Saturday, August 18, 2007

Cash and Carry

I have to confess that I'm partial to downloading financial graph porn off the Internet; domestic or imported, and the stronger the better

And what a hardcore treat this week has been

Here are a couple of examples I found particularly arousing...

Man Group plc

A 200 year old company with its roots in the colonial sugar trade. In recent years it moved into the equally ethical hedge fund management business with an astonishing degree of success. I like to follow what Man is up to because I used to work there and even though I don't have any particular beef with how the group is run I'm just a teensy wee bit bitter and twisted that I didn't end up holding any of its stock. The fact that I know people who own lots doesn't help.

So, imagine my absolute delight at looking at this graph of the Man share price this week...

However, as extremely funny as this is, anyone who understands hedge funds and the influence they now have on the world's financial markets should probably take this as a very bad omen indeed

The NZ $ / British £ exchange rate

Another graph I have a personal interest in watching. For reasons I didn't fully understand at first, New Zealand's economy and currency have behaved peculiarly in recent years. New Zealand has been booming - with house prices going through the roof, high interest rates, a strong dollar and a growing trade deficit. The only problem being understanding 'why'?

Anyway, let's check out the NZ$/£ exchange rate graph


What's going on there?

The explanation has actually got a lot to do with the Man share price going south and the turmoil in global markets generally

Oh yes, we're talking the Carry Trade here

The Carry Trade (as practiced by hedge funds amongst others)...

1. Borrow absolutely insane amounts of money in Japan and Switzerland where the interest rates are virtually zero

2. Exchange those borrowed Yen and Francs for Kiwi dollars or Icelandic Krona

3. Invest that money in New Zealand or Iceland where the interest rates are 7% or 8% or more

4. Sit back and make 8% a year on someone else's money (in reality, money that was made up out of thin air by a bank in Japan or Switzerland)

5. Actually, the original loan is made for something like 10 times your available security, so your real return on the carry trade is something like 80%

And the best part is that, to earn that 80%pa, you haven't produced anything of any intrinsic value whatseover

This works great until the Kiwi Dollar starts to weaken against the currency your loan was made in. At which point you have to scramble like fuck to turn your Dollars back into Yen so that you can pay your loan off. Only everyone else is trying to do the same thing at the same time so you'll end up getting a really shitty exchange rate, cannot pay your Yen loan off and go bust. If you were playing this game with someone else's money, they go bust

Here's a sleazy bloke sitting in a hot tub on Al Jazeera TV who can explain it better than me (*very* highly recommended)...

...first broadcast on 5th August - now that's what I call timing

And it's not just the carry trade. There are all sorts of sharp practices, scams and outright frauds out there just waiting to fall apart. And that's the question that will decide if the markets really will melt down or not - will the big financial institutions, the media and the politicians stop the current slide before one of the many greasy little frauds that have been hidden by the rising markets is exposed and starts a chain reaction?

And here's the same bloke off Al Jazeera doing a quick tour of some of those greasy little frauds on which the global system that passes for capitalism these days is so precariously balanced



Wolfie said...

...and then when you've really creamed it off and ended up with egg on your face the FED or some other central bank come and bail you out. Sometimes with "our" money.

This situation is the "debt" we owe the US. Ha, ha... hmmmmm

Our computer systems have been melting-down with the volumes so lack as sleep has made me a bit "tetchy".

Stef said...

It's not like the good old days when people could simply not pick up the phone is it

Merkin said...

Picking up the phone, long time ago :

'Hello Dad, I am stuck in the middle of Greece can you send me a couple of hundred quid?'

Micro Economics at work.

Anonymous said...

I did a finance exam and we covere the 'International fisher effect' and 'Exchange Rate Parity'.
Both seem to imply that what you gain from interest rate differences, you lose on exchange rates.

Now I didnt pass this exam - could anyone tell me why these rules dont seem to apply and the carry trade works?

Shutter said...

"Borrow absolutely insane amounts of money "

Correction . Obscene amounts of money

Stef said...

