Daily Comments: 2013-06-05
Barring economic collapse, I don’t see this happening. Look below at a few cases of corporatism to see how the system operates. These ideas are post-bank crisis ideas only. That time has past already. Maybe 2009 or 2010 would have worked.
“The big conclusion that one inevitably draws from Haldane’s analysis is that the structure of banking should be reorganized to promote both economic stability and economic development. Banking used to be a simple boring job; it needs to go back there.”
Swiss have no choice but to bow to U.S. ultimatum – Ackermann | Reuters
Governments will look for money in every which way. Tax avoidance has become a huge issue as the economic crisis has lingered.
“Switzerland has no choice but to bow to a U.S. ultimatum and sidestep its banking secrecy laws to end an investigation into how Swiss banks helped wealthy Americans evade taxes, ex-Deutsche Bank AG head Josef Ackermann said.”
Krugman on spat with Rogoff, Reinhart – Global Public Square – CNN.com Blogs
“It’s very unpleasant, because Ken is a magnificent economist. He’s done fabulous work over the years. And then this one paper, which was thrown out hastily, unfortunately, is the one that has had the greatest impact on policy debate…The fact of the matter is this one result – claimed result – which is that growth falls off a cliff when debt exceeds 90 percent of GDP, that’s what the world picked up. And that result is false. That result is clearly not true. There is a mild negative correlation between debt and growth, but that cliff doesn’t exist. It never existed in the data. It certainly isn’t anything anyone should believe now.
That paper of theirs did a lot of damage by giving people who didn’t want stimulus, who didn’t want any kind of expansionary policy, a way to scare their opponents, to say if we don’t do it my way, we’ll go over the 90 percent line and terrible things will happen.
And my problem now with Carmen and Ken is that while they’ve said a lot of things that indicate more flexibility, they have never, to my knowledge, said clearly, OK, there is no cliff at 90 percent. And we really need that from them. For them to say, look, you know, we think debt is dangerous, we think it’s a problem. But 90 percent, that was an artifact of some things in our original calculation that don’t appear in subsequent work.”
BIS lays out simple plan for how to handle bank failures | Reuters
This won’t happen because bondholders will balk and lobby against it.
“”(It) proposes a simple recapitalization mechanism that is consistent with the rights of creditors and enables recapitalization of a TBTF bank over a weekend without the use of taxpayers’ money,” the paper said.
Under the template laid out by BIS, which is termed a creditor-funded recapitalization mechanism, the bank would undergo a forced recapitalization by its creditors when it reaches the point of failure.
The ownership of a bank would be transferred to a newly created temporary holding company over a weekend. The bank is then immediately recapitalized by writing off the claims of creditors.”
American Homes 4 Rent files for up to $1.25 billion IPO | Reuters
This tells you that the rental market is hot as an investment class. I see this as a contrarian indicator telling me the market is frothy and danger lies ahead.
Carrington Stops Buying U.S. Rentals as Blackstone Adding – Bloomberg
Here’s a little more on the overheating rental property market. Again, I am uneasy about all the finance money chasing this market. These house prices are still well off their highs but the fact that some of the finance guys are now exiting the market tells me we should be looking more closely for signs that the rental market is still on level ground. Note that Carrington is a company that has been here a while. Their exit says they might know something the new money does not. And notice how these investment are predicated on price appreciation – not just clipping coupons (rents):
“Funds are buying property now, including homes sold by Carrington, for rents that yield 6 percent to 8 percent a year, before costs such as insurance, taxes and vacancies, according to Rose. Carrington’s model called for mid-single digit net returns on annual rents on an unlevered basis, according to Rose. While returns would vary by market, they would generally be in the mid- to high teens over the duration of the holding period, with the profit from home price appreciation.”
Edward here again. Here is the key quote:
“Carrington may start buying rental homes again when other large investors decide to sell after learning they can’t make returns that justify the prices they paid, Rose said.”
Consumer Spending in U.S. Unexpectedly Declined in April – Bloomberg
Sorry I missed this in earlier links posts. This is one of those articles I wish I had had more time to cover in greater depth.
