G-8 says Greece should stay

The article of the day. Link: Uh huh - but what if it's too L-8. 


Mr. Obama is supporting Mr. Hollande in his pro-growth policies. And poor Angela M is finding herself the last austerity stalwart/bulwark/any-other-misunderstood-nouns. 


My question: should Obama really be dishing out the economic advice? Yes - things look to be improving in America on the face of it - but that's all eye-shadow and lip gloss. Underneath the "base" and "foundation" is an acne crisis that is desperately in need of roacutane. And the "base" and "foundation" are just making it worse. 


On the other hand, there is the Eurozone. Which is depressed and has clearly lost its Maybelline contract. Sure - it's ugly. But halfway through the treatment is no time to stop!


Grit teeth. Power through. Beauty is pain.


Economic surgery can't be superficial if it's to look good in the long term.

Daily News Roundup 2012: Thursday 17 May

Good morning

The headlines:

1. The Democrat Senate rejects five different budget plans. Link: WHAT is going on? It seems that the Republicans used some obscure rule to force the Senate to rule on all their proposed budgets (in a single day?) -  as an attempt to embarrass the Democrats for failing to organise a budget for the biggest economy in the world. Democratic fail. There's the usual mud-tossing about the Democrats just shooting holes in suggested plans, whilst failing to come up with a plan of their own. Frankly - I found the "shooting holes" metaphor a bit of a cheap shot (pun intended) at the pro-gun control Democrats. The Democrats slung back with "the Republicans seem to have developed amnesia". Entertainingly - only one budget plan looked at all like Obama's original budget suggestion; and that plan was rejected 0-99 (ie. UNANIMOUSLY). So it seems that unanimous bipartisan agreement is something Washington is capable of - all it needs is Barack's seal of approval to seal the Senate's complete disapproval. Muchos gracias at Florida Senator Marco Rubia for highlighting that.
2. JPMorgan's shareholders sue over the $2 billion loss. They've sued both the bank and Jamie D in separate lawsuits. You see - when you say things like "this trading situation is, like, so totally just a little teapot tempest," and it turns out that the tempest is a 2 BILLION DOLLAR LOSS - there are traders out there who are going to cruise out of Arizona on a highway train right to the door of your Manhattan apartment in search of blood and compensation and mostly the second one. Which is fine - except exacerbating the bank's loss seems a little pointless. And going after Dimon - well hasn't he punished himself enough by saying all those lowly deprecating things on TV in one of the wordiest displays of mea culpa the finance world has ever seen? Link: So then: to what end? 
3. Merkel and Hollande (Merkellande? Horkel?) say that they will concede Greek growth measures if the Greeks stick with austerity. Actually - I lied. What Horkel said was that they would "consider" some measures if everygreek toed the austerity line. On a side-note - apparently the Horkel meeting was delayed because Hollande's plane was struck by lightening mid-air?! Sweet Zeus! I would put money on the fact that there is a Greek contingent claiming God's smiting retribution. Yes... But you know that Hollande is the Socialist one promoting growth? Conclusion: the divine order and/or the weather wants Europe to get austere. So enough of this Greek carrot business... Link: The German/Hollande Carrot = Europe's Garrote?
4. Days after increasing the price, Facebook is now increasing the volume of shares to be sold by 25%. Link: Thanks to Goldman and Accel. Yes - Goldman has now doubled the number of shares it's offering, and Accel has increased its share offering by 28%. Potential investors should be VERY CONCERNED. Mainly because if the big boys are selling more, the best explanation is: the price is far too high. Oh, of course, there are some investors saying that it's because the demand is high - which makes NO sense - if Accel and Goldman thought that the price was too low "but the demand is high", that's hardly encouragement for them to throw more shares onto the roadshow. Honestly. 
5. Greece plans for new election on June 17. Link: Now framed as the Euro Referendum. 
6. ECB won't change its policy stance. At least, it has no intention of increasing monetary stimulus. Draghi has said that it would be better if Greece stayed in the euro, but the ECB won't "compromise on its principles" to prevent an exit. Link: Draghi is a drag.
7. Romney attacks Obama for not fixing Bush's mess. Or, rather, he told Obama off for saying that he would fix it, and then not fixing it. Link: Overgrown Bush left uncleared - Obama is a bad gardener; Romney is a racist. But jokes aside, I think that the trouble is that Republicans have some sensible economic policies, and then get stupid about things like sorting the tax system. And the Democrats have some sensible economic policies, and then get stupid about things like cutting federal spending. Umm - do both.
8. Treasuries fall before TIPS sale. Link: When Yields go Negative. Currently everyone is rushing to safety - and they're willing to pay for it. That's a negative yield: I'll PAY to keep my money is US treasuries - mainly the ones that are Inflation-Protected (the IP part of TIPS - the T and S being "treasury" and "securities" respectively). However, there is now concern that the rates are too low, and this will curb demand at next week's Treasuries auction (when the US sells/rolls more debt). By this time next week, who knows what Greece will have done? I'm sure that there will be no lack of demand.
9. Zeti says Greek Euro Exit consequences will be "unimaginable". Agreed - but... Link: Who is this Zeti person? She's Malaysia's Central Bank governor. Sometimes - I read Bloomberg's headlines, and I wonder if this really really qualifies as a headline?
10. Coffee drinkers live longer. Link: The I-Told-You-So Dance.

That's all for now.

Have a good day.

