bad apple

Some Banking News

Bank stocks are making a comeback you guys: “with yields expected to keep climbing as the economy improves and as the Fed begins to embark on a multi-year process of policy normalization, the environment for bank stocks is brightening.”  You’re probably sitting there thinking “sure, fine — But what inning?!”  “We’re only in the fourth inning of credit demand,” says banker.  Nice.  Meanwhile, foreign exchange rigging is $5.6 billion under the bridge (alt): “the DoJ said that between December 2007 and January 2013, euro-dollar traders at Citi, JPMorgan, Barclays and RBS — who described themselves as members of ‘The Cartel’ — ‘used an exclusive electronic chat room and coded language to manipulate benchmark exchange rates’…the total penalty being paid over forex now exceeds the approximately $9bn paid to settle the Libor rigging claims.  The banks settling the forex allegations…are hoping that Wednesday’s deal will enable them to finally draw a line under both affairs.”  Meanwhile, “nearly one in five [financial service professionals] feel financial service professionals must sometimes engage in unethical or illegal activity to be successful in the current financial environment.”  Also, “the number of people working in the securities business nationally has returned to 2007 levels, as has the gap between the compensation of Wall Street workers and that of everyone else…Average pay per full-time worker in the securities industry averaged 2.2 times that of the average American worker for the 70 years that ended in 1999 and peaked at 4.2 in 2007.  It has rebounded to 3.6 times as high in 2013, and looks likely to have risen further since then.”  But you guys, “it is unfair to suggest the entire industry is a den of thieves…Structurally, Wall Street firms carry much less risk than they did years ago.  Capital requirements are significantly higher.”  Indeed.  “It might be thought that [diminished liquidity in markets] is an unintended consequence of regulation…But comments from Bank of England Governor Mark Carney last week suggest investors should think again: this may be a feature of the new world, not a glitch…A vital part of this argument is that due to the regulatory overhaul of the financial system, markets have to bear liquidity risk — and should charge to do so…This is difficult for markets to reflect, however…as the assumption of abundant central-bank supplied liquidity has driven down the premium charged for investing in illiquid assets.”  


Dear China: We’ll Be The Judge

Here’s something people are really focused on: “The decline of Hanergy Thin Film Solar Group Ltd. was as spectacular and inexplicable as its ascent.  Just 24 minutes of Hong Kong trading erased $18.6 billion of market value and wiped out almost four months of gains that made it more valuable than Sony Corp. of Japan.”  Apparently the chairman missed the shareholder’s meeting and everything exploded.  Bubbles, amIright?!


EU: What Bound Rout?


JPN: GDP And Stock Market Have Been Beating Expectations Recently


Kentucky commonwealth stadium

Dear Fellow Shareholders,

Jamie Dimon’s latest letter to shareholders has an interesting section on “how the table is set” for the next financial crisis (“Where do you want me?” asks future rogue criminal).  First, some good news: “We will enter the next crisis with a banking system that is stronger than it has ever been.”  Harder! Better! Faster! Stron–“There is a greatly reduced supply of Treasuries to go around — in effect, there may be a shortage of all forms of good collateral…It is unlikely that we would want to accept new deposits the next time around because they would be considered non-operating deposits (short term in nature) and would require valuable capital under [new regulations]…Non-bank competitors are increasingly beginning to do basic lending in consumer, small business and middle market…it is my belief that in a crisis environment, non-bank lenders will not continue rolling over loans or extending new credit except at exorbitant prices that take advantage of the crisis situation.”  K.  Speaking of nonbanks, “many big banks have retreated from the repo market following the adoption of costly new regulations…This opens up a potential new revenue opportunity for nonbank brokers and others who aren’t subject to the same regulations.”  And the good taxpayers of Kentucky aren’t (directly) subject to the same regulations: “Stephen Jones, who oversees about $4 billion of state money at the Commonwealth of Kentucky, said he completed his first direct repo trade in January, without using a large, bank-owned broker-dealer.  The state is lending $123 million this month to a REIT called Invesco Mortgage Capital Inc., up from $50 million earlier.”