What is this telling us? It’s one month’s data but I think it says that the current pace of consumer spending is unsustainable given the trajectory of wage and job growth. One of two things has to happen: either consumers start to releverage or they cut back on spending. They could oscillate back and forth between the two but clearly private savings is reaching a very low level.
There’s a worse crisis on the way unless we get serious about tackling debt – Telegraph
This article is all about private debt so I think it’s good because the hysteria in the UK right now is ONLY about public debt.
IMF’S Lagarde says U.S. facing self-inflicted wound on economy | Reuters
I am amazed at how dovish the IMF has become on deficits. The fact that the IMF is blaming countries for cutting deficits instead of the other way around is an amazing thing to behold. It is clear that Lagarde has changed the ethos there.
Amazon set to sell $800m in ads – FT.com
“Amazon’s advertising business is forecast to generate over $800m of revenue this year as the online retailer uses its consumer data and ecommerce engine to woo advertisers from rivals such as Google and Facebook.
The revenue estimate from eMarketer, a digital research group, pointed to advertisers’ desire to use Amazon to target ads based not only on what people search for online but on what they buy.”
Court Clears Way for ‘Fabulous Fab’ to Go to Trial – WSJ.com
Note that Tourre is taking the fall for everyone else. Goldman did disgorge some profits but it wasn’t significant. Tourre will get the book thrown at him and Goldman will get off with a slap on the wrists.
Amazon is ‘destroyer of bookshops’, says French culture minister – Telegraph
Protectionsim? Socialism? It’s hard to say but it IS true that Amazon crushes smaller chains by driving prices to razor thin levels only they can sustain.
Fed ‘tapering’ fears push up US mortgage rates – FT.com
“The average rate on a US mortgage has soared above 4 per cent for the first time in more than a year, reflecting recent turmoil in the bond market and threatening to undermine the Federal Reserve’s efforts to stoke the US recovery.”
In Bank Earnings, Quantity Over Quality – NYTimes.com
Very good piece which highlights that net interest margins are being squeezed by zero rates and that banks are reducing charge-offs in order to boost earnings. Think of the earnings as accounting gains only. We have to see what the bottom of the cycle looks like to see how aggressive they were in provisioning for credit losses.
Portugal Seeks to Meet Deficit Target – WSJ.com
Notice that austerity is still ongoing in the periphery despite what you might hear about austerity being over. In Portugal, the austerity is FRONT-loaded as well, in order to gain access to the OMT.
French jobless total hits new record, in blow to Hollande | South China Morning Post
Unemployment in France has risen every single month for two years straight and for 53 of the last 61 months. Disastrous.
Pending home sales hit three-year high | Reuters
“Contracts to buy previously owned U.S. homes rose to their highest level in three years in April, but a shortage of properties for sale could slow down the momentum.
The National Association of Realtors said on Thursday its Pending Home Sales Index, based on contracts signed last month, rose 0.3 percent to 106.0, the highest reading since April 2010.”
ekathimerini.com | Greek prices ‘on level of Germany’
Internal devaluation is not going to work if you can’t get prices down with wages. There has been some deflation in Greece but you would have to see a lot of deflation to get prices down to levels where internal devaluation would work. Greece is not Latvia.
Why Did Citigroup Try to Overturn an Overhaul? – NYTimes.com
This is a testament to how the system works. Read it and know that Citi was able to essentially draft the bill discussed here. Corporatism in action
Canadian banks face rise of shorts | FP Street | News | Financial Post
This is the bullish case for Canadian banks. I thought it worth seeing.
Insight: How Treasury’s tax loophole mistake saves companies billions each year | Reuters
This is how the system works. Read this to understand how government and business operate together. Corporatism, plain and simple.
“As the U.S. economy crumbled in early 2009, President Barack Obama offered a plan that he said would save American jobs: a crackdown on corporate tax loopholes that encourage companies to send profits abroad to avoid paying billions of dollars in U.S. taxes each year.
