Thoughts on Italy’s election and Links: 2013-02-26
FYI: I will be on BNN at about quarter of 1ET to talk to presenter Howard Green and the Economist’s Ryan Avent about the news of the day. So a lot of the topics below will be on offer.
As for topics, I don’t know Italian politics so I have not commented on elections there. But what is clear to me is that the election represents a rejection of austerity. The polls did not capture the degree to which Grillo’s anti-austerity party would surge – and this with a record low turnout because of people disenchanted with the situation. That speaks to a level of latent popular unrest that is combustible, especially given how important Italy is in the euro zone (I think the euro cannot survive without Italy).
So the question is what happens next. Below are a number of posts talking about the possibilities including new elections and a grand coalition like the one we saw in Germany in 2005. Again, I won’t speak to the likely political outcome. I will speak to the market outcome, which sees Italy re-coupling to the periphery after its decoupling through January. It is possible that Italy and Spain will now trade in tandem once again, now that Italy has rejected Monti’s austerity pill.
I think this points to the OMT again. The question is who applies first – Italy, Spain or Ireland – and under what conditions. In my view, Italy’s euro departure is a non-starter because policy makers (including the ECB) would see this as catastrophic and do “whatever it takes” to prevent it. But then Italy also cannot get OMT money without more austerity. So the only way Italy gets away with a relaxed austerity stance is if markets calm without a formal OMT application. Even a Spanish OMT application could trigger an Italian OMT application if the two countries have fully re-coupled in this post-election world. And then there is France and the Netherlands with their 3% Maastricht hurdle problems.
So I would say that we have entered a new sovereign debt crisis phase with Spain, Italy and France as the trigger points. An Irish OMT application would not cause crisis. Nor would Dutch austerity. Though Dutch austerity could trigger a need to follow through on austerity in France and the periphery for the sake of consistency. The bottom line here is that there are a lot of moving parts in this crisis again and that is negative for European bank shares, negative for periphery bonds and CDS, and negative for the euro.
News links for 26 February 2013
Italy election sparks fresh fears for euro | World news | The Guardian
“Exceeding even the most adventurous pre-electoral predictions, the M5S emerged as Italy’s biggest single party in the chamber – a result that will send shockwaves through the eurozone and beyond. Grillo boasted it had achieved its prominence in the space of little more than three years, “with no money and no [state] funding.” However, Grillo’s movement lagged the two big alliances in the number of seats because it is running alone and not in a coalition.
The result indicated that fresh elections were a strong possibility and, at best, foreshadowed a weak government unable to pass the tough reforms Italy needs to enhance its grim economic prospects.”
BBC News – Barnes & Noble founder to buy back bookstores
“Leonard Riggio, founder of the Barnes & Noble bookstore chain, has said he plans to offer to buy back its retail operations, but not its Nook e-reader.
Mr Riggio, who owns almost 30% of the company, notified US regulators that he would seek to purchase the loss-making firm’s stores and online business.”
Three weeks in, it may be time for Andrew Sullivan to tweak The Dish’s metered paywall — paidContent
“A little over three weeks into its metered paywall model, Andrew Sullivan’s The Dish has raised an additional $93,000. The pace of subscriptions seems to be slowing, so how can Sullivan keep it up?”
U.S. Wireless Carriers Move to New Technology—For Voice – WSJ.com
“Older networks were built for voice traffic with a data pipe running through it, but newer networks are for data only. To maximize efficiency, carriers aim to eliminate the dedicated voice channels needed by older technology and clear the airwaves for the latest standard, called long-term evolution, or LTE. To do this, companies are taking on the multiyear process of converting voice calls into Internet traffic so the same airwaves can be used for voice or data.
Replacing traditional voice service with voice over LTE will take time, as complex kinks are worked out, network equipment is installed and, eventually, phones are made with the necessary hardware. VoLTE, as the new technology is known, offers greater efficiency because once-dedicated voice space can also run data when not being used for voice calls, something the current technology doesn’t allow.”
A Tale of Two Adjustments – NYTimes.com
“1. Thanks to the giant housing bubble, Spanish costs got much further out of line than Germany’s ever did, so the required adjustment is much bigger.
2. Germany got to do its adjustment in the face of a relatively strong European economy; Spain is being asked to adjust in the face of a depressed Europe sliding back into recession.
3. In part because of this difference in overall macro conditions, but also because Germany doesn’t have a housing boom and is actually engaging in a bit of austerity on its own, the burden of adjustment this time around is falling much more on deflation by the overvalued country.”
