tag:blogger.com,1999:blog-58094790188978207792024-03-13T05:57:58.705+01:00Economics: A closer look200 years ago, economics were called "political economy" because the authors knew the connection between the two. Since then economics became a "science" and the connection to politics was forgotten. We try to bring this link back into consideration.Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.comBlogger152125tag:blogger.com,1999:blog-5809479018897820779.post-56218775255291920032016-03-20T21:08:00.003+01:002016-03-20T21:08:45.105+01:00Interesting fall-out from the dogfight among Britain's Conservatives<div dir="ltr" style="text-align: left;" trbidi="on">
The British conservative party is tearing itself apart over the EU referendum in June. The internecine fighting has reached new highs over the recent days and some quite interesting bits of information are contained in the intense exchanges.<br />
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Work and Pensions Secretary Iain Duncan Smith resigned last Friday over a particular line item contained in the budget just presented by Chancellor George Osborne, some cuts in spending for handicapped.<br />
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Duncan Smith is also known as a passionate proponent of Britain's exit from the EU, the Brexit, and obviously he is free to campaign for his views from outside the cabinet. The British press has over the weekend been full of all kinds of guesswork about his reasons to resign.<br />
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The most interesting in this exchange is in fact Duncan Smith's resignation letter, which contained the following statement:<br />
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"I am unable to watch passively while certain policies are enacted in order to meet the fiscal self imposed restraints that I believe are more and more perceived as distinctly political rather than in the national economic interest".<br />
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Please read this again. One of the uncompromising conservative politicians in the UK states that the economic policies are subject to "fiscal self-imposed restraints".<br />
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He is talking about the balance budget target zealously pursued by Osborne in close cooperation with Prime Minister Cameron.<br />
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In a few words Duncan Smith revealed what has been clear to economists for a long time: Pursuing a balanced budget at all times is simply a question of ideology rather than the "national economic interest".<br />
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In the days after the presentation of the budget, there was a discussion about what would happen if the optimistic growth projections behind the budget did not materialise.<br />
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Osbornes view was that it would then be hard to balance the budget, unless further public sector cutbacks were introduced.<br />
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So there it is: The British economic policy is driven by the same ideology as the fiscal policy in Germany - and which Germany does everything to stamp upon the rest of the Eurozone.<br />
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So at least it has become clear that there are no real economic arguments for the wish to leave the EU.<br />
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Former PM Sir John Major is trying to make the opposite point: that there are significant economic reasons for Britain to stay. Britain can not expect that EU should be rushing to give Britain a privileged status, as Britain needs the EU more than the EU needs Britain. Major is afraid the Britain will find herself “sleepwalking into antagonisms it cannot repair”.<br />
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I notice use of the word "sleepwalking". Major basically tells his party to wake up and try understand what is at stake.<br />
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I am afraid that given the intensity and the personal focus of the exchanges inside the conservative party, his words are likely not to be heard. A good personal jibe is easier to sell to the press than a long historic argument about the role of the EU.<br />
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Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-30504206796487798692016-03-16T23:33:00.002+01:002016-03-16T23:34:26.070+01:00Fed: everything normal, so go back to work<div dir="ltr" style="text-align: left;" trbidi="on">
Writing about Federal Reserve's monetary policy is rarely exciting, same goes for reading comments about it.<br />
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I am sorely tempted to share my opinions about the Republican primaries instead. But since the situation on that front develops every day, I better hold back until things get more stable. There is one connection though.<br />
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The Republican party has since Obama's election set new standards in obstruction of the legislative process. It has had some bizarre side effects, such as "Government Shutdown" on a number of occasions.<br />
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The legislative gridlock has had one positive effect: any tendency on either side of the political spectrum to introduce "austerity" has been mostly curbed. The effect has been that the US as almost the only country has seen the public sector deficit develop according to the textbooks. As the crisis hit, government finances went deeply into red, providing stimulus to the economy. This stimulus has automatically been reduced as the economy recovered. No German-style destabilising "stability policy" here.<br />
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It does not mean that all is good, nor that I find political gridlock as a way to obtain an economic-political target is an idea to imitate.<br />
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Together with the timely (albeit rather distasteful) help to the banks, it does mean that the US today is in a better place than most of the other larger economies in the Western world. There has been a long period of economic growth, jobs that disappeared during the crisis are roughly re-created. Growth has been more subdued than seen in the years until 2007, but there has also been a significant improvement of the debt situation of the households, meaning that their savings have increased. That leads to slower growth in the short term.<br />
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Of course there are still a multitude of problems stemming from the fact that decisions on the fiscal policy are simply not taken. Still, the US economy is in a better state than the European economies.<br />
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Hence it is no surprise that Fed in general are upbeat: the US growth has survived a visible strengthening of the dollar and a slowdown in China. So there is only one way of interpreting Feds inactivity: the Open Market Committee simply finds that they are on the right path and are waiting for inflation to begin crawling up towards the 2 per cent target. And obviously, Fed finds itself on tract for further interest hikes during the year.<br />
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Whether it is 2, 3, or 4 hikes is not that important. Important is what Fed's analysis shows about the US economic growth. FOMC was not in doubt. We are on the right track and further rate hikes will follow as prices begin to crawl upwards.<br />
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What the markets should be spooked about is the capacity limit. Inflationary pressures begin to build as a shortage of certain kinds of labour begins to build. Inflation could also begin to increase if US companies hit their production limits. The fact is that nobody knows where the inflationary limits are. We just know that an awful lot of productive capacity has been dismantled after 8 years of crisis.<br />
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So no, further interest rate hikes are not taken off the agenda going forwards.</div>
Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-858571954062118122016-03-11T12:34:00.002+01:002016-03-11T14:31:18.973+01:00ECB's Bazooka?<div dir="ltr" style="text-align: left;" trbidi="on">
This time ECB delivered what the market expected in terms of easing. By some standards ECB even over-delivered by increasing the monthly bond purchases from 60bn € to 80bn € and by increasing the Targeted Long-Term Refinancing Operations or TLTRO for short. The lead interest rate was lowered to 0.4%<br />
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After an initial bout of optimism, the stock markets had second thoughts: By delivering that much, has ECB run out of ammunition for the "bazooka". Stock markets reversed sharply. The Euro also reversed parts of its initial loss.<br />
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Reactions from the stock market are largely irrelevant in this context, since they are mostly driven by day to day sentiment anyway. I also have some trouble believing the wisdom of stock market traders when it comes to assessing the effects of monetary policy in the medium and long term. I mean, stock market traders do not usually work on that kind of time horizon, right?<br />
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ECB's initative certainly created some angry comments, mainly from Germany, where "flooding" the banks with money is seen as a bad thing. For many German observers, the problem lies mainly in the clash between a macroeconomic reality and the deeply ingrained culture of saving among ordinary Germans. Obviously, negative interest rates removes the most important incentive for saving. And that is considered a very bad thing.<br />
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Germany has had a fantastic run of economic success. It has been built on strong exports of high quality industrial products. Germany has through its success in engineering been able to be competitive beyond expectations for decades, and even lived through the 55 years after the end of WWII with a steadily appreciating currency because of strong productivity gains.<br />
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Apart from strong productivity, this success was made possible by German savers, who provided the means for the investments necessary. In Germany it is still considered a virtue for households to save.<br />
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And of course the anger at ECB is because German newspapers and a great many politicians mistake household economics for macroeconomics. There is even a name for this misunderstanding. It is called the "thrift's paradox". If we all save, we will all get poorer.<br />
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Europe does not need any more savings. We need consumption and, in particular, investments to pull us out of the quagmire. The problem is that somehow the glut of savings does not translate into finance for consumption or investment.<br />
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The problem is that the intermediary, namely the banks, are badly out of order. Too many banks in Europe are still carrying too many dud loans on the balance sheets. So they remain unwilling or unable to boost their balance sheets with new lending.<br />
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And that is the rub. The TLTRO offers cheap liquidity to banks, and is targeting banks which have grown their balance recently. But the previous LTRO programmes have not been strong in inceasing bank lending, So I do not see why it should work this time. It seems that it is not the price of central bank money that stops the banks from lending. Instead it is their bad loans.<br />
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Since 2008 I have consistently claimed that in order to get out of the crisis we need to fix the banks and to increase public spending primarily on long-term infrastructure projects.<br />
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Markets fear that ECB is running out of ammo. Markets may be right. Markets, however, forget that it is not the responsibility of central banks to push the economy. Politicians must create fiscal policies that will resolve this crisis. And the Germans have long time ago won a complete victory in pressurising other EU countries to not do what is needed. ECB is put in an uncomfortable position because of a wrong fiscal policy.<br />
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When it comes to fixing the banks, this is not the time to be moralists. The Euro-TARP is still needed after 8 years of crisis.<br />
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Think about this one: what happens to banks all over Europe as long as they are afraid of charging clients negative interest rates? Well, they lose money on simple deposits. Certainly, it does not provide an incentive to lend.<br />
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Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-34373306243230383792016-02-26T09:42:00.001+01:002016-02-26T09:44:09.111+01:00Follow-up on Italian banks<div dir="ltr" style="text-align: left;" trbidi="on">
In a letter to Financial Times on 23 February, the Director-General of the Italian Treasury provides some info directly related to my previous post.<br />
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Vinzenco la Via writes that:<br />
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"Between the beginning of 2015 and the beginning of 2016, the Italian government introduced radical changes in the banking sector (...) The new system will exploit economies of scale, allow better use and allocation of skills, and permit better market access, while improving the management of non-performing loans.<br />
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Vinzenco, I love what you write.</div>
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My only question is: Why did it take you so long??? Where were you between 2008 and 2015?</div>
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I know. You were fighting the deeply entrenched interests in the financial sector which had put personal interests ahead of the common good. And various governments had been unwilling or unable to make a serious push to force the banks in this direction.</div>
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Has anybody got the guts to make an analysis of the costs to the society of not acting with far more resolve? I'm just asking..<br />
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Now I am curious about what happens in the French banking sector. Not to mention in what remains of the partially reformed savings bank sector in Spain.</div>
