Death Star Economics



Eurozone recession here to stay, UK gets ready for exit

David Cameron and his comrades of the Conservative Party published a policy draft for a referendum for a possible EU-exit of the UK. The draft says the referendum has to be completed by December 2017, given the Tories win the 2015 elections. I think the campaigning just began. read BBC

While the global “recovery” continues to force deficits to skyrocket and imports to slump, India has managed to become the outlier in the trend on Monday afternoon. Taking advantage of the low gold price, imports rose 138% since April 2012 to $7.5bn, or 18% of all imports, while the trade deficit hit 17.8bn. read Zerohedge

And of course the drama over Bloomberg‘s use of user data continued… read FT Alphaville

This morning…
there was a flood of data, with the German economy growing 0.1% from 4Q12 to the first quarter of 2013, undercutting the depressing estimate of 0.3% growth. The French economy contracted by 0.2% over the same period of time. read Bloomberg
Franco-German relations haven’t been great since Hollande got into office, but this morning’s result may just worsen the atmosphere of any policy discussion. The eurozone as such, contracted 0.2% in 1Q13. The recession continues…

Simultaneously, Mervyn “it’s-almost-his-last-day” King of the Bank of England raised the outlook for the UK economy [with lower inflation] and raised his eyebrows at eurozone performance, as well as the continental Financial Transaction Tax. read Guardian

Meanwhile, the US is preparing to become the model student again. The Congressional Budget Office is forecasting the deficit to fall as far as $378bn by 2015, much faster than anticipated. The 2013 forecast was cut by $203bn to an overall $642bn. read Reuters
And that is not all: Formerly the largest corporate debt market in the world, providing ample opportunity for the Michael Milken followers of the world to make money, China is going to take that spot within the next two years, according to S&P. Soon America will be debt and deficit free and flow with milk and vodka (we’re all grown-ups here). read Financial Times

In the kerfuffle over whether Jamie Dimon is allowed to stay in in his double-role as chairman and CEO of JPMorgan seems to be blowing over (much like Lloyd Blankfein expected), as fewer shareholders than expected are looking to back the leadership reform. Another bullet dodged for the industry. read Financial Times

And in case you’ve been in a good mood this morning, have a look at this: 10 Scenes from the ongoing global economic collapse (Zerohedge)

So long.


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Libor 2.0 and a £10bn UK-US trade agreement

Over the weekend…
we saw the first proposal for a Libor reform from Martin Wheatley of the FCA (Financial Conduct Authority and successor of the FSA), who told the FT about the Libor 2.0, which could look something like this:

[…] a dual-track system with survey-based lending rates running alongside transaction-linked indices as soon as next year.

In the US however, Gary Gensler of the CFTC calls for an immediate switch to transaction-linked rates. read Financial Times

Meanwhile, the G7 met just outside London to talk about monetary policy and how much liquidity is too much with the conclusion that money is something you can never have enough of: Go ahead Japan, ease some more. read Businessweek

In the US, WSJ correspondent Jon Hilsenrath published two articles on the future of the Fed, both in terms of staffing and monetary policy. Until yesterday, Friday’s article (read ZeroHedge annotations) was pretty much the most talked about news of the weekend, discussing how the central bank will unwind its QE program that is worth $85bn a month. It was followed it up with a piece on Janet Yellen, [probably] the next Ben Bernanke. read Friday’s Wall Street Journal read Sunday’s Wall Street Journal

This morning…

David Cameron is meeting with Barack Obama on future trade agreements, something that is being interpreted as a potential first step for the UK to leave the EU. A free trade agreement between the new and old world could be worth up to £10bn for the British economy. read Bloomberg

The Eurogroup is kicking of with both Cyprus and Greece on the agenda. Cyprus is seeking approval of the first chunk of its bailout program, worth €3bn, while Greece is set to receive €7.5bn in the latest bailout payment. read BBC read comment on Reuters MacroScope

As for the rest of the week, we’ll get all kinds of data from the US, including industrial production and inflation and housing. Same goes for the eurozone and Germany; the UK reports unemployment figures and Japan will give us preliminary Q1 GDP figures.

So long.

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Central bank center stage: the downside to repaying debt

In the US, the balance sheet of the Federal Reserve has exceeded $3tn in assets for the first time this week, resulting from its continuous stimulus policy. Only last week, the Fed purchased assets worth $48bn. In comparison, in the week before Lehman Brother’s collapsed, the Fed’s balance sheet measured $924bnAccording to Bloomberg:

One risk from a large balance sheet is the possibility that the Fed’s interest income could evaporate in coming years as rates rise, according to a paper released last week by researchs in the Fed’s monetary affairs division [surely, that’s the only division they have…].

