The (early) Lunch Wrap

Good morning New York,


Chinese deposit growth, but not as we knew it

Chart du jour from BCA Research:

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Just the minutes

The last Monetary Policy Committee meeting was on October 7 & 8, and much has happened in the last two weeks.

Volatility has stirred, and the market-implied timing for the first UK rate rise has been pushed out by about three months, from May to August, according to Citi. So the MPC minutes may not be the most relevant discussion for today, but in light of recent speeches, read on in search of a more doveish tone.

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Fed talk, inequality, and the lawless border town between fiscal and monetary responsibilities

It’s hard to say which was more surprising — the passages in Janet Yellen’s inequality speech last week that appealed to American values, or the topics she chose to omit entirely.

To start with the latter, the interdependent relationship between inequality and economic growth has become a mainstream topic of economic debate in recent years, and a very contentious one. Read more

Further reading

Elsewhere on Wednesday,

- Regulating variable pay is a world beater of a terrible idea…

- Of Rony Abovitz, CEO of Magic Leap:“In 2013, Abovitz gave a very bizarre speech at TEDxSarasota during which he wore a space suit while two giant furry creatures danced around a box of fudge.”

- Arkansas has completely surrendered to Bill Clinton… and a 404 page work keeping.  Read more

The 6am London Cut

Markets: Bourses in Asia-Pacific were mostly positive, taking their lead from gains on Wall Street and better-than-expected Japanese export data. The Nikkei 225, which lost 1.5 per cent on Tuesday following the release of sluggish Chinese gross domestic product data, reversed with a gain of 1.6 per cent following the healthy rise in exports. The Japanese market also benefited from positive news in the US, notably strong earnings from Apple and US home sales data, which helped the S&P 500 to its biggest one-day gain in the past year, closing up 2 per cent at 1,941. (FT’s Global Markets OverviewRead more

The Closer


- Martin Wolf castigates the German economic model, which has produced zero productivity gains since 2007 Read more

Rally Monkey is back from vacation to celebrate biggest 1-day S&P gain of the year

After a few weeks of plummeting bond yields, crashing stock markets, and panicked calls for additional asset purchases by the Federal Reserve, an old friend returned:

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Why would the ECB buy corporate bonds?

Reuters is reporting that the European Central Bank might be willing to purchase corporate bonds as part of its €1 trillion effort to restore “the size of [its] balance sheet towards the dimensions it used to have at the beginning of 2012.” The story has also been picked up by the FT and WSJ.

We didn’t immediately get why the ECB would decide to do this, especially since spreads on even the junkiest of junk debt are still quite narrow. (Lufthansa’s recent 5-year note yielding just 1.1 per cent at issuance comes to mind.)

One explanation is that the size of the markets the ECB has already agreed to target — asset-backed securities and covered bonds — is too small for the central bank to achieve its objectives. Read more

London Whale — some NY Fed blubber

Since it’s curiously hard to find on the NY Fed’s home page, given the prominence of Bill Dudley’s recent firebreathing speech warning against complexity and cultural dysfunction in US banks…

Click for the Federal Reserve inspector general’s account of how the NY Fed failed to follow up on the early signs it had uncovered of risks in JPMorgan’s Chief Investment Office. Read more

FREE e-book offer for FT Alphaville readers

Numbers are limited, so no more than 6 downloads per registered user please. (Before you click, it’s an 8meg file.)

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Markets Live: Tuesday, 21st October, 2014

Live markets commentary from 

Update: moles still largely unwhacked in China

If there’s one sure bet in China it’s that money, uh, finds a way and that shadow banking (or whatever less objectionable name you wish to apply) will do its damndest to help. Otherwise, what’s the point?

In this episode, crowd funding. Read more

The (early) Lunch Wrap

Total chief dies in Moscow air crash || China GDP growth slowest since global crisis || Apple smashes through forecasts || UK public finances deteriorate || Facebook’s new board member apologises for harassment || Libya-Goldman clash sheds light on formerly secretive fund || Asos profits dip unstylishly by 14% on strong pound || Mark Carney launches review after BoE payment system crash || Markets Read more

On the subject of Buffett favourites

After Tesco and IBM, Coca-Cola earnings are out on Tuesday.

You’ll likely have more luck trying to prise a Cherry-Coke from Warren Buffett’s grasp than get him to sell his stake: a favourite since 1988, Coca-Cola is worth multiples of what he paid for it and the Sage is not one for selling much of anything.

Still, Wintergreen Advisors is not going to stop agitating at the soft drink maker. David Winters was a strident critic of the 2014 pay plan for executives that has since been revised, and ahead of Coke’s results he has 12 questions for the company that are worth a read (with our emphasis). Read more

New York Fed taking cues from Occupy on banker pay

That was our takeaway from reading Bill Dudley’s speech at the “Workshop on Reforming Culture and Behavior in the Financial Services Industry”.

His thesis is that skewed incentives in banks and other financial firms encourage excessive risk-taking and even outright illegal behaviour. Losses from wild bets that go badly tend to be borne by shareholders and the rest of society, while the gains are often hoarded by the mid-level individuals making the trades. There is also a timing issue, where a trader can collect a bonus today for engaging in an activity that appears profitable in the short-term but has a high likelihood of catastrophic failure in the medium term. Read more

Further reading

Elsewhere on Tuesday,

- Inside the Ebola wars.