Daily News Roundup 2012: Tuesday 8 May

Good morning

The headlines:

1. Consumer credit in the US is growing. Consumer credit "surged" in March: its largest monthly movement in a decade. The increase came mostly from new car and student loans (but the indicator released by the Fed doesn't track home mortgages - so where else is the increase going to come from?). Some analysts ascribe the increase to good Spring weather. Some think that the student loan surge is ahead of an expected rates increase in July. Some say that the increase is due to poor job markets sending people back to school. Obama is trying to persuade Congress to freeze the interest rate on student loans - because Middle-Class Americans should get to go to college. To me, it sounds like fudging the issue. If the educated are returning to education for the lack of anything better to do, then subsidized student loans are just social welfare spend. Some would argue that education is productive spend. I would argue that Doctorates in Interpretive Dance and/or Renaissance French Literature are not. What are they studying? Link: Spend spend spend.
2. Hollande (France) vows to choose growth over austerity. This guy is a clown: I'm all for alternatives to austerity; but I think that in Europe's case, they've forgotten the ravages of hyperinflation in the 1940s. Monetary stimulus is not the answer - it continues the illusion that people can indefinitely spend more than they can ever realistically pay back. The real hope for the Eurozone is that the Socialists will lose the parliamentary elections (in five weeks time), and Hollande will then have an opposition cabinet to deal with. One determined to make him lose face. In fact, that's not only the answer, it's a better solution to Sarkozy in power: a pro-austerity cabinet with a Socialist President to be the fall guy. It's the Capitalist sex dream (just without Carla Bruni). Link: The French Jester. 
3. Chancellor Merkel rejects stimulus as the plan for growth. The Germans have not forgotten the hyperinflation of the 1940s. Nor, I'm sure, the one from the 1920s. She's prepared to talk about "business-friendly changes" - like, what, lower licence fees? Not sure what those are - but her point is a favourite. "Growth is important, that's not the issue: the question is whether we want growth driven by debt-finances programs or sustainable growth elements oriented toward a country's strengths". Dear Angela: you sound Austrian. The Austrian Economic School will sing your praises even if you fail. Link: Germany unimpressed by Hollande (France). 
4. Christine Lagarde advocates a middle ground. There's always someone advocating the middle ground. But her middle ground sounds a lot like Angela's position. I enjoyed her euphemistic description of austerity as "fiscal adjustment". Because that's what it is: adjusting fiscal policy into something sustainable, rather than adjusting fiscal policy for voters into something that resembles the original problem-causing pattern. Link: Yes, mom. 
5. Samaras fails to form Greek Government. No one is surprised. The mandate now goes to Syriza, the radical left coalition that came second, to try form a government. When they fail, it will go back to Pasok. And when they fail, the country will go back to the polls. Link: More Greek elections to follow?
6. Google found guilty of infringing Oracle's Java copyright. There are nine lines of code out of 15 million that have been identified as the issue (by the jury). The rest are now excluded. The question facing the courts now is whether this was "fair use" by Google, if the use has caused a meaningful loss to Oracle, and to what extent. Oracle sought $1billion in damages. The 9 lines out of the 15 million disputed makes for $150 000 (apparently). Not the hoped-for payoff then... Link: My phone for 9 lines of code.
7. Liquidator adds Madoff's sons' wives to lawsuit list. Link: Challenging the traditional sanctity of marriage. 
8. Nobel Prizewinner says that South Africa should manage its Exchange Rate. Joseph Stiglitz suggests that the problem that South Africa faces is unemployment, and that this is exacerbated by appreciation of the rand. Therefore, be China about it. However, historical attempts to manage the exchange rate and target inflation by managing interest rates have proven somewhat flawed. I am cast back into first year macroeconomics where exchange rates, interest rates and inflation rates were the unholy triumvirate where you can control one or two concurrently, but to handle three is courting disaster. Why? Because there is speculator capital out there - and it likes arbitrage created by mismatches between the three. Link: This debate feels like an old one.

That's all for now.

Have a good day.

Daily News Roundup 2012: Monday 7 May

Good morning

The headlines:

1. Sarkozy is no longer: enter Hollande and the French Socialists. So the Socialists have won, and Hollande rides into French Presidential power on the back of "No to austerity", "I'm not Sarkozy" and "No more presidential bling-bling". Actually - that's not entirely accurate. The parliamentary elections still need to take place - so Sarkozy could still wield power from the back. But that seems like a long shot. So what does it mean? Well it means that the Merkozy alliance is now a party of one; although the Germans have said that they will allow Hollande a chance to "save face". Which I find ambiguous - does that mean that he can continue to advocate growth in public as long as he supports Merkel in private and the Germans will keep it hush-hush; or does it mean that they'll let him keep his stance on growth and Germany'll ignore it? On an internal front - Hollande proposes tax increases, including a 75% levy on incomes higher than 1 million euros! If my tax rate suddenly leapt to 75%: I'm sorry man, but that would make the French Government a daylight robber and tax evasion my lifestyle choice. Farewell to tax revenues, hello to more government borrowing. I think that we should probably brace ourselves for a French debacle a la Greece. Link: Farewell Sarkozy.
2. Buffett announces that he abandoned a $22 billion deal. Berkshire-Hathaway has been sitting on a cash pile of some many billions of dollars. More than $22 billion, but not enough to make a payment of $22 billion and keep the standard historical cash pile of $20 billion (for short-term liquidity purchases). Buying would have meant selling something else, so WB passed. I think that the real question is: who was the target? Link: Buffett stands by his securities.
3. The Greeks vote anti-austerity. With the votes partially counted, the election results look like a giant tossed village salad with too much cheese and not enough lettuce-agree. First-pro-austerity-then-not-(now-who-knows) New Democracy looks to come first with around 19% of the vote. Very-much-anti-bailout Syriza are coming second. Pro-bailout Pasok are coming third. This means that New Democracy leader Antonis Samaras has primary responsibility for forming a coalition government, and he says that he'd like to build it based on two pillars: "staying in the euro" and "changing the economic policies of the bailout". I believe that those two pillars belong to two very different buildings. What happens next? Well how do you continue spending whilst continuing to be in the Euro? You need a new currency. Does that mean abandoning the euro? Not necessarily. Let's say that the Greek Government starts paying its employees with IOU notes (like cash cheques of some kind). The state employees will then have to use those IOUs to pay for things. The market will then decide how much those IOUs are worth in relation to euros. And voila - new currency. Which can then happily inflate as the government continues to issue them. And Merkel will tear her well-coiffed hair out. Better that, however, than the Golden Dawn party: who want to lay land-mines across Greece's borders to prevent illegal immigrants from entering. Who ARE these people? Link: The Greek Split.
4. The EU will be flexible in applying budget rules. Yes - I think they have to be. Particularly when most of its key members are not meeting those rules. Link: Enforcement ain't easy.
5. Facebook gets its first "buy" rating after setting its price range. Which amazes me. The implied valuation at the top-end of the price range ($96 billion) would mean that the market is valuing Facebook at almost 100 times its earnings ($972 million for the 12 months ended March 31). Madness. That implies a growth rate virtually equivalent to a required rate of return. So hypothetically, let's say that I want a return on my investment similar to the return that Google has generated since its listing (about 38% compounded annually). That implies a long-term growth rate assumption (into infinity) of 37%!! Madness. Link: Who are these people?
6. Citigroup says that a ratings cut would require it to come up with $4.7 billion in cash. If rated down by two-steps by all three ratings agencies, that is. The money would have to be used to meet derivative requirements and margin calls. If just Moody's makes the call, that would require raising $1.1 billion (so Citigroup says). Moody's announced that it is reviewing the credit ratings of the banks, and indicated that it is considering a two-level ratings cut of Citi. Link: The Awkward Moment.