Is your company watching your weight? – MarketWatch
“Your company already knows whether you’ve been taking your meds, getting your teeth cleaned and going for regular medical checkups. Now some employers or their insurance companies are tracking what staffers eat, where they shop and how much weight they’re putting on—and taking action to keep them in line.
The goal, say employers, is to lower health-care and insurance costs while also helping workers. Last month, 1,600 employees at four U.S. workplaces, including the City of Houston, strapped on armbands that track their exercise habits, calories burned and vital signs, part of a diabetes-prevention program run by insurer Cigna. Some diabetic AT&T employees also use mobile monitors; in September, AT&T also started selling to employers blood-pressure cuffs and other devices to track wearers 24/7.”
La agencia de calificación Fitch pone a Murcia al borde del ‘bono basura’ | Economía | EL PAÍS
Fitch has downgraded the Spanish regional government Murcia to near junk. Catalonia and Castilla-La Mancha have already received this treatment.
Apple declara pérdidas en España | Economía | EL PAÍS
Apple and Google both lost money in Spain supposedly. Is this a case of tax avoidance? Well, revenue expanded to a record in Spain in 2012. It’s hard to believe that Apple lost money. And this El Pais article seems to indicate disbelief as well.
Yet more indication of pricing pressure in the mobile space.
“The two 3G newcomers to the Lumia line are the Lumia 720, which slots into the portfolio just above the Lumia 620, and a new entry-level handset, the Lumia 520, which pushes the price of Nokia’s Window Phone 8 devices to a new low of €139 ($180) before taxes, down from its previous low of $249.”
Dexia prévoit une perte de 950 millions d’euros en 2013 | Fil Info – lesoir.be
Dexia’s CEO says the bank is expected to lose yet another 950 milion euros in 2013. Think about this: is Dexia that different than other banks or is it the fact that it has been nationalised that makes its losses larger. It’s the same with Fannie and Freddie in the US. I would argue that a large part of what we see in nationalised banks is a thorough balance sheet cleansing that the still private banks do not do. This makes their balance sheets better. Something to think about in the context of ban capital requirements.
Dexia accuse une perte nette 2,86 milliards d’euros | Fil info Economie – lesoir.be
The Franco-Belgian bank Dexia, now under state control, lost another 2.86 billion euros in 2012
European mobile companies vow to break Google and Apple monopolies | Technology | guardian.co.uk
“At the Mobile World Congress trade show in Barcelona on Monday, UK-based Vodafone, Spain’s Telefónica and Telecom Italia called for measures to boost their power including a single market with common rules across Europe, lower tax and the granting of spectrum licences in perpetuity as in China and the United States.
“This is not a level playing field. It is not sustainable that we invest more in handset purchases than in the development of networks,” said the Telefónica chief executive and chairman, César Alierta.
In a belligerent call to arms, he said European telecoms companies have invested €225bn (£197bn) over the last five years but seen little return. Telefónica is challenging Google’s Android software and Apple by backing an alternative smartphone operating system designed by Mozilla, maker of the popular Firefox web browser.
Firefox OS will reach consumers in the spring when the first handsets go on sale, many of them in developing markets. It aims to give consumers and makers of content more control by allowing apps to be downloaded directly from the internet rather than via an app store.”
Twitter Announces App For Firefox OS | TechCrunch
Could this operating system be a competitor in emerging markets? It’s too early to tell
“Mozilla said yesterday that 18 carriers have committed to its new, HTML5-friendly mobile OS, and the launch of the Firefox Marketplace app store. Many Firefox-powered handsets are being targeted at emerging markets with lower overall smartphone penetration.”
HP Tablet May Hurt Apple’s Profit – Business Insider
“the tablet will set a new low mark in the tablet pricing wars, one that will undercut almost every tablet in the market, especially Apple’s iPad Mini.
Apple’s Mini is priced at $329.
This means that HP’s new tablet will cost only half as much.
Apple fans will quickly argue that the iPad Mini is “much better” than HP’s tablet (they’ll argue this regardless of how good HP’s tablet actually is–we don’t need to see HP’s tablet to know that). And Apple’s Mini will probably, in fact, be better than HP’s tablet.
But that’s not the point.
The point is that HP has now established a new low mark in tablet pricing, one that will continue to put pressure on tablet prices across the board.”
