BMO notes that RMB deposits held in Korea have soared from basically zero to a little more than $20 billion over the past year:
One possible explanation for this phenomenon is that Korean corporations that earn RMB from trading with China can earn about 1 percentage point more on their cash if it is kept in yuan than if it is converted into won.
Whatever the reason, the growth in RMB deposits means that it is now the second most important source of foreign currency deposits in the Korean banking system (after US dollars), although it should be noted that these fx deposits are tiny relative to the overall banking system.
Low rates aren’t good for all stocks. Companies with big (and underfunded) defined benefit pension obligations underperform their sector when interest rates fall. Via Goldman:
Pension funds are net short duration as their liabilities often have a longer duration than their assets. As a result, their solvency, which is the value of their assets relative to their liabilities, tends to decline with bond yields and they can become underfunded…While there are other factors (e.g. inflation and mortality assumptions) that affect the present value of pension liabilities, we find bond yields are by far the most important.
Regulators can force cash contributions to improve the solvency of a pension fund, which might put dividends or capex plans at risk. With falling bond yields YTD, European companies with large pension liabilities have to book increases in pension deficits directly against shareholders’ equity at the end of the fiscal year 2014
For those who still remember it, a little perspective on Piketty’s (r-g) from BernsteinResearch:
Net interest margins (a decent proxy for r) are positively correlated to growth rates and negatively correlated to the stock of wealth. Concerns about slowing growth leading to rising concentration of wealth (r-g getting bigger) may be overdone.
From Deutsche’s latest long-term asset return study showing where current nominal and real yields are relative to each country’s long- term history (last 100ys) in percentile terms:
On both measures, nominal yields have rarely been lower than current levels for the majority of countries, particularly in Europe. This is a fundamental starting point for the case that government bonds are in bubble territory. However real yields are not at such extreme levels. Using the full history, most DM countries are in the 60-80% range and have therefore been lower 20-40% of the time. So they are low but not extremely low unlike nominal yields. Japan sees one of the lowest real yield readings relative to its own history in this sample partly due to the rise of 'Abenomics’, but with some of this due to the recent inflation spike after the April 2014 sales tax rise. If we go back around 18 months, this number drops from 79% to 59%. On the other side many countries in Europe actually have real yields that are closer to their median relative to history. Italy (63%) and Spain (61%), certainly stand-out, especially as both are at 100% in terms of nominal yield lows. Indeed if we only look at data over the last 100 years Spain (40%) sees real yields slightly higher than the long-term median and Italy (53%) is close to median. France (62%) is also much closer to its median over this period.
People have rightly been focusing on the comeback in US auto spending, but we were interested in this chart from CreditSights on the impressive recovery in the UK:
Total new passenger cars in the UK market grew by 9.4% YoY to 72,163 unit sales this month — a 30th consecutive month of growth that highlights the strength in the UK autos market relative to the choppiness seen in other major European automotive markets. Private registrations were up 10.3% and fleet sales were up 10.0%, while corporate sales (2.3% of the market) fell by 14.0%. Attractive financing deals for consumers including Personal Contract Purchase (PCP) offers are helping to support growth against a backdrop of a relatively stable economic outlook. On a LTM basis, the UK market is now 0.1% above levels reached prior to the crisis in December 2007.
The size of this coming wave of robotics is staggering: spending on robots worldwide is expected to jump from just over $15 billion in 2010 to about $67 billion by 2025. (See Exhibit 1.) Driving this growth is a convergence of falling prices and performance improvements. The cost of high-quality robots and components is dropping rapidly, while CPUs are getting faster, and application programming is getting easier. As robots become cheaper, smaller, and more energy efficient, they gain flexibility and finesse, increasing the breadth of potential applications.
Initially, robots were used mainly for dirty, dull, repetitive, or dangerous tasks that did not require high precision, such as painting car doors or spot welding. Today’s robots, by contrast, are moving into a new range of precision applications far beyond the manufacturing realm. For instance, they’re enabling food processors to make products untouched by human hands. At Sweden-based Charkman Group, robots slice and pack high volumes of salami, ham, turkey, rolled pork, and other cooked meats. At the heart of the line is an intelligent portion-loading robot that can handle 150 picks per minute across multiple sizes and types of meat.
If you want to make a bet on the expected devastation of the US by hurricanes, CreditSights has you covered:
From the report:
Allstate, Chubb, Liberty Mutual and Travelers are the most exposed to hurricane losses…On the other end of the spectrum, Progressive, CNA, AIG, ACE, and Hartford are more insulated from hurricane events.
