Today, this column is going to deploy two devices that writers often use to make themselves sound very intelligent. The first is the quote from a great thinker, which has to be both witty and knowing; and the second is exposing the classical origin of a well-known word, which only a man of either great scholarship or access to Google can appreciate.
With the aid of these two tools, we will look at the recent giddiness surrounding the prospect for the Irish government bond market, which has had the green jersey brigade bellowing out the economic equivalent of Ireland’s Call with all the patriotic vigour of the West Upper ahead of a showdown with England.
So here goes. Don’t say you haven’t been warned.
At the height of the Great Depression, when financial markets were bouncing around all over the place in search of a trend, Keynes observed: “These markets can remain irrational longer than you can remain solvent.”
Keynes, the great philosopher, economist and stock market gambler, was trying to make some sense of the short-term moments of the market, which were rallying on precious little real positive data, and then selling off dramatically on – again – precious little negative data.
This meant that the markets back then were being driven by irrational sentiment. It was this sentiment which Keynes feared, noting that the rational investor, who assesses the data and tries to make investments based on real evidence, could go bust waiting for the irrational markets to validate his analysis. This is the uncertainty – or the essential hazard – implicit in the financial markets.
Armed with this observation, let’s look at the etymology of this word hazard. Hazard comes from the Arabic game ‘az-zahr’. This was a highly popular pastime of the Moors of Andalucia before the Christians decided to kick them out of Spain. (This ethnic violation robbed Spain of its Arabic and Jewish business acumen, condemning Iberia – after a brief heyday of post-colonial gold looting – to become the economic backwater of Europe.)
Az-zahr comes from the Arabic for bone because knucklebones were used as dice in one of the first rudimentary gambling games. Skeletal knucklebones were rolled – the first roll of the dice – and people gambled on which side would show up in the same way as we gamble the numbers of the dice.
So hazard or risk, the currency of financial markets, comes from the ancient Arabic game of knucklebone-rolling. There is always risk because this is what makes the financial world go round.
The financial world is driven by sentiment, which Keynes understood so well, and the optimism of a gambler is normally also a function of how his run is going and what the rest of the herd is doing. When things are going well, he gets greedy, believing that his run of good luck will last, and when things are going badly, the opposite can occur. He oscillates between greed and fear.
Now what happens when everyone is greedy and no one is fearful? Asset prices, particularly risky assets like Irish government bonds, rise, because traders believe that risk has disappeared. They therefore take positions in risky – rather than secure – assets.
What is happening in today’s global financial markets? Something odd is happening, because perceptions of risk have collapsed at a time when there is still quite a bit of economic uncertainty.
Let’s use two indices to quantify how the irrational markets are not gripped by fear but pumped up by greed.
The first is the VIX index, which measures how the markets think the next 30 days is going to pan out through measuring bets taken today on what next month is going to look like. It is widely used in markets to gauge perceptions of risk. What we see from last week’s reading is that the markets are behaving as if risk has being eliminated worldwide.
The VIX index spikes upwards when the markets are fearful and when there is lots of risk, and downwards when something happens which causes the markets to believe risk has been reduced.
In the past two weeks, the VIX index has fallen by an enormous 37 per cent. It is now at its lowest level since 1991. This means traders are taking risky positions driven by their belief that risk is low.
The other index is a lovely little index used by CNN money. It aggregates seven specific indicators of market direction from the momentum of shares themselves to the gap between junk bonds (like Ireland) and safe bonds to the ratio of put options (options to sell) to call options (options to buy).
It aggregates these together to assess whether greed or fear is dominating the irrational sentiment that Keynes warned might remain so long after the traditional investor goes bust.
And guess what? The index is now showing extreme greed. Last week saw the highest level of greed ever recorded by CNN. It means the market sees no risk anywhere, skies are blue and the future is rosy.
Why could this be? The answer lies in the behaviour of world’s central banks and their zero-interest rate policy. The New Year was trumpeted by the Bank of Japan saying it would print as much money as it needed to facilitate the government’s aim of raising the rate of inflation in Japan. The markets know this means trillions of surplus yen are sloshing around, so why not borrow these yen at zero interest rates and buy other assets which yield higher and pocket the difference?
