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Greece and the weather in New York City

Greek elections are positive for world stockmarkets.

The story is simple: Since 2008 Europe imposed austerity on all its countries. That only made things worse. Job losses. Company bankruptcies, etc. It gave stupidity in economics a whole new meaning.

Now, for a the first time, one country is saying, “Enough already.”

Were the country its own entity, it would do the obvious — devalue, boost exports and fix all the stupid rules on starting and running businesses.

The new Greek government has said it wants to stick with the Euro. I’m not sure why. But, for the time being that gives it a small bargaining chip. It also means it will have to deal with people like the Germans, who think Greeks are lazy and bailing them out is a waste of good German money.

Personally, if I ran Greece I’d drop the Euro in a heartbeat and become master of my own destiny. Then I’d advertise on American TV that “Greece is on sale; Greece is a great place to locate your European business, etc.

I’d  tell all the Greek bond holders that they’re going to have to take a haircut on their Greek Euro bonds (just like what happens when a company here goes Chapter 11). I’d tell the Greek bond holders that we’re reorganizing and here are some nice Greek drachma bonds that should be fine in a few years.” That wouldn’t be too hard a sell, since Greek bond holders are not very bright. Let’s face it. Would you ever have bought Greek bonds?

Sanity is not politics and Europe will muddle along. I’m mildly optimistic.

At least one European government will be preaching that austerity sucks. Which it does.

Masochism? Idiocy? Why would you buy something that loses you money? The Economist addressed that this week:

 Accentuate the negative. Why investors would opt to lose money

A GUARANTEED loss. That is what investing in bonds at negative yields implies: those who buy the bonds will get back less than they paid even after interest is taken into account (and some will have to pay tax on the income as well). Yet government bonds of various maturities in as many as ten countries are selling at negative yields. Why on earth would bond investors, the “masters of the universe” once famed for intimidating governments, be willing to accept such a lousy deal?

One obvious reason is fear, or at least caution. In the depths of the financial crisis in 2008, when the safety of the banks seemed in doubt, short-term Treasury bills offered negative yields and investors were happy to take them. (Holding physical cash is impractical, given the sums involved.) Now, with some uncertainty about what might happen to banks were Greece to leave the euro, investors may decide it is worth accepting a negative yield of 0.16% on two-year German bonds. “In effect you’re paying a 16-basis-point custody fee for keeping your money safe,” says David Lloyd of M&G, a fund-management group.

Moneyshreddders

In other words, investors are willing to lose a little to make sure they don’t lose a lot. But it is harder to see this as an explanation for negative yields on longer-term debt, such as Switzerland’s ten-year bonds. You would have to be quite depressed to conclude that no asset on the planet would make any money at all over the next decade.

Why might investors be so gloomy? The euro zone is struggling to generate growth and faces a poor demographic outlook, with the workforce in many countries either stagnant or set to fall. Even so, accepting a negative yield over ten years is quite a bet. Long-term bond yields are, in effect, a forecast of the future direction of short-term rates. The European Central Bank has imposed negative rates at the moment, but will rates still be below zero in a few years’ time?

Another reason investors might accept a negative nominal yield is if they expect steadily falling prices, ie deflation. In such circumstances, a negative nominal yield could still deliver a positive return in real (inflation-adjusted) terms. In the latest report, the euro zone had experienced falling prices over the previous year.

Deflation does not automatically lead to negative yields, however. Japan has had periods of deflation for more than a decade. While its bond yields were for a long time the lowest in the world, they only went negative recently (see chart). And most forecasts still predict a modestly positive rate of inflation in the euro zone this year.

Another possibility is that foreign investors may expect currency gains to outweigh any losses on the bond itself. International investors who bought Swiss bonds before the Swiss franc’s recent jump (it rose 30% against the euro in minutes after the central bank abandoned its exchange-rate cap and ended the day 12% higher) will have made a killing.

Believers in the theory of purchasing-power parity think that, over the long run, exchange rates adjust to account for price differentials. A country with a relatively high inflation rate will tend to see its currency depreciate; a country with a low inflation rate will see its currency rise. So international investors who expected to see the Swiss economy suffering a long period of deflation might accordingly expect the Swiss franc to rise steadily, and thus be willing to hold its government bonds.

Some banks and institutions are also forced to hold government bonds, regardless of their yield, because of regulations and liquidity requirements.

