25IQ

Pooh: I haven’t been able to find a job since I graduated two years ago.
Rabbit: Oh, that’s terrible, but help is on the way since the government is going to cut spending which will revive the economy.
Pooh: Won’t cuts in government spending mean more layoffs?
Rabbit: Oh, that will free up more money for the private sector to create jobs.
Pooh: What would the people you know do with more money do?
Rabbit: Oh, they would pay off their debts.
Pooh: Would they spent it to or start companies or hire new people?
Rabbit: Oh, well no. Businesses already have too much spare capacity.
Pooh: So how is lower government spending right now going to create jobs?
Rabbit: Oh, that will happen when banks are free from government regulation and start lending.
Pooh: Didn’t the government just bail out the banks?
Rabbit: Oh, but that was caused by government regulation?
Pooh: And if the banks they make bad loans again, wouldn’t the government have to step in again. Isn’t that government regulation?
Owl: Look Rabbit does not know what he is talking about. We need more debt and more spending.
Pooh: More debt solves the problems caused by debt?
Owl: Yes.
Pooh: What happens if interest rates go up?
Owl: We will worry about that later.
Pooh: Do you think voters will trust that this lower spending will happen?
Owl: Just because we have never done it before does not mean we won’t do it next time.
Pooh: I am a bear of very little brain, but I think maybe we need to lower our standard of living for a while. You know, save, raise taxes a bit and make sure the less fortunate get through this Great Recession without terrible suffering. I am talking about not just a sustainable environment but a sustainable economy.

The best summary is here:

Yes, I am not posting as much on the blog. I’ve been busy. But I am posting at Twitter at @trengriffin. Regarding Twitter, I don’t get the messages sent to my handset. That’s annoying. I just read the Twitter stream on-line on my PC , sometimes on my mobile. It is the best content aggregator there is if you follow the right people. For a start on how to build your aggregator check out who I follow and then who they follow. Don’t follow too many people. You get notices of when I post on this blog since I post that on www.twitter.com. Only about 7% of people use Twitter, but that is a GOOD thing.

“… The producer price index rose 0.8 percent, Labor Department figures showed today in Washington. The figure matched the median forecast in a Bloomberg News survey. The so-called core measure, which excludes volatile food and energy costs, rose 0.5 percent, the biggest rise since October 2008. http://mobile.bloomberg.com/apps/news?pid=2065100&sid=aysG2UXlVnNw

“.. the root mean square error for the TIPS 10-year-ahead forecast of 0.84% was less than the six-month-ahead RMSE for economists of 1.11%   

http://www.minyanville.com/businessmarkets/articles/futures-markets-tips-treasury-inflation-protected/2/15/2011/id/32761

“… most important, argues UBS economist Jonathan Anderson, is a spell of bad weather in mid-2010. Based on the low probability of another poor harvest this year, he predicts that food inflation will start to fall within six months. Regional analysts point to other idiosyncratic factors. HSBC’s chief China economist Qu Hongbin says food inflation in China has been “caused mainly by disruptions in the farming and transportation of fresh vegtables and some specific food items.” Surjit Bhalla, economist at Oxus Investments, blames food price rises in India on “gross mismanagement” by the government, which has left large amounts of food to rot…”  

http://blogs.ft.com/beyond-brics/2011/02/17/how-long-will-em-inflation-last/

Tanzania’s income is 2.04 percent of the U.S. and allocates 73.24 percent of expenditures to food.

The chart is also very interesting and illustrates how a marginal increase of one dollar in income would be allocated to various expenditures across  the 114 countries listed in the table.  In further contrast, an additional $1 of income in Tanzania would increase expenditures on other, recreation, and medical care by 5 cents, 3 cents, and 4 cents, respectively, while the same additional dollar in the United States would increase expenditure on these three goods by 18 cents, 9 cents, and 13 cents, respectively (a difference in magnitude of 3 to 4 times). The difference in the magnitude of marginal spending by consumers in the two countries is about double for clothing and footwear, gross rent, fuel and power, housing operations, and transportation, while it is only about 1.3 times for education. 

http://macromon.wordpress.com/2011/02/15/the-global-pain-of-rising-food-prices/

Better economic growth this year should allow companies to pass along some of the higher costs. That is why “core” consumer prices excluding food and energy—the Federal Reserve’s preferred inflation gauge—are probably headed higher. This will likely stop the Fed from extending its latest bout of buying government bonds. 

http://online.wsj.com/article/SB10001424052748703961104576148760984943294.html

RDQ Economics.

