Friday, January 6, 2012

Times are about to get ugly

Ain't no Chairs
By Bob Moriarty
I came across an interesting quote recently in The
Gartman Letter. Dennis Gartman quotes Charles Biderman of TrimTabs fame.
"European leaders are searching for a relatively quick and easy way out of the government debt bubble that has been building for decades and just started to burst a few years ago. Unfortunately, there is no quick or easy way out.
"Debt has to be reckoned with one way or another. It either has to be repaid, or someone has to bear the losses on what cannot be repaid, either through default or inflation and currency debasement. If it were otherwise, everyone could be rich.
"The bailouts proposed for the Eurozone do not solve the underlying solvency problem. Instead, they are little more than shell games to shift losses on bad debt from bondholders to taxpayers."
That of course is a variation of my very important concept that all debt gets paid, either by the borrower or by the lender.
Greece is a serial deadbeat and has not even the slightest intention of paying their bills. The EU can play games until the cows come home but the Greek debt is not going to get paid. Greece defaulted many months ago and the governments of the EU and the financial media keep pretending there is a solution. There is none.
Here are the facts. There is $195 trillion dollars of debt in the world but only $150 trillion in assets. That assumes there isn't trillions more of debt hidden in the $600 trillion in derivatives. I suspect the debt may be far higher than anyone anticipates today.
The debt cannot be paid, even if the entire load is dumped like bales of hay onto the backs of the taxpaying camels. The debt must be written off and governments, like corporations and families, must learn to live within their budgets. We cannot float in a sea of debt attached to an anchor of unpaid obligations.
No one in the United States has done the math on the obligations the Federal Reserve dumped on the backs of Americans since 2008 else they would be carrying pitchforks and hot tubs of tar to the local OWS rally. If you assume 330 million Americans and $16 trillion in loans from the Fed, that is $48,000 and change per every American. Will that ever be paid back? No.
I made the comment years ago that the $600 trillion in derivatives is like a game of musical chairs in a giant casino with people playing with Monopoly money. Well, the music stopped in September of 2008 and there ain't no chairs.
The world economy is in a minefield where each day another unforeseen mine explodes. The Dexia Bank, Belgium's largest, which passed the fake stress tests with the highest ratings, crashed a few weeks ago. I cannot help but be reminded of the failure of the Credit-Anstalt Bank of Austria that crashed in May of 1931 and led to a series of cascading bank failures and eventually to a total shutdown of all US banks in March of 1933.
I'm going to crawl out on a limb and suggest that 2012 is going to go down in history as the year of the bank failures. Every bank in the United States has been underwater since 2008 and the only reason the doors remain open is a mob psychosis insisting the King is indeed clothed. Well, he ain't and the banks will collapse.
We had a perfect example of surprise explosions proving market forces are far more significant than government manipulation with the sudden collapse of MF Global on October 31st. This is the biggest bankruptcy since the fall of Lehman Brothers in 2008 but was a total shock to the market.
November 1, 2011 brought yet another mine explosion with the release of news from Greece where Prime Minister George Papandreou announced that he would call for a referendum by Greek voters as to implementation of new austerity measures. Given that 80% of voters indicate they are against the measures and 70% are in favor of staying in the Euro (And why not? It's a Goodo Dealo.) Greece just blew the French/German bailout plan sky-high. The Greeks literally are caught between a rock and a hard place.
I want to make it abundantly clear that there are no good solutions in Europe, the Euro is doomed. Indeed there are no good solutions on our side of the water, our financial system is toast.
The AWA protests in the United States (Americans with an Attitude) have escalated to a new degree with the shooting in the head at point blank range of a Former Marine protester by a San Francisco policeman working in Oakland on October 25. It's interesting and noteworthy that a Federal Judge ruled that the demonstrators were there perfectly legally. Clearly Scott Olsen was peaceful in his actions and presented no threat to anyone.
Videos show a SFPD officer firing a tear gas grenade at Olsen at a range of about 10 feet. When Olsen collapsed and fell to the ground, other demonstrators tried to come to his aid. The same policemen pulled out a flashbang grenade and tossed it into the middle of the group.
If the United States were a nation of laws, that officer would be in jail on charges of attempted murder. But when the biggest criminals in the country are working on Wall Street and the Justice Department thinks that arming Mexican drug gangs is a great idea, we are long past the point where those in power obey laws. It's interesting that the Oakland PD says that it will take months to investigate the case. Yea, right.
I wasn't shocked over the protests in New York and spreading protests all over the United States. Frankly I've wondered since 2008 just how long it would take Americans to wake up and recognize the shafting they were getting from the government. Frankly I was shocked over the protests spreading to Canada.
Face it, the only thing Canadian have felt like rioting over in the last 350 year was ice hockey. For Canadians to recognize that maybe Big Government wasn't their best friend is a sea change in attitude. We are in the early days of a Global Revolution. It's going to be ugly, it's going to be bloody and no one today can even guess how bad things will get. The AWA demonstrators are demanding changes government will not make until the entire false edifice has burned down.
For months I have been suggesting that cash was the best investment you could hold and a better time for investment would come at the end of October. It was a good call in that cash was the best investment since May but I don't see a safe environment for investment now. It's time to stay in cash and head for the bunker. Times are about to get ugly.