The final possibility, and the most obvious explanation in the short term, is that investors have been anticipating the introduction of quantitative easing by the European Central Bank. If experience in America and Britain is any guide, purchases by the ECB will eventually drive prices up and yields down. Why worry about the theoretical loss involved in holding a bond till maturity if the investor knows he can offload the bond to his friendly neighbourhood central bank?

There are risks involved, of course. If the global economy returns to normal, then losses on government bonds will be substantial. The same would be true if inflation ever reappears. M&G says that if German bond yields merely rose back to the levels that prevailed at their previous trough, in 2012, when it was feared the euro might break up, investors would suffer a capital loss of 7%. Whatever else European government bonds may be, they are not risk-free.

 What do your iPhone icons mean? Useful web site. Click here.

The thrill of making predictions.  From today’s New York Times:

Mayor Bill de Blasio said on Sunday that the storm approaching on Monday was likely to be one of the biggest to ever strike New York City, and he urged people to stay indoors to avoid powerful winds, low visibility and “treacherous” road conditions.

The National Weather Service, which issued a blizzard warning for the greater New York City area, forecast gusts of wind up to 50 miles per hour and snow accumulation of “at least one to two feet.”

But Mr. de Blasio said the storm could bring up to three feet of snow, beginning with flurries late Monday morning, and that the heaviest snowfall would probably come Monday night into Tuesday morning.

Re Greece, Europe and today’s weather predictions in New York:

Economics is called the dismal science. It is the only “science” in which it is impossible to conduct a controlled experiment and get it right. The standing joke is that an economist is someone who doesn’t have the personality to become an accountant. There is also a theory that God invented economists to make weather forecasters and astrologers look good. Economists are incredibly good at predicting the past. But the future? Forget it.

People claim “If you laid every economist end to end, it would not be a bad thing.” Another variation, “If all the economists in the world were laid end to end, they still wouldn’t reach a conclusion.

And the final one is the good news that economists were able to predict 12 out of the last five recessions.

There are also three types of economists: Those who can count, and those who can’t.

My best email. Received on the weekend:

My name is PAULINE AGGER, I had to make lucrative business and investments. My income was repatriated in western Africa for fiscal reasons. I am affected by an incurable disease and I am soon going to die. To obtain the salute with the Lord, it was deeply recommended to me by a priest to make a thanksgiving. I have already made it has associations and I donate you ?895,575.00 .I kindly requests you to accept this thanksgiving and in return just a prayer for me. The choice can seem to you surprising but reassure you. If you accepted this donation, this is my email:agpauline@yahoo.com, for the reception of your check.

 Synagogue Bulletin Boards:

+ Under the same management for over 5,774 years.

+ Don’t give up. Moses was once a basket case.

+ Sign over the urinal in a bathroom at Hebrew University: “The future of the Jewish people is in your hands.”

HarryNewton
Harry Newton who vows he’ll start a competitor to eBay and PayPal. I’m trying to sell something on eBay. What a nightmare!

8 Comments

  1. Herb says:

    read Bret Stephens in the WSJ to understand what ails Greece

  2. AR says:

    “Personally, if I ran Greece I’d drop the Euro in a heartbeat and become master of my own destiny.”

    Bah, Satan does not give soles back. They signed the damn paperwork.
    A good example of why we should respect our U.S. dollar.

  3. RonaldWilsonReagan says:

    Greeks having to actually pay taxes is why their saying “enough already”…..hears another saying “hey Greece, guess what, your decades long party of living off of other peoples money is finally over.” This is what happens when socialist gov’s, who by definition practice Keynsian economics, finally come to the end of the road. An economics lesson for all to see, indeed!

    • peter a. howley says:

      Exactly right, Ronald. More government and less work sounds wonderful, but as Greece and Spain/Italy show, doesn’t work after a while. the rooster come home to roost. And that’s not pretty.
      Harry’s suggestions make sense IF they were followed. They won’t be.

  4. jon says:

    Sounds like a green light for my trip to Skiathos.

  5. Paul Livingston says:

    The good about economics. It is a science with laws of nature,like physics, that can not be violated. Too bad voters, politians and governments forget about and violate them. Here are some of them. Who can add to the list?
    1. The law of supply and demand
    2. The law of diminishing returns
    3. The law of unexpected consequences
    4. The law of the only way to create wealth is to produce more than you spend

  6. mikeyancey says:

    Pauline emailed YOU TOO???

  7. Lucky says:

    Gee…maybe you will be able to build many, many snowmen…to scare off the Muslims who are insulted by them. I believe it was Turkey who outlawed them when they got a half inch of snow recently.