Death Star Economics



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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Go team Draghi

So we got ourselves a banking union. That is surprising for a number of reasons. First of all, the Eurogroup struck a deal. Secondly, the Eurogroup struck said deal before the deadline. Finally, Germany managed to add a clause that protects its Mittelstand. Oh no wait, the last one isn’t the least bit surprising.

A summary a la WSJ:

Ministers said the European Central Bank would start policing the most important and vulnerable banks in the euro zone and other countries that choose to join the new supervisory regime next year. Once it takes over, the ECB will be able to force banks to raise their capital buffers and even shut down unsafe lenders.

Once approved by the European Parliament, the show could kick off as early as March [let’s be realistic and say July]. The threshold for banks under supervision is €30bn of assets held, leaving Germany’s retail banking sector more or less untouched.

Unfortunately, the EU delegates involved were just as impressed with their own efficiency, so they decided to leave all other decisions be for now… until June. According to the FT, both budget negotiations and economic reform contracts, were completely taken off the agenda. The remaining time spent together will be used to play Secret Santa (guess who got Greece).

Moreover, Mario Draghi, soon to be puppeteer of Europe’s financial institutions was named the FT’s person of the year. Good for you, Mario. We know it hasn’t been easy. read article

In legal/regulatory/scandal news, the FSA, CFTC (US Commodities Futures Trading Commission) and the US Department of Justice are about to fine UBS more than $1bn for fixing libor ratesDealbreaker explains how such a humongous number (double of what Barlcays had to pay) comes together:

The fine-setters seem to have about four things to think about: 1) how much bad stuff did the bank do, 2) how much money did they make doing it, 3) how caught are they, and 4) how sorry are they now.

It calls for an investigation.

Co-head of Deutsche BankJuergen Fitschen, is under investigation for tax fraud committed in 2009. In his opinion, the reaction of German authorities, sending officers with machine guns to the Deutsche Bank headquarters in Frankfurt on Wednesday, was a bit much and he doesn’t intend to resign any time soon.

For the weekend, Japanese elections are on, with the opposition (the Liberal Democratic Party) led by Shinzo Abe expected to winread article

Weekend reading

– North Korea: playing with rockets, read article

– Felix Salmon on NYT Dealbook’s first conference this week and whether it was a success, read article

– Joris Luyendijk’s banking blog returns to blame fund managers, read article

– Alphaville is selling shirts (or ECB collateral) for charityread article

Have a good one.

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Joining the dark side of the force: Disney buys Lucasfilm

After two days of storm, an exploding power plant, the shut down of three nuclear plants, almost 19,000 canceled flights, closure of public transport systems, 10,000 911-calls every 30 minutes in New York City and 14ft of water, America’s east coast is getting back on its feetWall Street will re-open, as well as airports and the rest of normal life.

But it won’t surprise you that the story on my mind today is Disney’s acquisition of Lucasfilm. For $4.05bn the Walt Disney empire bought 100% of George Lucas’ production company, which owns the Star Wars franchise. The deal marks the second biggest acquisition in Disney’s history, only exceeded by the $7.6bn takeover of Pixar. And really, this is like a family reunion. Pixar used to be a division of Lucasfilm, which was launched in 1979, but spun out of the parent company in 1986. George Lucas, the godfather of Star Wars, will get about $2bn in cash from the proceeds of the sale, adding to his net worth of $3.2bn. Disney announced that three new Star Wars movies will follow, starting in 2015read article

Google is joining Starbucks in facing a parliamentary tax inquiry in the UK. Google is channelling most of its corporate sales through its headquarters in Dublin, thereby avoiding UK taxes on it. According to Margaret Hodge, chairman of the committee the corporation will face:

Apple, Google, Facebook, eBay and Starbucks [i.e. all the poster children of globalization] have avoided nearly £900m.

It is estimated that the UK loses approximately £5bn annually due to tax avoidance.

