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

My end of week reading:

• Home-sales data is bogus, Realtors say (NY Post) see also Shine Is Off Asian Properties (WSJ)
• A peek inside ECRI’s black box (Bonddad Blog)
• Questioning The Benefit Of Curbing Short Sales (NYT)
• As Retail Sales Lag, Stores Shuffle the Calendar (NYT)
• Banks See Their Footprint Downsized in 2011 (Yahoo Finance)
• Revealed: huge increase in executive pay for America’s top bosses (Guardian)
• U.K. May Face Derivatives-Law Setback in EU (Bloomberg) see also SEC Appeals Judge’s Rejection of Citigroup Settlement (WSJ)
• Gold Experiences an Identity Crisis (WSJ)
• History lesson: The People and the Patriots (Boston Review)
• Iran hijacked US drone, says Iranian engineer (CS Monitor)

What are you reading?

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Gold: Safe or Sorry?

Source: Gold Experiences an Identity Crisis, WSJ

Hey, lookie here, someone finally got indicted charged with civil fraud

Phoney & Fraudie had a long history of fraud, bad execs, fake accounting.

Next up: AIG. They are the no brainer, with zero reserves against $3 trillion in potential liability.

There are cases to be made against Countrywide, Citigroup, Bank of America, Lehman Brothers, Bear Stearns, etc., but you take the low hanging fruit first.

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SEC release below

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Nov CPI was flat headline m/o/m but rose .2% ex f&f. Expectations were up .1% for both. The y/o/y gain is 3.4% headline, down from 3.5% in Oct and 2.2% core which is the most since Oct ’08. This compares with the avg MMA/Savings account yield of .14% according to Bankrate.com and the Nov 1.8% y/o/y gain in avg hourly earnings. Keeping a lid on headline CPI was a 1.6% drop in energy prices led by gasoline. Food prices were up .1%. OER, 25% of CPI, rose just .1% m/o/m and is still not fully reflecting the rise in rents which is happening as ‘rent of primary residence’ rose .2% m/o/m and 2.4% y/o/y. Vehicle prices fell by .3% as both new and used car prices fell. Apparel prices rose .6% y/o/y and are now up 4.8% y/o/y. Commodity prices overall, 40% of CPI, fell .3% but are still up 5.3% y/o/y. Bottom line, in the Fed’s eyes and in the view of most economists, inflation seems benign and contained because they look at the rate of change rather than the absolute index. The index itself is just a hair shy from the record high reached in Sept which is another way of saying the cost of living has never been greater. Price stability that is not and has a negative impact on an economy where wages and interest income are growing less than the rate of change in inflation.

In yesterday’s AM Reads, I linked to Millionaire’s Island — a longish discussion about Job creation by Henry Blodget at Business Insider.

An interesting discussion, but a flawed argument. This error comes up frequently in the way employment is measured. As it turns out, entrepreneurs end up “creating” less jobs than you think. Yes, they do create jobs, but they destroy them as well. What they end up doing instead is competing for talent in the labor market, using new, more efficient business models.

This is a subtle difference.

Let’s consider Business Insider. They are ostensibly a news site — SEO traffic obsessed, tending towards outrageous headlines. Henry mentioned his firm has created 75 new jobs.

But did it really?

BI is a digital media property. The print industry (aka dead trees) has been fighting a losing battle versus online competition for years. The print news industry itself is shrinking, while the online industry is growing — but online’s gains are not nearly as large as offline’s losses.

Those 75 jobs Henry mentioned? Twenty-five years ago, they would have been 250 jobs at various newspapers and magazines. Writers, copy editors, artists, printers (Humans, not HPs), etc. The enormous gains in productivity allow far fewer people to do the work formerly employing far more people. This is the inevitable path of technology. Ever since the first human sharpened a stick to hunt, that curve has been the accomplishment of more production with fewer people.

What entrepreneurs actually do is facilitate moving workers from one firm to another — from the less productive business model to the more productive one — as they battle it out in the marketplace.

In my own firm, we hire people, but I am somewhat less certain we “create jobs.” Let’s say we hire a former trader from Bear Stearns and a former asset manager from Merrill Lynch. Did we just create two new jobs? From my analysis -2 + 2 = 0. But let’s assume we are more efficient in how we analyze markets and manage assets. Our employees retain a greater percentage of their income for themselves. If this model proves more productive, efficient, and effective, if it is readily adaptable by competitors, then it spells trouble for the old regime. They must either adapt or get bypassed. (Note I said if — I am not ready to declare we are taking Merrill down).

