2/1/16: The Future of Global Finance: Moscow 2015

Back at the start of December, I spoke at an international finance conference in Moscow covering developing trends in global finance.  You can find the conference archive (in English) here: http://cmconference.ru/en/about including videos of presentations. My interview relating to the conference is available here: https://www.youtube.com/watch?v=g7Og2yIDaGY. Some coverage of the conference in the press here: http://www.vestifinance.ru/articles/65070.

2-я Международная финансовая конференция «Валютные рынки. Мировые практики» проходила в Москве 18-19 ноября. Она была организована ГК Teletrade, совместно с Dow Jones, Google и Московской школой управления «Сколково». Архив конференции, включая видео презентаций (Русская версия): http://cmconference.ru/ru/about.

2/1/16: QE for the People 2016

Back in March 2015, I have signed a group petition in support of the QE for the People idea of using monetary policy to directly inject funding into the economy via households' budgets. Since then the idea continued to gain traction and in December 2015 the campaign issued an in-depth analysis of the idea, and a renewed call for public and professional engagement.

2/1/16: SOSV Slingshot 2015: Mentoring Start Ups

Totally forgot about this event few months back, but thanks to Silicon Republic, have a video to post here. I was honoured to be invited by SOSVentures to speak and participate in mentoring rounds at the SOSV Slingshot: Dublin event for start ups.

Here are the videos from discussions that took place at the event: https://www.siliconrepublic.com/start-ups/2016/01/01/start-up-advice-accelerators-ireland.

Enjoy!

1/1/16: Another VEB update: things are getting crunchier...

And another update to the long-running saga of VEB - Vnesheconombank - that I covered over a week ago here: http://trueeconomics.blogspot.ie/2015/12/231215-vnesheconombank-where-things.html.

Latest rumour mill is that VEB will need "AUD24.67 billion" - which is within the range we've heard for some time already.

About the only new bits we get from Moscow are:

• That "the Finance Ministry has submitted proposals to aid VEB in 2016 to the government for approval, with some measures ready to be carried out in the first quarter, Svetlana Nikitina, an aide to the finance minister, said in Moscow on Tuesday," as quoted here: http://www.smh.com.au/business/world-business/vladimir-putins-bank-needs-a-2467-billion-bailout-20151229-glwkd4.html or if you want USD figures: http://www.ibtimes.com/kremlin-rushes-bail-out-russias-state-run-bank-2242266. The article, overall, is a good summary of the bank history, complementing my own post. 
• Both Russian Treasury and the Central Bank of Russia have cut the rates paid by VEB on their deposits to 0.25% (see report here: http://www.reuters.com/article/russia-veb-rates-idUSL8N14J07U20151230). On top of that, national wealth fund deposits with VEB will be extended to a maturity of up to 5 years. All of which should decrease significantly immediate liquidity pressures on VEB.

The key point of the VEB saga, however, is still not adding up. As covered in my post, VEB is facing some USD19.3 billion in debt maturing through 2025 with less than USD8 billion due through 2018. So why USD18 billion in capital hole, then?

Moodys note from earlier this week explained (emphasis mine):

"VEB Group's problem loans/gross loans ratio (including impaired but not overdue loans) increased to 39.3% as of end-2014 compared with 19.7% as of end-2013. Moody's estimates that the bank has already recognized a substantial portion of these problem loans and therefore further growth of problem loans should be contained. However, VEB remains highly exposed to single-name concentration risk and risks associated with its subsidiaries, particularly the Russian banks bailed out in 2008-09 and Prominvestbank in Ukraine.

Moody's notes that VEB's profitability metrics have substantially deteriorated, as reflected in its return on average assets (RoAA) ratio of -3.7% in the first half of 2015, following RoAA of -7.2% posted in 2014. ...At the same time, its net interest margin declined to 1.9% in H1 2015 relative to 2.7% in 2014, which reflected growing funding costs and an increasing problem loans.

Moody's anticipates some improvements in VEB's core profitability metrics following a normalization of Russian financial market conditions and gradual stabilization of problem loan levels. Nevertheless, VEB will not achieve breakeven over next 12-18 months due to still high provisioning charges and weak core profitability metrics.

