Tuesday, October 23, 2012

23/10/2012: Signs, Indicators and Noise

From time to time in the past I used to look at CDS spreads for sovereigns. I have not done so in a while. In fact, I have not even updated my database for these in a while. Why? Because something is dodgy about the sovereign assets' market that is manipulated by the sovereigns. And here's a quote from the TF Market Advisors that sums it up well enough:

"One of the effects of the central bank policies is that many of the more obscure parts of the market that you could look to for clues or early warning signs have been eliminated. Sure these markets still exist, but the information from them is so manipulated that it is difficult to get a clear read."

  1. LIBOR : "Between Fed lending programs, LTRO, and the lawsuits, I have no clue what to make of LIBOR other than it probably isn’t a whole lot of use as a sign of anything."
  2. EUR/USD 3 month basis swap : "...was another useful indicator showing the relative strength of US banks versus European banks. Again with LTRO and various central bank global swap lines, this measure has become useless. With banks willing to use central bank liquidity without fear of reprisals or negative stigma, they do, and this rate hovers right around where the governments would like it to be."
  3. European sovereign CDS : "has become far more difficult to interpret as all these naked bans get enforced. French CDS went from 106 on the 11th of October to 65 today, in pretty much a straight line. I have difficulty thinking of one real reason that France could have done so well – they have funded ESM, instituted some domestic policies that seem dubious at best, have had weak economic data, and are marching to the beat of their own drum in the Euro in a way that indicates willingness to take on more debt, yet they are tighter. This makes it hard to figure out what is going on in European bank CDS."
  4. US Treasury Yields : "...are very difficult to figure out. The Fed owns over 35% of treasuries with maturities 5 years and longer. Almost everything you would look at and try and infer from the treasury market is skewed by that."
  5. Economic data "has even come under attack. In general I don’t believe the data is manipulated, particularly not for political purposes (but there are a growing number of people who do). But I do think they try and cover up their own mistakes. Jobless claims came in at 337k or something (pre upward revision) two weeks ago. There was a lot of concern, and some very good economists spoke to the BLS and came up with the conclusion that one big state had not sent in their quarter end revisions in time. There was some confirmation of this, but then some sort of denial. Missing the deadline would be an honest mistake in my opinion, it shouldn’t happen, but I can see how it could. Then last week, we posted 388k as the number. Now we have data that looks like 369k, 342k, and 388k. Is the reality that had they properly accounted for the missing number, that the claims have been 369k, 365k, 365k? If so, we have okay but steady claims. If the actual data is correct (which I don’t think it is) then we would have seen some euphoric hiring followed by aggressive firing. I find that harder to believe."
Note, I wrote about US jobless claims figure here.

There is a major problem, folks. While we can debate the numbers left, right and center, what is clear is that the current environment (political, monetary and policy) is becoming less and less transparent. The market signals are being distorted (willingly and via the law of unintended consequences) and this does not bode well for the future. 

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