Friday, September 19, 2014

I tagli, le canne le Tltro

by Edoardo Varini

È notizia di oggi. I cannabinoidi verranno coltivati nei campi militari della città del Magnifico, che senz'altro era meno magnifico di questo. Di questa cosa. Di invitare il diavolo in mezzo al bianc'azzurro dei vasi officinali. Tra gli alberelli, gli orci e le brocche, ove "la sostanza" evaporerà lo zolfo e lenirà il dolore dei malati.

Il ministro Lorenzin dice che il fatto che un giovane su quattro fumi cannabis è male e che questo non è il primo passo verso l'autocoltivazione da parte dei malati. Ma non ce la vedo la forza pubblica fare irruzione nel giardinetto di un villino a schiera ed arrestare il reo dalla barba malfatta e che magari ha anche nella saccoccia del pigiama tono su tono una regolarissima prescrizione del medicamento.

"La sostanza" ci costa oggi a importarla 15 euro al grammo. Con il nuovo protocollo ce ne costerà la metà. Il diavolaccio dei tagli fa più paura di quello delle canne, oppure si inizia a pensare di non poter convivere con le conseguenze dei tagli senza le canne.

Pensionati, iniziate a comprare il vasetto per la piantina. Il Fondo Monetario sostiene che la spending review sarà inefficace senza tagliarvi le pensioni. Senza tagliare a voi ed ai vostri figli e nipoti l'assistenza. Di vasetti ce ne sono infiniti, di tutte le fogge e colori. All'Ikea, per esempio, ne troverete di meravigliosi, a partire da € 0,50.  Di vetro, di terracotta, di paglia, di legno, di ceramica, di plastica, di allumino e di acciaio. Mi sento di consigliare il colore rosa, per ricordarsi ogni tanto della canzone della Piaf: «Quand il me prend dans ses bras / ile me parle tout bas, / je vois la vie en rose...»

alt

La richiesta di rifinanziamento da destinare a imprese e famiglie da parte di 255 banche europee si è fermata a 82,6 miliardi di euro, ben al di sotto delle attese. La condizione per ottenere i finanziamenti era in questo caso che se la banca non utilizza il prestito per aumentare le erogazioni alle piccole e medie imprese non finanziarie, dovrà restituire l'intero ammontare entro due anni.

In Inghilterra una manovra analoga promossa dalla Bank of England funzionò. In Europa il rimedio parrebbe essere meno efficace (aspettiamo pure la seconda delle 6 aste di Tltro, ovverosia dei piani di rifinanziamento di lungo termine di cu stiamo parlando) perché non è ormai solo la liquidità a mancare, è la domanda di liquidità da parte di una classe di piccoli e medi imprenditori per troppo tempo umiliati, offesi, derisi, vessati e abbandonati a se stessi dalle istituzioni proprio nel momento di maggior bisogno.

Noi, come quasi sempre, i peggiori: da noi lo stato non si è limitato a non affrontare il problema della decrescita economica ma ne se ne è rivelato concausa, sia in termini di avida, insostenibile fiscalità, sia di ritardi nei pagamenti. Siamo noi il "Paese peggior pagatore d'Europa": 170 giorni per avere il saldo, a fronte di regole europee che di giorni ne tollerano al massimo 60.

Resta, questa iniezione di liquidità di Draghi, una mossa doverosa e giusta. Le banche si preparino a una corretta valutazione dei piani industriali, le imprese ritrovino il coraggio di investire, la politica esca dal vaudeville e smetta di essere La palla al piede, direbbe Feydeau.

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Buy the rumor sell the pound

By Andrew Wilkinson

The performance of the British pound(CME:BPZ4) the morning after a decisive No vote amongst Scottish voters reminds of us an old television game show. The pound spiked above $1.6500 as the first ballot box was counted, revealing clear lack of appetite from Scots to quit the Union. Yet despite the fact the issue has been settled overnight the British currency fell. It had been widely predicted that the pound would suffer badly had the Yes vote won. On Friday morning the pound is now lower than Thursday’s close, buying just $1.6333. One can almost hear the TV quiz host asking his contestants why they think the pound is lower:

Is it a) because the poll was so close there will likely be another referendum on the issue sooner than we think?

Is it b) because the pound never really fell very hard before the poll in the first place?

Or is it c) – Something else?

For sure the close shave for British Prime Minister David Cameron is likely to open up questions about the future of national politics. The turnout for Thursday’s poll at around 85% was tremendous. But another poll anytime soon seems an unlikely reason to dump the pound on Friday. And the pound had slumped five-cents against the dollar once the YouGov poll projected a possible Yes victory and so it would be unfair to conclude that there was little fear ahead of the vote. The currency options market saw the cost of defensive premiums sky rocket in the run-up to the vote as book runners clamored for protection. So perhaps it makes sense to conclude that the answer is c) – something else. Risk appetite is firmly on with European and London-traded stocks ending the week on a high note and in the wake of fresh record highs for Wall Street. Quite what that ‘something else’ is, eludes us this morning. It could be that the pound’s honeymoon simply didn’t last long in light of the dollar’s rally. That factor continues to grab the headlines as bond yields drift higher.

Chart – The pound quickly gave it all back on Friday

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An Expectation Gap

by Marketanthropology

Ignoring what Yellen continues to emphasize as her intentions to leave rates lower - longer, participants once again focused their attention Wednesday on the updated dot-plot projections, that implied some Fed officials may have turned towards a more aggressive policy path over the next two years. This hawkish bias was confirmed in the market, as 10-year yields rose to ~ 2.6% and 5-year inflation breakevens collapsed to just under 1.72%. Where the rubber met the road - real rates rose; causing the financials and US dollar to surge, commodity currencies to collapse and precious metals to weaken.


Similar to the reaction of the taper-tantrum last year, the ballast of the market continues to not believe that Yellen will err on the side of caution and maintain the status quo, implicitly encouraging inflation to perk before even considering raising rates. Here lies the large expectation gap in the market - and one we expect will capitulate towards the Chairwoman's underlying directive. As Jon Hilsenrath pointed out, the old market adage, "Don't fight the fed", should really be "Don't fight what the Fed says" - this time around the block. This dynamic is contrary to how participants reacted to the last time inflation was troughing during the financial crisis, when traders expectations were greatly in line with the Fed - as they both jumped hand and hand into the trenches. Today, there exists a large hawkish skew in expectations - predominantly swollen by the uncertainty surrounding the Fed's exit plan and the leftover and misplaced biases of previous rate tightening cycles. While we continue to believe participants are putting the cart before the horse when it comes to raising rates and inflation expectations, we have clearly remained offsides over the past quarter in anticipating the timing and catalyst of such a paradoxical resolution. 
Further muddling the waters has been the more aggressive policy and posturing by the ECB in response to persistently low inflation in the eurozone. These actions have encouraged and maintained downside momentum in the euro, which has re-engaged the value trap like conditions for commodities - as the disinflationary trend in the US has once again rebooted on the back of a surging dollar. While the circularity of conditions is enough to make even Rust Cohle smile, the feedback loop has maintained trend in the equity markets with all the smoothness of a Madoff return - basking under the fair weather conditions of moderating inflation. Conversely, this has caused various reflationary assets (i.e. precious metals, commodities, commodity currencies, emerging markets) to stall out for a third time over the past year - as participants inflation expectations have broadly fallen. All things considered, we believe those biases are once again misplaced and find the same relative value that has remained attractive over the past year, in corners such as precious metals and their respective miners, the Australian dollar and emerging market and Chinese equities.

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Japan working on 18 year breakout, Yen 30 year breakdown

by Chris Kimble

nikkeiyenbreakoutdownsept19

CLICK ON CHART TO ENLARGE

Buy & Hold investing has worked pretty well when it comes to many stock indexes around the world. One place where this strategy has been disappointing is the Nikkei 225 over the past couple of decades. If one happened to buy the Nikkei in 1990, they would still be down over 50%, twenty-four years later.

