Death Star Economics



How the US became the world’s biggest economic threat

The G20 has done it and banned Greece from being the single biggest annoyance threat to the world economy. In its place, just in time for tomorrow’s elections, is the US fiscal cliff. Or in last year’s press jargon, the end of the Bush-era tax cuts paired with a truckload of spending cuts. The US debt ceiling, which has been of concern in virtually every administration, was last lifted in August 2011, and the same might be required come January. read article

Otherwise, people are pulling their hair out about who will win the election and what move to make in either situation. The Wall Street Journal says post-election America will have answers for questions of fiscal policy, taxes and regulation, giving investors a better base for their decisions disregarding who wins. Bloomberg goes even furtherthis glass is more than half full:

No matter who wins the election tomorrow, the economy is on course to enjoy faster growth in the next four years as the headwinds that have held it back turn into tailwinds. Consumers are spending more and saving less after reducing household debt to the lowest since 2003. Home prices are rebounding after falling more than 30 percent from their 2006 highs. And banks are increasing lending after boosting equity capital by more than $300 billion since 2009.

So we’re all set then. Meanwhile, WSJ MarketBeat says that either presidential candidate could fail to address the fiscal policy issues or lead the Fed to stop throwing money at the country. And Bruce Bartlett (no, not President Barlet from the West Wing), former White House economist, says no president can save the US economy.

On the other side of the Atlantic, it has dawned on the ECB that it is giving Spain too much credit, both literally and figuratively. Spanish government debt used as collateral for corporate loans may be overvalued and is thus dangerous for the central bank’s massive balance sheet. Spain’s banks got almost €17bn from the ECB by putting up their government’s treasury bonds as collateral. For corporate loans, this number grows to €80bn. The crux is  the ECB rated Spanish debt as highest-quality collateral. Hmm. The story was first broken by the German newspaper Welt am Sonntagread article

In AustraliaStandard&Poor’s has been found guilty of misleading investors by misrating CPDOs (constant proportion debt obligations: a leveraged bet on the creditworthiness of a small group of companies), which created by Dutch bank ABN Amro’s in 2006. Twelve councils in New South Wales have lost AUD15.3m, which equals 90% of their initial investments.

Also on a regulatory note, HSBC could be fined up to $1.5bn for money laundering. In July, the US Senate initiated an investigation of the bank’s finances as a response to allegation of money laundering for Mexican drug cartels. HSBC announced to have a buffer of $2bn for regulatory expenses in 2012.

So long.


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Globalization, vertical integration and buying commodity firms

Japan is edging towards more QE, as the country’s exports fell most since the earthquake in March 2011. Most of it is attributed to the general performance of the global economy, but also the dispute with China, causing Chinese demand for Japanese goods to fall and factories to close. According to JP Morgan, the dispute will shrink Japan’s Q4 GDP by 0.8%. Besides, the strong yen, makes Japanese goods unattractive for importers. read article

Angela Merkel is getting a taste of her own medicine. She’s having an argument about austerity measures with David Cameron. After Cameron stated that the UK will veto any EU budget proposal that sees spending increases in any shape or form, Merkel, being efficient, sees no point in holding the November budget meetings. The German take on the EU budget is to cap spending at 1% of GDP, around €900bn, for the years to come. read article

In other EU news, tomorrow, the proposal that would impose a 40% female quota in boards of European companies will fail. A number of predominantly liberal politicians have stated to vote against the regulation, 11 out of 27, enough to make it fall through. In the background, the European Parliament is trying to fill a position on the board of the ECB. Prime candidate Yves Mersch seems to bring one major disadvantage: being maleread article

But there really seems to be just one theme today, and that is buying commodities businesses.

In the UK, four of the largest private equity houses in the world, KKR, CVC Capital Partners, Apax and Carlyle are allegedly looking into buying Urenco, a British government-backed provider of nuclear fuel solutions. Urenco was founded by the British, Dutch and German government in the 70s; today, it’s largest shareholders are the British state and two German utility companies.

In AustraliaArcher Daniels Midland, one of the largest processors and traders of agricultural products, has bought 14.5% of GrainCorp, a logistics and storage company that deals with a third of Australia’s wheat grain production, for $2.8bn. According to the UN Food and Agriculture Organization, global agricultural output could grow by 50% until 2050.

Meanwhile, the Canadian government is set to block the acquisition of Progress Energy Resources, Calgary-based owner of gas fields in British Columbia and Alberta, by Petronas of Malasia. The acquisition would be valued at $5.3bn.

And finally, BP sold 12.84% of TNK-BP for $27bn to Rosneft, i.e. the Russian government.

It’s a trend. Clearly.

So long.

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BP’s “culture of corporate recklessness”


There won’t be a news brief tomorrow, Thursday, 6 September 2012.

The story of the day is a commodities investigation roundhouse kick involving Shell, BP and Gazprom.

The US Department of Justice is charging BP with gross negligence and wilful misconduct in the case of the 2010 Deepwater Horizon disaster, upon which BP’s shares fell 3.95%. If gross negligence is proven, the fine could be up to $21bn according to the US Clean Water Act. BP, however, is only prepared to pay $15bn in total. The case is being heard in New Orleans, for the view, with unnamed lawyers of the Department of Justice saying the following in a leaked memo:

The behaviour, words and actions of these BP executives would not be tolerated in a middling size company manufacturing dry goods for sale in a suburban mall. Yet they were condoned in a corporation engaged in an activity [deepwater drilling] that no less a witness than Tony Hayward [former BP chief executive] himself described as comparable to exploring outer space.

