Saturday, February 27, 2010
from the Kirk Report
This is a clear comment on risk reward in the labor market. You want to reach a goal and you have to pay a price. Or, there is limited time and resources available for personal development so you have to make allocation decisions.
Wednesday, February 24, 2010
Tuesday, February 23, 2010
Central banks have spent 20 years trying to control the inflation excesses of the the later 70's and early 80's. They were successful by increasing their creditability through forcing targets upon themselves. This has been good for many economies and have reduced the cost of inflation even at low levels.
Saturday, February 20, 2010
Friday, February 19, 2010
The increase in 25 bps will mean an increase cost to those borrowing money of about $217 million per year. One will expect that the borrowings will decline even more in the coming weeks. What is an issue is the composition of the borrowers for the $87 billion. This is not clear whether these borrowers have access to other funds.
Overall, this action has a strong announcement effect that the Fed is serious about normalizing monetary policy. However, the key move is what will happen with the mortgage purchase program which ends this quarter.
Tuesday, February 16, 2010
Monday, February 15, 2010
So what does it mean to be a contrarian in 2010? The financial sector did well and stocks in general did well. Should you avoid banks and equities in general? That would assume that growth prospects for the US economy are actually going to be lower than the most recent numbers. In the face of strong government stimulus, it is not clear that being a contrarian is a sure bet.
One reason for being a contrarian is based on the relationship between operating leverage, the business cycle and profits which are all closely tied. When the economy turns down and there is a fall in top line growth, there will be a squeeze in profit margins. This is especially true if there is a shock to top line revenues such as a the create crisis. Sales will fall faster than expected and there will be inventory build. Margins fall because the operating leverage does not change with decline in sales.
In 1982 there were 27 countries with inflation above 20%
In 2008, there were18 countries with inflation above 20%
In 2011, the IMF estimates there will be only one country Venezuela with 20+% inflation.
This shows the great progress we made in inflation in the last thirty years, but the issue is always where are we going not where have we been. If Greece had its own currency, would we be looking at a high inflation QE policy with possible devaluation?
What is the point of all of the liquidity? Central banks want to get inflation higher. Certainly not 20% but the objective is o bed the inflation curve upward. Once that is done, can they stop the process? I think not.
You Can’t Put Lipstick on These PIGS:
California Budget gap (as a % of the total budget): 22% Gap: $22.2 billion
New York Budget gap (as a % of the total budget): 9.8% Gap: $5.5 billion
Florida Budget gap (as a % of the total budget): 19.9% Gap: $5.1 billion
New Jersey Budget gap (as a % of the total budget): 7.7% Gap: $2.5 billion
Arizona Budget gap (as a % of the total budget): 19.9% Gap: $2 billion
Nevada Budget gap (as a % of the total budget): 16% Gap: $1.2 billion
All data for fiscal year 2008 Source Businessweek
These gaps are large and will have to be solved in the next year. Does this involve a bail-out? This is the same problem as the EU dealing with Greece. Of course, the Federal government can reverse flows and reduce regulation to help with some of the problem; however, the real problem is that the states will place a drag on fiscal stimulus. There is counter-cyclical fiscal policy at the state level.
Friday, February 12, 2010
Focus on Chinese economic numbers is essential in the coming quarters.
Greece - Can it get their house in order?
The real issue is whether we are going to have another EU banking crisis. Large EU members do not care about Greece, bu they do care about the quality of their banks. A bank problem will change the focus of the ECB which will put further pressure on the EUR.
Treasury auction - Have investors had enough?
What is saving the US is the demand for safe risk-free assets. Treasuries are still viewed as a safe asset so there is strong demand from foreign sources. The domestic demand is also strong given the weak private credit demand, but both these sources seem to be sensitive to changes in the news environment.
The Fed - Following an exit strategy?
