Links: 2013-02-04

The big news in the links here are the political stories in Spain and Italy. I hope to have a brief post out on the situations there because I expect the sovereign debt crisis to flare up again and I believe Spain will be where the action is.

News links for 4 February 2013

Who is afraid of currency wars? | Gavyn Davies

“Worries about global currency wars have resurfaced in recent weeks, mainly because of Japanese action on the yen. This is only the latest of several such flare-ups since the 2008 financial crash. It is hard to avoid the suspicion that the unconventional monetary policies of the US, UK and others are designed to drive down their exchange rates in order to indulge in “beggar thy neighbour” policies of the type which Samuel Brittan has condemned.

Currency wars strike dread into the hearts of most economists because they contributed greatly to the severity of the Great Depression in the 1930s, especially in the worst phase from 1931-33. The damage done to global trade in that period took several decades to repair, and a repeat of this nightmare cannot be entirely ruled out. However, there are very large differences between the policies pursued in the 1930s and what is happening now, and the results may also be very different.”

Berlusconi’s $5.4 Billion Giveaway Vow Draws Monti’s Scorn – Bloomberg

“Silvio Berlusconi’s campaign promise to give Italian taxpayers a cash rebate of 4 billion euros ($5.4 billion) was criticized by Prime Minister Mario Monti as an attempt to buy votes.
“We can call it a quid pro quo or even a friendly attempt at corruption,” Monti said today in an interview with RTL 102.5 radio. “Berlusconi wants to buy the votes of Italians with the money that Italians had to turn over to cover up the shortfall left in the public accounts by Berlusconi, who governed for eight of the past 10 years.””

La crisis y la corrupción llevan al PP a sus expectativas más bajas | Política | EL PAÍS

The ruling Partido Popular in Spain is at its lowest ebb ever with only 23.9% of the voters supporting them after a corruption scandal has hit headlines there. As I have said before, the Spanish have no one to blame here but themselves because it was clear from the outset that Rajoy’s policy would be a failure. Now they have turned on him. If he is found to have taken funds, his government will fall and we will get new elections and the socialists will return to power. Markets will not like this, making an OMT request that much more likely. Of course, the socialists will have to keep up with the terms of the OMT if they want ECB support. That means more of the same.

Anger rises as scandal rocks Rajoy –

“Mariano Rajoy waited more than two days to comment on the slush fund scandal threatening to engulf both the Spanish prime minister and his Popular party. When the denial finally came, it was firm and unequivocal. “Never, I repeat never, did I receive or hand out black money, not in this party nor anywhere else,” Mr Rajoy declared over the weekend.
Until recently, many of his countrymen would have been inclined to believe him.”

Beware governments’ post-doping malaise | Steve Keen | Commentary | Business Spectator

Here, Steve Keen echoes my sentiments on the fiscal side of things, remarking that we are seeing a revisit of 1937 when Roosevelt’s double dip occurred during the Great Depression. Steve also does a bang up job of bringing in all the Anglo-Saxon economies and talking about how private debt levels explain much of their relative economic performance.

La Argentina tuvo en 2012 los peores indicadores de la región – 04.02.2013 –

Argentina has the worst macro fundamentals in all of Latin America according to this article in The Nation. It’s growth, production, industrial, construction, investment, employment and inflation prospects are all worse. I would agree that Cristina is not getting it done in Argentina. I expect currency devaluation at a minimum. And I expect the economy to worsen. Note that the IMF has recently cited Argentina for falsifying its statistics. So there are no really good numbers to judge how bad things already are.

Is the Secular Bear Market Coming to an End? | The Big Picture

This makes much more sense to me than some of the other more bullish analyses I have shared.

“Regardless of your answer to our broad question, there is one thing that I believe to be clear: We are much closer to the end of this secular cycle than to the beginning. Many optimists — most notably, famed technician Ralph Acampora — believe the secular bear market has ended. Even skeptics have to agree that we are more likely in the 7th or 8th inning than earlier stages of the game.  Only the “America is Japan” crowd thinks we are in the 3rd or 4th inning.

The key question for investors: Are you prepared to make changes to your portfolios?”

Low Interest Rates Force Companies to Pour Cash Into Pensions –

“The drain on corporate cash is a side effect of the U.S. monetary policy aimed at encouraging borrowing to stimulate the economy. Companies are required to calculate the present value of the future pension liabilities by using a so-called discount rate, based on corporate bond yields. As those rates fall, the liabilities rise.”

How U.S. stocks ‘have been a poor investment for a long period of time’ – The Globe and Mail

These numbers point to the dynamics of a secular bear market, one which is now long in the tooth but I think is still here.

““The long-term patient retail buy-and-hold investor would not have fared as well. Against the popular view in equity-land that it’s only the bottom-up that matters, it has been timing the macro developments that have been the bread winner for any cycle timer. This observation is true without adjusting for inflation, but it’s truer yet after taking account of inflation. Indeed, the S&P 500 is still almost 25 per cent lower than its peak in early 2000 after taking account of inflation, and it has been volatile but with downward drift since, so be careful with the record-high optimism.”

