...is usually advice straight out of the wishful thinking school of speculation - for Apple fans are a fervent bunch. Even Marc Faber might hesitate at the idea of selling the company however "heavy" its share price may be acting.

That is because Apple has managed to sell 3.6 million marvellous Macs, 8.7 million incredible iPhones and 21 million intense iPods (actually a decline from the prior quarter) - all just in Q4 2009. Magic touch.

Still, those fans may yet have to cultivate new levels of devotion in order to believe the latest gizmo is as "revolutionary" as Steve Jobs proselytized today. This slab is just an oversized iPod Touch, isn't it?

And maybe the the 'iPad' name could use a rethink.

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It is funny how so much can be agreed and yet, when conclusions are drawn, how much of a fundamental divide can remain.

These excerpts, fresh off the presses, come from the IMF's World Economic Outlook update:

"Real activity is rebounding, supported by extraordinary policy stimulus. Global production and trade bounced back in the second half of 2009. Confidence rebounded strongly on both the financial and real fronts, as extraordinary policy support forestalled another Great Depression. In advanced economies, the beginning of a turn in the inventory cycle and the unexpected strength in U.S. consumption contributed to positive developments. Final domestic demand was very strong in key emerging and developing economies, although the turn in the inventory cycle and the normalization of global trade also played an important role.



[...]

At the same time, there are still few indications that autonomous (not-policy induced) private demand is taking hold, at least in advanced economies.

[...]

Continued policy efforts are needed to sustain the recovery and prepare for exit.

[...]

Lastly, policymakers are facing major structural policy challenges. In advanced and emerging economies with excessive external surpluses and domestic saving rates, global rebalancing could be fostered through structural policies to support domestic demand and the development of nontradable sectors. On the other hand, economies that relied excessively on domestic demand-led growth will need to shift resources toward the tradable sector."

And this is Andy "they asked arsonists to put out the fire" Xie, formerly of the Roach / Morgan Stanley stable, last week:

"Some of the bright spots, like bank earnings and GDP growth, that governments are touting as results of the trillions of dollars they have spent are misleading...How could banks make such huge profits? The usual explanation is that banks have traded well, like borrowing short-term funds from the Fed at a zero percent interest rate and investing in treasuries at 3.5% interest rate...Just 2% spread from such trades could yield over USD 300 billions in profits. That seems like a miracle: nobody is hurt, and banks make billions.

The pain is actually postponed in two ways. First, the low funding cost for banks' trading will turn into inflation that dilutes everyone's cash holdings: The Fed is just redistributing money from savers to banks, only the savers don't know it yet. Second, the banks' low funding cost has a government-guarantee component...their profits would be wiped out if the debt market doesn't believe in a government bailout...The cost associated with the guarantee is effectively a free insurance policy from the taxpayers. When the next crisis hits, the cost will materialize. The financial recovery that governments are touting is really a sham; it is just another robbery.

[...]

The next crisis will essentially be a continuation of the last one...governments and central banks have thrown trillions of dollars towards preventing necessary economic adjustments, believing that stimulus will bring back growth. The money is buying some time, but the costs are (1) that the governments won't have enough money to cushion the pain during the coming economic restructuring and (2) that inflation will increase misery in an economic downturn.

The whole world is drinking poison to quench its thirst. It may feel like relief now, but the sickness will strike in 2012."

Some people are never happy, of course, and their glass is always half-empty. The IMF appears to put great store in the assumption that private demand will "self-sustain" in due course and that inflation will not prove to be a problem. The rest is tricky but careful management etc etc.

Mr Xie, in contrast, assumes the course of private demand does not really matter much: his balances of probability already suggest that the critical action will concern inflation just when it hurts the most.

Fairly mutually exclusive looking outcomes...

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Bill Phillips, whose eponymous curve had been thoroughly roughed up by Milton Friedman by the time I studied it, was far more interesting than the relationship between unemployment and inflation which made him famous fairly well-known.

Or at least so his Wikipedia entry suggests. Personally, I wonder about how 'secret' his prisoner-of-war camp kettle really was. But anyone with the stories (crocodile hunter?) he surely had deserves much slack. All in all, it is somewhat bizarre that it is but the "Phillips Curve" for which he is principally remembered:



And so it is the San Francisco Fed has put together another of its informative, if not lively, Economic Letters called Inflation: mind the gap (from which the above chart). It fits topically into the current, broader, inflation versus deflation debate.

