Links: 2013-06-04

As I wrote on the tech links this morning, I have started to comment more on the links post rather than just recapping the salient highlight in quote. I think this is important is because I can’t get to all of the issues covered in the links with my own posts and so I can give you a more comprehensive feel of what I am seeing and how I react to that news. I hope this is helpful.

Edward

The ECB, negative rate confusion and the prepay tax option | FT Alphaville

Banks are not going to work within the reserve system where holding reserves are penalized when they can work outside of that system. In essence this means negative rates cannot spur lending by penalizing banks to ‘use’ their excess reserves, whatever that means. Instead, negative rates will cause banks to try to get rid of their excess reserves. This is liquidity-negative and contractionary, not expansionary. Negative rates are a tax on deposits plain and simple. It’s a bad idea that needs to die.

What is the opposite of helicopter money? | FT Alphaville

Iza works via a different paradigm than I do because her concern is liquidity and the availability of safe assets. It is an interesting perspective but one that I am still learning. Nonetheless, I come to similar conclusions i.e. because banks are not reserve constrained, negative rates cannot add to credit growth, instead they suck money out of the economy and destroy interest that could increase capital. 

“it’s worth considering what negative rates really are, at least in their purest form.

They are, to be blunt, the exact opposite of helicopter money. A giant vacuum in the sky. The equivalent of hoovering up liquidity, and giving the sector nothing back in return.
This is because with negative rates excess reserves, no matter what, decay over time. Liquidity is absorbed by default.

And given that the ECB never dished out helicopter money in the first place — because all its liquidity was created in repo deals or asset purchases of periphery debt — that would arguably make negative rates even more contractionary than most people appreciate.”

Marc Faber Sees Trouble Ahead for the Rich – Barrons.com

Interview with Marc Faber on his outlook for individual stocks and other thoughts about the market.

Aliko Dangote, première fortune africaine

The richest person in Africa is a Nigerian man with a net worth estimated at $20 billion

Merkel curbs plan to hand powers to Brussels – Telegraph

“Angela Merkel has spoken out against handing more powers to the European Commission, in the strongest sign yet that she is curbing her ambitions to create a fiscal union in which eurozone members cede budget control to Brussels.”

BIS warns of dangers of cheap money driving up stock prices – FT.com

I agree with this:

“Markets are “under the spell” of the world’s central bankers, with cheap money driving stock prices to record highs despite a lack of good economic news, the Bank for International Settlements has said.”

France worse off than UK in the 1970s: Axa chief – Telegraph

The Telegraph has a penchant for tabloid headlines now and this is another one in that vein. Nonetheless, the analogy is not terrible given the structure of the French economy. Worth reading – money quote below:

““The UK was not in great shape in the early 1970s,” he said. “Mr Hollande has to decide if he wants to be Harold Wilson or Tony Blair.
“So far he has been ambiguous. I hope he is going to go for Blair. I am not asking him to become Margaret Thatcher.
“It could get worse but I am convinced that at one stage or another, reason will prevail.””

India records worst GDP growth in a decade – Telegraph

India is stalling and inflation is still not under control. There should be a lot of concern that this is happening to India at this point in time when the crisis in the US is over. It suggests something systemic is going on inside India or outside India from which the country is not buffered.

Japan’s problems could make the eurozone’s look like a garden party – Telegraph

This is a fairly balanced read of Japan by Jim O’Neill. He says that an uncontrolled rise in yields in Japan would be terrible for Japanese investors who would sell overseas assets to deal with the problem, ushering in a bear market globally. But he doesn’t see this scenario as likely. I agree. More likely is that Japan gets some growth and yields rise in line with this growth. And then the question is whether that growth is enough to escape the deflationary spiral and whether the government would double down on growth if it weren’t.

Finland’s Greek collateral: still pointless | FT Alphaville

“Timo Soini, leader of the True Finns party alleges that their government either didn’t realise what a bad deal it was going to get for the taxpayer when negotiating to ‘protect’ its share of EFSF loans to Greece with a total return swap… or that it did at some point realise, and that’s why the terms remained so secret for so long.”

OECD: British house prices are ‘31% ‘too high’ – Telegraph

“The UK’s property market is the eighth most over-valued, according to the Organisation for Economic Cooperation and Development.”

BBC News – Will the bad be taken out of RBS?

“A draft report from the Parliamentary Commission on Banking Standards calls for the split of Royal Bank of Scotland into a good bank and a bad bank.”

What Sequester? Washington Booms As a New Gilded Age Takes Root – WSJ.com

A must-read piece

I can tell you that this story rings true since I grew up in DC. There is a lot more wealth in this town than there was 10, 20 or 30 years ago. I would think much of it has to do with connections to the government, though this article says that DC has moved beyond this somewhat.

China-Norway free trade talks nearing agreement | South China Morning Post

If Europe wants free trade, they can make agreements. Remember, Norway is  not a party of the EU

Spain’s Crisis Fades as Exports Transform Country – Bloomberg

I would say that this story sounds a bit optimistic but the tenor of the message tells you that things are not going to hell in a hand basket anymore. As in Greece some of this is sheer boosterism to support the chosen policy path, but some of it is real.

Meredith Whitney’s “Great Migration” | MuniLand

Cate Long doesn’t like Meredith Whitney’s book. She says it feels like it was written a year ago. I haven’t read the book so I can’t say. However, I would agree that it is outdated if it is saying imminent fiscal doom is coming. The states’ fortunes are going to be very much tied to the next cyclical downturn because the underfunding and deficits will come back then. 

BBC News – Spain’s jobless total falls in May

Good news here that the jobless total in Spain fell by nearly 100,000. This drop was not seasonally-adjusted, so it’s hard to say what impact this will have on the unemployment rate.

Exclusive: Abe to urge review of Japan’s public fund strategy – sources | Reuters

This targeting of equities by Abenomics is very worrisome. I see it as a very dangerous aspect of the program. It’s clear that targeting asset prices is a key consideration for the Japanese and they will do everything they can to keep asset prices up. My sense is that this move is partly driven by the recent selloff in shares and a need to underpin those asset prices as the program takes place.

After such a huge run-up, a selloff was inevitable, however. The question now is whether we get growth and whether that growth leads to wage increases that translate into demand and price increases. I am sceptical but this is really the only way forward for Japan after so much dithering.

Irish manufacturing shrinks again for third month in a row – Independent.ie

The shrinking Irish manufacturing sector story is a worrisome development since the Irish seemed to be the poster child for the periphery country makes good meme. As with all of Europe, the numbers ticked up last month and are again within reach of the 50 dividing line. So, Ireland might be able to crawl back into positive territory next month. I think the data for Europe were good this month because of the 2nd derivative effect. If we see follow thorough next month, that will solidify Ireland in positive territory.

Behind the Rise in House Prices, Wall Street Buyers – NYTimes.com

I have a great deal of angst over the rush by investors to buy up houses in these former housing bust markets. On the one hand, I think it’s a great thing that they have put a floor under prices. But, on the other hand, the increase in prices is so large that it creates a problem for real owner-occupier buyers. It increases the price for those looking to buy and if the prices turn out to be excessive, then it is the pain that owner-occupiers take that we should care about the most. The good thing here is that prices are still well below their highs. And so that gives us a lot of upside potential to protect price. The other interesting facet here is that the investors are buying to rent out, and that is also good because it tells you that the price to rent ratio is still manageable.