One of the primary focuses of “Out of the Box” is on where you might get hurt and, more importantly, seriously hurt. “Preservation of Capital,” the first ten rules of my thinking, has reached epic seriousness in a world with interest rates at unsustainable lows and underlying economic fundamentals that cannot support today’s yields. The irrational game goes on based upon one thing and one thing only which is the creation of capital by all of the world’s central banks. The money must go somewhere and so it does but the disconnect between the equity markets and bond yields from the real world is frightening.
 
“Begot of nothing but vain fantasy.”
 
                   -William Shakespeare
 
Nowhere on the planet is it scarier than in Europe. Made-up numbers, un-counted liabilities, four years of inaccurate projections from the ECB and the IMF and securitizations parked at the European Central Bank that have all of the credit worthiness of an empanada restaurant in Lisbon. Money flows in, yields go down, the amount of debt increases and few pay any attention to the entire equation which states that what must be paid is the interest rate times the amount of debt as the Draghi bravado overcomes everything. Scant mention these days of the total amount of debt accumulated by the sovereigns as the 3.00% debt limit has become the most elastic of road signs or a trivialized fairy tale by many accounts. >> Read More

Italy and France need to work harder and faster to resolve their structural problems, a senior ally of German Chancellor Angela Merkel said in a newspaper interview published on Thursday.

Michael Meister, deputy parliamentary floor leader in Merkel’s Christian Democrats, told the Neue Osnabruecker Zeitung newspaper that the European Central Bank should stop buying Italian government debt if Italyfailed to meet its debt reduction requirements.

“Italy and France have structural problems to resolve and not economic problems,” said Meister, deputy to parliamentary floor leader Volker Kauder. “They can’t wait any longer. More time won’t relieve the problem. It’ll only make it worse.” >> Read More

Japanese long-term interest rates should not shoot higher as a result of money flowing out of government bonds, Bank of Japan Governor Haruhiko Kuroda said on Saturday.

Kuroda added, however, that it would be natural for long-term rates to rise over time if Japan meets its goal of pushing inflation up towards two percent.

He said a shift in funds from Japanese government bonds to stocks and into lending was already taking place but that the BOJ was increasing its balance of JGB holdings at an annual pace of 50 trillion yen.

“The BOJ dealt with short-term volatility in bond prices by adjusting its market operations,” Kuroda told reporters after a two-day meeting of G7 finance officials.

“I do not expect a sudden spike in long-term bond yields. In the long-run, if the economy recovers and inflation heads towards two percent, we might see nominal interest rates rise but that’s natural.”

Finance Minister Taro Aso said the G7 had levelled no criticism at Japan’s monetary policy which has weakened the yen sharply.

Stanley Fischer, who cost his central bank a lot of money with his ill-timed bet to invest billions of the Bank of Israel’s foreign  currency reserves on names such as Apple last year, has demonstrated that Einstein’s definition of insanity is alive and well when it comes to central-planners, has just decided to double down on stocks. Alas, this is not a joke. Bloomberg reportsthat “The Bank of Israel plans to almost double equity holdings by the end of the year after falling bond yields prompted the central bank to invest in European shares for the first time. The bank will increase its stock holdings to as much as 6 percent of foreign-exchange reserves, or about $4.5 billion, from 3 percent at the end of 2012, according to Yossi Saadon, a Bank of Israel spokesman. Investments in shares rose to about 4.5 percent of assets in the first four months of 2013 as the institution made a “small allocation” to European equities in addition to its U.S. funds, he said.” Well, if the BOI’s investment in AAPL was the beginning of the end for that company, one can start shorting Europe – an academic Keynesian just called the top.

