LOL. . . WUT? . . . OMG! . . .

In this week’s Bloomberg BusinessWeek (5/12, p12),  Michael Metcalf, head of “cross - asset strategies” (what’s that?) at State Street Global Markets in "Printing Money To Help The Poor" suggests pulling poor countries out of poverty by governments issuing zero coupon perpetual bonds purchased by their central banks and giving the money to poor people in the third world.  After all, U.S., U.K., and Japan have issued $3.7 trillion without any problem, he points out.  This idea came to him when his five-year-old daughter, not having any money to give to a homeless man, simply drew a picture of a $5 bill.

Are the Germans and the French cuddling up to the Russians behind our backs, or are they just playing FTSE?

The NYT reports, “Recently, Mr. Hollande joined Chancellor Angela Merkel of Germany on a phone call with Mr. Putin. . . Mr. Hollande’s scheduled meeting with the Russian president now constitutes the French president’s most prominent diplomatic foray into the Ukrainian crisis since it began. It follows France’s announcement that it would honor a deal worth 1.2 billion euros, or $1.6 billion, to deliver two Mistral-class warships to Russia even after its land grab in Ukraine, a decision that displeased France’s Western allies.”

And we ask ourselves why the banks aren’t lending, or “the beatings will continue until morale improves.”

CEO Moynihan of Bank of America said at a conference yesterday that they have just one big legal settlement left: one with the Department of Justice, which is estimated to be around $10 billion.  “We’ve got a myriad of cases that we’ll work through, but of the big stuff, that’s really the one that’s left out there,” said Moynihan. To date, Bank of America has paid about $60 billion in settlements and legal fees relating to the crisis, mainly from the shenanigans at Countrywide prior to its acquisition.  At the end of 2006, total shareholders' equity was $135 billion. (Charlotte Observer)  

Salvation Army, eat your heart out

Consignment shop chain Snooty Fox in Cincinnati has achieved $5 million annual sales and 11 outlets. It imitates clothing boutiques but with zero inventory costs and, of course, low prices. Is used clothing moving upscale, or is America moving downscale?

What? Me worry?

Niall Ferguson et al, reports the WSJ, provided the following chart at a conference in Portugal. He said that we shouldn’t worry about it.

In space they can’t hear you scream.

Also in today’s WSJ, Sayuri Shira, board member of Japan Central Bank, worries that inflation will not be high enough next year.  (The target is 2% by spring 2015.)  Meanwhile, the Brazil central bank kept rates at 11% even though inflation is higher than it would like. In Turkey, the central bank cut interest rates 0.5% to 11.5% despite the fact that inflation is likely to exceed the bank’s 5% target by a wide margin, but Prime Minister Erdogan is not pleased.  He called the cut "a joke" and wants more aggressive cuts to stimulate investment.

”I want inflation to be higher than I want it to be.”

So says, in effect, San Francisco Fed President John Williams, who is quoted in the WSJ today as arguing forcefully that the “optimal policy should trade off a transitory period of excessive inflation. . . in order to bring the broader measure of underemployment to normal levels more quickly.”

And the winner is. . .

In the race to the currency bottom, this year’s losers are the yen and the won, both up 3% versus the dollar.  The Renmimbi wins; it’s down 3%.  Ultimately, the winner will be the currency that first achieves zero value.

In the Ivory Tower, computers never crash.

In a curious, nay bizarre, article in today’s FT (p9), Kenneth Rogoff of Harvard argues that there is too much paper money (i.e. cash) around, which is about $4,000/capita in the developed world.  (His recent book argued there was too much debt.)  He proposes doing away with it, beginning with the $100 dollar bill.  This will increase the government’s ability to monitor and, eventually, control every aspect of our spending, which he views as a good thing.

Is it taxes, regulation, or just old age?

U.S. Business failures have exceeded startups since 2009.  The rate of business failures seems relatively steady, while startups have been declining since at least 1978.  If a loss of 2%/year were to continue, there wouldn’t be any businesses left in fifty years. (Economist.)

Has the US passed the private leverage baton to China, and will the results be the same?

Private debt was declining in China until 2008, but then everything changed in a big way.  One has difficulty in imagining a very soft landing.

Please Dr. Yellen, are we taking enough risk yet?

An article in the FT by Patrick Jenkins yesterday identified 5 dangerous bubbles: 

1.      Leveraged loans.  Securities representing $260 bn in covenant light loans were issued in 2013, up 69% from previous peak in 2007. 

2.      ETFs.  Liquid securities composed of increasingly illiquid assets that must be liquidated as EFT's are redeemed have proliferated.

3.      Eurozone sovereign debt.  Peripheral countries like Portugal are paying the same rate as the US treasury.  (Does this reflect overconfidence in Portugal or lack of confidence in the US?) 

4.       European bank paper.    A DB-issued cramdown hybrid bond was 10x oversubscribed, and Spanish non-performing loans quoted at prices that would yield 14% were they paying, which they are not. 

5.      UK property in the southeast.  London house prices have gone from 4x the average earnings of first time buyers to 8x.

The mouse that snored: Shouldn’t the newest EU members be the most enthusiastic?

Slovakia led the 28 EU member countries in apathy in Sunday’s parliament election with the lowest turnout, 13%, compared an EU average of 43%.

With thieves and morons so-well represented, why leave out those of us who are overweight?

