Horrible Risk Versus Reward

Doug Nolan

Friday, April 17, 2015

I found myself this week reflecting back to this past May, shortly after Ben Bernanke began his (reportedly) $250,000 dinner meetings.

May 6 - Bloomberg:
“David Einhorn, manager of the $10 billion Greenlight Capital Inc., said he found a recent dinner conversation with former Federal Reserve Chairman Ben S. Bernanke scary. ‘I got to ask him all these questions that had been on my mind for a long time,’ Einhorn said in an interview today with Erik Schatzker and Stephanie Ruhle on Bloomberg Television…‘It was sort of frightening because the answers were not better than I thought they would be.’”

Bernanke’s new blog attempts to answer some of his critics. So far the “answers” have not been “better than I thought they’d be.” Not to be hypercritical, but even after all these years and dramatic experiences, Dr. Bernanke demonstrates an unsophisticated understanding of markets. And as international markets have assumed an ever more powerful command over global economies – and policymakers over the financial markets - is it coincidence that monetary policy has become largely dictated by academics? I find it somewhat ironic that Bernanke signed up this week as senior advisor to one of the world’s most successful hedge fund groups.

April 16 – New York Times (Andrew Ross Sorkin and Alexandra Stevenson):
“For eight years, Ben S. Bernanke, the former Federal Reserve chairman, was steward of the world’s largest economy. Now he has signed on to advise one of Wall Street’s biggest hedge funds. Mr. Bernanke will become a senior adviser to Citadel, the $25 billion hedge fund… He will offer his analysis of global economic and financial issues to Citadel’s investment committees. He will also meet with Citadel’s investors around the globe. It is the latest and most prominent move by a Washington insider through the revolving door into the financial industry… Mr. Bernanke joins a long parade of colleagues and peers to Wall Street and investment firms… In an interview, Mr. Bernanke said he was sensitive to the public’s anxieties about the ‘revolving door’ between Wall Street and Washington and chose to go to Citadel, in part, because it ‘is not regulated by the Federal Reserve and I won’t be doing lobbying of any sort.’ He added that he had been recruited by banks but declined their offers. ‘I wanted to avoid the appearance of a conflict of interest,’ he said. ‘I ruled out any firm that was regulated by the Federal Reserve.’”

I’m reminded of Willie Sutton’s response to why he robbed banks: “Because that’s where the money is.” I could only chuckle at the New York Magazine headline: “Helicopter Ben Makes it Rain – for Himself.” It’s absolutely laughable that the former Fed chair suggests part of his decision for hooking up with a hedge fund was his sensitivity to public anxieties about the “revolving door” between Wall Street and Washington.

I, at least, would rather see Bernanke working with a traditional regulated financial firm, although his compensation would surely be much less. 

Especially in this Bubble backdrop with the global leveraged speculating community playing such an integral role, it just doesn’t look good. In an era where public confidence in the Federal Reserve is so thin and vulnerable, why couldn’t Bernanke have just stuck with his post-Fed career of writing, teaching and a few lucrative dinner engagements? After all these years, I still miss Chairman Volcker.

In his April 7th post, “Should Monetary Policy Take Into Account Risks to Financial Stability?”, Bernanke further builds his case as to why the Fed should not rely on monetary policy to counter asset inflation and Bubbles. He leaves slightly ajar the possibility of at some point resorting to monetary tightening, although that requires the “weighing of benefits and costs.” Bernanke references recent studies where – no surprise here – the associated costs of tightening monetary policy greatly outweigh the benefits.

“Although, in principle, the authors' framework could justify giving a substantial role to monetary policy in fostering financial stability, they generally find that, when costs and benefits are fully taken into account, there is little case for doing so. In their baseline analysis, they find that incorporating financial stability concerns might justify the Fed holding the short-term interest rate 3 basis points higher than it otherwise would be, a tiny amount…”

A few basis points? Surely every sophisticated hedge fund manager in the world would scoff at such research. Directly from Bernanke: “Again, the bottom line is that large increases in the short-term rate based on financial stability considerations alone would involve costs that well exceed the benefits.”

Legendary hedge fund manager Stan Druckenmiller was out this week sharing some of his wisdom (including an insightful WSJ op-ed). He argued (on Bloomberg Television) that current ultra-loose monetary policy provides a “Horrible Risk Versus Reward.” Obviously he’s spot on. Two major U.S. bursting episodes in the past 15 years provide overwhelming proof of the profound financial, economic, social and geopolitical costs associated with Bubbles. If that’s not sufficient, the last two decades witnessed scores of devastating Boom and Bust Cycles around the globe.

While the “blunt tool” of global monetary policy has by now bludgeoned everyone senseless, the world’s numbness to risk did begin tingling a bit late in the week. As the current poster child for the devastating costs associated with major Bubbles, Greece is back in the forefront.

In reality, the “Greek” disaster has been absolutely great for markets. The summer of 2012 crisis of confidence in Greece, European periphery bonds, the region’s banks and the euro unleashed open-ended QE at the Fed, BOJ, SNB and elsewhere. More recently, ongoing Greek and European fragility made certain that the ECB joined the global QE soiree. And the more Greece has appeared to be sliding closer to the brink, the deeper European bond yields have sunk into the great unknown (pulling down Treasury and global bond yields in the process). Here at home, global fragilities empowered the dovish Fed to do nothing (not even a little 25bps baby-step) that might risk rocking the apple cart. This ensured Treasury yields completely defied U.S. fundamentals, especially with king dollar enticing enormous Bubble flows into American stocks, corporate debt and the real economy.

Bernanke concluded his most recent post (“Why Are Interest Rates So Low, Part 4: Term Premiums,” April 13, 2015) with the sentence, “Thus, the recent decline in longer-term yields and term premiums in the US remains something of a puzzle.” Bernanke again invokes the “global savings glut” thesis as the likely explanation for Alan Greenspan’s 2006 “conundrum” (long-term yields remaining low in the face of Fed “tightening”). I argued in 2006 that low bond and MBS yields indicated dangerously distorted Bubble markets. The bond market appreciated escalating Bubble risk – and correctly discerned forthcoming extraordinary policy measures. In the process, tremendous systemic damage was wrought in that 2006-2008 period of (“Terminal Phase” Bubble) market dysfunction.