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Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-75409083134409595612016-02-23T13:56:00.000+01:002016-02-23T16:04:41.859+01:00Euro-Tarp? Maybe... look at Italy<div dir="ltr" style="text-align: left;" trbidi="on">
In the dying days of the Bush administration, then Secretary of the Treasury Hank Paulson introduced a US 1tn program called the Troubled Asset Relief Program, or TARP for short. Translated into plain words, it was an offer to the banks that the Federal Government would buy the worst stinking pieces of bad loans the banks carried on their balances. And it was clear that not too many questions would be asked.<br />
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It was a variation of one of the elements in the famous rescue of the Nordic banking sector in the 1990's. At that time, banks signed up to be rescued, the insolvent ones were taken over by the Finance Ministries, who then combed through the bank balances, hunting for the worst stinking pieces of bad loans. The bad loans were then folded into a company which was floated on the market with a time limited loss guarantee from the government.<br />
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In the Nordics, shareholders lost their investments and boards and management lost their jobs. In the US the management largely kept their jobs while the shareholders saw their holdings diluted severely.<br />
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However, in both cases, the action contributed to "clean out" the bank balances, meaning that the banks relatively quickly could get back to the core business of a bank: to receive deposits and lend money.<br />
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Not so in Europe. 8 years after the onset of the crisis, and two "asset quality reviews" later we are stuck in a situation large European banks are sitting with unrealised losses, which - if they were realised - would lead to the demise of the banks in question. I - and several others with me - have a sneaking suspicion that this state of things holds back European bank lending in a significant way.<br />
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Last week, the ECB gave a startling confirmation of the gravity of the situation.<br />
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Since 2015, the ECB has tried its own version of quantitative easing or QE. This of course refers to the programs whereby central banks in the US, UK, Japan and Canada have purchased enormous amounts of their own government bonds in the market. Some covered bonds, such as mortgage backed bonds have also been purchased. All in the purpose of forcing down interest rates, particularly in the longer maturities.<br />
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ECB faces a particular problem in implementing a QE, since its statutes prevents it from financing the individual governments by buying their government bonds. A compromise was found, whereby government bonds were eligible if bought in proportion with the shareholdings in ECB of the individual countries.<br />
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It would of course mean that ECB was forced to buy mostly German Bunds - even if it is a relatively small bond market. There are tons of e.g. Italian bonds on the market, but ECB cannot buy that many of those. Then there is some agency debt out there, but having to buy 60bn EUR worth of bonds each month seems to be a problem.<br />
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So <a href="http://reut.rs/1U2w5nv" target="_blank">ECB has had a brainwave</a>: Let us buy some of the worst stinking pieces of bad loans the banks have been carrying on their balances. <i>In casu</i> the Italian banks, who suddenly admit to have a small sum of 225 bn EUR of bad debts they would really, really like somebody else to buy from them.<br />
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Which is possible for ECB if the Italian government is guaranteeing the debt. Once that obstacle is cleared away, we can start guessing which other banks are sitting on a mountain of bad debts.<br />
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In other words, the ECB QE program is now morphing into a Euro-Tarp. I am sure that the Germans are shaking their heads or even worse. I do not really care. The TARP program gave the US banks a headstart to recover even if bank regulators had to hold their noses while buying the bad debt.<br />
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Here in Europe we have had a very peculiar attitude. We want to punish the banks for doing a dirty on us all, so we want them to recover without any help. But we do not want to punish them so badly that the boards and bank managements were actually kicked out. So the "Swedish solution" was also excluded.<br />
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The result has been that it has taken waaay too long time for credit growth to return to Europe. It has held back consumption and investment. When we will be writing the story of the financial crisis in Europe, the lack of dealing properly with the banks will stand out as a monumental error.<br />
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So monumental that it will almost be on a par with the German insistence on draconian savings programs to curb government debt creation in an environment of weak consumer demands.<br />
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Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-16610389164311612462016-02-22T01:17:00.000+01:002016-02-23T11:51:36.330+01:00Cameron's nightmare - and EU's<div dir="ltr" style="text-align: left;" trbidi="on">
So the UK got a watered-down set of modifications to the various EU agreements, delivered with sufficient gravitas that Cameron could declare victory and go home and call the promised referendum to take place on 23 June.<br />
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Anybody just vaguely familiar with EU's workings knew already that nothing substantial could be negotiated in a few months. Substantial changes require changes to the treaties, and with 28 member states it will take at least 5 years to change as much as a comma.<br />
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But now the referendum has been called - with potential disastrous consequences for EU, Europe and not the least, for the EU.<br />
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<b>EU created peace</b><br />
It is worthwhile to remember the historical roots of the EU. Since Germany created itself as a national state under the stewardship of Bismarck, the country always had the uncomfortable geopolitical situation of having strong and often bellicose neighbours to the east and to the west: Russia and France. Bismarck saw this clearly and built a national strategy on the necessity to be able to fight a two-front war. This national strategy touched upon education, infrastructure, industrial production and defense. The strategy required speed, mobility and technological and tactical advantages. It is probably not wrong to claim that Germany's situation today is a direct consequence of the geopolitical situation and of Bismarck's response.<br />
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After Germany had tried to "solve" the geopolitical dilemma twice, each time ending in defeat, the US influence over Europe led to a major geopolitical change. By putting Germany under the US nuclear umbrella and by uniting Germany and her erstwhile enemy France in a close political and economic cooperation, Germany could finally forget the need to fight two enemies at once. The existence of the EU changed important geopolitical parameters.<br />
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EU is in other words the political and economic "leg" of the post-WWII re-organisation of the European map. Together with NATO, EU has been spectacularly effective. So much so that people today forget how efficient the combo has been in preventing war in Europe. The 70 years of peace in Europe since 1945 has been one of the longest and most prosperous periods in the continent's war-torn history.<br />
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The Britons have always had an ambivalent relationship to EU: why participate in the club of losers (of WWII) when we were one of the victors? For centuries Britain managed to survive nicely by playing the other European nations against each other and profiting from her naval superiority.<br />
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<b>And now?</b><br />
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Fast forward to today. Many brits appear to have forgotten entirely that they do not any longer dominate the seas. They do not any longer have colonies. And more seriously: The Americans do not any longer consider the "Special Relationship" between USA and Great Britain as particularly special. President Obama even told the Brits directly that Great Britain would be more useful to the USA inside the EU than out.</div>
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Europe has also lost in importance on a global scale. The larger powers do not any longer focus on the Europe. Instead it is China's growth, Russia's possible reemergence as a major player and the continued global dogfight over access to oil and minerals that dominate. Britain may have been good at manipulating the other European nations into wars for 400 years. That ability is just much less marketable today.</div>
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<span style="font-family: inherit;">Zbigniew Brzezinsky, a former national security adviser to US president Carter put it brutally<span style="font-family: "times" , "times new roman" , serif;">:</span><span style="font-family: inherit;"> <span style="background-color: white; line-height: 19.6px;">Great Britain is not a geostrategic player… Its ambivalence regarding European unification and its waning special relationship with America have made Great Britain increasingly irrelevant (</span><span style="background-color: white; line-height: 16.5455px;">The </span><span style="background-color: white; line-height: 16.5455px;">Grand Chessboard</span><span style="background-color: white; line-height: 16.5455px;">: American Primacy and Its Geostrategic Imperatives (</span><wbr style="background-color: white; line-height: 16.5455px;"></wbr><span style="background-color: white; line-height: 16.5455px;">1998)).</span></span></span></div>
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<b>A tactical error</b><br />
In 2013 Prime minister Cameron feared a major incursion on traditional Tory ground by the UK Independence Party. In order to placate the notoriously loud Euro-sceptical wing of his party and in order to convince euro-sceptical voters of his own credentials in this department, he promised a referendum on "in or out", in case he was re-elected as PM.<br />
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At that time, not much looked as if it would ever happen. The Tories were lagging Labour in the opinion polls, UKIP seemed to be a threat, and the Lib Dems still had some credibility and were not at all foreign to threaten Cameron to switch sides if needed.<br />
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And then things began to pear-shaped. First there was the 2014 Scottish referendum on independence. Scotland was deeper divided than expected and the outcome too close for comfort (55% voted to stay in the UK, 45% against). The next act was the 2015 general elections. The Conservatives had nearly no representation north of the border. So Scottish voters who wanted to vent their frustration hit Labour hard. The party was viped out in Scotland and that alone was enough that an expected national majority evaporated. UKIP did worse than expected because of a very weak party organisation, and the Lib Dems were hit badly by the law saying that the junior partner in a coalition partner most often suffer badly at the next elections (ask FDP in Germany).<br />
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Suddenly Cameron had a majority in Parliament - and had given a promise to the right wing of his party to make a decisive referendum after a round of negotiations with the EU. He had solidly painted himself into a corner with no way out. Except of course by resigning, which is not on the cards for now.<br />
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<b>Refugees</b><br />
The European refugee crisis has changed the dynamics in Europe as well as in the UK. By many voters not steeped in history, "migrants" of any colour and shape are seen as the result of Europe's open borders and flagrant disrespect for national values. Europe has certainly not handled the refugee crisis in a reassuring way, and it has given wind in the sails to illiberal nationalist parties across the continent.<br />
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Also in the UK, this particular political mood has gained strongly despite the weakness of UKIP. It is visible in the fact that Cameron's negotiation strategy has been to gain concessions on "migrants" even if the people in question are far from being refugees. Most often they are quite skilled labourers who quickly find jobs, particularly in the UK construction sector.<br />
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So the refugee crisis has in Cameron's strategy morphed into a general "bash the migrants" policy - which obviously annoys the eastern European EU members.<br />
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<b>How bad could it end?</b><br />
We may be heading towards one of those rare moments in history where one man's actions actually matter. Cameron's wrong reading of the situation inside his own party in 2013 could now lead to the following scenario:<br />
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Were UK to leave the EU, Cameron will be toast having campaigned for UK to remain in the EU and will have to resign. His own party, the Conservatives, will suffer a deep division that will take decades to heal.<br />
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Both the EU and the UK ends up weaker and destabilised.<br />
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Egged on by national conservative movements, more countries will ask for substantial opt-outs, in particular in the fields of EU law and integration. Scotland will request independence from the UK as the Scots are firmly in favour of a continued EU membership.<br />
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The EU may end up being split and the UK may be torn apart. That could be the parting shot for independence movements elsewhere, in Catalonia, in Belgium and who knows, in Wales?<br />
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Cameron may still go down in history as the man who made the worst tactical gamble possible and refused to see the implications of it until it was too late.<br />