A Michigan State University study documents weight bias in U.S. elections.  Overweight candidates get fewer votes than do the svelte, and overweight women fare worse than men with the same profile.  This means the third of the population who are obese are underrepresented in office. (From an article in a paper picked up on a Toronto street on Monday)

Is it still possible for a Nigerian politician to be too trusting and naïve?

Interviewed on Al-Jazeera TV, a Nigerian senator expressed surprise that military could not cope with Boko Haram. After all, he said, the military are given $10 bn a year. Even if they siphoned off 75%, they should have enough resources to defeat the terrorists.

Why the precipitous drop in law school applications and attendance?

The unemployment rate for lawyers nine months after graduation was 11.2% in 2013, up from 9.2% in 2011. Boston College Law School applications dropped 40% in five years, and Boston University’s were down 50%. Enrollment at the top 200 law school is down 24% from 2010. This is a lot even taking into account lawyer unemployment. (Boston Globe, May 4, G5)

At what age do we acquire wisdom?

On page 5 of the Weekend FT one finds the obituary of Stephen Sutton (1994-2014) who achieved fame in the UK by dying gracefully and publically at age 19. His Facebook and Twitter campaign raised £2.6 mn. (For what? The article does not say.) He is quoted as telling a group of wealth managers: "I do not know how long I've got left to live, but one of the reasons for that is because I haven't asked. That's because I don't see the point of measuring life in terms of time any more. I would rather measure it in terms of what I've actually achieved." Michel de Montaigne wrote something similar at a fairly young age, in his thirties: “Wherever your life ends, it is all there. The advantage of living is not measured by length, but by use; some men have lived long, and lived little; attend to it while you are in it. It lies in your will, not in the number of years, for you to have lived enough.”

Is it fair to say there is a management problem at the VA?

According to the Weekend FT, p14, The Veterans Administration has 8.57 million vets enrolled, a budget that has grown from $73 bn in 2006 to $154 bn in 2014, and visits have doubled since 2000. Twenty-four patients died in Phoenix after being on a waiting list for up to a year. Doctors there shredded papers to obscure the facts. What’s going on at other VA facilities?

What’s the difference between a bond and a bond trader?

(Answer: “The bond eventually matures.”) This old joke came to mind when I read in the FT that Deutsche Bank doesn't want traders to use bad or indiscrete language. Colin Fen, co-head of investment banking wrote to employees that "some of you are falling way short of our established standards [sic]." . . . "Let's be clear; our reputation is everything. Being boastful, indiscrete and vulgar is not o.k. It will have serious consequences for your career. And I have lost patience on this issue."

Is the US more anticompetitive than France?

France economy minister Arnaud Montebourg, prompted by opposition to the acquisition of Alstom’s power business by GE, has issued a decree requiring state approval for most foreign acquisitions. (One can expect that approval will not be given in this case.) In response to criticism that such a restriction is anticompetitive, Montebourg pointed out that his decree is no broader than the rights of the Committee on Foreign Investment in the US. (This inter-agency committee was established in 1988 to prevent Japanese acquisitions of US companies if “there is credible evidence that leads the President to believe that the foreign interest exercising control might take action that threatens to impair the national security.” It frequently blocks transactions.)

Where will the extra crude come from in the second half of the year?

The International Energy Agency (IEA) expects the world will need another 900,000 bpd in the second half, on top of the 400,000 bpd OPEC increase in April, but the IEA doesn't know where it will come from given production problems in Nigeria, Angola, Libya, South Sudan, Columbia and Kazakhstan.  Global crude inventories are below normal. (FT, Friday, p15)

Should we fear the 2nd of June?

President Putin has written a letter to each of the 19 European countries to whom Russia sells gas telling them he will cut off gas to Ukraine on June 2nd unless Ukraine begins prepaying.  Ukraine is currently paying nothing for gas and owes Gazprom $3.5 bn.  In the letter Russia says that it is willing to negotiate terms but has received no proposal from Ukraine.  For Russia to supply Europe while cutting off Ukraine, Ukraine would have to allow transit of the gas.    (FT, Friday, p4)

Should we be raising forecasts for Japan GDP growth in fiscal 2014 (ending March 31, 2015)?

The government’s forecast is 1.4%.   Some private economists have be predicting less than 1%. But the quarter just ended (the last of FY 2013) on March 31 was 5.9% versus a consensus of 4%, as consumer spending anticipated a 3% rise in sales tax.   Reports say post-tax-increase sales have not dropped off as much as expected, however, and capital spending was up 4.9% in the quarter.

Will the US ever get back to the 1.2-1.5 million housing starts a year we used to consider normal?

Housing starts were up 13% in April to 1.07 million, but still below last November’s 1.11 million annual rate.

Were they doing a “great job” or just a “good job?”

At a conference in London on Wednesday, Bank of America’s CFO Bruce Thompson was asked to comment on the accounting error that wrongly inflated the bank's capital ratios but he demurred, saying that the bank would "get back to doing a great job" on the stress test process and share buybacks, which were derailed by the error.   The stock has dropped from $18 to $14 due to the schoolboy error, resulting in the loss of $40 billion in market capitalization.

Fahrvergnügen (driving enjoyment). European auto sales accelerate

Europe is getting back in gear.  Ford announced that European sales rose 6.6% in April (industry 4.2%).  This was the 11th straight month of European sales improvement.  VW’s western European sales did even better: 8.2%.

On what planet does the Bank of England reside?

