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

Source:
It’s Time For Rates To Go Up
NPR
July 14, 2011

Guardian:

Rupert Murdoch’s decision to close the News of the World was greeted with a frenzy on Twitter. The Guardian has analysed half a million tweets sent with the #notw hashtag over the past four days to capture how the scandal has resonated with the online community.

k
Click for animation:

h

Source: How Twitter tracked the News of the World scandal (Guardian.co.uk)

A Few More Words From London
July 16, 2011
David Kotok
www.cumber.com

~~~

In Friday’s FT, James Mackintosh illustrated a critical difference between Europe and the United States. He noted that the Italian debt auction had an interest rate of 4.93% on 5-year government debt. That was a full percentage point higher than last month. He contrasted the Italian auction with the US auction of $5 billion of 2-week debt at an interest rate of zero. As Mackintosh said, with great politeness, “The fundamentals of the two countries do not justify either the optimism over the US, or the pessimism about Italy.”

This is not about optimism or pessimism. This is about the construction that Mackintosh outlined in his column. In Italy, the European Central Bank cannot directly buy government debt. Therefore it can only support Italy through conduits and only in minimal amounts. The conduits are the same banks in the same banking system that are under “stress” because of stress tests and that are dealing with a mix of sovereign debt in Europe that is highly suspect in terms of its creditworthiness.

In the US, the debt markets have the support of the Federal Reserve. The US gets away with its approach because its central bank has a policy that retains an interest rate at zero. Meanwhile, the Italians do not have the ability to use this approach, because their construction with the European Central Bank has taken away the weapon of maintaining their own sovereign debt in their own currency. In the old days, when the Italians used lira, they too had the ability to directly finance themselves.

The victims of the policy difference are the investors, the bond holders, and all those tied to them. Think about this as trillions of dollars around the world, impacting nearly all the elements of finance and government that we can imagine.

If you contrast the two interest rates, you find some remarkable comparisons, which Mackintosh has summarized in his columns. He writes that “the Italian government should have a surplus before interest” due to its new budget austerity. Meanwhile, the US is expected to run a deficit of 9% of GDP, before interest, this year.

We digress again. Note the difference between Italy responding to the impact of higher interest rates and changing its political mechanism, with political adversaries coming together out of a national interest. Contrast that with the United States and the behavior of the Democrats and the Republicans, which we would rate as poor, impoverished, irresponsible, and foolish. We too are being polite.

If Italy could borrow at US rates, then Mackintosh calculates that Italy “would look [to] have a budget deficit of just 2 per cent,” and therefore be “more like Germany than Greece.”

If the United States had to pay the interest rates the Italians have to pay, the US would face a game changer, in our view.

The point is: if you look at current interest rates, the world today is upside down and backwards.

Rating agencies only exacerbate the problem. In Europe, they have made such a mess of their ability to forecast creditworthiness that the Europeans are now ignoring the ratings and talking about ways they can create their own rating agencies because of the failure of the ones they used to rely upon.

In the US, the rating agencies now threaten to remove the AAA status of the United States. This is no insignificant issue. The AAA status of the US is the premier credit assessment in the world. It is being diminished, emasculated, and corrupted by American politics. The warnings are very clear by the rating agencies and the central bank leadership. The behavior in Washington is extraordinarily threatening.

A final word of warning: Americans currently are enjoying very low interest rates. At the short end of the yield curve the interest rate is effectively zero. At the longest end of the curve, the 30-year Treasury bond yields somewhere in the low 4% area. The Federal Reserve has practiced a policy to bring those interest rates to that level and keep them there. The Federal Reserve will not be able to control those rates if the world views the AAA creditworthiness of the United States as jeopardized. We saw that in the very short-term reaction in debt markets over the last few days, when there was the first inkling that the debt-ceiling issues will not be resolved in Washington.

The more politicians play brinksmanship, the more they threaten every retirement plan, every beneficiary of a payment stream from the US government, every investor, and every citizen in our country and elsewhere in the world who depends on the creditworthiness of the United States.

Cumberland’s position is based on an assumption that the United States of America will not default. We believe politics will play brinksmanship to the very end and subsequently extend the debt ceiling. The politicians have already introduced cost. There is already a risk premium in the market.

The fundamental assumption is that the US has the capacity to pay, as it has the structure with the Federal Reserve to achieve the liquidity, and in the very end, it will pay its debt and bills in a timely way. Based on that position, we are still fully invested in equity markets around the world and are maintaining our bond positions. That being said, the events suggest to us that a meaningful change in attitude and a permanent cure are not developing in Washington. In Washington, things are done for immediate political expediency, vision is limited to the next election, and the sense of responsibility is deteriorating to a new lower and abysmal level.

Therefore, at Cumberland we will commence a gradual process of shortening duration in bond portfolios. We do not see this as an immediate necessity. We do see it as a strategic shift. Policies that were responding to financial crisis are now running amuck. Our portfolio change will be gradual. When government policies explode in negative outcomes, they are usually received as surprises by markets. A touch of defensiveness is now warranted.

We are heading for Heathrow Terminal 5 tonight. We will be back at our desks on Monday.

~~~~

David R. Kotok, Chairman and Chief Investment Officer

Politico’s M. Wuerker captures this fellow beautifully:

>

Ezra Klein explains thirty years of the debt ceiling in one graph (note the Congressional control appears to be backwards):

>

Sweet ride, not sure about the paint job!