All across the world, central banks are doing the same. The Fed and the Bank of England are printing as if it is going out of fashion while, in Europe, the ECB’s “outright monetary transactions” policy means the central bank will buy almost any government bonds which, in this market, is simply encouraging the gamblers to follow suit. Free for all.
What has all this to do with the recent high-fiving that the green jersey brigade has been giving each other over the fall in Irish bond yields and the flogging of some Bank of Ireland bonds?
It implies that the markets worldwide are buying anything that offers yield, and Irish bonds offer yields. But does it mean that the economy here is improving, as suggested by the spin put out by the government? Clearly not. When you roll up all debts, we are still the most indebted country in Europe. The fall in Irish bond yields is a function of the global greed indicator being close to maxed out.
When you stand back, you can see the main risk in financial markets today is that there is no risk.
The collapse in bond yields is like the peaking of the housing market here in 2006. It is driven by a tsunami of cheap money looking for a home, rather than anything real.
Given this, I am sure that Michael Hasenstab, the US fund manager who owns large sections of our bond market, is now thinking of selling. So expect more glowing utterances from him, amplified by the echo chamber of spin and media cheerleading here.
Every time you hear this chorus, you can bet your bottom dollar that Hasenstab is now thinking of selling, not buying.
“Shoulder to shoulder” and all that jazz.
David McWilliams’ new book The Good Room is out now.
I think I might just SUBSCRIBE!
Ah why not?
Sounds disastrous.
Hi David,
I love to read all your analysis predictions on various issues / events; I’m a great follower of yours and even went to see The Insiders at the Abbey which I enjoyed.
However, you have written in your articles many times about what you believed was the great success of the Argentine default. I would love to hear your explanation of the unfolding disasters in the economy in Argentina, did you get it wrong?
Hi David I sent you a p.m. on what looks to be a disturbing megatrend in a certain area of Irish sales for 2013. This, combined with the fact, FACT that there is less and less spending going on from Irish consumers for luxury and disposable income goods proves you are correct. Im still not so sure about more filthy fivers though. I think we will see the preverbial hitting the fan on or about Easter and a deepening crises will emerge after the shit deal to be announced on the debt. The sleepy finance minister will however be looking… Read more »
Hi David,
I am sorry but I am unable to deny myself the gratification.
It will all come down to who comes first the co%ksuc*ers (contemptible people) in the dail in paying back the promisery note or the irrumators (latin for one who forces another to give him oral sex) in the Troika in accepting a deal on Irish debt all puns intended!
http://www.etymonline.com/index.php?term=cocksucker
http://www.faz.net/aktuell/wirtschaft/europas-schuldenkrise/kritik-an-der-geldpolitik-gericht-stellt-ezb-klage-gegen-anleihekauf-zu-12021861.html
Citizens challenge against the ECB policy of unlimited bond-buying in crisis countries through the European Court of Justice. These sort of challenges have not been successful thus far, but maybe this one’ll stick. Anyhows, judgement due in 2 months, one to watch.
Why does the Market Love Us ? Its easy . They F*^K Us .
Government Bonds/ Promissory Notes are just like the ‘sub-prime bubble’. ? The actions of the irrational markets is an ‘artificial market ‘ ignoring the ‘ underlying economic fundamentals ‘.
Irish Sovereign Bonds are a ‘tick -the regulators box collateral’. ….with style and panache of an International President .
When does it all end ? – Soon – When ?….Soon
What happens then ? – Hyperinflation / Poverty
http://youtu.be/Su1fTP6w1rg
Gerald Celente
A week in money 6th January 2013
Good Morning all
A very happy Monday to each & every one of you
peace
Hi David Interesting article and I share your doubts about the longevity of the current rally. A few things maybe worth pointing out here: 1) The market also has doubts about the longevity of the rally (looking forward to full-year filings, US debt ceiling, Italian & German elections) so this is not really news. 2) The VIX is itself extremely volatile and you will note that an equivalent low was reached as recently as August of 2012. 3) The Fear/Greed descriptor is a colourful measure of market sentiment and used frequently due its attention-grabbing sensationalism but the humdrum reality is… Read more »
It is people like Hasenstab, on whom I wrote here 2 years ago already, that represent the financial capitalist industry. – Before you try, as the search engine here will only consider entries by the host himself, you can not find my post. –
However,he represents the very class of people who create nothing, produce nothing, but are the global gamblers who place bets. They are as useful for the real economy as a bone cancer for a marathon runner.