Basically Nobody Knows The Difference Between A Bubble And A Bull Unless We’re Talking China

“The question of whether or not we are in a tech bubble has been raised regularly for years now…it’s easy to look at numbers, whether that be valuations, revenue multiples, or simple counting stats, but any analysis is incomplete without understanding markets.  In 1999 most consumer markets were simply not ready, whether it be for lack of broadband, logistics build-out, etc…Today, by contrast, many of the most valuable unicorns are consumer-focused companies like Uber or Airbnb.  Moreover, these companies are competing not with other tech companies but rather with entirely new (to tech) industries like transportation or hospitality.”  “Optimism in the face of growing uncertainty is hard to sustain.  That seems to be the crux of the problem facing the market.  The current situation — very optimistic implied earnings growth and deteriorating economic uncertainty — is a temporary condition…If the market’s pricing of earnings growth drops to the long-term realized growth mean of 7%, the S&P 500 would drop 11% to 1850.”  Meanwhile, Dan McCrum has dropped the mic on China.


USA: FAA Appears To Be Giving The OK On Drones For Insurance Companies


USA: “Could A Computer Do My Job?” Is A Decent Question To Be Asking Yourself


Oil: Is Volatile

Explaining the ECB negative deposit rate effectsMunicipal Debt: A Win-Win Situation For Everyone Present Generations

Despite how badly the United States could use an infrastructure upgrade (e.g. “Globally, the U.S. ranks 19th — behind Spain, Portugal and Oman — in the quality of its infrastructure), state and local governments are holding back, thanks to 1) heavy debt hangovers from the financial crisis, and 2) projects in limbo as the federal government’s Highway Trust Fund runs out of money.  “To finance big infrastructure projects, state and local governments usually go to the municipal bond market, but in the last few years, they’ve issued few bonds for new capital projects despite historically low interest rates.”  Meanwhile, “issuers from California to New York have scheduled $11.7 billion of long-term sales in the next 30 days, the busiest calendar in three months.”  So supply is going up, but what about demand?  “Municipal investors receiving $104 billion of principal and interest payments in the next three months” could help extend the muni rally even further in 2014.  Meanwhile, Moody’s would like you to know that Illinois politicians are running this thing into the ground.

Hog Farmers Concerned About Growing Hogs, Potential For Slaughter

“The Fed’s growing worry (alt) — which could influence future interest rate decisions — is that if investors start taking undue risk it could lead to economic turbulence down the road.”  How’s that for irony?  Reuters says Fed officials “are right to worry, but in casting blame, policymakers need to look in the mirror.”  Meanwhile, “the business of bundling junk-rated corporate loans into top-rated securities is booming like never before after the implementation of regulation aimed at making the financial system safer.“  Also, “lenders such as Ireland’s Allied Irish, Spain’s Bankia and Portugal’s Millennium BCP were once regarded as having little chance of long-term survival.  But today international investors are prepared not just to lend them billions of euros — they are doing so without collateral.  One reason such crisis-hit banks have returned to favour (alt) is that investment funds have taken on more risk in the hunt for better yielding assets…’Right now everyone is a yield hog.’”

Alibaba’s Money Market Fund Is Now 4th Largest In The World

The explosive rise of Yu’e Bao (Alibaba’s online money market fund) surprised everyone, including Alibaba, which is proving to be a potential disintermediator for the entire financial industry…High yield with perfect liquidity has made Yu’e Bao an unbeatable product, draining 400 billion yuan from banks in a click.”  Meanwhile, Chinese state media is printing things like this (alt): “foreign technology services providers such as Google and Apple can become cybersecurity threats to Chinese users…To resist the naked hegemony, we will draw up international regulations, and strengthen technology safeguards, but we will also severely punish the pawns of the villain.”  I guess that’s a no-go for Facebook Autofill and Google Wallet in China?

USA: The Rebirth Of U.S. Manufacturing: Myth Or Reality?

HBR argues that the debate over a U.S. manufacturing renaissance “is less black and white than either the cheerleaders or the naysayers would suggest.”  The results of an L.E.K. Consulting survey indicate “modest improvement in U.S. manufacturing but not a wave of reshoring.  More companies are investing in the U.S. or considering it as a location for new manufacturing facilities.  But this is essentially a rebalancing after many years in which manufacturing shifted overwhelmingly to lower-cost nations such as China.”

Fed: The Chicago Fed Doesn’t Wanna Hear It From Small Banks

“Interest rate changes generally have small effects on bank profits, but changes in economic conditions do matter relatively much more.”

