Economics

Like QE, the ECB’s Long-Term Refinancing Operations Will Continue for Years

April 23, 2012
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Like QE, the ECB’s Long-Term Refinancing Operations Will Continue for Years

I came across an article in The Telegraph by Ambrose Evans-Pritchard which does a good job of highlighting the circularity of the ECB’s LTRO and associated bond buying. As banks throughout Europe took advantage of ECB stimulus, which they were de facto encouraged to do by Mario Draghi and the ECB, it is clear that both the stimulus itself as well as ECB sovereign debt purchases will be needed until there is a solid economic recovery throughout the periphery of Europe. With austerity implementation to reduce deficits, economic recovery for many counties in Europe could be years away. With the automatic stabilization mechanisms in peripheral Europe broken as weaker economic growth leads to higher interest rates it will become necessary for Europe to continue to cap interest rates to...

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Bernanke’s Labor Market Speech – The Case for Continued Accommodative Policy

March 30, 2012
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Bernanke’s Labor Market Speech – The Case for Continued Accommodative Policy

Ben Bernanke made a highly referenced speech earlier this week, which was credited with fueling a sharp rally in the stock market. The speech was colorfully titled: “Recent Developments in the Labor Market” and is a worthwhile read for investors and those interested in the US economy. The speech highlights a growing controversy in the labor market regarding the constraints on hiring. The traditional school of economic thought focuses on the cyclical factors which have depressed hiring and constrained labor market improvements. In Fed speak this is described as insufficient “aggregate demand”. A new school of thought is emerging focusing on the bottlenecks in the job market stemming from; the aging of the workforce, globalization, and technological change. Obstacles based on these reasons are described as “structural impediments”. Ben...

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Welcome to the World, North Korea – Investment Opportunities Will Eventually Sprout

March 13, 2012
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Welcome to the World, North Korea – Investment Opportunities Will Eventually Sprout

North Korea has been isolated since the disintegration of the Soviet Union in 1991. Significant amounts of communist aid ceased, and the fall of communism across Eastern Europe ultimately had a profound impact on the Democratic People’s Republic of Korea for the next two decades. North Korea was figuratively and literally off the grid as the country experienced severe shortages of electricity, energy, and food for many years. Society was more advanced around the time of Mao Zedong’s death in 1976 compared to today and the economy was much more productive. North Korea has been one of the few industrialized civilizations to experience famine during peacetime over the past 50 years. The state controlled media ranks second to last in terms of the World Press Freedom Index (if you’re...

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The Economic Process of Deleveraging Part Two – Why the US is Well Positioned

February 22, 2012
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The Economic Process of Deleveraging Part Two – Why the US is Well Positioned

The differences between the US situation post-financial crisis and Japan in 1990 are stark. The previous post outlined how extreme things got in Japan and how ahead of itself the Japanese stock market, real estate market and economy got. While Japan was exposed to “extreme extremes” the US economy experienced imbalances that could be worked off much more quickly. Real Estate Excess Has Been Wrung Out Over 5-years The US experienced multiple years’ worth of double digit real estate gains. The gains were spectacular and fueled by credit standards which continued to loosen until the point where the housing market evolved into the concept of “renting with the option to own”. When mortgage financing was willing to underwrite this type of one-way asymmetric risk the party was bound to...

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The Economic Process of Deleveraging Part One – What Happened in Japan?

February 9, 2012
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The Economic Process of Deleveraging Part One – What Happened in Japan?

The process of deleveraging has been in place since the onset of global recession and financial crisis in 2008. Many investors and economists have highlighted how long the process can take once it gets going. It’s striking how the theme of deleveraging, broadly speaking, is universally assumed to play out over a very long time. Japan is the oft cited example of how a deleveraging processes can take 20 years or more! It is all very alarming given that the western world’s recent crisis is only 2-3 years in. At risk of sounding Pollyannaish, there are dramatic differences between the economic situation in Japan in the late 1980’s and the US in 2008. For a number of reasons, I believe that a decade-long deleveraging process in the United States...

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When Greek Debt Servicing Resolves – Spain is the Key to the Eurozone Compact

February 2, 2012
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When Greek Debt Servicing Resolves – Spain is the Key to the Eurozone Compact

The Spanish Empire reached the height of its powers in the 1500’s. Naval supremacy, decades of rapidly rising wealth, discovery of gold, and influence over the Catholic papacy led to Spain becoming a dominant world power. It wasn’t until Philip II and The Great Armada’s defeat against the English in the Anglo-Spanish War that Spain’s global power and sphere of influence crested. Fast forwarding 400 years, all of Europe and Spain are in a new crisis which is economic as opposed to military. As attention inevitably shifts from Greece to the next country at risk of contagion, the dynamics in Spain are likely to determine the EU-17’s future path. Spain has been through the wringer and if the country can emerge from recessionary dynamics, then all of Europe can....