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And over in Moscow, Putin and his inner circle will be all smiles.<br />
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Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-24043101204400352702016-02-19T12:20:00.000+01:002016-02-22T14:15:26.911+01:00Same old, same old<div dir="ltr" style="text-align: left;" trbidi="on">
Famously, the rapper Eminem declared "I'm back" on one of his albums and reviewers noted with some surprise: Has he been gone at all?<br />
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I have not been away, I have been working my blog under the name "Connecting the dots" and it is likely to reappear soon under that name soon. But until that is in place, I will publish my opinions here.<br />
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When I review what I wrote in 2012, it is surprising to see how little has changed:<br />
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QE is still in place, except that ECB has now replaced FED as the driver. Economic growth is still way weaker than politicians hope, and the reasons are the same: consumers are still saving too much and the European banks still carry too many bad loans on the balance in order for them to lend freely.<br />
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Japan remains an unmitigated disaster. Seen from the helicopter it is incredible that anybody is still surprised to see that a country with a rapidly shrinking population is experiencing negative growth.<br />
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The German establishment is still fighting against a reasonable European monetary policy, based on a mixture of angst and a rigid belief that rest of Europe must become like Germany in order for healthy economic growth to return to the continent.<br />
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Egged on by the Tea Party, US Republicans have taken further steps away from economic sanity - one would have sworn that it was impossible. The only good thing is that the political paralysis has created a situation where the economy has been able to recover healthily, undisturbed by ideological incursions.<br />
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A couple of things are new, though. Some countries have negative interest rates, Denmark, Sweden, Germany, Switzerland. Oil has fallen to comfortable levels. Russia is trying to reestablish Soviet era glory on the backdrop of an impending economic disaster.<br />
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And then over to a subject as relevant today as in 2012: The European monetary policy and in particularly the impact of the debt crisis on certain South European countries. Italy is of course the 800 pound gorilla in the room with a government debt in excess of 130 per cent of GDP and more than 2,000 bn EUR.<br />
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Add that Italian banks still drag a ton of bad debts along. 8 years after the onset of the financial crisis, many banks in Europe's south (broadly defined) have still not managed to write off the bad loans and move on.<br />
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<b>Italy, German wise men and haircuts</b><br />
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I found <a href="http://www.telegraph.co.uk/finance/economics/12158626/German-bail-in-plan-for-government-bonds-risks-blowing-up-the-euro.html" target="_blank">this</a> article and it is interesting reading. Apparently the German Council of Economic Advisors now recommend that before the institutions of the Eurozone will help a country with a bail-out, the holders of the country's debt will have to take a "haircut", i.e. a programmed loss of a certain percentage of the bonds. Rumours are that Finance Minister Schäuble is backing the proposal.<br />
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This breaks with a tradition that has survived even the Greek debt crisis: Eurozone countries holding debt of another Eurozone country will not suffer losses on that debt. Private debt holders, however, can lose money, as they did in the case of Greece.<br />
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By now gingerly suggesting that other countries must suffer a loss before help can be granted to a country in need, Germany will make sure that they will not be the only ones to insist on budget discipline. They simply obtain that everybody else will also stand to lose money. The effect is of course to avoid that Germany is the only villain to insist on budgetary discipline.<br />
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If the proposal is accepted by the other Eurozone countries, Germany will not be alone in resisting "frivolous" proposals from left-wing or populistic new governments in e.g. Portugal, Spain or, oh horror, Italy.<br />
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The Germans are understandably tired of being portrayed as latter day nazis imposing iron discipline on freedom-loving countries with young and dynamic governments, as it happened in Greece. The German proposal would remove the focus from Germany as the sole source of budgetary rectitude. Everybody else would have an incentive to put pressure on countries who habour pipe dreams of breaking with austerity demanded by the Eurozone.<br />
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It is intelligent, at least seen from a German point of view. To me it again looks as if Germany in its rigid adherence to the belief that every Eurozone country should become a mini-Germany continues to impose rules that simply imposes more instability in the name of stability.<br />
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The proposal will give other governments an incentive to put pressure on "irresponsible" governments. It will also give all investors a motive to sell government debt in the affected countries as soon as the word "bail-out" is mentioned.<br />
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Ideology continues to stand in the way of ending the economic crisis. Ideology prevents an economic policy that will support economic growth in Europe. Wonder if anybody has calculated the price Europe has paid as a result of a sluggish recovery over the past years. <br />
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Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-72144352646202621102012-06-22T17:22:00.001+02:002012-06-22T17:22:14.827+02:00Bank downgrade - yawn. Europe downhill. Spain<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<b><span style="font-family: inherit;">Banks downgrade</span></b><br />
<span style="font-family: inherit;">Moody’s has been doing a hatchet job on banks across Europe recently and yesterday saw Moody’s downgrade 15 large international banks. For some reason it came as a shock to many. I do not really get the point. The markets have known for years that something was wrong in the banking sector. The banks are forced to increase their capital base, reducing their profitability. Households are deleveraging, reducing income for the banks. So why is it a surprise that banks are a worse business now than before? The chart below compares global banks (blue line) to global equities (red line). Banks have underperformed the market badly – the market participants have been voting with their feet for years.</span><br />
<span style="font-family: inherit;"><br /></span><br />
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: center;">
<a href="http://3.bp.blogspot.com/-ikgJN-19UYM/T-SMv1u9TrI/AAAAAAAABO0/hMxBByxWmD0/s1600/BAnks.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: inherit;"><img border="0" height="238" src="http://3.bp.blogspot.com/-ikgJN-19UYM/T-SMv1u9TrI/AAAAAAAABO0/hMxBByxWmD0/s400/BAnks.png" width="400" /></span></a></div>
<br />
<span style="font-family: inherit;"><br /></span><br />
<b><span style="font-family: inherit;">Europe</span></b><br />
<span style="font-family: inherit;">The<a href="http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9683"> “Flash” PMI for the Eurozone</a> and for some of the larger countries were released yesterday. It was very bad reading, as the European contraction continues. The German index showed an accelerating contraction. German export orders continue to fall rapidly. The only question one can ask is how long it is allowed to continue. I wrote on Thursday that domestic and international pressure on Merkel to change her economic policies were mounting. Yesterday’s data release just confirms that economic policies in Europe must change and the sooner the better.<a href="http://www.washingtonpost.com/business/markets/european-finance-officials-to-meet-but-wide-ranging-fix-to-debt-crisis-remains-elusive/2012/06/21/gJQAeaCOsV_story.html"> IMF Chief Lagarde</a> seized the opportunity to tell the German government that joint debt would be a very useful element in solving the crisis. I remain optimist that they will. Germany will find it in her own interest to adjust. The only question is when.</span><br />
<span style="font-family: inherit;"><br /></span><br />
<span style="font-family: inherit;">For a comparison, look at Industrial Production in USA (red line) and in the Euro-zone (blue line). Europe’s output has been falling whereas the US output has been increasing. The difference? The degree of austerity.</span><br />
<span style="font-family: inherit;"><br /></span><br />
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<a href="http://4.bp.blogspot.com/-8hDJSv1ogQk/T-SMkwYaxAI/AAAAAAAABOs/YGTOe_UScmw/s1600/IP.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: inherit;"><img border="0" height="238" src="http://4.bp.blogspot.com/-8hDJSv1ogQk/T-SMkwYaxAI/AAAAAAAABOs/YGTOe_UScmw/s400/IP.png" width="400" /></span></a></div>
<br />
<span style="font-family: inherit;"><br /></span><br />
<b><span style="font-family: inherit;">Spain</span></b><br />
<span style="font-family: inherit;">Two international consultancies had been asked to conduct an independent review of the capital injection needed to salvage the Spanish banks. They ended up with a maximum of 62bn EUR. Just some months ago the Spanish government believed that 25bn would be enough. Or at least that is what they said. Two weeks ago the same government asked for 100bn in help from the Euro-zone.</span><br />
<span style="font-family: inherit;"><br /></span><br />
<span style="font-family: inherit;">I think the 62bn is good news, on the condition that the two consultancies have built in enough buffers in to compensate for the continued recession in Spain that will increase the credit losses. At this moment it is not important if the necessary capital is 62bn or 100bn. We just need to get to a point where the markets finally begin to believe that the number is final. </span><br />
<div>
<br /></div>
</div>Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-36761659485733201672012-06-11T08:44:00.000+02:002012-06-12T15:55:16.239+02:00Finally, a move to rescue banks<div dir="ltr" style="text-align: left;" trbidi="on">
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<div style="text-align: left;">
<span style="font-family: inherit;">Spain asked for a bailout from the EU and the other EU countries appear to have accepted it. It is not a general bailout as known from Greece, Portugal and Ireland, but limited to assistance in recapitalising the ailing savings banks. Apart from my firmly held conviction that the method chosen is the most expensive for everybody, it was positive that something happened. Even if the details will take some weeks to hammer out, I think it is important to understand that this step is more momentous than the three previous bailouts. Finally the EU is moving to resolve the situation with Europe’s sick banks.</span></div>
<div style="text-align: left;">
<span style="font-family: inherit;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: inherit;">Importantly, the oversight with the package appears not to go to EU and IMF, but only to the EU and it is not a general control of the country’s spending, but only a control of the banking sector. It may be an important pointer that we are moving towards a “banking union” with a joint euro-zone banking regulator.</span></div>
<div style="text-align: left;">
<span style="font-family: inherit;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: inherit;">It ought also by now be clear that the crisis is not only about public sector debt. The four countries that had seen the strongest increase in private sector debt in 2000/2007 are also those where the banking sector is in deepest problems. UK, Spain, Ireland are involved in major rescue actions for their banking sector and the economies are suffering from protracted recessions or zero growth.</span></div>
<div style="text-align: left;">
<span style="font-family: inherit;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: inherit;">The fourth, Denmark, has escaped a deeper economic crisis because of a very efficient mortgage financing system, and relatively healthy public finances. But the economic growth is anaemic, the banking sector is still in deep trouble, and more than a quarter of the country’s banks have closed. The largest bank, Danske Bank, only survived through generous government loans.</span></div>
<div style="text-align: left;">
<span style="font-family: inherit;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: inherit;">Greece is in deep trouble because of public over spending to the tune of 15 per cent of GDP. Portugal needed its bailout because of a sclerotic economy and its government is fighting to rush economic reforms which should have been implemented 10/15 years ago.</span></div>
<div style="text-align: left;">
<span style="font-family: inherit;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: inherit;">So the lesson is that 1) bailouts are different from case to case, 2) it is good that EU is finally getting some focus on the banks and 3) private sector indebtedness is at least as important in the current economic crisis as the public sector debt. </span></div>
<div style="text-align: left;">
<span style="font-family: inherit;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: inherit;">Portugal obtained EU’s accept to spend some 6.6 bn EUR out of its emergency facility to recapitalise the country’s four largest banks. Good news for two reasons: another banking rescue as in Spain, and it appears that the costs can be covered without increasing the emergency facility. It is a sign that Portugal’s economy is moving the right way. </span></div>
<div style="text-align: left;">
<span style="font-family: inherit;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: inherit;">I still do not exclude that the best solution would be to keep the emergency facility in place until 2014 instead of 2013. We will see.</span></div>
<div style="text-align: left;">