Some nine years later, there should be little confusion surrounding low (“Conundrum 2.0”) bond yields. Global central banks have demonstrated there is no limit to either the amount of “money” they are willing to create or quantities of securities they will buy. They have essentially guaranteed uninterrupted abundant and cheap market liquidity. Policymakers have assured market participants that financial crisis (or even a recession!) will not be tolerated. Worse yet, central bankers have repeatedly demonstrated no appetite for even a small ration of global de-risking/de-leveraging. In total, myriad interventions have had momentous impact on global market risk and “term premiums.”

Nowadays, the larger global Bubbles inflate the higher the probability of additional QE. This market perception pushes yields lower and stocks higher – in the process fueling a precarious self-reinforcing Bubble Dynamic. Central bankers should never so vigorously manipulate market risk perceptions – especially in an extraordinarily speculative marketplace. The end result has been the most highly distorted Bubble markets in financial history. At this point, everyone has been forced on board (some kicking and screaming).

Greek five-year bond yields surged 325 bps this week to 18.31%, the high since those dark days of 2012. Increasingly pricing in default, Greek CDS surged 770 bps this week to 2,775 bps. Notably, especially late in the week, thus far dormant contagion effects began to awaken. Portuguese bond yield spreads to German bunds surged 48 bps. Italian spreads widened 19 bps and Spain spreads widened 30 bps. Portuguese CDS jumped 21 bps, Italy 22 bps and Spain 19 bps. An index of European (subordinated) bank debt jumped 27 bps to a 2014 high. And after having rallied significantly on the back of Draghi’s QE, European corporate junk bonds this week suffered a sharp reversal of fortunes. Meanwhile, Thursday and Friday trading saw Germany’s DAX equities index suffer a two-day decline of 4.4%.

Blackrock’s Larry Fink has been out front warning of latent market illiquidity risks. Discussing liquidity Friday with UBS’s Axel Weber (on Fox Business), Fink admonished global regulators for failing to address this issue. Yet with the world awash in central bank liquidity and market participants having grown convinced of its endless supply, why on earth would anyone fret illiquidity? The chief worry has instead been the risk of being underinvested and not fully capturing rallies.

April 16 – Financial Times (Ralph Atkins):
“‘I was flabbergasted, I could not believe it.’ The veteran portfolio manager at a top US fund was this week recalling the US Treasury ‘flash crash’ exactly six months ago, when yields in the world’s largest government debt market swung wildly in a matter of minutes. Statistically, such events happened only once every 3bn years, Jamie Dimon, chief executive of JPMorgan Chase, noted recently… But maybe it would help if such events were frequent? As Mr Dimon observed in a letter to shareholders this month, ‘almost no one was significantly hurt’ by what happened on October 15. Instead the ‘flash crash’ triggered a welcome debate about the underlying fragility of the post-2007 crisis global financial system. As Mr Dimon pointed out, it served as a ‘warning shot across the bow’ of investors and market participants.” 
The S&P500 rallied 16% off of October 15th “flash crash” lows. The Semiconductors rose as much as 34% and the Biotechs 50%. In reality, so-called “flash crash” “warning shots” have fallen on deaf ears, working instead to embolden what is now a powerful late-cycle buy the dip mentality. Indeed, the too hasty policymaker responses to previous bursts of risk aversion (2010, 2011, summer 2012, spring 2013, October 2014 and early-2015) solidified the market view that officials have adopted the role of eager promoter and defender of global risk markets.

Bubbles burst. Yet Bubbles can thrive on loose monetary conditions for so long that seemingly nothing can get in their way. And the bigger the Bubble the greater the risk of a destabilizing shift in market perceptions. The longer “risk on” gains momentum and becomes more deeply entrenched, the higher the probability of a “black swan.”

From my vantage point, excesses have reached the point where a bout of “Risk Off” de-risking/de-leveraging risks another “flash crash” and liquidity panic. 

As I’ve argued in the past, so-called “black swans” are actually not the as-advertised “low-probability events”. Indeed, the deepening perception of low probability bad market outcomes over time creates a high probability for market dislocation catching The Crowd unprepared. The next “flash crash” is as close as the trend-following, performance-chasing and “high-frequency” trading Crowds moving concurrently to take some risk off the table. The proliferation of derivative strategies and trading provides enormous additional market leverage to the upside as well as the downside.

Greek default and possible “Grexit” create potential major “Risk Off” catalysts. 

That monetary policy has so numbed global market risk senses significantly raises the stakes. Policy-induced runaway global equities Bubbles have unfolded in the face of diminishing economic prospects. This elevates the risk of “Risk Off” escalating into something quite problematic. And that Chinese officials moved Friday evening to tighten the finance fueling their runaway stock market Bubble adds another important source of global uncertainty.

It’s worth noting that the crowded dollar bull trade was under pressure this week. The dollar index fell 1.8%. The crowded euro short was pressured by a 1.9% rally in the euro currency. The “yen carry trade” was pressured by a better than 1% yen rally versus the dollar. The crowded commodities short was also under pressure. Crude surged 7.9%, with natural gas up 4.9%. As Treasuries rallied, corporate Credit and MBS spreads widened.  Risk Off has an opening.

April 17 – Reuters (Marc Jones and John O’Donnell: “The European Central Bank has analyzed a scenario in which Greece runs out of money and starts paying civil servants with IOUs, creating a virtual second currency within the euro bloc, people with knowledge of the exercise told Reuters.
Greece is close to having to repay the International Monetary Fund about 1 billion euros in May and officials at the ECB are growing concerned. Although the Greek government has repeatedly said that it wants to honor its debts, officials at the ECB are considering the possibility that it may not, in work undertaken by the so-called adverse scenarios group. Any default by Greece would force the ECB to act and possibly restrict Greek banks' crucial access to emergency liquidity funding. Officials fear however that such action could push cash-strapped Athens into paying civil servants in IOUs in order to avoid using up scarce euros. ‘The fact is we are not seeing any progress... So we have to look at these scenarios,’ said one person with knowledge of the matter.”

Liquidity in markets


Regulators have made banking safer. But has that made markets riskier?

Apr 18th 2015

TO ENSURE that it meets the 750 new rules on capital imposed in the aftermath of the financial crisis, JPMorgan Chase employs over 950 people. A further 400 or so try to follow around 500 regulations on the liquidity of its assets, designed to stop the bank toppling over if markets seize up. A team of 300 is needed to monitor compliance with the Volcker rule, which in almost 1,000 pages restricts banks from trading on their own account.

The intention of all these rules is to prevent a repeat of the bankruptcies and bail-outs of 2008.