The UK has been reporting strong employment and good growth.  Meanwhile, Bank of England's Carney said that rates will stay low into next year anyway at a 0.5% level because inflation will stay near the bank's target of 2% through 2017 and growth will be modest.  Odd, since inflation, which is was 1.6% in the last report, was well above 2% all of last year and the economy is now accelerating.

Is the UK on the verge of a boom?

The UK just reported the strongest quarterly increase in jobs since records began in 1971.  The jobless rate fell to 5-year low of 6.8%, and the number of people out of work dropped by 133,000.  The total number of people working rose to 30.43 million, also the highest absolute number since 1971.  Self-employed workers now number 4.55 million, an increase of 183,000 for the quarter.

US banks will lend less to Russia, but the Russians don’t mind.

With a balanced budget, a current account surplus, and little sovereign debt, the Russian state is relatively indifferent to banking sanctions.  According to the central bank, Russia’s total external debt (public and private) is about $700 bn, most of it long; reserves are $500 bn.  The trade surplus is running at $170 bn. Banking sanctions are the favored kind of showy gesture that the US can make without the risk of affecting anything.  As such, they serve a useful public relations function.

Land of hope and baloney

The Indian stock market is rallying on expectations of a Modi victory.  Shares have risen 17% in three months.  Rodham Desai of Morgan Stanley is quoted in the FT as saying, "the market has turned hugely exuberant; there is a big hope that this incoming government will fix all of the country's macroeconomic problems.” 

The European defense industry is still downsizing even as global threats increase.

 Airbus is restructuring and cutting 5,800 defense jobs in response to a steep reduction in European defense spending.  It would appear that Europe is not particularly worried about security despite events in Ukraine.  Will this change?

Chinese housing: Built to last but likely to diminish

Residential construction is currently 23% of Chinese GDP.  (In the US it is 3.1%) The Chinese build houses and apartments of cement, and China produced more cement in 2011 and 2012 than the US did in the entire 20th century, according to China’s statistical agency.  But the economy is slowing. Electricity consumption was up only 4.4% in April. Curious though it is, the government has taken no stimulus measures.  One suspects the authorities want a slowdown.

Do Americans love their mothers?

­The National Retail Federation says Americans spent $29 bn on Mother's Day gifts this year. That’s only $300/mother.

Thank you, Federal Reserve, for the easy money

Ethiopia got its first credit rating: Fitch B, S&P B, Moody's B1. The economy is said to be growing at a 10% rate and the country is planning to issue a Eurobond.

Confucius says: “Even the seizure of the largest hydrocarbon resource must begin with a single offshore oil rig.”

China has moved an offshore rig into waters off Vietnam. Vessels of the two countries have been harassing each other. In December China state TV aired an eight part documentary proving it owns the seas within the famous “nine-dash line,” which goes up to the shores of Vietnam, the Philippines, Malaysia, and other countries.

The mouse that prospers: Why is it that small countries are usually more successful than big ones?

I suppose it is because everyone knows what is going on and consequently there is more accountability and efficiency. Take the Isle of Man, which was profiled in the FT recently. The country has had 29 years of continuous economic growth. It’s the 8th richest country in the world, ahead of the UK. It has a comprehensive welfare state for its 85,000 people. During the crisis the UK cut off its customs revenue sharing with Mann so the Manx are balancing their budget entirely on local revenues from the 10% corporate profit tax on banks, property companies and retailers, and a 20% personal income tax capped at £120,000/person.

How does one invest in Mann? Manx Telecom, recently listed in London. MANX. 162.50p. P/E: 500x. Market Cap: £183 million. Revenues £76 million.

Is Internet retailing peaking?

US April retail sales were up +0.1% compared to consensus expectations of +0.4%. Internet down -0.9% while department stores up +1.8%. 

It has been prophesied that the electricity price rapture will precede drought apocalypse in Brazil

Alcoa has stopped aluminum production in Brazil in order to divert power from thermal plants used in smelting to the spot electricity market. It is guessed in the FT that it costs Alcoa $18/megawatt hour to produce power which can now be sold for up to $377/megawatt hour in spot market.   70% of Brazil’s electric power is hydro.  Reservoir levels in the state of Sao Paulo are expected to fall below the outflow mains next month. On the positive side, there’s the World Cup.

The luck of the Irish

Ireland's financing costs have fallen below Britain's for the first time since the crisis. Get out your magnifying glasses: 2.656% (Ireland) vs 2.683% (UK) for 10-year bonds.

Steel yourselves: base metals are looking up

ArcelorMittal reported better results than expected. The first quarter loss was $250 million compared to $345 million last year.  The company is now expecting steel demand to rise to 2%-3% this year. They had been expecting a 1.5%-2.5% only a couple of months ago.   At the same time iron ore prices have fallen to a 20-month low of $102.80 a tonne.  Are we seeing a favorable conjunction with price and volume leverage going forward?  Is the economy approaching escape velocity?

Inebriation of the press is the best defense against tyranny

Journalists in India fear a nationwide alcohol ban. Prime ministerial candidate Modi’s home province of Gujarat has banned alcohol since 1960. Would an India-wide ban lead to an exodus of the best journalistic minds?

Everything an Italian prime minister needs to know he learned in kindergarten:

"I learned from my mother that doing good deeds is the best way to elevate oneself," remarked Silvio Berlusconi, beginning his one year community service sentence in a home for elderly dementia patients.