$2.4 Million At Today’s Exchange Rates:

Source:
In Auto News, Bugatti Veyron Grand Sport

This morning, Joe Nocera offers up his Mea Culpa on the Murdoch purchase of the WSJ. The Journal Becomes Fox-ified:

As a business story, the News of the World scandal isn’t just about phone hacking and police bribery. It is about Murdoch’s media empire, the News Corporation, being at risk — along with his family’s once unshakable hold on it. The old Wall Street Journal would have been leading the pack in pursuit of that story.

Now? At first, The Journal ignored the scandal, even though, as the Murdoch biographer Michael Wolff pointed out in Adweek, it was front-page news all across Britain. Then, when the scandal was no longer avoidable, The Journal did just enough to avoid being accused of looking the other way. Blogging for Columbia Journalism Review, Dean Starkman, the media critic, described The Journal’s coverage as “obviously hamstrung, and far, far below the paper’s true capacity.”

Regular readers of TBP were warned many years ago that Murdoch was less interested in pursuing journalism, and more interested in his own political agenda. What was once the best paper in America became a mere tool in that pursuit.

Rather than recognize the unique strength of the Journal as a Wall Street institution, we warned in 2008 that Murdch would “De-Financialize” the WSJ. Not too long after, the paper saw prize winning reporters defecting for NYT and other papers.

The editorial page has always been batshit crazy, but you expect that to stay sequestered fromt he business of Journalism. No longer. As Nocera points out:

“Along with the transformation of a great paper into a mediocre one came a change that was both more subtle and more insidious. The political articles grew more and more slanted toward the Republican party line. The Journal sometimes took to using the word “Democrat” as an adjective instead of a noun, a usage favored by the right wing. In her book, “War at The Wall Street Journal,” Sarah Ellison recounts how editors inserted the phrase “assault on business” in an article about corporate taxes under President Obama. The Journal was turned into a propaganda vehicle for its owner’s conservative views. That’s half the definition of Fox-ification.”

And to me, the great tragedy has been the spoiling of what was once a tremendous asset. We noted the OpEd madness creeping onto the front page and then other stories 18 months ago in WSJ Jumps the Shark.

The good news is the WSJ can be saved. NewsCorp (NWS) is actually a highly profitable company that could easily be cleaved into (profitable) entertainment and (less profitable) news. Spin Dow Jones back out as a standalone company, and let their editors and reporters do what they do best without interference from a modern day Foster Kane.

Murdoch has had an out-sized influence on the political processes on 3 continents and numerous countries. In the UK, he is facing possible charges of corrupting Scotland yard. After years of bullying Parliament into submission, the MPs smell blood in the water and appear to be out for revenge.

In the US, Murdoch’s Fox News has coarsened the political process and LITERALLY made the American public dumber. Fox News viewers consistently rank amongst the least knowledgeable, worst informed people when it comes to the FACTS about the issues of the day. Over the short run, it has been a cynical yet highly profitable infotainment machine, but ultimately, highly destructive to our body polity.

You cannot have a functional Democracy without a vigorous press and a well informed electorate. Here’s to hoping that the net effect of the unfolding scandal is a more aggressive press run by Journalists, and fewer media barons mucking up the process.

>

>

Previously:
Murdoch’s WSJ Changes Creates Opening for NYT, FT (April 24th, 2008)

Read It Here First: “De-Financializing” the WSJ (April 28th, 2008)

Why Are WSJ Reporters Defecting for NYT ? (August 31st, 2010)

WSJ Jumps the Shark (January 22nd, 2010)

>

Source:
The Journal Becomes Fox-ified
JOE NOCERA
NYT July 15, 2011
http://www.nytimes.com/2011/07/16/opinion/16nocera.html

Some interesting reads for your weekend pleasure:

• Return of the Gold Standard as world order unravels (Telegraph) see also Fed Official: It’s Time For Rates To Go Up (NPR)

• As a Watchdog Starves, Wall Street Is Tossed a Bone (NYT)

• Worried About Debt Limit? The Bond Market Isn’t (Bloomberg) see also Why Obama Has Already Won the Debt-Limit Fight (Bloomberg)

• Warning Signal? Dow Jones Transports Slumping (WSJ)

• Why Some Home Sellers Are More Delusional Than Others (Moneyland) see also Beginning of the end of the entire Housing crisis? (Market Watch)

• Dimon Says Mortgage Clash Swells as ‘Everybody Is Going to Sue’ (Businessweek)

• Murdoch’s (In-House) Legal Woes (Media Matters) see also Phone hacking: Rupert Murdoch’s American media empire ‘could unravel’ (Telegraph) and US AG Holder Considers News Corp. Probe (Daily Beast)

• Daniel Ek’s Spotify: Music’s Last Best Hope (Businessweek)

• Why Netflix Raised Its Prices (NYT)

• How Twitter tracked the News of the World scandal (Guardian)

What are you reading?

Fri 15 Jul 11 | 07:00 AM ET

~~~

Hilarious: Kenny Powers becomes CEO of K-Swiss, and enlists the help of Michael Bay, Matt Cassel, Jillian Michaels, MMA Champion Jon “Bones”