<span style="font-family: inherit;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: inherit;">The German opposition may have some luck flexing its muscle (it controls the Bundesrat and could delay all legislation) and appears to have forced Chancellor Merkel to accept some kind of growth initiative for Germany. That is absolutely fine, it is completely in line with the fact that general elections will take place next year, but it is not enough. We still need more pressure on the government to accept something like the "redemption fund" that would change investors' perceptions of European government debt.</span></div>
<div style="text-align: left;">
<span style="font-family: inherit;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: inherit;">Five steps to European Happiness</span></div>
<div style="text-align: left;">
<span style="font-family: inherit;">Well, not quite. But the events in Spain, Portugal, and Germany are small steps in the right direction. All of them fall within the five requirements I listed back in December 2011. Here is the<a href="http://economicsacloserlook.blogspot.com/2011/12/sense-and-sensitivity.html"> link to my blog post</a> from back then.</span></div>
<div>
<br /></div>
</div>Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-11046589457472531012012-06-06T13:35:00.003+02:002012-06-06T13:39:58.168+02:00Bank rescue. Chicken<div dir="ltr" style="text-align: left;" trbidi="on">
<b><span style="font-family: inherit;">Bank rescue</span></b><br />
<span style="font-family: inherit;">Today is the day where the EU should present its blueprint for salvaging the EU banks. In principle it is simple. We need an EU banking regulator, a deposit guarantee, and a big bag of money. But then the problems begin. Which authority should be given to the EU banking regulator? Who should be covered by the guarantee? And who is to pay? Enough open questions to ensure that it will take quite a while to make the scheme work.</span><br />
<span style="font-family: inherit;"><br /></span><br />
<span style="font-family: inherit;">There is one big issue that deserves some attention. EU has had as a principle to “protect smaller shareholders” who are supposedly “innocent” as regards the banks’ reckless lending practices. This principle stands in the way of something very important, the ability of the state/regulator/government to take full control over an insolvent bank.</span><br />
<span style="font-family: inherit;"><br /></span><br />
<span style="font-family: inherit;">Only by taking full control it becomes obvious to start the necessary process: to sell the non-performing assets, while the now government-owned banks can continue the activities that are absolutely indispensable in the society, namely payments and lending. </span><br />
<span style="font-family: inherit;"><br /></span><br />
<span style="font-family: inherit;">It would then become possible to obtain an honest estimate of the losses. Eventually, it will lead to much smaller costs for the tax payers.</span><br />
<span style="font-family: inherit;"><br /></span><br />
<span style="font-family: inherit;">The key is of course that it is possible to temporarily suspend normal reserve requirements, because there is a deposit guarantee in place. As long as such a guarantee is in place, a nationalised bank can in principle operate without a capital base. </span><br />
<span style="font-family: inherit;"><br /></span><br />
<span style="font-family: inherit;">It obviously requires that all shareholders must be wiped out. On this point I am more adamant that the EU Commission. It is normal capitalist logic that one can lose money through bad investments. There are no “innocent” investors. Protecting small investors should not stand in the way of providing a much larger public good: a restored and restructured banking sector.</span><br />
<span style="font-family: inherit;"><br /></span><br />
<b><span style="font-family: inherit;">Chicken</span></b><br />
<span style="font-family: inherit;">The venerable game of Chicken is played in a variety of ways. One is when two young men on motorbikes race towards each other on the white line. He who first veers away from the line is Chicken. If both stay the course, there is no Chicken. Only two dead bikers.</span><br />
<span style="font-family: inherit;"><br /></span><br />
<span style="font-family: inherit;">Germany’s Finance Minister Schäuble has given an interview in Handelsblatt. Under the heading “<a href="http://www.handelsblatt.com/politik/deutschland/schaeuble-im-gespraech-fuer-europa-gibt-es-keinen-bequemen-weg/6711698.html">No easy way out for Europe</a>”, Schäuble says “If government debts are made collective, and it leads to lower bond yields in the debtor countries, it would reduce the pressure to solve the problems”. Written in black on white: Germany resists an EU solution because it would remove the pressure on the debtor countries.</span><br />
<span style="font-family: inherit;"><br /></span><br />
<span style="font-family: inherit;">Apart from the fact that Mr S forgets that Spain’s government debt is lower than that of Germany, he says in plain words that Germany is playing Chicken with the rest of Europe.</span><br />
<span style="font-family: inherit;"><br /></span><br />
<span style="font-family: inherit;">Could that end up as badly as Motorbike Chicken? I am not alone in fearing just that. Germany’s former Foreign Minister Joschka Fischer has written an <a href="http://www.project-syndicate.org/commentary/the-threat-of-german-amnesia">analysis of the European problem</a>. He ends it with the following warning: “Germany destroyed itself – and the European order – twice in the twentieth century... It would be both tragic and ironic if a restored Germany, by peaceful means and with the best of intentions, brought about the ruin of the European order a third time.”</span><br />
<span style="font-family: inherit;"><br /></span><br />
<span style="font-family: inherit;">It cannot be stated any clearer than this.</span><br />
<br /></div>Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-35549697244919052022012-05-11T09:25:00.002+02:002012-05-11T09:26:34.065+02:00Whoops! Helicopter. Euro.<div dir="ltr" style="text-align: left;" trbidi="on">
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<div class="MsoNormal">
</div>
<div class="MsoNormal">
<b>Whoops!</b><o:p></o:p></div>
<div class="MsoNormal">
The drama of the Spanish banking sector is getting worse.
The government has asked the (savings) bank sector to increase loss provisions
from 54 bn EUR to 166 bn EUR to cover potential losses on loans to construction
companies and developers: It would not be that bad, if it also covered
potential losses from loans given to property buyers. Some estimate that making
reasonable provisions for such loans would mean that the banks would have to
make provisions of 270 bn EUR. That would effectively kill the sector.<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
Spain is rapidly approaching an Irish situation, with one
important difference: the Spanish government has not been silly enough to
guarantee anything. The problem is quickly beginning to look like a situation
where it will be impossible for the government to bail out the banks by
injecting capital. I am afraid that at some point in time it will be impossible
for the government not to explore the “Swedish model”, of nationalisation
without any compensation to shareholders, flotation of huge chunks of bad
loans, and a later re-privatisation of healthy banks. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The good news is that EU is now clear in offering Spain an
extension of the time limit to reduce government deficit to below 3% of GDP. In
return Spain has to accept an “audit” of the plan to rescue the banking sector.
I am not entirely sure that such a plan really exists.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Spain is a living testament to the complete misunderstanding
that this crisis is about government debt. It is not it is about total leverage
of the economy, public AND private. Spain and Ireland (and Denmark) had healthy
government finances but a hugely leveraged private household sector as the
crisis began. Healthy government finances proved to be no help.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>More Whoops!</b><o:p></o:p></div>
<div class="MsoNormal">
JP Morgan-Chase admitted to have lost some loose change, USD
2bn and counting, on their Prop Trade activities, i.e. speculation for the
bank’s own books. Of course that old devil, mark-to-market, was to blame
(together with poor risk management and failing organisational oversight). If
only JPM had been allowed to book the positions at prices that suited the bank
better insted of being mercilessly forced to book the positions at market
prices, things would not have run out of hand.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
To me it sounds as if the arrogance of the pre-2007 period
is coming back with a vengeance. As they say in French “Chasser le naturel, il
revient au gallop”. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The good news is that such a loss is a major setback for
Wall Street’s lobbying activities, aimed at weakening the legislative efforts
to curb Prop Trade, the so-called Volcker rule.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Helicopter Ben gets company</b><o:p></o:p></div>
<div class="MsoNormal">
Fed Chief Ben Bernanke got the nickname early in his career
because he advocated QE programmes to stave off financial crises. Now Citi’s
chief economist Willem Buiter joins Ben in the helicopter. Buiter recommends
even more <a href="http://ftalphaville.ft.com/blog/2012/05/10/993921/buiter-says-bring-out-the-helicopter/">radical easing of the monetary policy </a>than seen so far. Buiter is not
just any bank economist. He was a highly respected academic economist and a
member of Bank of Englands Monetary Policy Council before taking the jump to
the big paycheque in Citi. It is just six weeks ago that Buiter claimed that
Spain was heading for a debt restructuring. The reason: the government is not
strong enough to recapitalise the savings bank system.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Now Buiter sees that the monetary initiatives by the world’s
central banks are becoming increasingly ineffective when combined with a
banking system in full deleveraging mode. Add the death-by-austerity fiscal
policies in Europe. Buiter suggests Central Banks to lend money directly to the
private sector, circumventing the banking system.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>And some good news</b><o:p></o:p></div>
<div class="MsoNormal">
The<a href="http://www.cnbc.com/id/47356767"> Euro has been weakening recently</a> (no, it is not really
the dollar that has gained, if you measure on a trade-weighted basis), and the
usual chorus of anti-EU megaphones have trumpeted that as a sign of the
Euro-zone’s imminent collapse. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
For those who remember my writings last year in the autumn,
I am strongly in favour of a weaker currency. I am even in favour of parity
with the USD. It should not happen too quickly and disorderly, though. But for
sure it would help on Europe’s economic situation. As long as Europeans still
find it cheap to shop in the US, there is something wrong with the terms of
trade.</div>
<br /></div>Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-52102717882100903832012-05-09T11:04:00.000+02:002012-05-09T11:52:42.706+02:00Overstepping the limits. Banks. US economy.<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="margin-right: -2.3pt;">
<b><span style="font-family: inherit;">Overstepping limits<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<span style="font-family: inherit;">German member of ECB’s management Jörg Asmussen gave <a href="http://www.handelsblatt.com/politik/konjunktur/geldpolitik/ezb-direktoriumsmitglied-asmussen-schliesst-kurswechsel-aus/6607004.html">an
interview in Handelsblatt</a> that almost – almost - gave me sympathy for
outgoing French President Sarkozy. Sarko once famously hissed at former ECB
chief Trichet that as an unelected civil servant, Trichet’s role was not to
decide on politics. That should be left to politicians. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<span style="font-family: inherit;">Mr Asmussen, who is a career civil
servant, clearly oversteps all limits for public statements from the ECB. He
lectures Greece – where no government is formed. He lectures incoming French
president Hollande. He gives rather precise policy designs – namely that the
deadly austerity policy must be continued at any price. His only admission is
that the austerity drive may be “complemented” with a growth initative. Mr
Asmussen repeats the views of Bundesbank, and acts like a mouthpipe of the most
conservative politicians in Germany. This is not the way for a high ranking
member of the ECB to gain friends. Such a rant from Asmussen would have served
him a stinging rebuke if there had not been a power vacuum in France and
Greece.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<b><span style="font-family: inherit;">Spain dodges an important decision<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<span style="font-family: inherit;">The Spanish government has apparently
decided to yet again recapitalise a local savings bank, Bankia, created by
merging 7 smaller regional lenders. The top management, including highly
respected former central bank chief Rato, has resigned. The problem with giving
the banks more money instead of nationalising them is that it does not solve
the issue of the bad assets, in this case loans to real estate development. In
the USA, the government gave money to the banks (without demanding a management
change) and lifted a huge amount of bad debts off their balance sheets.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<span style="font-family: inherit;">The bad news is that according to all
statistics, Spanish property prices have nowhere fallen enough. More bad loans
will arrive.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<span style="font-family: inherit;">The Spanish banking crisis will not be
solved until the government decides how to handle the bad debt. I still believe
there is a simple solution: Package it and sell it in the markets. It may mean
that the banks are insolvent. Some of them should then be allowed to fold. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<b><span style="font-family: inherit;">Denmark enforces tougher rules on bad bank
loans<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<span style="font-family: inherit;">The Danish banking sector – which started
the banking crisis as one of Europe’s most fragmented – is reeling under new,
tougher rules for loan provisions. After three years where dozens of local
banks have gone belly up, the Danish regulator’s no nonsense approach is likely
to <a href="http://www.bloomberg.com/news/2012-05-09/denmark-s-banks-endure-writedown-shock-delaying-recovery.html">force
more bank closings</a>. Prospective loan provisions are likely to exceed all
market expectations and may push some more of the weaker banks into insolvency.
