Death Star Economics



Banker bonus debate: Why it’s always better to be Switzerland

After the EU’s policy proposal to cap banker bonuses last week, Switzerland voted in a referendum on a similar topic, regarding both [executive] salaries and bonuses. Surprisingly, the result leaned towards Brussels, with 68% voting in favor of new rules. On the one hand, that’s surprising because Switzerland is already losing business to places like Singapore that offer favorable tax rates to big multinationals like Trafigura, which could lead to a relocation of their headquarters. But on the other hand, the Swiss proposal gives more rights to shareholders and seems to encourage internal management of compensation as opposed to a blanket EU-one-will-fit-all-because-it-has-to policy (on the far side of the spectrum, Breakingviews suggests the introduction of tipping for services). read article 

On the same topic, George Osborne will launch a last lobbying effort on behalf of the City tomorrow, trying to mitigate the reach of the proposed rule to protect London’s financial district. Before that, the Eurogroup will begin meetings in Brussels today to discuss Cyprus’ bailout program.

Over in the USinvestors worry about the effect of new cuts and taxes on consumer spending, particularly in the light of a 3.6% slump in personal incomes in the beginning of the year weighing on household budgets. The government’s worries still lie with last week’s sequestationObama wants to get the issue resolved to move on to other policies, but Congress is currently just laughing in his faceread article

Elsewhere, China has pushed past the US and has become the world’s largest net oil importer, driven by America’s move into fracking and shale gas, as well as China’s rising demand for fuel. The analysis was derived from December data, when US net imports dropped to their lowest levels since 1992. read article

As for the week aheadJapan is poised to announce a current account deficit of JPY 768.5bn on Friday, according to ZeroHedge, which is the worst number ever recorded. Otherwise, all central banks of the rainbow are meeting this week, leaving plenty of room for statements on the currency wars.

Have a good week.


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SEC investigates big four, Boris Johnson wants EU referendum

The American SEC is investigating the Chinese operations of the big four (Ernst & Young, KPMG, Deloitte, PwC) + BDO for failing to cooperate with the Commission investigating potentially fraudulent behavior of Chinese companies that went public in the US. The auditors could be sanctioned or even excluded from operating within the US. read article (including another angry picture of enforcement director Robert Khumzami)

In fiscal cliff newsrepublicans put a new (old) proposal on the table, which already got rejected by the White House this morning. The proposal included $800bn in tax increases over the next 10 years, paired with a number of cuts, including scarping $600bn from Obama’s Medicare program. According to the Wall Street Journal, the proposal looked a lot like a the outlines of a budget deal discussed by Obama and Johgn Boehner, speaker of the House of Representatives, in 2011, the last time America stood at the cliff. Interestingly, Boehner’s proposal “also did not specify how Congress would address the $110 billion in spending cuts set to take effect Jan. 2 in defense and discretionary spending.” read article

But that’s not the only thing on Obama‘s mind. Another one is how to compensate those who have raised the most funds for his re-election. One of them is Anna Wintour, editor-in-chief of Vogue US and the very original devil in Prada. And to say thank you, Obama might make her the American ambassador to the UKread article

The IMF has released a staff paper saying that capital controls may be beneficial to countries whose economies are struggling and unable to deal with the volatility attached to capital inflows. Previously, the IMF was vehemently against capital controls, despite their use in some emerging economies. Now, however, it argues like this:

The experiences of Spain and Indonesia, as well as Brazil and Korea during the global crisis, highlight how regulations or re-imposition of restrictions on certain transactions can mitigate the build-up of vulnerabilities.

Spain!!! You know what that means. Next thing we know, there will be capital controls all over Europe’s peripheryread article 

Meanwhile, at a morning conference in London, major Boris Johnson said that a renegotiation of the UK’s relationship with Brussels was a necessary step forward and should lead to a straight forward referendum regarding the current terms and conditions that tie Britain to the single market. read article

In Doha, British Energy Secretary Ed Davey said the UK was going to put £1.8bn towards the battle against climate change. This will include financial support to cut emissions in developing countries. Britain is the first G7 country to commit to the project. read article

So long.