VEB's standalone credit worthiness is also supported by its capital levels, which have historically been maintained by the government. VEB's statutory capital ratio (N1.0) was 12.4% as of H1 2015, which was higher than the regulatory minimum of 10%, which VEB has to respect due to its Eurobond covenant. Moody's notes that the government's regular capital injections have totalled around RUB559 billion in Tier 1 capital and $6 billion in Tier 2 capital since 2007. However, future capital increases may come in a less tangible form, e.g. via the provision of cheaper funding resulting in a fair value gain under IFRS, rather than through paid-up capital."

There are some EUR 9 billion worth of eurobonds issued by the VEB still outstanding.

In other words, we have a 'development bank' (not a retail bank) that is bound by 10% capital ratio, that, absent that ratio would require much less capital than USD18 billion. It will be interesting to see how Moscow can restructure capital in VEB to avoid an absolutely massive capital blackhole, but I suspect there will be some financial acrobatics involved.

1/1/16: Developers Questioning Banking Inquiry Report

While we do not know what is in the Banking Inquiry report signed-off this week, concerns being expressed by the two developers, namely Michael O’Flynn and Johnny Ronan, that the report is likely to be a whitewash of Nama is a legitimate one.

The inquiry basically and obviously failed to provide platform for the voices critical (or robustly critical) of Nama, opting instead to put forward testimonies of some developers who have potential coincident / congruent interest in seeing Nama escaping serious criticism.

Thus, legitimate suspicion can be (though we should wait to confirm or decline it) that the Banking Inquiry report will indeed skip over Nama's core role in creating a dysfunctional (and currently strongly legally challenged) crisis resolution environment in Ireland. And another legitimate suspicion (based on past record of coverage of the Inquiry in the media) is that most of Irish media will be unlikely to robustly challenge the report on any conclusions regarding Nama.

That said, let's wait and see the report...

1/1/16: Historical Default Cycles: Are We Testing the 'Norm'?

Having written before about the growing signs we are upon a new default cycle (see, for example, post here http://trueeconomics.blogspot.ie/2015/12/301215-us-junk-bonds-heading-into-new.html), it is only fitting that I should highlight the latest article from Carmen Reinhart in which she talks about default 'waves' or cycles: https://www.project-syndicate.org/commentary/sovereign-default-wave-emerging-markets-by-carmen-reinhart-2015-12#d0X1sQB3KuUHlp7A.99.

Key chart:

Reinhart says that "From a historical perspective, the emerging economies seem to be headed toward a major crisis. Of course, they may prove more resilient than their predecessors. But we shouldn’t count on it."

I can add, either that, or count on a new wave of 'competitive devaluations' or 'currency wars' and forget about any 'normalization' in the interest rates.

31/12/15: 2016 Bonds Market Outlook

My take on 2016 outlook for bond markets for Manning Financial is available here: http://issuu.com/publicationire/docs/mf_newsletter_22122015_web?e=16572344/32155392 (see page 5)

Or you can click on the following images to enlarge

31/12/15: Euro's share of international reserves falls... again...

The dream of the Euro becoming world reserve currency has had a bit of a rough year in 2015. The world's most prominent bureaucurrency just kept on losing ground as the share of international forex reserves goes:

Down from 28% in 2009 to 20.3% in 2015, marking its seventh consecutive quarterly fall.

30/12/15: 2016 Better Be Kinder to the Old Ruble... or...

The never-before mighty Ruble started the last day of 2015 trading on a shaky ground:

And it ended the year on a shaky ground:

And for all the pain, there is little gain. As oil tanks, Ruble will keep sinking. Per recent report from Bloomberg (emphasis mine):

"The currency would need to tumble more than 20 percent to at least 90 against the dollar to tip the
country into a full-blown crisis, according to 17 of 20 respondents in a Bloomberg survey. Should such a threat emerge, the Bank of Russia has an array of tools at its disposal, including verbal and market interventions, an emergency interest rate increase and capital controls, they said. “It would take more than 90 rubles per dollar to provoke significant repercussions,” said Sergey Narkevich, an analyst at Promsvyazbank PJSC in Moscow. “In 2015, Russian monetary authorities managed to mostly avoid spillovers from the foreign currency market and keep the financial system afloat and broadly functional.”