Last year, tighter practices led to the first senior debt loan losses in Europe
and it shut many Danish banks out of the interbank market. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<span style="font-family: inherit;">It is ironical that the country which
arguably is further ahead in the cleaning up of its bank sector is being
punished by the financial markets. It compounds the problems of getting the
economy going again. It proves the old adage: it is better to fail
conventionally than to excel alone. It is better to pretend the problem of bad
loans does not exist than to get it out in the open. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<b><span style="font-family: inherit;">US need more QE??<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<span style="font-family: inherit;">A number of pundits are trying to change
the tone of the economic debate in the US. Some disappointing economic data
have created renewed doubts about the future growth. It is interesting to see
the difference between perception and reality. The reality is that the US
economy is chugging along with virtually all of the economic indicators
pointing to continued growth. It is particularly good news that small and
medium sized companies are getting more optimistic. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -2.3pt;">
<span style="font-family: inherit;">However, the perception is that data are
disappointing. You cannot be disappointed if you did not have expectations. And
we have seen everybody (and his dog) revising forecasts upwards in the past
three months as the US economy recovered from a mini-slowdown in Q3 of last
year. Now the growth is stabilising – and we get disappointing news in
comparison to the new, more optimistic expectations. Following the time
honoured practice of economists and other pundits, it could lead to 2-3 months
of disappointment. Even if there really isn’t anything to be disappointed
about.</span></div>
</div>Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-11022971880670260092012-05-07T15:35:00.000+02:002012-05-07T15:35:06.768+02:00European elections<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
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<span style="font-family: inherit;">The elections in Europe largely had the
outcomes expected last week. However, it did not come as any great relief to
the markets. What was two days ago a <i>potential</i> political uncertainty is
now a <i>confirmed </i>political uncertainty. This adds to the uncertainty
created by the horrible data indicated by the “Flash PMI” numbers last week. It
is interesting that the uncertainty only affects the stock markets and the
Euro. All other kinds of risk assets are holding up nicely. It rhymes with our
perception that this is a completely normal rotation between the asset classes,
driven by a readjustment of growth expectations. It is confirmed by our proprietary
risk indicators, which remain low. This is not a repeat performance of the 2011
market collapse.<o:p></o:p></span></div>
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<b><span style="font-family: inherit;">France<o:p></o:p></span></b></div>
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<span style="font-family: inherit;">Hollande won the French election and
will now have to face the reality. That reality is a country with high
unemployment, slow growth, slow productivity growth, and a twin deficit as both
government and external balances are in minus. He will not be able to fix any
of that with the economic program presented during the election campaign.
Rumours are also that he will face a wave of redundancies from large French
companies – companies that Sarkozy allegedly leaned upon to make them postpone
firings until after the elections. His first foray into the international scene
will be a visit to Berlin, where he will be reminded that agreements are there
to be respected. <o:p></o:p></span></div>
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<span style="font-family: inherit;">However, the EU commissioner for economic
affairs, Olli Rehn, has already indicated that the pact could be interpreted in
a more flexible way – which probably means that the budget targets will stand
but that the deadline for their implementation. German Finance Minister
Schäuble has spoken of Hollande’s need to “save face”. <o:p></o:p></span></div>
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<span style="font-family: inherit;">What the practical outcome will be is
still uncertain. My guess is that some kind of growth initiative plus a de
facto (even if not official) delay in the deadlines for cutting the budgets. <o:p></o:p></span></div>
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<b><span style="font-family: inherit;">Greece<o:p></o:p></span></b></div>
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<span style="font-family: inherit;">The preliminary results of the general
elections pointed to a hung parliament, where the parties behind the debt
restructuring agreement command exactly half of the seats in the new
parliament. A motley crew of parties opposing the agreement form the other
half. For the financial markets the issue will be whether this will now lead to
an actual default on the reduced government debt. It is too close to call, by
my impression is that a weak coalition will be formed between parties in favour
of staying inside the EU, and – by extension – to respecting the agreements. It
may then survive a few months. <o:p></o:p></span></div>
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<b><span style="font-family: inherit;">Germany<o:p></o:p></span></b></div>
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<span style="font-family: inherit;">Local elections in the German state of
Schleswig-Holstein gave an important pointer to the mood among Germans voters.
Chancellor Merkel’s party experienced a slight loss, The main opposition SPD
gained and most of the votes came from the minority partner in the current
government, the liberal FDP. Merkel’s coalition is somewhat weakened, but
mainly because of the plight of the coalition partner. So far it has no
practical implications for her government.<o:p></o:p></span></div>
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<b><span style="font-family: inherit;">What it means<o:p></o:p></span></b></div>
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<span style="font-family: inherit;">All of this will probably keep the stock
markets on their toes in the short term. There appears to be two main strands
of thinking out there, and the market movements can be interpreted as result of
the mood prevailing at any given mood. There are those who (still) believe that
it is possible to cut one’s way to growth, and those who believe that excessive
cutbacks will kill growth. <o:p></o:p></span></div>
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<span style="font-family: inherit;">So far, the latter camp has been right.
While nobody contests the necessity to increase budget discipline, it is
obvious that Europe’s growth is tanking because of public sector cutbacks. And
a lack of funding to small and medium-sized companies. We expect that the stock
markets will remain jittery in the days to come and that EUR will continue to
weaken.</span><span style="font-family: "Segoe UI","sans-serif"; font-size: 10.0pt;"> <o:p></o:p></span></div>
</div>Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-5236893660159542512012-05-04T15:26:00.000+02:002012-05-04T15:26:55.693+02:00A possible change to Europe's austerity<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal">
<span style="font-family: inherit;">The French presidential elections on Sunday will be followed
by elections to the parliament in June. So if all the opinion polls are right,
France will have a new president and a new majority within a few weeks. </span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">For Europe this could have a significant effect. Francois
Hollande, who appears to become France’s next president has been very clear that
he wants changes to the current “Fiscal Compact”, the code name for Europe’s
German-inspired austerity programs, by which all Euro-zone member state must
have cut their budget deficits to 3 per cent of GDP by 2013. </span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Data released this week point to a sharp downturn in the
economic activity in Southern Europe and in France. Economic activity is also
stalling outside the Euro-zone and unfortunately there is no other explanation
than government cutbacks. All of this will eventually hit Germany, whose growth
is strongly dependent on the growth in the export markets. With the rest of
Europe slowing, Germany’s economy is bound to follow.</span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">All over Europe voters are throwing out politicians who have
been managing the crisis and are now connected with the austerity programs. The
“hard core” of the Fiscal Compact is crumbling. The Dutch government has
resigned as the far-right PVV refused to support domestic budget reductions. In
Finland, the True Finns party has adopted a similar position. </span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">This creates an interesting situation. Will Hollande cave
in, faced with Merkel and Schäuble, and give up on his election rhetorics? Or
will Merkel and Schäuble realise that keeping Europe on track will require that
France is fully on board and that this can only be obtained by relaxing the
economic policy? Most pundits expect the first.</span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">My guess is that Germany will “cave in”.</span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">In practical terms it could imply that the 3% budget targets
will be postponed by a year or two. All kinds of EU funds will be used to
provide assistance in long term financing to southern Europe. It will reach
from Infrastructure funding to long term financing. Portugal and Ireland will
probably be able to negotiate a 1-year extension of their bail-out loans.</span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">All of this will happen in the face of determined resistance
from the Bundesbank.</span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Does it sound too good to be true? Well, maybe. But Germany
is not controlled by a strict economic philosophy alone. There is a political
dimension to it as well, and Chancellor Merkel is a politician with strong
instincts.</span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Having failed to explain to German voters what the packages
to Greece, Portugal, and Ireland were all about, Merkel is now facing German
voters fed up with “paying for Europe”. Local elections in the coming days will
give an important indication of the strength of the dissatisfaction. If the
results are a strong showing for the Social Democrats, Merkel will be weakened
politically and will need to adopt her policies well in advance of the next national
elections to be held in 2013.</span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">The only way of getting out of that situation is to make
sure that growth will resume soon. So far Germany’s leading politicians and
Bundesbank have acted as if Germany alone was immune to the crisis. That perception
has allowed them to treat lack of growth in the other European countries with
something akin to disdain. </span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">A combination of a crumbling Eurozone “hard core”, a sharp
drop in exports and political resistance from German voters could change Merkel’s
mind. </span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">On top of that, remember that for the longer term political
prospects in Europe, Germany cannot afford to alienate France. Germany needs
Europe as much as Europe needs Germany.</span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">If I am not right in assuming that growth will be back on Europe's political agenda, things could get worse than they are now. I hope I am right.</span></div>
</div>Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-78177861063092311712012-04-27T10:36:00.000+02:002012-05-04T16:31:57.004+02:00Hollande. S&P. Spain. US GDP.<div dir="ltr" style="text-align: left;" trbidi="on">
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<div class="MsoNormal" style="margin-right: -1.1pt; tab-stops: 459.6pt;">
<b><span style="font-family: inherit;">Expecting Hollande<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: -1.1pt; tab-stops: 459.6pt;">
<span style="font-family: inherit;">The expectation of
Francois Hollande winning the French Presidency has triggered some shuffling of
feet in Berlin, Frankfurt, and Bruxelles. In Berlin, Chancellor Merkel tries to
make sure that Hollande will feel welcome when he arrives for the first of his foreign
visits, probably already on the day after the election. On the other hand she
is also clear that the Fiscal Pact is not up for renegotiation. However, she
subtly changed her language about the necessity of balancing the budget. Now it
is needed “over time”.<o:p></o:p></span></div>
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<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt; tab-stops: 459.6pt;">
<span style="font-family: inherit;">Francois Hollande
on his part said that when he arrives in Berlin, the French people will have
given him a clear mandate for renegotiation.<o:p></o:p></span></div>
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<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt; tab-stops: 459.6pt;">
<span style="font-family: inherit;">Not particularly
surprising, Bundesbank believes that the “fiscal consolidation” should
continue. Even if the negative growth makes it increasingly difficult for many
countries to actually consolidate.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt; tab-stops: 459.6pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt; tab-stops: 459.6pt;">
<span style="font-family: inherit;">And perhaps the
best news is that the <a href="http://www.telegraph.co.uk/finance/financialcrisis/9226543/Brussels-to-relax-3pc-fiscal-targets-as-revolt-spreads.html">Eurocrats
in Bruxelles</a> are discretely pointing out that there is enough legal leeway
in the Pact to actually relax it quite a bit. “The pact is not stupid”, as an
anonymous source have succinctly put it. Changes must be approved by a majority.
