Lower leverage means lower profit (and loss) potential.
Friday, April 1, 2016
Deutsche Bank is not a happy camper
Deutsche Bank has been deleveraging. (WSJ, A1) Leverage pre-crisis was 61:1 compared to a European bank average of 39:1 and a US average of 13:1. Now, after selling €11 billion in equity and €5 billion in CoCos and shrinking its book leverage is 21:1, compared to 18:1 for the average European bank and 12:1 for the US. (WSJ numbers) The new CEO John Cryan is making further cuts after the €6.77 billion loss in 2015; his nickname in the bank is “Mr. Grumpy.”
Thursday, March 31, 2016
Factoid: US economic expectations in 2010
The WSJ today (A2) says that the US Government predicted in 2010 that growth from 2010 to 2015 would be 3.9%/yr and unemployment would drop from 10% to 5.9%. Growth was 2.1%/yr and unemployment dropped to 4.9%. The difference between growth and unemployment is anomalous; perhaps we are mismeasuring one or the other.
Factoid: Surprising increase in US gasoline demand
Today's WSJ reported that US gasoline demand in the 4 weeks ending last Friday averaged 9.4 million BPD, which is a summer peak-like level. (8.8 mn BPD in same period in 2014 and 2015.) Lower prices are having their logical effect. (Total oil demand was 19.4 mn BPD in 2015.)
Wednesday, February 24, 2016
Separated at birth: Russian gold reserves and Switzerland's 5000 franc bill
I recently read (WSJ, 2/23/16, C2) that demand for the CHF 1000 note, currently Switzerland's largest denomination, has been increasing as Swiss central bank rates have turned negative. This raises the fear that local depositors will soon be charged for storing their money in banks. There are now CHF 45.2 bn (US$45.7 bn) in circulation, a 17% increase in the last twelve months.
Two gnome-like parliamentarians from Zug, near Zurich zeroed in on this and proposed that the SNB also Issue CHF 5000 notes, arguing that "an individual's ability to keep wealth stockpiled in cash, and out of the reach of banks, digital payment systems or the government, is a fundamental right." (WSJ's paraphrase)
Meanwhile back in the Kremlin, Bank of Russia President Elvira Nabuillina, a Tartar and worthy scion of the Golden Horde, whom Euromoney has named Central Banker of the Year in 2015, is buying all the gold she can get her hands on. (Well, almost all) In the fourth quarter, the Bank was reportedly the world's largest single buyer of gold, and in January alone it added another 700,000 ounces ($840 mn). Russia's concern is that by holding dollars in reserve it risks having them effectively cancelled by denial of access to the international transfer system, which is the only way these ones and zeroes in the their computer have any value. It is interesting that the Zug solons also expressed concern for digital payment systems in arguing for the CHF 5000 bill. (By the way, one of the ideas discussed last year by the US authorities was to close the payment system to Russia to force them to default on their external debts, which are mainly corporate, thus strewing chaos; international creditors did not like this idea, however.)
Money is a means of exchange and a store of value. In the dollar world, both of these functions are available at the pleasure, and only at the pleasure of the Fed and the US Treasury. That is why politics worry some and "unconventional policies" worry others.
Two gnome-like parliamentarians from Zug, near Zurich zeroed in on this and proposed that the SNB also Issue CHF 5000 notes, arguing that "an individual's ability to keep wealth stockpiled in cash, and out of the reach of banks, digital payment systems or the government, is a fundamental right." (WSJ's paraphrase)
Meanwhile back in the Kremlin, Bank of Russia President Elvira Nabuillina, a Tartar and worthy scion of the Golden Horde, whom Euromoney has named Central Banker of the Year in 2015, is buying all the gold she can get her hands on. (Well, almost all) In the fourth quarter, the Bank was reportedly the world's largest single buyer of gold, and in January alone it added another 700,000 ounces ($840 mn). Russia's concern is that by holding dollars in reserve it risks having them effectively cancelled by denial of access to the international transfer system, which is the only way these ones and zeroes in the their computer have any value. It is interesting that the Zug solons also expressed concern for digital payment systems in arguing for the CHF 5000 bill. (By the way, one of the ideas discussed last year by the US authorities was to close the payment system to Russia to force them to default on their external debts, which are mainly corporate, thus strewing chaos; international creditors did not like this idea, however.)