In an attempt to buy more time, Greek policy makers have agreed to push spending cuts worth €13.5bn and reforms through parliament. Greece is once again in danger of running out of money within the coming month. Today, the Greek parliament will vote on a bill scrapping the obligation for the government to own a minimum stak in formerly state-owned companies, which is expected to set the tone for developments in the near future. On November 12, there will be an EU summit officially dedicated to the management of Greek debt. It’s getting boring and all seems like a replay of last year. Count the days until someone suggests to devalue parts of the Euro again… read article

In the background, eurozone unemployment rose yet once more in September, gaining 0.1% from August and amounting to 11.6% overall. That means that 18.5 million people are currently out of work in the European Monetary Union (hello, Spain). Austria is maintaining the lowest unemployment rate of 4.4%read article

So long.

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It’s the politics, stupid!

There won’t be a news brief tomorrow, September 25, 2012.

Today, and possibly this entire week, is about politics, whether underlying or obvious.

The UK is getting a new bank. This government-backed brain child of Business Secretary Vincent Cable is the latest idea to poke the lending market back to life. The British business bank is a way of starting from scratch with a new clean balance sheet, argues Cable. A little bit like buying new socks after having worn a pair once. But the bank won’t be a public affair: privately run, proceeds from selling shares will add to the £1bn government injection. A harsh comment from the FT:

The announcement is, partly, an admission of failure of government attempts to free up lending. The coalition’s early loan targets for banks, Project Merlin, proved ineffective and was quickly dropped. It was replaced by a national loan guarantee scheme and, most recently, a “funding for lending” scheme to provide cheap finance to banks offering business or home loans.

Let’s see how long this one will be around for. read article

This week may see the official bailout request from Spain to the bottomless savings account that is the EU. This is exciting because it will test the ECB’s new bond purchasing policy and, well, it might save Spain. The request is contingent on the results from Spain’s bank review, determining available credit line. On Thursday, the country will also announce its 2013 budget, suggesting that the bailout business will wait until Friday. This may come to the discontent of Angela Merkel, whose cabinet said that Rajoy had to make up his mind rather sooner than laterread article

Next door in Portugal, the government has indicated to abolish an austerity measure that would increase worker contributions to lower overall labor costs to avoid a country wide protest. read article

Otherwise, the BAE-EADS merger is becoming more politicized, as BAE fears its customer relations with the pentagon will suffer, and the German Ifo business climate index fell unexpectedly to a 2.5 year low. Oh nein!

Meanwhile, China and Japan are edging further towards a full-blown political conflict, with three Chinese ships ‘casually floating through’ the disputed area of the East China Sea today. read article

And not just as far east, in BelarusAlexander Lukashenko, “Europe’s last dictator“, appears to have secured all parliamentary seats once again. read article

So long.

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“an intriguing day for monetary policy”

So there we go. Bernanke announced what everybody wanted to hear. For $40bn per month, the Fed will buy agency mortgage-backed securities until the labor market shows any signs of vitality besides twitching. Rates will stay locked in until summer 2015.

“We’re not promising a cure to all these ills,” Bernanke said at the news conference. “But what we can do is provide some support.”

It sounds like he really tried, although I’d also hope that the amount of crises we’ve been through has yielded a financial enlightenment that distances us from the conviction of quantitative easing as a panacea. Unfortunately, it sparked an avalanche of negative commentaryFT Lex appears outraged:

Markets had been expecting Federal Reserve chairman Ben Bernanke to refill the punch bowl. He did, but the forgot the fruit juice. The Fed is now ladling out straight booze.

Altogether, “an intriguing day for monetary policy.

In Japan, the yen rose against the dollar in response to the Fed’s action, leading policy makers to threaten currency intervention in response to the response, hoping to get the Bank of Japan to ease their policies in response to the response to the response. read article

Back in the USprocrastination is on the best way to be signed into law. Passed by the House of Representatives and now with the Senate, the bill in question allows lawmakers to postpone dealing with the government’s funding gap, including the eminent expiry of tax cuts in January, until after the elections. It will also keep the government from running out of money in October, as it guarantees another six month of funding of state agencies. The stopgap budget is the fence at the fiscal cliff, the overused term describing the above, but it is not the only looming problem for America’s finances. Remember last year, when there was too much debt and too little ceiling? Yeah, that will happen again, it’s just a matter of time. read article

Yesterday, Greek unions agreed to a general strike on September 26. Simultaneously, IMF officials said the country would need a third bailout and had only fulfilled 22% of the conditions of the last one. Greece denied the allegations.