Thursday, January 5, 2012

Spontaneous Order vs Urban Planning

Urban-Development Legends
Grand theories do little to revive cities.
By Mario Polese
Cities that have used incentives to lure heavy industry have created little long-term growth.
Cities that have used incentives to lure heavy
 industry have created little long-term growth
For decades, city fathers and academics have studied economic development, searching diligently for ways to make urban economies prosper. Surely this quest is understandable—as understandable as the search for success that so many people undertake in the personal-finance section of the local bookstore. But just as personal finance has yet to unlock the secret of how to get rich, no surefire government-led strategy exists that can turn around a troubled economy like Buffalo’s or Gary’s. Cities, like people, are too diverse to allow anything but fairly commonsense prescriptions. A lot of grand theories have been advanced—targeted tax incentives! bike paths!—but they have proven of little practical use.
The history of local economic development is a story of academic fads. The 1960s, when I was a student at the University of Pennsylvania, were the heyday of growth poles and multipliers, of econometrics and mathematical modeling made possible by powerful mainframe computers. For a city, the key to generating jobs and income was to lure strategic industries by offering them tax breaks, loans at favorable rates, promises of infrastructure development that would benefit them, and so on. This approach would propel the entire local economy forward, the theory held, so long as the city picked the right industries. On a corridor wall in Penn’s Wharton School building was plastered a huge input-output table of the Philadelphia economy, which would help planners make the right choices. The direct and indirect employment effects of any investment could be precisely predicted. It was all very scientific.
The unfortunate results of that optimistic epoch were large industrial complexes, often in petrochemicals or steel, which created jobs but little subsequent growth. It turned out that input-output models were essentially static, limited to one-shot income and employment effects. Over the long term, in fact, investing in supposedly strategic industries frequently had a negative effect on growth; for example, those large plants tended to be unionized, which pushed up local labor costs and drove employers away. Take the Canadian province I hail from, Quebec, which in the 1960s proudly inaugurated a large steel complex in the city of Sorel, near Montreal. The story of Sorel since then has not been a happy one; employment there has long been stuck below the province’s average rate.
The next fad was high-tech industrial parks. Every city wanted its research park, equipped with all the latest frills and a billboard declaring it the high-tech capital of the region, the nation, the world. Accompanying the parks were goodies that cities offered firms to induce them to come. Some parks, such as North Carolina’s Research Triangle, were highly successful, but just as many weren’t. Many other conditions had to be in place for the approach to work, such as competitive costs, a propitious location, and the presence of major research universities.
In the 1980s, “clusters” came along, thanks in no small part to the marketing skills of Harvard Business School professor Michael Porter. Porter noted that related industries tended to bunch together. The key to success, then, was identifying a cluster—say, health or fashion or aerospace—in which a city purportedly held a competitive advantage and then building on it with targeted public investments. Though cluster-based strategies remain popular among economic-development strategists, they contain an inherent flaw: today’s winning clusters may be tomorrow’s losing clusters. Building an entire development strategy on one cluster is as risky as assembling an investment portfolio concentrated in one or two stocks. And history shows clearly that politicians are even worse at picking winners than investment bankers are, which these days is saying a lot.
The story of Montreal’s Multimedia City, launched in the 1990s, is illustrative. Montreal and Quebec decided to jump-start a “high-tech multimedia cluster” in a dilapidated city neighborhood—and to stimulate the wider local economy—by building a new high-tech complex and promising generous tax write-offs to firms that would locate there. The firms came. But Montreal’s most dynamic software companies flourished in a different part of the city, a gentrifying area with a lively street life and a long tradition of small business. Multimedia City had no such natural advantages; all it had was the dubious distinction of having been publicly anointed. Firms and communities elsewhere then began to demand equal treatment, and Quebec eventually extended the program to them, simultaneously making it even more costly and defeating its original intent. Montreal was left with a shiny new building filled with subsidized firms, but few visible economic spin-offs. Quebec has since ended the program—no newcomers need apply—and one may well ask what will happen to the current beneficiaries when their subsidies expire.