- Insider traders mostly keep their tipping within their ethnic groups, except Western Europeans, who tip and are tipped promiscuously.

- The wiki story.

- Sovereign-debt relief and its aftermath: The 1930s, the 1990s, the future? Read more

The 6am London Cut

Markets: Bourses around Asia were mixed following news that China’s gross domestic product expanded at its slowest pace since the first quarter of 2009, and after a choppy session on Wall Street. The figure raises concerns about global growth prospects, and increases the likelihood of Beijing introducing more stimulus measures. The latest quarterly numbers mean China’s economy this year is almost certain to register its slowest annual growth pace since 1990. However, the reading beat analysts’ consensus estimate of 7.2 per cent, prompting bourses most exposed to the country to heave a sigh of relief. Japan’s Nikkei fell, having on Monday risen nearly 4 per cent – its biggest one-day gain since June 2013 – following local media reports that Japan’s $1.2tn public pension fund was likely to increase its holding of domestic stocks.(FT’s Global Markets OverviewRead more

The Closer


- Why New Yorkers can’t find a taxi when it rainsRead more

Secular stagnation and the paradox of worth

Gauti Eggertsson and Neil Mehrotra’s latest stab at modelling secular stagnation can be found here.

It includes explanations about the role of demographics, technological displacement, the liquidity trap and the paradox thrift, toil and flexibility within the secular stagnation framework — and there’s also a really neat explanation about the effects on capital, and in particular productive capital’s tendency to depreciate more quickly than might otherwise be expected. (You know, there’s more stuff being produced than expected, so the return on investment is never quite achieved in time, due to increasingly lower barriers to entry thanks to technique.)

The flip side of that scenario, however, is that unproductive capital becomes strangely useful for dodging depreciation for as long as there is belief in the asset class; hence the tendency for bubbles to form in asset classes which can’t easily be over-produced. At least not without significant investment. Read more

Floating-rate debt is great when interest rates go down

Many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward…American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.

– Alan Greenspan, February 23, 2004 Read more

The Sage gets what he wants at IBM – Update

A brief reminder, amid the headlines about losses for the largest shareholder in IBM, that this is what Warren Buffett said that he wanted.

Back in 2011 Mr Buffett’s Berkshire Hathaway spent about $10.9bn to buy about 63.9m shares in the group. It was the first big technology investment for the famously tech-adverse investor, and his reasons had little to do with disruption, likes, clicks or eyeballs, and a lot to do with the financials.

Happily, the Sage of Omaha explained his thinking in that year’s annual report, and how he would react were the stock price to languish. Read more

A new raison d’être for cryptocurrency, but an age old problem

Steve Randy Waldman’s latest post at Interfluidity talks about econometrics, open science and cryptocurrency. He makes the point that the real potential of “blockchain technology” is rooted in the possibility that it could one day help many different groups and movements achieve consensus for the sake of mutual discovery and progress.

There is, in his opinion, a need to create a public forum in which scientists, academics and inventors can share data and research, and in a way that allows them to shed the mal-effects of groupthink and open themselves up to public scrutiny and refutation. Read more

Real Time Gross Settlements fail at the BoE

From the BoE on Monday:

The Bank of England has identified a technical issue related to some routine maintenance of the RTGS payment system and has paused settlement while we resolve it. We are working to address this issue as quickly as possible, and restart the RTGS payment system in a controlled manner. The most important payments are being made manually and we can reassure the public that all payments made today will be processed.

What does this mean and do you have to panic?

Best consider it a BoE “blockchain” ledger fail. Read more

Markets Live: Monday, 20th October, 2014

Live markets commentary from 

The (early) Lunch Wrap

SAP cloud costs || Jindal raid hits shares || Intercontinental Exchange proposes Libor fix fix || Markets mixed || Greene King tops up Spirit offer || UK backs hail Mary medicine || What is Saudi up to?  Read more

Regressing to the mean in China or why if something cannot go on forever, it will stop

With a h/t to Marginal Revolution, here’s Larry Summers and Lant Pritchett on why — for the same reason the USSR didn’t overtake the US, and Shinzo Abe has a tough job on his hands — “excessive extrapolation of performance in the recent past and treating a country’s growth rate as a permanent characteristic rather than a transient condition” is a bad idea.

Most particularly where China is concerned. Read more

Tibco and Pearson: shares and shares alike

The strange story that Tibco Software and their adviser Goldman Sachs had not used an accurate share count in their financial analysis, which evaluated a $24 per share buyout offer from Vista Equity Partners, will awaken unpleasant memories for the Financial Times’ parent company, Pearson PLC.

In May 2010, the publicly-traded securities pricing company Interactive Data Corporation (IDC), which was then 60 per cent owned by Pearson, was in final discussions to sell itself to private equity firms Silver Lake Partners and Warburg Pincus. A price of $34.00/share had been agreed to but, at literally the last minute, some previously undisclosed IDC shares were discovered. Read more

Spending versus consolidation, German political capital edition

Two sets of charts from BCA Research with unclear implications:

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Further reading

Elsewhere on Monday,

- Davies: What is global market turbulence telling us?

- Credit kleptocracy and China’s bezzle.

- European banking stress tests — pour encourager les autres?

- What has happened before will happen again. And we’ll have forgotten.  Read more