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Central bank center stage: waiting for Ben

Today is mostly about the Fed – again. Bernanke’s speech in Jackson Hole at 3pm London time, which party pooper Mario Draghi cancelled on, has been anticipated all week. Sort of. Because as the Fed failed to implement more QE over the summer, expectations went from high to low. In the end, we may very well save the enthusiasm for a rainy day, i.e. the Fed’s policy meeting on 12-13 September. read article

Over here, across the pond, we’re presented with stagflation. Great. Eurozone unemployment rose to a new record (since 1990, that is) of 11.3%, after Germany announced a fifth month of rising unemployment numbers yesterday, reaching 6.8%. Meanwhile, inflation increased from 2.4% to 2.6% in August, exceeding expectations of 2.5%. read article

The ECB is busy planning for the European banking union. Much discussed, much denounced, few things have been done to actual implement this policy construct. But that’s about to change. The proposal was agreed by Jose Manuel Barroso, president of the Commission, and everybody’s darling Michel Barnier, European Commissioner for Internal Market and Services, i.e. Europe’s [over-]regulator. Under the proposed bill, national central banks would be stripped off their responsibilities for national banks, whose fate, in turn, would lie in the hands of the ECB. This would concern approximately 6,000 banks in the eurozone. You can take a wild guess who won’t be fine with this – exactly, Germany. read article

Samsung strikes back: after Apple’s destructive court victory this week, a similar lawsuit has been rejected by a court in Japan. Galaxy II S for everyone!

Otherwise, Barclays named Antony Jenkins, former head of retail and corporate banking, its new CEO. Good ole Tony proclaimed that it was his priority to restore the banks reputation. Well, of course, that’s what got you the job! He will also revise ROE targets from 13-15% to around 11%.

Weekend reading

– The case for a German sovereign wealth fund despite the lack of oil money, read article

– Pretending it’s the good old days: Clinton, Blair and Cardoso met in Sao Pauloread article

– “Socially liberal, fiscally conservative” – a historic account of American fiscal attituderead article

Have a good one.

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More bad data, more LIE-bor, more EU “solutions”

There’s nothing worse than having the new week continue in the exact same fashion as the last one… more bad economic data, more EU meetings and more Libor questioning, but here we go.

Chinese inflation sank to 2.2% in June – that’s a reduction of 0.8% since May and the lowest inflation has been in 29 months. That is bad news for Friday’s release of Q2 GDP data, which could show that China’s economy grew less than expected. read article

The Eurogroup is meeting in Brussels this afternoon and even a Greek representative will make it this time. The meeting itself is as likely to lead to the same well known EU-press-fluff as it always does. There might also be discussion of a pan-European banking surveillance authority for the 25 largest financial institutions, the urgency of which is clearly related to the Libor scandal (see below). Meanwhile, Spanish yields are steady above 7% and Italy has requested structural aid from the IMF to reform its tax policies.

An invisible financial wall, potentially as dangerous as the Iron Curtain that once divided eastern and western Europe, is slowly going up inside the euro area,

says Reuters. Thanks for the panic and the nice analogy. read article

Friday’s US job data was worse than expected, with 80,000 jobs added in the month of June, as opposed to 100,000 as expected by analysts. This is the fourth month in a row that the actual data comes in lower than forecasts. Also, earnings season is about to kick off, with expectations set comfortably low due to the obvious.

In the Libor scandal, Paul Tucker of the Bank of England will be facing questions by the Treasury select committee, much like Bob Diamond on Friday. In response to the manipulation scandal, Michel Barnier, EU commissioner for internal market and services, wants to criminalize said manipulations in the new market abuse regulation. One very brave (or delusional) FT reader sent a letter arguing in favor of the manipulation for the financial system’s sakeread letter

Airbus and Boeing are pressing their common suppliers to merge to strengthen the supply chain and secure meeting their 2012 production target forecast of 40% combined growth. That takes the concept of duopoly to a whole new level…

South Sudan is marking one year of existence today. Unfortunately, the whole independence thing is not going so well yet… read article

And finally, Nobel prize-winner Daniel Kahneman talks to the Guardian about “his pessimistic mother, the delusion of investment bankers and the need for irony.” read article

So long.

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Monetary easing didn’t ease anything at all

And somehow we’re back to the doom and gloom of the European explosion. Christine Lagarde, portrayed as a leather-skinned barbie on Reuters’ front page since this morning (seriously, who chose this picture?!), has declared how worried she is, once again, about the state of the world economy. Her remarks come in response to the collective central banking action from yesterday, including rate cuts by the European, British and Chinese central banks. Probably just about as important were the rate cuts of the Kenyan and Danish central banks. Unimpressed by all of this, Spain’s borrowing costs keep rising. Fun fact on the side: both the FT and CNBC have interviewed Barclays people concerning the RATE CUTS. Pun intended?