Global: Can We Talk About Portfolio Concentration And Risk Tolerance For A Second?

Also, even Warren Buffett doesn’t practice what he preaches.

EU: Apparently Belarus Is The North Korea Of Europe

Godzilla-sized stimulusReading Too Much Into Bond Rallies And The Gambler’s Fallacy

A Citigroup Equity strategist says don’t read too much into the recent bond rally: “We think [the reason for falling yields is] pretty technical…Look at jobs, auto sales, planned capital expenditures — none of that is indicative of something ominous in the economic data…the justification for the bond rally has been driven by technical factors like people covering short positions.”  Meanwhile, Mohamed El-Erian has a thesis on the recent bond market surprise (US and German 10-year government bonds are very low and the yield curve is flattening): “First, persistent concerns about the failure of American and European growth to ‘lift off’…have been amplified in recent weeks by spreading worries about ‘lowflation.’…Second, central banks have signaled continued willingness to repress interest rates longer in order to stimulate growth and reduce the threat of deflation…Third, market positioning has turbocharged economic and policy factors…the recent yield moves have triggered market stops, forcing them to buy bonds to limit their mounting losses.”  Meanwhile, Morgan Stanley is warning of municipal bonds’ high vulnerability to being blindsided, and suggest “reducing credit risk in a number of sectors, including hospitals, states, tobacco, and transportation.”  Merrill Lynch disagrees: “we remain bullish on rates, bullish on Muni/Treasury ratios, and bullish on credit.”  Furthermore, “we think if the ECB does deliver its promised rate cut and possible eventual QE, it should provide a good support for global markets.”  Also, the worries about a market correction seem to get louder the longer we go without a market correction.  Meanwhile, here’s a brush up on Gambler’s Fallacy.

Homeowners And Homebuyers: “You Go First”

Housing is stuck in a bit of a chicken or the egg dilemma:  “when inventory shrinks and prices move higher, it makes it even more difficult for a buyer to upgrade to a larger home.  And if they can’t buy, they can’t sell, reducing the number of lower priced, starter homes…demand is so high that real estate agents are actively seeking people who are willing to sell.  ‘You get letters in the mail asking if you’re interested in selling…People knock on your doors.’”  Furthermore, “the competition for the homes that are available is so intense that buyers need to bring plenty of cash to the table.”  Which is a problem for about 19 million homeowners: “At the end of the first quarter, some 18.8% of U.S. homeowners with a mortgage — 9.7 million households — were ‘underwater’ on their mortgage…In addition to homeowners who are underwater, roughly 10 million households have 20% or less equity in their homes, which makes it difficult for them to sell their homes without dipping into their savings.”  Furthermore, “the least expensive homes — those in the lower third of the price spectrum, which first-time home buyers are most likely to be shopping for — are much more likely to be underwater than higher-priced homes.”

Tech Buzzwords: The Fog, P2P Lending

Forget the Cloud; the Fog is the future (alt): “Modern 3G and 4G cellular networks simply aren’t fast enough to transmit data from devices to the cloud at the pace it is generated, and as every mundane object at home and at work gets in on this game, it’s only going to get worse.  Luckily there’s an obvious solution: Stop focusing on the cloud, and start figuring out how to store and process the torrent of data being generated by the Internet of Things (also known as the industrial internet) on the things themselves, or on devices that sit between our things and the internet…The bottom line is, we just have too much data.  And we’re just getting started.”  I’m predicting a “Clear-Skies” disruptor in the big data/cloud computing realm to appear sometime soon, you heard it here first.  Meanwhile, “the global credit meltdown may have shattered public faith in mainstream financial institutions by those like her in need of funding, yet it could not have come at a better time for the fledgling and fast-growing P2P loan industry (alt)..Just like a bank, P2P loan sites check the credit history of borrowers, charging more to those who have a history of defaulting on loans.  But unlike banks they use new technology to keep their overheads low, and rates are largely determined by the people who lend the money.”