The above chart highlights a resistance line that has been heavy for the Nikkei for almost two decades. The Nikkei is now making an attempt to break free from this resistance line.

At the same time the Yen is working on breaking a support line that has been in place for almost 30 years.

Could a breakout by the Nikkei help push the S&P 500 and major European markets even higher?

Buyer beware- One of the popular ETF's for Japan is EWJ. Check out its resistance line, because it looks a good deal different.

If you like the idea of buying breakouts or shorting breakdowns, these are markets to keep on your radar screen.

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Monetary Policy Weighs On Precious Metals

by Bob Kirtley

Gold has an inverse relationship with the US Dollar so when the dollar declines gold rises. The dollar is affected by monetary policy as decided by the various central bankers across the planet. We recently covered the effect of the European version of QE with an article entitled; Why ECB QE Is Bearish For Gold Prices so today we will take a quick look at the ramifications for the precious metals sector emanating from the monetary policy meeting of the Federal Reserve held today.

A brief overview of the Fed’s actions

The two most important points to come out of today’s meeting were firstly that the tapering of QE would continue and finally come to an end in October 2014. The second point was the wording that surrounded interest rates whereby the Fed Chairperson, Janet Yellen, talked along the lines of the following:

The decisions that the committee makes regarding the appropriateness of the time to commence increasing its target for the federal funds rate will be data dependent. Should the goals set by the Fed look to be accelerating in terms of being achieved earlier, then it is likely that the federal funds rate rise could be introduced earlier than expected.

Uncertainty about economic projections would appear to be the order of the day with a policy of steady as we goes rather than hard and fast actions set to a solid timescale.

So there we have it, still data dependent but the door has been opened, if required, for rates to rise sooner. There is no real indication of when this might happen but we have been warned that it could be sooner than we first thought. The markets responded instantly with the US dollar being the main beneficiary, gaining 0.52 or 0.62% on the US Dollar Index, gold closing $12.00 lower, silver down $0.16 and the HUI down 5.39.

Gold, Silver and the HUI

Gold, silver and the mining sector have suffered from a sell off recently to the point of being oversold. A bounce was on the cards from a technical viewpoint as nothing goes down in a straight line.

The coming end of QE brings with it the end of the dilution of the dollar as no more money will not be produced in this manner. As we know the dollar has refused to collapse and of late has been gaining in value when compared with a basket of the other major currencies. With QE more or less behind us, for now at least, the focus is on the prospect of interest rate increases and the timing thereof. The Fed have indicated that they will be small and that the increase will be gradual and as per usual; data driven. This leaves the situation open to interpretation; it could be that we get two rate increases of 25 basis points in 2015 or five increases of 50 basis points. Either way, a better return on cash deposits will tempt investors into cash and hence the dollar will continue to strengthen.

It should be noted that the Japanese and the Europeans are doing their best to push down their own currencies down which has the effect of putting upward pressure on the dollar. If the dollar does continue to trek north then any rally in precious metals will be restricted to say the least.

On the positive side for the PMs is that the last jobs numbers report was somewhat of a disaster in terms of new jobs created coming in at 142,000 instead of 200,00 plus. This maybe an aberration with the trend being resumed next month, but if we continue to get poor jobs numbers then the Fed, being data driven, might be tempted to take action. This action could be in the form of a reintroduction of QE and/or a delay in rate rises, it’s a tad too early to call. We are of the opinion that the reintroduction of QE is unlikely and that the Fed will continue with their strategy of tapering as planned.

Conclusion

I am a precious metals bull, but not a perma-bull, as such a position does not allow the flexibility a trader needs in order to generate profits. By adopting a flexible stance whereby we can be bearish or bullish in any market sector, our options trading team has generated a profit of 895.42% in just 5 years. The super bulls will continue to snort but as retail investors we have to see things as they are and not as we would like them to be.

We are now of the opinion that gold will trade lower and re-test the $1180/oz level, silver; if it breaks below $18.00/oz, then it would experience a severe drop to the $15.00/oz level and the miners as represented by the Gold Bugs Index, the HUI, will test the low of 190 that it made in December 2014 and possible go on to test the 150 level formed in 2008.

The current environment favors the bears so a short trade would be better than a long trade.

We believe there are times to be fully invested and times to exercise the utmost caution. At the moment we are finding it difficult to acquire stocks in this market sector, however, should they keep falling then the bargain buys will present themselves. Having the cash available for such an event is top priority for us and so that’s where the lion’s share of our funds is placed today.

Finally, given what we know today it is hard to see what the catalyst will be that would ignite gold prices and drive a substantial rally. Money printing, political turmoil, terrorism, protests, demonstrations, riots, separatism, sanctions, air strikes, et al have done nothing for the precious metals sector of late.

Got a comment, then please fire it in whether you agree with us or not, as the more diverse comments we get the more balance we will have in this debate and hopefully our trading decisions will be better informed and more profitable.

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Small Countries’ Big Successes

by Michael O’Sullivan, Stefano Natella

ZURICH – Scotland’s vote on independence from the United Kingdom has spurred widespread debate about the secession of small states, such as Slovenia and Croatia in 1991, or the independence drive today in Spain’s autonomous region of Catalonia. But neither a narrow focus on the political and economic implications for Scotland and the UK – nor, for that matter, the referendum’s decisive pro-union outcome – should overshadow the broader lessons of one of the more overlooked geopolitical trends of our time: the rise of small countries.

Roughly 75% of today’s small countries were formed in the last 70 years, mostly as a result of broader democratic transitions and in tandem with trade growth and globalization. Their successes and failures are more germane to current discussions than, say, the fiscal implications of Scottish independence.

The lessons to be learned from these cases are useful not only to new and potentially new small countries. Relatively young small countries in Africa, the Caribbean, and the Middle East can also benefit by examining the secrets of Singapore’s success, the causes and effects of Ireland’s property bubble, and Denmark’s decision to build strong counter-terrorism capabilities, despite its relative safety. Indeed, such considerations can help them to chart a path to economic prosperity and social cohesion.

Of course, in learning from one another, countries must always be careful to avoid the “folly of imitation.” The Nordic countries, for example, have benefited significantly from deeply entrenched social, legal, and political characteristics that are not easy to transfer to their developing-country counterparts.

Moreover, young small countries must recognize that building the institutions and economies to which they aspire will take time. In fact, age may well be the most important factor in small-country performance, with per capita GDP in small countries that were established before 1945 some four times larger than in their newer counterparts.

More established small countries also lead the rankings in other metrics. For example, they occupy nearly half of the top 20 positions in the United Nations Human Development Index.

In general, older small countries outstrip medium-size and large countries in terms of economic and social performance, openness to international trade, and enthusiasm for globalization – features that younger countries should work to promote. But small countries’ economic growth is often more volatile – a tendency that younger states must learn to contain if they are to prosper in the long term.

The question of “large” or “small” government is less relevant, despite the impression given by heated debates in large countries like the United States. Overall government expenditure is only weakly correlated with the size of the government. A better proxy would be public-sector salaries – the only area where large countries appear to benefit from economies of scale. Smaller countries spend more, as a percentage of GDP, on education and health care – another habit that new small countries would do well to uphold.

Indeed, there is a strong positive correlation between the pace of economic growth and “intangible infrastructure” – the combination of education, health care, technology, and the rule of law that promotes the development of human capital and enables businesses to grow efficiently. Small countries account for seven of the top ten countries for intangible infrastructure.

Add to that measures like the quality of institutions, suitability to thrive in a globalized world, stability of economic output, and level of human development, and one can generate a country strength index, in which 13 of the top 20 performers are small, with the most successful being Switzerland, Singapore, Denmark, Ireland, and Norway. A cluster of larger countries is led by Australia, the Netherlands, and the UK. Other “resilient” small countries include Finland, Austria, Sweden, and New Zealand.