The case for a grand coalition in Italy – FT.com
“One of the questions Italian politicians were discussing as results came in is whether to hold new elections. Would this produce a true majority? Would it be seen as fair by the electorate? The answer may well be No to both questions. After the implosion of the centre, Italy has now three large political groups – the centre-left, the centre-right and Mr Grillo’s the Five Star Movement, an anti-establishment movement. It may not be that easy from now on to produce clear cut majorities in both chamber of deputies under the present political system.
The situation is not comparable to that of Greece, where after an initial election last year it was simply not possible to form a government. In Italy, by contrast, there exists a solution to break the political gridlock: a Grand Coalition. And if there is a rerun of these election, the overall outcome may still be the same.”
Argentina aportó más de 200.000 votos a la elección
Argentines of Italian citizenship were able to bring 200,000 votes to bear on the Italian election while Brazilians were able to bring almost 100,000. The overseas communities are very important in these elections, especially if they vote differently than those living in Italy.
Italian post-election misery | FT Alphaville
“The lower house is relatively straightforward in that someone will win. The centre-left Bersani-Monti coalition had 29.62 per cent of the vote compared to the Berlusconi coalition’s 29.1 per cent. Whichever coalition gets most votes automatically has 55 per cent of seats, so it won’t end up divided.
The Senate is more complicated, though: neither of the two biggest groups has a clear lead and the bonus seats are allocated on a regional basis. Here’s JP Morgan’s Alex White explaining the rather complicated Senate electoral rules, from a couple of weeks back”
Gary Shilling: Why You Should Sell Stocks And Buy Treasurys – Forbes
Remember, these things are based heavily on mean-reversion thinking. Clearly things don’t have to entirely mean-revert, though I tend to think they will and perhaps overshoot. But let’s keep an open mind about the mean reversion trends in savings and household indebtedness because Japan’s numbers have not mean-reverted yet.
“consumer debt is a very interesting pattern. It started very low after World War II. Everybody was still in a recession mode. There wasn’t much you could buy that you could finance then. You couldn’t buy cars and washing machines in the ’30s. People couldn’t afford them in the war years.
But basically consumer borrowing, and that’s all borrowing, mortgage borrowing, credit cards, auto loans and now student loans have become big. If you look at that, in relation to after-tax income, the norm was about 65%. It ran up to 131%. We’re now back to still over about 109%. We’re still on the high side.
I’m a great believer in reversion to norm. I think that we’re going to go back to those debt levels. At the same time, the flip side of that is saving. How much do people save out of their ongoing incomes? And that, back in the early ’80s, was 12%. It got down to less than 1%. I think it’s probably going to go back to double digits because, among things, the post-war babies have not saved. They’ve been lousy savers.”
Chômage: la France sur le point de battre son record de 1997
French unemployment statistics are set to reveal a 21st consecutive month of increase putting them at levels not seen since January 1997 when the record number of unemployed was 3.205 million.
Bank’s downfall opens old Dutch wounds – FT.com
“The collapse of SNS Reaal, the country’s fourth-largest bank with a balance sheet of €82bn, has rekindled investor and public fury at bankers whose failed bid to turn the country into a global financial services power has left taxpayers footing the bill.
The former director of the property finance unit that brought down SNS Reaal has been arrested on suspicion of fraud. The Dutch central bank has been criticised for approving SNS Reaal’s acquisition of a property business in 2006 – despite worries that its balance sheet was too big for the bank to handle – and for failing to step in sooner to shut it down.
Sjoerd van Keulen, the former SNS Reaal boss who made the purchase, has resigned as head of the Holland Finance Centre, a banking lobby group. Mr Dijsselbloem accused him of personifying the “entwinement of interests” plaguing the Dutch financial sector.”
DutchNews.nl – Dutch house price drop third biggest in EU since crisis began
“Spain and Ireland are the only two countries in Europe where house prices have fallen more sharply than in the Netherlands over the past four years, according to Dutch national statistics agency CBS.
After reaching a peak in 2008, Dutch and Spanish house prices have been going down every year, but in Europe as a whole, prices have stabilised, the CBS told news agency ANP. The drop in Spain is around 7% a year, in the Netherlands 4%.
New figures from European statistics office Eurostat on Thursday show house prices across the EU went down an average 2.5% in the third quarter of last year, compared with the year-earlier period.
The drop in the Netherlands was 8.7%, in Spain 15% and Ireland almost 10%. By contrast, house prices in Norway and Estonia rose nearly 8.5%.”
