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A post-crisis guide to financial jargon

One of the interesting effects of the financial crisis has been the addition of a plethora of new words and phrases that market participants and journalists now use to describe the economy. Best referred to as financial jargon, the following explanation will attempt to demystify a few (clearly not all) of the words and phrases that have peppered the financial landscape over the past few years. Some words or phrases have graced front page headlines and will likely gain a permanent place in financial dictionaries, and more importantly, are no longer flagged up by spellcheck. Others have shone brightly before fizzing out and are now barely uttered or spoken of.

Financial markets are well known for their ability to innovate. This applies not only to investments and financial products, but also the language we use on a daily basis. With such an evolving and dynamic investment landscape, we should not be surprised to see a new acronym or portmanteau being used in the press next month. The question is, what will be the word or phrase of 2014?


Used to describe the economic policies (known as the ‘three arrows’) advocated by the current prime minister of Japan, Shinzo Abe.

Abe was elected in 2012 and has quickly implemented the ‘three arrows’ of Abenomics: fiscal stimulus, monetary easing and structural reforms. These policies have had some success in lifting Japan out of the economic quicksand it had found itself stuck in for over 20 years. The yen and the unemployment rate have fallen, while equity prices, inflation and economic growth are all up. Abenomics may provide a blueprint for European policymakers to follow in the not-too-distant future as central bankers attempt to deal with the deflationary forces of high unemployment, austerity and internal devaluation.

Of course this is not the first time a politician has been associated with a set of economic policies. Think ‘Thatcherism’ or ‘Reaganomics’. There has also been a huge trend of adding ‘nomics’ to just about any word – ‘freakonomics’, ‘soccernomics’, ‘frugalnomics’, ‘cybernomics’… the list goes on.

Bitcoin or crypto-currenc

A digital medium of exchange.

Bitcoin has sparked a lot of interest recently, mainly because of pumped-up prices generating extensive media coverage. Apart from the speculation interest, many have advocated Bitcoin as a way of protecting the interest of the holder from the traditional pitfalls of fiat currencies, namely inflation and currency debasement. This is at the forefront of some investors’ minds, as central banks embarked upon quantitative easing and a rapid expansion of their balance sheets.

Central bank regime change

The unspoken shift in major central banks’ priorities away from targeting inflation towards boosting economic growth.

We are proud that we came up with our own thesis in December 2011 on the behaviour of central banks post the financial crisis. As economic growth stagnated, central bankers rightly took their eyes off hitting a specific inflation target. Of course, they could never tell us, for fear that inflation expectations may become unanchored. At least that’s what we thought, although Shinzo Abe recently used the phrase to describe the evolution of the Bank of Japan, while the Wall Street Journal has also highlighted the dangers for bondholders of a shift away from inflation targeting.

Currency wars

An environment where countries devalue their currencies against one another, in the hope of boosting domestic demand and economic growth.

Following 2008, developed economies grappled with recession and high debt levels. The view was that export-led economic growth was the best strategy to deal with these problems, hence the requirement for cheaper currencies in the globalised marketplace.

Several countries took action to devalue their currencies in 2010, including China, Japan and Switzerland. The topic dominated the G20 summit but today barely garners any attention. This could change if the Chinese authorities devalue the renminbi in order to support the Chinese economy at some stage in the future.

Debt ceiling and fiscal cliff

Terms associated with the regular US budgetary disagreements that we have witnessed over the past few years. The failure of the US Congress to agree on increases in government borrowing limits (the so-called ‘debt ceiling’) may lead to the country facing a ‘fiscal cliff’, or a combination of expiring tax cuts and enforced government spending cuts.

Every couple of years, the markets turn their focus to the debates and deliberations of Democrats and Republicans. The main fear is that these two groups fail to come to an agreement on government spending, resulting in the US Treasury being forced to default on payments to bondholders or stop payments such as social security and Medicare. Things got so dire in 2011 that the US was downgraded for the first time in its history by Standard and Poor’s from AAA to AA+.

The reaction in markets? Buy US Treasuries, a true ‘safe haven’ asset. The good news is the US Congress has agreed to raise the debt ceiling until March 2015, which will allow the US government to raise more money to pay off its debts (thus avoiding the ‘cliff’).

The Fragile Five

Five emerging market nations with large current account deficits – Indonesia, South Africa, Brazil, Turkey and India.

This is a pretty new phrase, having being coined by economists at Morgan Stanley late last year. As the era of ultra-high liquidity measure begins to end, as signalled by the Federal Reserve’s (Fed’s) tapering (see ‘taper tantrum’), these economies face recession and plunging currencies as ‘hot’ capital flows exit their respective financial systems. We have seen a lot of turmoil in emerging markets so far in 2014, and we believe it is unlikely that there will be calm in the short term.

Forward guidance

Central banks’ attempts to manage market expectations of the future level of interest rates.