European parliament elections from a UK perspective

Blimey! While the UK’s leaders quail before the rise of the UK Independence Parties, even the most affected average chaps seem indifferent.  The FT reports that there are 300,000 registered and 600,000 unregistered British citizens living in Spain, for a total of 900,000.  Only 16,000 are enrolled to vote in British elections.  Few seem aware of the May 25 election. According to a Brit in Annie's Irish Pub on the Spanish coast, “most people down here just want to get together and have a laugh.". 

Americans exit stage left, pursued by weird tax rules

American citizens are running away. In 2013, 2,999 Americans renounced their citizenship, up 211% from the previous record in 2011. The Foreign Account Tax Compliance Act of 2010 (FATCA), now being phased in, not only makes it unadvisable for foreign banks to accept American taxpayers as customers (UBS, DB, etc. already don’t) even if the Americans in question are living abroad. Not only that, compliance is difficult for the 6 million Americans living abroad; those who can find banking services face onerous reporting requirements and criminal penalties for errors.

As for American corporations, will the US politicians’ opposition to Pfizer’s move to the UK prompt a rush for the exits? Ron Wyden, chairman of the Senate finance committee is threatening retroactive legislation to prevent this. It would certainly be prudent for multinational corporations to get while the getting is good.

The government seems to assume that no one has any legitimate reason to be abroad, nor to do business there. The concept of globalization is foreign to them.

We fear death, so we focus on the present

People are revoltng in Europe

Of the EU's six original members, three are expected to see "populist or far-right parties" (are they the same thing?) finish first or second in the upcoming European Parliament elections.  These three are France, Netherlands, and Italy.

Irish (CPAs') eyes are smiling

From today’s FT.  Any comment would be superfluous, except that Irish eyes are smiling, along with those in Germany and Canada.

Shareholders in London express revulsion to excessive compensation

British firms are apparently now required to submit executive compensation plans to binding shareholder votes. Over 40% of Standard Chartered's shareholders have just voted against the company’s plan because the incentives were tied to annual rather than longer performance. 

WIth Barclays' downsizing, there is no longer any British bank in the bulge bracket

Barclays is cutting 7000 jobs from its investment bank (one quarter of the staff) and moving over half its investment banking-related assets into a bad bank.  Barclays’ focus will be the U.K. and the U.S.  Higher capital requirements and more deferred pay put at a disadvantage, they say, UK banks compared to those in France, Germany, and the U.S.  Wasn't the U.K. supposed to benefit from banking restrictions on the continent?  The banking sector worldwide is in secular decline as debt/GDP shrinks.  According to the FT, Deutsche and the Wall Street players will be the only bulge bracket banks left.  Where does this leave London and Paris?

Informed money launderers prefer dollars to bitcoins.

CNBC just had a discussion of bitcoins and a couple of similar digital currencies that I had never heard of.  Concern was expressed that miscreants and low-lives could use bitcoins to launder money. 

I asked myself the following question:  If 99% of all money laundering is in US dollars, which it is, isn’t it the security of the dollar the issue? The dollar's vulnerability is putting too much of a burden on the intermediaries to police transactions, which is driving up transaction costs. The provenance of each bitcoin is contact within its code so every transaction is recorded automatically.  Why can't this be done with digital dollars?

It's getting easy to find a job in the USA, if you want one.

Dr. Yellen says that the JOLTS (Job Openings and Labor Turnover Report) is an important indicator of the labor market that she watches it carefully.  The March JOLTS came out this morning and the key phrase in the BLS’ commentary is "March was little changed from February."  The labor market was on cruise control.  The press commentary that followed the announcement opined that the report shows no pickup in activity and will not satisfy Mrs. Yellen that conditions are improving.  She can be expected, they think, to remain very dovish.

I find this puzzling. Doesn’t the key chart of JOLTS data above, the “Number of unemployed per job opening,” look great?

Climate change and the art of lawn maintenance

Who are you going to believe?  A bunch of distinguished scientists or your own lying outdoor thermometer?  I saw a headline today that said it has been the coldest winter in the US since 1912, and another that gave another more recent comparison date.  One specified that it has been the coldest winter if one counted only the months since the beginning of this year.  Etc.  Anyway, it's been cold recently.  Here on the Massachusetts coast, the trees are only now budding, which is on the late side.  Today it was 54° when I got up; yesterday it was 39° and the day before 34°. 

Doubts are spreading about the global warming thesis, and the recent UN report confesses that the models they had been using were not working; they suggest that weather is too complex to model.  The climate issue has, unfortunately, become a political football, or fireball, or snowball, as the case may be.  It is confusing.  Anyway, I know that I am not as worried about warming as I was ten years ago when it seemed imminent.  Perhaps we should look to the medieval author of The Cloud of Unkowning and put aside any preconceptions.  I know one this for sure, however, and that is that this cold, wet weather seems to have worked for the new lawn I put in behind the house.  The grass seeds have germinated and are coming in evenly.  In my neighborhood, all politics are local.

Nigeria's war on corruption; We wish them the best of luck.

At the World Economic Forum in Abuja President Goodluck Jonathan announced the “Clean Business Practice Initiative.”  The goal is for corporations in Nigeria to become less corrupt.  Of course, the only way for corporations to be corrupt is to bribe government officials; they certainly don’t bribe each other.  Putting that aside, President Jonathan is to be commended on his fine sense of irony in light of the $20 billion that recently disappeared from the state oil company and his efforts to suppress any inquiry. 