No hard feelings.

But really, Deepwater Horizon ruined the fun for everybody. Shell, which has spent the past seven years in preparations of oil drilling in the Arctic sea north-west of Alaska, struggled so much with government licenses and environmental groups that it led many other companies to turn their back to those waters. Even more hilarious, however, is that the license agreement that Shell ended up securing, allows the Noble Discovery Rig to drill 1,400ft deep. That is about 4,000ft ABOVE the predicted oil reservoir. Hmmm.

Lastly, the European Commission has launched an investigation into Russian state-owned Gazprom. The investigation regards market barriers that keep countries from diversifying their gas suppliesAccording to WSJ:

EU said the probe will look at Gazprom’s behavior in eight countries. Russia supplies 36% of the EU’s natural gas, but it is the effective sole supplier to Bulgaria, Estonia, Latvia, Lithuania and Slovakia. According to EU data, it also supplies 82% of Poland’s gas, 83% of Hungary’s and 69% of the Czech Republic’s.

But no worries, EU officials said there are no problems with Russian gas deliveries, as this isn’t likely to piss anyone off at all.

Re: yesterday’s US manufacturing data:
WSJ Real Time Economics shared a chart mostly composed of the words ‘expanding slower’ and ‘contracting faster’… read article

In Germany, where both the government and most banks are vehemently against a European banking union that would establish the ECB as a central monitor of all European banks, Juergen Fitschen, Co-CEO of Deutsche Bank has spoken out in favor of such a union, causing quite some turmoil at today’s Handelsblatt banking conference in Frankfurt. read article

Otherwise, Australia’s Q2 GDP came in at 0.6%, undercutting the expected [massive] 0.7% and European retail sales dropped by 0.2% from June, to -0.1%. This can mostly be attributed to the poor state of consumer confidence, which is worsened by increasing energy prices (hello, EU! (see above)) read article

So long.


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The advantage of debt in the family

As mentioned yesterday, Greece is going to avoid bankruptcy AGAIN on Monday, when a little over €3bn fall due in debt repayments. Much to Greece’ advantage, the money belongs to the ECB, so the whole thing is a lot more like borrowing money from your parents. Greece sold €4bn worth of 13-week notes yesterday, raising enough money to meet the deadline. On to the next! read article

UK unemployment, including the number of jobless claims, have fallen. At 8%, unemployment rose almost 1.5% since the onset of the 2007 financial crisis. The current ease is considered to be related to job creation through the Olympics. But even though the date is better than expected, it’s not going to lift European markets. see graph

In the US, the picture looks similar. Retail sales and jobless claims, released yesterday and last week respectively, have been better than forecasted. But in the typical fashion of overweighting positive factors, many say there won’t be any government action any time soon, which may be a mistake.

At least, both American and German 10-year bond yields are rising to 1.73% and 1.47% respectively. That is, if you believe Ken Rogoff’s analysis in last Friday’s News Brief, a good thing.

Banking scandal round-up:

After the US Department of Justice dropped its criminal investigation of Goldman Sachs, which could have been turned into a civil fraud case on the coattails of Goldman’s sales of mortgage-backed securitiesNYTimes Dealbook declared the end of financial crisis law suits, almost five years after it erupted.

The new trend, as we’ve learned in the past weeks, is money laundering and rate fixingStandard Chartered has now been fined $340m for the former by the New York State Department of Financial Services. Oh yeah, and then there were transactions worth around $250m with sanctioned Iran. Oops. read article

Otherwise, Australian courts have granted the display of ‘discouraging packaging’ for cigarettes in the scope of its new anti-tobacco marketing laws and India is celebrating 65 years of independence today.

So long.

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Wednesday, #8

As I failed to explain the difference between an orderly and disorderly default last night, I will give it another try now…

An orderly default is the process of restructuring, meaning that public debt is cut and payment terms are changed in favor of the debtor. The haircut that has been heavily discussed in the press, can be considered part of an orderly default. If Greece was to default in this way, the eurozone countries would have to wait a very long time to get repaid. But honestly, who actually expects that Greece will EVER do that…
A disorderly default on the other hand, happens for the same reason: the debtor can’t pay the money back. But this time around there is no restructuring, no haircuts and definitely no more love from any other eurozone country. If Greece was to default disorderly, they would just not repay their debt. Period. The disorder is caused by the fact that there is no postponement (it’s difficult to prolong forever anyway) for the repayments, but that they just don’t happen.
In the end (or in the case of Greece), money will be lost either way. The question is just how much.
And because we (still) don’t have crystal balls around, nobody has the answer, but everybody knows it better.

Stock markets outside Europe (particularly in Asia) are doing pretty shitty today, because the uncertain demand in Europe (money is tight, y’know) makes it hard to sell stuff. Even Australian banks are having a bad time now; Commonwealth Bank, Westpac, Australia & New Zealand Banking Group and National Australia Bank fell 3% today. Mind you, Societe Generale fell 17% just yesterday…

And as if that wasn’t enough, German unemployment rate rose. It only rose a bit (by 10,000 jobless claims), but it rose while everybody expected it to fall. From afar that looks like the German economy could slow down and nobody wants that. Literally NO-ONE. read article

But let’s take a moment and feel sorry for Mario Draghi, who is probably having the worst month of his life. Imagine going into a new job and the first thing they want you to do it save a currency that spans over 17 opinions, sorry, countries… watch video

Finally, something more fun (mainly because it includes the philosophical concept of willingness to pay): Here’s a really interesting article about facebook’s ad revenue. read article

So long.

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