And that's all for now.

Have a good day.

Daily News Roundup 2012: Friday 4 May

Good morning

The headlines:

1. After all the excitement of the last few days, Mario Draghi says nothing about further stimulus in the Eurozone. The official position of those expecting stimulus is "saying nothing means that he's leaving the option open". The argument about austerity is now a boring one: austerity kills growth and therefore the ECB should stimulate in order to create growth. Blah. This is the Paul Krugman argument. What's wrong with it? Well for example, while it's possible that Greece's economic growth could get to a point where it could cover its fiscal deficit, is it probable? It's all well and good to say that austerity won't work. But then, the problem is they're spending more than they can ever hope to make. So growth won't work either, except as a temporary solution. The only permanent solution is a cultural paradigm shift in a more German-frugality direction. What causes cultural paradigm shifts? Cultural shocks. Like austerity. Link: Draghi "leaves the door open".
2. Paul Krugman "wishes he were wrong" about the EU Austerity Backlash. Bollocks. Paul Krugman is well smug that he was right about the Europeans backlashing against austerity. But as for the people calling him a "genius" - at them I raise a skeptical eye-brow. Did anyone expect the freshly austere european nations to be happy about it? Or for things to get better before they get worse? We must be serious. That said, I see his point about austerity being self-defeating - because the economic downturn heightens the depression and could lead to increased debt levels anyway. However, while it's fine to say that the multiplier effect of decreased government spending magnifies as it hits the economy; the question to be asked is - what impact does lower output have on a government that uses debt financing as an alternative to revenue collection? Not too much. The underlying problem is cultural, and "economic growth" was the banner under which the problem began. I honestly believe that austerity has a much better chance of changing that mindset than more of the same. Link: But does that really make him a genius?
3. Gold Standards - is returning to them crazy? The mainstream economists think so. But my money (literally) is on America having to return to it. After all - clearly the current system isn't working. Link: The Fringe Economists.
4. Facebook backers plan to sell $5.5 billion in stock. When the initial investors on the inside (Goldman Sachs and Accel Partners) elect to sell enough of their stock to become two of the largest sellers in the IPO, people begin to wonder why they're so keen to get out. Link: The Insiders are getting out.

That's all for now.

Have a good day.

Daily News Roundup 2012: Monday 30 April

Good morning

The headlines:

1. Hedge funds are betting against the Eurozone. There is a core group of hedge fund managers (including John Paulson - who keeps being mentioned in books written by Michael Lewis) that has been rejoicing in the Long Term Refinancing Operations of the ECB. The theory is that German bonds are underpriced (their yields are near zero). Why? Well if you continue to look at Germany as a separate economy, then it makes sense to buy their bonds compared to other countries in the Eurozone. But practically speaking, the Eurozone is a collective economy, and the German bonds should be pricing in the risk of a default from, say, Spain. Germany would probably step in to help with a bailout, which would significantly alter its risk profile. What happens in that scenario? The price of bonds drop, and yields go up. And the other side of the equation is credit-default swaps. Because the current yields on the German bonds are so low, credit-default swaps are cheap (around 86 basis points per annum - or 86 cents for every $100 of protection). And as the yield goes up, so does the price of credit-default protection. If the German CDS spreads go back to their December 2010 levels of 121 basis points, that's a gain of almost 50% for current holders of default protection. It's not insuring against the risk of default so much as betting on the change of default risk relative to the other members of the Eurozone. Link: Hedge funds support Hollande.
2. Facebook snubs Wall Street. At least, that's what Wall Street is saying. The reasons? Well, Marky Mark doesn't want to go to the roadshow, which I believe makes the Wall Streeters feel like they're not wanted enough. Facebook is also maintaining control over the allocation of shares - and it's rumoured that they're going to screen the applicants for weed out the short-term individual investors in favour of long-term institutional ones. It mostly wrote its own exchange filing, thereby depriving first year analysts of weeks of review and amendment and change of font. I reckon that there's a lot of reference to Fecesbook in internal mails between bankers... Link: Mr Zuckerberg ignores the rules.
3. Clinton and Geithner are still going to visit China, despite reports that the US is sheltering a Chinese activist. Legal Activist Chen Guangcheng escaped house arrest in Shandong and fled to the US embassy in Beijing. Has anyone else noticed the string of chinese "defectors" fleeing to US embassies in China? If I was into conspiracy theories, I would say that those Sino-US relations are under attack. Link: Annual US-China talks to continue.
4. China invests in South Sudan. The $8 billion loans will be used over the next two years for infrastructure improvement. However, it looks like one of the requirements is that the construction companies used be Chinese. Which looks a lot like China lending money to South Sudan to pay China. And then South Sudan will repay the original loan to China, plus interest (in whatever form the interest will take). China will no doubt get some more pre-emptive rights to oil. The deal sounds sweet! Link: South Sudan's $8 billion loan.
5. Australian Billionaire to build the Titanic II. But I don't understand why? How expensive is it to maintain ocean liners - and is there really a grand demand to travel by boat? Link: Titanic Reloaded.
6. Syria continues to fall apart. There's not much more to be said really. Link: Syrian Peace Plan not working.
7. Lakshmi Mittal is not giving up on India. Link: "The India Story is not over".
8. Malawi is to devalue its kwacha to meet IMF Aid Requirements. The devaluation by 40% will allow Malawi access to IMF aid. The World Bank may help by offering grants to help cushion the impact of a sudden devaluation (presumably the grant can be used to subsidize imports, thereby slowing the cost-push inflationary impact?).  Link: Banda to devalue kwacha by 40%.

