Death Star Economics



Fixing Japan – a bucket list

Japan is all over the news today, trying to weaken its currency (or not), stimulate growth and create jobs. It’s ambitious, to say the least. But it’s also good news for Europe. After all, new PM Shinzo Abe is planning to weaken the Japanese yen by buying euro-denominated bonds from the ESM: to save Europe, the world and its currency. Unfortunately  the world moves faster than politics and while business executives had begged for a weaker currency, they now fret that the yen could fall too far. Abe also set a 2% inflation target alongside stability and prosperity for everyone, causing Japan’s pension funds, which hold the second largest pool of retirement assets in the world after the United States, to increase their gold holdings from JPY45bn to JPY100bn. And then there is this hint of an idea to eliminate the interest-rate floor for deposits at the Bank of Japan, something the ECB has done as well to try and incentivize lending. The final policy decisions will be announced at the Bank of Japan’s meeting on 21-22 January.

In the background, Eurozone unemployment has once again broken all records, while German and Finnish exports declined. Meanwhile, Spain announced that it would have to issue €215-230bn gross debt throughout the year, which is 7.5% more than accounted for in the November budget.

Norway’s Foreign Minister Mats Persson has called on the UK to reconsider its currently rather hostile relationship with the EU to save the City of London and influence European legislation. During a trip to Ireland, Persson pointed out that Norway, while swimming in oil money, only had very marginal influence in its status as a member of the EEA (European Economic Area). read article

Follwing yesterday’s mortgage crisis-related settlement charges, Bank of America has agreed to pay $11.6bn to state-backed Fannie Mae, the Federal National Mortgage Association, which was bailed out during the crisis. The settlement regards mortgage putbacks, those loans Fannie Mae wants BoA to buy back due to their questionable nature. read article

After the American SEC took the first step in fighting services providers in December, when it opened the investigation into potentially fraudulent behavior of the big auditing companies in China, Ernst&Young is now subject of an Washington-based inquiryAllegation say E&Y lobbied on behalf of its clientscompromising its independence in auditing said corporates. In 2004, E&Y was suspended from entertaining new client businesses with publicly traded companies for six months in response to violating independence rules. 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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The EU as a p(e)acemaker

One night after Christine Lagarde and Schaeuble fought about the necessity of austerity measures, the EU has been awarded the Nobel Peace Prize for “contributing to peace” in general. On first sight, that’s primarily one thing: incredibly confusing. It trumps Obama’s Prize in 2009. Why now, for crying out loud? But it does add another €8m to the EU’s budget/bailout funds/collateral. So thanks, Norway, for supporting the union that you continuously refuse to join to protect all the oil you’re sitting on. Barroso’s reaction: “When I woke up this morning, I did not expect it to be a good day.” Ha. Fair enough, we all know why.

But yes, fine, there’s another side to the story. Of course, this continent has seen a lot of wars in recent history and the EU has created a safety net for peace preservation and transnational cooperation. Say what you want, for example that the EU is a slow and overly bureaucratic construct, specialized in ineffective policy, but it has kept Europe at peace and let’s just admit that we haven’t exactly been good at that historically. read article

Meanwhile, Coca-Cola Hellenic Bottling, the company’s Greek division and second largest bottler in the world, is leaving Greece. Due to capital risks in its current location, the company will move its headquarters to Switzerland and re-list on the London Stock Exchangewiping out 1/5 of the Athens stock exchange. Despite being minority-owned by The Coca-Cola Company, the Greek company had its credit rating downgraded, which triggered the move. Most of its 2,000 production employees will stay [employed] in Greece. In July, Greece’ unemployment rate rose to 25.1%, marking the 35th consecutive month of increasing jobless rates.

Otherwise, the Chinese renminbi has hit the highest levels against the dollar in 19 years, reasons for which are thought to be a move against imported inflation brought about by US quantitative easing and an artificial calming of the market. Credit Agricole mentioned that this could also be China’s way of endorsing president Obama, who has continuously pushed for appreciation of the renminbi. read article

Speaking of which, yesterday’s vice-presidential debate didn’t yield a winner as clear as last week’s deeply upsetting Romney-Obama debate. Naturally, they disagreed on taxes and economic issues, Reuters has the key quotes, the Washington Post got a video with highlights.

Weekend reading

– a short history of debt crisesread article

– why the IMF gets to run the worldread article
– the world’s quest for socialist capitalismread article
– the first world victim: Michael Lewis gets a message from a Wall Street banker’s disgruntled sonread article
Have a good one.

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Central bank center stage: Japan is riding the QE dragon

The Bank of Japan has locked step with the Fed and expanded its quantitative easing program by ¥10tn. It now amounts to ¥80tn, ot $1.01tn. The deadline for the policy program was extended to the end of 2013. The added ¥10tn, will be split 50:50 between short and long-term Japanese government bonds. As a result, the dollar rose against the yen and the Nikkai exploded upwards. read article

But Japan’s worries are not only domestically. After yesterday’s anti-Japan protests in China, forcing many factories to shut down, Japanese car manufacturer are getting ready to face the consequences. According to Bloomberg:

The collective market share of Japanese car brands, No. 1 among foreign nameplates in China since 2005, will probably fall to 22 percent this year, whil eGerman marques could increase their share to 22.5 percent, according to projections by China’s Passenger Car Association.