To be sure, there is a clear “old European” bias here. Developing small states like Croatia, Oman, Kuwait, and Uruguay may consider exhortations to emulate countries like Switzerland and Norway to be impractical.

But a useful set of priorities can be gleaned from their experiences. Specifically, small developing countries should focus on building institutions, such as central banks and finance ministries, that explicitly seek to minimize the macroeconomic volatility associated with globalization. They should also advance the rule of law, develop strong and efficient public education and health-care systems, and encourage domestic industry to emphasize return, rather than cost of capital, as their guiding metric.

Beyond emulation, small countries can help one another through direct alliances. Surprisingly, very few such alliances exist, with many small countries – especially developing ones – cultivating close ties with “big brother” countries or immersing themselves in regional federal structures. The risk, of course, is that their voices become drowned out by larger entities, impeding their ability to do what is best for their own citizens.

In a fast-changing geopolitical and economic environment – characterized by challenges like interest-rate rises spurred by high debt levels; competitive corporate-tax reductions; changing immigration patterns; and a possible slowdown in the pace of globalization – small countries must be able to identify and assess risks, and adjust their strategies accordingly. Indeed, even without full independence, this is precisely what Scotland, which has been promised even greater autonomy within the UK than it already has, will have to do if it is to succeed.

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Cleaner, Greener, and Richer

by Christiana Figueres, Guy Ryder

GENEVA – In the past, action to combat climate change was viewed largely as running counter to economic growth, with “going green” implying a sacrifice of prosperity for the sake of the environment. Today, we know better. By taking action to mitigate climate change, companies are promoting sustainable growth and creating high-quality employment.

The United States, for example, has added 1.2 million “clean” jobs to the economy since January, according to a new study by the Ecotech Institute. Since last year, employment has risen by more than 115% in the solar industry, and jobs related to energy efficiency have increased by over 50%.

In China, the International Renewable Energy Agency reports that more than 1.7 million people are already employed in the renewable-energy sector. And the Global Climate Network estimates that seven million additional jobs could be created if government targets for wind, solar, and hydropower are met. Worldwide, an estimated 5.7 million people were employed directly or indirectly in the global renewable-energy industry in 2012 – a figure that could triple by 2030.

Of course, the expansion of renewable energy alone is not enough to combat climate change. Smarter ways of managing the planet’s natural assets – such as forests, freshwater supplies, soils, and biodiversity – are also needed to enhance the environment’s capacity to absorb carbon-dioxide emissions, while increasing the capacity of communities and countries to adapt to the climate change already underway.

One initiative that addresses climate change from both angles is South Africa’s Expanded Public Works Program, which generated one million employment opportunities during its first five-year phase, and aims to create 4.5 million more by the end of this year. In addition to renewable-energy production, the program emphasizes wetland and forest rehabilitation and fire management. It even addresses social inclusion, with many of those employed coming from vulnerable groups, such as single mothers.

Likewise, India’s Mahatma Gandhi National Rural Employment Guarantee Act aims to ensure livelihood security in rural areas by providing at least 100 days of guaranteed wage employment in a financial year to every household whose adult members volunteer to perform unskilled manual labor. The lion’s share of this work involves projects that can boost environmental resilience, from soil and water conservation to flood protection, reforestation, and small-scale irrigation.

In Brazil, the Bolsa Verde (“green grant”) program, which offers incentives to poor families to carry out conservation work in local nature reserves, provided monthly payments of $35 to more than 16,600 families in its first year. There are plans to extend the program to 300,000 families, and to add other climate-friendly projects, such as renewable-energy schemes. Colombia and Mexico have introduced similar initiatives.

Achieving a meaningful global climate agreement at next year’s United Nations Climate Change Conference (UNCCC) – one that advances the long-term vision of a climate-neutral world by 2050 – would substantially boost the potential to create high-quality green jobs. The alternative – continued growth of global CO2 emissions – would not only limit this potential; it would undermine economic output and, according to estimates by the International Labor Organization (ILO), reduce productivity by more than 7%, on average, worldwide.

Extreme weather events, which will increase in frequency and severity as global temperatures rise, are already taking their toll. Hurricane Katrina, which struck New Orleans in 2005, led to 40,000 job losses that year. Cyclone Sidr, which ravaged Bangladesh in 2007, disrupted several hundred thousand small businesses and adversely affected more than 560,000 jobs. In other words, climate action will not only create new jobs; it will also save existing ones.

To be sure, some job losses are inevitable, as carbon-intensive industries give way to more sustainable businesses. Managing these losses is integral to ensuring a “just transition” to a climate-neutral economy.

The good news is that the seven most highly polluting industries, which account for 80% of CO2 emissions, employ just 10% of the labor force. Job growth in the low-carbon economy can easily compensate for these losses.

Moreover, governments must initiate retraining and skills development to enable workers to take advantage of new employment opportunities in clean energy and natural-resource management. After all, creating jobs means little if the labor force is not equipped to fill them.

The fact that two of today’s most pervasive challenges – climate change and unemployment (especially among the young and the unskilled) – can be addressed simultaneously, with mutually reinforcing policies, leaves governments and international institutions with no excuse for inaction. The ILO and the UN climate convention recognize this, but they cannot do it alone.

By putting the planet on the path toward de-carbonization, world leaders meeting in New York for the UN climate summit this month and in Paris for the UNCCC next year can deliver a safer, healthier, and more prosperous world that provides millions with decent work opportunities. It is an opportunity that all should seize.

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Scottish "No" Vote Pushes S&P To New Record High

by Tyler Durden

So much for any Scottish referendum vote "surprise": the people came, they voted, and they decided to stay in the 307-year-old union by a far wider margin, some 55% to 45%, than most polls had forecast, even as 3.6 million votes, a record 85% turnout, expressed their opinion. The gloating began shortly thereafter, first and foremost by David Cameron who said "There can be no disputes, no re-runs, we have heard the settled will of the Scottish people." Queen Elizabeth II, who is at her Scottish castle in Balmoral, is expected to make a rare comment on Friday.

The loser was graceful: speaking in front of an image of a giant white on blue Scottish flag, nationalist leader Alex Salmond conceded defeat in Edinburgh. Salmond laced his admission of defeat with a warning to British politicians in London that they must respect their last minute promise of more powers for Scotland. "Scotland has by a majority decided not, at this stage, to become an independent country. I accept that verdict of the people and I call on all of Scotland to follow suit in accepting the democratic verdict of the people of Scotland," Salmond said.

Despite its loss, the Yes movement will be seen as a victory for the Scots. From Reuters:

Opinion polls showing a surge in Scottish separatist support in the two weeks leading up to the Sept. 18 vote prompted a rushed British pledge to grant more powers to Scotland, a step that has angered some English lawmakers in Westminster.

In an effort to deflate that anger, Cameron vowed to forge a new constitutional settlement that would grant Scotland the promised powers but also give greater control to England, Wales and Northern Ireland.

"Just as Scotland will vote separately in the Scottish parliament on their issues of tax, spending and welfare, so too England, as well as Wales and Northern Ireland should be able to vote on these issues," Cameron said.

"All this must take place, in tandem with and at the same pace as the settlement for Scotland."

Cast as a constitutional revolution, commentators said Cameron's pledge of more powers to the constituent parts of the United Kingdom was aimed at sedating 'the slumbering beast of English nationalism'.

Still, tonight's referendum is hardly the end of the question of Scottish independence:

While Scottish leaders promised to work together, Scots remained divided in joy and disappointment over the fate of their country. "Absolutely amazing," said unionist campaigner Stephen Stanners. "They shouted the loudest, so it made it seem like a majority. But we’re obviously the silent dignified majority. And we pushed it through. And it just shows that Scotland loves the UK and the UK loves Scotland."

But Calum Martin, a 21 year-old history student at Edinburgh University who voted for independence said the question of secession would return. "It’s a disappointing result but it sets the stage for going forward," Martin said. "As long as there are flaws, there will be calls for independence. You can’t put the genie back in the bottle once it’s out."

