Prepare for a shock from Middle-East

Financial times – Mohamed El-Erian

Global markets paid scant attention to the Egyptian and Tunisian revolutions. Both were seen as lacking systemic economic and financial significance.

This is now changing as youth-inspired uprisings spread to other countries in North Africa and the Middle East. While related political and social issues rightly dominate the headlines, this past weekend could also prove a tipping point when it comes to the implications for the global economy; and there is little that western countries can do to offset short-term stagflationary winds. It is understandable that Egypt and Tunisia had essentially not registered on the markets’ traditional scale of systemic influence. The two countries are not significant global economic powers; they do not owe much money to western banks and governments; and they are not large exporters of commodities. Yet Egypt and Tunisia are catalysts for a broader phenomenon of change that is gaining systemic importance. Over the weekend, protests occurred in a growing number of countries in the region, from Algeria and Morocco in the west to Bahrain and Yemen in the east. Two developments are particularly important when it comes to global demand and price dynamics. With an oil exporter such as Libya now in the grips of a popular uprising, markets will push oil prices higher to reflect much greater supply uncertainties for this key global commodity. And with sectarian issues now on display in Bahrain, geopolitical risks are higher for the region – especially as other countries seek to influence events in the Kingdom.

Michael Pettis on China’s very own zaiteku

Financial Times

Here’s something for anyone who thought last week’s bank lending figures from the People’s Bank of China showed the country was succeeding in its tightening efforts. It’s a statement from PBoC member Sheng Songcheng. In it, Songcheng writes that “society-wide financing” might act as a better guide for monetary policy than net new loans. And according to that measure, total financing came in at RMB 14.3 trillion in 2010, up 1.5 per cent year on year, due to a surge in off-balance sheet lending, which more than doubled to RMB 4 trillion in 2010. We’re aping the words of SWS’s Chen Long here — but with good reason.

SWS analyst and all-round China expert Michael Pettis brings up his colleague’s work in his latest China Financial Markets newsletter. In it he argues that bank lending is still a major risk factor for the Chinese economy, but also that one of the most worrying aspects of the recent numbers was a decline in corporate deposits. Here’s Pettis on why:

"So why did corporate deposits drop? My guess is that large businesses may be finding it much more profitable to lend money to other businesses, especially those who don’t have easy access to bank credit, than to deposit cash in the bank at such negative real rates. Both the Credit Suisse report and an email I got last month from a friend of mine at Bank of China suggests that there may be an increase in intercompany lending, and to me this would be a very plausible consequence of negative real deposit rates. … Those of us old enough to remember the 1980s will be reminded that the Japanese had a word for this kind of activity: zaiteku. According to the Japanlink website, zaiteku is an abbreviation of zaimu tekunorojii, which means “Raising profit by utilizing capital for securities investments, real estate and the like.” In the late 1980s Japanese companies, faced with the combination of highly repressed borrowing costs and the prospects of ever-rising asset prices (sound familiar?), discovered that it was far easier and more exciting to make money by speculating than by normal operations, and it became the great fashion among Japanese corporations. But it came with a huge cost. Japanese companies began relying increasingly on zaiteku for profits and imbedded increasingly risky structures into their balance sheets. When the seemingly impossible happened, and asset prices stopped rising inexorably, the impact on Japan’s subsequent contraction was made much worse. "

Emerging Markets Get Cheap

Wall Street Journal

Investors have been piling out of emerging markets lately. It might be time to start tiptoeing back in.

While the world’s developed markets have rallied in 2011, emerging markets have slumped. The MSCI Emerging Market Index has dropped 3.5% this year, while the MSCI World Index, which tracks 24 developed markets, has jumped 5.1%. In fact, developed markets have beaten emerging markets for five consecutive months, the longest streak since the five months ended October 2008. What’s driving the trend? For starters, emerging economies, after two years of world-beating growth, are starting to face competition from the U.S. and other developed nations. The U.S. Federal Reserve, for instance, raised the low end of its 2011 growth forecast by 0.4 percentage point, to 3.4%, on Feb. 16.  "Today, the emerging markets aren’t the only growth story in town," says Kate Moore, senior global equity strategist at Bank of America Merrill Lynch Global Research in New York. Another factor spooking investors: inflation. The consumer price index in China jumped by 0.3 percentage point in January to 4.9%, above the central bank’s 4% target. Brazil saw a 0.8 point rise to 6%, while India’s CPI is mired above 8%. As central banks raise interest rates to slow price increases, investors fear that economic growth will slow as well.

No free lunches in debt-fuelled bear rally

Financial Times – David Rosenberg

There is no doubt that we have an incredible bear market rally on our hands. But after a monstrous 90 per cent rally from the March 2009 lows (over such a short time frame, and the most pronounced bounce since 1955) this market has become seriously overextended. While everyone focuses on the gross nominal returns, they do not see the risks that are nearly invisible to the naked eye. But we see the risks very clearly. Here at Gluskin Sheff & Associates, we assess them; we measure them, and we benchmark the returns against them.