The broad conclusion is that the Phillips Curve would have worked pretty well since 2007 (disruptive economic times suit it, apparently) and, moreover, it suggests inflation will continue to fall - assuming continuing stubbornly high unemployment.

Couple of elephants watching this from armchairs. The Federal Reserve's balance sheet expansion; and (some may struggle to recall this bit) the vaporisation of financial assets over the last 30 (minus the recent 10) months. Or has the letter puts it:

"Our evidence does not imply that inflation cannot run up as long as unemployment remains low. Other factors determine inflation beside the unemployment gap. This is an important and painful lesson that we have learned from the experience of the 1970s. For example, supply shocks and commodity price increases can push inflation up."

Nice examples.

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Despite a fifth straight year of being assessed by International Living magazine as offering the globe's best quality of life (top 10 here, all 194 here) it is nice to know that France can still find fault with herself. Or can she? From Le Monde (link):

"Are French banks moderate in bonus matters? According to our calculations, Paris-based traders of French banks, as well as those employed by the French subsidiaries of foreign banks, are set, this March, to enjoy bonus payouts of between €900m et €1bn. It is the equivalent of what 62,000 minimum-wage earners make in a year. [...]

These estimates are based on the statements made by Finance Minister, Christine Lagarde, in Le Figaro on Tuesday, January 12, which valued the take from the bonus tax on 2010 payouts from 2009 performances at around €360m. This 50% tax applies to bonuses over €27,500 - a sum representing nearly 80% of all bonuses paid in France..."

But breath easy, citoyens, although this implies average bonuses of over €250,000. All is relative:


"In this context, and while the severe effects of the financial crisis continue to be felt in the real economy, can we talk of moderation? In their defense, the French banks stress that they compete globally in a market largely dominated by American and British banks. Moreover, in bonus matters, these two continue to lead all others. Last year saw the poaching in London of two star performers from Merrill Lynch, Antonio Polverino and Bruce Van Saun, by the Royal Bank of Scotland. Both men will pocket over 10 million pounds (€11.3 million euros) in bonus guarantees!"

Separately Le Monde also report that high-end Paris property has got its groove back. Little, it appears, to do with the 3,500 registered traders/operators covered in the first article but again, it seems, the work/fault of foreigners. Impoverished, laissez-faire Anglo-Saxons apart.

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Just in time to cheer equity bulls for the weekend, the IMF today published one of their "Position Notes" entitled U.S. Consumption after the 2008 Crisis. Its conclusion:

We expect the U.S. consumption to remain at a relatively subdued level over the next several years, with the household saving rate settling at 5–7 percent of disposable personal income, somewhat above the 2009 saving rate of nearly 5 percent. Though the estimate is subject to a sizable statistical uncertainty, it is supported by several alternative estimates and simulation analysis. Compared to the pre-crisis years (2003–07), the estimated changes in saving and consumption imply a decrease in the U.S. private-sector demand of 2–3¾ percentage points of GDP—close to a half of the U.S. current account deficit at its peak. This will have substantial effects on global economic development after the current crisis. [Guess whose emphasis]

Nice long-term graphs, though, for some superb context:



Have a good one and do something precious for Haiti's future with Save the Children.

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Do what you can this weekend for Haiti with Save the Children.


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With the bonus battle reaching new heights of frenzy, this piece in the WSJ from Professor Macey of Yale Law School jumped out. An excerpt:

"These paychecks are highly rational from the shareholders' perspective...[the] bonuses are big and they are unremittingly linked to performance.

What Mr. Obama and others apparently fail to understand is that the banks' own shareholders benefit from these huge performance bonuses. The bonuses are paid to those who make large profits for their employers—that is, they are linked to performance."

This is, of course, the linchpin of the we-have-to-pay-this-much-or-the-talent-will-walk argument. But what is this "performance" measure that anyone curious to ask about is hard pressed to find defined in mainstream media?

Academic literature is reasonably rich in plausible answers. A notable 2008 paper comes from Smith & Swan and describes increased equity and bonus awards to CEOs as the "road to riches" for shareholders. "Performance" is measured by Return on Assets for operations and by Tobin's Q for firm valuation.

Contrast this with the conclusions in a paper from last month by Michaud & Gai.


"Do CEO compensation schemes in large public companies relate to public company performance? Our empirical research shows that firm’s performance is not affected by CEO compensation.

Does a pay “incentivized” public CEO enhance firm performance? If so, to what degree does this occur? Our empirical research shows that the incentive components of CEO compensation packages including bonuses, stock options, and stock awards do not affect firm performance.

