25IQ

El-Erian = very low interest rates – approaching “confiscatory levels” he believes – are unlikely to do enough to stimulate recovery. 

El-Erian =  “For the dollar to go down, something has to go up. And nobody wants their currency to go way up.” 

“The free money game for the banks has been a holocaust for savers and the elderly.”  http://www.thereformedbroker.com/2010/10/21/raise-rates-cowards/

Goldman is weighing whether to pay back Buffett’s $5 billion investment in the investment bank, a stake that has funneled nearly $1 billion in dividends into the (probably frayed) pockets of Buffett (The 10% yield nets Buffett a cool $15 a second) … Buffett’s roughly $2.6 billion injection into Swiss Reinsurance came via a bond that pays him annual interest of 12%. Forever. Or he can convert the bond into stock at 25 Swiss francs each. Swiss Re is trading at 46.75 Swiss francs. His $3 billion worth of GE warrants can be exercised at $22.25 each, deeply out-of-the-money given GE’s $16.06 stock price. But don’t feel bad for Buffett. He also secured $300 million in annual dividends for his $3 billion investment in GE.  http://blogs.wsj.com/deals/2010/10/21/oogling-warren-buffetts-investment-scorecard/

The index of U.S. leading indicators rose in September for the third straight month

Claims for unemployment insurance benefits declined by 23,000 to 452,000 in the week ended Oct. 15, Labor Department figures showed today. The prior week’s figures were revised up by 13,000, to the highest level since late August.  http://www.bloomberg.com/news/2010-10-21/leading-economic-indicators-in-u-s-rise-in-sign-recovery-is-sustainable.html

During the Korean War, Congress enacted an excess profits [meaning] anything above what a company had been making during the peacetime years 1946-1949. Boeing .. had made hardly any money at all from 1946 to 1949. So …its effective tax rate in 1951 was going to be 82%. … [so the plowed]  those profits and more into developing what became the 707, a company-defining and world-changing innovation. … a huge gamble, but for every dollar of the dice roll, only eighteen cents of it would have been Boeing’s anyway. http://blogs.reuters.com/felix-salmon/

China’s third quarter inflation up at an annual rate of 9.6 percent ..  “The purchasing power of households is being eroded,” said Ma Jun, a Hong Kong-based economist at Deutsche Bank. “These low rates are basically a subsidy to corporations by the household sector.” Interest rates on savings deposits in China had recently fallen to about 2.25 percent a year before the decision Tuesday. (The government-mandated rate is now 2.5 percent.) http://www.nytimes.com/2010/10/22/business/global/22yuan.html?_r=1&ref=business

The Treasury Department has spent $135 billion on Fannie and Freddie since they were seized by the government in 2008,… If the economy recovers more quickly than expected, the projections show that the companies could need as little as $6 billion in new aid. By contrast, if the economy falls into recession, the companies could need another $124 billion.  http://www.nytimes.com/2010/10/22/business/22fannie.html?ref=business

My Cliff’s Notes ten bullet points on what is going on in the world macro economy:

This country:

South Africa Stops Fighting `Currency War’ Amid Soaring Rand http://www.bloomberg.com/news/2010-10-18/south-africa-stops-fighting-currency-war-as-soaring-rand-damages-economy.html

Has a hard time doing this:

 Mr. Fischer began buying up dollars in March 2008, the first intervention by the Israeli central bank in currency markets in over a decade. From mid-2008 to mid-2009, the bank snatched up $100 million a day. It has continued at a furious pace, adding over $7 billion to its reserves so far this year. http://online.wsj.com/article/SB10001424052702303550904575562313029626460.html?mod=WSJ_hpp_MIDDLENexttoWhatsNewsTop  

More generally:

Maybe [China does not] heart Treasuries, but with a soaring trade deficit they don’t have much of a choice if they want to keep the Yuan cheap. http://econompicdata.blogspot.com/2010/10/china-hearts-us-treasuries.html