But while a No vote was where the smart betting money was ahead of the vote anyway, and is thus hardly a surprise, the most curious thing overnight was the complete roundtrip of cable, which was bought on the rumor and then sold off on the news, roundtripping by nearly 200 pips:

Perhaps even more surprising was the roundtrip in the USDJPY which also, like cable soared on the BOJ reduction in its assessment of the Japanese economy, only to retrace all gains.

In fact, the only thing that has not roundtripped are US equity futures, which however will be driven far more by the imminent break for trading of what several days ago we we dubbed the most important event of the week, far more relevant to "markets" than the Fed or the Scottish vote - the $168 billion BABA IPO, expected some time around 11 am, or possibly earlier if the underwriters want to start spending their commission early ahead of the weekend.

Finally, it is quad witching day, so watch those option pins. With volume already abysmally low, it literally takes oddlots to move the E-mini.

In summary, European shares rise, though are off earlier highs, with the real estate and telco sectors outperforming and tech, basic resources underperforming. Scotland rejected independence in referendum. The Spanish and German markets are the best-performing larger bourses, French the worst. The euro is weaker against the dollar. Spanish 10yr bond yields fall; Irish yields decline. Commodities little changed, with wheat, soybeans underperforming and Brent crude outperforming. U.S. leading index due later.

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Growing Older in Emerging Markets

by Tassos Stassopoulos

The rapidly aging demographic in developing countries is an important market for consumer companies. For investors, it’s imperative to understand why complex socioeconomic changes will affect spending patterns in unfamiliar ways as emerging markets mature.

It’s easy to overlook the aging trend in emerging markets. Countries like India and China are home to the world’s youngest populations in terms of size. Yet as birth rates decline and healthcare improves, older people will constitute a growing percentage of the population. In the top 12 emerging markets, the over-65 demographic is growing at an annual rate of approximately 3.7% (Display)—nearly double the rate in developed countries.

As they are now living longer, older people are likely to play an increasingly greater role in consumer spending growth in the coming years. According to our estimates, annual consumer spending in emerging markets will rise from $12 trillion in 2014 to $63 trillion in 2030—a $50 trillion increase. You might think that the sectors best positioned to benefit from this trend would be financials, leisure and healthcare. After all, in developed countries, older people are often seen as consumers of post-retirement wealth-management services, cruises, and expensive drugs to fight age-related diseases.

But we don’t think so. In our view, the developed-market experience isn’t a good guide to the consumer spending of older people in emerging markets, where rapid economic development is transforming labor and income trends.

Job Insecurity Hits the Middle Class

As part of our research on consumer spending in emerging markets over the past four years, we visited consumers in their homes in 13 emerging-market countries. We discovered that young people in emerging countries are quickly becoming better educated and more qualified than their elders—including those at the peak of their earning abilities. As a result, people over the age of 45—who constitute the rising middle classes—are increasingly losing their jobs and getting pushed back down to the bottom of the pyramid.

This explains why emerging-country workers are reaching their peak income levels at very young ages—often between 35 and 39—a decade earlier than their developed counterparts (Display). And the older workers who are now losing their jobs typically have little or no savings, so instead of living out their lives comfortably, they are falling through the social classes.

 

We believe that this will have a profound impact on the spending power—and preferences—of older people from Chile to China.

New Struggles for Older Workers

For example, last month we talked with Enrique, from the Mexican town of Santiago de Querétaro. At 52, he earns 70% less as a freelance medical rep than he earned as a mid-level executive when he was 45. Back then, he bought fashionable clothes for his kids on weekly trips to the US; his family often went to the movies and restaurants and enjoyed expensive summer beach holidays. But in 2006, Enrique lost his job to a younger candidate. Suddenly, he was in financial free fall.

Enrique regrets that he didn’t save enough during the good times. Retirement is a big challenge. Today, his spending priorities are focused on obtaining cheap generic drugs and good value, high-quality products.

He’s not an isolated case. Many of his peers are facing the same problems. And we have found similar situations across diverse emerging-market countries. Unlike in the past, a university degree no longer assures middle-aged workers a bright future, because socioeconomic development is creating a generation of younger people with comparable degrees and better English skills, who are often willing to work for less money.

Since people in emerging markets are likely to face financial insecurity as they grow older, luxury and leisure goods won’t be priorities. That’s why we think successful consumer companies will be those that understand how to grab a growing share of the older demographic by offering quality products at good value and services such as retirement insurance or cheaper healthcare. For investors, aging trends serve as a reminder that traditional research into company fundamentals must be complemented by an understanding of the underlying forces that are shaping the evolution of emerging markets.

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Europe’s Bargain

by Michael Spence

MILAN – In July, the European Commission published its sixth report on economic, social, and territorial cohesion (a term that can be roughly translated as equality and inclusiveness). The report lays out a plan for substantial investment – €450 billion ($583 billion) from three European Union funds – from 2014 to 2020. Given today’s difficult economic and fiscal conditions, where public-sector investment is likely to be crowded out in national budgets, this program represents a major commitment to growth-oriented public sector investment.

The EU’s cohesion strategy is admirable and smart. Whereas such investment in the past was heavily tilted toward physical infrastructure – particularly transport – the agenda has shifted to a more balanced set of targets, including human capital, employment, the economy’s knowledge and technology base, information technology, low-carbon growth, and governance.

That said, one can ask what the economic and social returns on these investments will be. True, sustaining high growth rates requires sustaining high levels of public investment, which increases the return to (and hence the levels of) private investment, in turn elevating output and employment. But public investment is only one component of successful growth strategies. It will do some good in all scenarios, but its impact will be much larger beyond the short term if other binding constraints are removed.

Three complementary issues seem crucial. One, mainly the province of the European Central Bank, involves price stability and the value of the euro. The second is fiscal, and the third is structural.

Inflation rates, now well below the ECB’s 2% annual target, are in the deflationary danger zone. Because deflation drives up the real burden of sovereign debt and public non-debt liabilities such as pension systems, its emergence would undermine the already fragile state of many countries’ public finances and kill growth.

In a post-crisis environment of aggressive and unconventional monetary policy in other advanced countries, the ECB’s less aggressive policies (owing to its more restrictive mandate) have resulted in an exchange rate that has damaged competitiveness and the growth potential of many eurozone economies’ tradable sectors. This is crucial, because most economies experienced pre-crisis growth patterns characterized by unsustainably high levels of domestic aggregate demand. So rebalancing requires shifting toward the tradable sector and external demand. A weakening euro will help.

The ECB understands this, and, without being explicit about it, is expanding its asset-purchase programs to elevate inflation and bring down the euro. ECB President Mario Draghi has been clear that restoring target inflation and weakening the currency is not a growth strategy. Difficult reforms are needed to put many national economies’ fiscal affairs in order and to increase their structural flexibility. The ECB cannot do it alone.

On the fiscal side, sovereign-debt levels are too high and still rising. But the bigger challenge is the unfunded non-debt liabilities in pension funds and social-security systems, which are estimated to be four times or more the size of sovereign debt. It is clearly necessary to implement credible plans to arrest the growth of these liabilities.

But these liabilities also have to be reduced, because they are already imposing a crushing fiscal burden, largely owing to rapid aging, with rising longevity a major contributor. The US has a similar problem, though it is more distant. A recent analysis for the US suggests that entitlements programs’ liabilities will hit the public budgets in about ten years. By contrast, in Italy, for example, with its less favorable demographics, they have already hit.

Growth would reduce this burden, but growth in the short and medium term is highly problematic. Inflation would reduce the real value of both debt and other non-indexed non-debt liabilities. But even controlled inflation at higher levels has been ruled out; again, the current risk is deflation.