Le mauvais état de la France

 Les Echos – Eric Le Boucher

Une croissance de 1,5 % seulement, contre 1,7 % pour la moyenne en zone euro. Un déficit extérieur qui replonge à 51,4 milliards d’euros. Un chômage en hausse de 80.000 (+ 3 %) qui touche au total 2,7 millions de personnes. Un déficit budgétaire de près de 150 milliards d’euros, 7,7 % du PIB. Le bilan 2010 de l’économie française est mauvais et franchement inquiétant. « La France a bien passé la crise », s’était vanté Nicolas Sarkozy l’an passé. C’était vrai. Les gigantesques dépenses sociales ont amorti le choc. Mais elle repart mal. Langueur, manque de compétitivité, impuissance à créer des emplois et comptes publics au bord du gouffre : voilà la triste réalité du pays. A seize mois de l’élection présidentielle, il serait temps que les Français et leur classe politique en prennent conscience et que le débat public sorte des faux sujets (les faits divers et les conflits depersonnes) et porte sur le ressaisissement.

Is this bull market for real?

NEW YORK (Reuters) – The S&P 500 has doubled from lows reached in March 2009 but the jury is still out on whether this is a true U.S. bull market.

Rallies are said to undergo five stages: displacement — such as a large injection of capital by the Federal Reserve — boom, euphoria, profit-taking and panic. With the S&P at twice the 666.79 value hit in March 2009, there’s no doubt markets are experiencing the boom. What is troubling investors are inflation pressures and high unemployment that could squeeze growth and margins.

Originally, many thought this rally was simply an interruption in an ongoing bear market that began in 2007. But as the gains mounted, most prominent analysts started to see it as the nascent stage of a longer-term, "secular" bull market. A secular bull market is one where the prevailing trend is for higher prices, with short corrections interrupting it, much like the long-running 1982-2000 period. There are recent converts to the secular bull market theory. Skeptics warn another bear market may be approaching. "If you’d had asked us in 2010 what kind of bull market we are in I would have been in the camp that it’s a cyclical bull," said Thomas Lee, JP Morgan’s U.S. equity strategist, referring to a shorter rally that interrupts a long-term bear market. He believes the longer the rally lasts the greater the chances it will stretch for several more years.

China’s Home Prices Defy Curbs, Rising in 68 of 70 Cities

Bloomberg

China’s January new home prices rose from a year earlier in all but two of the 70 cities monitored by the government, defying property curbs to keep housing affordable.

New home prices in the capital Beijing advanced 6.8 percent in January from last year, while Shanghai climbed 1.5 percent, the statistics bureau said on its website today, initiating a new method of calculating prices. Haikou had the biggest gain, surging 21.6 percent, and 10 cities had increases exceeding 10 percent. Housing values in the southeastern city of Quanzhou and the western city of Nanchong fell. China extended property curbs last month, including raising the minimum down payment for second-home purchases, telling local governments to set price targets on new properties, and introducing taxes for residential homes in Shanghai and Chongqing. The central bank raised interest rates on Feb. 8 for the third time in four months. “The new data clearly shows home prices are still rising and the government curbs only suppressed transaction volumes,” said Jinny Yan, Shanghai-based economist at Standard Chartered Plc. “The ultimate problem is monetary policy — the government should at least raise interest rates two more times this year because if the liquidity is not tightened, it would be impossible for home prices to fall.”

Global markets

Financial Times

These bulls have stamina. Global stock markets hit rock bottom 23 months ago. Since then, the US bull run has lasted 700 days – making it the 12th longest of the 26 bull markets since the Great Crash of 1929, according to Bespoke Investment. The total return on the S&P 500 has now beaten that on 10-year Treasury bonds by 103 per cent since the March 2009 nadir. The latest upward leg is also long-lived. Ever since September 1, the S&P has traded above its 50-day moving average, a measure of short-term trend, its longest stay above this average since the bull market began. Despite such signs of froth, stocks have ignored geopolitical reasons for caution such as November’s Irish bail-out and the unrest in Egypt.

Emerging markets spoil the pattern. For a decade they have functioned as a “high beta” play on developed stocks, outperforming when the west does well and underperforming when it does badly. But this year they have underperformed by 10 per cent. This might be benign. Western economic and corporate data have provided positive surprises since September, while western central banks stay determinedly dovish. While money stays easy there is nothing to do but sell bonds for stocks. And emerging markets – where central banks are tightening – now trade at a premium to the developed world in book multiple terms, and only a slight discount in price/earnings terms. With the historic misvaluation that started their bull market now corrected, maybe this shows that sensible value-based allocations have replaced crude correlations.

