Beneficiary of rent extraction says rents explain inequality

Peter Orszag has a new column arguing that insufficient attention is being paid to “profits at some companies well in excess of what’s necessary to keep them in the market” as a source of inequality. This is far from being an original idea, although we appreciate Orszag’s citation of data on factory-level productivity.

However, we were struck by an odd omission. While Orszag is quick to note the importance of patents and land values, he leaves out any mention of the large subsidies enjoyed by the financial sector. (Orszag is paid several million dollars a year as a vice chairman at Citi.) That obscures a lot. Read more

On the availability of dollar funding

General collateral rates are known to get volatile as banks scramble for liquidity ahead of the quarter’s close.

But this March 31, GC rates didn’t just get volatile. They went positively paraobolic.

According to Bloomberg Data, the overnight US dollar GC rate more than doubled to 0.45 per cent, a rate not seen in the markets since October 2012. They fell back to 0.2 per cent range on Wednesday, implying there’s no systemic threat to talk about, but the spike does prompt questions over how and why a funding mismatch of this level might have come about. Read more

Buiter on why the ECB as a whole can’t go bust

Citi’s chief economist and former BoE MPC member Willem Buiter is worried that the ECB’s new profit-and-loss sharing stance on National Central Bank asset exposures risks transforming the 19 NCBs of the eurosystem into a glorified currency board.

It’s a policy that also stands to bring needless uncertainty and volatility into the system. Making NCBs accountable for their own assets in his opinion only delays risk-sharing. If Europe is to defend its currency union there’s no way out of risk sharing in the long run. In fact, risk-sharing is precisely the point of a currency union. It’s what makes a currency union work. Read more

Quindell corrects: it sold most of its digital business as well

Another Quindell correction, this time to Monday’s announcement of a deal to sell nine-tenths of the company to Slater & Gordon, the Australian law group.

It comes after shares were suspended for more than five hours on Wednesday, provides partial answers to one of the outstanding questions — where had the rest of Quindell’s business gone? — while raising others about the nature of its operations, financial statements and previous announcements. From the RNS:

The Board has noted that there was a failure to fully transcribe profits related to entities forming part of the Disposal as disclosed in the Circular (predominantly in respect of iSaaS Technology Limited and Intelligent Claims Management Limited, entities previously included within the Company’s “Digital Solutions” division in historic financial information).

 Read more

Ratings shopping, China edition

From Bloomberg:

Dagong has seen its market share halve in six years to 20 percent due to “irresponsible” competitors, Chairman Guan Jianzhong said in a March 24 interview in Beijing. Some companies are compromising evaluations to win business and a lack of defaults has made it hard to gauge the assessors’ trustworthiness, according to Dagong, China Lianhe Credit Rating Co. and China Chengxin International Credit Co.

“The ratings are creating credit risks and blindfolding people, instead of revealing the risks,” Guan said. “Ratings that are only labels and can’t disclose risk will be a huge latent danger to China’s economy.”

At least they’re honest about it: Read more

Video: Stocks are up, so buy bonds

A bit of FT Short View videographic entertainment below the fold.

TL:DW? Stocks have gone up so much, savers need to keep buying bonds just to rebalance, irrespective of any thoughts about the inherent value or non-bubbliness of fixed income.

See also the most recent Flows & Liquidity monitor from Nikolaos Panigirtzoglou and team at JP Morgan for a fuller analysis of the question: can equity prices lead to higher bond demand? Read more

What Cofer won’t tell you about the euro

We’ve already had some of the IMF Cofer story spelt out, namely that “foreign currency reserves in emerging markets fell last year for the first time in two decades”. At the least, there’s a hint of a new divergent pattern between EM and DM central banks going on there.

But we wonder if we mightn’t squeeze a bit more out of it. Particularly where the euro is concerned. The IMF data showed that the share of euro in global central bank reserve assets kept falling last year — to a new cycle low of 22 per cent. However, as Deutsche’s George Saravelos says, almost all of that drop is down to valuation effects, rather than active selling.

Of course, he also says that’s not the full picture. With our emphasis:

The IMF data excludes two of the world’s largest holders of FX reserves, holding as many assets as the rest of the world’s central banks combined. It is precisely these holders that have the largest ongoing potential to sell euros:

 Read more

Further reading

Elsewhere on Wednesday,

- India’s (oft brutal) Naxalites look more like a phenomenon of the globalised present rather than the Maoist past.

- “Pet-Sitter startups may be next success in sharing economy”.

- Bernanke, Bernanke, sec stag edition. Read more

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Emerging market forex reserves are shrinking. From a peak $8tn in mid-2014, cash kitties have been whittled back as the China carry trade unwinds and the end of ultra-easy monetary policy in the US lures funds out of other emerging markets. That’s bad news: the world will “sorely miss” the recycling of emerging market reserves when the west’s easy monetary policy turns tighter, says one economist. Read more

Why American companies are borrowing more in euros

While nominal borrowing costs are now much lower in Europe than in the US, that by itself isn’t a good reason for firms that earn money in dollars to start taking out debt in euros. Modest moves in exchange rates can wipe out any perceived benefits from lower interest rates — just imagine what would happen if the euro returned to its level last summer of around $1.4 — and the cost of hedging this currency risk usually means that borrowers are better off staying in local currency. American corporate treasurers know all this, yet are also responsible for more than a fifth of all the euro-denominated investment grade corporate bonds issued in 2015.