Governments could raise taxes to cover a larger fraction of the required expenditures. But that is not likely to help growth, and it imposes the burden on the workforce and the young who are trying to enter it, a valuable subset of whom are mobile and could simply leave. Likewise, issuing more debt to cover the portion of liabilities coming due would merely shift the composition of liabilities without reducing them.

The only other alternative is direct reduction. For sovereign debt, that means default, which will happen only in extreme circumstances; for non-debt liabilities, it means changing systemic parameters – for example, increasing the retirement age – which is contentious and exceptionally difficult to do politically.

The third missing ingredient is structural flexibility, which is needed for two reasons. First, most advanced economies have maintained the unbalanced growth patterns that led to the global crisis in 2008. Restoring growth requires structural changes.

In the US, though growth remains well below potential, data suggest that about half of the recovery in growth has resulted from a shift in capital and labor to the tradable side of the economy, with shale gas providing a big boost. That is either not occurring or happening at a glacial pace in southern European economies, where structural rigidities in labor and services markets need to be addressed. The exception is Spain, which initiated labor-market reforms in late 2012. Perhaps as these reforms’ impact becomes more visible, reform momentum will increase in other countries.

Even without crisis-related imbalances, structural flexibility in all economies is necessary to adapt to the shifts caused by globalization and the labor-saving and skill-biased technological shifts associated with the rising value of digital capital. In the past 30 years, the global economy added 1.5 billion new connected workers in developing countries, with three billion new consumers in sight.

Digital technologies have eliminated millions of routine white- and blue-collar jobs, and we are rapidly entering the realm of cognitive-based employment. If investment in human capital is to keep up with the changing composition of employment, structural flexibility is needed.

Europe has a real chance to conclude a bargain: member countries implement fiscal and structural reforms in exchange for short-run relaxation of fiscal constraints – not to increase liabilities, but to focus on growth-oriented investments to jump-start sustained recovery. Private investors would take note, accelerating the recovery process. The challenge now is to seize the opportunity.

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Un’unica via per la ripresa dell’Eurozona

by Francesco Giavazzi e Guido Tabellini

L’affermazione che una politica fiscale anticiclica accompagnata da quantitative easing sia economicamente destabilizzante non è giustificata alla luce delle esperienze di Stati Uniti e Regno Unito. Resta l’unica strategia con più probabilità di successo nella situazione attuale.

POLITICHE FISCALI ANTI-CICLICHE: STABILIZZANTI O DESTABILIZZANTI?

In un recente articolo su lavoce.info, Roberto Perotti scrive di non essere d’accordo con la nostra proposta di una espansione monetaria e fiscale coordinate nell’area dell’euro, attuate tramite una temporanea riduzione delle tasse finanziata con emissione di moneta. Robrrto Perotti non mette in discussione l’efficacia della proposta nello stimolare la domanda aggregata. Ma sostiene che un’espansione temporanea del deficit di bilancio dell’ordine del 5 per cento del Pil non possa essere riassorbita in modo credibile attraverso un piano di tagli futuri della spesa. E afferma che riassorbire un taglio delle tasse di oggi attraverso aumenti di tasse future sarebbe destabilizzante, economicamente e politicamente.
Le politiche avviate negli Stati Uniti e nel Regno Unito durante la grande recessione contraddicono la seconda parte dell’argomentazione di Perotti, come mostra la tavola qui sotto. Gli Stati Uniti hanno fatto crescere il loro deficit di bilancio di quasi il 7 per cento del Pil in un anno, attraverso una combinazione di maggiori spese e minori entrate. Meno della metà di questo aumento è dovuta all’effetto degli stabilizzatori fiscali, il resto riflette scelte politiche discrezionali.
Negli anni successivi questa espansione del bilancio federale e’ stats riassorbita. In parte perché l’aumento del deficit era riconducibile a misure “una tantum, adottate per salvare alcune istituzioni finanziarie; in parte, il riequilibrio è avvenuto in modo automatico con la ripresa dell’economia;  e in parte è stato ottenuto attraverso cambiamenti nella politica di bilancio, come ad esempio il “Sequester” del 2013. Al netto degli effetti degli stabilizzatori automatici, le spese federali si sono ridotte di più del 2,5 percento del Pil tra il punto più basso del ciclo economico e oggi, mentre le entrare federali (sempre al netto degli stabilizzatori automatici) sono cresciute di circa il 3 per cento del Pil durante lo stesso periodo (fonte: Congressional Budget Office).
Nel Regno Unito l’espansione del deficit è stata simile a quella degli Stati Uniti: + 6,4 per cento in un solo anno, anche in questo caso ottenuta attraverso una combinazione di maggiore spesa e minori entrate fiscali, e per i due terzi dovuta a decisioni di policy. L’espansione fiscale è stata poi completamente riassorbita nel periodo 2010-2013, con circa metà della contrazione (56 per cento) dovuta a misure di policy, quasi interamente sul lato della spesa.
Nell’Eurozona l’espansione fiscale del 2008-2009 è stata minore – con il disavanzo complessivo dell’area che ha registrato un aumento del 4,2 per cento del Pil, circa due terzi di Stati Uniti e Regno Unito. Metà di questa espansione è stata ottenuta attraverso misure di policy. Come nel Regno Unito, l’espansione fiscale è stata in seguito completamente riassorbita, ma con due differenze significative. Le misure discrezionali prese per realizzare la contrazione sono state di un ordine di grandezza doppio rispetto a quelle che hanno accompagnato l’espansione: una contrazione del 4 per cento del Pil nel periodo 2010-2014 rispetto a una espansione discrezionale pari al 2 per cento del Pil nel 2008-2009. Ma quello che è ancora più importante è che lo stimolo di politica fiscale è stato pro-ciclico, in quanto è stato attuato nel mezzo della crisi di debito sovrano che ha ristretto il credito e aumentato l’incertezza economica nel Sud dell’Europa. Inoltre, in molti paesi ha preso solo la forma di un’impennata delle tasse. Il risultato sono stati due anni di recessione che hanno eroso parte dei miglioramenti di bilancio.
C’è un consenso quasi unanime tra gli economisti sul fatto che le politiche anti-cicliche messe in atto negli Stati Uniti e nel Regno Unito, accompagnate da un eccezionale allentamento monetario, abbiano contribuito a stabilizzare le fluttuazioni cicliche e spieghino la ripresa molto più veloce di queste economie rispetto all’Eurozona (sebbene l’epicentro della crisi finanziaria sia stato proprio nei paesi anglosassoni e non nell’Europa continentale). L’affermazione che, nelle condizioni attuali, una politica fiscale anticiclica accompagnata da quantitative easing sia economicamente destabilizzante è quindi difficile da comprendere, anche se fosse realizzata interamente attraverso riduzioni di imposte non accompagnate da tagli di spesa futuri.
Come si è visto, nei paesi anglosasoni il ritorno della crescita ha contribuito in maniera rilevante a riassorbire i disavanzi. E questo è esattamente il punto: accadrebbe lo stesso anche nell’Eurozona.
Tra il 2009 e il 2013, dopo che l’output gap nell’Eurozona è passato dal +3,2 per cento al -3 per cento, il saldo di bilancio complessivo aggiustato per il ciclo si è ridotto di circa 4 punti percentuali di Pil. In alcuni paesi, la restrizione pro-ciclica è avvenuta principalmente attraverso tagli alla spese (in Spagna in particolare) ed è stata più innocua. Altrove, come in Italia, si è basata interamente su un inasprimento delle tasse e ha prodotto una grave e duratura recessione. Parte del taglio alle tasse che proponiamo semplicemente cancellerebbe gli aumenti pro-ciclici delle imposte varati in questi paesi al culmine della crisi del debito sovrano. Quando redditi e prezzi cominceranno di nuovo a salire, una parte dell’espansione di bilancio si ridurrà automaticamente senza la necessità di alcun intervento, come è avvenuto negli Usa e nel Regno Unito. Se l’elasticità del bilancio al ciclo fosse simmetrica (non è necessariamente così) e utilizzando i numeri del deterioramento di bilancio sperimentato nell’area euro tra il 2007 e il 2009 (un calo ciclico del bilancio, cioe’ al netto degli interventi, del 2 per cento del Pil, a fronte di un peggioramento dell’output gap del 6,6 per cento), un azzeramento dell’output gap dal livello attuale (-3,8 per cento alla fine del 2013) migliorerebbe automaticamente il deficit dell’Eurozona dell’1,2 per cento del Pil, un numero relativamente piccolo non trascurabile.