After its presentation on Wednesday afternoon, Apple has already sold out of the new iPhone 5, just one hour after the presale opened online. That was quick. Those who still got an order in, will receive their device on September 21. Everyone else will have to wait for restocking, suggesting an even more positive Q4 sales forecast for Apple. read article

Weekend reading:

– One for the “awesome people hanging out together” list: Michael Lewis and Barack Obamaread article

– “If regretsapologies and promises to behave better were redeemable for cash, the world’s banks would be rolling in it,” read article

– The U.S. Employment-Population Reversal in the 2000s: Facts and Explanationsread article

– Bridgewater Associate’s CIO Ray Dalio on … everythingread article

Have a good one.

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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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Sovereign crises stream of consciousness


There won’t be a News Brief tomorrow, Tuesday, 21 August, 2012.

The ECB, obviously tired of the 7% yield-of-death benchmark, is said to implement a high-yield interest rate threshold, which would forbid any buyers to purchase government debt of struggling economies when their borrowing costs exceed a certain percentage. And then? Then, the ECB will step in an take on that debt. This is following the bank’s August statement that it would only start buying Spanish and Italian bonds if the countries explicitly request aid. Contradictory. Needless to say, ze Germans are against this. read article

Aha! Look at that, the ECB is annoying denying everything.

But speaking of Germany… Angela Merkel is meeting Antonis Samaras in Berlin on Friday, where he will fail to say “thank you” and she will push Greece’ compliance with the initial targets and conditions that were set as part of the €130bn bailout package. Otherwise, this Monday marks another day on which Greece did not default. To commemorate the day, the ECB’s Joerg Asmussen told the Frankfurter Rundschau the following:

Firstly, my clear preference is that Greece should remain in the currency union. Secondly, it is in Greece’s hand to ensure that. Thirdly, a Greek exit would be manageable. It would be associated with a loss of growth and higher unemployment and would be very expensive – in Greece, Europe as a whole and even in Germany.

In other words: I don’t want the Grexit, but “there are Greek people living there,” so what are we going to do…

But speaking of defaulting countries. Belize is facing to default on its pile of debt worth $543.8bn on 19 September unless it strikes a deal with its creditors. Belize is asking its lenders to take a 45% haircut or to accept a delay in debt payments by 15 years. Sounds like a pretty bizarre case of blackmailing if you ask me. Recent history has taught us that potential defaults don’t really happen, but as the ECB isn’t involved in South American debt scenarios this may turn out differently (hello, Argentina!). read article

The commodity du jour is hay, after the hardly standardized product saw price gains above those of soy and corn. read article

The House of Commons and the Treasury have released a report to preliminary findings in the Libor probe, mostly blaming the Bank of England, then the FSA and then the bank again. The real report promises to be exciting holiday reading.

So long.


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Chinese inflation down, Goldman Sachs bad at German

Chinese inflation eased to 1.8% in July, more than the 1.7% expected by some, but less than the 2.2% in June and much much less than the 6.5% in July 2011. The most immediate reaction, paired with data showing the slowdown of industrial production and retail sales, is hypothesizing over the urgency, likelihood and effects of more quantitative easing by the Chinese government. Here’s the back and forth as according to Alphaville vs SocGen

The banking scandal du jour concerns UBS: discs indicating tax fraud of “big clients” showed up in Germany, while the bank is shifting to the center of libor manipulation claims in the US.

Otherwise, Greek unemployment rose to 23.1% in May, which is an increase of 0.5% from April. On the upside, industrial output has risen 0.3% after previously slumping by 2.9%. Yay. Fitch downgraded Slovenia, while warning Japan to get a grip on its debt measures to avoid a downgrade themselves. Further, the ECB has cut its 2013 GDP forecast from 1% to 0.6%, following a growth forecast cut of the Bank of England just yesterday. The FT argues that BoE is running out of things to do, while the pound is said to be headed for a slump.

After inventing the term BRICs for the emerging markets of Brazil, Russia, India and China, which later got extended for South Africa and also kind of included Indonesia at some point, Jim O’Neill, father of economic acronyms and chairman of Goldman Sachs Asset Management, got a new one in stock: MIST. And the MIST-countries are outperforming the BRIC-countries by a mile, according Goldman. Even the anti-anglo-saxon Germans appreciate the new promising investment turfs. Somewhat amusing, because loosely translated the acronym for Mexico, Indonesia, South Korea and Turkey means ‘shit’ in German.