As for reducing corruption I can only say, "Good luck."

For central banks, there are no red lines. Monetary tightening may have become impossible.

Think back: In January 2013 the Fed announced that it would raise its bond buying from $40 billion to $85 and would keep buying bonds and maintaining zero rates until unemployment dropped to 6.5%. Unemployment then was 7.7%.   Today unemployment is 6.3%, but bond buying continues, albeit at a reduced rate, and zero rates persist.  Yesterday Yellen said these policies would continue and bond buying might increase again if housing weakness and unsatisfactory conditions in the labor markets persisted.

 

Meanwhile in the UK Bank of England Governor Carney, who had previously said he would tighten policy when growth reached "escape velocity," which, at more than 3% (.8% q/q, 3.2% y/y in Q1) , it has, now says he's waiting for "sustained momentum".  Chris Giles in FT notes that he does this while at the same time denying he has changed policy.

Maybe it is impossible for any single central bank to tighten policy without dire consequences on the trade and capital flow fronts?  New Zealand, for example, wants to raise rates to curb speculation but cannot do so because its currency is too strong.  It’s a sort of prisoner’s dilemma:  Once a critical mass of countries have bad policies, it is in the interest of each to be the last to implement good policies. The result is paralysis, and perhaps danger.

Blame it on the Bossa Nova: Brazil dances to inefficiency.

A recent study by the Boston Consulting Group rated Brazil as a more expensive manufacturing venue than Europe due to low productivity.  A report in the FT today, however, indicates that what Brazil lacks in efficiency it may be making up in volume.  Government revenues have risen from 33% of GDP in 1999 to 39% today, compared with an OECD average of 36%, while the country ranks 124 out of 148 in government efficiency, according to the World Economic Forum.  Under Lula and Rousseff, the number of ministers has about doubled to 39 and there are other cabinet-level officials, each with his retinue of advisors, consultants, minions, sycophants and hangers-on.  The FT relates the story of the rookie bureaucrat in Brasilia who was warned by her supervisor that she should stop spending eight hours a day at the office and put in four like everybody else. (FT, p2)

Sweden massages its data and is shocked by high household debt

Oops!   Sweden's central bank has adjusted its figures.   They had been concerned that the ratio of household debt to disposable income was 174%, one of the highest levels in Europe.  (In the US it’s more like 120%.)  Delving deeper, they noticed that when one excludes the households with no debt at all, the ratio is 313% of disposable income.  They are shocked.  (Reuters 5/7) 

It seems that the countries that avoided the financial crisis are destined to have one.  Debt and housing prices are soaring in Australia, Canada, Sweden, Holland, and other countries.  Global easy money is undermining the heretofore healthy economies.

Below-average central bankers: The Yellen Years

Janet Yellen testified today before the Joint Economic Committee of Congress.  Sen. Bernie Sanders of the Vermont Progressive Party asked her if the US were an “oligarchy or a capitalist democracy.” Yellen said she doesn't know how to describe our system but she, like Bernie, is troubled by the fact that everybody doesn't have the same amount of money.  (CNBC)

If she doesn't know what our economic system is, wouldn’t she find it difficult to lead monetary policy?

Keep and eye on Tony Blair: His kind are money launderers, say the Feds

JP Morgan is closing the accounts of 3,500 "politically-exposed persons" because new US regulations aimed at squelching money laundering are imposing too many costs and liabilities.  Included among those whose accounts are being terminated are Jose Antonio Campos, former Colombian finance minister and candidate for president of the World Bank, and Tony Blair, a British politico on JP Morgan’s payroll.  (FT, p13)

It appears that the federal bureaucracy thinks all foreigners are bad.

The Zen of the Oligarch: think money

The new Ukrainian governor of Odessa, an oligarch, has adopted a creative way to stifle dissent.  He is planning to offer bounties of $1,000 to $100,000 for the capture of political protesters, following the example of a fellow oligarch governor further east. Oligarchs are limited in their communications ability: they can only speak the language of money. The local police, too, apparently. (FT, p2)

The Bank of England has introduced new rules requiring banks to spend two hours interviewing each mortgage applicant, which is an ingenious way to slow down borrowing.  

Canadian housing prices approach the ozone layer

A survey of 56 countries by Frank Knight shows that world house prices rose more than 8 percent last year. Prices in eleven countries rose by double digits. (FT 5/6. P2)  Shortly after I read this, someone sent me a chart comparing US and Canadian housing prices.  After a slight tremor when the US cracked, Canadian house prices soon resumed their upward trend.  The high price of housing in Canada has long puzzled me.  It is, after all, the second largest country in the world by area and sparsely populated. 

 

For example, Yonge Street in Toronto, which extends north from Lake Erie toward the pole, was listed in the Guinness Book of World Records as the longest street in the world until it was displaced by the Pan American Highway, which runs from Alaska to Chile, in 1999.  Yonge Street is 1,178 miles in length.  It was built in the 1790’s and named after Sir George Yonge, the British Secretary of War at the time and, was designed so that the capital could be evacuated northward in the event of a US invasion. 

(Given the length of the road, the British were clearly contemplating a worst case scenario. -- The route’s straightness belies the legend that it was built by prisoners arrested for inebriation.)  One would think it possible to have a prestigious Yonge Street address fairly cheaply somewhere.  But prices are twice the US level.

