Happy "New Normal" New Year, from the current New Yorker issue

Banking, broadly defined, from yesterday's FT

California: The turkey in the coal mine?

California has among the highest taxes in the US, plus it has the biggest budget deficit in the land. Despite the state's large scale consumption of resources the state ranks 47th of the 50 states in the support for education. Why? It's because the state, which has 12% of the nation's population, supports 30% of the nation's welfare recipients, so there is little money left for anything else, like schools. A great many of the the constitutionally idle prefer the California lifestyle, it appears, to places like, for example, Nebraska, and there is the appeal to those from south of the border many of whom lack the skills needed to participate in the non-welfare economy. California dreaming is turning into a nightmare as the social deterioration wrought by its policies continues. (See Financial Times, May 30, 2012: "California democracy fetters drive to balance books" by Matt Garrahan.)

Is the Irish mortgage problem intractable?

Ten percent of Ireland's 760,000 home mortgage are more than 90 days in arrears. Already over ten percent have been restructured. Of the restructured mortgages, 50% are more than 90 days in arrears, so a total of 15% have been restructured or are in arrears. The number of restructured mortgages was up 10% in the first quarter. Getting into arrears even if you can pay is a way of getting a mortgage reduction. What are the implications for the US and the UK?

Is the smart Irish money leaving the euro for the dollar?

In this morning's FT, there is an interesting article entitled "Wary Irish reluctant to jeopardise recovery." In it, one Bernard O'Reilly, a retired civil servant, is said to believe that many Irish citizens are voting for the fiscal discipline treaty out of fear. This fear has other implications: "If Greece goes down," Mr. O'Reilly said, "we are next in the firing line. I know people who are trying to put their money into US dollars. We just don't know what is going to happen here." Is "smart money" going into the dollar? Does this explain the weakness of gold? The money is going into the dollar, but it's not smart. It's a trap for investors based in other currencies.

St. Louis Fed's Bullard says 1970's-type inflation is main risk to outlook

The St. Louis Fed is supposedly a bastion of monetarism. Thus, President Bullard is fearing inflation. We should take his concerns seriously. Here are his slides: http://research.stlouisfed.org/econ/bullard/pdf/BullardDialogueWithTheFedLouisvilleKYMay16_2012_Final.pdf

Best Greece option: Stay in euro and default

It puzzles me that people assume that Greece should leave the euro if it defaults. Default is the only action that will allow it to stay in the euro. When GM defaulted, did it leave the US dollar?

Inflation or Deflation?

There is a great deal of concern among policy makers that we will fall into deflation. And yet, aside from houses and natural gas, I can't think of many things that have decreased in price over the past five years. Last night we had some neighbors over in an impromptu manner and I went out for a large cheese pizza at Bertucci's. It was $18 plus tax, up from $14 the last time I bought one. (several years ago) Shoe polish (i.e. Kiwi shoe wax) has doubled in price since the recession's onset, perhaps because of the surge in job applications; pencils are way up, as are gasoline and electricity, and, here in Hingham, water rates. Yesterday the Bank of England announced that its growth expectations have been reduced from 1.3% in 2012 and 2.8% in 2013 to 0.6% and 2.0% respectively, while at the same time it raised its outlook for inflation, which is now running at 3.5%. What gives? These prices are definitely more reminiscent of the Great Inflation of the 1970's than the Great Depression of the 1930's.

Discussion of Eurozone breakup and default moves to the front burner

Charles Dumas of Lombard Street argued in a letter to the Financial Times this morning that further austerity would be "immoral" while Miller and Skidelsky say that Keynes would now be arguing in favor of default over depression. What was unthinkable two months ago is now on the front burner and will soon be accepted wisdom.

Profiles in Carnage: Luc Coene, Gov. of the Central Bank of Belgium

A refreshingly modest man, Luc Coene says that Greece may leave the Euro or stay; there is nothing central bankers can do about it: "But of course, if one member decides it no longer has a shared interest in being a member [of the euro], you must allow them to get out." Euro zone growth: "This is basically a crisis of confidence. . We [central banks] cannot stimulate the economy as such." Coene may be the only above-average central banker in the world.

JPM's trivial losses: too big to understand

JP Morgan has announced it has lost about $2 billion in its hedging portfolio. This is about 1.1% of its $183 billion of equity capital and is inconsequential in terms of the soundness of the bank. The problem is that the numbers are big; in fact, too big for the average person to understand how small they are. Let's reduce the scale. Our local bank, the Hingham Institution for Savings, is very sound and has $85 million in equity. A loss proportional to that of JPM would be about $900,000, which is 65% of the CEO's salary. Unfortunate, but not that important even for shareholders, let alone taxpayers. The problem is really one of management scale. I would estimate that Jamie Dimon weights around 200 pounds, about the same as the CEO of the Hingham Institution for Savings. Dimon would, however, have to scale up to 43,000 lbs to be big enough proportionally to manage JPM. JPM is too big for Dimon, as now proportioned, to manage.

`The Laughter Curve: The funny thing about California's growing deficit

Governor Brown just announced that the state's budget deficit for the fiscal year was likely to be $16 billion rather than the $9.2 billion he projected in January (NYT, May 13, 2012) The main culprits are lower-than-expected individual and corporate income tax receipts and, to a lesser degree, faster than budgeted growth in expenditures. The funny thing is that units of economic activity are having smaller tax revenues associated with them. The solution proposed by Gov. Brown? Higher taxes, of course.