Germany holds no veto in this matter. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt; tab-stops: 459.6pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt; tab-stops: 459.6pt;">
<b><span style="font-family: inherit;">Spanish Downgrade<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: -1.1pt; tab-stops: 459.6pt;">
<span style="font-family: inherit;">S&P Downgraded
Spanish government debt by two notches from A to Bb. Yawn. The press has
ignored it. The downgrade happens after everybody has found out there is
something wrong in Spain. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt; tab-stops: 459.6pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt; tab-stops: 459.6pt;">
<b><span style="font-family: inherit;">Spain takes the
bull by the horns<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: -1.1pt; tab-stops: 459.6pt;">
<span style="font-family: inherit;">Sorry, could not
let that one pass! The Spanish economy minister has announced that the
Governent will force a sale of real estate assets from the crisis Cajas. He
expects foreign real estate funds to bid for the property. It confirms my
impression that Spain are more hands on handling their banking crisis than many
other countries. Unfortunately, forcing a firebrand sale of assets will likely
leave a colossal hole in the balance sheets of the local savings banks, that
the government will then have to fill. It would be better first to nationalise
the banks.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt; tab-stops: 459.6pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt; tab-stops: 459.6pt;">
<b><span style="font-family: inherit;">US GDP<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: -1.1pt; tab-stops: 459.6pt;">
<span style="font-family: inherit;">Stronger than
expected labour market data, an increase in Consumer Spending and better data
from the US housing market has made most US economists upgrade their
expectation for today’s release of US GDP data. They now expect an annualised
growth rate of between 2.5 and 3.0 per cent.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt; tab-stops: 459.6pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt; tab-stops: 459.6pt;">
<span style="font-family: inherit;">Adam Posen, an
American member of the Bank of England Monetary Policy Board, has explained why
<a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech560.pdf">things
are better in the US</a>: There is no austerity programs, and companies are not
as dependent on banks for financing as in Europe. European small and medium-sized companies depend critically on bank loans they cannot get. No further explanations
are necessary.</span><span style="font-family: 'Segoe UI', sans-serif; font-size: 10pt;"><o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt; tab-stops: 459.6pt;">
<span style="font-family: inherit;"><br /></span></div>
</div>Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-195405530678823102012-04-25T11:23:00.000+02:002012-05-04T15:40:45.706+02:00Austerity backlash on its way<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal">
<b>How stupid are the markets?</b></div>
<div class="MsoNormal">
Faced with a growing unease over the effects of the
austerity programmes, German Chancellor Merkel and her spokespersons are making
it clear – this lady is not for turning. The message from Berlin is that there
is no alternative to the “balanced budget”
fiscal pact, and that “Europe’s Credibility” is identical to the ability
of respecting budget discipline.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
No, Europe’s credibility (or rather, that of the Euro-zone)
depends on the ability to find a cure for the current predicament that does not
kill the patient. Continuing with cutbacks in an economy with negative growth
is suicidal. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
To the best of my knowledge, suicides committed to prove
credibility has never led to anything but a passing admiration and a shaking of
the head. Too bad, so sad.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Anyway, The Dutch government collapsed on the issue. If
Hollande wins the French elections, the “core” of the “Team Austerity” has
shrunk to one member, Germany. With upcoming local elections in Germany we will
see how strong that core really is.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
As for the alternatives, are there really any? Of course, it
is just a question of not putting on the ideological sunglasses on. Germany
could add to domestic demand. France could unleash an economic revolution by
privatising the state-controlled behemoths that increasingly hampers French
competitiveness. Spain could (temporarily) nationalise the Cajas and move on,
in particular with reforming the dysfunctional labour markets. All of Europe
could postpone the insane idea of forcing the banks to deleverage amid the
economic crisis. And so on. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>British recession</b><o:p></o:p></div>
<div class="MsoNormal">
The UK GDP numbers for Q1 have just been released and they
showed a second consecutive quarter of negative growth. Construction fells
sharply, and there is no growth in the biggest sector. The service sector.
Consumers are squeezed by higher oil prices, government cutbacks, slow income
growth. Oh, and then there is the problem of having too large debts related to
buying property.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
All of this is not surprising. A possible cause for concern
is that UK exports are not doing any better after a long period of a weakened currency. Maybe because things are
not looking too good in the export markets, either.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Where did the money go?</b><o:p></o:p></div>
<div class="MsoNormal">
ECB President Chairman Draghi gave a testimony to the
Economic and Monetary Affairs Committee of the European Parliament. Draghi clearly asked the politicians to put growth back on the agenda. And he revealed a concern (which I share): The huge loans
granted to the banks are not flowing into the economy in the form of loans to
businesses and consumers. Draghi is optimistic that it will happen with time.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The question is: how long time does Draghi expect this will
take? <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>On a lighter note</b><o:p></o:p></div>
<div class="MsoNormal">
FT today carries this little story about <a href="http://ftalphaville.ft.com/blog/2012/04/24/972461/once-upon-a-time-in-italian-banking/">Italian
Banking</a>. Enjoy. Or cry.</div>
</div>Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-31916717886379016012012-04-23T13:11:00.000+02:002012-05-04T15:30:03.131+02:00Hollande. Europe's growth is slowing.<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<b><span style="font-size: 10pt;"><span style="font-family: inherit;">France<o:p></o:p></span></span></b></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<span style="font-size: 10pt;"><span style="font-family: inherit;">French presidential contender Francois
Hollande of the Socialist Party came out with most votes in the first round of
the French presidential elections. He will now face incumbent president Sarkozy
in the second round in two week’s time. Opinion polls have persistently shown
that Holland would win the second round hands down. Assuming that he wins,
there will probably also be snap parliament elections.<o:p></o:p></span></span></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<br /></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<span style="font-size: 10pt;"><span style="font-family: inherit;">Markets are now nervous that a new French
government will challenge the German-imposed austerity programmes. Hollande has
been clear that he wants to renegotiate the basis for the euro-zone “fiscal compact”.
I have previously been quite convinced that faced with German determination,
Hollande would back down quickly. But it seems that one of the austerity
stalwarts, the Netherlands are also beginning to have second thoughts about the
austerity programme<o:p></o:p></span></span></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<br /></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<b><span style="font-size: 10pt;"><span style="font-family: inherit;">Netherlands<o:p></o:p></span></span></b></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<span style="font-size: 10pt;"><span style="font-family: inherit;">Growth has slowed markedly in the
Netherlands in the first months of the year. It has now led to the
Anti-Immigration party PVV to refuse supporting the EUR 16bn cutbacks, required
for the country to meet the demands of the Fiscal Pact. Party Chairman Geert
Wilders demand new parliamentary elections, in order “to allow the voters to
decide” on the “Brussels diktat”. The open question is whether the other
political parties can find an agreement to force through further savings as the
economy is slowing. <o:p></o:p></span></span></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<br /></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<b><span style="font-size: 10pt;"><span style="font-family: inherit;">Spain<o:p></o:p></span></span></b></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<span style="font-size: 10pt;"><span style="font-family: inherit;">Bank of Spain released its quarterly
survey this morning and it is not uplifting. Economic growth in Q1 is falling,
demand as well as supply is contracting. Employment is falling at a rate of 4%
per year. BoE points out that private sector demand is weak and the decline in
house prices has accelerated to a rate of more than 7% per year. So far,
exports have been a growth driver. That has also stopped, but is more than
balanced by a strong fall in imports. Add the significant budget cutbacks.
Ugly!<o:p></o:p></span></span></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<br /></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<b><span style="font-size: 10pt;"><span style="font-family: inherit;">PMI<o:p></o:p></span></span></b></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<span style="font-size: 10pt;"><span style="font-family: inherit;">This morning’s “Flash” PMI for the
Eurozone and for Germany were not good news. Essentially, they point to a
stronger rate of decline in Europe now at the start of the second quarter. I am
certainly uncomfortable with this, as it demonstrates what has been visible in
the Euro-zone monetary data, that bank lending is not reflecting a recovery.<o:p></o:p></span></span></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<br /></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<span style="font-size: 10pt;"><span style="font-family: inherit;">I need some time to think this one over.
My expectation has been that Germany would do nicely, and that the rest of
Europe would be past the maximum downdraft forced by the austerity programmes.
With Germany as the motor, I had expected Europe’s recession to end now. I may
have been mistaken on two elements: Germany’s growth is still more driven by
exports than by domestic demand – which means that the economic activity in the
other European countries affect key export sectors. And the austerity
programmes in Italy, France, UK, Spain and elsewhere may have more power in
pulling down the economies than expected.<o:p></o:p></span></span></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<br /></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<span style="font-size: 10pt;"><span style="font-family: inherit;">If this is the case, we will see Europe – including
the UK - tanking under the weight of its own mistakes (the accelerated
austerity programmes) while the US will do relatively fine because of the
absence of austerity programmes for now.<o:p></o:p></span></span></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<br /></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<span style="font-size: 10pt;"><span style="font-family: inherit;">If France and the Netherlands join Italy
in a criticism of Germany regarding the austerity programmes, we are entering a
phase of new political dynamics. The austerity programme may come under heavy
fire, eagerly helped by the London-based financial press who will find it a
brilliant opportunity to counter the increasing German influence on the
continent. We may be looking at a renewed round of crisis meetings.<o:p></o:p></span></span></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<br /></div>
<div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0cm; margin-left: 14.2pt; margin-right: 45.3pt; margin-top: 0cm;">
<span style="font-size: 10pt;"><span style="font-family: inherit;">It will only confirm my opinion that the
German zero-deficit ideology was destabilising for the economic growth. I will
be happy if the rest of Europe comes to its senses and oppose Germany’s wrong
designs. I am not sure I will be happy about the way it happens. It could be
messy.</span><span style="font-family: 'Segoe UI', sans-serif;"><o:p></o:p></span></span></div>
</div>Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-9973704444491283412012-04-18T10:32:00.000+02:002012-05-04T15:59:59.962+02:00Spain. IMF.<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<b><span style="font-family: inherit;">Mr Market has got
something right<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<span style="font-family: inherit;">You will not often
catch me saying something positive about the large majority of financial market
participants. In the past couple of days, I have found several pieces that have
left me thinking whether the markets are actually getting something right.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<span style="font-family: inherit;">In Spain, all
signs point to disaster. The story is well-known by now. A host of weakly banks
have fuelled a housing boom. The growth falls, property prices begin to fall,
banks end up in deep trouble, and that accelerates the economic downturn.
Government finances deteriorate sharply. Add Spain’s notoriously ineffective
labour market.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<span style="font-family: inherit;">In Berlin, Paris,
and Bruxelles, politicians are still shocked that Greece was “forced” into a de
facto bankruptcy. The response is that the market “attacks” are best countered
by draconian austerity measures.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<span style="font-family: inherit;">The markets now
appear a good deal more sophisticated than that. Bond markets are not afraid of
government deficits a<i>s such</i>. Bond markets are afraid of losing money.