Money is a means of exchange and a store of value. In the dollar world, both of these functions are available at the pleasure, and only at the pleasure of the Fed and the US Treasury. That is why politics worry some and "unconventional policies" worry others.
Tuesday, February 23, 2016
Drug-induced optimism? Botox sales up. Consumer confidence down. It just doesn't make sense.
We note in the paper this morning that Allergan has reported good profits, thanks partly to higher sales of Botox (+10%) and Restasis (+18%). I guess the increase in Botox sales means the consumer is doing better; she has money to spend, and is ceasing to behave like the Madwoman of Chaillot, becoming more mindful of her appearance. Consequently, since it is hard to express emotion while under the influence of Botox, said consumer can neither cry nor laugh, pushing up Restasis dry-eye treatment sales.
What does this say about mass psychology following the Great Recession? We are clearly past denial, and maybe mostly through anger, but what about the other stages of grief? My bet is that ever more people are between depression and acceptance.
Should this trend continue, there will be fewer angry people to attend Trump and Sanders rallies as the folks start going about their business in a more normal way; GDP growth is likely to pick up.
At the same time, we learn this morning that consumer confidence has unexpectedly declined. Fed take note: More Botox is needed. (How about the Fed printing Botox certificates that are tradable and redeemable? A certain amount of economic activity would directly result; in addition, the Botox treatments would greatly increase confidence. It's time for the Fed to try something different, something that might work.)
Unfortunately, Allergan is already an expensive stock and its shareholders are smiling only slightly, which is probably the best they can do, under the circumstances.
What does this say about mass psychology following the Great Recession? We are clearly past denial, and maybe mostly through anger, but what about the other stages of grief? My bet is that ever more people are between depression and acceptance.
Should this trend continue, there will be fewer angry people to attend Trump and Sanders rallies as the folks start going about their business in a more normal way; GDP growth is likely to pick up.
At the same time, we learn this morning that consumer confidence has unexpectedly declined. Fed take note: More Botox is needed. (How about the Fed printing Botox certificates that are tradable and redeemable? A certain amount of economic activity would directly result; in addition, the Botox treatments would greatly increase confidence. It's time for the Fed to try something different, something that might work.)
Unfortunately, Allergan is already an expensive stock and its shareholders are smiling only slightly, which is probably the best they can do, under the circumstances.
Monday, February 22, 2016
Martin Feldstein among the faeries, reporting from a dreamworld.
Martin Feldstein says, “The US economy is in good shape.”
In this morning’s Wall Street Journal, Harvard professor Feldstein said, “The American economy is in good shape, better than critics think and financial investors fear. Incomes are rising, unemployment is falling, and industrial production is up sharply.” (p. A13)
I am glad to hear this because it echoes President Obama’s State of the Union assertions that “America right now has the strongest, most durable economy in the world,” and anyone saying America is in decline “is peddling fiction.”
The market problem is a market problem, according to Feldstein. Fed policy has pushed equities to artificially high levels; even after the recent decline, stocks are still 35% above normal.
He thinks the data showing that household income has stagnated is deceptive because it measures cash income. “The CBO explains that once corporate and government transfers are added to market incomes, and federal taxes are subtracted, the real income after transfers and federal taxes is up 49% between 1979 and 2010 for households in the lowest income quintile (with average total incomes of $31,000 in 2010). Real income is up 40% between 1979 and 2010 for households in the middle three quintiles (with average total incomes of $60,000) in 2010.”
These adjustments are interesting. Until a few years ago, the BLS when reporting on the number of Americans below the poverty line did not take into account government benefits. Today both numbers are available and you can choose between them depending on what point you wish to make. I noticed a couple of years ago, and wrote about it, that the average teacher in the local public schools with a master’s degree and 5-10 years of experience had about same effective income as a family of four on assistance. If the salary were $65,000, then about $20,000 comes off the top for health insurance (here the teacher pays half) and pension contribution (11% of gross income). Then we must subtract state and federal income taxes and NEA dues. On assistance, this teacher and his family could get subsidized housing, free healthcare, food stamps, and cash payments. In effect, he is no better off working, if we go by the numbers.