.
Secrets And Lies Of The Bailout by Matt Taibbi
http://www.rollingstone.com/politics/news/secret-and-lies-of-the-bailout-20130104
So….I sell you some of my debt,which I borrowed at 2.5% I guarantee a return of 4% over 5 years My turnover has dropped over the last 5 years and my costs are spiraling…. I took over debts from my old partners business and I am paying them back in full. My accountant produces a report stating my business will grow by 1.6 % this year. My historical debt “carried over”is 122% of my turnover. My business model is based on services & sub-contractors and I no longer produce enough of anything to add value to my business. My auditor… Read more »
Keynes model is flawed it only works in bull markets when everthing is all right,does not allow for natures law and social mood,and the economists are always wrong when the crash hits ,oh i did not see that coming,always late and wrong,after the horse has bolted,and will continue to be wrong, there are others models to economists to learn how many where u taught at uni/college sometimes it hard to admit keynes is wrong,thats how he lost money in the stock market, he could not perdict bear markets with his method
I love old Wall St sayings, even if their predictive qualities don’t work out a lot of the time. “Sell in May and go away”….funnily enough if you’d done that on the 1st of May last year you’d have made a tidy sum in these manipulated markets. The Dow Jones Ind Average lost over 1000 points in a month. On a similar selling theme, as David “when the VIX is low, it’s time to go”. The Dow and other indices look very toppish at the moment and I reckon they’re ripe for a hefty sell off, just after everyone is… Read more »
U.S Fiscal cliff problem not solved,just put a “plaster” on it… more major debt repayment due in March 13
Hi David
Been watching you from afar!
Yes, Volatility has collapsed but was lower from 2004-2007. have a look at your Bloomberg. Do you really think anyone cares about debt anymore?
France plays the Military Tactic intervening in Mali . Does it have benefits both economically and politically for Holland & France ?
How will the Markets view this ?
10/5/2012 at 16.03 at 13655 on the US30 / 4HR CHART is the time we enter into deflation depression mode,hows that for a old wall st saying ,
The very essence of the so-called ‘markets’ is irrationality and volatility. Of course the irrationality is only apparent; not actual; and the volatility is synthetic; not natural. We are not talking about a real market here; i.e. a place were real products and services are traded; what we mean is the parasitic casino markets aka known as the financial markets; the purpose of which is to suck wealth out of the real markets and economy and concentrate it in the bank accounts of a tiny parasitic elite. The irrationality is only apparent; not actual. It is apparent to those who… Read more »
Hi whirmark [Your rude comments to Georg above disapoint. You dont merit a considered reply; but it’s done so I’ll post it for any interested parties] The financial markets and the real economy are not the same thing; nor are they extensions of each other. The financial markets are parasitic on the real economy and actively destructive of it. I say more about that below. I do not propose shutting down the real economy; the economy of real productive capital and economic activity. So the CEO of CRH would not be without capital. Nor do I propose full central planning.… Read more »
Hi whirmark and others. I would suggest that you go to http://www.globalresearch.ca (It’s the Interest, Stupid! Why Bankers Rule the World) and pay particular attention to what the Bank of North Dakota has done with great success.
Conor
“TODAY, THIS COLUMN IS GOING TO DEPLOY TWO DEVICES THAT WRITERS OFTEN USE TO MAKE THEMSELVES SOUND VERY INTELLIGENT. THE FIRST IS THE QUOTE FROM A GREAT THINKER, WHICH HAS TO BE BOTH WITTY AND KNOWING; AND THE SECOND IS EXPOSING THE CLASSICAL ORIGIN OF A WELL-KNOWN WORD, WHICH ONLY A MAN OF EITHER GREAT SCHOLARSHIP OR ACCESS TO GOOGLE CAN APPRECIATE.” DAVID MCWILLIAMS (2013) McWilliams above brings attention to the origin of Conventional Opinion that has plagued our societal freedom and depleted our ability to think. The regurgitation of other toughs of the past appears to add weight to… Read more »
For John Waters Take on the economy and fiscal cliffs
http://www.irishtimes.com/newspaper/opinion/2013/0111/1224328670506.html
In reality, who cares if the markets love us or not! I live in the real world as does 99% of the Irish people and 100% of the people I know, we do not want to be Captains of Industry, Multi Millionaires, nor have the adulation of millions for our efforts, we simply want to live a decent comfortable life, pay our bills, raise our kids and love our partners. This is being stolen, eroded, squandered and given away by our political leaders,the financial institutions and faceless people in foreign lands, the sooner the Irish people and the Irish Government… Read more »
Hi Whirmark,
See link below
http://www.globalresearch.ca/its-the-interest-stupid-why-bankers-rule-the-world/5311030
Phoney Bonds bought with Phoney Junk Money but they are not Phoney Bombs and Bullets.