The Chinese government sees it, the market sees it, but the issue is how can this bubble be stopped. Cutting credit is one solution. We are seeing reserve requirements go up, but credit restrictions are blunt instrument for sector bubbles. Also, if the bubble is pricked too quickly, the feedback loop will work in reverse which will led to a collapse in the economy. Allowing for more flexible exchange rates may seem like a solution to cut the monetary link with the US, but this will affect the export growth engine. If the adjustment is not large enough, there will be further fuel for speculation in China from foreign sources.
This is a problem that will end badly. We have seen this real estate problem before, the US, Ireland, the Scandis, UK, Spain, and Japan to name a few.
The Greek government plans to reduce the deficits fro m 12.7% to 8.7% of GDP this year. Greek economic minister, George Papaconstantinou, called his nation "a terrible mess".
There have been strikes by government employees since the planned for budget cuts has been announced. This will continue. It will be hard to make these cuts in the face of citizen upheaval.
Now we have problems with derivatives swaps that have not been clearly included in the budget. Eurostat didn't receive the information, wasn't aware of the swaps, and does not have confidence in the budget numbers. They were used to make deb limits looks lower. This will turn people against banks. The song that "banks and derivatives are the evil" will start which will further ignite problems. We are also hearing that the spreads on Greek debt are too high and an overreaction from bond vigilantes.
So what is the EU plan for Greece? It is unclear. There is communication of support but no concrete plan.
Wednesday, February 10, 2010
Consider the European solution to the lack of an executive. Now it has three presidents: Van Rompuy, the president of the European Council (who is talking about "an economic government and greater control of national budgets), Zapatero, Spain's Premier who is also the rotating president of the EU and Barroso the President of the European Commission.
- Marc Chandler BBH
The most important point on why the EU will provide some help. They need to save the banks.
The real driver here is not that the private debt problem is becoming a sovereign debt problem, but the opposite--the sovereign debt problem is threatening to renew the private sector banking crisis. Consider the BIS data that is cited in press reports today: German bank exposure to Greece is 43 bln euros, to Protugal 47 bln euros, to Ireland 193 bln euros and to Spain 240 bln euros.
Greece needs to raise around €53 billion this year, a quarter of which (€13 billion) is simply to service the debt, i.e. interest payments.
- Marc Chandler BBH
The Stability and Growth Pact, which requires members to limit budget deficits to 3% of GDP and 60% debt to GDP, barring extenuating circumstances. The EU have been reluctant to enforce the agreement and now we are seeing the impact.
The discount rate is usually higher than the Fed funds rate and has been used as a rate or place for last resort bank borrowing. During the crisis there was some stigma with using the discount rate window. It was viewed that discount borrowing meant that you could not get the money in the Fed funds market. This may not be true, but it was the perception. Raising the rate will not change the fact that we are awash in excess reserves that can be borrowed at close to zero. Raising the discount rate will force more borrowing into the Fed funds market which would be more normal.
There is no reason why the discount rate should not be raised. It could happen soon which means within the next two quarters.
I have been reading some work form Barclays Bank which suggests that the impact of the crisis on the deficit is small relative to demographics. The aging of the G3 will have a greater impact on debt financing problems.
Tuesday, February 9, 2010
2009 trade decline of 13% was a first contraction since 1982 and the greatest contraction in global trade since WWII. It was a bad year for trade but there are signs of a rebound; however, all numbers are coming off of low bases. The trade bottom was hit in the second quarter and has shown a V-shaped recovery although the end of year trade numbers were still below fourth quarter in 2008.
* DEBT – Dubai EU Brazil Turkey
* SICK – Spain Iceland Columbia Kazakhstan
* DUMP – Dubai Ukraine Mexico Portugal
* PUKE – Portugal UK EU
* STUPID – Spain Turkey UK Portugal Italy Dubai
It is an amazing collection of names of countries with debt problems.Contagion is likely because there are so many countries that are on the brink. The question is what will be the safe assets in this environment.
The message is clear investments is outstripping savings. There will have to be a cutback in the domestic spending to return to an equilibrium level that is sustainable. The terms of trade cannot change on a country specific basis in the EU except if there is a change in productivity. A significant portion of these current account deficits is with other EU countries which means that the debt problem is intertwined with the rest of the EU. Unfortunately, the prescription for solving the problem follows the classic austerity programs usually recommended by the IMF during a credit crisis.
