may have helped ease this year’s roll-over risk (Spain has met almost 50% of this year’s refinancing needs). But they have not substantially altered the market’s views of the risks of an eventual restructuring