It is wiser, though, to view emerging markets’ problems as malign. Worries about emerging market growth mean worries about the growth picture for western companies. They are selling off because they have higher inflation. Their tighter monetary policy will limit demand for western goods, while inflated raw materials costs will soon be exported to the west. That is reason for stocks’ outperformance of bonds to persist – but also for the bull run in developed market stocks to end

Roubini’s Next Crisis Is Scary Food for Thought: William Pesek

Bloomberg

Forget Egypt for a moment. Skip the water crisis in China. Look past angst on the streets of Bangladesh. If you want to see how extreme the effects of surging food prices are becoming, look to wealthy Japan. So big are the increases that economists are buzzing about them pushing deflationary Japan toward inflation. Yes, rising costs for commodities such as wheat, corn and coffee might do what trillions of dollars of central-bank liquidity couldn’t. Yet the economic consequences of food prices pale in comparison with the social ones. Nowhere could the fallout be greater than Asia, where a critical mass of those living on less than $2 dollars a day reside. It might have major implications for Asia’s debt outlook. It may have even bigger ones for leaders hoping to keep the peace and avoid mass protests.

Lamborghini Said to Show $370,000 Aventador Supercar in Geneva

Bloomberg

Lamborghini SpA will unveil a flagship supercar costing more than $370,000 called the Aventador, its most powerful series production vehicle ever, at the Geneva Motor Show, a person with direct knowledge of the plans said. The Aventador LP 700-4, which has a 700-horsepower V12 engine that surges to 100 kilometers (62 miles) per hour in 2.9 seconds, will premiere March 1, said the person, who asked not to be identified before the model is shown publicly. The Aventador, which replaces the Volkswagen AG brand’s top-of-the-line Murcielago model, is already sold for the first year of production, the person said. Lamborghini, which competes with Fiat SpA’s Ferrari, will decide over the next year whether to add a third model to its portfolio to complement the Aventador and Gallardo lines, the person said. “People may be ripping order forms for the new Lamborghini out of salesmen’s hands,” said Christoph Stuermer, a Frankfurt- based analyst at IHS Automotive. “The timing seems right, it’s no longer deemed inappropriate to flaunt your wealth.” Lamborghini is counting on the Aventador to help capitalize on a recovering market for luxury autos costing more than $200,000. Supercar sales in the U.S., the top market for the world’s most expensive cars, may surge 146 percent this year for vehicles costing from $200,000 to $400,000 after plunging 40 percent in 2010, according to IHS. Sant’Agata Bolognese, Italy-based Lamborghini is ramping up production of the Aventador and may expand output to build as many as 100 of the cars by March 1, the person said. The brand is already taking orders and will start selling the new model, which has a top speed of 350 kilometers per hour, in the second quarter in showrooms. Lamborghini spokesman Raffaello Porro declined to comment on the carmaker’s Geneva plans.

Hubert Védrine : «Quelque chose de considérable a commencé en Tunisie…»

Les Echos – 09/02/2011

La révolution tunisienne a provoqué une véritable onde de choc dans l’ensemble du monde arabe. Après l’Egypte, voyez-vous le mouvement se propager à d’autres pays ?

Ce qui a commencé en Tunisie est le début de quelque chose de considérable qui va s’étendre sur des années. Cela concerne le monde arabe, et au-delà tous les pays corsetés par des régimes autoritaires ou devenus insupportables, en Asie centrale, en Afrique, voire un pays comme l’Albanie… Mais il est encore trop tôt pour dire comment tout cela va tourner. Le monde arabo-musulman n’est pas homogène. En outre, l’hypothèque islamiste n’est pas encore levée : lorsque le Shah d’Iran a été renversé en 1979, la plupart des démocrates, le président américain Jimmy Carter en tête, pensaient que cela allait faire naître la démocratie en Iran. On sait ce qui s’est passé. Ce précédent pèse, incontestablement, même s’il faut tout faire pour dépasser cette fatalité.

La Tunisie est d’ores et déjà entrée dans une phase de transition. Selon vous, le chemin vers la démocratie sera-t-il long ?

Cela peut prendre des années ! Dans l’histoire des pays européens, à travers des révolutions et des contre-révolutions, cela a pris au bas mot un ou deux siècles. Tout va plus vite mais ce n’est toujours pas du café instantané. C’est un processus long, et cela peut déraper. Les Tunisiens ont admirablement franchi les premières étapes. Maintenant, ils doivent se mettre d’accord sur les conditions que devront remplir les partis islamistes pour participer aux élections et éventuellement au gouvernement. En fin de compte, on sera tout à fait sûr que la démocratisation est enclenchée lorsque les islamistes, quelque part, auront quitté le pouvoir après avoir perdu des élections.

