Hello Everybody. We are witnessing today uprisings in the Middle East region after successful dethroning of their ruling regimes. This Geopolitical event is adding seasoning to existing laundry list of issues. Today I will discuss current events around the world from my perspective and will add my analysis on US interest rates, swaptions.
This Week, Uprisings in Middle East, Finding next ECB leader in rudder less political Europe, Berlusconi and Ruby the heart breaker scandal in Italy, Inflation genie in Emerging markets, QE2 and Federal Reserve, Republican and democrats political drama in Wisconsin have peppered this week’s flow of economic events.
Uprisings triggered in Egypt following toppling Ben Ali’s regime in Tunisia. This has initially created flash point for Oil price rises. But somehow Mubarak’s regime lost its power to hold onto its position in front of popular uprising. Consequently Oil flashed sub 90. Today we are seeing further uprisings in Libya and Bahrain. This drove oil to 98. On the Eve of 2011 no one expected this event to come to play into existing global issues. As always Life is full of surprises and we are witnessing it live now. This kind of flux in Middle East adds uncertainty to Oil price. Global investors are discussing can this happen in Saudi Arabia. This all depends upon the dissatisfaction and unrest level in the Saudi youth. I will leave it to future but would definitely advise to hold on to some Oil calls. I think after Middle East if we focus at EU and see what’s going on there, it looks very ironic. At one end, ECB is struggling to find a new successor & Angela Merkel German premier is fighting her domestic elections and on other end Italian Premier is struggling in sex scandal. One thing common is every one is muddling through their problem. This brings into memory one of the great stories of the Nero playing Violin when Rome is burning. Today when recession is making it difficult for ordinary people to bring food to their dinner table, their leaders are finding ways to fight their issues instead of focusing on people. Currently inflation genie is slowly coming out of the bottle as measured by statistical reports. This brings me next to look at Emerging markets in latin America and Asia. Brazil, India and china are already flashing amber with regards to food price inflation. China is already tightening its monetary policy to arrest this inflation monster. Only course of time will tell who has won the battle. From Emerging markets to US to see how measures taken by Federal Reserve is affecting asset markets, Fiscal restraint drama enacted by republican governors. Ben Bernanke has slashed the interest rates to its lowest level, he successfully completed Quantitative easing first phase and started second phase. These measures appear to have stabilized stock markets, lowered Treasury rates and looks deflation is no more a problem. Now new problem we are seeing is inflation. Next at the political level we are seeing governors Wisconsin and couple of other states are targeting Public school funding reductions. In my opinion real cuts should come through clear cut reforming of Health care sector and slashing the burden on the entitlements. This can be done by creating a tiered health care structure. In this Basic health care will be free and additional health care services needs to be purchased at some insured costs. Any way this problem is more political and will be solved by the force of economics.
Interest rates and Options
This morning I read Analysis from Richard Koo (from Nomura) discussing US is following the path of Japan. Agreed his analysis has good graphs comparing the state of housing sector rise and fall in Japan and overlaid with US Housing sector. I am also seeing in local housing markets, prices are not rising. But one strange thing is sellers are still holding onto their price levels. I believe most of these sellers are doing what Issac Newton did during the south Sea bubble by holding on to his positions.
Rates have been decreasing since last week despite seeing higher CPI prints. 10y swap rates are at 3.69 and market consensus is expecting them to go as high as 4 this year. In my view this is a possibility. Skews have not changed much compared to January month end. Short dated skew for 5y tails is now moving away from super lognormal to lognormal. This means, payer skew is cheapening. Long dated skew is also becoming slowing more closer to Normal compared to what it was a month ago.
Monday, February 21, 2011
Monday, February 7, 2011
Egypt - Implications
Egypt – Implications
What has happened today in Egypt can happen anywhere in the world. Egypt is cradle of human civilizations. Whenever I think of Egypt the following things come to my mind, Pharaohs, Mummies, Great Pyramids, Arab university (Al Azhar) and most importantly, Suez Canal. Despite, having so much of history and being controller of strategically important Suez Canal Egypt lived under military regimes. Hosni Mubarak ruled Egypt for almost 30 years. He chose to stay close to US like Saudis or Pakistan to keep his control on the people domestically and attain legitimacy to their regimes internationally. This kind of arrangement works well when people are happy with their current standards of living. But world is a dynamic place, things always moves from one state to another state of disequilibrium. People start to realize the differences between them and people living in other more democratic or autocratic regimes. These aspects form part of normal discussions and thinking of people. Mubarak’s regime followed the recipe of a tyrannical regime similar to other previous regimes that have arisen and succumbed to the popular uprising. One question comes to mind is why now? Answer is simple, Egyptian regime was vulnerable since the day it started traveling along the path of autocracy, nepotism, crony capitalism and embrace of expedient fundamentalism. So all it needed is a trigger similar to a spark from burning match can trigger dry and parched forest on fire.
