The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

As long as I am here in Europe, I might as well give you some flavor of what has become known as Recession Porn: The most dire forecasts expecting the most egregious outcomes.

Today’s “Crisis Porn” comes to us via Société Générale by way of the UK’s Telegraph, and its Pretty grim:

“In a report entitled “Worst-case debt scenario”, the bank’s asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.

Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of “deleveraging”, for years.

“As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse,” said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.

Under the French bank’s “Bear Case” scenario, the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.

Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.

Note that the report is a “worst case scenario.” That’s your recession porn for the day . . .

>

Source:
Société Générale tells clients how to prepare for ‘global collapse’
Ambrose Evans-Pritchard
Telegraph, 6:12PM GMT 18 Nov 2009

http://www.telegraph.co.uk/finance/economics/6599281/Societe-Generale-tells-clients-how-to-prepare-for-global-collapse.html

Initial Jobless Claims totaled 505k, in line with estimates and flat with a revised 505k last week. Continuing Claims, which covers the first 26 weeks of benefits, fell by 39k but were slightly above forecasts. Emergency Unemployment Compensation which takes us past 26 weeks rose by 101k which makes clear that the fall in Continuing Claims is more because of the inability to find a job which thus keeps people collecting past 26 weeks. Extended Benefits, which runs past EUC, rose by 17k. With recent legislation, benefits run up to 99 weeks. Ironically, Larry Summers in the mid ’90s wrote a piece saying that unemployment insurance is one of the causes of long term unemployment “by providing an incentive, and the means, not to work. Each unemployed person has a minimum wage he/she insists on getting before accepting a job. Unemployment insurance…increase that reservation wage, causing an unemployed person to remain unemployed longer.”

The US$ index is rising to a one week high and the US$ is also higher against emerging market currencies such as Brazil, Taiwan, and Indonesia, so the bounce is broad based. Whether it was Bernanke uttering the dollar word in terms of its impact on commodity prices and inflation on Monday, Trichet following up saying don’t ignore Bernanke’s comments, maybe (I emphasize maybe) comments today from JPM saying Brazil may increase the tax on FX inflows to further stem the rally in the Real and more vocal comments in Asia this week telling China to let the Yuan appreciate (which the Chinese say the Fed is responsible for due to their peg), we may have reached a short term global pain threshold on the US$ weakness that could spur a counter trend rally in it. The reflation today is being sold and is weighing on the futures. Also, UK banks are lower after Experian, a credit check co, said the UK banks are in the worst state in the developed world.

Why aren’t we listening more to this font of common sense and logic?

“A proposal to give banking regulators authority to block accounting standards is “a terrible idea,” Paul A. Volcker, a former chairman of the Federal Reserve Board, said Monday.

Mr. Volcker has been an outspoken critic of “mark to market” accounting that forced banks to take large write-downs in asset values, a position cited by banks earlier this year when they persuaded members of the House Financial Services Committee to demand changes in that rule.

But in an interview Monday, two days before a House committee vote on a proposal that would grant bank regulators the power to sidestep accounting standards, Mr. Volcker said he believed that accounting rules had to be set by an independent agency. He voiced concern that rising political pressures on both sides of the Atlantic were endangering that independence.”

The Financial Services Committee is to vote on amendments to a bill to establish a council of bank regulators as a systemic risk regulator, able to take action if bank activities threaten financial stability. . .

Mr. Volcker was the founding chairman of the International Accounting Standards Committee Foundation, which oversees the International Accounting Standards Board, and has long been a supporter of independent rule-setting. He has been campaigning for a single set of international accounting standards, but he said on Monday that he feared that effort was being undermined.”

Its quite likely that this power will be exercised in the next crisis, removing yet more transparency and data for investors; Worse still, the accounting exemptions will create a new class of zombie banks.

The amendment is strongly supported by the banks. In addition to removing Mark-to-Market accounting, it allows a systemic regulators “to order the Securities and Exchange Commission, which now oversees the Financial Accounting Standards Board, to suspend or change any accounting rule that the council thinks is a threat to financial stability.”

Here’s the most insane quote I’ve seen in a long time:

“The amendment has been endorsed by the American Bankers Association, which says the S.E.C.’s focus, on helping investors, is too narrow. The amendment has been strongly opposed by groups including the Chamber of Commerce and groups representing investors.” (emphasis added)

If this passes, there will be no end to the shenanigans banks can play in the next crisis. As we have sen, many financials insitutions have taken egregious advantage of the crisis they created.

This new reg will be a license to pillage . . .

>

Source:
Volcker Criticizes Accounting Proposal
FLOYD NORRIS
NYT, November 17, 2009

http://www.nytimes.com/2009/11/17/business/economy/17volcker.html

Picture du Jour: Plunging dollar erodes non-US investors’ returns

With the US dollar falling down a precipice, spare a thought for non-US investors invested in US stocks and bonds.

The graph below shows the performance of US 10-year Treasury Notes since the beginning of March in both US dollar terms (red line) and euro terms (blue line). Whereas US investors are showing a poor return of -2.8% for the period, European investors are completely under water to the tune of -17.5%. For the year to date the figures are -4.8% (US dollar) and -10.5% (euro). (Although I am using the euro in this example, the same logic applies to most other non-US dollar currencies.)

Source: StockCharts.com

The next graph illustrates the same principle for equities by comparing the performance of S&P 500 Index in US dollar terms (red line) with the same Index from the viewpoint of a euro investor (blue line). Whereas US investors have every reason to be very pleased with a return of +64.1%, euro investors are lagging quite far behind with +39.2%, which becomes more pronounced when compared to a return of 55.4% for the European Top 100 Index. For the year to date the figures are +22.9% (S&P 500 – US dollar), +15.6% (S&P 500 – euro) and +21.9% (European Top 100).

