Markets Insight

June 12, 2013 4:13 pm

Markets Insight: Central bank loss of control leads to EM tumble

By Ralph Atkins in London

Fears of stimulus withdrawal trigger rising bond yields but central banks could change tactics, Ralph Atkins

Tear gas and riot police fill Istanbul’s Taksim Square. Investors fret about the growth outlook in India and China. But these were not the main factors behind sharp falls this week in emerging economies’ bond prices, and corresponding rises in yields.

Instead, the story was about how the world’s central banks lost control, at least temporarily, over market interest rates, heightening fears about disruptive times in prospect as they head for the eventual withdrawal of their exceptional support for economies.

While it is not clear that we are at the beginning of a great global bond market sell-off, we have at least learnt a little more about how successive waves of monetary policy loosening might work in reverse. It has not looked pleasant.

Over the past few years central banks, led by the US Federal Reserve, have encouragedportfolio rebalancing” across financial markets. Tumbling yields on US Treasuries persuaded investors to shift into something riskier. Those already in riskier assets took bigger risks maybe in emerging market debt. It was like the nursery rhyme Ten in a Bed in which “the little one said: ‘Roll over, roll over’” ... And as any child knows, “ ... they all rolled over, and one fell out”.

The yield on bonds in JPMorgan’s emerging market EMBI diversified index has risen more than a percentage point to 5.5 per cent during the past month. Fears about economic as well as political weaknesses put Turkey among the worst performers. With activity hectic, traders on some fixed income desks have reported record flows in the past few dayssuggesting forced selling (or perhaps opportunistic buyers?). Volatility has spread to equity markets, with the FTSE All-World Index down 4 per cent from its May peak.

Behind the falling-out-of-bed were signs that global quantitative easing was entering an uncertain phase that will undermine lucrative carry tradesborrowing in a low interest rate currency to invest in higher yielding assets.

On one view, the initial cause was volatility in Japanese bond markets; the Bank of Japan has struggled to guide yields since launching aggressive bond buying plans to drag the economy out of deflation. The sell-off really gained momentum, however, after Ben Bernanke, Fed chairman, hinted on May 22 at a possibletapering” of US quantitative easing. His comments shifted expectations from a bias towards “no change, possible further loosening” in QE to talk of possible tightening. It was a subtle change – but the effects were striking.

Ten-year US Treasury yields have risen 60 basis points since the start of May, and markets are pricing in a Fed hike as early as January 2015 at least six months sooner tan economists’ consensus view. Disruption has spread into credit markets and globally.

German 10-year Bund yields have jumped from 1.15 per cent to 1.61 per cent – the sort of jump seen during the most intense phases of the eurozone debt crisis. While the eurozone remains deep in recession, interest rates on three-month euro loans starting in December 2014 have risen from 0.48 per cent to 0.64 per cent during the past week one of the sharpest five- day jumps this year.

As ever, movements were almost certainly exaggerated as some investors found themselves wrongfooted; the most egregious example were trend-following hedge funds, which took big losses. The lesson, however, is that turning points in the interest rate cycle are messy.

Central banks are not about to raise the white flag of surrender. Global quantitative easing measures remain firmly in place – the Fed has an opportunity at its meeting next week to reset market expectations about any scaling back - so some investors will see a chance to buy.

Then there is the role of the Bank of Japan. Markets initially assumed the central bank’s aggressive action would drive Japanese investors into riskier overseas assets, with positive roll overeffects for emerging markets.

It did not work out like that. Instead a weaker yen encouraged Japanese investors to reap windfall profits by selling overseas holdings. Now market volatility has reduced risk appetites, while higher yields in US and European bond markets have further reduced the relative attraction of emerging market debt. Calculations by HSBC show that after hedging back into yen, yields on many emerging market bonds are less attractive than investing in Japanese government debt.

Still, like the Fed, the Bank of Japan has time to change tactics, perhaps by accelerating its bond buying. With bond markets stabilising on Wednesday, the sell-off does not yet seem to be a rout. A bout of calm could restore confidence in emerging markets.

Copyright The Financial Times Limited 2013.

sábado, junio 15, 2013



Are The Gold Bugs Wrong?