The import price report release by the department yesterday also showed inflationary pressures at work, the firm said. “Moreover, it is not just a food and energy story as core inflation pressures were significant in this report at all levels of production,” said Chief Economist John Ryding in a note. “Furthermore, the relationship between food prices paid to farmers and PPI foods points to more food price increases to come, while surging raw materials costs suggests higher core finished goods prices ahead.”

The Fed is making a gamble that these increases will not feed into the CPI by more than a modest amount, Ryding added, noting that the Fed wants core inflation about 1% point higher than it ran in 2010.

“The Fed, however, should be careful what it wishes for—monetary policy is ultra accommodative and continues to be eased further by QE2,” he wrote.   Core consumer goods prices are rising 2.3% year-over-year at the wholesale level, a significant increase, Ryding wrote, while apparently falling at the consumer level. “We do not think this gap can persist for long and we look for an acceleration in core CPI,” he wrote. 

http://blogs.barrons.com/stockstowatchtoday/2011/02/16/ppi-report-is-latest-sign-of-rising-inflation-pressures/

In minutes from its latest Federal Open Market Committee meeting, the Fed upgraded its growth forecast to 3.4-3.9 per cent from its previous range of 3-3.6 per cent 

http://www.ft.com/cms/s/0/60fee4e6-39d7-11e0-8dba-00144feabdc0.html#axzz1E5uKY9He

Food inflation including a nice chart: http://blogs.ft.com/beyond-brics/2011/02/14/chart-of-the-week-fighting-inflation/

IMF    http://online.wsj.com/article/SB10001424052748703361904576142901753380400.html?mod=googlenews_wsj

“We are concerned that inflation is spilling over” into underlying demand, Mr. Singh said in an interview. Monetary policy alone won’t be enough to contain these pressures and exchange-rate reform is essential. “There’s certainly much more room for much of Asia to have more-flexible exchange rates and to have more strengthening,” Mr. Singh said.

“We do see flexibility and appreciation of many currencies in Asia as part of the process of normalizing the policy stance.”

Some governments are reluctant to allow their exchange rate to float freely, or appreciate in value as they seek to protect their exporters, and some authorities routinely intervene to weaken their currency.

Mr. Singh, who has been the IMF’s Asia chief since 2008, said policy makers can’t have effective monetary policy with controlled exchange rates. Mr. Singh didn’t single out a specific country, but a number of economists pin part of the blame for regional imbalances on China, which allows the yuan to move only in a limited range compared with the U.S. dollar.

Much of the blame for Asia’s quickening inflation has been pinned on ultra-loose monetary policy in the developed world, prompting a surge in capital inflows into higher-yielding emerging nations. This is a criticism that Federal Reserve Chairman Ben Bernanke has pointedly rebuffed in recent weeks, saying U.S. policy is not to blame. Instead, some of the underlying demand in Asia can be attributed to a widening middle class, which means the price increases may not be as temporary as some policy makers suggest, Mr. Singh said.

“What we’re seeing in food prices is partly supply, cyclical, and weather developments, but you are also seeing more structural shifts which we need to bear in mind in the medium term,” the IMF official said. “We are concerned that although we should be pleased by the high growth rate and recovery in Asia, we have to look at the sustainability of it and quality of it.”

On the IMF’s planned overhauls to the basket of currencies the fund’s 187 members can use as a reserve asset, known as Special Drawing Rights, Mr. Singh said consideration will be given to including the yuan, which he said remains “undervalued.”

“If you look ahead to the countries that will be part of the Special Drawing Rights, certainly it makes sense to extend it to emerging-market currencies, and the yuan is one,” to consider, Mr. Singh said, adding the process will take time. The SDR at present has only four constituents: the euro, sterling, dollar and yen.