That leads to the critical point: Markets are not afraid of the Spanish budget
deficit, but they rightfully fear that a German-style austerity policy will
make things worse and lead to a “death spiral”, which eventually increases the
default risk.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<span style="font-family: inherit;">So far it appears
that this analysis is better than the one made by the European politicians: in
order to meet the EU demands to the budget deficit in 2013, the Spanish
government introduces policies making it close to impossible to reach the goal.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<span style="font-family: inherit;">Suddenly I find
myself siding with the bond markets. Weird feeling, indeed.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<b><span style="font-family: inherit;">IMF<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<span style="font-family: inherit;">Has adjusted its <a href="http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/text.pdf">growth
forecast</a> for the EU-zone upwards. From -0.5% to -0.3% in 2012. Wow, let’s
have a party! This is entirely for public consumption. No economist worth his
salt believes that forecasts can be made that precise (and in 98% of the cases
they are wrong anyway).<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<span style="font-family: inherit;">The most important
is that IMF strongly pushes the European politicians to make it their
“overarching priority” to prevent a renewed escalation of the debt and growth
crisis. IMF also tells Europe to get more busy in resolving the problems in the
banking sector. IMF identifies two major obstacles to a resumption of normal
growth in the Western economies, fiscal consolidation and bank deleveraging. I
totally agree.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -2.3pt; tab-stops: 451.3pt;">
<span style="font-family: inherit;">In the cases of
USA, UK, Spain, and Denmark another factor is at play, a heavy increase in
household debt related to property investment, all happening while property
prices were booming. That complicates the situation in those four countries. In
the US there is no political consensus to fight the budget deficit and hence no
austerity. In Denmark the government debt is sufficiently low that dramatic
action can be postponed. But have a look at UK and Spain.</span><span style="font-family: 'Segoe UI', sans-serif; font-size: 10pt;"><o:p></o:p></span></div>
</div>Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-83354073586394982402012-04-13T15:55:00.000+02:002012-05-04T16:25:33.020+02:00EBF. Spain. Seasonality<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="margin-right: -1.1pt;">
<b><span style="font-family: inherit;">EBF </span><o:p></o:p></b></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">There is now less than three months until
the European banks have to meet EBA’s strict demands for a Tier 1 Capital of 9
per cent. I have repeatedly been highly critical of the decision to force the
banks into a rapid deleveraging at a point in time when the European economies
are being hit left right and centre by austerity programs. Not surprisingly <a href="http://www.bloomberg.com/news/2012-04-12/bank-overhaul-mess-is-noose-around-eu-s-neck-ebf-says.html">Christian
Clausen, President of the European Banking Federation</a> (EBF) is also highly
critical. In his criticism, he adds a couple of points that are worth noting. <span style="color: #1f497d;"><o:p></o:p></span></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">His first point is that the new standards
are often so weakly formulated that the banks tend to be more careful, rather
than aggressive, when implementing the standards. Another point is that in
order to meet new demands for net stable funding, the interbank market need to
provide funding to the tune of 1.9 tn EUR, which is frankly impossible.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">While I agree with some of Clausen’s
views, it is worth remembering that the banks themselves created the mess that
politicians are now trying to get them out of. Shame that the<span style="color: #1f497d;"> </span>same politicians managed to make a mess out of
the rescue mission.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<b><span style="font-family: inherit;">Spain<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">I continue to be surprised about the lack
of precision in the financial press when it comes to <span style="color: #1f497d;">“</span>bailouts<span style="color: #1f497d;">”</span>. Reading the most recent batch of comments about
Spain’s economic problems<span style="color: #1f497d;">,</span> the reader would
be excused for believing that Spain faced bankruptcy. It could also seem that
the European bailout funds are not sufficiently large as their total volume
more or less corresponds to Spain’s government debt. It is nonsense.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">Greece got a debt restructuring. It means
that a large proportion of the country’s government bonds were declared null
and void, and new ones with a lower nominal value were issued instead.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">Portugal and Ireland got what is now
popularly referred to as a “bailout”. It is a credit line, established for a limited
period in time, allowing the countries to cover their financing needs from
other EU countries. Such credit facilities allow the countries to bypass the
market, and the idea is to reduce the financing costs temporarily while the
countries try to get their economic house in order, <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">Such a credit facility is not related to
the overall outstanding debt, but to the financing and refinancing needs for
the term of the facility. If it is e.g. a three year period, it is assumed that
10-year bonds will be dealt with on market terms later. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">Spain may opt for such a facility if the
short term yields continue to climb. But it has nothing to do with 10-year bond
yield climbing past 7 per cent, as the press has had it. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">In order for a country’s debt/GDP ratio not
to increase, the average yield on the outstanding debt cannot exceed the
nominal growth of the GDP. That is exactly the purpose of “bail-out packages”,
and explains why the interest paid on the credits are lower than market rates.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<b><span style="font-family: inherit;">Seasonality<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">The most recent job numbers from the US
came out a bit worse than expected after a number of months with better than
expected numbers. While being highly interesting from a political point of
view, the data are probably simply a result of the milder than normal winter in
the US. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">Job data are always seasonally corrected,
as everybody knows that bad winter weather leads to short term layoffs. When
the winter is milder than expected, fewer people are laid off. Seasonal
correction mechanisms are based on several years of data and adds some<span style="color: #1f497d;"> </span>jobs. The result is an overshoot. Unless you are
familiar with this mechanism, you will have a tendency to adjust your forecasts
upwards. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">But around March, the effect of the warm
winter disappears out of the statistics as the seasonal correction does not add
those extra jobs in the spring. So suddenly your fresh optimistic forecasts
collide with the seasonal correction mechanism. And the data disappoint.
Interesting to see if we are in for more disappointments.</span><span style="font-family: 'Segoe UI', sans-serif; font-size: 10pt;"><o:p></o:p></span></div>
</div>Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-65474984703744921652012-03-30T10:20:00.000+02:002012-05-04T15:44:49.406+02:00Dividend stocks. Firewall. Spain.<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="margin-right: 6.0pt;">
<b><span style="font-size: 10pt;"><span style="font-family: inherit;">Dividend stocks and other retail products<o:p></o:p></span></span></b></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-size: 10pt;"><span style="font-family: inherit;">The stock market is ever busy in the
eternal search for new “themes”, i.e. stories that can persuade investors to
buy and sell and thereby generate the commissions needed for the business. As interest rates have fallen, one
particularly hyped theme has been “dividend stocks”. <o:p></o:p></span></span></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-size: 10pt;"><span style="font-family: inherit;">The story has been that if you could not
count on stocks to appreciate steadily each year, then at least you could
borrow money at low interest rates and invest in stocks that would give you a
better cash flow, i.e. dividends. I have never met any theoretical explanation that
could make me understand why “dividend stocks” should be more attractive than
any other stocks.<o:p></o:p></span></span></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-size: 10pt;"><span style="font-family: inherit;">In Germany a group of researchers have now
worked for a bit on the “dividend stocks”. Their verdict is clear: <a href="http://www.faz.net/aktuell/finanzen/studie-dividendenfonds-bringen-keinen-renditevorteil-11702500.html">dividend
stocks do not offer a better return on investments</a> over any relevant time
horizon than any other group of stocks. But for sure the many new products
based on “dividend stocks” have generated a nice commission (plus loan margins)
for the finance sector.<o:p></o:p></span></span></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-size: 10pt;"><span style="font-family: inherit;">Caveat Emptor. We’re just saying. <o:p></o:p></span></span></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-size: 10pt;"><span style="font-family: inherit;">Another “new-new thing” is investment in
volatility. For private investors who do not even know what it is all about!
With <a href="http://www.bloomberg.com/news/2012-03-30/credit-suisse-opened-volatility-bets-to-small-investors.html">the
predictable results</a>.<o:p></o:p></span></span></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<b><span style="font-size: 10pt;"><span style="font-family: inherit;">Firewall<o:p></o:p></span></span></b></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-size: 10pt;"><span style="font-family: inherit;">The EU summit in Copenhagen seems set to
decide that the total emergency facility to help troubled countries (and banks)
will end up at EUR 800bn as the Germans finally seem to understand that the
larger the facility, the smaller the probability that it will ever be used.<o:p></o:p></span></span></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<b><span style="font-size: 10pt;"><span style="font-family: inherit;">Spain<o:p></o:p></span></span></b></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-size: 10pt;"><span style="font-family: inherit;">Yesterday, I referenced <a href="http://www.voxeu.org/index.php?q=node/7799#fn1">a study from the Swiss
National Bank</a>. There you would find a chart indicating that the Spanish
residential property market is still significantly overvalued, and we are NOT
talking holiday property here. When that information is combined with PM
Rajoy’s new inititatives to cut the public sector deficit by a whopping 3.2 per
cent of GDP we have all but a guarantee that Spain will remain mired in
recession for a while. Personally i have a hard time believing that Spain will
meet the German-imposed deficit targets in 2013. When will they ever learn?<o:p></o:p></span></span></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-size: 10pt;"><span style="font-family: inherit;">At the same time Spanish trade unions are
demonstrating against reforms that would actually make it easier to create new
jobs. <o:p></o:p></span></span></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-size: 10pt;"><span style="font-family: inherit;">Not funny at all. We will hear more of
that story soon.</span><span style="font-family: 'Segoe UI', sans-serif;"><o:p></o:p></span></span></div>
</div>Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-44176987324981688642012-03-29T11:05:00.000+02:002012-05-04T15:48:22.168+02:00Queen. UK. EU M3. US jobs.<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="margin-right: 6.0pt;">
<b><span style="font-family: inherit;">Queen<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-family: inherit;">Pity the poor elderly. Even the British
Queen Elizabeth II cannot celebrate her 60 years of ribbon-cutting,
crowd-weaving, and banqueting, without having bad conscience that the
celebrations will “push the UK economy back into recession”. The press has
eagerly sunk their teeth into the story.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-family: inherit;">The warning words come from another elder,
Sir Merwyn King of BoE. His point is simple. By giving the entire country a(n
extra) day off, UK will miss one day of economic output in Q2. One day out of
65 working days is about 1.5%. So if the UK lose 1.5% of output in Q2, for sure
it would turn out a negative quarter, given the sluggishness of the UK economy.
