Trading Alert and Correction
First off a correction. Simon Johnson whose masterly NYT.com summary of the options for the euro bloc I used this morning, is a professor at the Sloane School of Business at MIT.
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What Europe Should Do
Longtop Financial Technologies(LFT) has been removed from the Dow Jones Emerging Markets Technology Titans 30 Index.
Reproached for writing about China rather than the euro crisis by my demanding readers, I reprint this article by Simon Johnson:
Greece has no good options. Without question, Greece brought debt problems on itself – the consequence of politicians using irresponsible fiscal policy to win elections.
As the IMF [said] when Greece became the first eurozone country to borrow from [it] in May 2010, 'Even with the lower deficits envisaged under the program, the debt will continue to peak at almost 150% of GDP in 2013 before declining thereafter.' The situation has not improved in recent months – even under the most optimistic scenario, the debt-[to]-GDP ratio will peak above this number.
The problem is that loose talk among European leadership of potentially 'restructuring' or 'reprofiling' Greek debt creates more problems than it solves. Financial markets fear another Lehman moment, in which authorities decide to let a significant borrower fail – without fully understanding the consequences.
Who in the private sector, the responsible governments, or the IMF can tell you exactly what would happen – and to whom and where – if Greece were to default in any fashion?
European banks have very low levels of capital, meaning they are highly leveraged [with] a great deal of debt relative to their equity. They are not in a position to withstand losses on their large portfolios of European government securities if Greek problems cause a fall in the price of Spanish, Italian, Belgian, or other eurozone sovereign debt.
The banks convinced regulators that lending to governments was 'riskless'. This was the structural mistake at the heart of the eurozone. Greece and others were able to borrow so much because creditors believed this debt was very nearly as safe as German Bunds.
European politicians are now choosing between what they see as three options (a) restructure Greek debt, take big losses at French, German, and other banks, and deal with systemic consequences on the fly; (b) provide additional financing to Greece, allowing [it] to run for another 5 years without having to [tap] private markets; (c) muddle through, with promises of further fiscal adjustment, quick privatization, and greater structural reform from the Greek side, while hoping that a sufficiently strong global growth boom will lift all ships.
The right approach would be to deal with all troubled eurozone sovereigns and global vulnerable banks in the same pan-European package of debt restructuring, fiscal adjustments as needed, and improvements in competitiveness for all countries consistently running current account deficits.
But there is zero probability for this course. European politicians understand the issues just fine, but they do not want to face the electoral consequences that would follow from acknowledging the currency union was poorly designed and implemented.
Johnson writes for NYT.com and Bloomberg.
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Behind the News
We are reporting on news today, but only subscribers get the stock advice related to the news.
Britain's Independent Commission on Banking is working on a reform package that Parliament is expected to have to vote on as a whole. The main proposal will end most of the implicit annual post-Lehman govt subsidy worth over GBP10 bn to the UK banks. The ICB plans to require British banks with retail customers to hold more capital than required globally (under Bank for International Settlement rules), and also to hive off some consumer operations from riskier investment banking.
Meanwhile Moody's downrated to Aa3 the debt of 14 British banks, among them Lloyd's Bank and Royal Bank of Scotland. The British sub of Santander had its rating put on review for a possible downgrade from Aa3.
UK banks got 1 trillion pounds ($1.6 trillion) in govt capital and guarantees after Lehman Bros collapsed in 2008 and owe to govt support a 2 to 5 level boost in their ratings, according to Moody's.
The outlook on the Aa3 senior debt and deposit ratings of Barclays has been changed to negative from stable and the Aa2 senior debt and deposit ratings of HSBC Bank plc have been affirmed with a negative outlook.
Michael Kurtz writes from Macquarie Research in Hong Kong about “1.3 Billion Mouths to Feed", about the impact of Chinese development on the country's food security and rural reform. The Oz bank had a panel on the subject.
Macquarie panelists believe that China's food prices will continue to rise because of higher costs to produce food and higher per capita demand.
One hope is that reforms of the rules for holding or transfering land can help meet demand. And the panel also cited better farming inputs like high-tech seeds and more sophisticated irrigation.
China has had to import food since 2004, the govt aims to make the country 95% self-sufficient. China is nowhere near that level, Grain production in 2010 missed the government plan by 6% and China imported a record 59mn tons last year, with corn imports up 18% YoY, wheat imports up 36%, and record-high soybean imports.
China's rising food imports and food prices result from consumer demand from richer Chinese. China's income elasticity for meat is high: a 1% increase in income leads to a 1.5–1.6% increase in beef consumption. China's current per capital beef eating, at 41 kg/yr, still can grow a lot (to Hong Kong's level of 99kg, for example). On poultry, Chinese consumers eat 9 kg/yr while Hong Kong residents eat 35 kg. A kg of meat requires 7kg of feed grain.