FAO and wheat:  http://www.ft.com/cms/s/0/9f1ee7fc-381b-11e0-8257-00144feabdc0.html#axzz1DxvftkOR

India’s problem is primarily distribution and storage: http://www.moneycontrol.com/news/business/key-to-food-security-is-distribution-fix-expert_522630.html

“… distribution, rather than production, remains the key issue for India, Gulati said, and the recent mini-crisis around onions could prompt the government to take action here.

“Governments act when there is a crisis. So this crisis may turn into an opportunity to change. At least the right noises are coming out of this,” he said.

Earlier this month, Singh called for a “paradigm shift” to improve availability of foods domestically and Gulati echoed the view that distribution networks needed upgrading, especially as Indians shift their diet towards perishable fruit and vegetables.

“You need to invest in facilities that can store them and increase their shelf life. That is where investments are needed and where the laws have to be cleaned up,” he said.

As much as 40% of India’s fruit and vegetable production is wasted because of poor networks and a lack of cold storage facilities, with much product still sold on flat-bottomed carts by smallholders even in the centre of cities such as Delhi.

Gulati said the government could move as early as the next budget, due on February 28, to bring incentives to the sector.

“If you clean up the laws, this country doesn’t have a dearth of entrepreneurs and investors … I am sure they are preparing some policy paper on that to change … it could be as early as this month in the budget,” he said.

He said the government should look at increasing incomes of its half a billion poor who live on less than USD 1.25 per day, rather than handing out free or subsidised grain.

“Our view is the best way is to mainstream these people into high productivity activities so that their incomes go up,” he said. “But that takes a little time and therefore in the short term you may have to keep feeding them,” he said.

IFPRI would favour cash transfers on a targeted basis, such as for specific foods or for children, rather than subsidising foods or intervening on exports and imports, he added.

With many of India’s poor spending up to 60% of incomes on food, price volatility is a much more important issue than in the United States, for example, where only 10% of average incomes goes on groceries.

And he added that health issues had to be addressed at the same time as ensuring people could afford to eat.

“Nutrition also depends on hygiene. You may be feeding the child but if the water is not clean it’s washed away in diarrhoea.”

US farm income effects: http://www.bloomberg.com/news/2011-02-14/usda-farm-income-and-costs-forecast-report-for-2011-text-.html

Net Farm Income Forecast Up Nearly 20 Percent in 2011

Net farm income is forecast to be $94.7 billion in 2011, up $15.7 billion (19.8 percent) from the 2010 forecast. The 2011 forecast is the second highest inflation-adjusted value for net farm income recorded in the past 35 years. The top five earnings years for the past three decades have occurred since 2004, attesting to the profitability of farming this decade.

http://online.wsj.com/article/SB10001424052748703843004576140762706032294.html?mod=googlenews_wsj

Mr. Bernanke swore this {global] inflation would not spread here. But then Mr. Bernanke once predicted the subprime mortgage mess would not spread, either. … Republicans gave Mr. Bernanke a pretty hard time, challenging his boast that as soon as higher inflation inevitably rears its head, he’ll guillotine it with a gentle pull of his interest-rate lever.

…A new form of inflation is increasingly described in the blogosphere. It better explains the pricing paradox Mr. Bernanke has failed to embrace.

It’s called “biflation.”

Everything you already own — a house, a car, a stock portfolio — has rapidly declined in value. Everything you actually need to buy — food, gasoline, medicine, education — is going up.

Biflation is apparently what happens when the Fed creates trillions of new dollars out of nothing, but mostly just gives it to the banks.

