It is a public holiday in Germany on Monday and that is probably a good thing. But that won't prevent the hot takes on Deutsche Bank from piling up faster than Donald Trump's tax liabilities. I have a lot of friends on the buy side as well as strategists at major sell side shops, and the debate between us has been lively in recent days. But we are no closer to a solution and neither, it appears, is the market given the ridiculous price action on Friday. The grapevine has it that the DOJ will lowball the fine, which should allow DB to stagger along in accordance with its original 2020 plan. But the results on October 27th will be a key event in either case. A bad downside surprise could bring coupon payments on the COCOs in danger, at least as far as I understand. I concede, though, that I have no strong take on whether this is indeed likely to happen.
Read MoreA number of interesting stories are being groomed at the moment in financial markets. First off, investors looking for a “Reverse Twist” story at the BOJ were partly vindicated by the introduction of yield curve control, but the details were underwhelming. In the end, the BOJ opted to commit to the maintenance of status quo.
The most interesting aspect of this policy move, however, has been the interpretation of its significance and what indeed it is trying to achieve. The main story, as I see, is that the BOJ wants a steeper yield curve, and they’re trying to achieve that by playing chicken with the momentum chasers in duration. They are sending a signal to the market that they will continue to do QE, but that they won't buy as much duration as before. They are betting on herding and front-running here. That has worked before for central banks, but will it this time, and will investors start to discount a similar move in Europe? The initial evidence doesn’t really suggest that this theme will have legs.
Read MoreInvestors are beginning to get seriously interested in the idea that the BOJ and the ECB will change the composition of their bond purchases to steepen the yield curve. In effect, this would be the opposite of the Fed’s Operation Twist, which saw QE purchases concentrated on the long-end, chiefly to lower the yield on mortgage-backed securities. I think this story, at least partly, is to blame for the recent nudge higher in global bond yields. But we will know soon enough. This week's BOJ meeting should give us a hint of whether this narrative has any legs.
Read MoreDo you remember what you were taught in introductory economics? Do you remember how much math you had to chew through in graduate school? Do you want to relive that? Alternatively, you might just have wondered why macroeconomists write and speak like they do, why they use complex math to explain seemingly simple concepts, and why they don't seem to agree on anything?
In this first part, I pick apart the traditional undergraduate story of macroeconomics, and try to explain why Keynes and Friedman maybe weren't as different as everyone would like you to believe. In doing so, I am setting up the big plunge into why on earth macroeconomics has come to rely on a fusion of math and representative agent models to make theories of the world, a story that I will grapple with in part 2 of this show.
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