Chinese food prices will rise over the longer term, likely requiring sustained food subsidies or price interventions. Moreover, land prices are rising from ongoing conversion of farmland for non-farm usage as wage increases affect the cost of farm labor just as much as manufacturing.
Beijing wants to keep wage growth in line with GDP growth. Ovewr the past 5 years, however, labor income growth has lagged GDP, so the risk of higher food prices in the future is higher than over the past 5 years.
Longtop Financial lost its CFO and its auditors (Deloitte Touche Tohmatsu) and much market value after the SEC began an investigation into the accounts. DTT was involved in another accounting fraud case earlier, over China MediaExpress, but this is the first time our US watchdog has begun checking out the financial documents listed Chinese companies have to file with the SEC.
From her perch in Amsterdam, Frida Ghitis writes:
Updating from yesterday: the Bank of Israel raised interest rates for June 25 by basis points following a 50 bp bump in Mar., putting the benchmark at 3.25%. CB chief Stanley Fischer, claims he is bringing rates to a “more normal” range, and that Israeli exports remain stable despite stronger shekel with higher rates.
What this news means for our China and Israeli stocks follows along with news from England, the Netherlands, Belgium, for paid subscribers only.
The Prophet's Words
Morgan Stanley Smith Barney published a new allocation review fo which some highlights are:
“We remain overweight global equities, commodities, REITs, and inflation-linked securities and underweight cash and bonds. Within global equities, we continue to OW emerging market and US equities; we remain UW other developed-market equities. Within US equities our capitalization preference is large caps, and on a style level we prefer growth.
“We anticipate bipartisan agreement on a credible [US] deficit-reduction plan early this summer, with implementation after the 2012 elections. US monetary policy should remain highly stimulative. In Europe, fiscal policy tightening is under way while monetary policy tightening remains on hold. In Japan, a decent economic rebound is unlikely until 2012. Thus, we expect better growth in the US this year, as compared with other developed economies. Concurrently, growth in the emerging market economies is likely to be much stronger, at around 6%. We expect subdued inflation in most developed nations, while emerging market inflation should abate in the second half of 2011.
“Apart from the European Central Bank, central-bank policy rates in developed nations are likely to change little this year. By contrast, emerging market central banks should continue to hike policy rates to restrain GDP growth and dampen inflation. Yields on long-duration sovereign debt of the developed nations are likely to head higher, and investment-grade and high yield credit spreads further compress.
“Most of the trade-weighted US-dollar weakness is likely done.”
European governments are good at one aspect of international organizations, getting jobs for the boys. Today, for the first time, the boy for the job, Christine Lagarde is a girl, but the slick way Paris managed her candidacy for heading the International Monetary Fund is impressive. By winning support from other capitals that count, France cut off at the pass any attempt by the newly recognized developing countries in the Group of 20 to have their experts considered for the post.
The argument that with the euro in crisis we need a European to replace Dominique Strauss-Kahn is jaw-droppingly arrogant. Back in the 20th century when IMF interventions were settling the fate of Latin American, African, or Asian countries, there was no precedent for that giving their nationals a crack at the top job.
But however good Europeans are at lobbying, it is not certain that Ms. Lagarde is going to save the euro. She is extremely bilingual in English, which is nice in a French person. But her background is as a lawyer and businesswoman, not necessarily the best curriculum vitae for knocking international heads together. Or for dealing with the European blame game over the crisis in Greece, Portugal, and Ireland.
What is needed is coherence in policy, not just in placement.
The failure of the Rapture to take place this weekend led me to seek a Biblical piece of advice for Ms. Lagarde and the rest of the crew trying to refinance the troubled trio while making sure the crisis doesn't spread to neighboring countries or squelch the common currency. The pernicious theory that somehow the huge banking and/or government deficits in these 3 countries were entirely produced by domestic greed and profligacy is an obstacle to solving the crises.
Greece alone did not create its fiddled accounts to hide its deficits. Ireland did not have the bank resources to finance a real estate bubble by itself. Portugal alone did not crush solo its prospects for economic growth while engaging in Euro-generated spending.
There are too many lies about the causes of the economic crisis, too much mindless assignment of blame by censorious creditor lands, too much buck-passing by the financial industry.
So for bankers and currency traders, here is the Word of God. For Ms. Lagarde and Jean-Claude Trichet, the uptight Frenchman running the European Central Bank, here is the word from on the Prophet. For the censorious office-hugging politicos from Germany, Finland, and the Netherlands among the surplus countries, and the unrepentent office-hugging politicos from Portugal, Spain, Italy, and Greece with their deficits, here is a heavenly message:
"What does the Lord require of you but to do justice, and to love mercy, and to walk humbling with your God?" (Micah 6:8) King James Bible.