Skype Competitor Viber Hits 175 Million Users, Up From 140 Million+ In December | TechCrunch
“Viber has been around since early 2011 but been growing rapidly in the past 12 months. In December it passed 140 million users, saying it was adding new users at a rate of 400,000 per day. Back in September, it hit 100 million users, after hitting 70 million users in May and 50 million in February.
Viber’s app supports iOS, Android, S40, Symbian, Windows Phone and BlackBerry.”
Call For $30 Smartphones To Connect The Next Wave Of Mobile Users From Emerging Markets | TechCrunch
This talk of ever cheaper smartphones to fulfill the desire of many to move into the smartphone realm who won’t or can’t pay more points to price pressure in the smartphone market. It is clear now that prices are headed down in that market. That also means that margins are headed down.
Ireland’s Exchange Rate Brace | David McWilliams
“A country that adopts a permanently overvalued exchange rate for political reasons, as we have done, will become an economy with small exporting companies, a large public sector addicted to debt and a tax-induced multinational sector that is not sensitive to local prices because (a) it uses precious few local inputs other than the labour, and (b) it is part of a global supply chain, where exchange rate movements are exploited in the multinational’s treasury department.
A country like this will also get into debt quickly because the debt markets confuse a yield arbitrage (a gap in interest rates on government bonds) within a monetary union – such as the difference between Ireland’s interest rates and Germany’s – with the country’s ability to pay the debts in the future.”
Banks to sell complex CDS books | Top News | IFRe
“Several major banks are desperately trying to free up billions of dollars in capital by finally selling what is left of the complex credit portfolios that brought Wall Street to its knees in the 2008 crisis.
It will be a bitter pill to swallow for the banks, which are having to sell them off now at a loss just as the positions are finally in the black and they can glimpse the finish line – most of the exposures are expected to roll off in the next two years.”
Felix Zulauf: „Einige Märkte können 20 bis 30 Prozent einbrechen“ – DAS INVESTMENT
Interesting thoughts here – Felix Zulauf of Barron’s fame believes a coming buying wave could drive stocks to a new high but that in the second half of the year you will get a market correction of at least 10% and perhaps as much as 30%. The reason – the markets believe the world economy is recovering and the crisis problems have been solved. The crash will happen when it is clear this is not so.
An empirical nail for the austerity coffin | Steve Keen | Commentary | Business Spectator
“”Panic and fear are not good guides for economic policies.
“Financial markets did not signal northern countries to stimulate their economies, thus introducing a deflationary bias that lead to the double-dip recession.”
They also finish with a theme that has occupied me for some time: the potential for these austerity policies to lead to a grassroots revolt against the euro (which could well involve fascist parties gaining power, as they did during the Great Depression):
“As it becomes obvious that the austerity programs produce unnecessary sufferings especially for the millions of people who have been thrown into unemployment and poverty, resistance against these programs is likely to increase. A resistance that may lead millions of people to wish to be liberated from what they perceive to be shackles imposed by the euro.””
Why Marissa Mayer’s ban on remote working at Yahoo could backfire badly — Tech News and Analysis
“Yahoo says that its new edict banning remote working is necessary to build the right kind of culture. But how is making things less appealing for potential employees going to help Yahoo become more innovative?”
Samsung’s Heft in Android Worries Google – WSJ.com
“Samsung’s growing might—last year, the South Korean manufacturer shipped nearly 200 million more Android smartphones than the next-biggest Android-device maker—has boosted Google’s mobile-ad revenue but also is causing concern inside the Internet company. Google executives are worried that Samsung could extract financial or other concessions if it gains more leverage, people with direct knowledge of the matter said.”
Pimco Joins Invesco Finding Value in TIPS With Low CPI – Bloomberg
“Pacific Investment Management Co. and Invesco Ltd. say growing central-bank tolerance of inflation means securities with interest or principal tied to consumer prices are the ones to own. Global expectations indicated by the gap between yields on so-called linkers and government bonds reached a 21-month high of 1.70 percent, Bank of America Merrill Lynch indexes show. Economists in Bloomberg surveys forecast consumer-price gains of 2.72 percent in 2013, in line with the 10-year average”
What LG Will Do With webOS – Arik Hesseldahl – News – AllThingsD
“You may be forgiven if you’ve all but forgotten about webOS, the mobile operating system that Hewlett-Packard picked up with its $1.2 billion acquisition of Palm in 2010. Today HP announced that South Korean electronics giant LG Electronics has acquired the rights to use the operating system in forthcoming smart TV products.”
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