That's all for now!

Have a good day.

Daily News Roundup 2012: Tuesday 24 April

Good morning

The headlines:

1. To make an observation about a general trend, the peoples of Europe are making their opposition to austerity measures known. France has just delivered a defeat to Sarkozy in favour of Hollande (the observation that keeps being made is how Sarkozy is the first incumbent to not come first in a primary election ever); the Dutch government is falling apart, and the current PM, Mr Rutte, has just delivered the news to Queen Beatrix that she should dissolve parliament to make way for new elections; Silvio Berlusconi got thrown out of the Italian party-party; Papandreou got tossed by the Greeks, who seem to be in the mood to toss everyone else. Multiple governments have fallen. On the other hand, not Ms Merkel, who is championing the austerity cause. Of course, German austerity is a cultural cliche, so maybe it just comes natural. But sometimes I wonder if it's not a question of alternatives. Germans have a long memory, and inflation scarred deeply after both World Wars. Austerity may not lead to economic growth, but it certainly prevents the ravages of inflation. It sounds a lot like weight-control. This German obsession with crash-dieting, or this Euro-popular obsession with strong laxatives: well, it all just leads to unattractiveness and needing to be hospitalised. The key is a solid diet plan, some exercise and plenty of roughage for regular bowel movements. Link: European Austerity Backlash. 
2. Facebook has elected to list on the NASDAQ rather than the New York Stock Exchange. What difference does this make? Well, for those who may not be aware of it, the NASDAQ and the Dow Jones actually follow different exchange models. If I remember correctly, the NASDAQ operates through a system of market-makers ie. a buyer will not interact directly with a seller, but from a market-maker. The market-maker therefore acts as a go-between, and because of their placement at the center of the trade, negotiate better prices on both sides, and limit the bid-ask spread. The Dow J operates on an auction system, where buyers bid for the stock directly from sellers. Why this decision from Facebook? Part of me wants to say: because NASDAQ was the first stock exchange to start trading online... Link: Facebook to list on NASDAQ.
3. In other Facebook news, the company is spending some listing money in advance on AOL patents. From what I can tell, there has been a bit of an auction war ongoing for AOL patents - between Microsoft and Facebook. And yet, they both want different sets of patents from the same collection being sold. So Microsoft bought them, licenced them, and is now selling Facebook the licences to use the ones it wants. Facebook is said to be paying $550 million for the licences. I realise that I've been a bit harsh in the past about Facebook's reasons for listing - but I suppose that in the land of the virtual space, the holder of intellectual property is king. Maybe this is what they need all the IPO money for. Link: Facebook buys rights to intellectual property.
4. Murray and Roberts, South Africa's second largest construction company, has announced that its rights offer was three times oversubscribed. For those who don't know, there is often a dirty smell attached to rights offers: they're seen as signs of a company in distress. Which makes sense: if you need capital, going back to the original owners and asking for more money does smack of desperation. M&R are indeed struggling - they posted losses last year, and say that they're suffering from a slow-down in construction. It's true - South Africa may be slowing down - but then why aren't they participating in the infrastructure boom that seems to be gripping the rest of Africa? Maybe I've missed something - which is probably why the rights issue was so oversubscribed. Link:  Murray and Roberts have oversubscribed rights issue.
5. And the African Business News in brief. Link: ABN Briefs. The highlights:
• Chinese demand for West African crude is set to rise by 16% in May.
• Somaliland, the breakaway secessionist state from Somalia, has instituted a new law to formally create a Central Bank. Somaliland has not been recognized as an independent state internationally. But then, neither has Palestine.
• Meyer Kahn is stepping down as Executive Chairman of SAB Miller in July. The eventual successor is Alan Clark, but Graham Mackay will take over for an interim year-long period. 

That's all for now.

Have a good day.