And here is a more detailed breakdown by region:
By the way:
According to researchers at Colorado State University, the Atlantic basin will experience below average hurricane activity in 2014 due to the combination of a cooler than normal Atlantic ocean and a still-developing El Nino. As of July 31, 2014, the CSU forecast called for approximately one major (category 3,4,5) hurricane (median is two), four category 1 or 2 hurricanes (median is 6.5), ten named storms (median is 12.0), three major hurricane days (median is 21.3), and 40 named storm days (median is 60.1).
The declining inflation rate in the Eurozone is problematic for the ECB. One tool they have yet to employ to battle disinflation is asset purchases. But due to institutional constraints – both owing to politics and capital market structure – a QE program like the FOMC’s is unlikely in the near term.
But as the chart shows, the falling balance sheet size corresponds directly with the falling inflation rate, so even if the transmission mechanism is unclear and complicated, the ECB is under increasing pressure to put the balance sheet to work.
Private-sector savings in the UK have fallen sharply, dropping to just 1.68% of GDP in 2014 Q1, according to the latest flow-of-funds data (see Figure). At the end of 2009, when the UK balance sheet recession was at its worst, private-sector savings amounted to 10.47% of GDP. The drop in this figure to 1.68% is a major change that signifies a large contraction in the economy’s deflationary gap. The 1.68% financial surplus is small not only in comparison to the US, where private-sector savings totaled 3.92% of GDP in 2014 Q1, but also in comparison to the UK fiscal deficit, which stood at 5.8% of GDP in 2013.
The fact that the UK’s private sector is still saving 1.68% of GDP in spite of near-zero interest rates indicates the economy remains in a balance sheet recession. However, the UK is one of the few countries where the private savings surplus is smaller than the fiscal deficit. That suggests the UK’s economy is being supported in no small part by the decline in private savings and by the government’s fiscal stimulus, coupled with support for the real estate market from overseas capital inflows.
Despite being an epicenter of the global financial crisis, the UK is one of the few countries where house prices have recovered to pre-crisis levels, something I suspect has helped to reassure people. On the other hand, the average UK household has not seen a significant increase in income, and—as BOE Governor Mark Carney has noted—the private sector still faces balance sheet problems. After taking on huge amounts of debt during the bubble, UK households are now net savers despite the lowest interest rates ever, as the household financial surplus in the accompanying Figure demonstrates.
That indicates the possibility that today’s UK economy is not as strong as it appears. I suspect that is behind the BOE Monetary Policy Committee’s decision to keep interest rates low for the time being in spite of the substantial decline in the unemployment rate. The fact that inflation in both the UK and the US is running below the target rates of 2% offers some justification for current policy, but it also implies the risk of a sudden change in the monetary environment were inflation to accelerate.
Bank costs - Brain scans show that men think their body movements are more exaggerated than they are. Hence blokes shuffle about a dance floor but feel like John Travolta. Banks are the same when it comes to cost cutting. Many are convinced they are being radical but in reality change is fairly modest. Barclays just announced a “bold” plan to reduce 2015 costs to £16.3bn versus £18.7bn last year and headcount 13 per cent by 2016. When the 45 year old Jack Welch took the reins of General Electric, by contrast, he promptly cut his 410,000 employees by almost a third. Indeed many predicted that post crisis banks would finally rein in expenses. But in aggregate European lenders, for example, are forecast to have the same 60 per cent cost to income ratio this year as they had in 2009. Staying alive!
(c) Negative interest income for the three months ended March 31, 2014 and 2013, is a result of increased client-driven demand for certain securities combined with the impact of low interest rates; the offset of this matched book activity is reflected as lower net interest expense reported within short-term and other liabilities.
Abe, that is. He’s definitely got three, probably got four, and some might say five if you allow them to include the Olympics. But let’s ignore them (because it’s irrelevant) and allow Citi’s Buiter et al the use of “fourth” to discuss why “the fourth arrow of Abenomics will be fired belatedly and awkwardly, but it will hit its target, and in a way that ought not to re-open the old wounds of persistent deflation and excess capacity.”
If, as we expect, the scope for financial repression may also become more limited as Japan becomes a current account deficit country and its vast stock of private wealth is gradually diminishing because of an aging and declining population, balancing the fiscal equation will either have to come from sovereign debt restructuring or from fiscal austerity.
In our view, it is unclear whether it will be the former or the latter, or in fact a combination of the two. Our base case is that eventually austerity will do the heavy lifting. This is based on the view that, first, there is plenty of private wealth, as noted above, and, second, that the willingness to pay taxes (once they are on the statute books, that is tax compliance) will remain very high. After all, the incidence of sovereign debt restructuring is not simply a function of the debt burden, but usually requires a breakdown in social cohesion as well, and there are few signs of that in Japan.
