On The Edge
From the creator of the new normal, and the bimodal World, here are some points worth reading. By PIMCO’s El Erian via Foreign Policy.
The global economy is balanced precariously between total collapse and salvation. Here are four tipping points toward disaster and four things that could get it back on track.
The year 2012 is Europe’s moment of truth. If their dithering continues, European politicians will soon lose control of the continent’s economic and financial future. After all the excitement of 2011, it is also a make-or-break year for some Middle Eastern countries in the midst of tricky political transitions. Even the United States is being shaken out of its social slumber as concerns mount about income inequality and, more generally, the fairness of the “system.
(Full article here).
Economic Collapse of the Western Nations
Hudson and Kaiser on the Economy, Europe, Ron, Iran, Austrian Economics and much more. Video below.
Greece to leave the Eurozone and become a German colony
Guest Post by Bill Mitchell.
The Euro leaders are having another Summit in Brussels today – another one – the 17th in two years. I think they are getting used to the nice wine and sumptuous food that is served up. Little ever comes from these summits that is of any productive import. This time they plan to set in concrete balanced budget rules to be embedded into the national legislation of EU member states yet at the same time propose job creation and growth strategy. The job creation strategy is allegedly going to focus on the youth of Europe who are becoming unemployed and excluded in increasing numbers as time goes by. The lunacy is that Europe’s youth started losing their jobs some years ago yet the leaders are now expressing concern. Also over the weekend, there was a leaked German proposal for today’s summit detailing how Greece should leave the Eurozone and become a German colony. My how audacious our Teutonic friends have become!
(Full article here).
News That Matters
Ft.com
Bank of America is shaking up the leadership of its investment bank as it looks to find its footing in a difficult market environment, says Reuters, citing a memo sent to employees on Sunday by co-chief operating officer Tom Montag. http://ftalphaville.ft.com/thecut/2012/01/30/856791/bofa-shuffles-investment-bank-leaders/
US banks fear that any recovery in the US housing market will be further delayed as a result of moves to remove credit ratings from American regulations, which will boost banks’ capital requirements by billions of dollars, http://ftalphaville.ft.com/thecut/2012/01/30/856631/us-banks-warn-against-new-risk-weightings/
British and Swiss regulators are likely to begin enforcement proceedings against UBS for shortcomings that allowed a London trader to make unauthorised trades last year, the WSJ says, citing people familiar with the situation. In September, http://ftalphaville.ft.com/thecut/2012/01/30/856521/ubs-to-face-discipline-from-regulators/
Iran’s oil minister said on Sunday that oil sales to “some countries” would be halted soon, amid pressure from the parliament that the government should pre-empt a looming European embargo, the FT http://ftalphaville.ft.com/thecut/2012/01/30/856541/iran-to-halt-exports-to-some-countries/
Europe’s carmakers are crying foul over a proposed trade agreement between the European Union and India, which they say would restrict access to one of their most important but highly protected markets, http://ftalphaville.ft.com/thecut/2012/01/30/856531/europes-carmakers-hit-out-at-india-trade-deal/
Banking Wasn’t Meant to Be Like This
From one of the free thinkers out there. By Mr Hudson;
What will their future be – and what is the government’s proper financial role?
As published in the Frankfurter Allgemeine Zeitung.
The inherently symbiotic relationship between banks and governments recently has been reversed. In medieval times, wealthy bankers lent to kings and princes as their major customers. But now it is the banks that are needy, relying on governments for funding – capped by the post-2008 bailouts to save them from going bankrupt from their bad private-sector loans and gambles.
Yet the banks now browbeat governments – not by having ready cash but by threatening to go bust and drag the economy down with them if they are not given control of public tax policy, spending and planning. The process has gone furthest in the United States. Joseph Stiglitz characterizes the Obama administration’s vast transfer of money and pubic debt to the banks as a “privatizing of gains and the socializing of losses. It is a ‘partnership’ in which one partner robs the other.”1 Prof. Bill Black describes banks as becoming criminogenic and innovating “control fraud.”2 High finance has corrupted regulatory agencies, falsified account-keeping by “mark to model” trickery, and financed the campaigns of its supporters to disable public oversight. The effect is to leave banks in control of how the economy’s allocates its credit and resources. (Full article here).
Legal Loopholes when Merkel tries saving Europe
Last year everybody “knew” Europe was about to vanish from the World Map. Now, as we still enjoy the last fumes of the Santa Rally, let’s once again reconsider what Europe (Germany) wants to do with Europe. PSI, Greece, Italy/Spain bonds, LTRO are all words in fashion, but what is Merkel actually telling Europe? From Spiegel;
It’s German Chancellor Angela Merkel’s pet project — a new European Union fiscal pact to insure members’ budgetary discipline through stricter controls. But European legal experts have doubts about its viability, while critics say there are more important issues at hand.
People seem to have forgotten what was signed some 20 years ago regarding deficits and budget discipline. Now it is up to Germany to decide what Europe should do.