Fiscal conservatism can be popular

Sweden Shows Europe How to Cut Debt
The Euro in Sweden
By The Bloomberg Editors
Sweden faces a difficult year, like every other European economy, but unlike the rest of the European Union, it’s equipped to cope. There are lessons here, especially for the EU’s other non-euro countries.
Scandinavia’s biggest economy will see growth slow to less than 1 percent in 2012, down from an impressive 4.5 percent in 2011, according to the National Institute of Economic ResearchSweden relies heavily on exports to the rest of Europe, and the EU’s protracted economic crisis will set it back.
Shortly before Christmas, the Riksbank cut its benchmark rate for the first time since 2009 to 1.75 percent. The NIER predicts further reductions this year in response to a weaker economy and slower inflation. This prospect underscores the seriousness of the situation -- and how valuable it is at such times to have an interest rate to change.
The value of monetary independence is the first and most important Swedish lesson. Sweden stayed out of the euro system when the currency was introduced in 1999, and in the past several years, the government has used this monetary flexibility to the full.
Firm Fiscal Hand
With most of the EU bound by the European Central Bank’s excessive monetary caution, the Riksbank cut interest rates more sharply than the ECB and (in real terms) the U.S. Federal Reserve from 2007 to 2009. Its inflation-adjusted interest rate fell from 2.25 percent to minus 1.5 percent. The central bank also devised new credit facilities and other unconventional measures to support the Swedish financial system.
Fiscal policy played a smaller role in steadying the economy. This, too, was a legacy of the 1990s, when budget deficits widened and a national consensus formed around the need to curbgovernment spending and stabilize the public finances. Sweden’s subsequent success in doing that is nothing less than remarkable.
Hence Sweden’s second lesson: Fiscal stimulus isn’t a necessary condition for economic recovery. Through the course of the recent recession, the government’s cyclically adjusted budget stayed in surplus. As a result, Swedish government debt stands at less than 40 percent of gross domestic product, among the lowest of any rich country.
Fiscal policy still helped to cushion the recession and support a recovery -- not with discretionary stimulus, but through so-called automatic stabilizers, which are relatively strong in Sweden. (Measures such as consumption taxes and generous unemployment benefits relax fiscal policy in recessions and tighten it in booms, even if policy stands pat.)
In Sweden’s case, a firm fiscal hand, far from stifling the recovery, probably helped it along. Keeping the budget under control buoyed consumer and investor confidence. Surging demand for Swedish debt drove bond prices higher last year; indeed, Sweden’s government pays less to borrow than Germany’s.
Should others follow its example? For one group, the answer is plainly yes. Members of the EU that have not yet adopted the euro are nonetheless committed in principle to doing so. (This includes Sweden; the U.K. and Denmark are two exceptions.) Sweden proves, if further proof were needed, that euro membership is a mistake.
Lacking a currency to devalue and interest rates to cut, members of the euro system would only worsen their recessions if they squeezed fiscal policy as tightly as Sweden did. Beyond the EU, though, Sweden does suggest that sufficiently powerful monetary easing can carry most, if not all, of the burden of economic stabilization.
New Swedish Model
Models have their limits. Every country has to cope with its own special circumstances. It helped Sweden that the most recent slump, unlike that of the 1990s, was export-led: Its exports are capital-intensive, so a drop in foreign demand raises unemployment by less than a decline in demand at home. It also helped that since coming to power in 2006, the country’s center-right coalition government has made private-sector job creation a priority.
Note, therefore, that this isn’t the old Swedish model. Taxes on labor have been cut and the country’s once-lavish welfare state is being squeezed.
What do Sweden’s voters, who once elected left-wing Social Democrats by default, make of that? Their economic concerns have increased lately, but few blame Prime Minister Fredrik Reinfeldt and his government, and the Social Democrats have failed to recover.
This suggests a third lesson, political rather than economic: Fiscal conservatism can be popular. Sweden is reluctant to put its hard-won fiscal strength at risk. Rightly so. Sweden is better placed than most to deal with the further economic setbacks the EU seems determined to dispense. More interest-rate cuts and a shift to budget stimulus, if needed, are options that few other rich economies have.