An example of central bank regime change, forward guidance has been used by the Bank of England (BoE), the Fed, European Central Bank (ECB) and Bank of Japan (BoJ) with varying degrees of success. The problem is, no one can control the market, and in the case of the UK, the BoE has quickly dropped all talk of ‘knockouts’ (what were they again?) and has now been forced into backing down on linking interest rate moves with the unemployment rate. We have never been great fans of forward guidance, believing that central banks risk either a) not changing their policy even if economic circumstances mean that they should (for example, if economic activity picks up strongly yet they have promised to keep rates on hold for years), or b) lose face, credibility and trust with the market by going back on their promise. Forward guidance: handle with care.

Great rotation

Investors on mass ‘rotating’ from government bonds into equities.

It seems obvious to many investors that the nominal and real long-term returns from investing in government debt look pretty poor as we stand today. Hence, many strategists are advocating a long stocks and short government bond position for portfolios. Of course, a ‘one size fits all’ approach to asset allocation is a highly simplistic view of the world and ignores a number of technical factors that exist in financial markets. For example, there is evidence that pension funds are likely to de-risk their portfolios as their members get older. Safe investments and income will become the primary concern for these mammoths of the investment world. The great rotation will more likely be a gentle spin.

Grexit, Cyexit, Irexit etc

A term used to speculate on [insert European country here] leaving the eurozone.

Take the first two letters of any eurozone nation, add ‘exit’ to the end of it and you have made yourself a new financial term describing the devastating effects of a member leaving the single currency. Greece, Ireland and Cyprus have severely tested the euro in recent years yet remain in the union. The strongest argument that has been put forward is that the costs of leaving the European Monetary Union will be too painful relative to the gains. Capital outflows, skyrocketing inflation, bankruptcy on a national scale, mass unemployment and social unrest do not make the option particularly enticing. And just imagine what would happen if Italy, Spain or Germany decided to get out.


An acronym describing the economies of Portugal, Ireland, Greece and Spain. These nations were deemed to be suffering the worst effects of retaining the currency of the eurozone, the euro. Italy was added later as concerns arose about the government’s ability to service its debt obligations.

We don’t see this term much anymore, largely because sentiment around the above nations has improved markedly since the dark days of the eurozone debt crisis. So much so, that Ireland was recently upgraded to investment grade status. It seems too early to become complacent though, with austerity, high unemployment and deflation prevalent across these nations.


More acronyms, this time used to describe the various packages cobbled together by the European authorities to bail out those eurozone members in danger of default (see PIIGS) and their respective financial institutions.

The ECB has a problem. It can’t just buy government debt like the BoE, the Fed or BoJ. The reason is, it may or may not be illegal. As such, the ECB must be more inventive when trying to assist nations in the eurozone in dealing with their large amounts of government debt and those that hold the debt (namely European banks). The European Financial Stability Facility (EFSF) and European Financial Stability Mechanism (EFSM) directly helped eurozone members in difficulty and were used to bail out Greece, Ireland and Portugal. The European Stability Mechanism (ESM) later replaced the EFSF and has pledged funds to Cyprus and Spain. The Long-Term Refinancing Operation (LTRO) helps banks through cheap loans issued by the ECB, which would hopefully ease any credit constraints as the banks withheld credit from each other.

Talk about alphabet soup.


The Shanghai Interbank Offered Rate (think LIBOR or EURIBOR).

Market watchers look at LIBOR, EURIBOR and SHIBOR to gauge the level of funding stress that banks are facing in the market. If banks stop lending to each other, usually due to fears over counterparty risk, then the offered rate tends to increase if not spike. It can cause a mad scramble for funds as banks offer higher interest to attract the capital they need. In this environment, the weakest banks suffer the most. SHIBOR spiked midway through 2013, causing analysts to focus in on the measure. Most think the spike was the result of excessive leverage and bad loans in the Chinese economy. Expect SHIBOR to hit the headlines more frequently this year as the People’s Bank of China attempts to address the risks that excessive leverage poses to Chinese economic growth.

Taper tantrum

The negative reaction of markets to the winding down of the US Federal Reserve’s quantitative easing programme.

If bond yields rise or equities sell off, strategists have become accustomed to blaming these price moves on the market’s reaction to the US reducing the amount of US Treasuries and mortgages that it purchases through its quantitative easing programme. The theory being that the Fed is less inclined to hold down longterm interest rates and this will have a dampening effect on the US economy as financial conditions tighten. Other potential effects include a rising US dollar as the Fed eventually moves to normalise interest rates and emerging market turmoil as investors repatriate money back to the US.

“Whatever it takes”

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

– Mario Draghi, 26 July 2012.

These could be the most important words ever uttered by a central banker. At the time of his speech, the future of the euro was in question. Immediately, yields on peripheral European sovereign bonds fell from dangerously high levels that made borrowing unsustainable over the long term. Eighteen months on, yields on peripheral sovereign debt are at their lowest levels since 2009. And the euro area is healing, albeit slowly.

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