Verbal Rhetoric Escalates

So far it has been an exciting day, despite very little scheduled economic data. Chinese reserve requirements rate hike came just in the middle of Ben Bernanke's speach in Frankfurt to defend QE. Did Chinese plan it? It is probably just too coincidental... Same goes for a number of comments from ECB, IMF et al on debt problems. I doubt they will be able to talk everyone out of this, as anticipation of eventual deal for Ireland is being priced in. I am not sure whether the deal itself will help as it opens doors for further bailouts for Spain, France, Portugal. Yields above 5% for any country will make IMF loan look cheap.

there are few ways out of debt laden economies in Europe: economic growth (valid only for Germany), deflation (yes here it comes again), outright default and full fiscal and tax consolidation (something we should have done long time ago) or as I call it "averaging down your costs. Issuing common Eurobonds might help, but, obviously Germany is against it. Anyway, it does not look like it is going to be a quiet end of the year.

No directional opinion on the markets yet, just watching the show.

Still catching up... It is all about interest rates markets

Today's post is rather useless as it mostly discusses old news, yet for the sake of catching up with the market developments it is worth mentioning.

It is all about interest rates these days and nothing else matters. Benchmark interest rates hikes in Asia and rising yields elsewhere are weighing on the markets. Obviously the underlying factors for yields rise should be taken into account. While Asia and Latin America performed, well, better then developed world, and interest rates increase is the proper policy response to inflation, growth of monetary base, etc, the rest of the world is simply experiencing higher interest rates through bond yields. There is nothing new in rising yields in peripheral Europe, but French yields are a concern, yet it is more likely due to relatively better growth.

(for some reason I tend not to like the US, sorry for this) The fact is that US yields are rising as well post QE2 announcement (10y chart is below):

And, according to FED there are not supposed to. Ok, I might admit that it is also a growth story... or another insolvent country story. put everything aside, there is a trend there and the way for it is up. It is also interesting to see that rising yields correspond to stronger dollar (correlation of 10Y with Dollar index is very high):

and ,watching the markets intraday, you can feel that it just knock down a chair under the "risk assets". While it persists, stronger yields will limit a rise in oil, metals and equities.

No charts or technicals today as I am still catching up with the markets.

Silence is golden, up until certain limit though

Well, this is my first post in over a month... Not taking into account recent 3 weeks vacation, the desire to keep this blog alive was overwhelmed by the fear of saying something stupid. No, I am not afraid to start talking against the trend and neither I fear to be wrong (up to certain limit though). I just did not know what to say and I honestly did not want to say anything I did not believe in.

This break allowed me however to focus on other things and I also had an opportunity to write a small article for an university magazine. I will publish it later as soon as it becomes public. This was a tough task as anything I write in this blog is, among others, simply a writing exercise - need to express my thoughts better.


Feeling of uncertainty prevails, so it is time to go back to page one in financial theory book - risk free rate. This is probably the most commonly used "constant" in finance. So what is it now? German or US bills? Just some years ago I would have said yes without any doubt. The problem is some years ago I was still in the university. The reality now is it is much safer to purchase not the US bills, but 10year bonds as US government will buy them as part of QE. And German bills are no longer so attractive as Irish and Portuguese bonds are. You can be sure that ECB will purchase them and make sure there is no default risk associated with them as we all can count on bailout without any loss to bond investors.

The reality is we do not know any more what risk free rate is. So how does DCF and Black and Scholes models should work then, if indeed Irish bonds are safer then the ones of Germany?