Season of mists


“The years of war saw the mark lose three quarters of its purchasing power. The years of peace saw the process speed up, as the borrowing continued, and at first it had its friends. ‘I am not afraid of inflation,’ said Walter Rathenau, tycoon and minister, later murdered by two proto-Nazis. ‘People are wrong when they say that printing money is bringing us to ruin. We ought to print money a bit faster, and start construction works.’ He has his followers today.”


-       Christopher Fildes, reviewing ‘The downfall of money: Germany’s hyperinflation and the destruction of the middle class’ by Frederick Taylor in ‘The Spectator’, 7th September.



Autumn naturally lends itself to a mixture of retrospection and introspection. The bright and sunny certainties of summer are replaced by the cloudier anticipations of the winter to come. As the crops are gathered in, the days darken, and chill. And as animal spirits start to wane with the weakening sun, problems that swelled up during the heat of summer start finally to decay and reveal themselves. It is not typically in the Halloween month of October (the 1987 Crash was only a blip, after all) but during the mistier days of September when the market’s shadowy errors start to walk abroad.

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At play with the risk market wolves


“We have to turn the page on the bubble-and-bust mentality that created this mess.”


-       President Obama, weekly radio address, August 10, 2013.


The commentary is now off on its summer break. It will be back in mid-September.



In the 1964 Sidney Lumet film ‘Fail-Safe’, a group of US nuclear bombers is accidentally sent a “go code” ordering it to drop its payload on Moscow. A Russian jamming device prevents the US military from contacting the bombers until they’ve already reached the point of no return; thereafter, SAC protocols dictate that the pilots ignore any orders received from headquarters. The US President, played by Henry Fonda, desperately seeks some way of resolving the impasse and avoiding an escalation into a full-blown nuclear exchange. But how ?

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King Carney Fails To Command The Tides


“Sir, Martin Sandbu writes: “We should not worry about inflation – if we strip out volatile or policy-driven elements, it stands at 1.5%, according to Citigroup”, (“Carney has not yet bent the markets to his will”, August 14.)


“Please arrange for Mr Sandbu to cancel the policies concerned and to prevent the volatile situations encountered. When was the last time inflation was 1.5% ? This comment is as meaningless as my saying: “If savings rates were 5%, then I could afford two more holidays a year.” They aren’t, and I can’t.”


-       Letter to the editor of the Financial Times, from Mr Charles Kiddle, Gateshead, UK.

King Cnut The Great, more commonly known as Canute, was a king of Denmark, England, Norway and parts of Sweden (thanks Wikipedia !). He is likely to be known to any English schoolchildren still being educated for two specific things: extracting Danegeld – a form of protection racket – from the citizenry, and for the possibly apocryphal story that once, from the shoreline, he ordered back the sea. Over to Wikipedia:

“Henry of Huntingdon, the 12th-century chronicler, tells how Cnut set his throne by the sea shore and commanded the tide to halt and not wet his feet and robes. Yet "continuing to rise as usual [the tide] dashed over his feet and legs without respect to his royal person. Then the king leapt backwards, saying: 'Let all men know how empty and worthless is the power of kings, for there is none worthy of the name, but He whom heaven, earth, and sea obey by eternal laws.' He then hung his gold crown on a crucifix and never wore it again "to the honour of God the almighty King". This incident is usually misrepresented by popular commentators and politicians as an example of Cnut's arrogance.

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That latest Bank of England press conference in full


“The Bank sets interest rates to keep inflation low to preserve the value of your money.”


-       The Bank of England website.

From the Bank of England’s Hyperinflation Report, August 2013

In order to maintain price instability, the Government has set the Bank’s Monetary Policy Committee (MPC) a target for the annual inflation rate of the Consumer Prices Index of 2%. Since the summer of 2003, when Sir Mervyn King became Governor, the average CPI inflation rate has actually been 3.2%, but let’s not quibble about details been quite lovely. The MPC is also required to support the Government’s economic policy, namely to keep house prices up, although the MPC is technically independent from the Government, i.e. it is not physically based in Downing Street.  

The Hyperinflation Report is produced under duress quarterly by Bank staff under the guidance of George Osborne with a sockful of wet sand members of the Monetary Policy Committee.

In the United Kingdom, a laughable anaemic vigorous recovery appears to be impossible taking hold. But the legacy of adjustment and repair left by the last Labour government financial crisis means that the recovery is likely to remain impossible weak by historical standards. CPI inflation rose to 2.9% in June (roughly 1% above target, again) but will surely return to its 2% target when hell freezes over pretty much immediately. Against that backdrop, the Committee has provided some windy nonsense nicked from the Fed explicit guidance regarding the future conduct of our explicit inflationism monetary policy. The MPC intends at a minimum to inflate ! inflate ! inflate ! maintain the present highly stimulative stance of monetary policy until every last saver is dead, economic slack has been substantially reduced and house prices are higher, provided this does not entail material risks to price stability or financial stability house prices.

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Still waiting


“This suspense is terrible. I hope it will last.”


-       The Hon. Gwendolen Fairfax in ‘The Importance of Being Earnest’ by Oscar Wilde.