Moreover: Finxit… just doesn’t sound right, does it? Finexit. Fiexit. Fixit. Fix it. No wait. So the Finish Minister of Finance Jutta Urpilainen said the country would rather leave the eurozone than pay everybody’s eternal debt. It’s not really a surprising thought, but it sure it politically incorrect, at least if you consider European dynamics. read article

And then there is the new found love between Russia and Cyprus: the latter said it may prefer the bailout terms from Moscow to those from Brussels/Washington. read article

Otherwise, after the recount of votes demanded by the candidate of the opposition, it is now reconfirmed that Enrique Pena Nieto won the Mexican presidential election last weekend.

Also, expectations are high and the outlook is mildly positive for the today’s US jobs data that will be released later. But there’s nothing like good news anymore these days, enter MarketBeat:

Just don’t confuse a slightly upbeat number with an actual good jobs report. The economy needs to add about 200,000 jobs just to keep up with population growth. Anything less indicates the recovery still has a long way to go before it can get back onto solid footing.

Weekend reading

– The end of the trading floor cultureread article

– Same topic different angle: banksters and the white collar hood, read article

– Superpowers, the end of an era and the US presidential election, read article

Have a good one.

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World economy is closed until further notice…

… apologies for any inconvenience caused.

Economic data from China and Japan show that things keep pointing down – though ‘down’ is a relative direction in the case of China as it really means the country grew at a slower pace and indicating that economic growth fell below 8% in Q2. Yet, both China’s PMI and Japan’s manufacturing index performed better than expected. US manufacturing data is due later in the day.

Eurozone unemployment has risen to 11.1%, its highest levels since records started in 1995 and 0.1% higher than in May. Spain is still leading the picture with more than 24%, followed by Greece with almost 22% and Portugal with 15%. Continuing with bad news, Finland and the Netherlands have declared to veto those undefined procedures leaders “agreed” on last week that would depress Italy’s and Spain’s borrowing rates. This regards the purchasing of bonds in the secondary market through both the EFSF and the ESM – the latte of which needs unanimous support from EU leaders. Square one.

But if you want to believe the Wall Street Journal, all of this will lose its relevance in exchange for new drama:

With government policy playing a greater-than-usual role in driving financial markets, investors are nervously eyeing the November U.S. presidential election and the year-end expiration of tax cuts and economic stimulus that could drive the U.S. economy into recession should Congress fail to step in.

So to sum up, Europe is closed until further notice, China’s clockwork is slowing down and the US is collectively scared of whatever there is to come in November. Q3 is going to be fun.

Surprisingly, a European authority is taking the side of the financial services industry for once: ESMA, the European Securities and Markets Authority, has launched an inquiry into how S&P, Moody’s and Fitch evaluate banks’ credit ratingsread article

Otherwise, Marcus Agius stepped down as chairman of Barclays, as a response to the Libor manipulation scandal that erupted last week. Here’s his comment on his departure. In a weird sort of defence of Barclays and a show-off of white-collar-crime-and-got-away-with-it, the Telegraph printed the holy grail of anecdotal evidence: an anonymous “insider from one of Britain’s biggest lenders” talking about how he used to manipulate the lending rate all the time… read article

And linking back to last week, remember how I said, half-seriously, I expected Citigroup and Nomura to join the bad-PR party of all those other banks drenched in scandal? Well, here you go, embezzlement (Citigroup) and insider trading (Nomura).

So long.

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A reminder that the UK would rather be the US

All European cat-fighting got a lot more serious, or should I say a matter of life and death, when Angela Merkel said there would be no Eurobonds for as long as she lives. Needless to say, her disgruntled communications squad made her amend the statement immediately. That puts her against the proposal of the joint EU presidents from yesterday. Meanwhile, Mario Monti made the opposite move, saying he would resign (boring!) if eurobonds don’t happen quickly.

In other continental news, the Bank of Spain said the country’s recession deepened in Q2, while Evangelos Venizelos (Remember him? He’s one of the 725,000 former Greek Ministers of Finance) said Greece needed an urgent liquidity fix and the recession is worsening by the minute. Italy is getting a taste of Spain’s banking problem, with UniCredit’s shareholder Pamplona Capital increasing their stake by 3%. UniCredit is the country’s largest bank and pan-European banking group and was the worst performing stock across Europe at certain times this month. Over the last 12 months, it lost almost 73% in value on the Milan stock exchange. Ouch.