Why is the Bank of Israel gambling in a manner that until recently was seen as taboo by even the most clueless of economist PhDs? For a reason only an absolutely clueless academic could come up with: “risk-premia.” Bloomberg again: >> Read More

As Europe continues to churn nowhere but down economically, it seems that leading government officials everywhere have suddenly become fixed income experts. According to these financial wizards, declining yields from Italy and Spain is vindication that (once again) the worst is over. This is the point where we ask investors, government officials, and media to read beyond both the headlines and the first paragraph of investment reports. Just as the declining US unemployment rate is attributed to more and more people simply giving up hope (there’s that “word” again) and not an abundance of new jobs; the decline in sovereign bond yields is the result of domestic banks and pension funds buying new bonds from their respective governments – not an increase in confidence from international investors. While strong domestic demand for a government’s debt is usually a good sign, “forced” demand is not. By any measure the all-in strategy of demostics banks and pension funds investment in their own bonds is epic.

 Of course, odds are this epic strategy will only end in disaster. The high concentration of investment is embarrassing for whomever is in charge of the fund and is really no different than directly raiding the pension fund assets. This is a shameful act and ultimately someone will have to pay for this Spanish mistake, which naturally leads us to Germany. And, in simple terms, the generosity threshold of the average German is pretty close to being breached.

IceCap Asset Management Limited Global Markets 2013.4

The definition of a hedge fund, people used to joke, was a fee structure in search of an investor to fleece.

However, four years on from the financial crisis, and with so far little to show for it, hedge funds’ notoriously high fees are looking less and less definable, let alone defensible.

Some investors now hope that the industry’s totemic “two and 20” fee structure – 2 per cent of assets and 20 per cent of returns annually; a formula that has made many managers fantastically wealthy – may finally be beginning to crack.

Challenging fees is no easy task for investors, however.

Thanks to the crisis, they may well have more clout than ever before when it comes to negotiating with managers, but they are also themselves more desperate. In a time of ultra-low bond yields and high equity volatility, hedge funds are proving an irresistible draw.

And as such, investing in hedge funds still seems to be a game rigged in the managers’ – and not the investors’ – favour. >> Read More

The move by the European Central Bank and its head Mario Draghi to introduce the OMT bond buying programme is one of the drivers of the revival in eurozone sentiment. But there is more evidence that the Bundesbank is not keen. Gary Jenkins at Swordfish Research says:

When Spanish two year bonds hit 7% last summer it appeared that it might be game over for the Eurozone. Or at least Spain would have to restructure its debt or receive assistance on a scale that would have been unprecedented even in European bailout terms. At that moment however the ECB changed from an institution that spoke softly and carried a small stick (that was temporary and limited in time and scale) to one that shouted very loudly and carried a great big stick that it wouldn’t hesitate to use to punish anyone with the audacity to short / underweight European government bonds. >> Read More

Enrico Letta has been put called in by president Napolitano to try to broker the formation of a government. He will be replacing Mario Monti in the vacated hotseat.

• Will begin talks to form government on Thursday
• Will only be formed if conditions are there. Will not be formed at all costs
• European economic policies have been too focused on austerity
• Must reform electoral system
• Political forces must recover credibility to resolve crisis )good luck with that one)

The long running Italian saga continues and the market is more or less discounting any news from it. Most news is just white noise. What is surprising is that bond yields had a field day the last two days of which none of the moves were attributed to the Italian political situation.

Should our Roman cousins finally form a government we may get a small relief rally. It depends on who joins with who under what conditions.

Surprisingly the euro positive effect is nil.

Italian bonds are currently posting a low of 3.990% , down 2% on the day, to levels not see since Nov 2010. They are down almost 5% over the last two days.

Yesterday we had Italian parliament president raining fire and brimstone at politician at his inauguration but I can’t see that as the main reason yields are sliding. The ECB comments this morning twinned with Japanese lifers talking about raising foreign holdings are more likely the cause.

Spain is also posting lows of 4.338% down 3.83% on the day

 Italian and Spanish stocks are also posting decent gains with Italy’s FTSE Mib up 1% and Spain’s IBEX up 1.3%

Large losses in European stocks today after four days of gains:

• UK FTSE -0.5%
• French CAC -1.3%
• German DAX -1.7%
• Spain IBEX -1.3%
• Italy MIB -1.5%

Overall it was a solid week for European stocks. Periphery bond yields are also lower on the week.