Jun 13 2013, 21:46

by: Jeff Clark 


What a ride the precious metals have been on recently. Gold and silver prices have fallen off a cliff, while gold stocks were thrown on the rocks and left for dead. GLD has seen record outflows.

Popular financial news shows featured guest after guest who proclaimed gold is now "officially" in a bear market, emboldened by the fact that in spite of its recent bounce, the price has languished below its September 2011 peak for 20 months. As a group, gold stocks are down an abysmal 54% over that same period. The capitulation process has been brutal.

So, were we wrong? Is it time to admit defeat, sell our positions, slink into a cave, and lick our wounds?

Absolutely not.

The only thing that changed over the past 60 days was the price of gold, and perhaps the mainstream's perception of our industry. The realities of the fiscal and monetary state of the world, however, did not.

What has struck our industry was not the consequence of a shift in fundamentals, but rather a number of transient factors, including: (i) growing belief in the general investment community that inflation will not result from global money-printing efforts; (ii) claims the global economy is improving; (iii) Europeans fleeing their economic troubles buying US dollars (which makes the dollar look strong and hence gold less appealing to some); and (iv) a very large gold sale that caused the gold price to breach "technical support levels" and trigger a cascade of further selling. All of this - and a lot of commentary based more on opinion than fact - has led to the misguided conclusion that gold is a has-been asset.

Casey Research readers know we think inflation is inevitable, but even if deflation were more likely, it is the fallout from a world living beyond its means, which is the reason most major central banks are massively debasing their currencies in an attempt to prop up ailing economies, that worries me.

These stimulus policies are unprecedented in scale, entirely unsustainable, and induce financial-system instability. And somehow, it is widely believed that the same policymakers who concocted this mess can get us out of it. Our views haven't changed - yet suddenly, we're contrarians again.

It takes patience and courage to stay the course amid a groundswell of proclamations that the "gold trade is dead," but our positive outlook isn't based on stubbornness. The evidence from history is very clear; you cannot solve debt problems with more debt, nor strengthen an economy by destroying your currency. Eventually, these sins catch up to you.

Today's ongoing economic and fiscal crises cannot end smoothly or without unpleasant
consequences. Since none of the excesses that precipitated the 2008 financial crisis have been fixed, another round of crisis is baked in the cake and will likely inflict even greater damage. When that happens, gold will again be seen as the refuge it is, regardless of current popular opinion.

We're not alone in this thinking. As you've undoubtedly read, in response to the crash, global demand for physical metal soared at both the retail and wholesale levels. This reaction is extremely important: we can't identify a single crash, collapse, or crisis that ended with retail investors stampeding to buy the asset that had just been crushed. Not one.

In our view, the gold story is not over. Far from it. The reasons for owning it are just as important now as they've ever been since the bull market started in 2001. I can't be sure the price is done falling - but I'm sure it's not done climbing.

What is going on with gold? Was it overvalued before the recent drop? Or is the price being manipulated? Is now the time to get in, and if so, how? These are just a few of the questions investors want answered. And while no one has a crystal ball that issues definitive answers, some people have been around long enough to have keen insights on what's happening and what's likely to happen from here.

Last updated: June 14, 2013 7:08 pm
IMF denounces US fiscal policy
logo of the International Monetary Fund PWORLD©Getty

The International Monetary Fund denounced the tightening of US fiscal policy as “excessively rapid and ill-designed”, saying it will knock as much as 1.75 percentage points off growth this year.

In its annual economic check-up on the US, the IMF forecast growth of just 1.9 per cent this year and cut its 2014 outlook to 2.7 per cent from the 3 per cent it expected as recently as April.

It said that rapid tightening of fiscal policy – including tax rises and $85bn in across-the-board sequestration cuts to public spending – will take between 1.25 and 1.75 percentage points off growth this year.

“The IMF’s advice is to . . . slow the fiscal adjustment this year – which would help sustain growth and job creation – but hurry up with putting in place a medium-term road map to restore long-run fiscal sustainability,” said Christine Lagarde, IMF managing director.

The IMF’s comments suggest that US growth could have exceeded 3 per cent this year had Washington kept tax rates and spending steady. The Fund now expects sequestration to continue, undermining expansion through 2014.

“We had assumed that the sequestration would be phased out,” said Ms Lagarde. “In this latest forecast we assume that it will continue.”