Nissan has the biggest plans in the country, with its China venture budgeting 50 billion yuan($7.8 billion) in investments to raise sales to more than 2.3 million vehicles in China by 2015 from 1.3 million in 2010. Toyota said this month it aims to increase Chinese deliveries to 1.8 million vehicles by 2015, more than double the tally last year, by adding at least 20 new models. Honda said in April it plans to double deliveries in the country over four years after being “too cautious” in its expansion.

The Bank of England confirmed to keep its rates and QE target steady for the moment. The current asset-purchasing program is capped at £375bn, but after yesterday’s inflation data came out, it is very possible for the target to be reset in November’s policy meetingread article

Meanwhile, the US is waiting for the announcement of an awful lot of housing data this morning.

Saudi Arabia is feeling socially responsible and wants to combat high oil prices, by adding some more to the market. It’s like oil-QE. The Saudi oil production amounts to 10 million barrels per day. read article

Otherwise, Goldman Sachs has found a new CFO to pay $15.8m annual remuneration to (final salary of departing David Viniar). With 12 years in the role, Viniar is the longest serving CFO on Wall Street. Harvey Schwartz, who will move into the new position in early 2013, is yet another one for the next-CEO-question-mark list.

And the fun fact of the day, according to the Telegraph, journalists rank higher than bankers in the least trusted professions (probably because bankers don’t trust journalists…).

So long.

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Central bank center stage: pre-ECB meeting freakout


The US is back from Labor Day weekend, right in time to see the FT claiming that the European Central Bank is losing its grip on interest rates as borrowing costs continue to diverge further and further. This is by no means news, but it gives us a reason to talk about/anticipate/dread the meeting of the ECB’s governing council this Thursday. Fitch says, further fragmentation of the eurozone, i.e. divergence between the northern and southern nations in terms of interest rates, could make the breakup of the euro easier in the end, creating a breaking point. Meanwhile, Moody’s changed the EU’s rating outlook to negativeread article

But the story got interesting last night, when a European official said that Draghi said he would be comfortable [and in fact not breaking the law] with buying European government bonds with maturities of up to three years. His reasoning was along the lines of this: as “monetizing debt with a maturity up to three years is not really monetization but is instead within the arena of ‘money market management’.” Everything above this three-year cut-off point would violate the EU treaty. Uhm. Okay. Personally, I’d like some more qualification for this statement, but that’s just me. read article

The main issue with this process is that the ECB is not legally entitled to provide government financing in the bond-purchasing-i-e-quantitative-easing kind of way the Bank of England or the Fed can.

Speaking of which, Spain confirmed that its latest cash injection into Bankia, sourced from government-backed bailout fund FROB, was worth €4.6bn. But just now via ZeroHedge:

Instead of cash, Spain will inject Treasury debt into overlevered Bankia. Europe is back to abnormal.

On this note, some investment advice to buy real estate in Germany and stay clear of Spain. view chart

In midst of all this, Switzerland committed to keeping its currency down against the euro (CHF1.20, as implemented in September 2011), mostly due to its export-dependency (and making we wonder which European country is not export dependent…). According to the FT, Thomas Jordan, head of the Swiss National Bank, said

In the current situation, a further appreciation of the Swiss franc would constitute a very substantial threat to the Swiss economy and would carry with it the risk of deflationary developments. With this in mind, we will continue to enforce the minimum exchange rate with the utmost determination.”


Otherwise, today is the day of the Democratic convention in Charlotte, North Carolina, where Obama will make his case for re-election in November.

This afternoon will bring nauseating Spanish unemployment numbers and US manufacturing data, expected to have risen from July,

So long.


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Can we please talk about something else?

Reuters’ headline this morning: “EU wants Greece in euro, but plans for possible exit.” It might as well have read “EU wants to have its cake and eat it too.”

I don’t know why everyone (today it’s MarketBeat once again) is still saying that it is likely to get worse in Europe before it gets better… Likely? Isn’t it already getting worse by the week/day/minute?

The six-hour (not -course) dinner of EU leaders resulted in the typical EU soft talk of plans to make everything better, this time in form of keeping Greece in the euro. But just in case nobody believes them or they don’t believe themselves (…) plans how to manage the exit will be put in place. This might be worth talking about again when there are more tangible statements to work with. Having said that, I do hope they all enjoyed their food last night.

The euro slumped to its lowest value against the dollar in 22 months and remember, this charade is going to continue for at least another month, when Greece is taking another stab at electing a government.

The Facebook situation has turned into a fight of the titans NYSE and NASDAQ: apparently, Zuckerberg & CO are in talks with NYSE to switch exchanges. All parties involved declined to commentread article

I’m so tired of this, let’s talk about something else.

For example, how the British government is historically bad at managing its budgetno matter if labor or conservative (read article), or how Europe’s borders meandered on during the past 1000 years (watch video), or maybe income inequality, economic growth and fairness under the Obama administration (read article). Anything, really.

So long.

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