http://www.rte.ie/news/2013/0114/greece-shots-government.html
After following the dialog above (sometimes rude) I think a little dose of reality is urgently needed : Liam Halligan: Glass-Steagall Seems Quickly to be Building a Head of Steam 14.01.2013 (LPAC) Liam Halligan, chief economist of Prosperity Capital Management in London, has again taken to the pages of Britain’s Daily Telegraph to demand Glass-Steagall. In his column entitled, “At Last, Question Time for the Money Printers,” Halligan writes: “….The trouble is that both QE [Quantitative Easing, the Fed’s term for the endless bailout] and ring-fencing are a disaster waiting to happen…. Until the zombified mega-banks are put out of… Read more »
Hasenstab he has got a honest face
Has a stab at the Irish
I believe fund management human resource offices actively seek out narcissistic characteristics
Alright, this is what I read into the current rating of the VIX.
If the VIX is at an all time low….we are on the cusp of a massive market crash.
yep..yep Yep…Deco.!
Not as regards great thinkers, Keynes certainly not being one, even with the lipstick, economists should really consider their trade as something other than a sidewalk parade. How Adam Smith fooled you suckers!: MOST OF THE TIME There we have the sentiment, mentioned numerous times in the lead, of Adam Smith’s key (and Keynsian) edict : “To man is allotted a much humbler department …. Nature has directed us to the greater part of these by original and immediate instincts. Hunger, thirst,the passion which unites the two sexes, the love of pleasure,and the dread of pain, prompt us to apply… Read more »
“This was a highly popular pastime of the Moors of Andalucia before the Christians decided to kick them out of Spain. (This ethnic violation robbed Spain of its Arabic and Jewish business acumen, condemning Iberia — after a brief heyday of post-colonial gold looting — to become the economic backwater of Europe.)” David, I take issue with your description above. The Christians as you call them were the natives, also known as Spaniards. Spain was violently invaded from across the Straits of Gibraltar by blood letting booty looting Arab-Afro combo in 710. They reached Northern Spain less than 10 years… Read more »
Interesting article and comments. When it comes to the concept of hazard one sector in the financial markets stands out very clearly and that is the derivative market. This is basically a massive interbank casino where the size of the bets go way beyond any normal concepts of hazard. Unlike stocks and bonds a derivative is not an investment in anything of value but a “legal” bet on the performance of some market such as interest rates. The total value of this market is now in excess of $700 trillion and to give you some idea of how grotesque this… Read more »
The troika are not running this country, FG,LAB are running this country and there lies the big problem ,if the troika where running things we might be better of,I don’t say this lightly. The Irish government can’t make the fair and proper cuts needed because simply they would have to take a 50 percent pay cut and they would them be in a better position to lead from the front and put a stop to the war on waste. It’s quite a mountain the waste mountain in fact it would turn your stomach . It’s quite funny that the government… Read more »
Ireland is like a box of Lego you spend your time making something good and along comes FG,LAB,FF and they destroy the good and systematicly are destroying this country for who or for what how can so many people be controlled by so few.
In 1965 Charles de Gaulle sent the French navy across the Atlantic to pick up French gold.
2013 – Germany now asking for the return of their gold in the USA and Bank of England.
Are we about to see a new gold backed DMark http://www.zerohedge.com/news/2013-01-14/it-begins-bundesbank-commence-repatriating-gold-new-york-fed
http://directdemocracyireland.ie/question-for-michael-noonan/
I think we are about to see major changes in the global monetary system.