The Fund also urged the US to adopt a more gradual fiscal consolidationalong the lines” of US President Barack Obama’s budget proposal. But no change is in prospect. At present the US public is feeling little pain from the cuts, and Mr Obama unwilling to cut healthcare and pension programmes.

“The automatic spending cuts not only exert a heavy toll on growth in the short term, but the indiscriminate reductions in education, science, and infrastructure spending could also reduce medium-term potential growth,” said the IMF.

Given its downbeat forecast, the Fund said it expects the US Federal Reserve to keep buying assets at a pace of $85bn-a-month for the rest of 2013, and slowly reduce its purchases in 2014.

That contrasts with Fed chairman Ben Bernanke’s remarks that the Fed could start to reduce asset purchases at one of its “next few meetings”, sparking global turmoil as markets fret about a likely reduction in the pace of US monetary easing.

Unwinding monetary policy accommodation is likely to present challenges and this must be managed carefully,” Ms Lagarde said. “We are seeing clearly that communication will be key.”

The Fund added that, given the large amount of slack in the US economy, the Fed was right to continue quantitative easing, but warned of the dangers of a long period of low rates: “A long period of exceptionally low interest rates may entail potential unintended consequences for domestic financial stability and has complicated the macro-policy environment in some emerging markets.”

Copyright The Financial Times Limited 2013

06/14/2013 06:05 PM

The Pep Challenge

A Superstar Football Coach Comes to Múnich

By Markus Feldenkirchen and Juan Moreno
Wildly successful football coach Pep Guardiola sought out Bayern Munich as his...
Wildly successful football coach Pep Guardiola sought out Bayern Munich as his next challenge. But he is arriving just after the team had one of the most successful seasons the Bundesliga has ever seen. Will he stand up to the pressure?

On July 26, 2011, Karl-Heinz Rummenigge and Uli Hoeness were sitting in the VIP restaurant at the Allianz Arena when a man with a shaved head walked in and sat down at a table. He was alone.

When they recognized who he was, Rummenigge stood up and went over to say hello to football coach Pep Guardiola. "Can I speak with you for a moment?" Guardiola asked. Rummenigge asked Hoeness to join them, and they ordered three espressos. At that moment, Rummenigge and Hoeness -- the chairman and club president of powerhouse football team FC Bayern Munich, respectively -- had no idea what Guardiola wanted. But of course they were interested in talking to him.

Pep Guardiola had traveled to Munich with his team, FC Barcelona, for a sponsor's tournament, the Audi Cup. His team had just won the semifinal against the Brazilian team Porto Alegre, and the second semifinal, pitting FC Bayern Munich against AC Milan, was about to begin.

He liked FC Bayern, the Spanish coach said. He had toured the club grounds on Säbener Strasse that morning, and now the Allianz Arena. "You have an interesting philosophy," he said. Then he said something that Rummenigge and Hoeness hadn't expected: "I could imagine coaching here some day."

"He was making a clear statement," says Rummenigge. Guardiola was approaching the Bavarians, and not the other way around. When Rummenigge talks about it at the club's headquarters today, he still seems flabbergasted. He shakes his head. "I don't know if I would have dared to ask him at the time: 'Could you ever imagine coaching for Bayern Munich?'"

At that point, Guardiola was already much more than just a successful coach, and much more than someone who is hired because he can promise victories and trophies.

Guardiola was seen as an inventor, someone who had given the game of soccer a new dimension. His FC Barcelona was playing more efficiently, faster, more precisely and more beautifully than other teams. The club had discovered a new identity through its young coach, and its game became a trademark that even the layman could recognize. There was something different about Barça games, something elegant.

"It was the best team we've ever played," said Sir Alex Ferguson, coach of Manchester United since 1986, after their defeat in the 2011 Champions League final. The secret lay in Guardiola's Barça code. After that performance in Wembley Stadium, even Ferguson would have agreed with the statement that Guardiola had changed football the way Steve Jobs changed the computer, Bobby Fischer the game of chess and the Beatles pop music.

When Guardiola said his goodbyes and gave Rummenigge a piece of paper with his mobile phone number on it, Rummenigge put it away and made sure he kept it in a safe place. He knew that he had been given a small treasure.