Their research shows that U.S. stocks surged in the 1990s, in both inflation and adjusted measures, but since then have been “drifting within a wide, volatile and generally sideways (nominal) to down (inflation-adjusted) range.””

Dutch-bottomed bank bondholders | FT Alphaville

“If you’re not aware at this stage that governments can and will use their domestic law to change the rules of the game in bail-ins, you are going to get smoked.

Of course the sub debt has been bailed-in but SNS senior unsecured bonds are safe, which maybe demonstrates that one rule of the game remains unchanged (until new European rules come in much later this decade). “

JPMorgan Joins Rental Rush For Wealthy Clients: Mortgages – Bloomberg

“The firm’s unit that caters to individuals and families with more than $5 million, put client money in a partnership that bought more than 5,000 single family homes to rent in Florida, Arizona, Nevada and California, said David Lyon, a managing director and investment specialist at J.P. Morgan Private Bank. Investors can expect returns of as much as 8 percent annually from rental income as well as part of the profits when the homes are sold, he said.

The bank’s wealthy clients are joining a growing number of private-equity firms and individuals buying rental homes in the regions hardest hit by the U.S. housing crash.”

Sony Kapoor and Charles Goodhart: Europe’s Sham Banking Union –

“The fragility of the current construction can be seen by the fact that, if a German bank with branches in Spain were to launch an advertising blitz offering Spanish depositors the safety of German-government deposit insurance, there is little that supervisors could do to stop tens of billions of deposits leaking away from even the stronger Spanish banks.

In the immediate aftermath of Lehman’s collapse, many EU states launched schemes that allowed their banks to issue state-guaranteed bonds. More than €700 billon of such debt was issued by 2010.

The expiration of these schemes, and doubts about the creditworthiness of certain sovereigns, led the European Banking Association to propose a pan-European funding-guarantee scheme. This was considered politically unpalatable by stronger member states, and the credit crunch necessitated the European Central Bank’s two Long-Term Refinancing Operations.”

Sequester Looking More And More Likely – Business Insider

While I am calling for recession, this seems perfectly reasonable.

“The increased likelihood of the sequester has caused Goldman’s Jan Hatzius to change his roadmap for GDP.

The good news is that he still sees no recession:

We expect the US economy to move over the hump of fiscal contraction in 2013-2014. This hump looks even more front-loaded than when we rolled out our forecast late last year. We now expect a more rapid ramp-up of the federal spending “sequester” by late 2013, compared with the more gradual phase-in that we had assumed earlier.”

Sen. Harry Reid: Any Budget Deal Must Include Revenue – ABC News

This is the Democratic position. It’s untenable for Republicans because the fiscal cliff already had lots of revenue via tax increases, especially since capital gains taxes increased markedly.

“Asserting that “the American people” are on his side, Senate Majority Leader Harry Reid, D-Nev., told me during an exclusive interview for “This Week” that any that deal reached between Republicans and Democrats to avoid the looming sequester must — “without any question” – include revenue.
“The American people are on our side. The American people don’t believe in these austere things. We believe that the rich should contribute. We believe we should fill those tax loopholes — get rid of them, I should say. And that’s where we need to go,” Reid said. “And I’ve got a pretty good fan base for that: the American people. Republicans, Democrats, and Independents.””

Twin crises in Italy and Spain stalk markets as political unrest prevails – Telegraph

I don’t buy this thesis that the ECB would back away from the OMT on Spain or Italy but here it is.

“The escalating political crises in Italy and Spain are being watched with growing concern by bond investors, fearful that both countries could slide into paralysis and lose the crucial backing of the European Central Bank.”

The end may be nigh but don’t bet on it –

Being early is sinful from an investment manager’s perspective. You might have the secular view right but it’s important not to jump into a secular view early and underperform. I wrote a piece talking about this last year, riffing off of something Jeremy Grantham wrote:

“In my last column, I suggested that investors pay more attention to the credit cycle. There may, however, be another cycle whose repercussions are even more important. This cycle is analytically harder to pin down, as it morphs through various stages and lasts many decades. Yet some analysts believe firmly in the “debt supercycle”. A few doomsayers go so far as to claim that we have entered its final phase.

“It is interesting to ruminate on how the supercycle might end,” noted BCA back in 2007, “but one should not invest today on the assumption we are close to that point.”

In the investment world, to be early is to be wrong.”

Deep military cuts begin as Congress dawdles – U.S. – Stripes

“The entire Department of Defense has imposed a civilian-hiring freeze. At least 46,000 temporary employees are getting pink slips and many more employees under “term” contracts won’t see those contracts renewed.”