Source: StockCharts.com

It is understandable that European investors are not ecstatic about the greenback’s slide and will keep having reservations about committing funds to US assets until they see signs of the dollar forming a bottom.

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

(Rooters, New York):  Having inoculated its employees with H1N1 vaccine dosages usurped from pregnant women and children, Goldman Sachs has increased its vigilance against the contagious virus by banning employee contact with spare change.

An internal memo outlines steps staff should take to avoid becoming ill, starting with the eradication of the potentially infected currency that may have lodged itself under the seats of their automobiles. The hazardous materials are being collected and sent to Small Business for disposal.

The memo also advised employees to “resist the urge to open your own car door ; let your driver do it.”

-Richard Ambrose

Today’s Outside the Box comes to us from England. My European partner Niels Jensen from time to time sends me some of the best letters he reads from the hedge fund world. He is an excellent filter for me, and this week’s Outside the Box offering is no exception. Below is the November commentary from Eclectica fund manager Hugh Hendry. He challenges the current preoccupation with the falling dollar and China, and posits what would happen if that thinking is wrong? It offers some very thought-provoking ideas. You can contact them for more information at info@eclectica-am.com or visit their website: http://www.eclectica-am.com

Your wondering if we are all turning Japanese analyst,

John Mauldin, Editor
Outside the Box

Eclectica November Fund Commentary

by Hugh Hendry
Eclectica Fund Manager

“The power to become habituated to his surroundings is a marked characteristic of mankind.”

John Maynard Keynes
The Economic Consequences of the Peace, 1921

This month I will attempt to answer the entrance examination for the Chinese civil service. That is to say, I will attempt to tell you everything that I know. In doing so, I will argue that this year’s rally in inflationary assets, from emerging stock markets to industrial commodities to the fall in the US dollar, could be a FAKE. Let me explain why.

But first, I am indebted to Scott Sumner, professor of economics at the University of Bentley, and his essay on the economic lessons that can be drawn from timelessness in art (see http://blogsandwikis.bentley.edu/themoneyillusion/?p=2542). It is a theme that I will constantly revisit in my arguments below.

Sumner is able to take us from the Flemish forger, Van Meegeren, and his horrendous reproductions of the Dutch painter, Vermeer, to the notion that every recession seems unique and special to its protagonists. So just how did Van Meegeren fool the Nazis with paintings that today look so awful, so un-Vermeer? Jonathan Lopez, the noted art historian, argues that a FAKE succeeds owing to its power to sway the contemporary mind. Or in other words, the best forgeries tend to pay homage to the tastes and prejudices of their time. The present is so seductive.

However, forget the art world. Controlling the psyche of this generation of investor is the indelible mark of the falling dollar and the associated fear of inflation. Monetary inflation has been the distinguishing feature of the last ten years, and it is now firmly embedded in the contemporary mind. I am sure I need not remind you that gold, along with just about every other commodity, has at least quadrupled in price since 1999. You already know my explanation for why this has happened.

The spectacular rise in the Chinese trade surplus, predominantly with America, to $320bn per annum at its peak in 2007, and the mercantilist desire to prevent currency appreciation drove the Asians and the sheiks to buy Treasuries and print their own currencies. The ability of fractional reserve banking to leverage this liquidity many times over provided the monetary mo-jo to instigate ever higher commodity prices. In other words, quantitative easing, masquerading as a cheap but fixed currency regime, has succeeded where Japan’s orthodox version has failed. The QE succeeded because, amongst other features, it raised the velocity of monetary circulation.

However, it was not always like this. As an example, ten years ago it was unthinkable that the dollar would prove so fragile. Recall that back then, when the euro was first launched in 1999, it promptly lost 31% of its value against the greenback. The subsequent reconstruction of modern China, though, intervened. In order to finance the emergence of a new economic superpower, an abundance of dollars was needed. Have no doubt that had we not had the dollar as a reserve currency, the rise of China would not have been as swift nor as decisive.

The Yellow Brick Road

Consider another economy needing to be rebuilt: that of the United States in 1865, the post Civil War era. The rebirth of the American economy was funded from the monetary rectitude of the gold standard, not from the generosity of a foreign and infinitely expandable paper currency. However, all of this occurred before the discovery of cyanide for heap-leaching and the opening up of the huge South African gold fields. In other words, hard money was in tight supply and the recovery was neither swift nor decisive. Indeed, 30 years later, during the presidential election campaign of 1896, Williams Jennings Bryan was still hotly contesting its merits. He railed against the persistent price deflation and argued that the economy was burdened by a “cross of gold” (see The Eclectica Fund Report, December 2005).

Read the rest of this entry »

Interesting stuff:

• China’s Blunt Talk for Obama (WSJ)

• China Faces Asset-Bubble Risk, PBOC Adviser Fan Says (Bloomberg)

• China vs United States by the Numbers (NYT)

• Riding on China’s coat-tails (Business Spectator)

• Hong Kong to U.S: Please Don’t Blow our Bubbles (Real Time Economics)

• The Tokyo Hot List: 20 people to watch (Tokyo)

here’s another cool interactive map, via the Detroit News:

>

click for ginormous graphic

This is one of the things I will be discussing at the Berlin Conference:

Comparing the 1982 Bull Market with the 2009 Rally

>

Sources: Gluskin Sheff, S&P, Bloomberg