Decodificare il presente, raccontare il futuro


mer 27 aprile 2016


Interview with Lando Hoffman: "Germany will be left alone to deal with negative rates and deflation"

HAMBURG —  In 2000, Lando Hoffman decided to start operating on financial markets; at that time he was 27 and had a PhD in Mathematical  Sciences. The monetary union was already a fact. Germany was the engine of Europe and the works in progress were reshaping Berlin. Since then, Herr Hoffman’s career has coincided with a sudden ascent to the summit of the S***Group.
He was born in Dresden, in the German Democratic Republic, forty-three years ago, his father was an “administrative officer” of SED, the Socialist Unity Party and he moved to the West after the unification of Germany. The memory of the Democratic Republic faded soon. The West was the sole available option for the future. Hoffman started to study Statistics and Actuarial Science at the University of Cologne and obtained a full marks degree with a dissertation on Bond Fund Credit Rating, before devoting himself to research. When the new millennium started, his life changed completely: he decided to abandon his studies and entered one of the leading German insurance companies.
Nowadays, he is an influential figure of the financial community, able to combine deep analysis and profound knowledge of the so-called “street”, the word used by the operators to describe the exchange networks. On the walls of his office in Hamburg, there are two portraits that summarize the personality of this eccentric German professional: the portrait of Évariste Galois – French mathematician, theorist of the solvability of algebraic equations and passionate republican in the beginning of the 19th century – lies next to the picture of Willy Brandt, a social democratic burgomaster. Namely, they represent both intellectual passion and fondness for social-democracy.

Herr Hoffman, the disagreement between the German government and the ECB top brass seems to go beyond the usual dialectic between opposite perspectives. How would you explain such a tough debate?

The answer is simple: negative ratings are helpful for debtor nations but may damage creditors. Someone in Berlin has decided that it does not work. However this is only part of the problem, the tip of the iceberg.

And what’s beneath the surface?

We need to look back at the 90s, when German pension funds and insurance authorities have started to buy high-yield bonds. Since then, and until 2008, these market players have bought Italian, Spanish and Greek bonds, along with CDOs [instruments with an underlying debt obligation, TN]. Essentially, German pensions and savings were mainly invested in the problematic countries of the Eurozone and leveraged instruments. This was an apparently perfect circle: the German productive machine exported its surplus and re-invested the debt revenues in the same countries. It can be compared to an international vendor financing, such as a household electrical appliances company that subsidizes the buyers of its own products.

The best of all possible worlds, so…

Let’s say that, for German operators, it was an ideal condition. We had high rates for our surplus and a weaker currency that enhanced competition. Such a fake balance allowed us to generate extra-revenues on public debts — compared to national government bonds — in order to guarantee excellent returns on pensions, funds and insurances in a context of fixed exchange-rate and therefore limited risk. However, the mentioned mechanism, excessively misused, has collapsed.

Why has this problem arisen in such a violent way in 2000?

The subprime great crash has destroyed the castle. In the first place it was a financial market crisis which involved stock market indexes and titles linked to mortgages, but the second crisis severely affected sovereign states and public debt. At this stage, most German operators reacted with massive pay-off of South European countries’ titles, causing, along with other global investors, political changes and instability.

This is an old story…

It’s true, but it is the key to the present, since we went from a crisis of “rejection”, let me define it in this way, to a crisis of perspective. In fact, with the protection of public debt, the quantitative easing policy has suffocated markets and cancelled any safe landing place for investors. The old concept of debt market has disappeared. Current negative rates have turned the time/revenue relation around. The operators now strive to pay investors back and the concept of public welfare or private insurance is changing. Crisis is endogenous to this system, which is not able to produce surplus, a vital element for investments.

But the stock market is still there…

And it is getting more and more important, it is becoming the financial centre of gravity although it is not able to absorb the savings of the bond market. The balance of markets was essentially based on some kind of equivalence between the revenues generated by the increase of money supply and debt instruments. Currently debt instruments are absorbed by the central banks and the remaining instruments on the market often produce negative revenues.

What possibilities are available for financial operators?

If savings are completely placed on the stock market, volatility is likely to keep increasing without control. With regards to this, year 2016 is a prime example, almost paradigmatic. Between January and February, the global stock indexes have registered a 20% decrease but they have evened up again. Volatility is likely to keep increasing exponentially: it may consist of strong bull spreads, and financial operators – at some stage – may have no other choice than buying, thus causing the so-called bubble that brings markets in a cycle of irrational exuberance.

We have already seen that: boom and bust have always been part of the markets.

Of course they have, but I fear that 2008 has been the “starter” only; the “main course” still has to come.  However I am not a sorcerer, there are several options. There is a single certainty at moment: negative rates. And this is a problem for us.

Let’s go back to politics: how do you think that the dispute between the German government and the Eurotower will be solved?

Simply, it will not be solved. It is likely to become a permanent conflict. Similarly, Italy is alone with its public debt, France and Belgium have to fight alone against terrorism, Rome and Athens have to deal alone with the migrants’ situation which is undermining the pillars of the European Union, and Germany will be left alone with its negative rates and deflation. We cannot avoid it; this is the other side of the coin of neo mercantilism. There will be no dialogue on the matter.  The ECB’s top brass has been clear: the central bank is completely separated from politics. It is the German model of monetarism. The objective of Frankfurt is to fight deflation all over the monetary union. It is not a political function.

However, a political role is often attributed to the Eurotower, together with a long-term Europeanist vision.

Such a role is a consequence of being the subject in charge of stabilizing the currency, which is necessarily associated to political functions. It is not Frankfurt’s fault if the exceeding German capitals do not produce revenue over time or even have negative rates of return. The problem is at the origin, as Keynes said in the last century. In a situation of common currency, a country cannot have a commercial surplus for too long compared to the other countries. Furthermore, without stabilization by the ECB, the European Union would have disappeared.

Therefore are you and the other operators who deal with pension funds and insurance destined to keep on dealing with negative rates?

We are participating in a possible change, an actual paradigm shift. There is no more free lunch and people must be prepared for the erosion of savings or, on the contrary, for an increased risk. Stagnation and deflation will follow one another for a long time and the expectations still need to be adjusted to the present circumstances.

Forecasts are not positive also for the rest of Europe, are they?

It is true, they are even worse. However the South of Europe may experiment big restorations, in the banking system for example, and restoration always brings new opportunities. The real challenge is to make them available for everyone, and to avoid such changes to lead to new speculation. As I read somewhere, the choice is between ethics and money.