“…Tuesday night Mervyn King, the governor of the Bank of England, warned that tensions over exchange rates could degenerate into trade protectionism. “That could, as it did in the 1930s, lead to a disastrous collapse in activity around the world,” he said in a speech. Indian officials have warned that the G20 is split between debtor countries, such as the US and the UK, and creditor nations, led by China with its large foreign exchange reserves. Undervaluation of currencies and monetary easing were complicating problems and leading to a dangerous divergence of opinion among global leaders … “A beggar thy neighbour attitude has taken hold,” said Hafiz Pasha, a leading Pakistani economist and former finance minister. “The space for growth is smaller and China is artificially taking up too much of that space….The Third World will gang up on it. We need to start complaining,”  http://www.ft.com/cms/s/0/64ffe84e-dbb1-11df-a1df-00144feabdc0.html?ftcamp=rss

Brazil’s real fell 0.7% since it raised the so- called IOF tax on foreigners’ investments in fixed-income securities to 6% from 4%. Brazil wants a currency war truce http://www.bloomberg.com/news/2010-10-19/brazil-steps-up-action-in-currency-war-even-as-mantega-seeks-ceasefire.html

South Korea, meanwhile, said Tuesday it would consider lifting tax exemptions on government bonds owned by foreign investors. Such a step would make it less attractive for foreign investors to put their money in such instruments.  http://www.nytimes.com/2010/10/20/business/global/20asiaecon.html?ref=business

PBoChina raised 1 yr -year lending and deposit rates by 25 basis points. QE2 will increase capital flows to China, making inflation worse. Not a 27 BP increment as is usual which is easier to count with an abacus

china economy charts= http://www.creditwritedowns.com/2010/10/more-thoughts-on-china.html

bill gross on QE2 (the 5 year) = http://www.bloomberg.com/video/63583858/

Tyler Cowen on QE2 risks= macroeconomic knowledge is hard to come by, namely that each situation brings some new risks and new constraints. http://www.marginalrevolution.com/marginalrevolution/2010/10/arguments-against-qe2.html

Fox on Mandelbrot: http://blogs.reuters.com/justinfox/2010/10/18/why-didn%E2%80%99t-people-in-finance-pay-attention-to-benoit-mandelbrot/

So why haven’t finance academics and practitioners paid more attention to Mandelbrot’s warnings? I think it’s mainly that he didn’t provide them a handy alternative to Black-Scholes. I can’t pretend to fully understand the practical implications of his fractal view of markets (and yes, I’ve read his book for lay readers on the subject), but it does seem more useful as a critique than as a positive model of market behavior. You can’t haul in big consulting fees or create giant new securitization markets with a critique. So the natural tendency of both scholars and bankers has been to hold on for dear life to the Black-Scholes approach to modeling market risk. They get paid well for doing so, after all.

http://ultimibarbarorum.com/2010/10/17/through-the-looking-glass-again/

 if anyone tells you they have a clear view on what is going to happen to the econo-world from here, walk away briskly. As Ed Hyman of ISI* puts it, with the now imminent onset of QE2 we are in “scary times”, a world of “unintended consequences”.

http://www.econbrowser.com/archives/2010/10/more_than_one_t.html

We are thus in the historically unprecedented position that for purposes of both its employment and its inflation objectives, the Fed would like to be more accommodative.

http://www.nakedcapitalism.com/2010/10/goldman-launches-pr-campaign-to-burnish-its-tarnished-image.html

The people there honestly believe that working for Goldman is the most elevated calling (Blankfein’s bizarre-sounding “Doing God’s work” remark no doubt resonated within the firm) and doing anything else is a fall from grace. Seriously. People who exit Goldman typically take a year or two to get over it the deeply-inculcated belief that departure = failure

http://www.ritholtz.com/blog/2010/10/shared-profits-not-losses/

NYT takedown of JP Morgan’s raping and pillaging of various cities and pension funds. The accusation: Shared profits, client’s losses.

http://www.ft.com/cms/s/3/2cb7f7d0-da0b-11df-bdd7-00144feabdc0.html

A Northwestern University study estimates the funding gap for city pensions at $574bn nationwide, on top of an estimated $3,000bn gap at the state level. Such actuarial calculations are often treated as abstract, but they will become real cash flow issues for the most indebted cities and states in the not very distant future. Philadelphia can only fund existing benefits through 2015 while New Jersey is funded through 2019.