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Global Demographics – An Important Multi-Year Investment Theme

January 26, 2012
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Global Demographics – An Important Multi-Year Investment Theme

With much fanfare, estimates of the earth’s population recently surpassed 7 billion people. Population growth rates have been staggering for decades, for a number of reasons. The straightforward explanation is that global birth rates have remained high while there has been tremendous improvement in child mortality rates and life expectancy. Sewer system implementation in the 1800s helped separate waste from drinking water and cut down on the spread of cholera and typhus. Later medical advances in the form of a smallpox vaccine and Penicillin, coupled with DDT control for Malaria, helped more people live longer. As people lived longer, more reached childbearing age and had children themselves. Back in the 18th century, replacement fertility was up to six children. In order to keep population stable, women needed to have...

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Inflation in Europe is Sticky – Another Reason the ECB to Remain Balanced

January 12, 2012
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Inflation in Europe is Sticky – Another Reason the ECB to Remain Balanced

December inflation data was released this morning in France and Germany. In both countries, the inflation rate was higher than expected and failed to come down relative to prior months. EU harmonized German inflation was reported at 2.3% and EU harmonized French inflation was 2.7%. Two large economies yet to report inflation data are Spain (to be released on Jan 13th) and Italy (to be released on Jan 16th). The stickiness of inflation shouldn’t be a complete surprise because part of the higher inflation in Europe is structural based on labor market and corporate sector rigidities. The process of implementing the structural reforms which have been described as essential will take a long period of time. The positive flow through to inflation dynamics could take years. Despite inflation remaining...

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Philippine Central Bank – Another Emerging Market Set to Ease Monetary Policy in the First Quarter

January 11, 2012
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Philippine Central Bank – Another Emerging Market Set to Ease Monetary Policy in the First Quarter

The Philippines is a very large nation that is off the radar of most mainstream economic analysis. The country has a population of 93 million, and the economy has enormous potential but has exhibited inconsistent growth. The economy of the Philippines has a decently developed electronics/semiconductor industry and has a large export industry for fruits, palm oil, and coconut oil. The World Bank estimates that the Philippines is the 43rd largest economy in the world yet many investors would be shocked to learn that it is forecast to be top 20 in the world by 2050. Economic growth in the Philippines has been volatile based on agricultural gearing and dependence on inflows of overseas remittances. While the Philippines is not a member of the BRICS-2 (CIVETS) it is a...

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Negative German Yields – Implications for Risk Averse Financial Markets

January 10, 2012
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Negative German Yields – Implications for Risk Averse Financial Markets

On Monday, Germany gained entrance to a rarified club of sovereign nations which were paid to borrow money. This has been a feat which the US was able to accomplish during the depths of the financial crisis. Now Germany has been able to achieve the same feat during the Eurozone sovereign debt crisis. In a debt auction on Monday, Germany was able to sell 3.9B EUR worth of six-month debt priced at an average yield of -0.0122%. The auction was almost 2x oversubscribed. Investors were willing to pay Germany a little over a basis point to take money for six months and simply give it back. These are fascinating times within financial markets, where there is no term premium for money and such extreme risk aversion. There are a...

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Spain & Germany – In Sickness and in Health

January 4, 2012
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Spain & Germany – In Sickness and in Health

The plan forward with the Eurozone crisis is the German plan forward. Germany has proposed closer fiscal union and increased austerity for EU-17 nations with high deficits and/or high debt burdens. This path suits German interests well because there is little that needs to be changed. Unfortunately from Spain’s standpoint, the German path forward is not what Spain needs. This dynamic is highlighted with yesterday’s unemployment releases. Spain hit a 22.8% unemployment rate, which is an all-time high, while Germany released a 6.8% unemployment rate, which represents a new low since German reunification. Here is a chart of the unemployment rate spread (as defined by Spain less Germany): It is clear that Spain needs dramatically lower interest rates relative to appropriate monetary policy set rates for Germany. It is...

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Investing Ahead of a European Recession

December 14, 2011
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Investing Ahead of a European Recession

Investing ahead of a recession is like a trip to the dentist for a filling when the Novocain isn’t quite right. You know you are in for some pain, but it’s unclear just how much, and how long it will last. Europe is accepting the German path forward, which will at a minimum, lead to plenty of pain for many countries. Spain, Portugal, Greece, Belgium, Italy, and France are all experiencing, or likely to experience, a recession. Forward looking indicators have turned down, confidence has been dashed, austerity is being implemented, European financial assets are down sharply, and interest rates are higher. The ECB is taking a minimalist approach to fighting the recession and the 17 countries in the Eurozone have different agendas, interests, and policy aims. In the...

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