Tax lobbyist Ken Kies was not worried. A decade earlier, he had led a fight to preserve a key loophole – known in Treasury Department shorthand as the “check the box” rule – when another Democratic president, Bill Clinton, had tried to kill it.
“I told my clients, ‘Don’t sweat this. This is never going to happen,'” recalled Kies, who has advised corporate giants Microsoft and General Electric on the issue.
Kies was right.
Business groups rose up against Obama’s plan, arguing that it could damage U.S. businesses already threatened by the weak economy. Democrats in Congress balked, Obama dropped the idea and the loophole survived.”
Analysis: Dividend stocks lose shine as U.S. bond yields rise | Reuters
This shows you that the Fed’s yield suppression tactics are dominating asset allocation decisions. Now that we have seen an uptick in yield dividends look less interesting given the fact you can clip Treasury coupons risk-free.
Los preferentistas de Bankia reciben sus acciones con pérdidas de más del 70% | Economía | EL PAÍS
An investor who had 1000 euros invested in Spain’s Bankia’s predecessors in 2009 would have 278 euros today. This article laments that loss. The truth is that Bankia was insolvent. And so you would have expected shares to go to zero but the state bailed the investors out. That’s my take here.
Hintergrund: Vier Frauen für hundert Unternehmen – News Wirtschaft: Karriere – tagesanzeiger.ch
Only 4 companies in the top 100 in Switzerland have women at the helm. That’s pretty poor.
Larry Summers has an edge in the race to head the Federal Reserve – FT.com
I don’t see this at all. Summers would have a hard time getting nominated compared to Yellen in my view. Why would Obama go through that when he has Yellen? It doesn’t make any sense to me.
ekathimerini.com | EU dictated sale of Greek branches of Cypriot banks
“The terms for the sale of the Greek branches of Cypriot banks to Piraeus Bank were determined by the European Commission and were particularly favorable for the Cypriot banks, an executive of the Greek lender has said.”
Ireland considering reform of corporate tax system: paper | Reuters
I suspect this loophole will get closed because it has damaged Ireland’s reputation.
“The Irish government is examining options to close a loophole in its tax system that has allowed multinational companies to significantly reduce taxes they pay on profits, the Sunday Business Post newspaper reported.”
What will happen to markets when QE ends? | Gavyn Davies
MUST-READ
This is a good piece by Davies. He argues that investors are already reaching for yield and this is distorting asset allocation. Overvaluation per se was less of a problem for US equities because the equity premium was high, he says. The problem, he believes, is high corporate earnings. I would say the problem is both high earnings and multiple expansion.
There’s a lot more packed into this one.
Experts unearth concerns over ‘peak soil’ – Features – Al Jazeera English
“In the past 40 years, 30 percent of the planet’s arable land has become unproductive due to erosion, scientists say.”
Running out of cash, Australian miners get creative to survive | Reuters
Are we finally going to see what happens to Australian tax receipts and house prices when their economy is not underpinned by Chinese buying of commodities? I think, yes!
“From pooling office space to paying bills with company stock, small and mid-sized Australian miners are finding new ways to stay afloat during one of the sector’s worst downturns.
China’s slowdown has helped cool a decade-long commodities boom that pushed gold, copper, iron ore and coal prices to record highs, leaving Australian miners facing a painful transition to lower margins and weak investment interest.”
The Center of the Universe » Blog Archive » JPY
“So yes, they are trying to cause inflation, but not for inflation’s sake, but as a way to increase output and employment. But I’m afraid what they are missing that the causation doesn’t work in that direction.
In conclusion, this was the thought I was trying to flesh out:
Just because increasing output can cause inflation, it doesn’t mean increasing inflation causes real output and employment to increase.”
New Census Finds Smaller Population and Fewer Foreigners in Germany – SPIEGEL ONLINE
Read this article because the main takeaway here is that the demographic issues in Germany are even worse than we thought. They do not have as many immigrants to add earning power to pay for their social programs. That is a big problem for the economy going forward.
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