Armed with these data, Mr. Connor is comfortable espousing some truths about global cartels. They require a limited number of market players, homogenous products, few individual conspirators, and the opportunity for face-to-face meetings every three months or so, possibly to deal with currency changes.
They rarely last longer than a decade, often torn apart by internal instability, as one firm tries to cheat the others. (The Justice Department banks on that suspicion, granting leniency to the first company to defect from a cartel.) The government also punishes price-fixing against itself more severely than such offenses against the private sector, he has found, and its sanctions result in a net benefit to national accounts.
FT Alphaville meets mathbabe to talk Occupy Finance
After reading Occupy Finance, the book launched by Occupy Wall Street’s Alternative Banking Group on the second anniversary of OWS’ formation, we were curious about some of the motives and mechanics behind it. FT Alphaville went to our usual point of contact, Cathy O’Neil, aka mathbabe, to ask a few questions.
AV: How did the idea for the book come about?
We wanted to turn our conversations that we’d been having in our group on Sunday into something we could share with the wider world. In particular we know a bunch of people we consider “occupy friendly” who don’t have time to come to the meetings but want the understanding that we’d come to as well as the ammunition to debate the issues in a conversation about the financial system.
AV: Writing by committee and forming a consensus on the content must be very hard, how did the group manage that?
Lots of meetings, DropBox, and massively large email chains.
AV: Sometimes when I read the book I found myself wanting more evidence to be provided for some of the claims made, or for more links to original sources in the notes rather than links to popular media articles. What sorts of discussion did the group have around this?
We were pretty proud of getting in as many footnotes as we did, but it’s absolutely true that it’s not comprehensive. It’s the beginning of a much-needed conversation. We’d love you to be part of it.
AV: Some of the members of the group work in finance. Do people at their places of work know about their involvement with the group? How do they square their involvement with their employment?
Some people use pseudonyms for this reason. Also the book was authored by 25 people but nobody’s name will appear on it.
AV: What was the role of some of the group’s more famous supporters, such as Yves Smith and Neil Barofsky?
They were certainly with us in spirit, but this book was made by the humbler elements of our group. Probably the most famous contributor is Akshat Tewary of Occupy the SEC, who helped us with the chapter on the history of regulation.
AV: What are you realistically hoping for in publishing this book?
A continuing discussion of too-big-to-fail and part in the evolving understanding of how finance touches the average person.
AV: Imagine you had a budget of $1m for the third anniversary. What are some suggestions you can think of for how to use it if the group had it?
Produce educational materials on finance, including improving our web presence so that people outside New York could be more involved with the group. You know, some people have suggested we become lobbyists. That’s one thing I can promise won’t happen. But it would be nice to be able to afford to spend more time writing and promoting public commenting letters on current regulation.
AV: As I understand it, you’re also a mum and work at City Hall. What proportion of your life does being involved in the group take and why do you do it?
Yes I have three sons, ages 13, 11, and 4. I spend Sunday afternoons at the meetings, and I often work on it when I can during the week. I do it because it’s important to me. I consider myself incredibly lucky that I get to do things that are important to me essentially every minute of the day, sleep included.
“Equity risk premium and term premium sound like sophisticated economic concepts, but in reality they are statistical junk yards into which economists toss stuff they can’t explain with fundamentals.”—
Well, *something* about this is embarrassing anyways
"It’s embarrassing," said a senior Crédit Agricole investment banker.
"We have to stay in hotels in the city’s outskirts and waste hours in the train to go to Amsterdam or Switzerland because we can no longer fly there," he said. "If I’m not taking clients out, I can barely afford an entree and a glass of wine in the evening."
However, 1970s sexism in banking is best illustrated by an interview question which was then included in Merrill Lynch’s broker trainee programme. “When you meet a woman, what interests you most about her?,’’ it asked. The correct answer, for which trainees received the most marks, was ‘her beauty.’ Trainees who responded with, ‘her intelligence,’ were penalized and awarded the fewest points of all. One applicant successfully sued Merrill Lynch for sexism on this basis.
“Across the five industries that are most sensitive to changes in military spending, employment fell at an annual rate of 2.5 percent in March and stayed flat in April, the latest month for which seasonally adjusted data are available. In all other sectors, by contrast, employment grew at annualized rates of about 1.6 percent in March and 1.7 percent in April.”—
China’s banks are operating in an environment where overall liquidity pressures are going to mount further, not just as a result of the current policy action, as I analysed in the Note mentioned above. The likelihood is that there will be a required reserves ratio cut by the end of the year as growth slows further below trend and the authorities will have to start easing monetary policy.