Meanwhile, municipal bond yields are near record lows, presumably because investors are assessing their risk through the rear-view mirror. Such retrospective analysis may prove as much of a mistake as it was for house prices and mortgages a few years ago.

http://www.bloomberg.com/news/2010-10-18/netflix-up-572-is-no-deterrent-to-analyst-wible-s-bearish-take-since-2007.html

{NFLX is} the best stock in the Russell 1000 over the past 3 1/2 years and a gain of 572 percent as of Oct. 15. A $100,000 investment then in Los Gatos, California-based Netflix would be worth almost $672,000 today. A similar bet on the S&P 500 Media Index, which includes Time Warner Inc. and Walt Disney Co., would have fallen to $83,000… Of 30 analysts who follow the stock, 9 have “sell” ratings, 15 say “hold” and 6 suggest buying it, according to Bloomberg data…. “Netflix is a great product, it’s a great platform,” Wible said. “It’s just that its market potential is limited. This is a story about growth and momentum and those stories can break at any time.”

When the FED starts buying bonds on November 3 and the US$ drops, the Euro Zone will come under greater stress. Southern Europe with far higher unemployment may  find the burden of a higher Euro too much.

It’s strange how calmly people are taking the prospect of QE2.  People I talk to seem to think we have been through this before, when the reality is that it is unprecedented. This is the new abnormal. Cranking up the printing press to depress the value of the world’s reserve currency has never been done in a situation remotely resembling where the world sits right now.  Time cannot be rewound of course and we always face a unique situation given that what is involved is a nest of complex adaptive systems. But the present set of conditions usually at least remotely resembles some pattern from the past.

This bit of text below from an article in this week’s edition of New Scientist may or may not be true in biology, but it sure rings true for economics in terms of micro and macro economics:

“…Macroevolution is not the simple accumulation of microevolutionary changes but has its own processes and patterns.  There can be no “laws” of evolution.  We may be able to reconstruct the sequence of events leading to the evolution of any given species of group after the fact, but we will not be able to generalise from these to other sequences of events.  From a practical point of view, this means we will be unable to predict how species will respond to projected climate changes over the next century..”   http://www.newscientist.com/article/mg20827821.000-the-chaos-theory-of-evolution.html

The professor who wrote this text above suggests that this means that changes will be both nonlinear and fractal (very sad news about B Mandelbrot as an aside).

One other similarity to economics is this statement:  “we cannot rewind…the initial conditions can never be specified to sufficient precision to prevent divergence of subsequent trajectories.”

The U.S. annual budget deficit = $1.294 trillion in the fiscal year ended Sept. 30, second only to the $1.416 trillion deficit in 2009

Venture-capital funding in the third quarter fell to its lowest level in more than a year as investors made fewer bets on alternative energy. Firms invested $4.82 billion in the U.S. during the period, down 7.3 percent from a year earlier and the least amount since the second quarter of 2009, the National Venture Capital Association and PricewaterhouseCoopers LLC said today in a report. The number of deals rose 8.9 percent to 780.

U.S. wholesale prices jumped 0.4% in September, mainly because of higher meat and natural gas costs, the government reported Thursday. Core producer prices, which exclude the volatile food and energy categories, rose 0.1%. The core number tends to draw the most attention of economists.  http://econompicdata.blogspot.com/2010/10/ppi-headline-core-diverge.html

J.P. Morgan just set aside a billion dollars for legal fees regarding its foreclosure problems

Retail sales in the U.S. climbed more than forecast in September, easing concern that unemployment near a 26-year high will bring the recovery to a halt. Purchases rose 0.6 percent following a 0.7 percent gain in August

Employer-sponsored 401(k) retirement plans will have to disclose fees that savers pay on investments and transactions by 2012

U.S. imports of Chinese goods jumped to $35.2 billion from $33.2 billion in July, while U.S. exports to China fell to $7.2 billion from $7.3 billion. The overall trade deficit was $46 billion, up from $42 billion the month before.