So long.

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Protectionism vs. globalization, round 65

Recap of yesterday’s May Day protests:

Spain saw more than 80 protests, most of which were motivated by the country’s ridiculous unemployment figures. InGermanymore than 400,000 unionists went on the streets showing their discontent with the government’s austerity measures. Obviously, there were demonstrations in Greece and France as well, but since that’s pretty much the norm now, it doesn’t seem worth mentioning. read article

In the US, most expected Occupy protests were peaceful, except for an “anarchist faction.” (Also, great picture, Reuters…)

A very fitting comment from an FT reporter on the interweb:

A thought: shouldn’t the “austerity vs growth” debate in Europe have been settled before austerity was hardwired into EU law?

In the NetherlandsGeert Wilders, leader of the far-right freedom party, has announced that his campaign for the general elections in September will advocate a Dutch exit from the EU. In an interview with new broadcaster NOS, he said

“We can be a member of the European Economic Area just as Norwayor of the European Free Trade Association, as Switzerland.”

This is really upsetting for a whole truckload of reasons. First and foremost, the only thing that keeps Europe from [continuously] falling into pieces is the interconnectedness of its countries. Arguably, a contract that forces nations into a union is worth more than alliances of independent parties. What is more, it’s like we’ve left the peak of globalization and the appreciation thereof far behind us and all that’s left is Occupy, a broken EU and protectionist policies.

On Project Syndicate, former LSE director Howard Davies, argues why protectionism is bad.

Tonight will see the last stand [off] between Nicolas Sarkozy and Francois Hollande. The 2.5hr debate, which I expect to be filled with contradictions and anti-European statements and which the French expect to be watched by 20 million people.

Otherwise, Germany has added a bureaucratic layer for oil companies by forcing operators Germany’s 14,700 gas stations to register their purchases and prices to harmonize [consumer] prices across the country. Needless to say, the industry is little amused. Also, now that it’s May, it’s time to have a look at how the world was doing in April. The answer is pretty consistently ‘shit’… read article

So long.

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The Spanish explosion

Spain is exploding, and that is mainly shown in its bond yields. As high as last year in December, 6.15% on 10-year bonds gives reason to worry. Reuters, by the way, seems to think the worst is behind us, writing

Spain’s debt yields broke above 6 percent on Monday as investors worried about its budget, knowcking the euro and sending safe-haven German bonds to a record last set at the height of the euro zone crisis.

It’s fine, guys, we already hit rock bottom!

Here is the FT’s Wolfgang Muenchau on the topic, trying to figure out which scenario would really be worst. Excerpt:

The investors I know are worried that austerity may destroy the Spanish economy, and that it will drive Spain either out of the euro or into the arms of the European Stability Mechanism. The orthodox view, held in Berlin, Brussels and in most national capitals (including, unfortunately, Madrid), is that you can never have too much austerity. (…)

So Spain won’t meet its deficit targets. Big deal. [Well, yeah, it kind of is.] Here’s Alphaville’s explanation of what to do with the outlaws as set out by the new Stability and Growth Pact.

Also, the time has come to bid Merkozy farewellSarkozy, who is desperately trying to win back his country in the current presidential election, supports a stronger support role of the ECB, more or less modeled on the Federal Reserve. That, however, is quite contrary to the opinion of Angela Merkel, but in line with that of his opponent Francois Hollande. Ouch. At one of the 17 EU summits in December, Merkozy had agreed to stop commenting on the role of the ECB. I guess someone’s going to get an awkward phone call. read article

While this morning was sunny in London, we’re going to get rained on for the rest of the week. Spring has died and summer will never ever come. There you have it. But no, I will not start doing the weather forecast, this has another reason: drought. Yes. Apparently, the UK is too dry for this time of the year, which is bad for food prices, consumer spending and the inflation rateread article

Finally, Tyler Cowen’s (from Marginal Revolutiontake on food and restaurant choices and why you shouldn’t go to trendy places with beautiful women – for utility reason, of course. read article

So long.

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