Echoes from another era

Lessons for Europe From America's First Great DepressionEchoes: Depression

By Alasdair Roberts
The European Union is in trouble. Some governments are teetering on default, and even German creditworthiness is questioned. Interbank lending in the euro area is increasingly strained. The entire project of European economic integration, wrought through six decades of delicate negotiation, seems at risk of collapse.
In the U.S., meanwhile, European leaders are being criticized for failing to face up to their troubles. The New York Times condemns them for "gross mismanagement of the euro-zone debt crisis." "European elites," says the Boston Globe, "have for too long deceived themselves into believing they can have their cake and eat it too." Europe would be better off today, says the Washington Post's David Ignatius, if its leaders "had handled their problems as cleanly as the United States did three years ago."
But Americans with a sense of history should be wary of the temptation to lecture. One hundred and seventy years ago, the U.S. was a new and fragile federation, struggling with a similar crisis. And the performance of American politicians then was little better than that of their European counterparts today. European creditors bemoaned the country's unwillingness to face up to hard economic realities. Eventually it did -- but only after a decade of wrenching political struggle that offers lessons for Europe today.
In the 1830s, European investors poured vast amounts of money into the expansion of U.S. cotton plantations, frontier banks, canals and railroads. This fueled a speculative boom, which the U.S. government encouraged through reckless monetary and banking policies. Many state governments served as intermediaries for foreign lenders, borrowing in Europe and investing directly in banks and public works.
In 1837, a slowdown in the British economy, combined with an increase in U.S. cotton production, caused a steep decline in the price of cotton, and also in the price of land. The boom suddenly ended. Banks collapsed, government revenues evaporated and the states' grandiose improvement projects were instantly transformed into white elephants.
State governments began to default on their obligations to foreign lenders. The first were Michigan and Indiana, which defaulted in July 1841, followed by Maryland, Illinois, Pennsylvania and Louisiana. Three southern states -- Arkansas, Mississippi and Florida -- simply repudiated their debts.

Sovereign Debt and Dirty Shirts

Family Feud
By William H. Gross
  • Investors should recognize that Euroland’s problems are global and secular in nature; it will be years before Euroland and developed nations in total can constructively escape from their straitjacket of debt.
  • Global growth will likely remain stunted, interest rates artificially low and investors continually disenchanted with returns that fail to match expectations.
  • Investors should consider risk assets in emerging economies, such as Brazil and Asia, and bonds in the strongest developed economies, where the steep yield curve may offer opportunities for capital gains and potentially higher total returns.
A 12-year-old coffee mug has a permanent place on the right corner of my office desk. Given to me by an Allianz executive to commemorate PIMCO’s marriage in 1999, it reads: “You can always tell a German but you can’t tell him much.”
It was hilarious then, but less so today given the events of the past several months, which have exposed a rather dysfunctional Euroland family. Still, my mug might now legitimately be joined by others that jointly bear the burden of dysfunctionality.
"Beware of Greeks bearing gifts” could be one; “Luck of the Irish” another; and how about a giant Italian five-letter “Scusi” to sum up the current predicament?
The fact is that Euroland’s fingers are pointing in all directions, each member believing they have done more than their fair share to resolve a crisis that appears intractable and never-ending. The world is telling them to come together; they’re telling each other the same; but as of now, it appears that you can’t tell any of them very much.
The investment message to be taken from this policy foodfight is that sovereign credit is a legitimate risk spread from now until the “twelfth of never.”
Standard & Poor’s shocked the world in August with its downgrade of the U.S. – one of the world’s cleanest dirty shirts – to double A plus. But what was once an emerging market phenomenon has long since infected developed economies as post-Lehman deleveraging and disappointing growth exposed balance sheet excesses of prior decades.
Portugal, Ireland, Iceland and Greece hit the headlines first, but “new normal” growth that was structurally as opposed to cyclically dominated exposed gaping holes in previously sacrosanct sovereign credits. 
What has become obvious in the last few years is that debt-driven growth is a flawed business model when financial markets and society no longer have an appetite for it. In addition to initial conditions of debt to gross domestic product and related metrics, the ability of a sovereign to snatch more than its fair share of growth from an anorexic global economy has become the defining condition of creditworthiness – and very few nations are equal to the challenge.
It was in this “growth snatching” that the dysfunctional Euroland family was especially vulnerable. Work ethic and hourly working weeks aside, the Euroland clan has long been confined to the same monetary house. One rate, one policy fits all, whereas serial debt offenders such as the U.S., U.K. and numerous G-20 others have had the ability to print and “grow” their way out of it.
Beggar thy neighbor if necessary was the weapon of choice in the Depression, and it has conveniently kept highly indebted non-Euroland sovereigns with independent central banks afloat during the past few years as well. Depressed growth with more inflation, perhaps, but better than the alternative straitjacket in Euroland. As currently structured, Euroland’s worst offenders now find themselves at the feet of a Germanic European Central Bank that cannot be told to go all-in and to print as much and as quickly as America and its lookalikes. 