This is the Darwinian competition in the marketplace.

On the software side, we may actually be creating jobs: We hire quants, programmers, run back-testing, find new ways to look at the same markets. These positions did not exist in finance 25 years ago. We can question if even these are actually creating jobs. After all, there are a fixed number of investors, and everyone in the industry is competing for their asset management and/or analytical business. Perhaps these hires come at the expense of other more traditional fundamental analysts that might have been hired elsewhere. (I simply don’t know)

Entrepreneurs create new ways of doing things. They see the world in a slightly different light, and that allows all kinds of new approaches and new business models to bloom. When people discuss “Job creators,” they are really talking about the more complex subject of creative destruction.

The business of the future is to be dangerous to the business of the present . . .

The RBI, India’s Central Bank, has imposed curbs on Rupee forward trading to try to halt the sharp decline in the currency. They also reduced the size of positions that could be held by dealers overnight. Whilst helpful in the short term, these type of measures rarely succeed, other than in the short term. Foreign investors are withdrawing capital which will add to the pressure on the Rupee. Furthermore the RBI will be cutting interest rates in the New Year (though, as expected, they kept repo rates on hold today at 8.5%), another negative for the Rupee;

The EFSF is considering the inclusion of explicit warnings to investors that the euro could break up or even cease to become a “lawful currency”.

Interesting data on the Bundesbank’s exposure to other (mainly peripheral) Euro Zone countries. The Buba has lent E495bn (64% of BUBA’s assets) to the ECB via Target2. Those funds have been taken up from Target2 by central banks in (guess where) the PIIGS. Oops, Oops and Oops. Even if you ignore the credit risk (though the ECB can just print money to cover the exposure, I suppose), this level of funding/exposure highlights the increasing strains in Euro Zone financial markets;

Fitch reviewed repossessed properties in Spanish RMBS’s that they rated. The summary – average sales prices are not only 43% lower than valuations at the time of the original purchase, but also 32% lower than the valuation conducted at the time of repossession. Some banks are selling the underlying collateral at inflated prices to intra-group entities !!!!! – surely accountants should have spotted this as inter group profits should be ignored in compiling the P&L. For those banks that have achieved the highest sales of such properties in the lowest time, the average discount is a massive 58%, though even this strategy took an average 11 months (source FT) This is a definite “prized Oops”;

Ms Lagarde warns that the Euro Zone crisis is escalating. In addition, she confirmed the weakness of the global economy, which would impact every country – hint to Germany? and which could lead to a 1930′s type of depression; The French national statistics office reported that France is in recession as the economy contracts in this Q (-0.2%) and next (-0.1%).

Domestic demand and corporate spending is declining. The French Government has forecast that their economy will grow by +0.5% – 1.0% next year – complete pie in the sky. A deteriorating French economy, combined with the (very likely) loss of its AAA rating suggests Sarkozy’s Presidential aspirations are effectively “French toast”. The only good news is that Insee is forecasting inflation to decline to +1.4% by June 2012 (source Bloomberg);

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For the 2nd day, European bonds are rallying sharply, particularly on the short end. Spanish and Italian 2 yr yields are each down by about 50 bps for the 2nd straight day. The Spanish 2 yr yield in particular is at the lowest since Apr and has been cut in half since late Nov. The French 2 yr yield is falling to the lowest since Sept ’10. I can’t explain the sudden enthusiasm for this paper. Some say that banks are the big buyers, tapping 1% ECB 3 yr funds and playing the carry trade by buying higher yielding sovereign debt but I can’t imagine this is going on after banks spent the last few months selling sovereign debt knowing the markets view it as toxic. Now they’re going to load up again? I just don’t see it. The euro basis swap is narrowing by 19 bps to 121 to the cheapest since last Thurs. After 6 straight days of losses, the Shanghai index bounced 2% but the Indian Sensex index fell to the lowest since Nov ’09. The Reserve Bank of India ended its rate hiking but gave no indication that cuts will soon follow with inflation remaining too high. Unlike the Western world seeing credit downgrades or the possibility of them, Fitch raised Indonesia’s credit rating to investment grade last night and S&P today put Philippines BB rating on credit watch positive from stable. Both have 5 yr CDS trading cheaper than France.

Why Man Creates — a remarkable short documentary from 1968, animated by Saul Bass and alluringly subtitled “a series of explorations, episodes & comments on creativity.”