But some observers, including JPMorgan’s boss, Jamie Dimon, and Larry Summers, a former Treasury secretary, argue that in their rush to make banks safer, regulators may have created a riskier financial system. By throttling the bits of banks that “make markets” in bonds, shares, currencies and commodities, the theory goes, watchdogs have made such assets less liquid.

Investors may not be able to buy and sell them quickly, cheaply and without moving the price.

The consequences in a downturn, when markets are less liquid anyway, could be severe.  

Banks have undoubtedly cut back as the plethora of new rules has made it difficult for their trading arms to eke out a satisfactory profit. They used to “warehouse” lots of bonds and other securities they had bought from one client and hoped to sell to another. But they must now hold more capital and liquid assets to offset the potential losses from trading, so keep much smaller inventories and place fewer bets. Broadly speaking, trading desks are still happy to match buyers and sellers but are reluctant to commit to a purchase before lining up a buyer.

Meanwhile, the value of outstanding bonds has swollen to record levels, most of them in the hands of asset managers (see chart). That is in part a corollary of banks trimming lending, and so pushing borrowers to the bond market instead, and in part a natural response to low interest rates. Even firms with patchy credit records are issuing “high-yield” debt to investors clamouring for returns. Governments have remained eager borrowers, too.

The result is an imbalance. In America, investment funds used to hold only three times as many bonds as banks. Now they hold 20 times as many, according to the Federal Reserve (see chart).

Mr Dimon paints an even starker picture for Treasuries. In 2007 JPMorgan and its peers used to have $2.7 trillion available to make markets. Now they have just $1.7 trillion—while the American national debt has doubled. In Europe, where banks have trimmed investment banking even more, the situation is if anything worse.

The result of this lopsidedness, pessimists say, are events like the “flash crash” last year, during which yields on Treasuries suddenly tumbled by 0.34 percentage points for no apparent reason—an extraordinary shift for the bedrock security of the global financial system. They are worried about bonds of all sorts, which are much less heavily traded than shares, currencies and commodities.

Funds that track corporate bonds often promise their investors their money back whenever they want it, despite the relative illiquidity of their assets. The IMF recently calculated that it might take 50-60 days for a fund holding American high-yield corporate bonds to find buyers for its securities.

Meanwhile, investors are typically entitled to their money back within seven days of asking for it. “No investment vehicle should promise greater liquidity than is afforded by its underlying assets,” says Howard Marks, boss of Oaktree, a debt fund.

Regulators are mindful of all this. The Securities and Exchange Commission in America has called for stress tests of asset managers to ensure they can muddle through a crisis. The Bank of England wants them to look closely at redemption policies. They also suspect, however, that the high level of liquidity before the crisis was an anomaly that bankers are harping on about in an effort to roll back regulation.

Asset managers are also aware of the risks of diminished liquidity. BlackRock, the world’s biggest, has said it is limiting its exposure to certain bonds as a result. Others are breaking up big trades into smaller orders, to prevent them moving prices in an adverse direction, or trading less than they might otherwise. Funds tracking bond indices hold cash to meet redemptions. They can also invest in derivatives linked to the index, which are typically more liquid than individual bonds. If faced with a rash of redemptions, these can be sold off without much loss.

Another solution is for the asset managers to bypass the banks. Many are trying to “cross-trade”, exchanging assets with one another directly, instead of using banks as go-betweens. But matching buy and sell orders electronically is tricky for bonds: whereas most firms have only one or two classes of shares, many have issued dozens of bonds, in different currencies and with different maturities. There have been several attempts to set up trading platforms, but few have attracted much volumen.

Even if such schemes get off the ground, asset managers cannot fully substitute for banks. They do not have as much purchasing power, since their balance-sheets are not swollen with borrowed money. Relatively few of them have a mandate to be contrarian: most (especially those passively tracking an index) want to enter or exit the same positions at the same time.

All this may mean that asset managers are indeed forced to offload securities at fire-sale prices in times of turmoil. But unlike banks, which can fail due to trading losses, asset managers are mere custodians of money. Any losses in their funds are passed on directly to investors. Having banks—highly leveraged and interconnected institutions—sit on top of that risk proved a disastrous recipe during the crisis. Maybe their retrenchment has indeed made markets riskier. Yet that may be an acceptable price for making banks safer.

Bonds beware as money catches fire in the US and Europe

Broad M3 money indicators point to a reflationary mini-boom in America and Europe by the end of the year, but be careful what you wish for

By Ambrose Evans-Pritchard, in Washington

6:23PM BST 15 Apr 2015

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The world is still on a dollar-standard, moving to US monetary rhythms, whatever the central banks elsewhere may be doing Photo: Alamy
Be thankful for small mercies. The world economy is no longer in a liquidity trap. The slide into deflation has, for now, run its course.

The broad M3 money supply in the US has been soaring at an annual rate of 8.2pc over the past six months, harbinger of a reflationary boomlet by year's end.
Europe is catching up fast. A dynamic measure of eurozone M3 known as Divisia - tracked by the Bruegel Institute in Brussels - is back to growth levels last seen in 2007.
History may judge that the European Central Bank launched quantitative easing when the cycle was already turning, but Italy's debt trajectory needs all the help it can get.

The full force of monetary expansion - not to be confused with liquidity, which can move in the opposite direction - will kick in just as the one-off effects of cheap oil are washed out of the price data. "Forecasters ignore broad money at their peril," says Gabriel Stein, at Oxford Economics.

Inflation will soon be flirting with 2pc across the Atlantic world. Within a year, the global economic landscape will look entirely different, with an emphasis on the word "look". In my view this will prove to be mini-cyclical in a world of "secular stagnation" and deficient demand, but mini-cycles can be powerful.

Mr Stein said total loans in the US are now growing at a faster rate (six-month annualised) than during the five-year build-up to the Lehman crisis. "The risk is that the Fed will have to raise rates much more quickly than the markets expect. This is what happened in 1994," he said.

That episode set off a bond rout. Yields on 10-year US Treasuries rose 260 basis points over 15 months, resetting the global price of money. It detonated Mexico's Tequila crisis.

Bonds are even more vulnerable to a reflation shock today. You need a very strong nerve to buy German 10-year Bunds at the current yield of 0.16pc, or French bonds at 0.43pc, at time when EMU money data no longer look remotely "Japanese".