But most importantly, we got a new acronym!!! Indeed. And it is unrelated to Greece, although its draws from it for inspiration. Take is away, Alphaville

Just when you had had enough of Grexits, Greuros and Drachmageddons, here’s another irritating term to add to the eurozone crisis lexicon: Brixit. Yes, the genius fusion of the words Britain and exit to describe another gloomy scenario.

How realistic a Brixit is remains up for discussion. Despite all the whining and finger-pointing, I’m pretty sure the UK wouldn’t be the first to jump off the sinking ship.

Mervyin King of the Bank of England, however, provides ammunition by saying that the UK is not even half way through crisis brought to us live from across the Channel. read article

Meanwhile in the US, the American housing market is sort of alive and kicks a bit as well, with the largest number of new home sales in the last two years recorded this week and prices rising. But not so fast, says MarketBeat

“But before we bust out the pom-poms,” says MarketBeat, “let’s remember housing has exhibited many head fakes throughout its fitful recovery.”

Think of how long this is taking. Think of the US economy. And now think of how that’s going to look in Spain. Summer house, anyone? read article

The potential demerger of Newscorp into two separate divisions is likely to be decided on over the course of the day. Holding 40% in each division, the Murdoch family would remain in control of both. In the meantime, Dealbook dives into the numbers. read article

And finally a short read for the how-to-be-a-banker book (chapter 7: don’ts): enter Sheldon Maschler. read article

So long.

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Would Murdoch want to be new Greek finmin?

So about Greece… I’m sorry, but it’s one of those days. Finance minister Rapanos resigned yesterday due to health issues and prime minister Samaras announced that he will not be able to fly for two months due to his eye problem. What the… Rapanos may be replaced by Yiannis Stournaras, professor of economics at the University of Athens and one of those who hasn’t fled the country yet. Both the details and results of his health check are yet to be disclosed.

Newscorp is looking into splitting the company into separate entertainment and publishing divisions. What does this mean? Well, the legitimacy of the WSJ’s report on the story is up for discussion, as the journal is of course part of Newscorp. But Murdoch could stay in control of both parts, only mitigating the storm around the British newspaper units that were involved in the phone-hacking scandals, and not actually solving the problem that a demerger should presumably address (namely Murdoch owning everything). More importantly, a split would make it harder for the publishing division to find investors, despite its prime newspaper assets, because its growing at a much slower pace than the entertainment branch. Not really surprising, you’re comparing the WSJ and the Times to 20th Century Fox here… come on.

A new proposition from Brussels authored by the presidents of the Commission, Central Bank, Eurogroup and Council (mostly to set the stage for the summit later this week): In Dan Davies words [blatantly stolen from Twitter, yay for 140 characters]:

1. Pan-European single banking regulator – ie completely irrelevant to crisis, pure and simple power grab.

2. European deposit insurance & resolution schemes, backed by ESM – ie repurposing of existing fund, not in treaty. Nothing from ECB

3. “pooling of decision making on budgets” ie power grab

4. “issuance of common debt could be explored” – ie, jumping someone else’s train of ERF and Eurobills. No original work

5. “A full fiscal union” and what’s the most urgent issue about that? yup “it would need a central budget“.

6. “Towards an integrated economic policy framework” – equal parts sameold “stability and convergence” guff and power grab.

7. “Oh yeah, democratic legitimacy”. Insultingly brief 2 paragraph section, which just points you at Protocol 1 of TFEU.

(or read article)

In other European news, Cyprus has officially requested a bailout, the terms of which have not been finalized, but it’s like to be €8-10bn, and France is set to raise the minimum wage by 2% come July 1.

The woman in the news today is not Angela Merkel for a change, but Facebook’s Sheryl Sandberg, who is now director of the company’s board, which so far had only been comprised of men. Well done Sheryl, girl power and all that.

At last, a chart and a reason why we shouldn’t be looking forward to September: according to a study by Luc Laeven and Fabian Valencia of the IMF, which relies on 147 cases over 41 years, September is the month of banking crisesread article

So long.

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Remember when the Greek elections didn’t achieve anything?

