Thought for the day
Thought for the day (latest)
Sometimes controversial, sometimes quirky but always thought-provoking.
Michael Baxter, freelance journalist, provides his personal insights on current economic
and business issues - essential reading for investors interested in fuel for the mind.
For previous thoughts for the day, click here.
Bull and bear: Markets turn ire on Spain and Italy, could France join the melee? US sees its credit rating downgraded – in China
Markets tumble, but what does it mean?
03/08/2011 - Bull and bear: Markets turn ire on Spain and Italy, could France join the melee? US sees its credit rating downgraded – in China
Bull and Bear: an optimistic and pessimistic view of investment news. Today's stories include: Markets turn ire on Spain and Italy, could France join the melee? US sees its credit rating downgraded- in China. Dipping and soaring: profits dip at Barclays, soar at Standard Chartered. US real spending flat. Companies in the news: Xstrata, Cookson.
Markets turn ire on Spain and Italy, could France join the melee?
The yield on ten year Spanish and Italian ten year bonds hit 6.45 and 6.25 per cent respectively yesterday. By contrast, the yield on UK ten year bonds hit an all-time low of 2.77 per cent (at the time of writing). The yield on US ten years fell below 2.6 per cent, and German bonds stood at 2.36 per cent at the time of writing. Gold hit a new all-time high.
Bear: The yield on Spanish and Italian bonds is now approaching the kind of level we saw when the likes of Portugal and Greece were forced to plead for help. The EU is supposed to be able to help out now, and buy gilts, and use Germany's credit rating as way to raise the money the likes of Italy and Spain need. But the markets don't see it like that.
The latest EU bail out was never going to be enough. The problems across the Eurozone are far too deep.
Even the spread between German and French ten year bonds has now reached 75 basis points, which is a euro high.
Bull: The fundamental problem is that the politicians are not up to the challenge they now face, and – to a large extent – are in denial. The worst case scenario is that we see a gradual drip drip of bad news, and funding crises, each one solved by the use of sticking plaster. If that were to happen, the economic paralysis could just go on and on. The best scenario is for the bad news to come to us in a headlong rush. At least if that happens, the recovery can begin sooner. Yesterday's developments suggested that this second scenario has become more likely.
US sees its credit rating downgraded – in China
Yesterday Moody's and Fitch issued another warning. They both confirmed that the US still has a triple A credit rating, but warned it could fall.
Meanwhile, the Dagong Global Credit Rating has downgraded the US from an A+ to an A.
Bull: The downgrade from Dagong is unlikely to have much effect; after all it removed the US triple A rating some time ago. Now there is growing talk that, even if the US were to lose its triple A rating, it won't be too great a catastrophe. Let's face it, Japan has had been borrowing money for years, even though its rating has been less than perfect for a very long time.
Bear: And yet, the US has underlying difficulties that will just get worse. Demographic changes, and the ballooning health care expenditure mean that US debts are going to steadily rise. McKinsay predicts that by 2050 US health care spending will be 100 per cent of US GDP. An imminent US default may be unlikely, but it seems likely this will occur at some point during the next decade or so.
Bull: But in times of hardship people suddenly become willing to make tough decisions. The US has become an increasingly divided country, and this can create major economic problems down the line. Demographic trends suggest those people who have been typically the haves in the past, are likely to see their numbers dwindle, and those who have typically been poorer are set to see their numbers rise. The US can either try to solve this growing divide, or turn its back on the problem altogether and let market forces take care of themselves. What the US does not need is some kind of halfway house, which is what will happen if Democrats and Republicans are forced to work together.
But maybe Obama is at last showing some backbone. Yesterday he said: "Everyone is going to have to chip in…That is only fair. That’s the principle I’ll be fighting for during the next phase of this process."
Perhaps Obama will push for tax rises after all. If he succeeds, it's just possible that the US public deficit will begin to look manageable.
Dipping and soaring: profits dip at Barclays, soar at Standard Chartered
Barclays
Bear: Profits fell by a third at Barclays during the first half of this year, to £2.6bn. The bank has also announced it is following HSBC in making job cuts.
Bull: However, after excluding one-off charges relating to PPI payments, Barclays' profits were up 24 per cent from this time last year. The bank also said its bad debts have been reduced significantly.
On job losses: Barclays has tried to draw a connection between the job losses it is implementing to the tighter regulatory framework governments are trying to introduce. In other words, poor regulation may have contributed towards the banking crisis, but if you regulate us now, job losses will follow. HSBC gave a similar warning.
And Bob Diamond did put his foot in it somewhat. In fact he brought back memories of BP's Tony Hayward, with his "I want my life back," jibe. Mr Diamond said: it had been "fun" working with fellow directors restructuring the business. He realised the implication of what he said, and quickly added: "not that cutting costs is fun”. The response from Unions was predictably critical, but under the circumstances, one can hardly blame them.
Standard Chartered
Bull: Second half profits were up 19 per cent as earnings in Hong Kong hit a new all-time high. The bank has now seen net income hit a new record for seven years on the trot. It is also hiring 1,000 people this year, after taking on 7,000 last year. Chartered's Chief Executive Officer Peter Sands said: "Given the markets we are in, and the momentum of our businesses, we expect to deliver double-digit income growth in 2011 and beyond."
US real spending flat
Bear: US real spending was flat in June, after falling 0.1 per cent in both of the two preceding months.
Bull: But real disposable income actually rose 0.3 per cent. The US savings rate rose from 5 per cent in May to 5.4 per cent in June.
Conclusion: But it's hard to tell whether the rise in US savings is good or bad. Clearly US households need to save more in the long term than they have been over the last few years. But right now, rising US savings are a part of the problem. It was just like this in Japan, when rising household savings led to twenty years of economic malaise.