If CEO compensation does not influence firm performance, then how do we account for the relatively high levels of CEO compensation? What factors drive CEO compensation? Our empirical research indicates that that primary factor driving CEO compensation is firm size (measured in net sales). We note that is most likely due to CEO compensation benchmarking and the perception by compensation consultants, boards, and CEOs themselves, that there is a limited pool of talent that can manage large cap U.S. public companies."

Confused? Well, "performance" looks mighty different when considering - not unreasonably - if it means increasing shareholder wealth as defined by a measure (Economic Value Added) that is less artfully determined than Tobin's Q. Looks like Professor Macey may have assumed too much on the shareholder benefit front.

Lurking inside this argument of definitions is the directly related issue of handsome upside compensation versus no downside financial penalty. Try betting all-in at the poker table every hand and disaster awaits. Yet the feeling is that one would be an idiot not to do exactly that when in the world of investment banking compensation structures.

Watching bonuses being paid out this season thanks to the unique episode of massive global government intervention only reinforces this feeling; and efforts to bring symmetry to the problem (clawbacks, the cancellation of deferred share etc) look more like politically expediency than rueful recognition of good fortune and moral hazard.

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New counterfeiting data for the euro zone from the ECB reproduced below in graphical form:




Unfortunately, perhaps, for QE and M2 it is not big money in total - €19.9m - although the trend is sharply skywards with the onset of the credit crunch in late 2007:




This mirrors UK trends where, despite the end of the productive career of counterfeiter Stephen Jory in 1998 and the forced change of £20 design this compelled in 2007, the increase in fakes has jumped. With, funnily enough, the specialty being... £20 notes. The UK's Serious Organised Crime Agency has a neat little round-up of matters here.

Including US estimates counterfeits in circulation of dollars, euros and sterling do not appear to exceed $120m (assuming detection is as efficient as all claim). Even after printing off another $50m on top in order to account for the 2006 supernote story the sums would still make Madoff, and other white-collar equivalents, have a laugh.

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Ten for 2010. Seriously, put your money on them:


1. Goldman Sachs finances and produces a sequel to the 2009 anti-banker film The International entitled Pulpit Fiction. Lloyd Blankfein stars as ex-Interpol agent Louis Salinger, a driven yet dreamy sort of fellow not entirely at home with the concept of perspective. Hired by publicity-shy Icelandic banking group Krashbanki his life's purpose is the widespread securitisation of the revolutionary Krashbanki instrument, the Ephemerally Backed Indulgence (EBIs). A portfolio of EBIs, claims the proselytising Salinger, can buy entry into heaven.

Sinister villain Martin Luther (uncannily interpreted by Willem Buiter) once worked side by side with Salinger at Krashbanki before a bonus payment contretemps. Now he plots a bloody revenge from his employ as Chief Economist at Krashbanki's archival Sillibank. Watch for his scathingly delivered, Dirty Harry-like tag line “Because Jesus endorsed self-interest, punk!”


2. In the face of poor historical precedent (“The Soviets had no idea what they were doing”) President Obama’s December 1, 2009 decision to send 30,000 additional troops to Afghanistan - or one more GI every 21 km2 - secures a remarkable mid-summer 2010 peace accord. The Taliban, the former mujaheddin, communists, assorted reformers, poppy farmers and a motley crew of other hitherto uncooperative tribal warlord interests all admit the recent election of President Karzai was entirely above board and agree to work “together for the greater good”. Transparency International are forced to apologise for the “provocative and without basis” ranking of the country as the 2nd most corrupt in the world. The GIs are all withdrawn by year-end.


3. China’s President Hu Jintao confesses that his country has indeed been manipulating the renminbi and apologises for trying to raise the standard of living of his nation instead of “co-operating” like every other nation does in the global economy. “There was no excuse.” he says between tears in surprisingly fluent, mid-Atlantic lilted English on CNN’s Larry King Live. He continued, “Certainly not our massive industrial over-capacity in everything from umbrellas to shipbuilding that depend totally on export orders. We will just have to do The Right Thing and find ways to stimulate domestic consumption despite the alarming rise in penniless, newly unemployed rioters”.


4. After a 2009 during which central bankers everywhere read or heard that they may possess a secret pleasure zone inside their bodies that, if stimulated correctly, yields intense pleasure (and perhaps even some heady inflationary highs) most of 2010 passes without this alleged “I-spot” being precisely identified as a concrete economic entity. The furious search for the elusive I-spot continues until right up to December when some research teams begin reporting isolated successes (h/t CNN).


