POSTERITY MEASURES

Jobs or the credit rating?

The other day Krugman put some worthwhile stuff out about how dithering over the debt is the wrong priority for DC. 

Here’s El Arian saying the national credit rating should be a top objective. I would be more inclined to agree if the ratings agencies had more legitimacy.

I tend to subscribe to the version that the comatose labour market, not the perception of our future financial solvency, should be immediately addressed. 

The sage speaks

Being married to someone who graduated from Harvard, you don’t hear heaps of Yale praise around the home. That said, I regard Shiller as being in a class of his own so I’m looking forward to this.

Interested parties ought to take his Financial Markets class through the Yale Open Courses. It’s also available on iTunes U.

Real stats

The other night I had a friend from Shanghai over for a pizza and some beer. I asked him about the recent bump in the Chinese PMI and he said he doesn’t believe the numbers. That must be frustrating, I thought, to live in a place where you have to question what’s behind the economic data releases.

This coming Friday the Department of Labour will provide December’s (un)employment numbers. Obviously there’s a seasonal consideration, but it’s likely that the latest 8.6 will shed a bit. But how much of that can WE believe? One thing’s for certain, if you’ve fought for the country, you’re (statistically) worse off.

If anyone can provide me with a plain English guide to unemployment numbers and criteria, please do. Otherwise, I’ll write one myself.

Guest post: Whither the pound?

2012 will surely be another ribald year in the currency markets. This article is by Andrew Hallett of Consumer Focus in London.

Whither the pound?

Sterling enjoys a renaissance, of sorts.

Britain is not used to coming third at anything (it is not even in the top five economies on most measures anymore) but economic prestige can be measured in other ways. Certainly the pound’s position as the world’s third most held reserve currency is something to cling to in these testing times for the UK economy.

Last year 4% of all currencies held by the world’s central banks were dominated in Sterling, up from just 2.8% in 2000. Despite Japan’s considerably larger economy Yen holdings have not hit such a level since 2003. Undoubtedly this is due to London’s disproportionate influence as a financial hub and the spill-over effects from Eurozone-proximity. It also reflects a belief that Britain is fundamentally a nice boring economy that can pay its way, despite recent budgetary indiscipline.

Does this mean anything for British business and consumers? Certainly it helps the trade balance, enabling UK plc to buy any commodities listed in sterling at a small advantage compared to countries that do not issue such large quantities of reserve currencies. This should please the UK Chancellor, George Osborne, who has made increasing net exports a key plank of his economic policy. A bigger plus is the borrowing latitude such reserves also permit Britain, essential at a time of still high budget deficits; the resultant lower yields also help with credit and economic growth.

Interestingly Mr Osborne (via the Bank of England) is also keen to build-up Britain’s own bank of reserves of other currencies; partly to hedge against future financial troubles and partly to imply that his Labour predecessor let things slip. Other countries buying sterling may have similar, political motives – Oman, for example, a former protectorate of Britain, holds more than 5% of its reserves in pounds, presumably also motivated by anti-US feeling and so ill disposed to the dollar.

Other friends of the pound are the central banks of Eastern Europe, both inside and outside the European Union. The increasingly strong Polish central bank holds more than 10% of its foreign reserves in sterling, a percentage that can only increase if and when that country joins the euro zone. In comparison to the turmoil in that bloc the UK is a model of economic stability and predictability.

There is, however, some possible worry attached to the sterling’s increasing popularity. The last time monetary authorities around the world started holding more pounds with such keenness was the early 1990s, a decision based on Britain’s entry into the European Exchange Rate Mechanism (ERM).   That experiment in currency fixing ended in national humiliation, and billions of pounds down the drain, when Britain crashed out in 1992, unable to maintain sterling’s artificial value against the mighty Deutschmark. This time investors are banking that the pound can justify all the money invested in it, and it is Britain’s continental neighbours, if anyone, who will suffer from economic hubris.

Interesting AMZN valuation debates

Heather Bellini at Goldman says Amazon’s in for pain.

Doug Anmuth at JPM says it isn’t so.

I’m more with the latter.

Amazon at $200+ by March? I think yes.  

Global climate improvement?

It’s January first in New York. Aren’t we supposed to be under two feet of snow by now? Or at least wearing scarves and hats everywhere that’s not within 15 feet of a radiator? 

I picked up groceries wearing only a t-shirt today and as I walked by the dozens of other people on the street with other thin cotton clothes and coats wide open or folded under their arms, I became uneasy about the whole thing.

You know that feeling when you think you’ve gotten some great bargain but the seeming impossibility of the transactions terms makes you suspicious about the quality of the product? Like maybe paying more would have been better because you could trust that you gave something up to get something?