Daily News Roundup 2012: Thursday 5 April

Good morning

The headlines:

1. In Eurozone news, the pressure is properly hyping around Spain. This after the near-tragedy of Spain's debt auction yesterday. Spain sold 2.59 billion euros worth of bonds in the auction - which was just above the minimum amount that it had planned, but well below the maximum of 3.5 billion. At the same time, average bond yields have increased by almost 100 basis points since last month's sale (on 5 year benchmark bonds). What does all this mean? Well I often hear the non-finance friends (and some of the finance-type friends as well, if I'm honest), shaking their heads at these governments taking on more debt. And I remind them that they are likely not taking on more debt so much as "rolling" old debt. And by that, I mean that loans have time limits. As those time limits fall due, you can either repay the loan, or take out a new loan to repay the old one: leaving your debt position unchanged. Unfortunately, if investors are worried about the fiscal deficit that you have going (government spending more than it generates in revenue), and especially about your shooting past the EU fiscal deficit ceiling of 3%; well then they're not going to want to buy your bonds. Unless they're cheap. And in bond terms, "cheap" means that your bond is offering a higher yield than a similar one (just one of better credit quality). Hence the rise in yields. But as it gets more expensive to borrow, it means that you need to borrow more in order to repay your old loans, cover you fiscal deficit, AND cover the new higher interest cost. Cue: vicious cycle. And now, some of the local administrations in Spain have been shut out of capital markets, and therefore prevented from refinancing their debts. This means that the government has to carry them - and then, more pressure. Ay ay ay. Link: Rajoy says Spain in "extreme difficulty".
2. Almost immediately after the news above, Mario Draghi (European Central Bank president) said that talks of the ECB withdrawing its support from the euro-area banks are "premature". Draghi is under pressure to "exit" (ie. withdraw the ECB support), as the 30% increase in the ECB's asset base (ie. the credit it has extended - which becomes an asset to the ECB as it is now owed the money back) is threatening to cause inflation in the Eurozone above the 2% target for the region. Link: Draghi: No ECB exit.
3. In more fun news, there is some JP Morgan scandal around dealmaker Ian Hannam (JPM's Global Chairman of Equity Capital Markets), who resigned on Tuesday after being fined by UK regulators for trading on inside-information. I'd make some comments, but there is an awesome blogpost by my new favourite blogger Matt Levine on the topic. He actually uses the phrase "unspeakably awesome". I am in awe. Link to ML's post: A Word by the unspeakably awesome Matt Levine. And here's the Bloomberg Link: Hannam in the Eye of the FSA Storm.
4. Gold traders are apparently bearish for the first time in 2012. This is after the Fed dampened hopes of more stimulus measures (means less flocking to buy gold in panic), and jewellers in India (the world's biggest bullion market) go on shut-down strike to protest a new tax. According to the Bombay Bullion Association, Indian imports of gold have plunged by 81% in March as Indian jewellers remained shut for their 19th day. Indian jewellers apparently sell more gold than the Australian and US mines combined can produce in a year (and Australia and the US are the largest gold producers after China, apparently). The tax under protest is a 1% excise dute on non-branded gold ornaments. Crazy. However - the Austrian Economists will tell you that the real use of gold is as a store of value, so the decorative side is less relevant. On the other hand, Indian weddings. Link: Gold Traders Bearing up under Pressure.
5. And the African Business News in brief. Link: ABN Briefs. The highlights:
• The Zimbabwean Government is looking into complaints from the Mining Industry that new mining taxes will take 60% of every dollar the mines make. Generally, the Zimbabwean Government seems to react against complaint, rather than in favour of it. The dice are spinning.
• Kenya held its key lending rate constant at 18%.
• South Africa's Department of Energy "to review the mechanism used to set the country's fuel prices".

That's all for now.

Have a good day.

Leaving the Euro: Such a Cost

At the time that I'm writing this, the Greek Government is split over the bailout package requirements, and Evangelos Venizelos (the finance minister) is trying desperately to appease the Troika (the European Commission, the ECB and the IMF) whilst still asking for more time.

But the Troika is irritated. Time is running out. And various people in varying positions of authority are beginning to say menacing things like "the Euro can survive without them". Oi vey. When it stops being "our" problem, and it becomes all about "those guys", it really begins to sound like the unity is gone.

Which is only a step away from saying that they should bugger off.

So, the question that we should be asking is: why has Greece not left already? 

The answer, quite simply, is that it will be cheaper for them to stay. According to Chancellor Merkel, the cost of Greece leaving the Euro would be "incalculable". That is literally true - there are too many variables at play. But UBS analysts have come up with an economic estimate: when there are many variables at play, analysts just come up with a range.

So, to that end, I'm going to summarise the economic costs that will likely arise should Greece leave the Euro (horribly plagiarised from the UBS report - although I suppose that it's not really plagiarism once I acknowledge that fact). If you're interested in reading the full UBS report, the link is here.

To begin, I need to point out that there is no legal option for Greece to leave the European Monetary Union (EMU). There is no clause for it in any of the treaties - precisely to discourage any one country from leaving the EMU.

There is also no clause in the treaties that would permit the expulsion of Greece from the EMU. The only legal option for expulsion is an amendment to the Maastricht Treaty. In order for the treaty to be amended, there would have to be unanimous consent from all 27 countries, including the country being expelled. And even were Greece to agree to its own expulsion, many of the countries are required to take the amendment back to their people for referenda to take place. So extremely unlikely then within the necessary time-frame.

Which means that the only option available for Greece is secession. According to the UBS report (and common sense), this will come with five core economic costs:

1. Default on Domestic Debt
2. Collapse of the Domestic Banking System
3. Departure from the EU
4. Trade, Tariffs and Protectionism
5. Civil Disorder

Default on Domestic Debt

Once Greece leaves the Euro, it will need to adopt a new currency (let's assume it goes back to the drachma). The next obvious question is: will the sovereign debt (currently denominated in Euro) be converted into drachmas or remain denominated in Euro? 