In two weeks, when Guardiola coaches Bayern Munich for the first time, it will be two years after the brief conversation that began the most spectacular coaching contract in the history of Germany's national football league, the Bundesliga.

A 'Very Nice Contract'

The story behind that contract is one of convergence that many believed impossible. It's the story of a relatively small group of men who got together because they essentially share the same traits: unlimited ambition and the will to prove it to everyone. The Bavarians recognized the opportunity to be the measure of all things in the long term, not just in German football, but in European football, as well. Guardiola wanted to show that Barcelona was no accident, and that he didn't just owe his success to three exceptional footballers: Lionel Messi, Andrés Iniesta and Xavi.

He won't be giving any interviews for now, but even if he does, he will always be asked the same questions. What kind of a person is he? Can he repeat what he achieved in Barcelona? And why did he go with Bayern Munich instead of opting for the sheikhs and oligarchs of world football?

"The truth? I too was surprised when Pep called me back then and said: 'I gave Karl-Heinz Rummenigge my number in Munich, and I think he'll call me'," says his younger brother Pere Guardiola, who is the coach's most important adviser. He resembles his brother. Perhaps he is a little shorter, but he has the same comforting voice and speaks with the same musical Catalan intonation.

Pere Guardiola is sitting in a conference room on the 14th floor of a high-rise in the eastern part of Barcelona. He is managing director of Media Base Sports, an agency established in 2009 that specializes in Barça players. Pere secured several endorsement deals for David Villa and manages Iniesta's Twitter account. He negotiated his brother's deal with the Bavarians, which he calls a "very nice contract." It's eight or nine pages long, precise and "somehow German."

After returning from Munich, Pep told his brother that it wasn't just the training facility and the new stadium that he liked. Guardiola was also impressed by the squad, which was cleverly structured and, with "two or three minor corrections," had tremendous potential. He recognized the structures that Louis van Gaal had developed: the offensive game, the counter-pressing and a style of play that emphasizes ball possession.

Pere knew that his brother liked traditional teams, such as Ajax Amsterdam, Juventus Turin, Manchester United and Bayern Munich. While FC Bayern represents vast amounts of money in Germany, in other countries the club is identified with an illustrious past in the 1970s.

Pep, his brother, just happens to be a "romantic" for whom "tradition, history, the heroes of the past, those kinds of things" mean a great deal, says Pere. He used to work for Nike before becoming an agent. "Those kinds of things" aren't quite as important to him, he says. He isn't a romantic, but he is someone who has had plenty of encounters with the big money aspect of world football since last summer.

Representatives of Massimo Moratti, Inter Milan, Roman Abramovich, FC Chelsea, Sheikh Mansour bin Zayed Al Nahyan, Manchester City, Sheikh Nasser Al-Khelaifi, Paris Saint-Germain, Silvio Berlusconi and AC Milan came to see him. They all wanted Guardiola, and they all seemed like junkies in withdrawal. They needed the drug that only Guardiola seemed to have.

"I called Giovanni and set him to work on the Bavarians," says Pere. Giovanni Branchini is one of Italy's top agents, and an old acquaintance of Hoeness and Rummenigge. Considered discreet and professional, he orchestrated Stefan Effenberg's move to Florence in the 1990s and brought Brazilian player Ronaldo to Barcelona and, later, to Inter Milan. "We didn't want it to seem as if we were offering ourselves to the Bavarians. My brother just wanted to make sure that they understood that he thought Bayern was interesting," says Pere. Branchini was given an assignment: to arrange a meeting with the Bavarians.

  'It Takes Courage'

European football has changed considerably since Guardiola began his coaching career at FC Barcelona in the summer of 2008. He was one of the worst-paid coaches in the Primera División, without professional experience and faced with the legacy of an unruly squad trained by his predecessor, Frank Rijkaard. The change has something to do with Guardiola's record, which reads like a sugarcoated biography. In four years, he won 14 out of 19 possible titles, including two Champions League victories, three national titles and two FIFA Club World Cup trophies.

But the problems began to accumulate in early 2011. Both French defender Éric Abidal and Guardiola's friend and assistant coach Tito Vilanova were diagnosed with cancer. The team lost some of its intensity. Guardiola's talks sometimes lacked persuasiveness, and he started having trouble motivating his players. Guardiola is a strong communicator. He can be witty, glib and sometimes even funny.