Also in the US, Tim Geithner stepped down as Secretary of the US Treasury today.

Across the pond, the European Central Bank has announced that banks that borrowed cheap money under the ECB LTRO ‘funding for lending’-type scheme last year may repay some of the outstanding debt now. Estimated between €100-200bn, some reports say the repayments amount to €137.2bn. What’s disconcerting about people repaying their debt is that it will shed light on those banks that are doing poorly, throwing the EU for a loop yet again. read article

The UK sees its economy sliding in the general direction of a triple-dip recession (it’s starting to sound like ice-cream). In the aftermath of the Olympics, with lower manufacturing output and decreasing oil production in the North Sea, British GDP has shrunk 0.3% between October and December 2012. More than expected and frankly more than the UK can take if it wants to keep pretending to be a world power. read article

Another story shook the EU yesterday, with the Commission voting against actively supporting carbon prices in its emissions trading system, causing prices to collapse by 40% in just a couple of minutes. From the FT with no mercy:

The price collapse in the cornerstone of its climate policy is an embarrassment for the EU. It could also have far reaching implications at a time when other countries, such as China and South Korea, are testing or launching similar markets.

Weekend reading:

– Advance in data storage: let’s put it into DNAread article

– Tim Geithner on quitting, read article

– riding the 99%-wave – why suing Goldman Sachs doesn’t work when they’re not guilty, read article

– McSweeney’s guide to a middle manager’s principlesread article

– more on Cameron’s idea of the future EUread article

Have a good one.

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Across the board disappointing results: Japan’s deficit, Apple’s earnings, S Korea’s GDP

Over the past weeks, Japan has done a lot to try and convince the rest of the world of its [return to] well-being, but no distraction really did the job. And now this: Japan’s 2012 trade deficit hit JPY6.93tn ($78.27bn), the highest ever reported. Reasons are poor performance of its largest companies, rising fuel costs, the strength of its currency and the whole argument with China over the Senkaku Islands in the East China Sea. read article

South Korea’s 2012 GDP underperformed, recording the weakest growth figures since 2009. The country’s very own central bank had forecast the economy to grow 3% over the whole year – the actual number game in at 2%. To blame is the eurozone crisis, among other things, weakening demand for export products, which account for 50% of the South Korean economy. read article

The US House of Representatives approved a short-term extension on America’s borrowing spree, answering the question of whether the US will be able to pay its bills in the near future. This has bought some time to come up with a budget proposal to solve all problems – and without raising taxes, if you believe Paul Ryan, Chairman of the House Budget Committee. read article

The timing of the extension means the debt limit will be revisited after two other fiscal deadlines. Many members of both parties have said they want to revise of replace across-the-board spending cuts set for March 1, and they will need to renew funding by March 27 if they want to prevent a partial government shutdown. They are far apart on how to achieve both goals.

According to Reuters, the US Treasury will need the remaining $16.4tn the country is legally allowed to borrow until early March.

In Davos, Angela Merkel shows patience, saying that she was going to listen to David Cameron‘s complaints to work out the best possible solutions under which the UK would stay in the European Union. Wise words, after all, the UK’s vote would be helpful on her European budget proposal. Barack Obama also urged Britain to stop messing around and stay in the union. In the background economists polled by Reuters say that there is a 60% chance the UK will lose its AAA rating, which it has held since 1978, in the coming 12 months.

In other news, Apple announced earnings last night, showing the weakest increase in sales in 3.5 years, and the most disappointing profit growth since 2003. Since the shares of the world’s largest public company hit $700 in September, the price has fallen by 27%. Other technology companies like IBM, Google and Netflix did well and beat expectations in Q4 of the last year. Microsoft will report earnings tonight. read article

So long.

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Politics is about expectations: a referendum, taxes and inflation

Brace yourselves, it’s a Europe-heavy news day.

The big news of today is David Cameron’s EU speech, announcing a UK membership referendum sometime between now and 2017. Britons are applauding, while the rest of the EU is in a state of frustration. With the words of Laurent Fabius, Foreign Minister of tax hell France: “If you join a football club, you can’t say you want to play rugby.” Well, no. But was that what he was doing? Not really. Good analogy nonetheless. It set the tone for European politics this yearread article 

Eleven European countries (Germany, France, Italy, Spain, Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia) have proceeded to drafting legislation for a financial transaction tax on the trading of stocks, bonds and derivatives. That sounds specific, but really isn’t, as Brussels hasn’t decided on specifics at all. So one of the best reasons not to go on a rant of the ineffectiveness of the policy that is meant to generate €57bn for various rescue vehicles, is that it might be stuck in parliaments across the continent for a while, despite its scheduled implementation of January 2014read article

In Israel, Benjamin Netanyahu has been re-elected, though not exactly by a landslide. In the sobering words of the BBC:

It was relief more than real jubilation. The simple truth was that the combined list of candidates headed by Prime Minister Benjamin Netanyahu had performed disappointingly. But politics is about expectations.