Some have argued that the PBoC staying pat suggests the authorities have faith in the economy and want to show that they remain in control. But given the carnage in the corporate sector, with profits down and the squeeze on margins still on, the economy is in fact in for rising unemployment and a faster build-up of bad loans.
China has made very few meaningful reforms since the previous leadership took office in 2003, instead spawning ever bigger financial imbalances, not just in terms of overinvestment at home, but also the excessive build-up of debt abroad. But if the current PBoC response, together with Li Ke Qiang’s bold statement about capital account opening do indeed mark the start of substantial financial market reform, the long-term future of China just got brighter. Unfortunately, any long-term gain will only be possible after significant short-term pain.
There are probably two conditions needed for the EM sell-off to halt. First, we need US rates to stabilize. Second, we need redemptions to work their way through the system. Now that US equities are showing signs of turning, it is possible that US rates are going to stabilize. However, we worry that the EM flow story could have momentum of its own (and there could be a wave a further equity outflows too). For context, high-frequency EPFR mutual fund data show that, as of last Wednesday, we had only unwound a very small portion of the cross-border flows into EM from the US and eurozone that occurred between September 2012 and May 2013 (i.e., since the OMT announcement). Specifically, only 10-20% of post-OMT EM equity flows from the US and eurozone, and less than 5% of the post-OMT EM bond flows have been unwound so far (Figure 2). In addition, the absolute scale of these flows can be very large, as overall BOP data show that there have been a total of more than $250bn portfolio outflows from the eurozone and almost $150bn outflows from the US during this period (Sep 2012 – Mar 2013). The BOP numbers include DM flows as well, but we estimate that a sizeable 40% of the eurozone flows were to EM. Thus, we are wary of catching the falling knife by trying to time the end of this position washout.
That said, it is difficult to compare EM sell-offs with past blowups given that reserve positions are generally bigger, and funding has increasingly been in local currency, along with the fact that inflation risks (and pass-through) are smaller. Hence, we would not want to extrapolate the EM weakening into infinity (although quite a bit of commentary is now in this direction), and will look to use these moves as entry points to add to our preferred EM exposure, once markets settle.
He described as formative an incident in which he claimed CIA operatives were attempting to recruit a Swiss banker to obtain secret banking information. Snowden said they achieved this by purposely getting the banker drunk and encouraging him to drive home in his car. When the banker was arrested for drunk driving, the undercover agent seeking to befriend him offered to help, and a bond was formed that led to successful recruitment.
The six stages of G4 QE: Fed not even at stage 2 yet Tapering, if it were to start, would be stage 2. As stage 1 represents the initial buying of assets by the central bank, the next stage is about adjusting the speed of purchases. If QE is a car, then the accelerator (gas pedal) was pushed in late 2008 (see Figure 3) and it was the rate of change that mattered. When taking the foot off the accelerator, the car naturally slows down: so it is with QE. We should not confuse slowing down with going into reverse…
The Bank of England and ECB are at stages 3 and 4 respectively. Following the car analogy, both have slowed to a stop – ie they are no longer making new purchases – but there are important differences. Having bought GBP375bn gilts the BoE is actually maintaining its position by reinvesting the coupons and redemptions as they come in (see Figure 4) and provide a taper example from 2009. This is akin to holding the car on the clutch, which makes it fairly easy to move forward or backwards. The ECB is currently moving backwards, at stage 4, but this does not exclude the possibility of a new round of easing, which would take the process back to stage 1….
No G4 central bank is anywhere near stage 5 or 6 The ECB’s position is still not to be confused with an exit strategy and, stretching the car analogy, this would be like rolling back down the hill to where you started, slipping the clutch that was being held in stage 3. A stage 5 exit would mean putting this car into reverse and to a central bank this would mean decisively reducing the size of the balance sheet by selling assets and letting the level of reserves in the banking system return to a more normal level. No central bank is currently doing this and in our opinion it remains a long way off, maybe something for the next decade. Economic growth levels remain too low in the G4 countries and the outlook for the recovery is fragile. These would be enough reason to maintain the stimulation but falling inflation and a growing risk of deflation argue for maintaining the stimulus for longer
In English, the term ‘Anglo-Saxon’ is generally used to describe ‘a member of any of the West Germanic tribes (Angles, Saxons, and Jutes) that settled in Britain from the 5th century AD’.