Granted, there may be tactical reasons for buying Bunds, even at negative yields out to eight years maturity. Supply is drying up. Berlin is pursuing a budget surplus with religious zeal, paying down €18bn of debt over the past year. It has left the Bundesbank little to buy as it launches its share of QE.

Yet this is collecting pfennigs on the rails of a high-speed train. The German property market is on the cusp of a boom. David Roberts, of Kames Capital, warns of a "poisonous cocktail" of resurgent inflation and rising wages. “If you look at Bunds in anything other than the shortest possible timescale, the risk becomes very clear.”

US bond markets are equally vulnerable. Investors are pricing in rates of 0.9pc by the end of 2016, compared with 1.875pc by the Fed itself. This is extraordinary. The St Louis Fed's James Bullard could hardly have been clearer on a recent trip to London.

“I think reconciliation between what markets think and what the committee (FOMC) thinks will have to happen at some point. That's a potentially violent reconciliation," he said.

It is not as if the Fed is hawkish. It is rightly wary of tightening with the labour participation rate still stuck at a 40-year low of 62.7pc. Yet the market is turning. The quit rate - a gauge of willingness to look for a better job - is nearing 2pc, the level when employers must build pay-moats to keep workers.

It is true that the US economy gave a good imitation of hitting a brick wall in the first quarter.

Retail sales have fallen for three months, the worst drop since 2009. The Atlanta Fed's snap indicator - GDPNow - suggests that growth dropped to stall speed in March. The rise in non-farm payrolls slumped 126,000 in March, half expectations.

Yet economies do not fall out of sky. The US has already survived the biggest fiscal squeeze since demobilisation after the Korean War without falling into recession. Fiscal policy is now neutral.

The oil crash is a net plus: every one cent cut in petrol prices adds $1bn to the US economy as a de facto "tax cut". The eurozone is recovering.

The rising dollar cannot alone explain what has happened. The US tradeable sector is too small, and the time-lags are too long. New York Fed chief Bill Dudley said the 15pc rise since mid-2014 has been a "significant shock" and will knock 0.6pc off GDP this year, but it is not enough to derail recovery. Let us blame this recession scare on winter snow, the sort of anomaly that happens from time to time.

The greater threat - muttered sotto voce at the IMF Spring meeting this week - is that the Fed will soon be forced to hit the brakes hard, throwing dollar-debtors through the windscreen across the emerging world.

The official line is that all is under control. There will be no repeat of the "taper tantrum" in 2013. Behind the scenes, IMF officials acknowledge that it may be worse, a full-fledged margin call on $9 trillion of external dollar borrowing, much of it by companies in China, Hong Kong, Brazil, Mexico, South Africa and Russia. They fear too that it will combine with a nasty unwinding of East Asia's internal credit bubble.

Willem Buiter, at Citigroup, says those countries that drank mostly from the cup of global dollar liquidity when the Fed was feeling generous are about to discover that not all forms of stimulus are equal.

The world is still on a dollar-standard, moving to US monetary rhythms, whatever central banks elsewhere may be doing. You cannot offset QE in Japan and Europe, against the end of QE in the US, let alone US rate rises. They are not remotely equivalent.

"The dollar is the only global reserve currency worth the name. The euro is in intensive care, the yen is too small, nobody has heard of sterling, and the renminbi is not yet ready for prime time. Strangely enough, the dollar is more dominant today than I remember in a long time," he said.

Global lending in dollars has grown fourfold since 2000. We will find out over the next 18 months whether the world can withstand the rigours of Fed tightening and a dollar drought, or indeed whether the US itself is strong enough to withstand the eventual economic blowback if this turns serious.

That is a story for another day. The plain fact before our eyes is that monetary data in the US and Europe are catching fire. If you can figure out what the convoluted consequences mean for asset prices, you are doing better than anybody at the IMF this year.

Op-Ed Columnist

That Old-Time Economics

APRIL 17, 2015

Paul Krugman

But you can’t say the same about the eurozone, where real G.D.P. per capita is still lower than it was in 2007, and 10 percent or more below where it was supposed to be by now. This is worse than Europe’s track record during the 1930s.
Why has Europe done so badly? In the past few weeks, I’ve seen a number of speeches and articles suggesting that the problem lies in the inadequacy of our economic models — that we need to rethink macroeconomic theory, which has failed to offer useful policy guidance in the crisis. But is this really the story? 

No, it isn’t. It’s true that few economists predicted the crisis. The clean little secret of economics since then, however, is that basic textbook models, reflecting an approach to recessions and recoveries that would have seemed familiar to students half a century ago, have performed very well.
The trouble is that policy makers in Europe decided to reject those basic models in favor of alternative approaches that were innovative, exciting and completely wrong.
I’ve been revisiting economic policy debates since 2008, and what stands out from around 2010 onward is the huge divergence in thinking that emerged between the United States and Europe.
In America, the White House and the Federal Reserve mainly stayed faithful to standard Keynesian economics. The Obama administration wasted a lot of time and effort pursuing a so-called Grand Bargain on the budget, but it continued to believe in the textbook proposition that deficit spending is actually a good thing in a depressed economy. Meanwhile, the Fed ignored ominous warnings that it was “debasing the dollar,” sticking with the view that its low-interest-rate policies wouldn’t cause inflation as long as unemployment remained high.

In Europe, by contrast, policy makers were ready and eager to throw textbook economics out the window in favor of new approaches. The European Commission, headquartered here in Brussels, eagerly seized upon supposed evidence for “expansionary austerity,” rejecting the conventional case for deficit spending in favor of the claim that slashing spending in a depressed economy actually creates jobs, because it boosts confidence. Meanwhile, the European Central Bank took inflation warnings to heart and raised interest rates in 2011 even though unemployment was still very high.