USA: Credit Suisse Pleads Guilty In Felony Case

What’s surprising here isn’t that Credit Suisse is guilty of helping rich Americans pay fewer taxes; it’s that they plead guilty to a felony charge.  Attorney General Eric Holder says “this case shows that no financial institution, no matter its size or global reach, is above the law.”  The SEC, however, doesn’t really agree: “Last week, the [SEC] also voted to grant Credit Suisse a temporary exemption from a federal law that requires a bank to hand over its investment-adviser license in the event of a guilty plea.”  Also, “authorities agreed to announce the plea after the markets closed in the United States, preventing the bank’s stock from plummeting.”  Furthermore, “the plea deal will not require the bank to turn over the names of its American account holders.”  So anyways, shares in Credit Suisse (CS) opened +1.00% this morning, nothing to see here…

Global: Chinese Hackers Show Humans Are Weakest Security Link

In case you missed it, the United States indicted five Chinese military officials yesterday for stealing trade secrets from Alcoa, Westinghouse Electric, Allegheny Technologies, U.S. Steel Corp, the United Steelworkers Union and SolarWorld.  Wanna know their elaborate cyber-hacking scheme?  “By sending employees false e-mails purported to be official messages, hackers were able to trick them into divulging user names, passwords and other sensitive information.”  Apparently they call it “spearfishing” in the hacker biz.

Consumer Price Index breakdownPCE Price Index breakdownBrighter Financial Future: New Neutral Edition

“The United States posted a $107 billion budget surplus in April, according to Treasury Department figures released on Monday, suggesting the federal government was on track to slash its annual deficit.  Washington usually runs a surplus in April because households have a deadline for settling tax bills that month.”  Also, overall debt-to-GDP projections for the United States are looking better: “Right after the credit crisis, projections showed the ratio of debt to gross domestic product in the U.S. reaching 225 percent by 2040.  Improvements to the economy since then have increased tax receipts and lowered demand for safety net programs.  According to the latest forecast, debt-to-GDP ratio will be a bit more than 100 percent by 2040.”  The Federal Reserve Bank of Cleveland has an Inflation 101 report meant to prepare the public for long-term lowflation.  Meanwhile, Bill Gross is calling his outlook for the next three to five years the “New Neutral”.  He sees “a global economy that remains under the weight of a lot of debt, including a ‘sharp increase’ in debt in China, and at the same time an economy that can’t generate demand that keeps up with potential output.”  Furthermore, “the investment implications are striking: low returns yet less downside risk than investors currently expect; an end to bull markets as we’ve known them, but no perceptible growling from the bears.”  Meanwhile, a new study finds that some investors “are living in a world of unrealistic expectations and conflicting sentiments, leaving them hoping impractically that events will work out their way because they see no other route to success.”  Jeffrey Gundlach seems to agree with Bill Gross, however he is adding his own “No Normal” spin: “more retirees mean a shrinking workforce, leading to less spending, slower inflation and greater demand for low-risk, income-producing investments.”  Also, Mark Gilbert is on the hunt for the market volatility killer: if “‘New Neutral’ has replaced the ‘New Normal’ as the prevailing economic backdrop, low volatility is (1) due to economic fundamentals and (b) here to stay.’”  Meanwhile, “investors have increased their holdings of cash to the highest levels in nearly two years (alt) and scaled down risk-taking, amid fears of geopolitical instability and questions about the strength of the global economic recovery… One-third of the global panel believes the possibility of Chinese debt defaults poses the biggest risk… Europe is the region most in favour (“eurozone periphery debt is seen as the most crowded trade globally”)… The US is the least-favoured region… Forward-looking sentiment for emerging markets has improved slightly over the past month.”  Also, S&P 500 companies have about $650 billion in cash sitting in foreign banks (alt) earning low interest; “if investors aren’t applying some sort of haircut to the valuations of companies with hefty amounts of cash overseas, perhaps they should be.”

Income Inequality May Exacerbate Recessions Depending On What Triggers Them

“Despite seeing similar nominal dollar losses, the housing crash led to the Great Recession, while the dot-com crash led to a mild recession…What explains these different outcomes?…we argue that it was the distribution of losses that made the housing crash so much more severe than the dot-com crash.  The sharp decline in home prices starting in 2007 concentrated losses on people with the least capacity to bear them, disproportionately affecting poor homeowners who then stopped spending.  What about the tech crash?  In 2001, stocks were held almost exclusively by the rich.  The tech crash concentrated losses on the rich, but the rich had almost no debt and didn’t need to cut back their spending.”