Except, here's a problem, per BAML:

Source: Bloomberg

Now, connect the dots... At above 90, we will have 'significant repercussions' and oil is already at around 37. What is more, all of the above references Brent prices. But Urals-Brent spread has been pretty awfully 'unfair' to Russian energy suppliers, and with the glut of eager and ready substitutes producers in the markets, the spread is unlikely to improve. Which means that 'above 90' can be 91 or it can be 95 or it can be 88... go figure.

Then again, may be, by some miracle, the New Year will be a happy one for the Ruble.

Update: Russia is hardly unique in linking currency valuations to budgetary / exchequer balances, as argued in this post - all commodities-dependent economies do that. And there is, of course, that added dimension of recessionary pressures, as shown in the chart below (taken from Bloomberg article covering Chinese growth woes):

30/12/15: Baltic Dry Index: Brick in Search of a Lake's Bottom

While IMF (belatedly) is warning about the risks of slower global growth, the Baltic Dry Index - a strong instrumental variable for global trade flows - has been sinking and sinking, like a brick searching for the bottom.

Yes, IMF did project back in October WEO that global growth will reach 3.56% in 2016, up on 3.123% in 2015. And that the growth in volume of trade flows will rise form just under 3% to 4.3%, with much of this growth accounted for by increased rate of growth in trade in goods (from 2.9% in 2015 to 4.13% in 2016). But, hey... one day someone will be booking real stuff on foot of IMF forecasts. Until then, good news-bad news from Washington forecasters mean zilch for the Baltic Dry.

30/12/15: US Junk Bonds: Heading into a New Defaults Wave?..

U.S. Junk Bonds markets have been a canary in the proverbial mine of the global economy since 2014, when we first felt some tremors in the markets. But so far, default rates for the junk bonds remained relatively subdued, albeit rising.

 
However, as recent Fitch forecasts suggest, things are about to get 1999-2000 styled. Fitch latest projection (mid-December) for U.S. Junk Bonds default rate for 2016 is at 4.5%, with energy sector at 11%. Now, for sectoral comparatives, here are the historical average default rates for the periods outside official recessions:

 The average in the historical series ex-recessions is close to 2.2%, which would make 2016 forecast for 4.5%... err... touchy, to say the least. It is also worth noting that in three pre-Global Financial Crisis recessions, build up in default rates was gradual, over two-four years. We are now two years into such a build up.

Obviously, this does not look like a good time to go into heavily leveraged assets... unless you've never been through a credit cycle meat grinder before...

30/12/15: Blink by 25bps, chew through billions: U.S. rates 'normalization'

In a post yesterday, I mentioned USD3 trillion hole in global bonds markets looming on the horizon as the U.S. Fed embarks on its cautious tightening cycle. Now, couple more victims of that fabled 'normalization' that few in the markets expected.

First up, U.S. own bonds:

Source: @Schuldensuehner 

As noted, US 2-year yields are now at 1.09%, their highest level since April 2010 and roughly double January 2015 average. Now, estimated interest on U.S. federal debt in 2015 stood at around USD251 billion for publicly held debt of USD13,124 billion. Now, suppose we slap on another 0.55%-odd on that. That pushes interest payments on publicly held portion of U.S. debt pile to over USD323 billion. Not exactly chop change...

And another casualty of 'normalization' - global profit margins per BCA Research:
"Over the past two decades, the G7 yield curve has been an excellent leading indicator of global margins. Currently, not only are short-term borrowing costs becoming prohibitive, at the margin, but the incentive to raise debt and retire equity to boost EPS is diminishing. This suggests that profit margins have likely peaked for the cycle."

Here's a chart showing both:

Source: BCA Research

Now, absence of margins = absence of capex. And absence of margins = profits growth on scale alone. Both of which mean things are a not likely to be getting easier for global growth.

Now, take BCA conclusion: "Finally, global junk bonds are pointing to a drop in equities in the coming months, if the historical correlation holds. Indeed, we are heeding the bond market’s message, and are concerned about margin trouble and the potential for an EM non-financial corporate sector accident: remain defensively positioned."

In other words, given the leverage take on since the crisis, and given the prospects for organic growth, as well as the simple fact that advanced economies' corporates have been reliant for a good part of decade and a half on emerging markets to find growth opportunities, all this rates 'normalizing' ain't hitting the EMs alone but is bound to under the skin of the U.S. and European corporates too.

Good luck trading on current equity markets valuations for long...