But while European policy makers may have imagined that they were showing a praiseworthy openness to new economic ideas, the economists they chose to listen to were those telling them what they wanted to hear. They sought justifications for the harsh policies they were determined, for political and ideological reasons, to impose on debtor nations; they lionized economists, like Harvard’s Alberto Alesina, Carmen Reinhart, and Kenneth Rogoff, who seemed to offer that justification. As it turned out, however, all that exciting new research was deeply flawed, one way or another.
And while new ideas were crashing and burning, that old-time economics was going from strength to strength. Some readers may recall that there was much scoffing at predictions from Keynesian economists, myself included, that interest rates would stay low despite huge budget deficits; that inflation would remain subdued despite huge bond purchases by the Fed; that sharp cuts in government spending, far from unleashing a confidence-driven boom in private spending, would cause private spending to fall further. But all these predictions came true.
The point is that it’s wrong to claim, as many do, that policy failed because economic theory didn’t provide the guidance policy makers needed. In reality, theory provided excellent guidance, if only policy makers had been willing to listen. Unfortunately, they weren’t.
And they still aren’t. If you want to feel really depressed about Europe’s future, read the Op-Ed article by Wolfgang Schäuble, the German finance minister, that was published Wednesday by The Times. It’s a flat-out rejection of everything we know about macroeconomics, of all the insights that European experience these past five years confirms. In Mr. Schäuble’s world, austerity leads to confidence, confidence creates growth, and, if it’s not working for your country, it’s because you’re not doing it right.
But back to the question of new ideas and their role in policy. It’s hard to argue against new ideas in general. In recent years, however, innovative economic ideas, far from helping to provide a solution, have been part of the problem. We would have been far better off if we had stuck to that old-time macroeconomics, which is looking better than ever.

Reform in China

The quiet revolution

A slowing economy commands headlines, but the real story is reform

Apr 18th 2015       

WITH China, the received wisdom belongs to the pessimists. Figures this week revealed that growth has slowed sharply and deflation set in, as the economy is weighed down by a property slump and factory production is at its weakest since the dark days of the global financial crisis. In the first three months of 2015, GDP grew at “only” 7% year-on-year. Growth for 2015 will probably be the weakest in 25 years.

Fears are rising that, after three soaring decades, China is about to crash. That would be a disaster. China is the world’s second-largest economy and Asia’s pre-eminent rising power. Fortunately, the pessimists are missing something. China is not only more economically robust than they allow, it is also putting itself through a quiet—and welcome—financial revolution.

The robustness rests on several pillars. Most of China’s debts are domestic, and the government still has enough sway to stop debtors and creditors getting into a panic.

The country is shifting the balance away from investment and towards consumption, which will put the economy on more stable ground. Thanks to a boom in services, China generated over 13m new urban jobs last year, a record that makes slower growth tolerable.

Given China’s far bigger economy, expected growth of 7% this year would boost the global economy by more than 14% growth did in 2007.

However, the real reason to doubt the pessimists is China’s reforms. After a decade of dithering, the government is acting in three vital areas. First, in finance, it has started to loosen control over interest rates and the flow of capital across China’s borders. The cost of credit has long been artificially low, squashing the returns available to savers while, at the same time, succouring inefficient state-owned firms and pushing up investment. Caps on deposit rates are becoming less relevant, thanks to an explosion of bank-account substitutes that now attract nearly a third of household savings. Zhou Xiaochuan, the governor of China’s central bank, has said there is a “high probability” of full rate-liberalisation by the end of this year.

China is also becoming more tolerant of cross-border cash flows. The yuan is, little by little, becoming more flexible; multinational firms are able to move revenues abroad more easily than before. The government’s determination to get the IMF to recognise the yuan as a convertible currency before the end of 2015 should pave the way for bolder moves.

The second area is fiscal. Reforms in the early 1990s gave local governments greater responsibility for spending, but few sources of revenue. China’s problem of too much investment stems in big part from that blunder. Stuck with a flimsy tax base, cities have relied on sales of land to fund their operations and have engaged in reckless off-books borrowing.

The finance ministry now says it will sort out this mess by 2020. The central government will transfer funds to provinces, especially for social priorities, while local governments will receive more tax revenues. A pilot programme has been launched to clear up local-government debt. It lays the ground for a municipal-bond market—despite the risks, that is better than today’s opaque funding for provinces and cities.

The third area of reform is administrative. In early 2013, at the start of his term as prime minister, Li Keqiang pledged that he would cut red tape and make life easier for private companies. It is easy to be cynical, yet there has been a boom in the registration of private firms: 3.6m were created last year, almost double 2012’s total.

The high road of lower growth
In time, these reforms will lead to capital being allocated more efficiently. Lenders will price risks more accurately, with the most deserving firms finding funds and savers earning decent returns. If so, Chinese growth will slow—how could it not?—but gradually and without breaking the system.

Yet dangers remain. Liberalisation risks breeding instability. When countries from Thailand to South Korea dismantled capital controls in the 1990s, their asset prices and external debts surged, ultimately leading to banking crises. China has stronger defences but nonetheless its foreign borrowing is rising and its stockmarket is up by three-quarters in six months.

And then comes politics. Economic reforms have high-level backing. Yet the anti-corruption campaign of President Xi Jinping means that officials live in fear of a knock on the door by investigators. Many officials dare not engage in bold local experiments for fear of offending someone powerful.

That matters because reform ultimately requires an end to the dire system of hukou, or household registration, which relegates some 300m people who have migrated to cities from the countryside to second-class status and hampers their ability to become empowered consumers. Likewise, farmers and ex-farmers need the right to sell their houses and land, or they will not be able to share in China’s transformation.

Ever fond of vivid similes, Mr Li says economic reforms will involve the pain a soldier feels when cutting off his own poisoned arm in order to carry on fighting. “Real sacrifice”, he says, is needed. China’s quiet revolution goes some of the way. But Mr Li is right: much pain lies ahead.

Men Go Mad in Herds

By: The Burning Platform

Friday, April 17, 2015

Charles Mackay

The Chinese real estate bubble has been imploding for the last year. The Chinese economy is barely growing at 1.6% after decades of 10% growth. There are millions of unoccupied condos.

There are dozens of ghost cities and empty office towers. It´s the most corrupt nation on earth.

We are in the midst of a global recession. It´s pure madness that the Chinese stock market would soar when its leading economic indicators crash to 2008 lows.

Shanghai Composite versus China LEI

Its stock market has gone up 115% in the last 9 months. It has gone up 80% in the last 5 months. It has gone up 35% in the last month. Housewives and other uneducated gamblers have opened a record 10.8 million new stock accounts this year, more than the total number for all of 2012 and 2013 combined.

Shanghai Composite Daily Chart

The Hong Kong stock market has gone up 14% in three weeks.

HSI daily Chart

Since real estate investing is failing miserably, the Chinese middle class have piled into stocks on margin. Where have I seen that before? Margin debt on the Shanghai Stock Exchange climbed to a record 1.16 trillion yuan on Thursday. When has buying overvalued stocks on margin when the economy is tanking ever gone wrong before? Have we already forgotten 2000 and 2008? Humans truly act like irrational herds of cattle stampeding in whatever direction they are pushed by their keepers.