The End of Scarcity and other fairy tales

Keynes, the Future and Present Austerity
by Chidem Kurdas
In 1930, John Maynard Keynes dashed off an amazing prophecy. Extrapolating from the productivity gains of the past centuries, he came to the bold conclusion that the fundamental economic problem of scarcity would fade away in 100 years or so. Thanks to technological innovation and the accumulation of capital, the ancient condition of limited resources to satisfy competing wants would give way to a new age of plenty. Human beings would then face a very different quandary, namely what to do with themselves once they no longer have to work in order to survive.
Eighty-one years into the timeline Keynes suggested in his article, “Economic Possibilities for Our Grandchildren,” scarcity shows no sign of disappearing. Where did he go wrong?
He did hedge his bet by making it conditional on there being no important wars and no major increase in population. One reason we continue to experience a dearth of means to pursue the ends we desire is that wars absorb immense resources. Thus the $1 trillion spent on the Iraq war could have instead been used to satisfy myriad needs.
But aside from that, Keynes made a mistake in his reasoning. He argued that some high level of output be sufficient to meet needs because these will not grow as much as the ability to produce. He thought a point may soon be reached where what he called absolute needs – in contrast to relative needs or conspicuous consumption – will all be satisfied.
This notion of “absolute need” comes from a limited view of technological change as improving productivity while preferences for goods and services remain relatively stable. But in fact technology creates new products and tastes, working on the demand side as well as the supply side. It is not the case that there is a fixed basket of wants. We now want MRIs and smart phones; in the past there was no such need since we had no conception of these things.
That Keynes postulated less long-term growth in demand compared to supply fits in with his later theory that deficiency in aggregate demand causes recessions. Hence his argument that government spending can alleviate the down part of the business cycle by creating demand—the main rationale for large-scale stimulus programs, including the Obama administration’s questionable projects.
In a sense Keynesian policies reduce the possibility of the age of plenty that the man himself foresaw. Besides the question of the effectiveness of such programs – click for one of the posts on the subject by Mario Rizzo –  there is the matter of runaway government spending.  Keynes himself favored budget surpluses in good times to balance deficit spending in recessions.  Over the cycle surpluses would make up for deficits. But that is not the way it worked in reality.
A recent piece by Steven Horwitz in the Freeman reminds us of the seminal 1977 critique by James Buchanan and Richard Wagner, who pointed out that Keynes and the Keynesians removed institutional and moral impediments to deficit spending, thereby freeing politicians to spend without limit and rack up debt. No matter how huge the resources, the black hole of government spending can absorb it all.
Hence the current European debt crisis, brought on by various governments’ improvident spending.  Austerity is the word that dominates European policy discussions, the belt tightening necessary to counter past profligacy.  So Keynes provided governments with the excuse to run deficits with consequences that now threaten to create painful scarcity.
Almost certainly he would not have liked this unintended result. The end to the economic problem looks further off than ever.