Monday, February 8, 2010
Treasury Secretary Timothy F. Geithner said the U.S. is in no danger of losing its Aaa debt rating even though the Obama administration has predicted a $1.6 trillion budget deficit in 2010.
“Absolutely not,” Geithner said, when asked in an ABC News interview broadcast yesterday whether a downgrade is a concern. “That will never happen to this country.”
With the International Monetary Fund (IMF) calculating debt in the Group of 20 economies will reach 118 per cent of GDP in 2014, up from about 80 per cent before the crisis, some G7 nations are attracting the ire of investors and credit rating companies.
Ire is a nice word. The ire is with the fact hat these statements have limited creditability. The Us has a higher deficit to GDP than many lower rated countries. The debt to GDP is also higher than many countries rated Aa2 from Moody's.
For example, the US has a deficit to GDP of 13% and a debt to GDP of 94% India has a deficit to GDP of 9% and debt/GDP of 82%. It is rated Ba2. Now if the Us gets downgraded the same action should be taken for many other countries.
Countries with deficits to GDP in excess of 10% for 2009 include: US, Japan, UK, Spain, Greece, Ireland, Iceland and India. This represents 43% of global GDP. The US, EU, Japan and UK will need to issue $5 trillion of debt in 2010.
AAA countries should not make pronouncements about their ratings at this time.
16th largest in Europe at $357 billion. A little larger than Argentina and the same size as Taiwan.
Stock market cap $53 billion compared with $7.65 trillion for the Bloomberg European 500.
This is all about contagion.
This was a banner decade for big bankruptcy. Of the 20 largest corporate bankruptcy filings in history, all but three of them occurred in the last decade.The 2000s featured three businesses with more than $100 billion in assets. All the companies in the list here held more than $30 billion in assets.Combined size of the biggest bankruptcies this decade: $1.5 trillion. That would make them the 10th richest country in the world with a greater GDP than Canada, India, Mexico, Australia and most of Europe.
The Biggest Business Bankruptcies of Decade
- Pacific Gas and Electric: $36.1 billion April 2001
- Enron: $65.5 billion December 2001
- WorldCom: $107 billion July 2002
- Conseco: $61.4 billion December 2002
- Lehman Brothers: $691 billion September 2008
- Washington Mutual: $327.0 billion September 2008
- Chrysler: $39.3 billion April 2009
- Thornburg Mortgage: $36.56 billion May 2009
- General Motors Corporation: $91 billion June 2009
- CIT Group: $71 billion November 2009
The key statements from the week-end meeting was that Greece should be able to solve its problems. This was not what the markets wanted to hear. The G7 also stated that banks should pay for their rescue. Sounds like more taxes on banks which will not help growth.
Speaking after a meeting of finance ministers and central bankers from the G7 in Iqaluit, Canada yesterday, Canadian finance minister Jim Flaherty said the countries would “continue to deliver the stimulus to which we are mutually committed and begin looking at exit strategies to move to a more sustainable fiscal track”.
Acknowledging the risks, a document drawn up by Canadian officials for discussion said G7 members should set “clear, credible and consistent” plans to strengthen their budgets. Delay in doing so would lead markets to “begin to question our commitment to sound medium-term policy frameworks, with the result that interest rates would rise,” said the report.
Let's not forget the EU has requirements that budget deficits cannot get beyond 3% of GDP. Somehow Greece got to 12.7%. So who in Europe was minding the tore. Granted a recession should allow for greater short-term deficits but off by factor of 4X?
The fact that there was not much news suggests that the G7 should be disbanded and eliminate the policy noise.
A physicist, a priest, and an economist go duck hunting.
The physicist shoots and just misses. “I guess the wind blew the bullet off course,” he says.
The priest shoots and barely misses. “I guess God wanted that duck to live one more day,” he says.
The economist shoots and misses by a mile. “Nailed it!” he says.
from Marty Fridson