Overvalued market going even higher: a technician thinks so

A friend sent me a comment by Richard Russell of the Dow Theory Letters, which Russell has been writing since 1954.  (He’s getting old.)  Russell refers to Robert Shiller’s price-earnings ratio, in which “p” is the current price and “e” is the average inflation-adjusted earnings of the past ten years.  Russell states the following:

“We are now 53.3% above the average P/E of the preceding decade. There have been only three times when valuations calculated by this method were higher -- the late 1920s, the late 1950s and 2007 just before the bull market ended. Judging from current valuations, we are either near the beginning of a bear market -- or facing a decade of sub-par performance from stocks."

 

Paradox: As a technician, Russell nonetheless sees the potential of a big upside breakout in the Dow.

The Southern Stream gas pipeling will avoid transit through Ukraine

Russia is pushing for construction to begin on the “Southern Stream” gas pipeline, which will avoid Ukraine entirely by going under the Black Sea to Bulgaria.  The already completed Northern Stream has reduced Russia’s reliance on Ukraine by 50% in supplying Europe, and the Southern Stream will allow Russia to completely cut off Ukraine and still provide gas to Europe.  The European Commission is opposing the pipeline on “monopoly” grounds. 

The pipeline will almost certainly go ahead. Russia is prepared to finance it 100% on spec if EU opposition prevents bank financing.  Bulgaria, Serbia and other states are in favor.  Italy will build the undersea section and the Germans are manufacturing the pipes. 

Polio declared a "world health emergency" by the WHO

Polio, which a few years ago was on the verge of being eliminated globally, is coming back, according to the WHO.  Polio is a virus that mainly affects children under 5 by multiplying in their intestines and then attacking the nervous system.  It spreads through infected water. There are vaccines but no cure.  The WHO has issued a “World Health Emergency.” There were 68 deaths by the end of April this year compared to 24 in the same period last year.

Polio is endemic in three countries:  Pakistan, Afghanistan and Nigeria.  It is spreading in and from Pakistan because Islamic militants have blocked vaccination programs there.  Syria, which was polio-free for 14 years, has now been inflected from Pakistan. 

Americans are becoming pariahs to international financial institutions

Deutsche Bank in Belgium has asked its clients who are US taxpayers to close their accounts by June.  In a letter, the bank said, “it is no longer allowed to use Internet, email, phone or fax to serve [US] retail clients.”  This is because of FATCA (The Foreign Account Tax Compliance Act) which is being phased in.  It required foreign banks to provide the IRS all financial information on all US taxpayers.  The penalties are draconian: a bank can be fined 30% of its annual US income for missing a single individual.

Americans have become pariahs to foreign financial institutions.  When I was living in Singapore several years ago, UBS announced that it would no longer accept any US citizens or green card holders as clients whether or not they lived abroad.  Will more individual Americans follow Pfizer and renounce their citizenship?

Gary Becker of the University of Chicago has died: Created "Rotten Kid Theorem."

RIP: Prof. Gary S. Becker of the University of Chicago died.  NYT: “Households, for example, were long seen as entities intent only on maximizing consumption, but Mr. Becker saw them as small factories that also produce valuable, though nonmarketable, basics of life, like leisure and sleeping.” He also came up with the “Rotten Kid Theorem:”  He wrote, “Children have an incentive to act altruistically toward each other as their parents want them to, even if children are really egotistical.” He believed that “behavior is driven by a much richer set of values and preferences that can also include altruism, loyalty and spite.”

The thing that I most remember is that he long ago said that children had changed from economic assets (i.e. a retirement program) of parents into consumption items.  Large families would come to be seen as signs of affluence.

Indian economy turning up, according the Finance Minister Chidambaram

In an interview, India’s finance minister Chidambaram gave an upbeat outlook for the economy:  4.9% growth in the FY ending March 31 past and 6% in the current year, with inflation, now 8.3%, moderating.  He has reduced his budget deficit forecast from 4.8% to 4.6%.  A bit ruefully, Chidambaram added, “I have done more heavy lifting in the last 12 months than the RBI.”  (RBI = Reserve Bank of India)

There is some Fed-envy among the politicians in India who have to do their jobs rather than rely on an accommodative central bank.

Bank of America's $4 billion mistake is neither complicated nor trivial

Bank of America’s $4 billion mistake:  The error is not trivial compared to BAC’s $145.2 billion in regulatory capital or $11.8 billion increase yoy.  Accounting rules cause banks to mark to market assets and liabilities.  So when a liability falls in value, the bank books a gain, but when they rise, it books a loss.  These gains and losses, if unrealized, can only be applied to earnings but not to regulatory capital. An unrealized gain was properly applied to earnings but improperly also applied to capital.

Bank of America paid PWC $94 million to do last year’s auditing.  BAC’s board’s audit committee is chaired by Sharon Allen, former chairman of DeLoitte.  The risk committee is headed by Frank Bramble, former vice chairman of MBNA, and includes former Fed governor Susan Bies, and Clayton Rose, a Harvard Business School professor.

My wife teaches algebra to 14-year-olds.  She says they often make mistakes like this.

Obamacare costs will bust the budget unless healthcare is reformed

Eight year after Romneycare began, Massachusetts may show what Obamacare will mean.  Massachusetts has the lowest rate of uninsured in the county (3.1%) and the highest per capita health costs.  ($9,276 vs US average of $6,815)  Emergency room use for non-urgent care has not declined. 