The Graduate

Why Should Everyone Else Pay for Other People’s Dumb (and Hedonistic) Career Choices
by Barry Rubin 
I’ve recently made the acquaintance of a young man who has a problem. He is 28 years old; smart, of good moral character, and willing to work hard at part-time jobs. He does not expect anyone else, including the government, to support him.  Yet he is puzzled and increasingly bitter that he cannot make a good living.
What’s his difficulty? It’s not the economy (in this specific case) but the fact that he has a degree in linguistics and is now studying Oriental philosophy at a fine university. His case is not altogether typical, but is immensely revealing.
Here’s the secret: He cannot make a living because the market for people with degrees in linguistics and in Oriental philosophy is limited. He should have known that. Someone should have told him that. The calculation of practicality should have been made. It wasn’t.
As I said, this individual does not want handouts and he has not taken student loans. Many others have. A large proportion of the Occupy Wall Street-and-other-places movement seems to consist of those who have made similar “career” (or non-career) decisions but want others to pay for their pastimes and mistakes.
There are at least three important lessons here of the greatest importance.
First, young people should be taught, as the old saying goes, that the world doesn’t owe them a living. Nothing could seem more obvious, yet this has largely been forgotten. This is especially true in the United States, a country whose prosperity was built on understanding this point. Of course, telling them that the world does owe them a living can be rather popular and lead to one’s election to public office.
Despite the rhetoric employed, the current dominant idea in the United States seems to be not so much that the “rich” (and, in practice, the middle class) have to pay “their fair share” to those who are starving to death in rat-infested squatter camps (of whom there aren’t many), but that they must subsidize upper middle class people who are non-productive yet living very nice lives, often better lives than those who are hard-working and subsidizing them. Those to be subsidized include those who want to work in cushy, unproductive, useless but prestigious jobs but cannot find them, or those who want to work in cushy, unproductive, useless but prestigious jobs and do find them working directly or indirectly for the government, supposedly doing good things.
Indeed, the siphoning off of potentially useful citizens who might possibly engage in some economically productive activity (insert lawyer jokes if you wish) into all sorts of made-up and useless jobs is bleeding society. The problem is not the economic elite’s greed, but the oversized “intellectual” greed. Why do you think university tuitions have skyrocketed?
Know this for sure: a lot of these latter people (in contrast to the former group) do not work very hard and their work is of low quality, in large part because they don’t have to meet serious oversight and their “products” don’t bear any real value. In other words, their main achievement each day is to have good conversations over lunch.
Since when have Americans fallen for the idea that government bureaucrats are so useful and productive that the answer to their problems is to have more such people?
Terrorist attack? Create a giant Homeland Security office so people can write each other memos. Improve education or the environment? Raise the budget of the Department of Education or the Environmental Protection Agency.
Being unable to find a job is quite understandable in the current economy. Being unable to find a job because you have made decisions resulting in your having no qualification for a job and making no attempt to do so is something else entirely.
Glorifying the kinds of jobs that — at this point in history — make things worse, not better, is suicidal.