Shanghai and Shenzhen Stock Exchange Margin Purchases

After the markets closed for the weekend today in China regulators announced they were clamping down on the use of shadow financing for equity purchases and increased the supply of shares available for short sellers. Bloomberg explained what happened a few hours ago:
Investors have used umbrella trusts, which allow for more leverage than brokerage financing, to ramp up wagers on Chinese stocks after monetary stimulus sparked a world-beating rally in the nation´s benchmark equity gauge. Permitting mutual funds to lend their holdings to short sellers would make it easier for bearish traders to bet on a retreat after the Shanghai Composite Index closed at a seven-year high on Friday.
The announcement immediately caused Chinese stock market futures to crash by 6%. A similar move in U.S. markets would be a 1,000 point crash in the Dow. 

Monday should be interesting. The Chinese Plunge Protection Team is probably conferring with Yellen and her minions to avoid a worldwide contagion of people coming to their senses.

Bloomberg stumbles upon the truth of all the stock markets in the world hitting record highs:
Chinese investors have been piling into the equity market after the central bank cut interest rates twice since November and authorities from the China Securities Regulatory Commission to central bank Governor Zhou Xiaochuan endorsed the flow of funds into equities.
Central bankers in the U.S., Europe and Asia have created another massive bubble. This time it is a bubble in stocks, bonds and real estate simultaneously. 

There is no place to hide. We are now in the blow-off stage. Markets are totally disconnected from reality, amateurs and muppets have been lured into the fray, margin debt is off the charts around the globe, and confidence in the infallibility of Yellen, Draghi, and the Asian central bankers couldn´t be higher.

These bankers have been tasked by their .1% masters to elevate markets across the globe so they can extract the remaining wealth of the clueless plebs. We are now in the death throes of this latest tulip mania. It may go on for many more months or today may be the peak, but one thing is for sure - it will crash and burn.

What happens next is anyone´s guess. But I´d put my money on war, chaos, and revolution. There will be no impunity for our gambling.

Tulip Price Index

"Nations, like individuals, cannot become desperate gamblers with impunity. Punishment is sure to overtake them sooner or later." - Charles Mackay

The Consequences Of The Fed's Interest Rate Hike

  • Theoretical effects of rising interest rates.
  • History of the past three tightening cycles.
  • Conclusions for the gold market.
Although sometimes we doubt whether the Fed is going to increase interest rates soon, it is worth analyzing the consequences of such a game-changing move. The hike would be the first in nearly a decade. Theoretical effects of rising interest rates are well-known: higher interest rates mean higher borrowing costs (something to consider: if you have a variable rate mortgage and believe that Fed will eventually hike interest rates, think about locking in at current low rates with a fixed-rate mortgage), lower asset prices, reduced risk-premium and a stronger greenback. All of these are relatively bad for the stock market. Higher discount rates mean lower stock prices, while reduced risk-premium makes equities less attractive compared to new issues of bonds. Higher borrowing costs hurt indebted companies, while a stronger greenback negatively affects the exporters and international businesses, which are a significant part of the U.S. stock market. This is why the equity indices were generally falling in March in anticipation of the Fed's hike and surged after the publication of the dovish FOMC statement.

There are sound arguments for the Fed's hike being priced in stock market and U.S. dollar indices. This is how markets generally work: investors buy the rumor and sell the actual event.

In a sense, the Fed may be forced to hike interest rates since the February report has already caused the rise in market interest rates and decline in stocks prices. It means that global investors are not waiting for the Fed to raise interest rates and are already betting that interest rates are going to increase in the U.S. this year. Indeed, according to CME Fed Watch (on March 19), the Fed's funds futures contracts suggest a 12 percent probability of a June rate hike, a 49 percent probability of an increase in September, a 70 percent probability of a rate hike in October, and an 79 percent of December rate hike.

The hike has also been priced to some extent into the U.S. dollar index, as the currency investors are future-oriented. Typically, the currency movements are the very leading indicator. Indeed, the history of the past three tightening cycles teaches us that the greenback gains in the six to nine months preceding the first interest rate hike over the cycle.

It does not mean, however, that the Fed's hike will not cause the further appreciation of the greenback (and decline in stock prices). Everything depends on the timing and magnitude of the possible monetary tightening. At the moment, markets are pricing in a slower path than the median Fed's official projection. The history of the past Fed's tightening cycles shows that investors did not always fully price to the extent the Fed had planned on raising rates. The cycle from 1999 to 2000 was generally anticipated correctly, however in 1994 the scale and pace of the Fed's tightening surprised markets and hurt almost all asset classes. Soon, the long-term interest rates increased sharply and the assets were repriced accordingly. The last tightening cycle from 2004 to 2006 was a different story, because the longer term interest rates hardly moved due to strong demand for U.S. assets from foreign investors.

What are the conclusions for the gold market? As we have pointed out, the Fed's hike alone would not negatively affect gold prices. The real interest rates or U.S. dollar index are much more important for the gold market than single changes in the federal funds rate. According to Barclays analysts, apart from the "hiking cycle of 2004-06, gold prices tend to fall 2% in the three months leading up to the rate hike," but everything depends on the economic context.

After the surprising announcement of the interest rates hike in 1994 the gold prices fell from $388 to $380 (see the chart below), however during the whole tightening cycle the yellow metal was traded sideways, because the U.S. dollar was falling during the whole of 1994. The last tightening cycle from 2004 to 2006 did not disrupt the gold boom in 2000s. Again, it was a time of a falling U.S. dollar. For most of 1999 the gold price was falling only to rise from $270 to $323 in October 1999 following an agreement to limit gold sales by 15 European central banks.

It shows that the gold prices depend on many factors and may rise on worries about the eurozone economy, despite the Fed's tightening.

Graph 1: Gold prices (London PM Fix, green line) and Federal Funds Rate (red line) from 1993 to 2006.
(click to enlarge)

Indeed, with ultra-low yields on European and Japanese bonds, investors should shift their capital to the U.S. bond market. A possible demand for U.S. Treasuries would keep long-term interest rates low, which would support the gold prices. In other words, if the Fed's tightening is gradual and correctly anticipated, and interest rates remain low by historical standards, the impact on gold should not be huge. This is exactly what the economists are expecting right now.

The first move will be rather small, probably a quarter of a point, and it will be carefully signaled to the market to prevent any surprise. However, the strong U.S. greenback seems to be a headwind for the yellow metal, at least in the coming months before the Fed's hike.