(note: the headline regards the eurocrisis and not Greece by itself)

It’s funny how the lead up to some event is drenched in anticipation from virtually the entire world, but when it occurs the reaction is so unimpressive. In other words, Antonis Samaras can build a coalition on all he wants, all eyes are back on Spain [and Italy] and they were already yesterday.

So let’s go back to Spain. Yesterday, its bond yields exploded and stayed above 7%, and today, its short term borrowing costs (12-18 months) hit the highest levels since 1997. But that’s not all. The bad loans on the books of the country’s banks have reached the highest level in 10 years as well – 10 years ago, when the euro was introduced to make everything better…

ING said Spain would need another €250bn to get anywhere with its bank refinancing – €250bn the EFSF isn’t set out for. So then it goes back to the legal issue that is the ESM, which is not actually active yet and has different voting requirements from the EFSF. Here the ZeroHedge summary.

The bottom line seems to be this: while concerns used to focus on the willingness, or lack thereof, of European leaders to commit to strategy to battle the crisis, i.e. setting up the ESM, pushing eurobonds, injecting money here there and everywhere, it now (finally) shifted to a question of how much is actually possible. The answer is more or less unanimous: Spain can’t be paid for in the same way that Greece was. And we don’t even have to talk about Italy. So what are we going to do about it? Wrestle Angela Merkel down and force her to agree to eurobonds, i.e. piss off the one person who is paying for the whole charade (note: this is a simplification of actual circumstances)? Having said that, I’m pretty sure that Merkel knows exactly that she will have to give in to all the pressure unless she wants to foot a never-ending bill (see below).

In Greece, Pasok leader Evangelos Venizelos has allegedly expressed his support of NewDem leader Antonis Samaras, who is still in the process of pasting a coalition government together. And since Syriza said they’re out, Samaras just pitched another left-wing party, the Democratic Left, making the proposed government a center-center-left coalition. An agreement is meant to be reached today, and as we know Greeks are very precise and efficient people, so I’m taking this at face value (so far, the Democratic Left has not decided what to do). read article

In Mexico, the G20, first and foremost David Cameron, is pointing fingers at the bodiless mess that is European collective action. In Gideon Rachman’s words:

David Cameron is taking a break from irritating the Germans. Instead, he has decided to piss off the French.

It is going to be an entertaining week if this continues. The agreement that emerged from Monday’s meeting was to work on a “more integrated financial architecture” in Europe. I imagine Angela Merkel didn’t enjoy her stay.

Meanwhile, there are rumors that both Greece and Ireland will be granted a two-year extension of bailout terms, meaning forced austerity measures. Make a wild guess who’s not amused about that.

So long.

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For and against the banking union

There won’t be a news brief on Wednesday and Thursday, June 13 & 14, 2012.

While WSJ MarketBeat says all eyes turn to Greece after the Spanish failout, Alphaville says Italy is the center of attention now. The case for the former is the little anticipation of the mess that will undoubtedly result from Sunday’s elections; the case for the latter is Italy’s rising bond yields (and Austria’s finance minister saying Italy needs a bailout).

Or maybe, the attention will be shifting to Cyprus, which may be the fifth European country to receive a bailout. Coincidentally, Cyprus is up for the rotating EU presidency in July. A little bit awkward… read article

Jose Manuel Barroso, president of the European Commission (who looks like he is rapping on the article picture), is pushing for the banking union, the Bundesbank remains steadily against it unless the fiscal pact is fully enforced. Barroso says the banking union would be that one necessary bold move that the world has been waiting for. The Bundesbank, on the other hand, says that if you agree to carry the burden of a liability that is not strictly speaking your responsibility, you deserve to have a say in how said liability is managed. So really this is about security. The Bundesbank is aware that the peripheral problem children would benefit from a banking union without the fiscal pact. Of course they would. It’s like free money. But what is Germany getting out of it? Not paying for all the bailouts more or less by itself maybe, but at least that leaves the element of control. read article

Here’s a more convincing case for the banking union. Here’s a more convincing case that nothing will come of it.

And then there is the capital controls thing… Apparently, someone who couldn’t keep his mouth shut, told the press that the EU is working on plans for capital controls, limited cash withdrawal and a temporary suspension of the Schengen agreement, should Greece decide to leave the euro (hello, Bretton Woods). Yet, so the sources, nobody in Brussels actually believes that it will come to this. Sorry, no, that doesn’t make me feel better. read article

So long.

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