What gives? Read more

Daniel Stewart has a new shareholder

The Company has today been advised that Mr Rob Terry, directly and via company / family interests, now has an interest in 52,000,000 ordinary shares in Daniel Stewart, representing approximately 7.4% of the Company’s issued ordinary shares, having purchased 31,250,000 shares at prices ranging from initially 0.15p to 0.554p today.

One to watch. Read more

Eurozone: welcome to your currency board future

Citi’s Chief Economist Willem Buiter spent some time with FT Alphaville explaining why he believes Draghi’s concession on profit and loss sharing among ECB member national central banks turns, in all likelihood, the single monetary unit into nothing more than a glorified currency board.

Quick background: The ECB’s profit-and-loss sharing mechanism became a key negotiating point ahead of European QE. For the Bundesbank, QE was only viable if NCBs assumed most of the responsibility for losses on assets they brought into the consolidated balance sheet. In the end Draghi acquiesced by reducing risk-sharing to only 20 per cent of assets.

A currency board works by pegging liabilities (central bank reserves and currency) to an exchange rate target, rather than a CPI or employment target. The monetary authority managing the board achieves the target by ensuring all commercial entities served by the system can convert the authority’s liabilities into foreign currency at any point. In short, there’s a guaranteed FX convertibility promise at the central bank. Read more

M0 money, more problems

… By the notorious PBoC?

To be clear, the issue here is falling M0 in China.

SocGen’s China watcher in chief Wei Yao suggests that this is perhaps more important to real growth than the normally fixated-upon M2. Read more

Quindell, PWC’s review and fair disclosure of the facts

Quindell shareholders will soon be asked to approve the sale of substantially all of the company to Slater & Gordon, the Australian listed law group. The sale was agreed after S&G was granted the exclusive right to negotiate and conduct due diligence on the UK ambulance chasing law firm. Quindell is also strapped for cash and the list of alternative bidders seems small to non-existent.

Yet there remains a pertinent question: do Quindell shareholders have enough information to approve the sale?

PWC has conducted a review of Quindell’s accounting, one likely to lead to restatement of revenues and profits in recent years. S&G have seen the accountant’s work, yet shareholders have not. The review is price sensitive information – is it fair disclosure for the buyer to have seen it, but the selling investors to have been kept in the dark? Read more

The Fed’s inflation target doesn’t mean what you think it means

I consider short term as referring to less than, say, a year or two, medium term as ranging from around two to six years, and long term as anything beyond around six. Articulating a long-term inflation objective would be consistent with our past policy behavior and with, for example, the kind of optimal policy scenarios in recent Bluebooks that show convergence only after around a decade.

In contrast, I would interpret a medium-term inflation objective as one that we would be committed to hitting within several years. Even during normal circumstances, this would often require deemphasizing the employment part of our dual mandate. At this time, though, with such a huge adverse shock to navigate through, I don’t think a medium-term inflation objective is necessarily even attainable.

– Janet Yellen, January 16, 2009  Read more

The Fed’s grudging embrace of inflation targeting, part 1

It may seem odd given what else was happening at the time, but the first meeting of the Fed’s Open Market Committee in 2009, which took the form of a conference call on January 16, was devoted to a discussion about whether the central bank should have a public inflation target.

This wasn’t the first time the idea had come up — there was a long debate about the merits and costs of a formal target in January, 1995 — and it wouldn’t be the last. The Fed didn’t announce a “longer-run goal” of 2 per cent annual growth in the level of the personal consumption expenditures deflator until January, 2012. We want to compare the arguments in 1995 and 2009, which were conducted in private, as well as the subsequent public statements of various officials who seem to have changed their minds between 2009 and 2012. Read more

Further reading

Elsewhere on Tuesday,

- Born red, the rise of Xi Jinping.

- The strange tale of Carl Mark Force IV, Bitcoin secret agent and pirate. We await the film.

- Bernanke. Bernanke. Bernanke.

- The adventures of Wally the chief economist continue.

- A much needed Greek dictionary.  Read more

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Dealmaking is off to a running start this year – the value of mergers and acquisitions struck in the first three months this year is up 21 per cent on a year ago making this the fastest start to a year since 2007.

The Heinz takeover highlights some trends for the year – size-wise, big is good; the US rules the roost and independent advisory firms are nabbing more mandates. But the feverish search for new treatments by drugmakers facing a patent cliffs means the healthcare sector is leading the charge. The big leveraged buyout meanwhile is starting to look like an endangered species – deals have hit a six-year low. (FT) Read more

The Fed wonders where inflation comes from — 2009 transcripts edition

Professor Paul Krugman feels so strongly that the US and other rich countries would have recovered better if only prices had risen faster that he wrote two columns, one in April 2012, and another in May 2013, with literally the exact same headline: “Not Enough Inflation.”