My advice to the worried central banker is to invite UK consumers to buy as
many flags, mugs, hats, memorial medallions and what not to give the retail
trade a boost.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<b><span style="font-family: inherit;">UK growth<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-family: inherit;">GDP growth for Q4 in the UK came out
negative and we have a hard time being really surprised. UK consumers have been
among the most leveraged in Europe, the housing bubble have been among the
biggest, and the impacts on the public finances of the faltering banking sector
among the largest in Europe. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-family: inherit;">Looking at the underlying data, it is
clear that the UK consumers continue to consolidate. In combination with
continued spending reactions in the public sector, it will take a long time to
get the growth going again. For some <a href="http://www.voxeu.org/index.php?q=node/7799#fn1">food for thought</a>,
about house prices, look at this little study by a couple of economists from
the Swiss National Bank. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<b><span style="font-family: inherit;">EU M3<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-family: inherit;">I continue to be worried about the growth
of the Eurozone money stock (M3). The headline number came out positive (+2.8%
yoy), but dig a little, and you will find out that banks’ lending is still
slowing and grew only by 0.3% in February. Bank lending to the public sector
grew by 0.6%.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-family: inherit;">Does this prove that the huge amount of
3-year loans given to the banks “does not work” as in particular the UK
financial press have been trumpeting?<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-family: inherit;">No, The LTRO loans were not even intended
for that. Their purpose was a) to avoid a major liquidity squeeze in the
European inter-bank market, and b) to allow the banks to receive a colossal
subsidy by using the money to buy government bonds. In that respect the LTRO
loans work just fine.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-family: inherit;">But it does prove that when banks are
reluctant to lend and borrowers are reluctant to borrow, the limits of monetary
policy have simply been reached.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<b><span style="font-family: inherit;">US Jobs<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-family: inherit;">There is no doubt, the US economy has
created more jobs than expected due to “unseasonably warm weather” – the methods
used for seasonal adjustment of the employment data all but guarantee this
result.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-family: inherit;">But is this enough that we should call off
the optimism about the recovery in the US labour market. I think not. In fact,
if one sums up all the micro data, it is surprising that the unemployment rate
is not falling any faster than is the case. We may see a sharp drop in the
months leading up to the presidential elections.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: 6.0pt;">
<span style="font-family: inherit;">Given that the Republicans seem bent on
choosing an unelectable candidate, falling unemployment would all but guarantee
Obama’s re-election. My pious hope is that he would use a second mandate more
constructive than the first. </span><span style="font-family: 'Segoe UI', sans-serif; font-size: 10pt;"><o:p></o:p></span></div>
</div>Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-46023114306822599512012-03-14T15:25:00.000+01:002012-05-04T16:04:52.628+02:00Dirrty. Bank Stress. Italy.<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="margin-right: -1.1pt;">
<b><span style="font-family: inherit;">Dirty underwear<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">My, my. At Goldman Sachs things certainly
are not as they used to be. One Greg Smith, an executive director with GS’s
London office resigned today and felt it necessary to publish his <a href="http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?_r=1&hp">goodbye
to the firm</a> as a Op-ed in New York Times. His point is that the company’s
culture has turned into one of short term maximisation of profits instead of
building long-term relationships to the clients.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">Smith agrees perfectly with <a href="http://www.forbes.com/sites/petercohan/2012/03/14/greg-smith-quits-should-clients-fire-goldman-sachs/">William
Cohan</a>, who in a <a href="http://www.amazon.co.uk/Money-Power-Goldman-Sachs-World/dp/0241954061/ref=sr_1_fkmr1_2?ie=UTF8&qid=1331732654&sr=8-2-fkmr1">book</a>
last year gave the same picture of the firm. Are we surprised? No, or at least
we ought not to be. But the cabal of greedy bankers will just close ranks. As
said a commentator: “Maybe he’s made a sufficient amount of money in his life
that he isn’t particularly bothered if he isn’t employed in financial services
again and works in a completely different world like teaching.”<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">With this kind of attitude, it is clear
how much work the banking sector still has to do to position themselves as a
part of the broader society and not as the gods who have the right to rip their
clients off at will. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<b><span style="font-family: inherit;">US bank stress test<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">Federal Reserve has subjected 19 banks to
stress tests, and in the aftermath of the test, it has become clear that Fed
wants to use it as a verdict on the bank’s desire to pay dividends. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">Under a rather severe set of assumptions
regarding the economy and the markets, 15 out of 19 banks were found to be able
to keep their capital while continuing to pay dividends and re-purchase its own
stock. Citigroup was found not to meet the capital requirements, together with
Wells Fargo, Suntrust, and Ally Financials.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">Interestingly, the take from the financial
markets were that Fed’s required capital is waaaay to high, that the companies
should be allowed to proceed with paying dividends, and that they are now so
strong that nothing can break them down. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">We rest our case. One ought to remind
readers that Citigroup received most help of all US banks in 2008. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">No talk of needing to adapt to a new
reality, where banks have to accept living with lower RoE.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<b><span style="font-family: inherit;">Italy<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">In January, Italy’s industrial production
fell by 2.5% from December. That is not good news and again turns attention to
Italy as a potential problem after a good run that saw the country’s
refinancing costs fall strongly since late November.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">For Europe, the number was an increase of
0.2 per cent, pulled by Germany’s positive reading of 1.5%. Europe may be
pulling out of the recession, but significant differences persist between North
and South. </span><span style="font-family: 'Segoe UI', sans-serif; font-size: 10pt;"><o:p></o:p></span></div>
</div>Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-52783190182600424962012-03-13T11:55:00.000+01:002012-05-04T16:09:49.675+02:00China. Spain.<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal" style="margin-right: -1.1pt;">
<b><span style="font-family: inherit;">China I<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">Since China last week announced that its
new target for growth was 7.5% and not 8%, the financial markets have been busy
discussing with themselves if this was a good or a bad thing. The verdict is
mostly that it is a bad thing.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">I do not agree. It is only natural that
after a 10%-a-year growth target 15 years ago, and years of growth in the 8% to
9% range, growth will slow further. China still generates new jobs at a
blistering pace as a growth rate of 7.5% in the world’s 2<sup>nd </sup>largest
economy generates a lot more $$$ than growing the world’s 20<sup>th</sup>
largest economy by 10%.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">And 7.5% growth is not just 7.5%. In
national accounting, increased imports count as a negative growth element. So
China’s long and slow turn towards a growth driven by domestic demand and
higher imports<span style="color: #1f497d;"> </span>rather than exports will
necessarily see a negative contribution to growth coming from a steadily
worsening trade balance. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">So all in all, the slower growth rate is
nothing to be worried about.<span style="color: #1f497d;"> </span>Guess we can
sell them some luxury goods...<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<b><span style="font-family: inherit;">China II<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">But there is something else to worried
about. China’s reorientation of the economic growth will inevitably lead to a
worsening of the current account position. Pulled by its incredible export
success over the last decade and a half, China has become one of the largest
creditor nations on earth.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">The gigantic trade surpluses paired with a
fixed exchange rate has given China a huge need to purchase US treasury bonds.
If they had not done so, the currency would already have been dramatically
stronger than it is now.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">The flip side is that China by this policy
effectively has allowed the US of A to run similar trade deficits without
suffering the traditional consequence of a weaker currency and (much) higher
bond yields.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">The stock market manages to spook itself
when China comes out with a monthly current account deficit. In fact, the US
bond market ought to be the most concerned.<span style="color: #1f497d;"> </span>This
asset class has profited the most from huge Chinese demand. It is in that space<span style="color: #1f497d;"> </span>the adjustment to a smaller Chinese surplus will happen.
<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">Unless of course the USA suddenly falls in
love with savings and postponed consumption. When pigs fly.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<b><span style="font-family: inherit;">Spain<o:p></o:p></span></b></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">Spain’s PM Rajoy challenged the new EU
budget orthodoxy by announcing that Spain would end up with a higher budget
deficit than expected in 2012. His statement last week was initially met with a
deafening silence. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">But now, some days later, the Euro<span style="color: #1f497d;">-</span>zone members are recovering from the surprise,
and predictably, they now demand further cuts. Rajoy pointed out that deep cuts
already had led to slower-than-expected economic growth, and appears unlikely
to cave in, at least not without provoking a debate about the wisdom of
punishing depressed economies with further cutbacks.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<br /></div>
<div class="MsoNormal" style="margin-right: -1.1pt;">
<span style="font-family: inherit;">The outcome of that debate will be
interesting as a measure of the strength of the backlash against the German
dominance in EU budget matters.</span><span style="font-family: 'Segoe UI', sans-serif; font-size: 10pt;"><o:p></o:p></span></div>
</div>Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-18833795294952867682012-03-08T11:00:00.002+01:002012-03-08T11:00:35.344+01:00Risk-on/risk-off is off. Weidmann<div dir="ltr" style="text-align: left;" trbidi="on">
The rather dramatic market movements in the past days can of course not be explained by the stories in the headlines since nothing this week is different from what it was last week. <br /> <br />This caused us to go over the totality of our indicators to see if there was something new. It has led me to slightly revise my view on the world. Ignoring some of the fine print, my new contention is that the risk-on rally is over. Instead we have entered a more normal phase where rotation between asset classes will be the normal driver of dynamics. There will again be room for stock picks, value investing, ratings arbitrage, automatic trading algorithms and what not. <br /> <br />We have come to understand the risk-on/risk-off as something that applies in extraordinary situations. Those situations are when the correlation between asset classes increases enough to make diversification irrelevant. All of our risk indicators have dropped sharply and have now begun to stabilise at “normal” levels. It means that risk-on/risk-off slides into the background. <br /> <br />The financial markets react to changes, relative and absolute. Now that the risk situation has nearly normalised, it is only normal that market attention moves on to something else. The market, after all, is the ultimate <a href="http://en.wikipedia.org/wiki/Attention_deficit_hyperactivity_disorder">ADHD child</a>. <br /> <br />Will risk-on/risk-off trades come back into fashion? Probably. There are enough things out there that have just been plastered over. But it is impossible to predict, so we just reserve the right to react when it happens. <br /><br /><b>Another Weidmann </b><br />Quite a spat is building between <a href="http://www.spiegel.de/international/germany/0,1518,819255,00.html#ref=rss?utm_source=twitterfeed&utm_medium=twitter">Bundesbank and ECB</a>. Bundesbank chief Weidmann is intensely critical of ECB’s policy of covering everything and everybody in cheap liquidity. In particular, Weidmann is worried that the cheap liquidity could create a situation where “banks are discouraged from taking action to restructure their balance sheets and strengthen their capital base”. <br /> <br />Since Weidmann can safely be assumed not to be a complete idiot, this statement shows in all its horrifying clarity how much Bundesbank ideology is isolating the institution from seeing what is going on in the real world. <br /> <br />ECB is trying to counter the strongly negative effects on economic growth coming from thedisastros demands that the banks strengthen their capital base right at the point where German-driven budget cuts bite the hardest. With such friends in Bundesbank, the European economy will certainly not need enemies anytime soon.</div>Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0tag:blogger.com,1999:blog-5809479018897820779.post-81827116277483216102012-02-29T15:10:00.001+01:002012-02-29T15:10:25.029+01:00ECB's new LTRO continues the reflation wave<div dir="ltr" style="text-align: left;" trbidi="on">
<br />The European banks decided to borrow 529 bn Euros from the ECB at 1% in three years. Not quite what I had expected (600 bn), But more than last time (489 bn). Good enough. <br /><br /> Looking at the euro-zone money supply data shows that these loans are not channelled into lending to companies or individuals outside the banking sector. In other words, the money is either placed on deposit in the (central) bank, used to buy risk-free assets (government bonds, pfff!) or loaned out to other companies in the financial sector, who then invest in securities. <br /> <br />Aggregating the ECB's lending activities with QE programs in Britain and Japan and the recent relaxation of the Chinese reserve requirements, the world's central banks - minus the U.S. Fed – have added up to EUR 2200 bn to the international banking system, much of it in 2012. The U.S. QE programme amounted to USD 2360 bn, about EUR 1750 bn. While the U.S. has stopped further supply, there is no sign that the other central banks are about to stop their programs, and today's ECB loans were another big step in that direction. <br /> <br />I find it interesting that this topic has largely been ignored by the headlines, while the US equivalent program received a lot of attention. But there is no doubt that the monetary stance remains highly accommodative, and thus strongly supportive of financial assets of any kind. <br /> <br />Some fear it will lead to inflation tomorrow. That will not happen. Especially not as long as the world has a huge overcapacity.</div>Kim Asger Olsenhttp://www.blogger.com/profile/05487430418512979958noreply@blogger.com0