Because Chancellor Angela Merkel pushed the reform through almost entirely on her own, the new accord reflects a number of German suggestions. Each country that signs must introduce legal limits on budget deficits — a so-called debt brake. If they exceed the structural debt limit of 0.5 percent of gross domestic product (GDP), the debt brake mechanism will automatically go into effect, and they will face fines from the European Court of Justice.
On the other hand, EU is full of contradictory laws, and it will be great joy watching the politicians solving this problem…
Que pasa Espana? Unemployment hitting new record levels!
Spain is now joining many of the weakest Economies of the World when it comes to unemployment. The Trader has written extensively on the problems Spain is facing. One of the largest problems, despite hidden debt, collapsing properties etc is the huge unemployment, still climbing. Many still agree that Spain is not in that bad shape, yet. What if the recession starts hitting Spain for real? Where will unemployment go to next? The most scary part of the unemployment is the big youth unemployment, now just having broken 50%! Spain is now facing a “lost generation”. Motivating these people into getting a job will be very hard. Even if Spain manages reducing the youth unemployment by half, it would still be 25! Youths of Spain are in some big Pain. From RTE.
Official figures show that Spain’s jobless rate shot up to 22.85% at the end of 2011, the highest rate in the industrialised world.
The number of unemployed burst through the five-million mark, surging 295,300 to 5.27 million in the last quarter of 2011, the National Statistics Institute report showed.
As a result, the jobless rate at the end of 2011 surged to a near 17-year record, rising from 21.52% in the previous quarter.
News That Matters
Ft.com
Italian 10-year bond yields briefly dropped below 6 per cent for the first time since the European Central Bank announced plans for emergency three-year loans in December to stave off a credit crunch in the eurozone. http://ftalphaville.ft.com/thecut/2012/01/27/854741/italian-yields-briefly-fall-below-6/
Greece and its private creditors made progress on Thursday in talks on restructuring its debt, reports Reuters, with both sides saying they will continue negotiating on Friday with the aim of sealing an agreement within a few days. http://ftalphaville.ft.com/thecut/2012/01/27/854721/greek-deal-edges-closer/
Samsung Electronics posted a record $4.7bn quarterly operating profit, driven by booming smartphone sales, and will spend $22bn this year to boost production of chips and flat screens, reports Reuters. http://ftalphaville.ft.com/thecut/2012/01/27/854701/smartphones-help-samsung-to-record-profits/
The world’s biggest banks are set to have a new voice on the global regulatory stage as a little known body that acts as an umbrella group for three regional trade associations beefs up its profile and changes its top management, http://ftalphaville.ft.com/thecut/2012/01/27/854611/global-body-to-represent-big-banks/
News That Matters
Ft.com
The US Federal Reserve has set the stage for three more years of ultra-loose monetary policy in the world’s largest economy, prompting an immediate fall in bond yields, the FT reports. The rate-setting Federal Open Market Committee predicted low interest rates until late 2014 and set a formal inflation objective of 2 per cent,http://ftalphaville.ft.com/thecut/2012/01/26/852121/fed-sets-path-for-three-years-of-low-rates/
In a forthright opening speech to the World Economic Forum in Davos, Angela Merkel said that Europe could only recover the confidence of global markets if the weaker European economies boosted their growth and competitiveness with structural reforms, http://ftalphaville.ft.com/thecut/2012/01/26/851971/merkel-questions-calls-for-bigger-bail-out/
Iran has threatened to pre-empt a European embargo on its oil by halting its exports to the region immediately, a move that could hit economically weak southern European countries, the FT reports. The European Union this week approved a ban on crude oil imports from Iran from July 1, http://ftalphaville.ft.com/thecut/2012/01/25/851931/iran-threatens-to-act-first-on-eu-embargo/
Friday the 13th may be an unlucky omen for Portugal. On that day, almost two weeks ago, Standard & Poor’s became the last rating agency to downgrade Lisbon to junk, marking the moment for many investors when default looked inevitable for Portugal as well as Greece, http://ftalphaville.ft.com/thecut/2012/01/25/851911/portuguese-bonds-hit-as-traders-fear-default/
Great Expectations
Most Canadian pension funds are banking on 7% annual returnsforever. Over the next few years, this unrealistic expectation will costthe respective governments and companies millions in shortfalls.In the USA, the California Public Employees Retirement Systemassumes it will earn over 7.75% annual returns. This false hope willresult in over $6 billion a year in lower than expected investmentincome, that will also have to be paid by the financially challengedstate (ie. taxpayers).Meanwhile, Thelma O’Keefe continues to quietly sock away 5% of herpaycheck each and every week and has no idea what all the fuss willbe about when she is eventually told her pension benefits will beslightly less than originally promised.Over 50 years ago, the average worker started to earn pensionbenefits and has been dreaming of working less, and golfing more,ever since. The Defined Benefit Pension Plan has been the rock of thisdreamy foundation and is certainly a costly beast to say the least.Once the auditors, actuaries, custodians, lawyers, administrators,consultants, performance measurement guys, trustees andinvestment managers have been paid for their services, is there littlewonder most of these retirement funds are running a little short.Yet , the primary reason most people fall asleep with even a slightmention of the words “pension funds” is due to the complexities andconfusion resulting from this cumbersome investment scheme.
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