So why does he want to work? There are a number of reasons. He probably does not want to move his family to subsidized housing where he hears reports of frequent drug busts, shootings, assaults, and other crimes. He also likes being in a work environment where he is active, has interesting and dynamic colleagues, as well as other psychological rewards.
This is the point that Feldstein seems to miss. People don’t feel good about themselves if they are forced to depend on government programs. A good job is not an even trade for monetarily equivalent benefits. If you tell people in the latter group, or those who fear going there, that the economy is in good shape, they won’t believe you.
In this morning’s Wall Street Journal, Harvard professor Feldstein said, “The American economy is in good shape, better than critics think and financial investors fear. Incomes are rising, unemployment is falling, and industrial production is up sharply.” (p. A13)
I am glad to hear this because it echoes President Obama’s State of the Union assertions that “America right now has the strongest, most durable economy in the world,” and anyone saying America is in decline “is peddling fiction.”
The market problem is a market problem, according to Feldstein. Fed policy has pushed equities to artificially high levels; even after the recent decline, stocks are still 35% above normal.
He thinks the data showing that household income has stagnated is deceptive because it measures cash income. “The CBO explains that once corporate and government transfers are added to market incomes, and federal taxes are subtracted, the real income after transfers and federal taxes is up 49% between 1979 and 2010 for households in the lowest income quintile (with average total incomes of $31,000 in 2010). Real income is up 40% between 1979 and 2010 for households in the middle three quintiles (with average total incomes of $60,000) in 2010.”
These adjustments are interesting. Until a few years ago, the BLS when reporting on the number of Americans below the poverty line did not take into account government benefits. Today both numbers are available and you can choose between them depending on what point you wish to make. I noticed a couple of years ago, and wrote about it, that the average teacher in the local public schools with a master’s degree and 5-10 years of experience had about same effective income as a family of four on assistance. If the salary were $65,000, then about $20,000 comes off the top for health insurance (here the teacher pays half) and pension contribution (11% of gross income). Then we must subtract state and federal income taxes and NEA dues. On assistance, this teacher and his family could get subsidized housing, free healthcare, food stamps, and cash payments. In effect, he is no better off working, if we go by the numbers.
So why does he want to work? There are a number of reasons. He probably does not want to move his family to subsidized housing where he hears reports of frequent drug busts, shootings, assaults, and other crimes. He also likes being in a work environment where he is active, has interesting and dynamic colleagues, as well as other psychological rewards.
This is the point that Feldstein seems to miss. People don’t feel good about themselves if they are forced to depend on government programs. A good job is not an even trade for monetarily equivalent benefits. If you tell people in the latter group, or those who fear going there, that the economy is in good shape, they won’t believe you.
Friday, February 19, 2016
Dollar dreadnaught dings dong
Yesterday’s WSJ, which I just got around to reading today, has an interesting article on the effects of the strong dollar on coffee production around the world, “Strong Dollar Skews Coffee Trade.” It leads with a touching story of Vietnamese farmer Y Kua Mlo storing his coffee crop in his bedroom rather than putting the crop on the market because the price in dong, the national currency of Vietnam which is the world’s second largest coffee producer, is depressed because the dong is tied to the dollar. The world’s largest coffee producer Brazil’s currency has, however, dropped, making its coffee cheaper. Meanwhile, production in Brazil is soaring because the real ($R) price is up. “Coffee prices have been painfully low, and none of us want to sell the beans now,” Mr. Mlo moaned. (The market price is 34,000 dong ($1.52/kilogram) but he is holding out for 40,000.) Mrs. Mlo says he should have switched to peppers, so there is probably a lot of tension in the coffee bean-stuffed bedroom.
Vietnam, like the other countries whose currencies are tied to the greenback (China, Hong Kong, Saudi Arabia, Panama, etc. – the list grows ever shorter) are in increasing difficulties, as is the United States itself. I would expect that the market will bring the dollar down soon, particularly as the 10-year bond yield differential is diminishing. (Assuming of course the Fed does not tighten further.)
Vietnam, like the other countries whose currencies are tied to the greenback (China, Hong Kong, Saudi Arabia, Panama, etc. – the list grows ever shorter) are in increasing difficulties, as is the United States itself. I would expect that the market will bring the dollar down soon, particularly as the 10-year bond yield differential is diminishing. (Assuming of course the Fed does not tighten further.)
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