5. After losing the June, 2010 UK general election Labour’s Gordon Brown successfully challenges David Cameron for the leadership of the Tory party. Triumphantly returning to 10 Downing Street he declares “This is a momentous day in the long and glorious history of British politics. We have stepped back from the edge of an abyss in whose dark depths lurks a public policy decided by shop stewards over pints of bitter in the smokey back rooms of northern working men's clubs solely for the benefit of avaricious, casino banking, capitalistic wolves. Instead, we will march arm in arm, lock step onto the sunlit prairie of a new democratic dictatorship. Let one hundred flowers bloom instead of Labour boom and bust!”


6. Greek archaeologists working on the underwater site of the ancient Mediterranean harbour and trading centre Pavlopetri uncover a stunning cache of what experts judge to be Mycenaean gold. Initial estimates put the haul at 12,000 metric tonnes worth approximately €300bn – or around 75% of the entire Greek national debt depending on whose statistical service one believes.

Post-find and celebration, Greek Prime Minister Georgos Papandreou puts in a drink-and-dial call to ECB president Jean Claude Trichet transmitting what is later described by diplomats as a “particularly frank conveyance of opinion” regarding the ECB’s earlier refusal to consider any economic aid for the Greeks’ “home-grown” difficulties.

The gold market convulses at the discovery of a trove equal to 10% of the metal's known existing stock. Oil and the euro spike. Greece encourages Italy to take a leaf from its book and divert significant government expenditure to its archaeological service.


7. La Ciciollina, concerned about rising nuclear tensions between Iran and Israel, revives her Middle East mediation technique. She declares "I am available to make love to President Ahmadinejad and Prime Minister Netanyahu to achieve peace in the Middle East. Together or separately. Let me remind everyone what a shame it was Saddam Hussein declined my 1990 and 2002 offers - not to mention my rebuffed 2006 offer to Osama. Just look at where all this hate has led us to!”

Oil, initially steady, drops sharply on rumours of requests by both sides for younger celebrity alternates to the 58 year old Staller.



8. Thought relatively benign at the end of 2009, the H1N1 virus unexpectedly mutates in 2010 and attacks the Apple iPhone, stealing personal data, emptying bank accounts, making prank pizza orders and generally causing mayhem. Interpol rapidly concludes the hybrid virus is the handiwork of an international cabal consisting of the Russian Mafia, militant animal rights campaigners, a global hegemony of Zionist hardliners, Lagos-based Nigerian Muslims and a mysterious sub-group known only as “G”.

Apple shares plunge 65% along with smaller but pronounced drops for the likes of Nokia, Palm and Motorola. Google inexplicably hits 52-week highs whilst the value of UK Premier League transfer deals surges. The prices of pork bellies, oil and flights to Yemen melt up.

Belatedly, the SEC swings into action, condemns all short sellers and asks Harry Markopolos to explain how Madoff might have performed this latest mischief from behind bars.


9. US Treasury Secretary Geithner launches another emergency initiative: the Publicly Underwritten Relief Effort for Commercial Real-estate Assistance Program. The PURECRAP facility targets all commercial property landlords with less than 97% occupancy rates and aims to buy up the voids at average 2007 rates (with a contractual annual rent uplift of inflation + 8.5%).

An army of civil servants is hired to occupy the space, a generous central government headcount increase that insures the smooth administration of not just the PURECRAP but also the TARP, the PPIP, the TALF, the TGLP, the CAP, the TIP, the CPFF, the AMLF and the MMIFF.

PURECRAP is described by President Obama as “Another far-seeing and innovative program of Secretary Geithner’s. It will buttress the perilously poised commercial property market whilst also creating many new and essential jobs. Secretary Geithner continues to enjoy my unwavering support.”

Geithner leaves his post due to “personal reasons” 3 weeks later.


10. As low real interest rates around the globe begin to work what is called by a derided and dismissed few (notably Stephen Roach) “an illusionary magic” and “the papering over of structural faults”, Alan Greenspan finds his reputation fully rehabilitated. Despite the quite phenomenal timing of his May 2008 characterisation of the US economy as being in an “awfully pale recession” (after which equity markets immediately began a nine month fall of 50% and unemployment started its inexorably rise from 5.5% to 10%) the popular press begins once more, as asset prices return to mid 2006 levels, to refer to him as “Maestro”.


Happy New Year!

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