In the meantime, rival club Real Madrid had bought itself the world's most expensive team, and its top priority was to defeat Guardiola's Barcelona. A dispute with José Mourinho, Guardiola's adversary at Real, escalated. During one of the matches between the two teams, known in Spain as El Clásico, there were scuffles between players and coaches.

Even golden boy Lionel Messi was causing problems. Guardiola was increasingly tailoring Barcelona's game to the Argentinean player. Messi shot 73 goals in the 2011/2012 season, and Guardiola had molded his system around a single player. It troubled him increasingly, and he began to enjoy work less.

In the fall of 2011, after a Champions League match against the Belarusian team FC BATE Borisov, Guardiola mentioned to Barça's president, Sandro Rosell, that he might not renew his contract. The club's management was in turmoil.

In one of his very rare interviews -- for a film about his old club, Brescia Calcio -- he said: "It takes courage to manage such an important institution for four years. The players tire you out, you tire out the players, the press tires you out, and you tire out the press."

On Jan. 13, 2012, there was a party at the Postpalast building in Munich for a belated celebration of Hoeness' 60th birthday. Giovanni Branchini, the Italian agent -- and middleman -- was among the 475 guests. He sat down next to Rummenigge and told him what Guardiola's brother had asked him to say, namely, that what he'd mentioned at the Audi Cup was still true.

After that encounter, Rummenigge began calling Guardiola regularly. Sitting in his office, Rummenigge recalls that the conversations were somewhat odd. "They were really trivial, blah-blah conversations," he says. "You keep beating about the bush but never really get to the point."

A Private Person

Guardiola already had the makings of a coach when he was an 18-year-old player. He was physically inferior to most of his opponents, too slow and much too thin. But there was one thing he could do faster than his opponents: think. His only chance was to read the game better than the others. Johan Cruyff, the coach of his first team, soon made him captain.

Guardiola became the head of the legendary "dream team" that won Barcelona's first European Cup. He played with Romário, Michael Laudrup, Ronald Koeman and Zubizarreta. Until Guardiola's debut as coach, the team was considered the best in Barcelona's history. Guardiola was still with Barcelona when Louis van Gaal was hired as coach, but then he moved to AS Roma because he wanted to play under Fabio Capello. At the end of his career, he even moved to a wretchedly bad club in Mexico called Dorados de Sinaloa, because a certain Juanma Lillo worked there. Guardiola thought he was a genius among coaches.

"My brother can be unbelievably stubborn, almost obsessed, and he's always thinking about football, ever since I've known him. It was always clear that he would eventually become a coach. Off the football pitch, he likes his peace and quiet," says Pere Guardiola in his office. He describes Pep as reserved, more of a listener than a talker, and determined to keep his private life private. Once, when he was asked which word he associated with "fame," Pep Guardiola replied: "shit."

He is still together with Cristina Serra, his adolescent sweetheart, who he met at 18. He has three children, wears snugly tailored suits, listens to Coldplay, is considered politically on the left and, like most members of his family, wants independence for Catalonia. He doesn't believe in the existence of God, except in the form of Messi and Maradona, and if he hadn't become a pro footballer, he might have completed his law degree and would be an attorney today.

In late April 2012, Guardiola announced that he was leaving FC Barcelona. He said that he was tired and needed some distance. After that, Pere received daily calls from agents for other top clubs, but the only club Pep wanted to discuss with his brother was Bayern Munich. Pere met Christian Nerlinger, the club's sports director at the time, for a cup of coffee at a Madrid hotel on May 25. The encounter did not make a lasting impression on him.

Pere Guardiola was more interested in the Premier League and tried to convince his brother of the advantages of the "very respectable English." He said that they had small, efficient decision-making bodies and press that, while louder than the German media, was "actually easier to handle." Besides, he said, they had money -- a lot more money.

An offer from Manchester City was especially appealing. Txiki Begiristain, Guardiola's former sports director at Barça, was representing Manchester City. He knew that money wasn't the key to signing Guardiola -- or at least that it wasn't the only factor. They discussed a "project" and the club's plan to invest €150 million, or possibly even more, in new players.