China’s foreign exchange reserves, the world’s largest, rose $194 billion in the third quarter to reach a record $2.65 trillion

If China sells dollars to buy yen or won, it risks depressing the value of the greenback. And as long as it remains tied to a dollar standard, it must follow the greenback down, buying as many dollars as its firms wish to sell to it at the prevailing rate. Only if it is serious about pegging to a broader basket of currencies will it gain more leeway over where to cast its line.  http://www.economist.com/node/17257777

weekly jobless claims showed the number rose last week to 462,000, up 13,000. That figure has remained in the same range for several weeks

 ”… The median boomer– born in 1955 — was a spendthrifty 36 years old in 1991 (the year that housing bottomed and a housing boom ensued).  That same boomer still had some gas in the tank — at 46 years old — in 2001.  Now, however, at 55 years old, that boomer is pretty much done.  He’s trying to recover from massive twin bubbles not even a decade apart while working feverishly on his abacus to see if he’ll ever be able to retire.  Boomers are downsizing (or at least trying to).  They may now be empty nesters (unless the kids moved back in to the basement).  They want to sell their home, but not at the price the realtor tells them it’s worth; the real estate related dollar signs they saw in 2006 (and probably extrapolated 10 years forward) translated into a more comfortable retirement.  Oops.  Now what? Further, it does not help matters that there will be no Social Security COLA increase for the second year running.  Living on a “fixed” income has never been quite as “fixed” as it is now, with no cost of living adjustments.  Not a positive development for the senior set.  http://www.ritholtz.com/blog/2010/10/grinding-it-out/  

the yield spread between the nominal and inflation-indexed 10-year Treasuries, a proxy for the market’s inflation outlook. It’s imperfect and subject to error, of course, just like every other metric that’s used to forecast the unknowable future. But as a measure of market sentiment, it’s worth watching. As of yesterday, this spread was 1.95%, up from around 1.5% in late August,  http://www.capitalspectator.com/archives/2010/10/the_treasury_ma.html  

“By buying securities, the Fed will be looking to ‘push’ others into taking more risk — to push investors to move out on the risk spectrum and buy corporate bonds and stocks,” El-Erian  http://www.bloomberg.com/news/2010-10-14/treasuries-fail-to-extend-rally-as-monetary-easing-spurs-inflation-outlook.html

“The worst is behind us, but the pain will be felt for a long time from what happened,” Buffett said “We’re inching forward, we’re not galloping forward.” 

“…Half of the deals done by angels between 2002 and 2007 were with seed and early stage companies, but that figure fell to 35 percent last year and is likely to be 35 percent or less through the first half of this year…”    http://www.pehub.com/85232/less-angel-money-flowing-into-seed-deals/ 

Intel says 18% PC unit growth in 2010; 3Q rev > $11B for 1st time; up 18% yoy. $4.1B net income. PC up 3%, Atom down 4%; GM = 66% http://newsroom.intel.com/community/intel_newsroom/blog/2010/10/12/intel-reports-first-11-billion-revenue-quarter   Revenue in servers was up over 30% versus a year ago, with cloud-related shipments up 200%, or 50% sequentially. 

 Fund tracker EPFR Global said flows into emerging equities hit a 33-month high of $6 billion in the past week. 

The Institute of International Finance raised its estimate of net private capital flows to emerging markets to $825 billion this year, compared with $581 billion last year. http://ftalphaville.ft.com/blog/2010/10/12/366281/the-rush-to-em/  

NFIB Chief Economist Bill Dunkelberg said: “The ownturn may be officially over, but small business owners have for the most part seen no evidence of it.” http://www.calculatedriskblog.com/2010/10/graphs-small-business-optimism-hiring.html  

“Put simply, the Federal Reserve is positioned to declare war on Bretton Woods 2. November 3, 2010. Mark it on your calendars….The Federal Reserve is poised to crank up the printing press for the sake of satisfying their domestic mandate. One mechanism, perhaps the only mechanism, by which we can expect meaningful, sustained reversal from the current set of imbalances is via a significant depreciation of the dollar. The rest of the world appears prepared to fight the Fed because they know no other path. …  http://economistsview.typepad.com/timduy/2010/10/the-final-end-of-bretton-woods-2.html