Friday, March 20, 2015

Sovereign Debt as Murderous Puke

From ValueWalk:

Sovereign Debt: Is This How It All Begins to Unravel?
My daughter found a sick baby bird in our garage a few weeks ago. We took it in and began nursing it back to life. My daughter, a gentle little soul who believes that our home should be turned into an animal shelter for every imaginable creature whether it needs help or not, was interested in the species of bird we were looking after.

This led us meandering down the ornithology path. After we’d identified our patient as a house sparrow, we continued looking at other birds. What we found was a particular species of bird which I immediately recognized as a bird which should be the mascot for sovereign debt.

Fulmar chicks, like many small birds, are very cute looking. They look completely harmless. You can imagine cuddling one, taking it home to your partner and being rewarded with all manner of affection for being so thoughtful, “Oh dear, she’s beautiful. What a lovely gift.”

The fulmar, however, has a little secret. This cute looking chick sprays puke all over anything which comes too close. This is a defense mechanism designed to ward off enemies. When you come too close to it, this seemingly innocent little ball of fluff will projectile vomit a type of rotten fish smelling oil all over you. Apparently it’s incredibly difficult to get the vile smell off your skin even after using a wire brush in the shower. What a little bastard of a bird!

If you so happened to be a predatory bird you’re really screwed. The fulmar’s “gut oil puke” acts like a form of unbelievably strong super glue, gluing your feathers together and making flight impossible. Should you decide to head into the water to rid yourself of this death vomit, the sticky vomit apparently causes you to lose your buoyancy and you drown!

Murderous puke! And yet the bird looks harmless…
Similarly, investors lulled into a false sense of security caused by linear assumptions, have loaded up on sovereign debt, believing mistakenly that they’ve got themselves a safe asset. It is the equivalent of a harmless sparrow. Something that can’t possibly harm you. Boy, will they find a surprise when they open the shopping bag and realise what they’ve actually taken home. A vile stinking destructive package of crap, disguised as a safe investment. Risk free, they’re calling it.

Not long ago I showed how debt has risen since the 2008 crisis. In fact, today we have this unique situation where in Europe we’re staring at 700-year lows in interest rates.

Surely, with interest rates so low we’d expect to find a field of daffodils on the risk side. Declining yields on bonds would normally be attributed to lower risk of default. Stands to reason, but reason cannot be found today in the sovereign debt markets. Instead, we find that risk is off the charts....MUCH MORE