The failure of Lehman Brothers in September 2008 will forever be regarded by capital markets professionals as a JFK assassination-style moment, an occasion now set in amber that marked the moment when everything changed – or at least should have done. With the benefit of hindsight, it’s somewhat remarkable that the bankruptcy of a second tier investment bank better known for credit trading than for any facility with stock underwriting, for example, could trigger a global credit crunch. But it did. Andrew Ross Sorkin’s ‘Too Big To Fail’ – still probably the best example of financial crisis porn – masterfully explains why:

“It was just past 7:00 a.m. on the morning of Saturday, September 13, 2008. Jamie Dimon, CEO of JP Morgan, went into his home library and dialled into a conference call with two dozen members of his management team.

“You are about to experience the most unbelievable week in America ever, and we have to prepare for the absolutely worst case,” Dimon told his staff.

“..Here’s the drill,” he continued. “We need to prepare right now for Lehman Brothers filing [for bankruptcy]. Then he paused. “And for Merrill Lynch filing.” He paused again. “And for AIG filing.” Another pause. “And for Morgan Stanley filing.” And after a final, even longer pause, he added: “And potentially for Goldman Sachs filing.”

There was a collective gasp on the phone.”

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Shandong 5000 edges ahead in race for Fed chair


“Sir, The financial crisis is laced with ironies. In the run-up to catastrophe, bankers argued that, when it came to regulation, “less was more”. Government believed them. Bankers claimed that their risk management prowess made society safer. Governments applauded. Meanwhile, the British Bankers’ Association, the industry’s leading advocate for self-regulation, was blissfully ignorant of the biggest market manipulation in financial history – Libor, the process for which the BBA was responsible. Five years on, we now have bankers and their government cheerleaders insisting that regulators back off. Once again, bankers know best. Their risk management prowess is much improved. Oh, and the central bankers who bailed out the financial system and who are working hard to forestall a repeat are now labelled “jihadists” and the “capital Taliban”.


“Such name-calling is the ultimate irony and a new low in behaviour. How on earth can bankers, much less our public representatives, apply the terrorist moniker to well-intentioned public servants ? Where is the sense of decency, proportion and statesmanlike conduct for which we wait in vain ? And is it not the ultimate irony that the banking fraternity that happily applies the term includes among its membership the very institutions that facilitated payments to actual terrorists and violent drug dealers ?”


-       Letter to the editor of the FT from Robert Jenkins, London W9; Past member, Financial Policy Committee.

The Shandong 5000 electroglide flatbed currency printing machine has edged ahead in a fiercely competitive fight for the chairmanship of the US Federal Reserve, narrowly in front of its major rival, the Heidelberger Druckmaschinen high speed sheet fed rotary offset press. In an ominous sign for supporters of the Heidelberger Druckmaschinen candidacy, a number of US Senate Republicans are circulating a letter supporting the Shandong 5000 model in its quest to replace Ben Bernanke at the head of the world’s most important central bank. The Shandong 5000 is a six colour high speed flexo letterpress printing machine which can churn out up to $2 trillion in high denomination bills in less than 60 seconds. The only other serious contender, a 70 ton Komori Super Orlof Intaglio based in Tokyo, melted after recent overuse.

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Place your bets


“Investing in Treasuries at their currently artificially depressed yields is playing with fire. It is one of the wonderful ironies of the English language that the word “taper” not only means to “gradually withdraw” but is also a noun used to describe a long, thin candle or a long, waxed wick used to light candles or fires. Perhaps the Princeton economics professor was playing with the market in more ways than people realize when he used that term to describe his future policy moves.”  


-       Michael E. Lewitt, in John Mauldin’s ‘Outside the Box’. Hat-tip to Espirito Santo’s Marcus Ashworth. If this isn’t a team effort, I don’t know what is.

“These results have been achieved through the most perilous financial era of a lifetime. Throughout this period we have followed our objective of protecting your capital. The price has been, as I have referred to in previous statements to you, modest underperformance as we refused to put all your capital at risk when the economies of many areas, notably in Europe, have experienced moments of near collapse, and when political events in the Middle East and beyond have been so threatening..


“Sacrificing growth in value to ensure against danger has been an uncomfortable process. But necessary. We have not abandoned the overall caution which the world economy, in my view, still demands.. Defensive hedges cost us money last year, as did our historically profitable gold positions..”


-       Lord Rothschild, 6th March 2013, in the Chairman’s statement to shareholders of RIT Capital Partners plc, Company report and accounts.



Two frustrations are paramount as we watch the evolution of the financial markets today. One is the facile but obsessive coverage of apparent “forward guidance” by central bank spokespeople. This confirms the extent to which markets have become hostages to monetary stimulus, and hopes – or fears – of more, or less, of the same. This also makes sensible investing on the basis of what used to be called “fundamentals” more or less impossible, at least in the short term. The second is the seemingly widespread belief that the world economy is enjoying some form of recovery, which would then validate the ongoing melt-up in the prices of risk assets, and notably stocks. Note that these two influences are not unconnected; the ‘confidence’ generated by central bank policy pledges, with or without the subsequent liquidity gifts, drives markets higher, allowing those who still believe financial markets as discounting mechanisms are capable of pricing in nascent future developments not yet fully visible, such as an economic recovery, to see evidence of the recovery not otherwise apparent in real world data. It is all a hopelessly confused and confusing mess.

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