One reason you need a French person in the top IMF job is that France is tainted by both versions of the origins of the crisis. France is now in growth mode but it was a close-run thing.
As previously noted, if you scratch almost anyone in the United States you discover Irish ancestry. Barrack Obama promised to do what he could for Eire based on a 19th century emigrant cobbler ancestor of his mother's.
(In reply to Californian Randy S., the address of the apartment house where Dominique Strauss-Kahn was living is 71 Broadway. The TV vans found out earlier.) Today's blog is mostly about Israeli stocks with the occasional note from Brazil, France, Canada, or Britain.
Frida Ghitis writes from Amsterdam: All Israeli shares have been under pressure waiting for the outcome of the Bank of Israel meeting on interest rates. The CB did not raise rates over the weekend to cool down a fast-growing economy. But there are more weekends ahead. If Gov. Stanley Fischer decides to boost rates, it would mark the fourth rate rise this year, to reduce the threat a growing economy and inflation place on the bank's target rate. Inflation, at 4.3% is well over the 1-3% target But higher rates also drive up the Shekel, up almost 10% this year, adding to inflationary pressures.
After a frantic weekend hosting three of my grandchildren and their parents, I have just posted the tables. At one point we walked away from Chinatown (where we ate dim sum at a Ren Ren Han restaurant, where we were the only non-Chinese) heading for the Staten Island Ferry. Along Broadway, at the level of Chambers St., roughly midway between the courts and Wall Street, TV transmission vans were parked for blocks on the southern side of Broadway. I think it was where the Frenchman who may have given a new meaning to the term "les sans culottes" had wound up.
Since Dominique Strauss-Kahn is not allowed to leave the apartment where he is holed up, and Anne Sinclair has enough boob tube experience to avoid the cameras, the TV van presence marks a lack of news sense among global editors. Eventually they will have to move when weekday traffic arrives.
We appreciated our view of Lady Liberty from the ferry, recalling that it also came to us from France. Sophie, age 8, took lots of photos as the huge lines meant we got go no closer than the ferry to what her 3-year-old baby brother called "The Statue Delivery."
The tables are accessible on our website under the Global Investing banner headline. If you are a pre-subscriber, view our amazing performance this year and in the last two years, based on closed positions.
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Martin Ferara writes: How over-rated luxury goods company shares probably are. Not that they aren't doing well. But their share prices are too frothy.
Pandora, a Danish jewelry maker, intrigues me. Its products are much cheaper than Richemont, popular with teenage girls, and (relatively) affordable. But fashions change quickly. My near-teenager youngest girl wants Pandora presents. We have a long weekend coming up, with girls from across America coming to an Israeli dance festival here in Vancouver. We'll be hosting a few. I am tempted to poll them. A Pandora bracelet costs roughly $120 - you then buy amulets that fit on (costing roughly $40 each, if I recall rightly).
Vivian adds: I am seriously offended every weekend when I get the Financial Times' “How to Spend It” magazine. This latest trend has so far not spread to my granddaughters, aged nearly 10 and 8. The 8-year-old is spending the weekend here with her parents and brothers. I will poll her but try not to stimulate demand by my questions. Of course we do not own Pandora now, or its products.
More from France, Germany, Britain, Israel, Switzerland, Latin America, and Canada (from Martin):
A "Friend"-ly Offer
My French language lede yesterday offended two male Anglophone readers. No apologies. As Edith Piaf sang, “je ne regrette rien.” Rape, as opposed to statuatory rape (sex with a consenting party who turned out to be under age, what got Roman Polanski into trouble), is not a minor offense in civilized countries, including France.
More for paid subscribers follows from Australia, Britain, Israel, the Netherlands, Thailand, Finland, Holland, South Africa, China, France, Norway via Bermuda, South Korea, Taiwan, Thailand, and India. Blog is late today because I have the painters. My mother always used to say: "remember Adolph Hitler was a painter." Mine is named Mahoney. It will be late also tomorrow.
Bad Weather and other Disasters
Bienvenu au Sofitel Times Square où le service au client est notre seul bout. Si votre (chambre/suite) manque quelque chose, svp telephoner au concierge qui vous aidera à retrouver ce que vous desirez: du savon, du shampooing, de repassage, un mets special, un guide pour un voyage adventure à Harlem ou à un prison, une putaine (age, race, orifice, et sexe à specifier). Pourboire à la discretion du client qui paie $3000 per nuit.
More for paid subscribers from around the globe, Britain, Finland, Norway via Bermuda, Finland, Denmark, Israel, Canada, Australia, India, even Normandy in France. Mostly about bad weather.