Hedge Funds Increase Bullish Wheat Bets to Highest Since 2007-  http://www.bloomberg.com/news/2011-02-14/hedge-funds-boost-bullish-wheat-bets-to-highest-in-more-than-three-years.html 

Singapore Warns on Inflation

Inflation Hits 4 Percent in Britain‎ - New York Times

China inflation ex-food at decade high, adds to tightening case‎ – Reuters

 The post-Depression record for consecutive months with the unemployment rate above 9% was 19 months in the early ’80s. That record will be broken this month, and it is very possible that the unemployment rate will still be above 9% in December 2011…. The economy probably needs to add around 125 thousand payroll jobs per month just to keep the unemployment rate from rising …  If the participation rate does increases – say to 65% over the next year, from the current 64.5% – then the U.S. economy will need an additional 1 million jobs just to hold the unemployment rate steady (not counting population growth). Add in 125,000 per month more jobs to offset population growth, and the economy would have to add 2.5 million jobs in 2011 to hold the unemployment rate steady (assuming a 0.5 percentage point increase in the participation rate). This suggests any decline in the unemployment rate will be slow.
http://www.calculatedriskblog.com/2010/12/question-6-for-2011-unemployment-rate.html

 … If Congress had credibility, there would be no need to worry about the trade-off between helping the economy escape the recession and reducing the deficit. Congress could do what is needed to help the economy now, and promise—credibly with specific plans—to reduce the deficit once the economy has recovered. That would give us the best of both worlds.But, unfortunately, that’s not the Congress we have,  http://economistsview.typepad.com/economistsview/2010/12/how-fast-will-the-economy-recover.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+EconomistsView+%28Economist%27s+View+%28EconomistsView%29%29

 32 per cent of the $13,400bn in bank assets outstanding in the US, for example, are still loans secured on real estate. Mortgage-backed securities account for $1,252bn of the total. Many banks that are not dead today, then, could die very quickly if the housing market turns down again. http://www.ft.com/cms/s/0/5db725e4-11e8-11e0-92d0-00144feabdc0.html#axzz19SretkCq

China has about 23% of the world’s population but only approximately 7% of the world’s fresh water supply. Moreover, China’s water resources are not distributed proportionately; the 550 million residents in the more industrialized northern area of the country are supported by only one-fifth of the fresh water and the 700 million in the southern region of China have the other 80% of the country’s fresh water supply http://www.ritholtz.com/blog/2010/12/kass-15-surprises-2011/#more-61710

Kass: The sideways market of 2011 will prove to be a good year for opportunistic traders but a poor one for the buy-and-hold crowd as neither the bulls nor the bears will be rejoicing next Christmas.  http://www.ritholtz.com/blog/2010/12/kass-15-surprises-2011/#more-61710

During the holiday season, clothing posted the strongest gain, up 11.2% over the same period last year when apparel sales were roughly flat. Electronics sales rose only 1.2% this year, as a glut of televisions drove prices down and shoppers shied away from innovations such as 3D TVs.  http://www.ritholtz.com/blog/

“There are fundamental constraints on the behavior of terrorist organizations that look very similar to the kinds of constraints that startup companies face — that all social groups in some ways face,” he says. “This limit is manpower.”… [A] power law relationship — called “scale invariance” — the risk of a large attack can be estimated by studying the frequency of small attacks. It’s a calculation that turns the usual thinking about terrorism on its head. “The conventional viewpoint has been there is ‘little terrorism’ and ‘big terrorism,’ and little terrorism doesn’t tell you anything about big terrorism,” Clauset explains. “The power law says that’s not true.”

Massive acts of violence, like 9/11 or the devastating 1995 bombing of the U.S. embassy in Nairobi, obey the same statistical rules as a small-scale IED attack that kills no one, Clauset’s work suggests. “The power law form gives you a very simple extrapolation rule for statistically connecting the two,” he says.  http://www.miller-mccune.com/culture-society/the-physics-of-terror-25955/

I think Goldman is bit too optimistic about the economy so I would take their numbers up .25 on unemployment and down .25 GDP.    

http://www.zerohedge.com/article/goldmans-roadmap-losing-all-credibility-and-propaganda-based-utopia 

The U.S. economy will grow at a 2.7 percent rate next year, up from a previous forecast of 2 percent, and 3.6 percent in 2012 

“… private-sector debt/income ratios are still likely to decline further. But it is the pace of deleveraging——which corresponds to the level of the private-sector balance——that matters for GDP.  As the pace of deleveraging slows, the private-sector balance falls, and this implies a positive impulse to GDP growth. 

