Prieur’s readings (November 16, 2009)
This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.
• Jennifer Hughes (Financial Times): Visibility improved but storms may lie ahead, November 13, 2008.
The fog is beginning to lift. All year executives, analysts and investors have talked of a “lack of visibility” on the outlook for the economy, earnings and financial markets. By “visibility” they are in essence complaining about the uncertainty that clouds all forecasts all the time, but which we had increasingly managed to ignore during such a steady run of good times. Investors are becoming more confident that the fog is lifting, but that does not necessarily mean there is sunshine waiting just behind it.
• Doug Kass (TheStreet.com): Market ignorance is bliss, November 12, 2009.
I do believe with some certainty that the market’s vulnerability to disappointment and/or exogenous events has been elevated and that many apparent warning signs – for instance, a 17.5% underemployment rate, weak consumer and small business (National Federation of Independent Business) sentiment, the unrelenting increase in the price of gold, a steadily declining U.S. dollar, the specter of cost-push inflation from higher commodity prices and so forth – are too comfortably being ignored or are being rationalized away in a tide of rising world stock prices. I now see a far less attractive risk/reward ratio than at any time in 2009 – maybe longer.
• Steve Lodge (Financial Times): Super-rich buy gold and sell hedge funds, November 13, 2009.
The investment preferences of the world’s wealthiest families have shifted significantly in favour of gold and other commodities and away from hedge funds in the wake of the financial crisis, according to a survey of family offices and advisers of the super-rich.
• Matt Wittaker (The Wall Street Journal): Speculative investment in gold seen broadening, November 13, 2009.
A broad spectrum of participants are buying up gold as it sits at record highs, all hoping to add a little glitz to their portfolio. To be sure, some of the gold demand is from jewelry fabricators or buy-and-hold type investors such as those who purchase small bars and coins. But a large chunk is also coming from those who move in and out of the market more often. The sharp gains in gold – up about 26% on the year – have made it all the more alluring to these speculators who do not need physical metal and are making short-term bets on price direction.
• George Will (The Washington Post): Gambling with the dollar, November 12, 2009.
Perhaps Federal Reserve Chairman Ben Bernanke knows how to sop up the trillions of new dollars before inflation ignites. But will he? He knows about “the recession within the Depression” that occurred in 1937, perhaps as a result of premature confidence in a recovery. Furthermore, he may feel duty-bound to try to use loose money to help reduce unemployment. But although the Fed has suddenly assumed stupendous powers, it still has one sovereign duty – to preserve the currency as a store of value.
• Randall Forsyth (Barron’s): Betting your dollar is bottoming, November 13, 2009.
Charts, for once, support Treasury Secretary’s declaration in favor of a stronger US currency.
• Mu Xuequan (XinhuaNet): China not to let yuan gain in short term: experts, November 13, 2009.
China would not let the yuan gain against the U.S. dollar in the short term, experts said here Thursday when commenting on the latest quarterly report of China’s central bank. People’s Bank of China (PBOC), the central bank, said Wednesday in its quarterly report of monetary policy, for the first time, that the bank would improve the mechanism of the exchange rate determination “based on international capital flows and movements in major currencies”.
• Frederick Sheehan (Welling@Weeden): Dark vision – the coming collapse of the municipal bond market, September 29, 2009.
This paper is directed to traditional municipal bondholders, those who hold bonds primarily to receive tax-exempt, steady income. That investor generally holds municipal bonds expecting little change in the prices of these securities. That investor welcomes capital gains, but that is a secondary objective. Such investors do not own municipal bonds as speculative securities. They do not get paid enough to do so. They buy municipal bonds for the income, not for appreciation. Today, no matter what one’s reason for owning municipal bonds, these are speculative investments.
• Meredith Whitney Advisory Group: That sucking sound continues with consumer credit lines, November 12, 2009.
Nothing is more important to the revival in consumer spending than the consumer’s ability to access credit. Credit has, for better or worse, become a crucial vehicle enabling consumer spend. 90% of American credit card holders revolve credit at least once a year, and we estimate 50% of American credit card holders revolve credit every month. Undeniably, US consumers are using their credit cards as a cash flow management vehicle. Today, we continue to believe that by 2010, banks will cut over 50% of credit card lines from peak levels. What this means for the US consumer is as follows: less liquidity, lower spending, and higher default rates for banks.
• Paul Krugman (The New York Times): Free to lose, November 12, 2009.
Here in America, the philosophy behind jobs policy can be summarized as “if you grow it, they will come.” That is, we don’t really have a jobs policy: we have a GDP policy. The theory is that by stimulating overall spending we can make GDP grow faster, and this will induce companies to stop firing and resume hiring. The alternative would be policies that address the job issue more directly. We could, for example, have New-Deal-style employment programs.
• Peter Cohan (Daily Finance): A decade after Glass-Steagall’s repeal, it’s time to reverse Sandy Weill’s legacy, November 12, 2009.
At this point, the financial system has become far too complicated to go back to the days where simply separating investment and commercial banking could prevent financial Armageddon. But we certainly need to return to the spirit in which Glass-Steagall was passed back in 1933 – the desire to keep Wall Street from ruining the world.
• Jamie Dimon (The Washington Post): No more “too big to fail”, November 13, 2009.
Our company, J.P. Morgan Chase, employs more than 220,000 people, serves well over 100 million customers, lends hundreds of millions of dollars each day and has operations in nearly 100 countries. And if some unforeseen circumstance should put this firm at risk of collapse, I believe we should be allowed to fail.
• Martin Hutchinson (Asia Times): Which big country will default first?, November 11, 2009.
Of the world’s six largest economies, three have budget and public debt positions that if allowed to fester will push those nations into bankruptcy (the seventh largest, Italy, also has a budget and debt position that is highly vulnerable, but its problems appear chronic rather than acute). Given the proclivities of modern politicians for delaying pain and avoiding problems, it is likely that festering is just what those positions will do. So which major country, the United States, Japan or Britain, will default first on its foreign debt?
• Lindsay Whipp and Gillian Tett (Financial Times): JGB flood looms for Japan, November 12, 2009.
In recent weeks, a storm of debate has erupted among asset managers from New York to London about the sustainability of Japan’s fiscal position – and, above all, about whether investors will absorb the flood of JGBs that is likely to hit the market in coming years.
• Kelly Crow (The Wall Street Journal): The art market shows signs of life, November 13, 2009.
The US art market appears to be on the mend. The major fall art auctions may not have sold everything on offer, but collectors showed a renewed willingness to bid up top examples of artists’ work. Dealers also said inflation fears and expectations of higher bonuses in the financial markets stoked strong bidding.
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