Paris prône des solutions a minima pour la résolution des crises bancaires

Les Echos 11/02/2011

Jean-François Lepetit et Thierry Dissaux ont remis leur rapport sur la prévention et la résolution des crises bancaires. Une contribution de la place de Paris aux discussions du G20 qui exclut la création d’une liste d’établissements systémiques et de nouvelles surcharges en capital des banques.

Comment éviter une crise bancaire de dimension systémique comme celle provoquée par la chute de Lehman Brothers en 2008 ? Le débat bat son plein à Bruxelles et au sein des instances internationales comme le G20, le Conseil de stabilité financière et le Comité de Bâle. Après Londres, Paris fait entendre sa voix. Jean-François Lepetit, l’ancien patron des autorités boursières aujourd’hui administrateur chez BNP Paribas, auteur d’un premier rapport sur le risque systémique, et Thierry Dissaux, président du directoire du Fonds de garantie des dépôts, viennent de remettre un rapport sur cette délicate question à Christine Lagarde. « Je me félicite que la mission soit parvenue à élaborer une position partagée par l’ensemble des acteurs de la place. Les conclusions de ce rapport constituent une contribution importante aux travaux en cours sur ce sujet au niveau européen et international », a indiqué la ministre de l’Economie dans un communiqué publié hier matin.

Ce rapport s’est appliqué à dégager, au-delà du renforcement des pouvoirs des régulateurs, déjà largement admis, les pistes plus polémiques qui permettraient d’éviter une faillite bancaire sans recourir à l’Etat. Parmi celles-ci, et en ligne avec les positions défendues par les banques françaises, les auteurs ont privilégié l’instauration de mécanismes d’absorption des pertes, plutôt que de stigmatiser les établissements considérés comme systémiques.

Can Apple Rethink the iDiot Box?

Barron’s – 02/07/2011

Apple may be getting ready to reinvent the television. Here’s what we’d like to see.

 I haven’t owned a television in years. For the news stuff, online is a lot more satisfying, with greater depth and context. And if there’s a show I want to catch now and then, or even a whole series, I can generally find it on Apple’s iTunes, or Hulu, or Netflix. What would it take to put my digital life back in the living room? I imagine coming home, kicking off my shoes, using some kind of remote control—but much easier than looking for the actual remote, perhaps waving my hand, clapping, shouting "TV on!" or some such—and immediately immersing myself in any number of interesting channels finely tuned to my particular tastes.

I would be able to save programs I like for later viewing, or send them to another device—an iPhone or iPad, for example. Or to a friend, the way you’d send via computer, but easier. Did I mention that this device, occupying pride of place in my home, would also be far more attractive from an industrial design standpoint? Most television sets are big, ugly pieces of furniture, when you come right down to it. All of which explains why a note put out this past week from one Wall Street shop caught my attention.

La solution, ou pas, de l’inflation (Natixis AM)

"L’inflation est-elle la solution ?

C’est souvent un argument avancé pour en finir avec la dette et retrouver une croissance plus robuste et durable. L’endettement, perçu généralement comme excessif, crée un doute sur la pérennité et l’amplitude de la reprise. En contraignant les comportements, la dette privée ou publique crée de l’inertie, limitant alors les capacités de chacun à réagir. Une accélération durable des prix pourrait être la solution", écrit Philippe Waechter, directeur de la recherche économique de Natixis AM. "Un taux d’inflation plus élevé, en réduisant la valeur réelle de la dette, redonnerait à chaque acteur de l’économie des degrés de liberté supplémentaires. L’idée sous-jacente est d’imaginer que l’accélération de l’inflation gommerait, voire ferait disparaître, toutes les racines de la crise, l’économie retrouvant alors spontanément ses vertus perdues. Cette approche soulève cependant un certain nombre d’interrogations."

Moody’s pointe le risque d’une restructuration des dettes « périphériques »

Les Echos – 09/02/2011

Un analyste de Moody’s a fait valoir hier que les pays « périphériques » de la zone euro, comme la Grèce, le Portugal et l’Espagne, avaient du mal à stabiliser leur niveau de dette et a averti que le risque de restructuration avait augmenté. Les marchés ruminent cette idée depuis des semaines au sujet de la dette grecque, dont le niveau paraît peu supportable. Certains opérateurs se sont même positionnés sur les obligations helléniques de très longue maturité pour contourner un risque qu’ils jugent imminent. Lundi, Jean-Claude Trichet, le patron de la Banque centrale européenne (BCE), a souligné qu’un rachat de titres grecs avec une décote (par Athènes ou le Fonds de stabilité européen) profiterait aux intervenants qui ont pris des paris à la baisse sur les obligations en question. Le marché évoque dès lors l’hypothèse d’un échange de titres contre d’autres ayant une maturité plus longue.