Looking for suckers

World’s Biggest Economies Face $7.6 Trillion Bond Tab as Rally Seen Fading
By Keith Jenkins and Anchalee Worrachate 
Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs.
Led by Japan’s $3 trillion and the U.S.’s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, RussiaIndia and China is up from $7.4 trillion at this time last year, according to data compiled by Bloomberg. Ten-year bond yields will be higher by year-end for at least seven of the countries, forecasts show.
Investors may demand higher compensation to lend to countries that struggle to finance increasing debt burdens as the global economy slows, surveys show. The International Monetary Fund cut its forecast for growth this year to 4 percent from a prior estimate of 4.5 percent as Europe’s debt crisis spreads, the U.S. struggles to reduce a budget deficit exceeding $1 trillion and China’s property market cools.
“The weight of supply may be a concern,” Stuart Thomson, a money manager in Glasgow at Ignis Asset Management Ltd., which oversees $121 billion, said in a Dec. 28 telephone interview. “Rather than the start of the year being the problem, it’s the middle part of the year that becomes the problem. That’s when we see the slowdown in the global economy having its biggest impact.”
Competition for Buyers
The amount needing to be refinanced rises to more than $8 trillion when interest payments are included. Coming after a year in which Standard & Poor’s cut the U.S.’s rating to AA+ from AAA and put 15 European nations on notice for possible downgrades, the competition to find buyers is heating up.
“It is a big number and obviously because many governments are still in a deficit situation the debt continues to accumulate and that’s one of the biggest problems,” Elwin de Groot, an economist at Rabobank Nederland in Utrecht, Netherlands, part of the world’s biggest agricultural lender, said in an interview on Dec. 27.
While most of the world’s biggest debtors had little trouble financing their debt load in 2011, with Bank of America Merrill Lynch’s Global Sovereign Broad Market Plus Index gaining 6.1 percent, the most since 2008, that may change.
Italy auctioned 7 billion euros ($9.14 billion) of debt on Dec. 29, less than the 8.5 billion euros targeted. With an economy sinking into its fourth recession since 2001, Prime Minister Mario Monti’s government must refinance about $428 billion of securities coming due this year, the third-most, with another $70 billion in interest payments, data compiled by Bloomberg show.
Rising Costs
Borrowing costs for G-7 nations will rise as much as 39 percent from 2011, based on forecasts of 10-year government bond yields by economists and strategists surveyed by Bloomberg in separate surveys. China’s 10-year yields may remain little changed, while India’s are projected to fall to 8.02 percent from 8.36 percent. The survey doesn’t include estimates for Russia and Brazil.
After Italy, France has the most amount of debt coming due, at $367 billion, followed by Germany at $285 billion. Canada has $221 billion, while Brazil has $169 billion, the U.K. has $165 billion, China (PRCH) has $121 billion and India $57 billion. Russia has the least maturing, or $13 billion.
Rising borrowing costs forced Greece, Portugal and Ireland to seek bailouts from the European Union and IMF. Italy’s 10- year yields exceeded 7 percent last month, a level that preceded the request for aid from those three nations.
Bad Combination
“The buyer base for peripheral Europe has obviously shrunk at the same time that the supply coming to the market is increasing, which is not a good combination,” said Michael Riddell, a London-based fund manager at M&G Investments, which oversees about $323 billion.
The two biggest debtors, Japan and the U.S., have shown little trouble attracting demand.
Japan benefits by having a surplus in its current account, which is the broadest measure of trade and means that the nation doesn’t need to rely on foreign investors to finance its budget deficits. The U.S. benefits from the dollar’s role as the world’s primary reserve currency.
Japan’s 10-year bond yields, at less than 1 percent, are the second-lowest in the world, after Switzerland, even though its debt is about twice the size of its economy.
The U.S. attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold last year, the most since the government began releasing the data in 1992. The U.S. drew an all-time high bid-to-cover ratio of 9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they pay zero percent interest.
Tougher Year
With yields on 10-year Treasuries (USGG10YR) below 2 percent, an increasing number of investors see little chance for U.S. bonds to repeat last year’s gains of 9.79 percent. The U.S pays an average interest rate of about 2.18 percent on its outstanding debt, down from 2.51 percent in 2009, Bloomberg data show.
‘Given how well they have done, we don’t think they’re any longer a very good hedge,” Eric Pellicciaro, head of global rates investment at New York-based BlackRock Inc., which manages $1.14 trillion in fixed-income assets, said in a Dec. 16 telephone interview.
The median estimate of 70 economists and strategists is for Treasury 10-year note yields to rise to 2.60 percent by year-end from 1.95 percent at 11:27 a.m. New York time. In Japan, the forecast for the nation’s benchmark note yield is 1.35 percent, while it’s expected to rise to 2.50 percent in Germany, from 1.90 percent today.
Central Banks
Central banks are bolstering demand by either keeping interest rates at record lows or reducing them, and by purchasing bonds in a policy know as quantitative easing.
The Federal Reserve has said it will keep its target rate for overnight loans between banks between zero and 0.25 percent through mid-2013, and is now selling $400 billion of its short- term Treasuries and reinvesting the proceeds into longer-term government debt in a program traders dubbed Operation Twist.
The Bank of Japan has kept its key rate at or below 0.5 percent since 1995, and expanded the asset-purchase program last year to 20 trillion yen ($260 billion). The Bank of England kept its main rate at a record low 0.5 percent last month, and left its asset-buying target at 275 billion pounds ($431 billion).
The European Central Bank reduced its main refinancing rate twice last quarter, to 1 percent from 1.5 percent. It followed those moves by allotting 489 billion euros of three-year loans to euro-region lenders. That exceeded the median estimate of 293 billion euros in a Bloomberg News survey of economists. The central bank will offer a second three-year loan on Feb. 28.
Flush With Liquidity’
The money from the ECB may be used by banks to buy government bonds, according to Fabrizio Fiorini, the chief investment officer at Aletti Gestielle SGR SpA in Milan.
“The market is now flush with liquidity after measures taken by central banks, particularly the ECB, and that’s great news for risky assets,” Fiorini said in a telephone interview on Dec. 20. “The market will have no problem taking down supply from countries like Spain and Italy in the first quarter. In fact, they should be able to raise money at lower borrowing costs than what we saw in recent months.”
Italy’s sale last week included 2.5 billion euros of 5 percent bonds due in March 2022, which yielded 6.98 percent. That was down from 7.56 percent at an auction Nov. 29. It sold 9 billion euros of bills on Dec. 28 at a rate of 3.251 percent, compared with 6.504 percent at the previous auction on Nov. 25.
‘Phony War’
Investors should be most worried about the period after the ECB’s second three-year longer-term refinancing operation scheduled in February, according to Ignis’s Thomson.
“The amount of liquidity that has been supplied by central banks, with more to come from the ECB in February, suggests the first couple of months will be a sort of phony war as far as the supply is concerned,” Thomson said.
The ECB has bought about 212 billion euros of government bonds since starting a program in May 2010 to contain borrowing costs for Greece, Portugal and Ireland. It began buying Spanish and Italian debt in August, according to people familiar with the trades, who declined to be identified because they weren’t authorized to speak publicly about the transactions.
“There’s a lot of talk that the ECB might have to give more direct support to the governments,” Frances Hudson, who helps manage about $242 billion as a global strategist at Standard Life Investments in Edinburgh, said in a Dec. 22 telephone interview.
Following is a table of bond and bill redemptions and interest payments in 2012 for the Group of Seven countries, Brazil, China, India and Russia, in dollars, using data calculated by Bloomberg as of Dec. 29:
Country    2012 Bond, Bill Redemptions ($)      Coupon Payments
Japan             3,000 billion                   117 billion
U.S.              2,783 billion                   212 billion
Italy               428 billion                    72 billion
France              367 billion                    54 billion
Germany             285 billion                    45 billion
Canada              221 billion                    14 billion
Brazil              169 billion                    31 billion
U.K.                165 billion                    67 billion
China               121 billion                    41 billion
India                57 billion                    39 billion 
Russia                               13 billion                                             9  billion 