This is going to end badly – Tim Price – PFP Wealth Management

I presented the bull cases for the UK and the US just recently. Here is a counter example where the analyst, Tim Price, believes that the market is headed for a fall

IMF sees 140m jobs shortage in ageing China as ‘Lewis Point’ hits – Telegraph

“We can now discern more or less when the catch-up growth miracle will sputter out. Another seven years or so – enough to bouy global coal, crude, and copper prices for a while – but then it will all be over. China’s demographic dividend will be exhausted.
Beijing revealed last week that the country’s working age population has already begun to shrink, sooner than expected. It will soon go into “precipitous decline”, according to the International Monetary Fund.”

The eurozone crisis is not finished –

“banking will remain a national activity in the eurozone for all economically relevant purposes. The European Central Bank will become the common bank supervisor. This has indeed been agreed. But there will be no common deposit insurance. The resolution system likely to emerge later this year is also flawed. It will end up protecting only the taxpayer of the creditor countries from bank failures in the debtor countries. But it will not accelerate the resolution of the eurozone’s undercapitalised banks. My suspicion is that the ultimate intent of the Franco-German legislation is to secure the position of their national champion banks.”

Greek banks lobby to ease bailout terms –

“Greece’s banks have begun a frantic lobbying of the bodies behind the country’s bailout, in an effort to ease the conditions imposed on their recapitalisation and avoid full nationalisation.
Under the terms of Greece’s €172bn international bailout – backed by the so-called troika of the European Commission, European Central Bank and the International Monetary Fund – €27bn is to be injected into the big four lenders, with a further €2.5bn to be supplied by private sector investors.”

European bank bonuses face 20% cut –

“European investment banks are set to cut their bonus pools in the coming weeks by 20 per cent in a move that will exacerbate the pay gap with their US rivals.
Consultants and bankers estimate that banks including Barclays, Credit Suisse and UBS will reduce overall group bonus levels for 2012 by up to 15 per cent but agree that the cuts will be nearer one-fifth in their investment banking arms.”

Osborne threatens to break up banks –

“George Osborne will warn banks on Monday that they will be broken up unless they comply fully with rules to make the financial system safer.

The chancellor has bowed to political pressure by agreeing that a proposed ring fence to protect the taxpayer from banking collapses needs to be “electrified” with draconian sanctions.”

Some of the Carney Gloss Is Coming Off –

“It is fair to say that in the two months since his appointment, some of the gloss has come off Mr. Carney’s reputation—and that some of this damage is self-inflicted.

For example, Mr. Carney’s decision to seek a pay package worth more than £874,000 £1 million($1.37 million) including a £250,000 housing allowance will no doubt make his life easier but may make his job harder. The amount is certainly possible to justify but risks reinforcing the perception that he is a globe-trotting hired gun with no deep commitment to the U.K. That could become problematic if and when Mr. Carney, a former Goldman Sachs banker, is forced to take decisions that, for example, cause him to be blamed for ordinary U.K. families losing their homes.

The more puzzling self-inflicted wound was Mr. Carney’s decision to float the idea that the BOE might drop its inflation target in favor of a nominal GDP target. This piece of kite-flying, which appears to have been coordinated with the Treasury, has been almost universally dismissed by market economists and fellow central bankers.”

Amazon, Apple, and the beauty of low margins — Remains of the Day

“[As always, I preface any discussion of Amazon and Apple by noting that I own some stock in both companies, and that I worked at Amazon from 1997 to 2004]

A lot of folks, especially Apple supporters, like to characterize Amazon as irrational, even crazy, for its willingness to live with low margins. It must be frustrating to compete with a company like that. But to call their strategy irrational or to believe they want to be a non-profit is a dangerous misreading of what they’re all about.

It’s been years since I worked there, so this is largely speculation on my part, but I believe Amazon is anything but irrational when it comes to how they think about margins. I believe it’s a calculated strategy on their part, and anyone competing with them had best understand it.”

The Real Jobs Report – MarketBeat – WSJ

“the headline numbers, the revisions, obscure the reality behind the jobs market, how the wounds suffered in the Crash of 2008 have not healed for far too many people.

Nothing quite captures the state of the nation like two stories in today’s paper. The first is Lauren Weber’s piece of Americans’ retirement plans, or rather, the shreds of their retirement plans:”

Get ready for a world of global competitive currency devaluations – Macrobits by Marshall Auerback

“One can argue that this battle has been going on for years (decades?), but has reached a new phase with the election of the new LDP led Japanese Administration led by Prime Minister Shinzo Abe.  Abe’s comments about how Japan can no longer tolerate the U.S. and Europe devaluing their currencies against the yen tends to confirm the view that Japan is inching closer to the policy adopted by the Swiss central bank a couple of years ago in terms of drawing a line in the sand over continued yen strength.”

Tips are not optional, they are how waiters get paid in America | Chelsea Welch | Comment is free |

“While this story has garnered immense media attention, my story is not uncommon. Bad tips and harsh notes are all part of the job. People get fired to keep customers happy every day.

As this story has gotten popular, I’ve received inquiries as to where people can send money to support me. As a broke kid trying to get into college, it’s certainly appealing, but I’d really rather you make a difference to your next server. I’d rather you keep that money and that generosity for the next time you eat out.”

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