If the bonds are re-denominated into drachmas, that would constitute a default. Remaining euro-denominated would mean that the debt would have to be paid using Euros earned through trade flows - which are not going to be sufficient. I mean - they're not sufficient now, and if you consider point 4 below, it makes it even less likely. Default on Euro-denominated debt is therefore virtually certain. 

That said, even if Greece stays in the EMU, default is virtually certain.

The costly part of secession would be corporate default. If the government changes back to the drachma, the private sector will no doubt be forced back as well - which means that they will default in the same way. Even if not forced, the private sector would still be earning in drachmas, trying to pay off euro-denominated debt. And given the monetary and fiscal stress that Greece is experiencing, the drachma would immediately, and drastically, devalue against the Euro. Ergo: corporate default.

Corporate default = bankruptcy proceedings.

Bankruptcy proceedings = many firings and domino effects (as one company goes, so this puts strain on its creditors, who may also go bankrupt, and so the cycle continues).

Collapse of the Domestic Banking System

In order for the drachma to function, domestic bank deposits would have to be re-denominated into drachmas. As the UBS analysts point out - there are a range of questions that arise here. Would the only accounts affected be euro-denominated? Would it only apply to bank accounts belonging to Greek residents? And foreign branches of Greek banks?

But in any case, long before the denomination takes places, there would be bank runs. Any account-holder would be foolish not to withdraw their full funds in Euro-cash immediately - and either place it into a foreign bank account, or hide it in a mattress. Could the bank runs be curbed? Possibly - by imposing withdrawal limits during the transition, or by making the re-denomination a shock event (ie. a re-denomination without warning). But the former runs the risk of civil unrest, and the latter is practicably impossible. At the very least, bank officials in-the-know would seek to self-preserve - and in doing so, their actions would become a warning.

Also at a regional level, given the ease with which the suspicion of secession can initiate bank runs, the collapse of the Greek banking system is quickest way for contagion to spread to its European neighbours.

Departure from the EU

This almost goes without saying - to secede from the EMU is to secede from the EU. The UBS report does not attempt to quantify this cost - which makes me think that it is more qualitative. Obviously, there are trade repercussions, which will be dealt with below. But in my mind, the biggest implication here, apart from trade, is that Greece would lose access to EU financial assistance.

Trades, Tariffs and Protectionism

Given point 1, the secession would make Greece reliant on its trade flows for self-financing. But secession would also leave it without a trade agreement with Europe - which encompasses most of its trading partners.

At the same time, the devaluation of the drachma may give a temporary competitive advantage - but the European Commission has specifically stated that it would "compensate" for any movement in the new currency. This could be accomplished by a trade tariff being imposed on Greece equal to the advantage created by the devaluation.

So trade would likely collapse.

Civil Unrest

The risk of civil unrest would already be high during the transition with the panic and tension of a banking sector collapse. In fact, civil unrest seems to be a real risk at the moment. If the Greeks lose access to their bank accounts, that may well be the final straw.

But also, immediately after the transition, I would think that Greece would begin the process of monetizing its debts. The Government would still need to fund its current expenditure. And given the default, and the state of the taxation system, the easiest and most immediate source of financing would be money creation. It is highly unlikely that the Greek people would take this calmly.

Political Cost

Then there is the political cost, which cannot be quantified. With secession and fragmentation, Europe would lose her voice on the international stage.

In Conclusion

Without considering the impact of civil unrest and the political cost, the UBS analysts conservatively estimate that Greece withdrawing from the Euro will cost her citizens between €9,500 and €11,500 per person in the first year, and between €3,000 and €4,000 per person in subsequent years. In contrast, the cost of bailing out Greece, Italy and Portugal altogether, assuming a 50% haircut on debtors, would cost the German population "little over €1,000 per person, in a single hit".

So Greece.

She must stay.

Daily News Roundup 2012: Wednesday 1 February

So, the news that I'm reading:

The Eurozone Debt Crisis

• Greece one step away from Debt Deal (Associated Press via CNBC) link: http://www.cnbc.com/id/46205601 
• Europe's Central Bank can't fix "dysfunctional" EU (CNBC) link: http://www.cnbc.com/id/46205597
• What happens if Greece defaults? (CNBC) Link: http://www.cnbc.com/id/43425042?slide=1 Slide 11 is frankly unnecessary. 
• Portugal Pressures ECB to Halt Contagion (Bloomberg) Link: http://www.bloomberg.com/news/2012-01-31/portugal-as-greece-pressures-ecb-to-halt-contagion-prompting-nascent-bulls.html

The key points:

1. Everything mostly continues unchanged. Greece is still close to a deal, but not there yet.
2. The Greek deal will not be enough to make her debt sustainable. Even if there is a 70% haircut.
3. Germany is still irritated.
4. France is still telling everyone that they'll only ratify the new Fiscal Treaty after elections (ie. once Sarkozy has been replaced - that seems to be the general idea...)
5. Journalists still keep writing misleading headlines like "Greek Debt talks continue as EU signs new treaty". From what I can tell, that treaty is still unsigned and unratified. The best we can talk about is general agreement to agree.
6. Portugal is the new Greece. 
7. People (important ones) think that the EU is dysfunctional: the Southern countries (and, for some reason, Ireland) have one code of fiscal discipline (debatable use of the word "discipline") where the Northern countries have another (less debatable use). No big surprises there.
8. I found an interesting slide show on CNBC: "What happens if Greece defaults?". Although I felt that Slide 11 was frankly unnecessary. Link:  http://www.cnbc.com/id/43425042?slide=1 

The Golden Cross

• Stocks form "Golden Cross" (CNBC) link: http://www.cnbc.com/id/46203721 When the 50-day moving average crosses the 200-day moving average - considered a bullish signal. Issue with technical chartists.