The world's central bankers: Profiles in Carnage

We already discovered that both Ben Bernanke and Mervyn King were well below-average. To this elite group we must now add their Spanish counterpart, as revealed in today's FT: "Vicente Martinez-Pujalte, economy spokesman for the ruling Popular party, criticised Miguel Angel Fernández Ordóñez, governor of the Bank of Spain, for failing to identify the problems among Spain’s banks in his role as their supervisor. “There is a governor of the Bank of Spain who, despite being able to count on some magnificent professionals, has not done a good job,” Mr Martinez-Pujalte said in an interview with Madrid regional television."

Perhaps we should compile a book with each chapter devoted to the contributions of one of these leaders. We could all it Profiles in Carnage, or something like that.

Gotcha! Malawi delinks the kwacha

Malawi's new president Joyce Banda has ended the link of her country's currency, the kwacha, to the dollar. Like forward-thinking authorities all over the world, Banda is striving to achieve a valueless currency. The kwacha will now fluctuate in a relationship to other currencies to be known as "the banda."

Even the best central bankers are below average

One of the world's greatest central bankers, Sir Mervyn King of the Bank of England, is, in fact, an idiot, according to the Financial Times. This morning the FT had a special section on his reign in which they commented: Mervyn King was confident as he celebrated the 10th anniversary of Bank of England independence at the Royal Bank of Scotland five years ago. The economy was sound, the governor believed the risk to financial stability “appeared to be low” and lauded BoE independence as “the dramatic constitutional change” that convinced financial markets that Britain would run a stable economy. Life at the BoE was sweet. Five years on, Britain’s economic and financial stability has hit the rocks. Yet the BoE has emerged as the big winner of the crisis. Legislation to make it one of the most powerful central banks in the advanced world is passing through parliament. And its governor received not just a knighthood in 2011 but the highest form of that award, the Knight Grand Cross. How can so many of the BoE’s intellectually powerful figures have misdiagnosed Britain’s economy so badly? How can the country feel secure it will not happen again? And did Sir Mervyn’s personal style – dominating the BoE – contribute to the crisis? The study from the two economics professors that I previously sent you establishes that the distribution of human ability has fat tails, There are outliers at both ends of the spectrum. In fact, the ability of the most able is so high relative to the others that the great majority of people are below-average. This, according to the FT, applies to central banks as well as to athletes. Sir Mervyn is one of the world's best central bankers but he is still below overage. It one uses a reference population of not only living but of all central bankers who have ever lived, it is likely that all living central bankers are below average. Q.E.D. These are parlous times.

Most of us are below average, according to experts

http://www.npr.org/2012/05/03/151860154/put-away-the-bell-curve-most-of-us-arent-average?ft=1&f=151860154 The distribution of ability and performance is not normal. This is bad news for democracy. High performance individuals skew the results. Should they be suppressed? The article is worth reading.

Sort of sad mining joke

Junior gold stocks are depressed and the companies are having trouble raising equity capital. One CEO asked recently, "What is the difference between a large pizza and a mining geologist?" Answer: "The pizza can feed a family of four."

Junior Oil Co.: Hyperion Exp. Corp: TSX-V: HYX

We attended an interesting presentation by a Canadian oil exploration company that is active in the Cardium area of Alberta. Their strategy is to develop production by purchasing producing acreage and then applying horizontal drilling and fracturing to building up production. This very conservative strategy has been applied with success by the CEO Trevor Spagrud at previous companies. It is interesting that that, contrary to previous experience, stock market valuation for the company is not rising along with production. which makes new equity financing difficult. Today's market constitutes and anomaly, and perhaps an opportunity, assuming of course that market conditions will return to normal eventually. We shall see.

Gold mining company wave of consolidation?

The Financial Times suggests yes today, p. 18. http://digital.olivesoftware.com/OLIVE/ODE/FTUS/Default.aspx?href=FIT%2F2012%2F04%2F30&pageno=18&entity=Ar01803&view=entity

A Sunday Thought

Sometimes we learn surprising things about people long after their deaths. In 2009, The Times first published the following lines by TS Eliot:, who passed away in 1965. "Of all the beasts that God allows/ In England's green and pleasant land/ I most of all dislike the cows:/ Their ways I do not understand." How many of us, like Eliot, go through life without resolving such inner torments, and how better our lives would be if we did! It's worth thinking about.

The fracturing of shale formations holds the promise of almost free energy for the entire world. This may well (no pun intended) be the most important economic development of the next fifty years. Here are some implications: 1. Accelerating economic growth 2. Shrinking of the oil and gas industry (revenues shrink, like with mainframe industry thirty years ago) obsolescence of utility companies. (power generated at home level; more efficient) 3. No more coal 4. No alternative energy industry 5. Disruptive politics as industries and interests negatively affected engage in a bitter but futile resistance. 6. Middle East becomes unimportant and Canadians focus more on maple syrup production. In short, the future lies before us.

The center cannot hold. . .

In a way we are lucky that Obama was elected in 2008. His leftish (sort of) approach hasn't proved to be a panacea, so we has received a homeopathic inoculation that will protect us to a degree from radical solutions, whether or not the president is reelected. The cynicism of the American public is such that untoward enthusiasms are unlikely. This is not the case in Europe, where it is the conservative approach that has been called into question by a public anxious for rapid solutions to long-term demographic and structural problems, whether the formula comes from the the left or right. I just finished reading the Economist's special section on Cuba. They have achieved a sort of stability under Castro where a lack or economic growth combines with good social statistics. Castro is the Lee Kwan Yew of poverty, but the social outcomes have been similar, putting aside the relatively fewer numbers of automobiles and ipads in Cuba compared to Singapore. The business models of Europe and the US are broken and need to be changed. I suppose that this means that Europe moves to the left for a solution and the US will probably move to the right, at least for now.