Like Romneycare, Obamacare will extend coverage to virtually everyone, but the cost will be high.  If the Massachusetts model is predictive, then health costs will rise from 18% of GDP to 24% of GDP. (OECD average is 9.3%)  Like Romneycare, Obamacare extends the system without reforming it. 

Where did we put the $20 billion? Nigeria loses its oil money.

Gov. of Nigeria’s Central Bank Lamido Sanusi’s personal passport was seized today by authorities when he tried to leave the country for Paris.  Sanusi had presented a detailed report to the senate about $20 billion in oil revenues that recently disappeared. Pres. Goodluck Jonathan then dismissed him without bothering to obtain the necessary senate sanction.  The president also ignored a high court order to restore Sanusi’s previous diplomatic passport.

President Goodluck Jonathan’s actions are unfortunately bound to raise suspicions that he is somehow involved in the disappearance of the $20 billion. 

Zambian interest rates hold at 12%

Zambia decides to leave interest rates at 12% despite the decline in the kwacha. The currency weakness can be attributed to declining copper prices, which has produced a growing current account deficit.  Inflation is now 7.8% but is expected to abate over the course of the year.

Both Zambia and neighboring Malawi issue kwacha.  Malawi has much higher inflation, 24.6%. Some forex traders may liken a Kwachazone to the Eurozone except that the Malawi and Zambia each issues its own kwacha. Otherwise, Zambia might be compared to Germany and Malawi to Greece.

The lost girls of northern Nigeria are unfound. The problem is unrealizable aspirations.

The 276 teenage girls kidnapped in Moslem northern Nigeria are still missing.

The problem is the 4 wife standard. Nature has provided that half of births are men and half are women.  So if men try to change the1:1 rule to a 4:1 rule, then it is inevitable there be, (1.) periodic mass abductions of wife material, and/or (2.) large reductions in the potential husband stock.  Both things appear to be happening in northern Nigeria.

MERS shows up in the US: An epidemic is unlikely, however.

Middle East Respiratory Syndrome (MERS) has afflicted some 400 people in Saudi Arabia, of whom 100 have died.  The first US case has just been confirmed in a man who recently returned from Saudi Arabia.

The good news:  MERS is not very contagious.

The bad news:  There is no cure. 

China's rapid advance to economic dominance presages social change in the West

British writer Martin Jacques (When China Rules the World, 2009) predicts that by 2030 China will be 1/3 of global output, greater than the US and Europe combined. 

Economic dominance leads to cultural dominance:  Jacques’ TED talk is worth hearing.  Chinese culture’s most esteemed virtue is social harmony and unity.  The West seeks justice at the cost of harmony.  Let us hope we become more harmonious. Will our officials let their fingernails grow? 

Portugal's exit from support program highlights success of austerity program

Portugal is escaping from the claw-like grip of the IMF/ECB/EEC support program.  Its current account and primary budget are in surplus.

Deputy Prime Minister Paulo Portas commented that Portugal now regains the sovereignty that it had surrendered to creditors.  On the other, we may observe that had this sovereignty not been surrendered, the success would not have been achieved.

Europe is tasting the sweet fruits of austerity as manufacturing rises

The Eurozone has just achieved its highest manufacturing PMI in 6 years: 53.4.  The countries above 50 (expansion) include Germany, France, Italy, Spain, the Netherlands, Ireland, Austria and Greece.  Unemployment remains high at 11.8%, but below last year’s record of 12%.

ECB forecast of 1.2% GDP growth for 2014 looks very achievable.  It is notable that Greece, Italy, Spain and Ireland are all experiencing manufacturing expansion.  Are the fruits of austerity finally turning sweet?

Housing bubbles in the UK but cools in China

Deputy Governor Jon Cunliffe of the Bank of England says the UK housing boom is “dangerous,” and that “this is a movie we’ve seen before.” Gov. Mark Carney added that the housing market could heat up at “warp speed.” (Is he a trekkie?) Meanwhile, housing prices in China’s 100 largest cities were up 9.06% y/y, while sales were down 15.5%


Maybe the Chinese housing bubble is already deflating the places we need to worry about are the UK, Canada and Australia?

Kwacha in the sights of forex traders?

Malawi’s central bank has decided to keep lending rates at 25%.

Good yield.  Should we be looking at the kwacha?

Australian austerity promises to bite the far future elderly

The Australian government is proposing to raise the retirement age for everyone born after 1965 to 70 years.  This is due to budget problems arising from the collapse of mining investment in the country.  $15 charges for doctors visits are being considered.  (Australia is the only country in the world where health costs/capita are as high as in the US.)  Even worse, MPs’ special cards that entitle them to free plane travel may be restricted.

Australia is a trend-setter.  Expect New Zealand to follow suit.

The Russo-German Axis?

Gerhard Shröder, Merkel’s predecessor as chancellor, celebrated his 70^th birthday in St. Petersburg on Tuesday.   President Putin gave him a big hug.  The German ambassador was also there, and Merkel’s party’s foreign policy spokesman joined in the jollity and fun.  Back in Berlin, Foreign Minister Steinmeir is said to be supportive of the Russian position on Ukraine.  Anti-Americanism in the German population, exacerbated by the NSA spying scandal, is being further intensified by the Ukraine crisis.

