Iren Levina, economics lecturer at Kingston University, brings to our attention a fascinating, if under-appreciated, phenomenon in finance.
She describes this as the “puzzling rise in financial profits and the role of capital gain-like revenues” throughout most of the 2000s, which were totally delinked from real economic growth during the period.
Okay. Why so puzzling you ask? Don’t we know these profits were the result of too much risk taking? And haven’t there been hundreds of papers about this sort of thing?
Well, yes. But this isn’t quite Levina’s argument.
In a paper published in April this year she instead argues that the reason financial profits became disassociated from real economic growth was because of the way they were formed and the way they were transferred through the financial system consequently.
More to the point, because they were enabled by the very phenomenon of “capital gain-like revenues’.
Unfortunately, the monetary assets which facilitated these revenues have been incorrectly understood by the financial system. In Levina’s eyes they are not, as many believe, borrower liabilities matched by real assets at financial institutions, but rather borrower liabilities matched by something altogether different. Read more
From AIB’s IMS on Monday…
Based on the number of shares currently in issue and the closing share price of Friday 9 May 2014, AIB trades on a valuation multiple of c. 8x* 31 December 2013 Net Asset Value (NAV). The bank notes that the median for comparable European banks is c.1x NAV. Read more
Paul Krugman had an insightful post this week on secular stagnation. It alluded to the fact that bubbles may increasingly be coming to our rescue by inadvertently propping up our economy in a way that usually boosts employment.
We might try to figure out why we seem to need leverage and bubbles to have full employment, and try to fix it. More thoughts on that on another day. But what if that isn’t an option?
Paul Krugman has penned a rather wonderful explainer on the economics of Google Reader, and why it makes economic sense for Google to shut down a much-loved service like Reader even if people say they are prepared to pay for it.
Krugman actually picks up where Ryan Avent left off, but the following paragraph does a good job of nailing the problem:
Basically, if the monopolist tries to charge a price corresponding to the value intense users place on the good, it won’t attract enough low-intensity users to cover its fixed costs; if it charges a low price to bring in the low-intensity user, it fails to capture enough of the surplus of high-intensity users, and again can’t cover its fixed costs.
Here’s an interesting view.
Is the search for yield getting in the way of all rational sense in the market? Read more
Belgian bonds are blowing out.
Which means pain for any (unhedged) entity holding the stuff — for instance, Belgian banks. Citigroup attempts to quantify Belgian financials’ exposure to their host country in a Wednesday research piece — though it’s worth noting that they do reckon Belgium “is in a far stronger position than the [European] peripheral countries” by dint of its relatively healthy current account and smaller deficit. Read more
From sub-debt to equity– shareholders do not like news that Ireland might take a majority stake in the last of its big independent banks, Bank of Ireland.
Last week’s unlikely equities outperformer? One Allied Irish Banks.
Allied managed a more than 40 per cent rise last week (albeit from low levels) which you can see in the below chart. The story in credit, however, was rather different. Read more
Question: why would a stable, big Japanese company with huge cashflow, a high credit rating, a dividend yield on its shares of 2.9 per cent and ready access to debt markets — where its bonds trade at yields of under 0.5 per cent — want to launch a straight equity issue of Y555bn, or $6.65bn?
Indeed, many investors and analysts asked the same question after Tokyo Electric Power, or Tepco, Japan’s biggest utility company, announced plans for the monster share issue — the first such issue in nearly 30 years. The lead underwriter for the issue is Nomura, Japan’s biggest broker. Read more
BP can meet the costs of its huge oil spill in the Gulf of Mexico without issuing new shares, the company said on Monday, rejecting recent speculation that it was seeking a bail-out from a strategic investor, the FT reports. The company has launched an appeal for support to Middle Eastern and other international investors, arguing that its shares are good value after their near-50 per cent fall since the Deepwater Horizon disaster on April 20. Separately, the FT says the spill has drained BP of funding options.
Usury (pronounced /ˈjuːʒəri/, comes from the Medieval Latin usuria, “interest” or “excessive interest”, from the Latin usura “interest”) originally meant the charging of interest on loans. This would have included charging a fee for the use of money, such as at a bureau de change. After countries legislated to limit the rate of interest on loans, usury came to mean the interest above the lawful rate. In common usage today, the word means the charging of unreasonable or relatively high rates of interest. As such, the term is largely derived from Abrahamic religious principles; Riba is the corresponding Islamic term. The primary focus in this article is on the Christian tradition. Read more