AZZARDO MORALE E CREDIBILITÀ DI FUTURI TAGLI ALLA SPESA

Roberto Perotti ripropone inoltre la tesi secondo la quale politiche monetarie e fiscali non stringenti creerebbero un azzardo morale, in particolare nei paesi del Sud Europa. Non c’è dubbio che i governi cdi Italia e Francia potrebbero non avere la volontà politica, o la maggioranza in Parlamento, per portare avanti le importanti riforme strutturali che sarebbero nell’interesse di lungo periodo di questi paesi. Ma non è per niente certo che prolungare la depressione sia la ricetta migliore per favorire una maggiore disponibilità a realizzare le riforme. Anzi, è molto probabile che sia vero il contrario, per due motivi. Primo, una stagnazione ancor più lunga e un più alto tasso di disoccupazione possono solo rafforzare i partiti più radicali e populisti in tutta Europa. La recente crescita del Movimento 5Stelle in Italia e dei sentimenti anti-euro in Francia non sono avvenuti per caso, sono la conseguenza dei fallimenti economici del progetto europeo. Secondo, l’opposizione politica ai tagli alla spesa e alle riforme strutturali tendono a essere più forti quando l’economia è depressa, perché gli elettori percepiscono tali misure come veicoli di un ulteriore abbassamento della domanda aggregata e di un aumento dei licenziamenti.
La sequenza corretta, dal punto di vista sia economico che politico, è dunque una sostituzione intertemporale: tagli alle tasse espansivi ora per far ripartire la crescita e tagli alla spesa via via che l’economia si riprende. Per dare credibilità alle misure future, i tagli di spesa potrebbero essere votati subito dal Parlamento, rimandandone però avanti nel tempo l’entrata in vigore, e con un impegno di legge (una clausola di salvaguardia) ad alzare le tasse di un ammontare corrispondente se i tagli alla spesa dovessero essere abbandonati.

ESISTE UNA STRATEGIA ALTERNATIVA?

La strategia alternativa suggerita da Perotti — passi incrementali e simultanei per ridurre spesa e tassazione allo stesso tempo –  può funzionare in tempi normali, ma è politicamente troppo difficile da percorrere nelle attuali circostanze. Inoltre, e più importante, non coglie assolutamente il punto centrale: in questo momento abbiamo bisogno di un importante sforzo coordinato per far ripartire la dimanda aggrga nell’Eurozona. Non si può lasciare questo compito alla sola Bce, pena il fallimento.
Il nuovo presidente della Commissione europea, Jean-Claude Junker, ha proposto di aumentare gli investimenti pubblici per un totale cumulato di 300 miliardi di euro nei prossimi anni. Tuttavia, è probabile che anche questa strategia non riesca nell’intento, perché la spinta alla domanda aggregata arriverebbe troppo tardi e perché le risorse sono troppo scarse per fare la differenza (il Ministro delle finanse della Germania, Schauble, ha già ridotto la cifra totale, lasciando intendere che la somma complessiva dovrebbe includere i fondi strutturali e dovrebbe essere finanziata anche dal settore privato).
L’intervento di Mario Draghi a Jackson Hole, il suo riconoscimento che la crescita in Europa è vincolata dalla carenza di domanda, che la politica appropriata per allentare i vincoli è uno sforzo coordinato di politica monetaria e fiscale, e che la politica monetaria può giocare solo il ruolo di accompagnare la crescita, ma può difficilmente esserne il motore, ha cambiato il panorama politico. Se i governi dell’area euro non colgono questa opportunità e continuano a cercare scappatoie, passeranno alla storia come i responsabili della distruzione dello sforzo, che dura da sessanta anni, per costruire un continente senza guerre. Sfortunatamente sembrano proprio determinati a farlo.

Tabella 1a: espansione fiscale negli Usa durante la grande recessione

tab_giav1

Fonte: 2014 Economic Report of the US President, I numeri del 2014 sono previsioni. La fonte per il deficit aggiustato per il ciclo è il Congressional Budget Office e il numero si riferisce allanno fiscale (anziché solare).

Tabella 1b: espansione fiscale nel Regno Unito durante la grande recessione

tab_giav2

General government. Fonte: Commissione europea, Cyclical adjustment of budget balances, Spring 2014. I dati per 2014 sono previsioni.

Tabella 1c: Espansione fiscale nellarea euro durante la grande recessione

tab_giav3

Area euro (18 paesi), general government. Fonte: Commissione europea, Cyclical adjustment of budget balances, Spring 2014. I dati per il 2014 sono previsioni.

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Alibaba Prices High, Set For Turbulent Trading

by Doug Young

With Alibaba's (Pending:BABA) blockbuster IPO nearly in the history books, I wanted to take this opportunity to explore what's ahead for the company as it gets set to break numerous records with its New York listing. One good indicator of what lies ahead would be the performance for shares of other Chinese tech firms that have listed over the last 12 months. But such comparisons have limited value, since Alibaba is clearly in a far different class from all these other companies, following a pricing of its shares that makes it more valuable than such global corporate giants as Amazon (NASDAQ:AMZN) and Disney (NYSE:DIS).

Let's begin this final Alibaba posting before its trading debut with a summary of the latest developments, led by the company's IPO pricing. Alibaba finally priced its American Depositary Shares (ADSs) at $68 apiece, higher than its original range of $60-$66, after meeting with extremely strong demand. (English article) At that price the company will raise $21.8 billion, and will get an initial valuation of $168 billion. That figure will make Alibaba China's most valuable Internet company, taking over the top spot from former leader Tencent (OTCPK:TCEHY), which is valued at nearly $150 billion.

Let's quickly review some of the other records that Alibaba will break, starting with the biggest Internet IPO of all time. That record was formerly held by Facebook (NASDAQ:FB), which raised $16 billion in its Nasdaq IPO of 2012. Alibaba's total fund raising still puts it behind the world's biggest IPO of all time, made by the Agricultural Bank of China when it raised $22.1 billion from a dual listing in Hong Kong and Shanghai in 2010. But if Alibaba's underwriters exercise a number of overallotment options, which looks likely, its IPO could easily become the biggest of all time.

Now that we've gotten all the facts out of the way, let's look at what's ahead for Alibaba in its trading debut, and also what we can expect over the next year as its shares begin daily trading and some of the hype starts to fade. I've previously said the shares are likely to get a nice pop in their trading debut and could rise in the 8-15 percent range, mostly due to the residual effects of the nonstop hype that has accompanied this blockbuster deal.

To predict how shares might perform over the next year, it's helpful to look at how some of Alibaba's peers have fared since making similar listings over the last 12 months. The company's 2 closest peers in that regard are JD.com (NASDAQ:JD), its closest domestic rival in e-commerce, and Jumei International (NYSE:JMEI), an online cosmetics seller. Jumei has been relatively lackluster since its offering in May, up just 15 percent, while JD.com has risen by a more impressive 55 percent.

Other new e-commerce-related Internet listings have fared quite well. Shares of online classifieds site 58.com (NYSE:WUBA) and car listings site Autohome (NYSE:ATHM) have both more than doubled since their IPOs late last year. Recently listed shares of social networking giant Weibo (NASDAQ:WB) have been more mediocre, up just 25 percent since their trading debut in April.