More analysis from Israel, here: read article

In Davos, where the World Economic Forum [attended by both Merkel and Cameron – awkward] has begun, Russian Deputy Prime Minister Arkady Dvorkovich has admitted that Russia’s perception abroad is bad for foreign investments and is holding the country back. watch video

Overseas news bring us the policy decision of the Bank of Japan, which is braced to do what new PM Abe talked about all January: pump money in the economy to meet the 2% inflation target. In fact, Japan has never had a firm inflation target like that, so you’d expect it to be big news. Yet, nobody, from analysts to the IMF’s Christine Lagarde, seems overly impressedread article

In the background, Deutsche Bank has to simulate a breakup of its consumer and investment banking units. read article

So long.

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China grows less, because the new leadership has done a good job

This week has been quiet and it ends practically in silence.

China released preliminary GDP numbers, showing that 2012 ended on a positive note, with year-on-year quarterly growth pushed up to 7.9% by infrastructure investments. On the back of this, China lifted its growth forecast for 2013 from 8% to 8.2%. But slow down for a second, overall 2012 has seen the least expansion of the economy since 1999! Why the optimism? Oh right, because China’s leadership changed in November and the new guys need to look good. Meanwhile, the People’s Bank of China announced short-term liquidity operations to counteract inflation, “as it too has no choice but to ease although not by the conventional inflation targeting methods now used by everyone else.” read article

In the US debt ceiling crisis (yes, let’s just call it a crisis, it’s become the accepted synonym of any situation) is being complicated by tax refunds. On average, most taxes are being filed in February, says the FT, making it hard to forecast government cash flows:

For instance, in February 2012, daily tax refunds paid out by Treasury varied from a low of $140m on February 2, to a high of $14.7bn on February 8 – with significant spikes and drops within that range throughout February.

In the background, Reuters engages in a US-markets-default-scenario mind gameread article

The Handelsblatt says Commerzbank is looking to cut 6,000 jobs in Germany, joining all other banks in firing people restructuring their employee base.

In other news, David Cameron announced to delay his notorious EU speech in which may or may not set the tone for London-Brussels relations from here on out, due to the gas plant siege in Algeria.

Weekend reading:

– Obituary: Aaron Swatz, co-founder of Reddit, committed suicide last week, read article

– Things to fear in 2013, read article

– Getting behind the burning Boeing batteriesread article

– Off to round two, how history will see Barack Obamaread article

Have a good one.

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UK vs European budget; FSB vs shadow banking

After the UK has demanded higher budget cuts in the next long-term EU budget, followed by Germany’s threat to blow off the budget negotiations altogether, planning is now going ahead without British input. The budget summit commences on Thursday in Brussels and so far there’s little confidence that Britain’s demands will be included in the proposal. David Cameron responded that an ex-UK budget wouldn’t be acceptable. Besides the Brits, Sweden is also pressing for more cuts. But they are up against policies deep-rooted in the European ethos and expenses, such as ridiculous agriculture subsidies, which France wants to leave untouched. read article

Trying to ease the tension ahead of the talks, David Cameron’s spokesperson said the British government was sure to be able to reach an agreement with the EU.

The Financial Stability Board (FSB), set up by the 20 largest economies in the wake of the financial crisis to combat evil and restore balance in the global financial system, has made some significant observations: After traditional bank lending became more and more difficult after 2008, alternative credit providers, soon called the shadow banking system, emerged just in time to be blamed for all evil in the world. Policy makers’ favorite examples of shadow banking entities are private equity and hedge funds, which are entirely different in both motivation and structure, but nonetheless equivalent in regulatory context. With the introduction of new regulation to protect the unknowing consumer, banks’ lending capacity decreased and more business gets redirected into the shadow banking system, currently worth $67tn, set to grow even further and still comparably unregulated – something the FSB wants to change asap. Now, besides this very impressive number, couldn’t we have seen that coming? read article

Møller-Maersk, the world’s leading operator of container ships, has decided to refocus away from its core business. Instead of preserving its 16% global market share, Maersk will instead invest more in oil exploration and drilling rigs, as well as ports. The shipping division Maersk Line lost $540m in 2011. read article

In other news, Gaza is heating up more and more by the minuteSpanish bad loans rose to €182.2bn, the highest level on the record, and everything about Greece is screaming Grexit once again, as Joerg Asmussen of the ECB predicts that Greece will need foreign aid beyond the current 2014 end date.