Finally, we are not saying that the economy will feel good from a ‘Main Street’ perspective. We only expect a gradual decline in unemployment as growth moves above trend, to 9¼% by the end of 2011 and 8½% by the end of 2012. 

Because there is so much slack, inflation is likely to stay well below the Fed’s ‘mandate-consistent’ level of just under 2%.”

On average, economists surveyed by Bloomberg expect the U.S. economy to grow 2.5 percent next year and 3.1 percent in 2012.   Goldman recommends:

Long basket of crude oil, copper, cotton, soybeans and platinum will gain 28 percent.  For its top trades, Goldman recommended betting on a decline in the value of the U.S. dollar against the Chinese renminbi via two-year non-deliverable forwards for an expected return of 6 percent.

which seems directionally wise but the gains will probably be less than that predicted by Goldman.   I think food and energy are the best of these commodity bets.   Buffett won’t make predictions like this (and neither will I, at least in terms of actually making bets) but Goldman did:   

The S&P 500 will likely end next year at 1,450, up 20 percent from 1,206.07 .

Last year at this time Bill asked me “What is your current thinking on the stock market?”  and I said:

Tying to pick a number for the S&P for December 2010 is a mug’s game in a year’s time frame– but for fun will say that I think 1,300 is too high. It is no longer possible for companies to “cut costs” on their way to higher profits on lower sales. US small business is flat on its back and way worse off than the numbers show.  We will likely see at least some double dip as the stimulus wears off– a lot of the recovery we have seen so far is statistical.  For example, if a US firm books revenue from employees working in India in call centers that increases US GDP, which is a deeply broken approach. A car assembled in the US from Chinese parts is not what we once saw from an assembled car in the US as a contribution to GDP. When hiring starts again people will return to looking for work and that will keep unemployment up.  If someone put a gun to my head and said “pick a number for S&P end of 2010″ I would say 1,100.

But put a gun to my head again re S&P 500 in December 2011 and I would say 1,350.

4 euro end game scenarios http://baselinescenario.com/2010/11/28/the-eurozone-endgame-four-scenarios/  

[Martin Wolf writes masterfully here] “…In the eurozone, the fact that global interest rates were low and demand in core economies weak, exacerbated this effect. These ultra-low interest rates triggered asset price bubbles and credit booms in peripheral economies. These, in turn, encouraged construction booms. In these circumstances, what the late John Kenneth Galbraith called the “bezzle” – the stock of financial crime – rises, to emerge in the crash. As the financial system implodes, the economy collapses and the public finances, seemingly strong in the boom, turn sharply for the worse.  http://www.ft.com/cms/s/0/259c645e-fcbb-11df-bfdd-00144feab49a.html#axzz16olqLX3M  

the chief economist of Citigroup …claims Ireland is insolvent, Portugal is quietly insolvent, Greece is de facto insolvent and Spain will be insolvent once the problems in its banking sector are recognised. At which point things get really interesting. Buiter predicts the ECB could be forced to buy Spanish government paper and fund its banking system by purchasing the debt from the European Financial Stability Facility if things get really bad. http://ftalphaville.ft.com/blog/2010/11/30/420606/insolvent-greece-ireland-portugal-and-probably-spain/

A paradox of the debt crisis is that the 16-nation euro zone, as a whole, has a budget deficit of around 6% of its gross domestic product and total public debts of around 84% of GDP. While not exactly low—6% is twice what’s supposed to be the maximum in euro-zone countries—that is healthier than in the U.S., which is running a budget deficit of over 11% and has total debts of around 92% of GDP.  http://online.wsj.com/article/SB10001424052748703994904575647073671547454.html?mod=WSJ_hp_LEFTWhatsNewsCollection

The Portuguese 10 year is sitting at 7.1% this morning.  It looks like a foregone conclusion that they’ll need aid at some point in the first half of 2011.  http://pragcap.com/portugal-austerity-failed