Of course many of these frothy gains are in the past, and thus the sentiment they reflect has already been included in Alibaba's strong recent pricing. All that said, there's still probably a bit of froth in the market after months of hype surrounding the Alibaba deal, meaning the stock could perform reasonably well in its first few weeks of trading. After that I would expect the buzz to fade substantially, meaning shares could trade sideways and even face downward pressure over the next year until they approach valuation levels similar to those for Tencent.

Bottom line: Alibaba's shares will perform well initially due to lingering hype from their IPO, but will stagnate and move downward over the next year until they value the company at levels similar to Tencent.

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The Next Crisis

by Golem XIV

The present global financial ‘crisis’ began in 2007-8. It is not nearly over. And that simple fact is a problem. Not because of the life-choking misery it inflicts on the lives of millions who had no part in its creation, but because the chances of another crisis beginning before this one ends, is increasing. What ‘tools’ - those famous tools the central bankers are always telling us they have – will our dear leaders use to tackle a new crisis when all those tools are already being used to little or no positive effect on this one?

I think it is worth remembering how many financial crises we have had since the economy became globally interconnected and since we began the deregulation of finance and the roll back of all Great Depression safeguards under Reagan and Clinton.  It’s also worth noticing that the causes and pattern of the various crises have an unpleasant ring of familiarity about them – as in – the bank lobbyists making sure nothing gets learned and nothing gets changed.

In the 80′s there were four financial crises: The Latin American crisis caused by those countries borrowing and the global banks agreeing to lend them far too much (too much lending to people who couldn’t afford it – check), the American Savings and Loan (S&L) crisis when American S&L’s made too many bad, long-term and leveraged loans relying on rolling over and over short-term loans to fund it all (reliance on short-term liquidity to cover massive loan books of dodgy loans – check) , and the 1987 Stock market crash when the system of global debt had its first major modern global paroxysm (systemic contagion – check) . And before the dust had even settled from that we had the Junk Bond collapse ( Too much junk – check. $400 billion in junk bonds were issued in 2013 alone). In the 90s there were two more crises (if one ignores the Mexican currency devaluation): The Asia currency crisis (a replay of the Latin Crisis with the same global banks doing the same lending to different corrupt or stupid leaders who agreed to loans on behalf of  people who couldn’t afford to pay back – ie nothing learned at all  - check) and the Dot Com bubble (valuations way above reality fueled by cheap money and lax lending – check). I think that’s most of the kinds of greed fueled idiocy accounted for.

If you line up the S&L, the Junk Bond and the Dot Com bubble, America has had a major home-brewed financial crisis every ten years. If you consider that none of these events happened in isolation nor limited their effects to the country of origin then we have to conclude that the global financial system is prone to crises. You can, if you see the world through resolutely libertarian glasses, blame everything on interfering governments – it matters little. The fact remains that the system as is, is unstable and run by the myopic, the greedy and the corrupt. Where they draw their salary, which side of the revolving door they happen to be on, on any day seems to me irrelevant. The worst of them don’t understand and are easily bought. The best have no concern for anyone or anything beyond their next bonus.

And here we are being led by them.

Of course saying another crisis is coming is like saying we are due a large earthquake in Southern California. True, but it doesn’t mean one is going to happen tomorrow. What I think it does mean is that we should be thinking what our leaders, what the people they work for – the global overclass – might already have in mind or have already put in place, for what they want done next time. I think it would be foolish to imagine they have not thought about it and are not putting in place the things which will close off some futures and force us into others that they prefer. They have so very much to lose and so very much more they want to gain.

The next crisis.

To know what the next crisis might look like we first have to look at the conditions today that will form its starting point. Necessarily everything from here on is speculation, nevertheless even when we can’t know what people will do and what ‘events’ will overtake us, we can, I think,  discern quite a bit of the general topography, the landscape, of the future.

The first thing we should bear in mind is that however it starts, the next crisis will be another debt-crisis like the current one. This is because debt is now the global currency and global financing mechanism. Once it starts, however, one thing will be very different from the last time – this time nearly all nations are already heavily indebted. Last time they were not. And this is what changes everything for the over-class.

Contrary to the endless misinformation repeated at every juncture by austerity politicians and bankers alike, the debt load of most nations at the beginning of the present crisis was not already out of control before the banks blew up.

sovereign debt levels

The green bars are debt as percentage of GDP before the bank bail outs and the blue bars are after. These are official Eurostat figures. Notice Ireland. Its debt to GDP was down at 27%.  The ONLY thing that altered between 2007 and 2010 was the bank bails outs. Ireland’s ENTIRE debt problem is due to bailing out private banks and their bond holders. Britain’s debt almost doubled and again the ONLY thing that happened was bailing out the banks. The government claims that UK public debt was out of control due to spending on public services is just WRONG. UK government debt against GDP had not gone up in 7 years. Then when we bailed out the banks it nearly doubled. That is the fact as opposed to the propaganda of what happened and why.

If you look a little more closely into the figures for government debt levels in Europe between 2000 and 2010 the fact is that all European nations apart from Portugal were either reducing their debt-to-GDP level or at least not allowing it to grow. Most of Europe was reducing government debt to quite manageable and historically low levels. Ireland’s debt was very low (27%). Take a good long look at those two bars for Ireland. Even Spain was bringing in more in tax than it was spending. Don’t take my word for it look at the figures yourself. Almost  every European country was keeping debt to GDP even or going down – before the banks were bailed out that is. The exceptions, of course, were Greece and Italy whose debt was already very high even before they bailed out their banks.

The sudden explosion of European sovereign debt is the direct and indisputable result of all our political parties deciding they would safeguard their mates’ and their own personal wealth (it is the top 10% who hold the bulk of their wealth in the financial products which would be destroyed in a bank collapse. NOT the rest of us!) by bailing out the private banks and piling their unpaid debts on to the public purse.

So whatever the trigger of the next crisis may be, they know any solution which saves the wealth and power of the over-class will have to involve piling new, private-bank bad-debts on to already indebted sovereigns and that, our leaders must be keenly aware, will not be easy to force on an already angry public. They know a whole range of the assurances they might like to give us about what must be done when the next crisis hits and how those things will undoubtably save us, will not be so easy to shove down people’s throats.

“So what,” I can hear the 1% saying, “can we do?”

Here are some thoughts on what I think they can do, will do, are already begining to do and WHY they are doing them.

The over-arching thought that I have, which shapes everything from here on, is that this crisis is no longer primarily financial; it is now political. Any solution, no matter for whose benefit, is beyond the scope of financial ‘reform’ but will depend on radical political change. In my opinion, the era of reformist politics is over. The questions are:  radical change in which political direction? in whose hands? and for whose benefit?

At the moment, I believe the radical thinking is almost all being done on the 1%’s side. They may talk about fixing, but what I think they mean is changing. When Obama spoke of change, he meant it. Just not primarily for you. The 1% are not stupid. They see the need for change and intend to control it.

I think one of the cleverset things the 1% have done over the last few years is the way they have created a relentlless public discourse, via their paid political front-men and women and their media empires, to insist on the need to ‘fix’ and protect the system, and the extreme danger to us all  should the system not be ‘saved’. This has served as a perfect cover for making sure that not enough people have noticed that the system is, in fact, being gutted and replaced by something that better serves the interests of the 1%. We have not been fixing the banks, we have been feeding them.

So while the 1% are thinking ahead, too many of the 99% are still like rabbits in the headlights, mesmerized and paralysed. They have been told over and over that any radical change to our present financial and political system is impossible, and if tried, would only bring disaster upon us. The 1%, on the other hand, see clearly that the present system will bring disaster upon them if it is not changed radically. They can see that it must be almost done away with entirely – in all but name. The important thing for them is that the direction of radical change benefit them and that the 99% not even realise that it is happening.