Popular uprising started in Tunisia a small North African country bordering Egypt. One of the reasons include rising food prices led a vegetable vendor to set fire and burnt himself and history followed. This had a domino effect and brought the uprising to Egypt. Millions of people marched to Tahrir Square calling for Mubarak to Step down. This happened swiftly. US did not want to loose its close ally and hence showed initial reluctance in joining the popular uprising. People did not budge in their resistance. This reminds me of non violent movements supported by Gandhiji in India during the fight for independence to India and Martin Luther King’s fight against racial discrimination. Consequently, US and EU region governments called Mubarak to step down. Now here things got a bit interesting. Mubarak couldn’t give up the power easily. To rephrase this, members of his regime wanted to test the power of popular uprising. They set loose criminals from the jails, sent thugs in camel backs and horses armed with iron clubs. Internet and other telecommunications were shutdown. After these acts, Mubarak’s regime started showing signs of acceptance and appointed Security adviser as Vice president and invited outlawed Muslim Brotherhood for discussions.
Still events are unfolding in the Egypt. Regimes elsewhere are thinking how to handle their situation. One lesson from this uprising will be clear that no regime can last forever. People revolt for basic rights of their life like a famous quote from French revolution goes saying Liberty and baked bread for everyone.
Nobody knows how events will unfold and what happens exactly to current regime and will Egypt embraces democracy or turn into another fundamentalist nation. But happenings in Egypt have reset the world investor focus from Euro and US domestic issues.
Investment outlook:
If crisis in Egypt festers for some more time and a regime that is unfriendly to US or Israel takes hold then it would be better to long credit in Israel. Good idea would be to buy Israel 5y CDS swaps.
What has happened today in Egypt can happen anywhere in the world. Egypt is cradle of human civilizations. Whenever I think of Egypt the following things come to my mind, Pharaohs, Mummies, Great Pyramids, Arab university (Al Azhar) and most importantly, Suez Canal. Despite, having so much of history and being controller of strategically important Suez Canal Egypt lived under military regimes. Hosni Mubarak ruled Egypt for almost 30 years. He chose to stay close to US like Saudis or Pakistan to keep his control on the people domestically and attain legitimacy to their regimes internationally. This kind of arrangement works well when people are happy with their current standards of living. But world is a dynamic place, things always moves from one state to another state of disequilibrium. People start to realize the differences between them and people living in other more democratic or autocratic regimes. These aspects form part of normal discussions and thinking of people. Mubarak’s regime followed the recipe of a tyrannical regime similar to other previous regimes that have arisen and succumbed to the popular uprising. One question comes to mind is why now? Answer is simple, Egyptian regime was vulnerable since the day it started traveling along the path of autocracy, nepotism, crony capitalism and embrace of expedient fundamentalism. So all it needed is a trigger similar to a spark from burning match can trigger dry and parched forest on fire.
Popular uprising started in Tunisia a small North African country bordering Egypt. One of the reasons include rising food prices led a vegetable vendor to set fire and burnt himself and history followed. This had a domino effect and brought the uprising to Egypt. Millions of people marched to Tahrir Square calling for Mubarak to Step down. This happened swiftly. US did not want to loose its close ally and hence showed initial reluctance in joining the popular uprising. People did not budge in their resistance. This reminds me of non violent movements supported by Gandhiji in India during the fight for independence to India and Martin Luther King’s fight against racial discrimination. Consequently, US and EU region governments called Mubarak to step down. Now here things got a bit interesting. Mubarak couldn’t give up the power easily. To rephrase this, members of his regime wanted to test the power of popular uprising. They set loose criminals from the jails, sent thugs in camel backs and horses armed with iron clubs. Internet and other telecommunications were shutdown. After these acts, Mubarak’s regime started showing signs of acceptance and appointed Security adviser as Vice president and invited outlawed Muslim Brotherhood for discussions.
Still events are unfolding in the Egypt. Regimes elsewhere are thinking how to handle their situation. One lesson from this uprising will be clear that no regime can last forever. People revolt for basic rights of their life like a famous quote from French revolution goes saying Liberty and baked bread for everyone.
Nobody knows how events will unfold and what happens exactly to current regime and will Egypt embraces democracy or turn into another fundamentalist nation. But happenings in Egypt have reset the world investor focus from Euro and US domestic issues.
Investment outlook:
If crisis in Egypt festers for some more time and a regime that is unfriendly to US or Israel takes hold then it would be better to long credit in Israel. Good idea would be to buy Israel 5y CDS swaps.
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