The key point:

1. The Golden Cross is a trend observed by technical chartists: when the 50-day moving average crosses above the 200-day moving average. It's considered to be a bullish signal, mainly because it means that the average share price (that's more or less what an index is) over the last 50 days is now higher than the average over the last 200 days. Higher short-term averages over long-term averages sounds like the markets are picking up.
2. I'm just not sure why everyone is so excited. Generally speaking, technical chartists are dismissed as not having predictive power. 
3. It's interesting that the markets seems to be recovering, but the technical chartists then take it a step further and say that we can now reasonably expect a bullish market (an 81% chance) because that's what has happened historically.
4. Many academics consider this an incorrect assumption for a number of reasons (including a number of quantitative academic studies). But mostly, in my mind, the problem is the oranges and apples story. There is a mismatch between the underlyings: the historic data was generated in a period that had definitively different economic characteristics to today's. We are not the same fruit anymore.

The Republican Nomination

• Mitt Romney wins Florida Primary (Associated Press via CNBC) link: http://www.cnbc.com/id/46212222

I'll admit that I don't really understand the nomination process. Everyone runs around collecting delegates in various states, all in the lead-up to a convention. Anyway - I read it because I like the word "caucuses" - and I'm interested to see if the Republicans will nominate a candidate with a name like Newt Gingrich. He sounds like a character out of Harry Potter. But I suppose it worked for the Democrats with Obama. 

If politics had technical chartists, they would be predicting Newt Gingrich for the win on that basis alone.

Sorry - that was a bit mean. 

The US Housing Market Saga

• Treasury Investigates Freddie Mac Investment (The New York Times via CNBC) link: http://www.cnbc.com/id/46201587 Freddie Mac is a mortgage giant. Pressure from the Obama administration to forgive some of the principal for mortgage-holders whose principal exceeds the value of the underlying house (election year) - ease refinancing, and participate in debt forgiveness programs. Under investigation for investing in "inverse floaters" in 2010 - effectively giving them exposure to the interest component of mortgages. At the same time, Freddie Mac has barriers in place to prevent refinancing. 
• Foreclosures draw Private Equity as US sells homes (Bloomberg) Link: http://www.bloomberg.com/news/2012-01-31/foreclosures-draw-private-equity-as-u-s-selling-200-000-homes-mortgages.html

The key points:

1. Firstly, this is hugely interesting. I'm going to have to write a series of posts on the US Housing Market because it's both fascinating and important on a number of levels (it did, after all, trigger a crisis).
2. The Freddie Mac (the Federal Home Loan Mortgage Corporation) is a US government-sponsored enterprise that is intended to expand the credit available to home-owners (the topic of a future post).
3. The Freddie Mac has been under pressure recently from the Obama administration to ease refinancing for mortgage-holders, and participate in debt forgiveness programs. It is, after all, an election year. 
4. The background to this story is that after the housing market crashed, some investors were left with principal amounts to repay that exceeded the value of their properties (to be honest, for many, this was the case before the crash as well). So the Obama administration would like to forgive some of the principal for these home-owners; and also to permit them to refinance the mortgages at the new lower interest rates being pushed by the Treasury. ("Refinancing a mortgage" essentially means that you can take out a new mortgage at the lower rates of interest, and use those proceeds to pay off the old mortgage at the higher rates of interest, with the net effect that you pay less interest).
5. Freddie Mac has been actively resisting both the refinancing and the principal forgiveness - arguing that it does not make economic sense.
6. It turns out, however, that Freddie Mac has been investing in "inverse floaters". Basically, an "inverse floater" is a financial instrument that has higher values when mortgage-holders pay higher rates of interest (ie. when they're not permitted to refinance). 
7. It all smells a little like vested interest.

The US Credit Rating

• S&P warns of cuts; Another US downgrade coming? (CNBC) link: http://www.cnbc.com/id/46202656 

The key points:

1. The issue is health-care costs. As these go up, so the spending pressure increases.
2. The interesting question being raised is whether a US downgrade will make a difference. After all, the dollar was still a safe haven after its downgrade in August 2011. It actually strengthened.
3. According to the economist interviewed in the article, it seems that Ratings Agencies have a very short term view. If you project out any healthcare and pension costs, there should be no AAAs at all.

Dodd-Frank

• Citigroup opposes applying Dodd-Frank to Municipal Bond Market (Bloomberg) Link: http://www.bloomberg.com/news/2012-01-31/citigroup-joins-msrb-to-oppose-applying-dodd-frank-law-to-muni-bond-market.html

The key points:

1. The Dodd-Frank is to the Subprime Crisis what Sarbanes-Oxley was to the Enron crisis.
2. We should all know more about it. 

Other

• CNBC has a special "coverage" section on the Porn Convention 2012. Link: http://www.cnbc.com/id/45292339/

The key points:

1. The Adult Entertainment industry is a $14 billion industry, despite being under threat from piracy and legislation.
2. Like the Tobacco industry, most users repeat.
3. Would you invest in a listed Adult Entertainment conglomerate? Ethically, maybe not. But morals aside? Forgive the pun - but yes, you'd probably want to have a closer look...

Daily News Roundup 2012: Tuesday 31 January

It's important to start something new on the last day of the month. So I've been up for a bit, abused my iPad slightly, and I've decided on a hierarchy of news applications:

1. Bloomberg - obviously. However, Bloomberg is quite technical, and assumes a fair amount of pre-knowledge for anyone interested in doing this on their own.
2. CNBC - what a legendary news station. I recommend this one. All the essential stuff is covered. And it's really well-explained.
3. BBC - I've left out. I think Bloomberg and CNBC had it covered.