Economics is, of course, the 'science' that still hasn't figured out for sure that inflation is caused by printing too much money...

could anyone tell me why these rules dont seem to apply and the carry trade works?

The first thing you do after borrowing in the the low interest country is to sell that currency which depresses it's exchange rate at the expense of the currency you are buying

And particularly if you're buying into a pissy little economy like Iceland you're boosting that currency's exchange rate

Plus there's also a timing element. Sooner or later there is a correction but not necessarily a smooth one. The Kiwi dollar crashing last week is arguably such a correction. Any Yen-NZ$ carry traders still in the NZ$ last week just lost 15-20% in one go

Shutter said...

It is worth mentioning the unmentionable that never gets mentioned - the VAT carousel fraud which is losing the Uk Treasury £400Mn. smackaroos per month - and is now just seriously getting underway as the newer, shinier Eastern EU arrivistes get going.

Add to this the revenues from the worldwide drug trade.

Add to this the revenues from the illegal arms trade and the US$Bs creamed off in Iraq...

Add to this the US$Bns that Boris Berezovsky and his cronies have carried off from the Russian State Treasury.

..this is not "funny" money, it carries no interest rate burden, and it needs investing in assets at the rate - let us say conservatively at £1Bn. per month in real estate, stocks, the odd painted lady and football team.

Stef said...

Definitely worth mentioning

I can only assume that's what Brown and Darling are referring to when talking about the 'strong' UK economy

Just like Noriega's Panama, only more diversified

Stef said...

... I've used this line before but it's less of a 'knowledge based' economy we've got going here than a 'deny all knowledge' based system

Shutter said...

PS Gubment Wealth Warning - the figure of £400Mn a month on UK VAT / Carousel / Missing Trader fraud is the last figure HMG has issued.(feb 2007 if memory serves)

This is of course NOT th ereal figure realy don't know how big it is,and that figure was based on a statistical exercise, not by the HCRA but by the Nat.Stats Office.

The reason no other figures have been issued (although promised) is probably why the Joint Energy Security Committee (JESS) have not reported - the results would frighten the horses in the street.

Anonymous said...

I failed my economics exam in cheque kiting. Can anyone explain how that works and is there any comparison to the carry trade?

Anonymous said...

Someone had it all figure out in 2005 ... "The Second Great Depression" ... "Book Description
This frightening book shows how massive consumer debt will trigger the next depression, starting in 2007. With interest rates increasing, savings rates near zero and debt at its maximum, people will be pushed over their debt limit, causing the depression.

About the Author
Warren Brussee spent 33 years at GE as an engineer, plant manager, and engineering manager. He earned his engineering degree at Cleveland State University and attended Kent State towards his EMBA. The author has written two other books, Statistics for SIX SIGMA Made Easy and All About Six Sigma.

lwtc247 said...

Stef. Be careful with the NZD. A friend of mine reported a few weeks ago that the NZD almost collapsed when various influences on it exposed that the NZ govt didn't actually hold any (i.e. many) dollars in reserve! I've not researched the NZD, and frankly I don’t really care about it, suffice to say it's likely being tweaked at the moment and not indicative of any one particular stress.

I'm glad you followed up the 'Carry Trade' info and managed to find the link. It was a superb proggy wasn't it hosted by the respected 'duckman' {who I really envied sitting in that hot spring!} or 'sleazy bloke' as you call him. Another reason why I like Al Jazeera (English) :)

But I believe (I may have been mistaken) that duckman said that rather than just accumulating interest, more of it was being put into tangible assets like London real estate, businesses and housing. And YEs Iceland which has bugger all people, bugger all population and so when buying their currency (and the eventual cash in) their country is going to have some MAJOR problems (well, maybe not so major as it's so small - not like many people will be sleeping on the streets!!)