Spain, with its size, is worrying people the most, and the chart of its default risk doesn’t look pretty.  For much of 2009, Spain CDS traded at prices just above CDS for France and Germany, but default risk has recently spiked to levels that haven’t been previously seen for that country.  For the time being, default risk for France and Germany hasn’t hit new highs.  France is getting close, however, while Germany still has a ways to go. http://www.bespokeinvest.com/thinkbig/2010/11/29/european-default-risk.html

“Even the QE2 is not sufficient to restore growth to the trend level,” he said. “The problems of the economy are not problems of liquidity, but problems of credit insolvency, and therefore monetary policy cannot resolve this.”   http://www.bloomberg.com/news/2010-11-29/roubini-says-portugal-quite-likely-to-need-funding-update1-.html

The Eurozone is going to shrink in my view. That will come about as the electorate in key countries puts politicians in place that are willing to embrace default or the politicians in place embrace default.  Senior bondholders/foreign banks are going to take bigger haircuts than the market prices in right now.

“…There are very powerful arguments to support the default view, and the strongest argument against it, from Ireland’s perspective, evaporated last week – that argument was that any default on bank bonds would cause lenders to stop giving money to the Government to fund its deficit. That has now happened anyway. It is no longer in Ireland’s narrow national interest to prevent senior bondholders from suffering the consequences of their own bad judgement. …  the consequences of weaning Ireland’s banks off cheap ECB money simply transfers the problem. Support for the banks will have to come from the bailout fund, which, in theory, will offer cash at a much higher rate of interest. If a large part of the ECB funding were to be refinanced at a much higher interest rate, the State’s total debt burden (Government and banks) would become unmanageable.http://www.irishtimes.com/newspaper/opinion/2010/1126/1224284180165.html?via=mr

“… In early 2009, a joke was making the rounds: “What’s the difference between Iceland and Ireland? Answer: One letter and about six months.” This was supposed to be gallows humor. No matter how bad the Irish situation, it couldn’t be compared with the utter disaster that was Iceland.

But at this point Iceland seems, if anything, to be doing better than its near-namesake. Its economic slump was no deeper than Ireland’s, its job losses were less severe and it seems better positioned for recovery. In fact, investors now appear to consider Iceland’s debt safer than Ireland’s. How is that possible?

Part of the answer is that Iceland let foreign lenders to its runaway banks pay the price of their poor judgment, rather than putting its own taxpayers on the line to guarantee bad private debts. As the International Monetary Fund notes — approvingly! — “private sector bankruptcies have led to a marked decline in external debt.” Meanwhile, Iceland helped avoid a financial panic in part by imposing temporary capital controls — that is, by limiting the ability of residents to pull funds out of the country.

And Iceland has also benefited from the fact that, unlike Ireland, it still has its own currency; devaluation of the krona, which has made Iceland’s exports more competitive, has been an important factor in limiting the depth of Iceland’s slump….”  http://baselinescenario.com/2010/11/17/the-debt-problems-of-the-european-periphery/#more-8268

These probabilities of default  as expected by the market are still too low:

the probability that CDS spreads assign to a default of Italy in the next five years (around 12.7%) is significantly lower than that of Ireland (34%) and Portugal (28%). http://www.nakedcapitalism.com/2010/11/guest-post-will-the-irish-crisis-spread-to-italy.html

Nov. 26 (Bloomberg) — The cost of insuring Portuguese, Irish and Spanish government debt against default rose to records based on closing prices, according to CMA. Credit-default swaps on Portugal rose 31.5 basis points to 507.5, Ireland increased 19 basis points to 599.5 and Spain climbed 21 basis points to 320.5.  http://www.businessweek.com/news/2010-11-26/portugal-ireland-spain-credit-default-swaps-rise-to-records.html

Irish police estimate 20,000 people took to the streets of Dublin as bailout talks focus on the interest rate charged to Ireland and the fate of senior bondholders. A finance ministry spokesman said the rate will be “sustainable” after state broadcaster RTE reported that nine-year loans from the EU and the International Monetary Fund may cost as much as 6.7 percent.  … 