To bond or not to bond, too late to bother answering
that question. J P Morgan increased their exposure to Irish debt, I wonder why========= suggestions on a post card please.
All talk of makets and decisions by market participants is futile and a waste of energy until it is understood that there is no such thing as a free market. There is only manipulation and so anyone making a decision for investment is the irrational one. central banks around the world want to lend as much money as possible. “Money makes the world go around”-Cabaret. The banking cabal, the powers behind the scenes engineered one coup d’etat after another. They acquired a monopoly on the production of money for the state in one country after another, and also persuaded the… Read more »
So there is no doubt where the marching orders come from : European Commission Insists Governments Must Bail Out Banks Jan. 14 (EIRNS)–The European Commission has reiterated its policy that governments must bail out their banks no matter how many of its citizens will die as a result. On its front page, under the title “EU Redrafts Plans for Bank Rescue Funding,” London’s Financial Times reveals a new proposal by the European Commission which would force national governments to bail out their banks, or receive no aid from the European Stability Mechanism (ESM). Governments would also have to guarantee any… Read more »
http://brianmlucey.wordpress.com/2013/01/15/the-running-sore-that-is-anglo-part-2339/
Little piece by Brian Lucey today 130115 on the pending payment of €3.1 bn Anglo Promisory Note in March. Nothing new but he cuts through the b******t
The great irony of it all, is that it is Keynesian economic policies that are about to crash the bond market.
This is being conveniently forgotten in the present climate.
Good writing David and loved the Keynes quote.
You wrote about gambling recently and your visit to Paddy Power. The amount of gambling ads on tv has exploded in recent years and it seems that my suspicion that it would lead to social problems is coming to fruition
Scots punters blow £4bn on betting machines branded ‘crack cocaine’ for gamblers
http://www.dailyrecord.co.uk/news/scottish-news/scots-punters-blow-4bn-on-betting-1532216
This bond bust was brought to you by JM Keynes.
For some more detail on what’s going on about these bonds, without the metaphors of David’s homily, here’s something:
http://www.irishtimes.com/newspaper/finance/2013/0114/1224328802562.html
WHY DO MARKETS ‘LOVE’ US?
“A big part of the reason is technical. The Government, alas, was not selling shares in the bank. It was selling its contingent convertible capital notes — or CoCos — which are a different thing entirely
CoCos automatically convert into equity if the bank’s ratio of equity to loans falls below a certain level. However, if it doesn’t, the CoCo holders get their money back in 2016 plus 10 per cent-a-year interest”
so says
John McManus
Business Editor at the IT
REPLY
A sober gambler is capable of causing much more pain than a drug inducing alcoholic
This place is very bereft of humour today and everyone is being serious debating topics which by your own admission are highly irrational, unpredictable and most of all unnaccountable 170 comments in the first 24 hours is impressive by any standards and a lesson to anyone thinking of becoming an online entrepreneur. It’s not easy Today is no time for the casual observer or someone who is new to the ‘intellectual’ (crackpot) bearpit of economic theories with all baggage of emotional and invested reputations that people have made careers out of but it will shine a beam of light into… Read more »
http://sgtreport.com/2013/01/jim-sinclair-german-gold-repatriation-is-the-most-significant-gold-event-in-50-years-beginning-of-the-end-of-the-us-dollar-as-reserve-currency/
Jim Sinclair: German Gold Repatriation is the Most Significant Gold Event in 50 Years – It’s the Beginning of the End of the US Dollar As Reserve Currency
The, or a form of, gold standard is returning
http://www.telegraph.co.uk/finance/personalfinance/investing/gold/9804444/Bundesbank-to-pull-gold-from-New-York-and-Paris-in-watershed-moment.html
Germany reaffirms its affection for gold for good reason if the bond maket fails as expected.
http://www.roadtoroota.com/public/1088.cfm?awt_l=DEHhg&awt_m=3jvGjtRQ0dAZ85B
Here comes the SUN.
The Rule of Law.
When money was corrupted the rest of society follows. The rule of law pertaining to financing and economic policy is abandoned. With no law then all must act in their own best interest. Social mayhem follows currupted money.
http://blog.milesfranklin.com/the-rule-of-law