You mentioned that, if say NZD weakens against say Yen then you gotta convert back to Yen quickly or you cant afford to pay off the initial loan. But to weaken against two such different price structured currencies to the degree when you would start to lose money will take some time possibly enough time to cope with the lack of liquidity from asset investment. These scamsters probably do keep a fraction as shares / bonds and commodities. But is the Bank of Japan going to be able to pursue a foreign company that has used Japanese wonga in this way and refuses to pay back? I don’t think so.

Wolfie is right. Remember when Russia defaulted on its loan and the Hedge funds collapsed? The US legislature bailed the bastartds out. Why? IS it perhaps because its members may have had large investments in the Hedge funds and didn't want to lose money? I wonder, but not for very long.

Stef said...


If you do a little research on Max Keiser you'll find that he has a somewhat 'colourful' history and associates with some iffy characters - that's where the 'sleazy' warning came from the strap line to this blog says, it is written by an 'unrepentant 'Conspiraloon™' who doesn't trust anyone, not even himself'

Michael Hudson is an equally ducky sounding economist who advances similar ideas but doesn't dine with the Goldsmiths

And yes, the money is being used for other purposes - at the low interest rates the Japanese and Swiss have been charging it is effectively free money and has been used to buy and inflate the price of all sorts of assets in all sorts of places. However, as you say, more than enough of that speculative money stays in countries like Iceland and NZ to really fuck things up

I got an email from a chum who lives in Iceland yesterday which included this observation...

"...The inflow of money here is very obvious. A few months ago, they stopped re-investing the money here by buying properties and started building new ones instead. There are two areas in the outskirts of Reykjavik where they are building so many appartments that it looks like they are planning to re-house 1/2 of the town population. Nobody is really sure how they are planning to make money out of something on such a grand scale. There are just not enough people around to buy these properties. And of course, they are selling them at incredibly high prices, well trying to. The market went up so much due to their speculating in the past few years that people are starting to not being able to afford to buy them anymore and even renting becomes difficult.."

The reason why I am personally interested in the carry trade and New Zealand in particular is because I may move there in the not too distant future and have been watching the bizarre behaviour of its currency and economy closely for the last few years. You mention that other factors affect the NZ$ and yes, of course, that's the case but the timing of its crash last week and movements of other currencies are all consistent with unwinding of carry trades in response to what was going on in the global markets

And the point you made about the speculators thinking they have enough time to switch back into their loan currency is true, particularly if you believe central banks are manipulating the markets to sustain the current imbalances that make the carry trade possible but every now and again the currency movements become unstoppable and bite their arse...

and let's not forget that veteran Conspiraloons believe that economic crashes are a deliberate part of the cycle and initiated and timed to wipe people out so that the interests that had the foreknowledge to take their capital out of the markets can re-renter and pick up assets for a song

Anonymous said...

And it is a mighty fine strap line :) representitive of the whole the blog.

One can imagine the bank of Japan being very clever about all this. It lends its money all over the world relying on the perception that people are able to move quickly enough to avoid the avalance, but this perception may be false.
All it takes is an announcement say that Japans entire nuclear industry needs major upgrading to reduce the amount of nuclear radioactive pollution leaking into the envirnoment when the next earthquake strikes. Then boom... Intrest rate climbs weekly to attract inward investment. By by cheap yen, hello carry trader jumping from tall buildings on Wall St.

Apart from the RotsChilds of course! who sit back and enjoy the carnage.

- lw

Anonymous said...

Just seen this:

Brown 'ignored warnings over sale of gold reserves'
By Ben Russell, Political Correspondent
Published: 16 April 2007

Gordon Brown faced renewed pressure over his leadership ambitions yesterday, amid claims that he disregarded warnings over the sale of British gold reserves estimated to have lost the Treasury £2bn

Somehow I think at the same time (1999) the IMF and WB posted rather large influxes of gold. Amazing what happens at Bilderburger bar-b-que's innt?

- lw

Stef said...

yeah, but what always struck me about that gold reserve sale story is not that Gordo sold it when he was told to but just how pissy and small the holdings were - which TBH is a lot more significant than the loss made on the sale

SteveW said...

test post- blogger seems to be reluctant to post my giant roller coaster of a comment..if this goes through I'll try breaking it down.