But Pep remained fixated on Munich. With Branchini still acting as go-between, he let Rummenigge know that, after taking a year off in New York, he was eager to work as a coach again -- and that it wouldn't hurt to have a conversation. Rummenigge wanted to know whether it would make sense to meet with Guardiola before his departure to the United States. It would, Branchini said.

'He's a Stubborn Guy'

In July 2012, Rummenigge flew to Barcelona, where Pere Guardiola picked him up from the airport. They drove to a friend's house outside the city, where they spent almost six hours together. Pep Guardiola tried to convey his views about football to Rummenigge, and Rummenigge tried to explain Bayern Munich.

The Bayern president said that FC Bayern held half of its training sessions in public, which is somewhat unusual internationally. It was also something Guardiola would have to accept, he added. In return, Guardiola said that he doesn't give individual interviews, only press conferences, which was how he'd done things in Barcelona.

Rummenigge responded that he doesn't force anyone to do one-on-one interviews, and then he asked Guardiola whether he also wanted to bring along an entire staff of his own people, including assistant coaches and specialists, as van Gaal had done. No, said Guardiola, he needed only three of his own people, and the rest didn't matter to him. "If you have good people, I'll work with them," he said.

In early November, Rummenigge received a call from New York. "I want to go to Bayern Munich," Pep Guardiola said at the other end of the line.

Pep immediately hired a German teacher in New York, who had to sign an agreement not to talk to the press. "He did it the way he does everything: obsessively. Four hours a day, like a madman," says Pere. A few months later, Guardiola spent six days in Barcelona around Easter. He hired a teacher who was with him constantly. "It's absurd," says Pere. "You meet your brother for lunch, and the guy doesn't stop speaking German to his teacher." Pere swears that his brother will give his first press conference in German. "He's a stubborn guy. He'll do it."

What was still missing on the Bayern side of things, until the very end, was a fundamental decision in favor of Guardiola. It would have to involve parting ways with successful coach Jupp Heynckes.

Shortly after Guardiola's call, Hoeness, Rummenigge, sports director Matthias Sammer and outgoing financial director Karl Hopfner gathered for a game-changing meeting. There was a long, in-depth discussion, which ended with a unanimous decision in favor of hiring Guardiola. They saw Guardiola as a unique opportunity for the club: the most sought-after coach in the world, and someone who would enable them to complete the pending generational shift. Heynckes was 67 at the time, and Guardiola was 41.

Over the years, Munich has suffered from a certain inferiority complex, at least at the higher European level. Although the Bavarians had been among the top clubs, they had never been quite as dazzling and able to elicit the same admiration as FC Barcelona, Manchester United or Real Madrid.

They were upset by the fact that, despite being one of the financially healthiest and best-run club in Europe, they were not the most successful and attractive. It wasn't a club to gush about. Guardiola was supposed to change that.

The only problem was that no one in Bayern's management had actually spoken with the coach serving at that time. Jupp Heynckes knew nothing about all the conversations with Guardiola, and certainly not that an agreement had already been reached with him. Officially, the club had been saying for weeks that it intended to discuss its post-summer plans with Heynckes.

The thinking behind this rigged arrangement was that if Guardiola changed his mind, Heynckes would be damaged as a second choice. Besides, there were important matches scheduled for the end of the year, with Dortmund and Valencia, and the qualification for the round of 16 in the Champions League hadn't been secured yet. The Bayern executives argued that they couldn't know how Heynckes would react to this disappointment. Should we tell the coach now that things won't be continuing, the management team wondered? What do we do if he is angry? They opted for the less risky and less honest choice.

An Emotional Conversation

Hoeness planned to fly to New York in the week before Christmas to meet Guardiola and have him sign the contract. Financial director Hopfner had worked out all the details and given Hoeness the "precise, somehow German" contract, as Guardiola's brother calls it. Hoeness was scheduled to fly to the United States on December 18, a Tuesday. Shortly before his departure, his wife, Susanne, said to him: "Uli, you have to talk to Jupp before you leave. It's your obligation as a friend."

The two men met on the Sunday before Hoeness' departure, in what would be something of a confession for Hoeness. He had to reveal the Guardiola plans, at least in part, to his friend, who had been living in the Hoeness' city apartment for the last year-and-a-half. He would later call it "one of the most difficult conversations of my career."