While we’re inclined to agree with his reasoning, it’s worth repeating, as we have in earlier posts in this series, that the US actually ended up getting a lot more inflation than the Fed’s staff expected at the start of the recovery. Moreover, the staff almost always expected less inflation than any of the policymakers on the Fed’s Open Market Committee.

On December 16, 2009, researchers from several of the regional reserve banks gave a series of presentations that attempted to explain where inflation comes from and why it wasn’t behaving as the Fed’s staff had been expecting. Read more

Did Bernanke forget about QE?

Economics blogger Ben Bernanke wrote today on why interest rates are lower than they’ve been in the past. His argument is that changing estimates of future growth and inflation are to blame, rather than an overly activist Fed. While we have some sympathy for this view, we’re struck by the fact that it partly contradicts what Bernanke said when he was actually at the Fed.

In particular, compare this passage from Bernanke’s recent post (emphasis ours): Read more

Dear Slater & Gordon shareholders

Congratulations! Assuming Quindell shareholders give it the nod and UK financial and legal regulators approve, the Australian-listed law group Slater & Gordon will soon be the proud owner of Quindell’s professional services division.

What are you buying? The UK’s largest ambulance chasing law firm, for one, but rather more than that. We don’t have the answers, but here are the questions to ask about the deal, as well as the ongoing peculiarities of legal accounting.

First up: what is Quindell Professional Services? Read more

The ungagging of Bernanke

What death of blogging?

Now that I’m a civilian again, I can once more comment on economic and financial issues without my words being put under the microscope by Fed watchers. I look forward to doing that—periodically, when the spirit moves me—in this blog.

- Ben S. Bernanke | March 30, 2015

Here’s his first, on interest rates and not murdering seniors… Read more

Your Shanghai equity frenzy, we have “a fresh crescendo” people

Just going to leave these few charts here for a second…

That’s from BNP Paribas, this is via Tom Orlik and a few others: Read more

Quindell legal sold to Slater & Gordon – Update

Quindell plc (AIM: QPP.L) announces that it has today entered into a conditional sale and purchase agreement to dispose of the Professional Services Division (“PSD”) to Slater and Gordon Limited (“SGH”) for an initial cash consideration of £637 million and further contingent cash consideration payable in respect of the future settlement of its clients’ noise induced hearing loss (“NIHL”) cases (“Disposal”).

Quindell’s law firm is to be sold to Slater & Gordon, the Australian listed law group, and shareholders will get half a billion returned to them in cash in the second half of 2015.

More disposals to come, restatement of past accounts likely, and a new chief executive is needed again, while the chief lingering question is what remains. Read more

Further reading

Elsewhere on Monday,

- Your Shanghai equity frenzy continues.

- Aren’t we all Keynesians now? Apparently not.

- In 2014 Apple spent more on repurchasing stock than the top 500 Asian firms combined.

- Three inequality tales.

- The Kabuliwalas (Afghan money lenders) are getting lost in the bylanes of Kolkata. Read more

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Iranian officials took nuclear talks to the wire, raising a further obstacle by saying that they are no longer willing to ship their atomic fuel out of the country – a critical element of a proposed deal and one with which Iran had previously been on board. (NYT)

Meanwhile tensions were rising elsewhere in the Middle East as Arab leaders hatched plans for a joint military force, underlining Middle Eastern Sunni nations’ determination to challenge Iran’s expanding influence in the region. (FT) Read more

HeinzKraft and the lack of leaks

The Wednesday morning announcement that Heinz would buy Kraft was that rare thing, a big deal which didn’t leak.

The circle of advisors was small. Heinz, controlled by Warren Buffett’s Berkshire Hathaway and Jorge Lemann’s 3G Capital, were advised by Lazard, while Kraft were advised by Centerview. The public relations team at Brunswick only got the call on Sunday night, we hear.

Still, there were some lucky buyers of Kraft stock in the market before the deal was announced, with a number of block trades going through at $62 per share. Read more

Buiter on soggy global growth in 2015

Willem Buiter, Citi’s global chief economist, believes global growth will come in at somewhere between “moderate and modest” in 2015, with his team shaving their growth target from 3 per cent last month (and 3.3 per cent six months ago) to 2.9 per cent.

As Buiter noted in a meeting in London on Friday, it’s also unlikely that in the long run currency wars, which wash each other out, will help to drive demand: Read more

Markets Live: Friday, 27th March, 2015

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Dette er nødder. Hvornår er styrtet?

From the Wall Street Journal’s picture of the Danish housing market:

“People will often put in an offer even before they see the apartment,” said Christopher Christiansen, a property broker at Danish real estate agency Home A/S. “Sometimes they will even sign before they see it.”

A cost of debt close to zero for house buyers seems to be having some sort of effect. Read more