And so far it’s working – just. Just enough people continue, if grudgingly, to take refuge in a moribund political system made of parties and theories which date back to the Victorian age.  The temporary triumph of the 1% is that despite the fact that no one would drive a Victorian car, nor wear Victorian shoes or clothes, they somehow feel there’s no choice but to rely on Victorian political institutions, parties and ideas.  The good news is that the number who really believe this is dwindling and most of those who do, do so out of fear not faith. Which is why our present, 1% controlled politics, is increasingly about engendering fear rather than inspiring faith.

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On The Ambiguity Of The Fed's Dot Plot

by Nick Colas

In the Q&A period during yesterday’s Federal Reserve Chair press conference, Janet Yellen was careful to describe the projections made by Fed officials on future interest rate policy as point estimates.  The implicit caveat here is that every “Dot” on the Fed’s chart of expected future Fed Funds rates carries its own confidence interval – a statistical range with the dot at the center. Today we take Chair Yellen’s observation to heart, and ponder what range (rather than simple average) of potential future rates is most likely.

For example, the average projection for 2015 year-end Fed Funds is 1.27%, but the standard deviation of the 17 estimates that make up that mean is 0.71. Recall your college statistics: that means that a range of 0 to 2.7% covers 95% of the likely outcomes for Fed Funds by the end of next year. Based on this math, it isn’t until 2016 that an increase to Fed Funds becomes a statistical certainty, with a 2.7% mean estimate and a range of 0.75 – 4.7% Fed Funds at a 0.98 standard deviation.

Bottom line: forget the averages - markets actually aren’t far off the Fed’s estimates – they’re just shading their bets to the lower end of the curve.

*  *  *

Market sage and Yankee great Yogi Berra said it best: “It’s tough to make predictions, especially about the future.” He would have hated working at the Federal Reserve – or Wall Street, for that matter – where forecasting is an important part of the job.  At the same time both baseball and market projections do have one thing in common: it’s more about your averages than any specific at-bat or play.  Even the best traders on the Street seldom have win ratios better than 60%.  And Yogi “Only” had a .285 batting average over his career at the Yankees and Mets.

All that is worth keeping in mind as you look at the projections made by Federal Reserve officials for where Fed Funds will be at the end of 2015, 2016,  2017, and the longer run.  This is the now-famous “Dot Plot” chart that got so much attention at today’s press conference with Fed Chair Janet Yellen.  There’s a link to the document at the end of this note, but the basics are as follows:

The Federal Reserve regularly surveys members of the Federal Open Market Committee on their opinions regarding “Appropriate monetary policy in the future”. The Fed defines this as “The future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her interpretation of the Federal Reserve’s dual objectives of maximum employment and stable prices.”  The information is part of the central bank’s “Summary of Economic Projections”, or SEP for short.

One of the more interesting nuances that Chair Yellen highlighted in her Q&A session with reporters today was the need to think about such projections as merely a point along a continuum.  An estimate of 1% Fed Funds at the end of 2015, for example, did not include how certain the respondent actually was in making that projection. That’s an important point, for how valuable is an estimate of 2 percent if the respondent could also tell you that they really thought the range was zero to 4 percent?

The capital markets, however, do tend to focus their analysis on the average of these estimates. Today’s Fed dot plot, for example, showed a mean estimate for year-end 2015 Fed Funds of 1.27%, up from the average of 1.2% that the Fed published in June. For 2016, the average rose to 2.68% from June’s 2.52%.  Longer dated bonds like the U.S. 10-year Treasury sold off after the Fed release, closing the day at a yield of 2.60%, up from the 2.56% level right before the release. The change in the Dot Plot seemed to play a role in that move.

Taking Chair Yellen’s advice to heart, we got to wondering: just how much certainty does the Dot Plot actually express?  To assess that, we ran the standard deviation for each year’s projections: 2015, 2016, 2017, and what the Fed calls the “Longer run”.  A few points here:

If you want 95% certainty that the Fed will raise interest rates, then 2015’s estimates in the Dot Plot will not provide that level of conviction. Here’s the problem in a nutshell. The mean estimate for the 17 projections in the SEP is for Fed Funds to end next year at 1.27%.  At the same time, the standard deviation of those estimates is 0.71.

Recall your college statistics: in a normally distributed population, you need 2 standard deviations on either side of the mean to cover 95% of the dataset.  In this case, that gives us a range of negative 15 basis points (essentially zero) to positive 2.69%. In other words, Fed Funds could stay at zero for another year and still be consistent with the probabilities expressed by the Fed’s Dot Plot.

The story changes for year-end 2016, where a similar statistical analysis shows that the FOMC absolutely believes Fed Funds will be at least 74 basis points. The math here: a mean observation of 2.70% for Fed Funds, and a standard deviation of the Fed’s estimates of 0.98.  The same holds true for 2017, where Fed Funds should be at least 2.32% (mean of 3.54, standard deviation of 0.61).

Going out to the FOMC’s “Longer run” projections, the average here is 3.79% and a quite small 0.26 standard deviation. That’s a much higher degree of certainty than the 2015-2017 forecasts, indicating that the FOMC does have a lot of conviction over where they would like to see rates normalize. One odd historical point: the year end 2006 Fed Funds rate was 5.25%, and 4.25% in December 2005. Why doesn’t the FOMC think these (higher) rates are more appropriate than the lower point estimates for retarding the advancement of unwelcomed developments like asset bubbles?

This math provides an alternative explanation for another question posed in the press conference yesterday, highlighting a paper out of the San Francisco Fed (Chair Yellen’s “alma mater”). Essentially, the problem is this: why does the public (as expressed in the prices for financial assets, for example) “Expect a more accommodative policy than Federal Open Market Committee participants”?

Our statistical analysis shows one possible answer: the point estimates in the FOMC’s Dot Plot yield an artificial accuracy than markets and the public understand is actually a bit fuzzier than what the simple average shows. It’s not that asset prices are at real loggerheads with the FOMC. Rather they are handicapping the possibility that the Fed’s projections will change – modestly and in line with statistical ranges – downward over the course of the next 12 months.

In summary, the Fed’s Dot Plot may look like a precise set of forecasts, with a series of purposeful markings meant to portray certainty and conviction. The math, however, says something else entirely.  Ambiguity is part of life, either as a central banker or investor.  As Yogi once said while giving directions to his house: “When you come to a fork in the road, take it.”

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IMF urges labour reform as cuts Italy growth forecast

 

Milan (AFP) - Italy's government must overhaul its labour market to kick-start its economy, which is set to shrink for the third year running in 2014, the International Monetary Fund said on Thursday.

Gross domestic product is expected to contract 0.1 percent, the Washington-based fund said in a report, cutting its previous forecast that Italy's economy would expand by 0.3 percent.

Unemployment is set to average a record 12.6 percent, the IMF predicted, urging Rome of the need to push through planned changes to how employment contracts are structured.

"Prime Minister Renzi has outlined a bold reform agenda. Firm implementation is now essential to create jobs, increase productivity and lift potential growth," the IMF said in a statement.

Italy's premier Matteo Renzi has made overhauling labour rules a cornerstone of his efforts to revive the country's ailing economy, one of the most sluggish and indebted in the eurozone.

But his ability to turn around the bloc's third-largest economy, which fell back into recession in the second quarter, has been thrown into doubt as he has struggled to push reforms through parliament.

Finance Minister Pier Carlo Padoan this week was forced to admit that "it is possible" Italy's economy may shrink again this year after three years of painful contraction.

Ratings agency Standard & Poor's on Monday warned that the delays to structural reforms "have failed to improve the confidence of the business community and investors" in Italy.

Weak growth is also being felt in the government's coffers. Public debt, already the second-highest in the eurozone after Greece, is set to expand to 136.4 percent, from 132.6 percent in 2013, the IMF said.

The fund was more optimistic for the future, however, predicting Italy's economy will rebound to growth of 1.1 percent next year, increasing to 1.3 percent in 2016.

Still, it warned that broader risks remain substantial, particularly the conflict in Ukraine, which has seen Brussels impose sanctions on one of Italy's top trading partners, Russia.

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