Wednesday, January 4, 2012

A necessary reminder


Greed Isn't Just Good—It's Necessary For Capitalism
By WALTER E. WILLIAMS
What human motivation gets the most wonderful things done? It's really a silly question, because the answer is so simple. It turns out that it's human greed that gets the most wonderful things done.
When I say greed, I am not talking about fraud, theft, dishonesty, lobbying for special privileges from government or other forms of despicable behavior. I'm talking about people trying to get as much as they can for themselves.
Let's look at it.
This winter, Texas ranchers may have to fight the cold of night, perhaps blizzards, to run down, feed and care for stray cattle. They make the personal sacrifice of caring for their animals to ensure that New Yorkers can enjoy beef.
Last summer, Idaho potato farmers toiled in blazing sun, in dust and dirt, and maybe being bitten by insects to ensure that New Yorkers had potatoes to go with their beef.
Selfless Takers
Here's my question: Do you think that Texas ranchers and Idaho potato farmers make these personal sacrifices because they love or care about the well-being of New Yorkers?
The fact is, whether they like New Yorkers or not, they make sure that New Yorkers are supplied with beef and potatoes every day of the week.
Why? It's because ranchers and farmers want more for themselves.
In a free-market system, in order for one to get more for himself, he must serve his fellow man.
This is precisely what Adam Smith, the father of economics, meant when he said in his classic "An Inquiry Into the Nature and Causes of the Wealth of Nations" (1776), "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."
By the way, how much beef and potatoes do you think New Yorkers would enjoy if it all depended upon the politically correct notions of human love and kindness? Personally, I'd grieve for New Yorkers.
Some have suggested that instead of greed, I use "enlightened self-interest." That's OK, but I prefer greed.
Free-market capitalism is relatively new in human history. Prior to the rise of capitalism, the way people amassed great wealth was by looting, plundering and enslaving their fellow man.
Capitalism made it possible to become wealthy by serving one's fellow man.
Capitalists seek to discover what people want and then produce it as efficiently as possible. Free-market capitalism is ruthless in its profit-and-loss discipline.