For more enjoyable lunch-food-coma-afternoon reading: a review of Nassim Taleb’s latest book, full of linguistic questions and marmite. read article

So long.

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Democracy (Obama), anarchy (Greece) and communism (China)

Well, at least we don’t have to worry about what crazy things Paul Ryan is capable of. Obama won the election and now has the luxury of another four years to finish what he started without having to start campaigning again two years down the line. With 303 versus 206 electoral votes, the result is much more saturated than anybody expected after the polls had put the candidates up for a close finish. The Republicans keep the House, the Democrats the Senate. Obama, as positive as ever, said “For the United States of America, the best is yet to come.

An extension of the Obama-Bernanke days, means that the US economy will continue to have access to funds to stimulate growth. In response, the dollar fell against every but one counterpart currencies.

But as the new old president is just waking up, the media has pasted his name into all those now-that-we-got-this-settled-lets-talk-about-the-fiscal-cliff-some-more articles. FT WSJ

Bloomberg Businessweek is making another point: see picture

Back in Europe, Greek drama is looming – again. On November 27, the nation is due another bailout payment, this time worth €31.3bn. But Brussels can delay the tranche again, as the policy disagreements that have delayed it to begin with are still not resolved. In Athens, politicians are voting on austerity measures tonight. They could include abolishing Christmas bonuses for public service workers and more cuts in welfare and pensions. read article

In the background David Cameron and Angela Merkel are clashing over the EU budget. Cameron wants to see cuts worth €1tn over the next seven years, while Merkel is pressing for a €100bn budget increase. Cameron is threatening to block the budget. Merkel is threatening to block the budget meetings in case of the UK exercising its threat. Good times. read article

Tomorrow, China’s Communist party is holding its 18th party congress. President Hu Jintao has only one week left in office, before Xi Jinping taken over. Time to revisit how China’s democratic ambitions are doing. read article

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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More bank scandals, more economic trauma

Wherever you look, today’s favorite scandal is still Barclays, mostly because CEO Bob Diamond said he would reveal “potentially embarrassing details about Barclays’ dealings with regulators if he comes under fire at a parliamentary hearing on Wednesday.” I’m thinking party pictures and strippers. Next thing you know, Diamond quits, effective immediately. Bloomberg’s Nick Dunbar already dubbed him the Republican candidate for 2016.

But speaking of manipulative banks… JP Morgan has been subpoenaed twice in the past couple of weeks because they may or may not have inflated electricity prices in the USread article

Since yesterday’s atrociously bad ISM data, showing the rapid decline of the American industrial manufacturing sector, today continues in the same fashion. British construction activity fell to its lowest levels since December 2009, aka that really bad year, last month. Overall, the Global Manufacturing PMI has sunk to a three-year low, with manufacturing output falling in the US, UK, eurozone, China and Japan in June, says Markit. More QE in the US and UK can be expected shortly. Not even Brazil is doing well anymore, after a better than expected first quarter of the year, forecasts aren’t looking great.

Europe is not doing much otherwise, which I guess is a good sign, but here and there the possibilities of referenda on the EU membership are getting more real. In the Netherlands the situation is very political and contingent on voter support of extremist parties, such as Geert Wilders’s PVV, which presented its campaign program including a separation from the EU today, leading two of its parliamentarians to quit. read Dutch article read English article

In the case of the UK, the idea of a referendum is less surprising, because they like to pretend that they knew the European Union was a bad idea from the start. The prime minister’s opinion is a little muddled in his awful attempt of being diplomatic, but I still have a bit of a Cameron-appreciation-moment anyway, as he said

I don’t believe leaving the EU would be best for Britain. Nor do I believe that voting to preserve the exact status quo would be right either.”

Naturally, this only adds on to the constant back-and-forth in his agenda.

Also, Microsoft has admitted defeat in the online advertising battle with Google. At least sort of. In 2007, Microsoft bought AQuantive for $6.3bn, allegedly its most expensive acquisition. Now, the unit is being written down by $6.2bn. Since the acquisition, Microsoft’s internet business is meant to have recorded operating losses of $9bn. Ouch.

So long, and for the AmUricans, happy 4th of July.

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