The Headlines that caught my eye:

Emerging Markets

• Emerging Markets post Bigger Gains than the US so far (CNBC). link: http://www.cnbc.com/id/46191756
• Starbucks to enter India (Reuters via CNBC) link: http://www.cnbc.com/id/46196917
• Tata Global surges after venture with Starbucks (Bloomberg) link: http://www.bloomberg.com/news/2012-01-31/tata-global-surges-after-venture-with-starbucks.html
• Asia Stocks, Oil Rise on Greek Debt Talks (Bloomberg) link: http://www.bloomberg.com/news/2012-01-31/asian-stocks-oil-rise-on-greek-debt-swap-talks-progress-aussie-advances.html

I'm not sure if it's come through, but I'm an emerging markets fan. The media tends to turn all our focus toward the financial woes of Europe and the United States - and we end up forgetting that there is literally a whole New World of investment opportunity. A New World that seems quite capable of sustaining itself (if it had to) without Europe and the US. For example, the trade flows between China and Africa have grown at record pace; and now, China is the biggest trade partner for most African countries (including South Africa I'm told - although I stand to be corrected).

As the US and Europe struggle, we're seeing Emerging Market funds post higher returns and large multinationals driving their products and franchises into the economies of Asia, Africa and Latin America. The Indian Economy, for example, is expected to generate economic growth of around 6.5% in 2012 - during an expected global recession! The thing to point out (in my mind) is that the debt markets of these economies are relatively unsophisticated - and many of these cultures have historical biases against debt and borrowings. This leaves them relatively-hedged in a financial 'world' that is struggling with its debt.

Europe

• EU Nears Confrontation Over Greek Rescue (Bloomberg) link: http://www.bloomberg.com/news/2012-01-30/eu-nears-confrontation-over-greek-rescue-as-portugal-poses-looming-threat.html
• Most Banks Tightening Credit to Europe - Fed Survey (Reuters via CNBC) link: http://www.cnbc.com/id/46192914
• Greek Bondholders May Face 70% 'Haircut': Source (The Associated Press via CNBC) link: http://www.cnbc.com/id/46191869
• Jim Rogers: No One Leaves the Eurozone This Year (CNBC) link: http://www.cnbc.com/id/46186447

I'm just a big fan of Jim Rogers' attitude: "I would love for them to say that OK it's a disaster and for banks and shareholders to say they'll take big losses. Everything would collapse and I would buy all the euros I could and all the stocks I could, but I don't think that is going to happen." Perhaps he's exaggerating to keep off all the speculators.

The key points:

1. Portugal seems to be heading in the same direction as Greece. Its bond issues have a "junk" status credit-rating, and credit-default swap spreads (that is, the cost of insuring the bond issues) imply around a 70% chance of default.
2. As the headline implies, US banks are withholding credit to their European counterparts.
3. 1 and 2 are strong signs that contagion would take place should Greece default.
4. Greek debt negotiations are still continuing - and the EU is increasingly frustrated by Greece's lack of success, and its failure to implement enough fiscal measures (ie. just not austere enough). Apparently, Germany suggesting a fiscal overseer, which basically would have put Greece under curatorship - but it seems that everyone reacted with shock.
5. The EU summit is set to ratify a new Fiscal Treaty (it was agreed on in December last year - but it still needs to be ratified) which is meant to act as a safeguard against further fiscal problems by imposing penalties on governments whose fiscal deficits exceed set limits (I think I read 3% of GDP).
6. EU leaders appear to be admitting that austerity is not enough to take Europe out of the fiscal crisis. This is quite interesting - as it marks a change in stance for a number of the more conservative countries, Germany being the most prominent. And honestly, it just makes sense: if I was facing bankruptcy, slowing my spending would not be enough. I'd probably have to take on a second job. And maybe sell off some assets. 

America (The United States thereof)

• Why Even 20-somethings Are Worried About Retirement (CNBC) link: http://www.cnbc.com/id/46146242

This was interesting because I think it demonstrates why it's necessary to have some kind of formal finance taught in schools. I think this will be a future blog post. 

• Jim Rogers: I Would Not Buy Facebook (CNBC) link: http://www.cnbc.com/id/46186936

Just because Jim Rogers had a lot to say yesterday. But agreed - buying hot stocks has been shown to be a bad buy. Much better to buy underrated stocks with good fundamentals.

• US Treasury Forcing Mortgage Principal Forgiveness (CNBC) link: http://www.cnbc.com/id/46193915

The reason that the US lost its AAA rating was because of its high fiscal deficit (very bad), as well as its bad asset book (after the subprime crisis, the bailout of the mortgage agencies, banks and insurance companies involved the US government taking on their bad assets). Now there is a plan to write these off (this is an election year, after all). I'm just concerned that decisions made during an election year tend to be short-sighted. But we shall see.

• Blackrock's Doll says Feds' QE3 is unlikely (Bloomberg) link: http://www.bloomberg.com/news/2012-01-31/blackrock-s-doll-says-fed-s-qe3-is-unlikely-in-contrast-to-pimco-s-gross.html

Quantitative Easing is always of interest to me - it comes back to the Inflation post: Quantitative Easing is just another term for monetizing debt. In measured and managed format, a relaxed monetary policy can stimulate an economy. But then a government walks the very fine edge of perception. Interestingly, the US Fed does not release official money supply data. This does make it hard to form expectations of future inflation - I would guess that's part of the reason for not disclosing those figures.

Post-script

• CEOs of Barclays, HSBC may keep bonuses (Bloomberg) link: http://www.bloomberg.com/news/2012-01-31/barclays-s-diamond-hsbc-s-gulliver-may-escape-hester-s-zero-2011-bonus.html

This is just linked to my post from yesterday. I'm sure Mr Hester will be planning a move soon - to a bank that's not state-backed.