Europeans don’t see why the US is making such a big thing about Ukraine, which they view as in the Russian sphere of influence.

Is a German-Russian axis developing?

The city versus the countryside in Turkey

Riots in Europe’s largest city: Police in Istanbul (40,000 of them) blocked labor union May Day marchers from approaching the city center. Police used tear gas and water cannons. The same occurred in several other Turkish cities. Freedom House in Washington has downgraded Turkish media from “partly free” to “not free.”

Like in Thailand, this is a struggle between the majority in the pious countryside, who support the government, and the libertine city dwellers, who do not. The second law of thermodynamics suggests that the libertines will ultimately win.

Can't China take the pressure?

The World Bank’s “International Comparison Program” has recalculated purchasing power parity in such a way as to increase China’s GDP so that it will be the world’s largest economy by the end of this year. China has opposed this recalculation and “does not endorse the results as official statistics.” China fought for a year to prevent the release of this “data.”

China does not want to assume a global leadership position and does not feel itself ready to in any case. The same was true of the US in 1872 when it became the world’s largest economy.
Can’t China take the pressure?

The Chinese yuan progress rapidly to reserve status

The Chinese yuan progresses rapidly to the status of a reserve currency. Today it is the 7^th most used currency in the world, up from 13^th in 2012.  18% of China’s trade is now settled in Yuan, but this is expect to rise to 30% next year. 

The major barrier to reserve currency status is currency controls.  When will China enact full convertibility?  That would be the end of the US dollar’s quasi-exclusive reserve status. 

Will democracy come to Thailand: The Yellow Shirts say, "No!."

Tensions rise in Thailand:  Rural people (red shirts) support the ruling Pheu Thai party, which has won five successive elections.  The urban elites have never accepted this and their Democrat Party (yellow shirts) are pushing for a judicial or violent overthrow of the red shirts.  Meanwhile, the red shirts are forming militias in the countryside.

Food prices are rising, as is discontent. Is civil war a possibility?  Yet another military coup?  The red shirt militias are a new element.  In the past, the military would simply ask the King for permission to stage a coup and no one would oppose them.

Dought may presage social unrest and political problems in Brazil.

The average man can only live for three days without water:  Sao Paulo State’s 10 million people are running out of water due to a drought of biblical proportions, the worst since records began in 1930.  Reservoirs are at 12% of capacity.  (64% is normal for this time of year.)  Water will fall below reservoir intake pipes by mid-June, during the World Cup. The causes: drought; rising population; lack of investment.

Physical danger produces social unrest, and in extreme cases revolution. Political instability can be expected.

Are lower gasoline prices in the offing?

US crude inventories are now 399.4 million barrels. This is the highest inventory level since records began in 1982.  Refinery utilization is also high at 92.9%.

It appears the European automobile depression is over.

Car sales in Britain are expected to rise 10% in 2014, continuing the strong trend of recent years, according to a Renault executive.  Sales in Europe have turned positive and are up in March for the 7^th consecutive month, due to increased demand in Germany, Italy, and Spain.

I am PIIGS! Hear me oink!

Italy’s borrowing costs have suddenly dropped to the lowest level since the inception of the euro in 1999.  Its 10-year is 3.22% and its 5-year is 1.84%.

It looks like someone threw a switch on the PIIGS.

Bad US Q1 GDP does not look like a blip

GDP rose 0.11% in the first quarter, whilst the consensus was 1.2%. Only consumer spending was up, and that was due to heating bills and Obamacare, not voluntary consumption.  Residential construction, business investment, inventories, net exports, and government spending were all negative.

This does not appear to be a weather-related blip, because weather effects were offset by heating and healthcare.  The other categories would still have been down.  It’s even worse when one looks at inflation.  The BEA used a 1.3% annual rate in Q1.  If they used the BLS’s 1.8%, GDP would have been minus 0.39%, or if the BPP’s 3.91%, it would have been minus 3.8%.

Elder abuse in the USA: Well-educated seniors are being exploited

65% of men with professional degrees age 62-74 are working while only 32% of high school graduates in that age range are. 

Well-educated senior men are being abused by the system, and the less-educated are not pulling their own weight. 

Is the USA the new China?

Boeing expects to deliver 725 passenger jets in 2014, more than the 648 last year and the highest level ever.

It’s all about Asia.  Is the US the new China?

The end times and the rise of the locavores

In Vermont, 55% of public schools have vegetable gardens.  Vermont ranks #1 among locavores, followed by Maine, New Hampshire, Oregon, and Hawaii.

Is Vermont the next Cornwall?  "The center cannot hold."

The FT calls it the "disUniting Kingdom." Cornwall heads for the exits.

Cornish nationalists (both of them), who argue that Cornwall has never legally been a part of the UK, are making progress: the EU will be giving them protected national minority status, like the Welsh and the Scots.  

This follows logically from the designation in 2011 of the Cornish Pasty as a “Protected Geographic Indication” by the EU. (Although in my opinion the pasties one buys in Cornwall are even worse than the pseudo-Cornish ones in London.)  This is reminiscent of how the growing popularity of putine in the 1960s anticipated the rise of Quebec separatism.  

The March of Progress

Brunei’s government is introducing death by stoning and the severing of limbs to bring its laws into greater harmony with Sharia.

These changes are being temporarily delayed due to” unavoidable circumstances.” Brunei is a marshy country; perhaps they don’t have enough stones?