Companies in the news
Xstrata
Bull (ish): The 'FT's' Lex has been looking at Xstrata. Revenue was up by almost a quarter in the company's first half, with demand from Asia and the soaring price of coal. But cost stayed low. However, Lex reckons that with its shares trading at 8.4 times forecast earnings, and with no sign of a bid from its main shareholder Glencore, that the current price fairly takes account of what it calls the company's "rediscovered mojo".
Cookson
Bull: The 'Independent' was gushing in its praise for Cookson, the engineering group, which is doing nicely out of rising global demand for steel and electronics. Pre-tax profits were up 27 per cent in the latest half. It said: "Cookson remains a fundamentally strong company…the shares look undervalued."
Bull: The 'Independent' also tipped Devro and Umecon as buys. Questor in the 'Telegraph' tipped Centamin Egypt as a buy.
Bear: Tempus in the 'Times' looked at Barclays saying: "Until the eurozone scare properly recedes and the ring fencing outcome becomes clearer, it would be silly to chase the shares any higher." It also described Hargreaves Lansdown as an 'avoid.'
Lex was scathing on Danish jewellery company Pandora.
Around the Internet
There is some good economic debating at the BBC at the moment. There is a programme on radio four tonight, in the meantime, this piece may be worth a gander: Keynes v Hayek: Two economic giants go head to head.
July was a good month for bond investors, or so says this article on Bloomberg: Investors Made a Fortune on Treasuries in July.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.
03/08/2011 - Markets tumble, but what does it mean?
Something made markets take fright yesterday. There was a big sell off worldwide, except that is in assets that are supposedly safe. But what are the markets saying to us?
Well, yesterday's sell offs made me feel all nostalgic. It reminded me of 2007, 08 and 09 when market crashes became such a common occurrence that it was headline news when they didn't crash. Yesterday it happened again, or at least it sort of happened.
The Dow fell 265 points and is now some 800 points off its level on July 21. In Asia, markets seem to be in the process of crashing (or at least falling sharply) as I write. At the time of writing the Nikkei is down 200 points and the Hang Seng down 465, after seeing similar falls the day before. Then again, UK, US and German bonds did well, and gold hit a new all-time high.
But how about this for droll? Markets have been taking solace in the one quite unlikely place: in the land of hope and glory. Yes that's right, in Blighty. The FTSE 100 fell yesterday, but not by any kind of margin to worry about. Bob Diamond at Barclays has been talking about the UK being seen as a safe refuge, and the yield on UK ten year government bonds hit a new all-time low. It is enough to make your chest puff out with pride, isn't it? Not only does England boast the best cricket team in the world, it appears our economy is now seen as safe pair of hands too.
Okay before I start sounding over-zealous in my patriotism, let me just say I am being a tad facetious here.
But I did find yesterday's falls irritatingly predictable. Okay, it's easy to be wise after the event, and how often do people say, with the benefit of hindsight, "of course I expected this all along." But let me say now, before the event, I expect there to be many more falls to come.
The problem is, as the 'Economist' rather amusingly put it this week, the West is 'turning Japanese' (I really think so).
Investors are scared. Bob Diamond has said that SMEs have joined the frightened list and are boosting their cash balances, terrified of investing. Bonds on gilts are so low, because markets have become more risk averse than ever. The West is engaged in an orgy of de-leverage. It is the mirror image of what we saw during the credit boom. It is just like what happened in Japan twenty years ago.
On the subject of Japan, consider these words written by a certain Alan Greenspan in his book Age of Turbulence. Our Alan was recalling a meeting he had in January 2000 with Kiichi Miyazawa, the Japanese finance minister and former prime minister.
Mr Greenspan said: "After our customary exchange of pleasantries (his English is fluent), I launched into a detailed analysis of the deteriorating Japanese banking system. I had had many such conversations with Miyazawa; a very effective policymaker. I now told the story of how in the United States we’d set up the Resolution Trust Corporation to liquidate the assets of our approximately 750 failed savings-and-loan associations, and how, as soon as most of the seemingly unsellable real estate had been cleared off the shelves, the real estate market had revived and the new, smaller savings-and-loan industry had begun to prosper. I suggested that the U.S. government strategy of bankrupting a large part of our failed thrift industry, placing its assets in a liquidation vehicle, and unloading the assets at large discounts in a manner that would release the real estate market to fit the Japanese situation rather closely. After listening patiently to my lecture, Miyazawa smiled gently as he said, ‘Alan, you have analysed our banking problems quite perceptively. As to your solution, that is not the Japanese way.’ Throwing delinquent debtors into bankruptcy and liquidating their bank collateral was to be avoided, as was firing people. The Japanese hewed to a code of civility that made inducing a loss of face virtually unthinkable."
Now, it seems to me, we are making the same error seen in Japan. Markets may be scared, but policy makers are like frightened rabbits caught in the full glare of economic spotlights.
If one were to view the UK in isolation, one would say the austerity programme is just right. But, with the US set to join the belt tighteners, it seems to me we are seeing worldwide government austerity, just at a time when the private sector deleverage is gaining new momentum.
What's the answer? I guess we should indeed take a leaf out of Greenspan's book, and let bad assets go bad, including bad banks. At the same time central banks across the world should engage in a new run of massive quantitative easing, and buy government bonds, providing governments with the funding needed to cut taxes and re-invigorate the global economy through public spending.
The fundamental problem that is not being spotted is that we are not seeing a debt crisis at all. The problem now, as it has been for years, is that globally savings are too high, and investment and spending too low. But by hanging on to bad assets, refusing to let them fail, savers are not being punished for the underlying problems they are causing.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.
The Share Centre Limited © 2011. The Share Centre is not responsible for the content of external sites