Not to be a downer but that’s how I see 55+ degrees and sunny skies in January in the Northeast. 

New year, same old debate

Over dinner last night a friend mentioned lot of investors he knew had become more emphatic in expressing concerns over China’s outlook. Increasingly, sentiment seems to be that the Chinese government built too much too fast, and now the country’s ghost cities, faulty high speed trains, and risky initiatives like the electric car mandate will turn out to be unmanageable liabilities. Add falling global demand for what China produces and there is reason to believe that after two decades of phenomenal growth, the country could be in for a significant correction to the downside.

The main risk is what Michael Pettis articulates better than anyone else - namely that investment driven economic meltdowns (which he believes China could be facing), are more severe and enduring than demand-driven busts such as our own financial nightmare three long years ago. Pettis thinks a crash in China could cause a decade or more of subdued growth in the region. This accords with the Hayekian view that governments and markets exist in opposition to one another and central planning ultimately causes disastrous inefficiencies.

In some ways, though, China has already blown open the Austrian economist’s position by rocketing from agrarianism to the second largest economy on the planet, and sustaining double digit growth for two decades, with very comprehensive state intervention. In the terrific book Debt: The First 5000 Years, David Graeber argues that the notion that governments and markets lie in opposition is patently false, pointing out that markets were invented by sovereigns as a way to finance the maintenance of standing armies. Does that translate to 2012 when the Chinese government will most likely attempt to rectify economic imbalances with even more adjustments to the market it has created? And how sustainable is the foundation on which the newly engineered market is built?

In many ways the legitimacy of the model rests on the ability for China to continue providing its citizens with consistent improvements in living standards and greater opportunities for personal consumption. 2012 will be probably be the toughest year yet for Beijing to maintain that, though, as the world’s more mature economies extend their stay in the infirmary. 

Paulism conflated

Gideon Rachman gets it wrong in his analysis of what Ron Paul means for America.

He’s a good wordsmith but he missed the mark on Pau’s advance. A friend recently pointed out to me that’s Paul’s latest popularity is on account of the fact that a stopped clock tells the right time twice a day. That is, Paul’s been saying the same thing for 25 years and circumstances are now such that the message seems to make sense. I agree but I believe the 75-year old Texan offers the Republicans the best opponent of the would-be nominees to campaign against Obama next year.

If I were an Obama strategist I would view a campaign against Paul as more challenging than one against the ever-underwhelming Romney.

Healthy vol

Taleb on Obama’s failure to see the failure in US Middle-east policy, among other things. A great article and relevant to nearly every aspect of politics, economics and even social life. A good reminder that the more laws and order are made prominent, the more thieves and robbers there will be.

Vive la vérité. Vive le volatilité.

Chinese trade with US reflects the nature of our recovery

China sent more to the US in the most recently recorded month (October 2011) than in any previous month in history.

Maybe the China hard / soft landing debate has less to do with what Wen Jiabo and the gang come up with and more to do with how much consumer demand we drum up over here. Can’t, though, discount the effect of the seemingly inevitable demise of China’s largest trading partner - the EU.

On looting, corporate-style

John Bogle on the battle for the soul of capitalism.

Why is it relevant? We’ve moved from owner’s capitalism to manager’s capitalism. From an own-a-stock industry to a rent-a-stock industry controlled by speculators who sell to other speculators. So there’s no gain to anyone except the middlemen. 

Never before has a discussion about mutual funds been so riveting. Because never before have so few paid so little for so much (he’s talking about crony CEO and crooked bankers).

What does solvency mean to Kyle Bass?

Does solvency need to be redefined in 2012?

The US is paying almost 10% a year of central government revenue on interest payments.

Greece spends 16% of central government revenue.

2-year money in Greece is 100% and 10-year is 27%

Greece’s WACC is 4.4% - that’s the amount they’re borrowing at.

For anyone who thinks a 50% haircut on Greek debt is a solution, think again. Bass says it’s a full wipe out in the making. He defines the ECB as the optical backstop that owns 40% of the Greek debt.

Does debt matter?

Debt is the theme today. 

Debt will be the theme all year. 2012 will bring us closer to an answer for the question ‘how much does debt matter?’ To Kyle Bass, it does. I have to read more of Graeber to figure out his views.

The Duran Duran at the start (Come Undone) gives you an idea of the bias, but this video with Kyle Bass is worth a watch if you have an hour to get into his world.

It’s one worth knowing about.

Debt is when you take a promise and make it into mathematics

I’m a little late on it but I just started this book and so far it’s as good as anything I’ve read on finance ever.

Timely as 2012 will be another bumper year for debt as a topic. Whether it’ll be a good year for creditors, I can’t say.

What a drag(hi)

Will Mario get the firepower to save the kingdom(s) in 2012?