George Osborne basks in IMF glory as Britain achieves jobs miracle

Chancellor hails the economy as a 'job-creating machine' but warns Scotland will take the largest hit from falling oil prices

By Ambrose Evans-Pritchard, Washington

6:00PM BST 17 Apr 2015

Union jack sterling

A record 31 million people are in work, with unemployment dropping to 5.6pc 
Britain is enjoying its best rate of employment in 40 years and has become a poster-child of economic success in a depressed world still struggling to shake off the lingering effects of the financial crisis, George Osborne has claimed.
Basking in lavish praise from the International Monetary Fund, the Chancellor said the latest jobs data are a resounding triumph for British economic management under the Conservatives.
"The UK economy is one of the brighter spots in the world economy at the moment. That is confirmed by the IMF forecast, which shows the UK is the second fastest growing economy of the G7 in the next two years, after being the fastest-growing in 2014," he said.
"All of that is more than reinforced by the employment figures we saw this morning, which showed a record number of people in work, and claimant counts at the lowest level since 1975," he said.
Unemployment dropped by 76,000 to 1.84m over the three months to February. A record 31m people are in work, and the jobless rate has fallen to 5.6pc, close to the inflexion point where it starts to generate wage pressures.
"The British economy is a job-creating machine, and we set out plans today as the Conservative Party, to go on creating 2m jobs in the next parliament," he said.

Christine Lagarde, the IMF's managing director, praised the UK the recovery but did not specify whether this was the result of quantitative easing by the Bank of England or the strategy of the Government.

"It's clearly delivering results, because when we look at the comparative growth rates delivered by various countries in Europe, it's obvious that what's happening in the UK has actually worked," she said.

The IMF has persistently misjudged the strength of the UK recovery, forecasting that fiscal austerity would do more damage than has materialised.

The Fund's economists rely on Keynesian models that give too much weight to the fiscal multiplier, and have under-estimated the sheer power of monetary stimulus.

Christine Lagarde: 'It's obvious that what's happening in the UK has actually worked'

Mr Osborne said one of the side-effects of Britain's stellar jobs growth is poor productivity growth but called it the lesser of evils than can be tackled over time with infrastructure investment. "I would rather have a productivity challenge than a massive unemployment challenge," he said.

The Chancellor remains confident that Britain's North Sea oil industry is strong enough to weather the slump in global prices but warned that the crisis shows just how vulnerable Scotland might be if left alone to the mercy of the global commodity cycle.

The IMF said the UK's oil producers have the cost structure of any major region in the world, suffering even more stress than the US shale drillers since the collapse in prices over the past year.

"Canada, the North Sea and the United Kingdom are among the most expensive places to operate oil fields. As a result, the oil price slump will affect production in those locations earlier and more intensely than in other locations," it said.

Mr Osborne said the Scottish economy will bear the brunt but the UK as a whole will benefit.

"The oil price fall is clearly a challenge for the very important oil and gas industry in Scotland and important parts of the supply chain across the UK," he said

"I think this is a demonstration of the strength of the United Kingdom, that when one particular part of our UK is affected, the broad shoulders of the entire United Kingdom can stand behind it," he said.

Mr Osborne said the Government had taken "dramatic action" in the Budget to cut taxes on North Sea oil production and introduce investment allowances to pay for seismic surveys and exploration.

It is an open question whether it will be enough to prevent decimation of the industry if Brent crude prices remain near $60 into next year as hedging contracts by producers run out.

A Rigzone survey found that just 17pc of oil and gas professionals think the tax measures will not be enough to lift investment in the North Sea over the next five years. Many are already looking for jobs abroad.

The Over-Valued Dollar

By: GoldMoney

Friday, April 17, 2015  There are two connected reasons usually cited for the current dollar strength: the US economy is performing better than all the others, leading towards relatively higher US dollar interest rates, and that this is triggering a scramble for dollars by foreign corporations with uncovered USD liabilities. There is growing evidence that the first of these reasons is no longer true, in which case the pressure to buy dollars should lessen considerably.

In coming to this conclusion we must be careful not to limit our thinking to the dollar rate against other currencies. They are arguably in an even worse position, with active Quantitative Easing in both Japan and the Eurozone failing to resuscitate industrial life, while the UK is in the middle of a heated election campaign. Instead we should think primarily in terms of the dollar's purchasing power for goods and services, and here the market is already skewed to one side: the public prefers to hold dollars and reduce debt rather than spend freely, because everyone knows that prices of consumer goods are not rising and, so the logic goes, inflation is dead and buried.

Such unanimity is always dangerous and the mainstream fails to notice that far from an inflationless recovery, the US economy appears to be stalling badly. 

This is hardly surprising since private sector credit is still tight. Depending whose figures you use, total US debt is estimated to be in the region of $57 trillion, an increase of about $4 trillion since the banking crisis in 2008. 

However, government and state debt held by the public has risen by $6.7 trillion and large corporations have borrowed a further $2.3 trillion to buy back shares.

Meanwhile financial debt, which includes asset backed securitisations of consumer debt, has fallen by about $4 trillion, while consumer debt directly held has declined slightly. These rough figures suggest that credit for households and smaller businesses remains constrained.

Since mid-2014 markets have undergone a sea-change, with the dollar strengthening sharply against the other major currencies and the oil price collapsing along with a number of key industrial commodities. The Baltic Dry Index, a measure of shipping demand, has recently fallen to the lowest level ever recorded. Admittedly there is a glut of ore carriers helping to drive shipping rates down, but there can be no doubt that trade volumes are down as well; and there has also been hard evidence with China's imports and exports having declined sharply.

Common sense says that from the middle of 2014 the world ex-America entered the early stages of an economic slump. Common sense obviously took time to catch up with the US, and it is only in the last month or so that mainstream economists have begun to cautiously down-grade their GDP forecasts. It is now impossible to ignore the confirmations which are coming thick and fast. This week alone has seen inventories stuck on the shelves, small business optimism declining and the National Association of Credit Managers reporting serious financial stress; and that was only Monday and Tuesday. This is the background against which we must assess future dollar-denominated prices.

Conventional wisdom would have us believe that an economic slump leads to an increased demand for cash as businesses are forced to pay down their debt: this is essentially the Irving Fisher debt-deflation theory from the 1930s. It is for this reason that modern central banks exist and they stand ready to create as much money as may be required to prevent this happening. Let us assume they succeed. We then have to consider another factor, and that is the progress of monetary hyperinflation, for this becomes the underlying condition driving dollar prices.