“One possible scenario is that the financial package for Ireland could include an element of restructuring affecting senior debt,” Fitch Ratings said in a statement yesterday. “Fitch has no visibility of this matter but notes that such a restructuring could have wider implications for the euro area.” …EU and IMF officials are taking legal advice on how senior bondholders can share the cost of the rescue without triggering lawsuits, the Irish Times said yesterday, without saying where it got the information.

http://www.bloomberg.com/news/2010-11-26/ireland-races-to-secure-weekend-aid-deal-amid-bank-debt-concern.html

Shares of European banks which hold the debt of Irish banks tumbled on Friday on reports that they could be forced to share in the cost. Britain’s Royal Bank of Scotland and Lloyds Banking Group tumbled 5.3 and 4.4 percent respectively, while Spain’s top bank, Santander, fell 3.7 percent. http://www.reuters.com/article/idUSLDE6AO0HG20101127

Ireland’s debt is “massive,” says Sean Egan, managing director at Egan-Jones. After the latest bailout, Ireland will have €220 billion of debt along with €400 billion of bank guarantees. That equates to €135,000 per person. By comparison, the French have debt of €23,000 per person. Ireland’s government also plans €15 billion ($20.53 billion) in spending cuts and tax increases, even as its gross domestic product fell 1.2% in the seasonally adjusted second quarter and its debt as a percentage of GDP rose to 77.4%. Its deficit-to-GDP is the highest in the European Union at 14.30%, and it’s expected to rise in the months ahead as the government continues to repair its damaged banking system. To date, the government has injected roughly €22 billion in capital into the banks…. its unemployment rate is 13.6%, http://online.barrons.com/article/SB50001424052970204374404575630840242907612.html?mod=BOL_twm_mw

There were big falls in the price of senior Irish bank debt at home and abroad. AIB’s 5.625 per cent senior debt due in 2014 fell to 73 cent, a 5.2 per cent drop. Similarly, Bank of Ireland’s 4.625 per cent senior notes maturing in 2013 saw a drop of four cent on the euro, or 4.8 per cent, to 81 cent. According to one London trader, any move to compel bondholders to take a haircut could have long-term implications for Ireland’s ability to enter international markets for years to come, as the Government had explicitly guaranteed the senior debt of the Irish banks in September 2008 under the guarantee. “Ireland guaranteed its bank debt two years ago, much to the annoyance of other countries . . . if it was to renege on that debt, it could find itself in the situation faced by Argentina, which still can’t enter international markets because of its default.”  http://www.irishtimes.com/newspaper/ireland/2010/1127/1224284259127.html

More thoughts:

“… The public debt can be contained in two ways. The first and preferable option is that the state never nationalizes private bank debt as Ireland has done.  For Ireland, this opportunity has probably passed, but other countries should be warned not to make the same mistake. Kazakhstan’s refusal last year to bail out its major banks, despite strong demands from the senior creditors of these banks, has proved a far more successful path.  Banks can and should go under if they have failed. The state should only defend small and medium-sized depositors.

If the state has taken on too large debt, sovereign default is the natural outcome. In their excellent book This Time Is Different, Carmen Reinhardt and Kenneth Rogoff argue that 90 percent of GDP is the highest sustainable level of public debt for a developed country. This limit is not absolute, but there is little reason to believe that Greece and Ireland would belong to the exceptions. As Germany and France so sensibly, though perhaps not very cautiously, have argued in public, the EU needs a facility for sovereign debt default.  http://baselinescenario.com/2010/11/17/the-debt-problems-of-the-european-periphery/#more-8268

In a nutshell, we’re watching the most pitched, highest-stakes, most determined battle between politics and finance which has been staged. I am expecting finance to win. It’s not just about PIGS and the future of the eurozone, it’s settling a very general question about the relative power of politics and finance.  Either way, it is an event of momentous importance. http://www.marginalrevolution.com/marginalrevolution/2010/11/the-war-of-politics-and-finance.html

Taleb: “connectivity and operational leverage are making cultural and economic events cascade faster and deeper”. http://www.economist.com/node/17509373?story_id=17509373&CFID=149238396&CFTOKEN=89583226

The question is whether the Eurocrats can beat back the speculators. I find the whole situation much too complex. I can only come up with a list of things that I wish I knew.