SteveW said...

Re. your potential move to NZ.
Maybe this can help you decide.
I grew up with a fella (I'll call him Mark to "protect" him),who went on to work on the oil rigs.I lost contact with him when I moved to London.When I moved back up here,we caught up on news n stuff in the social club we both frequent.
Mark struck up a friendship with a geezer on the rig a few years back.They met during a fishing session.(once over you could fish off the rigs,but this has been banned,as discarded fishing line was becoming a problem to divers)
Turned out they shared many hobbies and interests-Geezer invited Mark to his home.
Mark sets off in his GTO twin turbo hoping to impress Geezer with said wheels.
Only,Geezers house is a fucking mansion.He says "nice car"-then trumps his GTO with a couple of classic Ferraris.
Up to this point,Mark hadn't given Geezers job on the rigs any thought.After seeing the mansion and wheels,he starts probing for info.
Geezer is basically responsible for writing the software that controls the valves etc. which pushes the oil around the system of pipelines on the North Sea-bed.
He was drafted in as a last resort for the company.They couldn't get the software right,and Geezer was mentioned in a "I know a bloke who might know" kind of way.
The company was getting desparate-they had been at this problem for months if not years.A deadline was coming up.Not producing oil after this deadline was going to cost the company BILLIONS.
Geezer stepped in,and a couple of weeks later,job done,sorted.
The company is gobsmacked.They treat him like a king.They pay him stupid money.His life changes completely.
Then he has a breakdown..his marriage breaks up.Wife leaves him and takes the kids.
He tells the company he can't work anymore.The company refuse to let him go.They basically pay him shedloads of dosh just to keep him handy,even though his manic depression renders him useless most of the time.
The reason for his breakdown?
Someone amongst his new found well-to-do friends and associates told him to get out of England..that something [i]massively fucking horrible[/i] is going to happen here.He wouldn't tell Mark any more details than that.
He couldn't convince his wife to move.She thought he had simply lost his marbles.She left.Which just sent him over the edge.Now he can't leave England himself-he can't abandon his kids.
Mark has since took early retirement.He's gone.Emigrated with his wife to be with a daughter and grandkids he's only seen a couple of times the odd xmas.Two of his sons emigrated to Australia,and another son is finalising his own emigration.
I don't have the cash or skills to leave,or I'd be gone too.
Up to now,I've only told this story to people around me who are contemplating emigration.I've resisted posting on the net,because I didn't want Mark to get into trouble:Marks out of danger now,and I think Geezer was aware of what he could reveal to other people without signing his own death warrant.He refused point blank to reveal the event itself.
I swear down dead this is a true story.I'm sorry I can't give any further verification.
Personally,I have a feeling its the gulf stream/north atlantic drift stopping and turning the country into a giant glacier.I think this because it would be something that could potentially effect the oil fields-rigs aren't designed to operate in a frozen sea.
Apologies for the doom and gloom,but I swear I'm not shitting you.Get out if you can,and giz a green card if you make it!

Anonymous said...

stevew. There are 101 questions I'd like to ask about this unusual stroy. But I dont have time.

SteveW said...

..and I'd gladly try to answer your questions,but theres nothing more to add really.Thats all I've got.
Mark told me this story back in 2003.He left the country early last year.

Stef said...

what a marvelous (I think that's the word) story

it's actually easy enough to believe that the powers that be are expecting something horrid to happen in the not too distant future

it would explain, for instance, the race to implement the infrastructure that will turn the UK into the world's leading surveillance state

then there's also that death of optimism thing that's going on in our media. Sure, Doom and Gloom sells newspapers but until the last few year there were at least some mainstream voices talking about all the fabulous new technologies there were and how great the future was going to be

I can't remember the last time I encountered anything like that

The UK public is being exposed to an unrelenting diet of pessimism and fear and it doesn't take a major leap of imagination to at least suspect that we are all being softened up for something nasty