Then Hoeness and his son Florian, who manages the sausage factory he owns, flew to Chicago for meetings. From there, the Bayern president flew to New York alone.

His meeting with Guardiola was supposed to stay secret. Guardiola had Hoeness picked up in a car with tinted windows from the Four Seasons Hotel in New York. Together with two bodyguards and Guardiola's brother, Hoeness was driven through Manhattan and, finally, into an underground parking garage. Guardiola's apartment, owned by a Deutsche Bank executive, was at 320 Central Park West. It has a private elevator and four bedrooms. The rent was $31,000 a month.

Hoeness spent four hours there. Guardiola's wife, Cristina, cooked dinner, and after the meal the coach presented the president with possible playing systems and lineups for Bayern Munich's next season on his laptop. He told Hoeness that he had watched all of Bayern's matches on TV in New York, as well as Manchester City and FC Chelsea matches. He said that he was convinced that FC Bayern was the team that could come to most closely resemble FC Barcelona. At the time, in December 2012, Hoeness still perceived the remark as a promise.

Guardiola's playing system was thought to be the ultimate, and he was considered invincible. The Barça code would only be cracked in the spring of this year, in the Champions League semi-final, by the man whose end as Bayern's coach Hoeness was just sealing in New York.

On Jan. 16, 2013, with the media already speculating over the upcoming signing of Guardiola, Rummenigge could no longer delay the unpleasant conversation. He had to tell Heynckes that it would be over for him in the summer, even though the irreproachable coach would have liked to stay on for another year.

It was an emotional conversation. Heynckes was upset. Why hadn't Rummenigge and Sammer talked to him about Guardiola before, he asked? Why hadn't they involved him earlier, and why wasn't he given a say in the matter?

In the end, it came down to what the press would be told. Rummenigge offered two options. Either Heynckes would say that he had decided to step down at the end of the season, and that the club had complied with his wishes, or FC Bayern would state that it had hired Guardiola and that Heynckes' contract was not being renewed.

Heynckes chose the first option. After he left, Rummenigge walked over the club president's office, two doors down.

"Karl-Heinz! Are you finished?" Hoeness asked, sitting in an armchair.

"I'm worn out," Rummenigge replied. He had no idea that Heynckes, the man he had just fired, would have the most successful season in FC Bayern's history in the coming weeks.

A Major Challenge

Heynckes' resentment over the way he had been treated became an incentive for him to show everyone what he was made of. He worked even harder and with greater concentration than before, almost to the point of physical exhaustion. He knew that he had only about half a year left, and he took advantage of the time he had left. FC Bayern broke all kinds of records and won the treble by securing the Bundesliga title, the European Cup and the German Cup in the same season. And now Heynckes is leaving on a high note.

"I'm leaving behind a world-class team, perhaps the best team in the world," he said last week at his farewell ceremony. And no one protested. FC Bayern has gained the respect of all of Europe in recent weeks. It's reached the dimension it has always aspired to, the dimension to which Guardiola was in fact supposed to take it to.

Until now, it was thought that Guardiola's successes were a problem for Heynckes, but now the situation seems to have been reversed. How is going to top the treble? Sitting in his office, Pere Guardiola pretends as if he doesn't understand that discussion. "A man who was the coach at Barcelona knows what pressure is," he says, and points out that his brother is simply the kind of person who always has always had to win and that nothing has changed.

The question is not whether the treble makes Guardiola nervous. The question is how someone who has built up one of the best teams of the last few decades handles the expectation of having to repeat the job.

Can Guardiola shape an era once again with FC Bayern, the way he did with Barcelona, or are the skeptics right when they say that with top players like Xavi, Iniesta and Messi in the starting lineup, almost any coach would have won the Champions League?

Frank Rijkaard, Guardiola's predecessor at Barcelona, won the Champions League in 2006 but was subsequently forced to leave the club. He has been wondering aimlessly around the world since then.

He was recently fired from his job as head coach of the Saudi Arabian national team after a series of losses. It's the question Guardiola has to answer, and it's the risk he is taking: Can he surpass the maximum?

A person's character reveals itself in defeat. But because Guardiola has never failed, hardly anyone can describe his true character. Guardiola could end up losing in Munich: against himself.

Translated from the German by Christopher Sultan