1. What is the true state of the large European banks? In particular, if, they had to write down the principal on the debt of the PIGS by, say, 15 percent, which banks would still be solvent?

2. What does the option for inflating away European debt look like? How would the cost of that inflation be distributed? Can the inflation take place within the context of the euro, or does it require that some countries leave the euro?

3. Does a crisis create an opportunity for governments to make radical changes to the welfare state, or is that still not possible?

4. Suppose that governments have to choose between preserving their banks and preserving high levels of spending on public employees and retirees. Which choice is better for the economy? For political survival?  http://econlog.econlib.org/

Posting every day is really hard work.

WSJ: “This year, about 40% of the weekly movements in the S&P 500 index can be explained by weekly fluctuations in energy prices, says Michele Gambera, head of quantitative analysis at UBS Global Asset Management. That is twice the level of similarity over the past five years and roughly 20 times the level of the past two decades.”

European finance ministers approved a request from Ireland for a multibillion-euro emergency rescue.The bail-out is expected to total €80bn-€90bn… Ireland will have to cut fast and deep.” http://www.ft.com/cms/s/0/9338047c-f5a0-11df-99d6-00144feab49a.html#axzz15xSeKJEK

The top 35 US banks will be short of between $100bn-$150bn in equity capital after the new Basel III global bank regulations are imposed, with 90 per cent of the shortfall concentrated in the biggest six banks… the study assumes the banks will need to hold top quality capital equal to 8 per cent of their total assets, adjusted for risk.  http://www.ft.com/cms/s/0/42d42de2-f593-11df-99d6-00144feab49a.html#axzz15xWmconh

Ten-year note yields climbed eight basis points, or 0.08 percentage point, to 2.87 percent yesterday. The price of the 2.625 percent security maturing in November 2020 fell 23/32, or $7.19 per $1,000 face amount, to 97 27/32. The yield climbed to 2.96 percent on Nov. 16, the highest in three months.  http://www.businessweek.com/news/2010-11-20/treasury-10-year-notes-fall-as-investors-back-fed-s-inflation.html

Chu suggests Gurley should have included China in the conversation. There’ve been 122 IPOs in the U.S. this year, and 25 have been China-based companies listing in the U.S. – a huge percentage. http://www.pehub.com/88843/will-china-play-nice-with-us-exchanges/

results show a strong correlation between weekly share transaction volumes of the S&P 500 companies and the weekly volumes of Google searches for their corporate names. More searches mean more share trading… As Google activity about a company increased, shares were just as likely to fall as to rise. http://www.ft.com/cms/s/2/9aea26be-f1ea-11df-84ef-00144feab49a.html#ixzz15nvi28H7

 Dealogic data shows that the number of technology deals — more than 5,100 so far this year — is at its highest point since the year 2000. the average technology deal this year is $46 million, not much more than the average of $40 million in 2000.  http://dealbook.nytimes.com/2010/11/19/as-tech-deals-boom-talk-turns-to-bubbles/ 

In 2008 the advertising on Google’s search engine was responsible for 98 percent of the company’s $22 billion in revenue, and while Google refuses to provide more recent percentages, the company’s 2009 revenue of $23.6 billion suggests that little has changed.  http://www.nybooks.com/articles/archives/2010/dec/09/google-and-money/

Foreclosures on prime fixed-rate mortgages in the U.S. jumped to a record in the third quarter as unemployment strained household budgets of the most creditworthy borrowers. The inventory of homes in foreclosure financed by prime fixed-rate loans rose to 2.45 percent from 2.36 percent in the previous three months http://www.bloomberg.com/news/2010-11-18/prime-u-s-mortgage-foreclosures-rise-to-record-on-unemployment-pressure.html

as investors turn their focus to the next-weakest peripheral nation…the markets indicate that country is Portugal with 10-year bond yields of 6.88 percent, compared with 8.26 percent in Ireland and 11.62 percent in Greece  http://www.bloomberg.com/news/2010-11-18/irish-bailout-may-unleash-bond-vigilantes-on-portugal-market-euro-credit.html