Also, particularly in America, it is used to denominate white people, usually of the Protestant faith (‘WASPS’), thus excluding large swathes of the population of that country. It follows that there is no such thing as an Anglo-Saxon country, or, as in the example below, an Anglo-Saxon agency or Anglo-Saxon capitalism. Furthermore, the Anglo-Saxon language ceased to exist in the 12th century (I am ill-informed about Brussels, but the last known speaker in Luxembourg was St Willibrord, 658-739). This term is particularly inapplicable (and, I gather, irritating for those concerned) when used to describe the Irish, Scots and Welsh, who partly base their national identities on not being Anglo-Saxons, and verges on the ridiculous when used to include West Indians.
Russia canceled an auction of ruble bonds for the first time since October as waning expectations of a central bank interest rate cut sent yields rising.
The Finance Ministry planned to offer 33.6 billion rubles ($1.1 billion) of December 2019 OFZ bonds in today’s auction at a yield range of 6.33 percent to 6.38 percent. The yield rose two basis points, or 0.02 percentage point, to 6.44 percent today, the highest in almost two weeks, after jumping six basis points yesterday.
“There’s also a disturbing cultishness to the Bitcoin community, where everyone is as bullish as can be. “Someone is going to get rich this year,” Peter Vessenes, the executive director of Bitcoin, said in his opening keynote. The Bitcoin documentary that was teased at the conference is called The Rise and Rise of Bitcoin. Everyone was talking about how the price was only going up. Bitcoiner Tuur Demeester, the author of a financial newsletter, gave a talk in which he projected a number of scenarios in which the price of a Bitcoin could exceed $1,000, such as hedge funds committing 1 percent of their portfolios. “That’s why I think the risk-reward ratio is extraordinary,” he said. “Everyone should own at least a few Bitcoins.” He did not discuss any scenarios which might cause the price to fall.”—From Verge. "Because it’s math. You can’t kill math” (Joseph)
Compare (Apple’s testimony to the Senate permanent subcommittee on investigations, on Monday):
Apple pays an extraordinary amount in US taxes. Apple is likely the largest corporate income tax payer in the US, having paid nearly $6 billion in taxes to the US Treasury inFY2012. These payments account for $1 in every $40 in corporate income tax the US Treasury collected last year. The Company’s FY2012 total US federal cash effective tax rate was approximately 30.5%. The Company expects to pay over $7 billion in taxes to the US Treasury in its current fiscal year. In accordance with US law, Apple pays US corporate income taxes on the profits earned from its sales in the US and on the investment income of its Controlled Foreign Corporations (“CFCs”), including the investment earnings of its Irish subsidiary, Apple Operations International (“AOI”)…
Contrast (the subcommittee’s report on ‘offshore profit sharing’):
Offshore Entities With No Declared Tax Jurisdiction. Apple has established and directed tens of billions of dollars to at least two Irish affiliates, while claiming neither is a tax resident of any jurisdiction, including its primary offshore holding company, Apple Operations International (AOI), and its primary intellectual property rights recipient, Apple Sales International (ASI). AOI, which has no employees, has no physical presence, is managed and controlled in the United States, and received $30 billion of income between 2009 and 2012, has paid no corporate income tax to any national government for the past five years…
We’ve written about it before but it bears repeating. China and Japan are ganging up to send deflation abroad and, in doing so, boost asset prices.
From Deutsche’s Alan Ruskin on Tuesday:
Firstly, China is a disinflationary force not only on the commodity side, but on the non-commodity goods side: US import prices from China declined -0.1% in April, and were down 0.9% y/y. Secondly, and more recently, import prices from Japan have declined sharply and are down 1.3% in the last 3 mths alone. This of course fits with USD/JPY having a significant disinflationary impact in the US. In the global context, Japan is having a dual influence - directly reducing import prices abroad, while the BOJ global liquidity boost, some of which leaks abroad, tends to help asset prices. I still regard the recent global disinflation theme as a major factor supporting asset inflation, as Central Bank’s remain accommodative for longer.
Push out deflation which allow more liquidity to be pushed out by central banks which flows into assets.
“The bottom line is the titans are working from the wrong playbook. We’re all, to varying degrees, slaves to our experiences. Their formative experiences, almost to a man, were in the early 80s. This is when they built their knowledge and assembled their financial playbooks. They learned words like Milton Freidman, money multiplier, Paul Volcker, Ronald Reagan, and the superneutrality of money. Above all, they internalized one dictum: real men have hard money.”—
The country’s securities regulators have handed a boost to this business by cutting the capital that brokers must hold against their prop trading activities and expanding the kinds of assets in which they can invest.
The broader industry saw similar patterns, making more than one-fifth of its revenues, or Rmb29bn, from securities investment income in 2012, according to data from the Securities Association of China. This was a huge rise from the Rmb4.9bn it made in 2011, which amounted to just 4 per cent of total revenues.