Central banks can nearly always debauch their currencies with impunity.

People automatically think that money is stable and do not generally draw the conclusion that a rise in the level of prices is connected to an expansion in the quantity of money or credit. While they often admit that money buys less today than it did thirty or forty years ago, and they are aware of the consumer price index trend, they may fail to appreciate that money can and does change its purchasing power from day to day. The result is they attach changes in prices not to money but to factors affecting individual goods.

There are several factors that affect prices, one of which is an increase in the quantity of money when that new money is spent on the goods being considered. Obviously, if the new money is not spent on consumer goods, but hoarded or spent on something else, an increase in the quantity of money will not lead to higher prices for items in a consumer price index.

But more importantly, prices are inherently subjective, which is why we cannot forecast tomorrow's prices. If you find this hard to accept, just look at the average stock trader's record: if he is very good he might have a 10% edge, but even then he cannot tell you tomorrow's stock prices.

Subjectivity of prices is the consequence of changing preferences for money relative to individual goods. In the current economic climate with its restricted credit people are understandably cautious about spending, which means their preference for money is relatively high. But not everyone shares the same preferences, and they are likely to be different across different classes of goods as well, with commodities and raw material prices behaving differently from the prices of finished goods, even though they are linked.

So far price rises due to monetary inflation have been generally restricted to financial markets and associated activities. Early speculators have done very well, with today's buyers being forced to pay considerably higher prices for the same investments. Despite this obvious phenomenon, speculators do not usually understand it is the swing in preference from money towards financial instruments that is behind the rise in prices.

But what if this relative preference starts to swing in favour of commodities? 

The swing in preference has meant the price of oil in dollars has already risen 25% in recent weeks, or alternatively, we can say the purchasing power of the dollar has fallen by that amount.

Copper, the commodity that should be collapsing as we go into a slump, has also risen, this time by 15% over the last two months.

Commodity traders who look at the charts will tell you that these are normal corrections in a bear market for the commodities involved. But how can this be, when we are entering a deflationary slump? The answer is simple: there has been a change of preferences with respect to oil, where buyers value oil more than dollars, and also for copper. This should not be confused with an increased desire to own oil and copper; rather it is a reduced desire to hold dollars relative to these two commodities.

If the idea the dollar is weakening spreads from selected but economically important commodities it could begin to alter the balance of preferences more generally, for which almost everyone is ill-prepared. How long the process takes we cannot know until it happens; but if the general public realises it is the dollar's purchasing power going down instead of goods prices rising, it will be very difficult to stop its purchasing power from collapsing entirely.


A zeal for deals

Corporate takeovers are booming once again

Apr 18th 2015


MIX processed cheese and ketchup and you get revolting gloop. Put two manufacturers that make them (Kraft and Heinz) together and you get a much more efficient company. Or at least that is the theory behind one of the year’s biggest mergers.

Chief executives are dusting off their chequebooks once more. Figures from Dealogic show that global takeover activity in the first quarter reached $889 billion, up 21% from the same period in 2014. It was the strongest first quarter since the financial crisis.

Academic evidence on the benefits of takeovers to the firms doing the acquiring is distinctly mixed, although much of it dates from the 1980s. That never stops chief executives from believing that their proposed deal will be different: like second marriages, mergers are a triumph of hope over experience.

Fashion plays its part. As the chart shows, takeover booms tend to be associated with periods when stockmarkets are doing well, such as the late 1990s or 2006-07. Executives can use their highly valued shares as currency. In the tech sector, the likes of Google and Facebook can scatter their shares like confetti. Equity-based deals are less risky for the predator, which does not have to saddle its balance-sheet with debts that might prove a dangerous burden in the next recession. But today’s very low level of interest rates also makes life easy for private-equity bidders, which rely mainly on debt.

During a merger boom, executives will be besieged by fee-hungry investment bankers eager to suggest plausible deals; the newspapers will be full of speculation about the next bid. A boom can thus create a “get rich or die trying” mentality. Managers reason that, if they are not a predator, they will turn into prey.

Even more cynical explanations are available. Running a bigger company can justify bigger salaries for executives. A study* in the Journal of Banking and Finance last year found that, in cases where the chief executive of the target company was retained after a merger, the acquirer paid a smaller premium to the initial share price than in other takeovers. That suggests executives are trading away shareholder value in return for personal benefits.

There is no sign, in the current boom, of the rise of the kind of acquisition-hungry conglomerates that marked the late 20th century: the likes of ITT, Hanson or Tyco. Indeed, GE, the longest-lasting conglomerate, is shrinking by lopping off its financial arm. Nor are we seeing the kind of cross-industry deal that usually denotes the top of the market, most famously in the case of the AOL-Time Warner merger of 2000. When investors start hearing the word “synergies”, they should head for the exit.

This merger boom seems to be focused more on consolidation within various industries, as with the Heinz/Kraft deal or Nokia’s offer for a rival telecom-equipment maker, Alcatel-Lucent. Such deals have a better chance of succeeding than most: the enlarged company can benefit from economies of scale. But they can also be a sign of an industry that is struggling to create growth: mergers are a way of boosting earnings per share by cutting costs. There were lots of oil mergers in the late 1990s, when the price of crude was low. Now the price has slumped again and Royal Dutch Shell has agreed to buy BG, another oil and gas producer, for £47 billion ($69 billion).

Indeed, companies seem rather pessimistic about their chances of achieving organic growth, as illustrated by their willingness to return cash to shareholders rather than to invest in new factories and equipment. According to S&P Dow Jones Indices, American companies spent $553 billion buying back their shares last year, and $903 billion if dividends are included. The combined figure may top $1 trillion this year. Meanwhile American domestic investment is well below pre-crisis levels as a share of GDP and profits fell last year according to the national accounts.

This cycle can become self-perpetuating, at least for a while. Companies buy back their shares to prop up prices and fend off takeovers. At the same time, the lack of business investment or organic growth makes it more necessary for firms to merge in order to cut costs and boost earnings per share.

The game only stops when the stockmarket declines. But it is hard to envisage a crash when yields on cash and government bonds remain so low, even negative in some cases. Expect the takeover fever to continue.

* “Do target CEOs trade premiums for personal benefits?” by Buhui Qiu, Svetoslav Trapkov and Fadi Yakoub, January 2014