Brighter Financial Future: Wal-Mart Edition

The banks operating in Wal-Mart are pretty good at charging fees (alt): “some customers at banks inside Wal-Marts said they previously used payday lenders but switched to overdrawing bank accounts because it is less expensive.  That was the case with Frank Owens, 38, who opened his Woodforest account in the Cleveland Wal-Mart because of ‘financial difficulties’ at another bank.  Mr. Owens said he overdrew $300 in January and Woodforest repaid itself $330 from his next disability-check deposit three weeks later, the equivalent of a 174% APR.”

Fire All Phasers!

Sanctions against Russia are about to go to “Phase 3”:  “One option being discussed is a plan that would prevent western companies from exporting high-end energy technologies to Russian companies (alt)…Existing projects would be protected, but any new programmes would either receive extended scrutiny or be blocked…Russia is hoping to open up new oilfields in areas such as the Bazhenov shale of Siberia and the Arctic Kara Sea, which will be very difficult to develop without the most modern western technology and expertise.”

Alibaba transaction volume compared to Amazon and eBayEinhorn Cries Bubble, Apple Splits 7-1

David Einhorn of Greenlight Capital says “we are witnessing our second tech bubble in 15 years,” and “what is uncertain is how much further the bubble can expand, and what might pop it.’  He described the current bubble as ‘an echo of the previous tech bubble, but with fewer large capitalization stocks and much less public enthusiasm.’”  Einhorn gives 3 reasons for his bubble call: 1) “the rejection of ‘conventional valuation methods,’” 2) “short sellers being forced to cover positions,” and 3) “big first-day pops for newly minted public companies that ‘have done little more than use the right buzzwords and attract the right venture capital.’”  Even though he isn’t “predicting a complete repeat of the collapse [of the first Tech bubble ~ 2001], history illustrates that there is enough potential downside in [momentum “Cool Kid” stocks] to justify the risk of shorting them.”  And, oh yeah, “the last time the internet bubble burst in the early 2000s, Cisco Systems dropped 89% and Inc. fell 93%.”  Speaking of which, “Amazon raised the stakes in its battle with Netflix (alt) for supremacy in online video streaming by striking a deal with HBO to gain access to some of the most popular shows from the pay-TV channel’s library.”  Meanwhile, “Apple Inc. raised eyebrows Wednesday afternoon by announcing a 7-for-1 stock split along with its (positive) second-quarter earnings…At Wednesday’s closing price of $524.75, the split would price shares at $74.96.”  Here’s something to consider: Apple stock priced at ~$75 as opposed to ~$500 makes it eligible for inclusion in the Dow.  Not only that, but “It makes the stock more attractive to the smaller buyers…It’s better priced and more people will buy it.”  Furthermore, stock splits can sometimes create “a shift in ownership toward less sophisticated individual investors…This creates more liquidity in the stock.”  Which is kind of an argument for market inefficiency?  Meanwhile, here are 5 things to know about Alibaba’s IPO.  And finally, MIT’s 10 most significant breakthroughs in technology over the past year.  

GM Recall Also Looks Bubbly

General Motors recorded its worst quarter (alt) since returning to public listing in 2010 after the costs of its botched ignition switch recall slashed first-quarter net income to $100m.  The results — down 89 per cent in the same period in 2013 — were hit by a $1.3bn charge for the costs of car recalls, mainly related to the ignition switches on a series of older compact cars.”  Meanwhile, “General Motors’ liability for defective ignition switches in its cars is complicated by its bankruptcy in 2009.”  Furthermore, “it seems that the bankruptcy case will probably mean that G.M. has no legal obligation to pay a good chunk of these claims.  Whether it faces political pressure to pay nonetheless is another story.”  Meanwhile, while everyone talks about Mary Barra getting thrown under the bus, I can’t help but notice the warm water and suds everywhere.

Liquidity Drops, ECB Plays “Fantasy” QE

“The amount of spare cash in the euro zone banking system fell to its lowest levels in 2-½ years on Thursday, pushing up short-term money market rates and adding impetus for the ECB to loosen policy further…The last time liquidity fell so low it nudged the ECB to introduce its Long-Term Refinancing Operation, a series of emergency loans to banks…The euro zone overnight bank-to-bank lending rate, settled around 0.22 percent, up about 2 basis points from the previous day but still below the rate of 0.25 percent which the ECB charges banks to borrow cash, known as the refinancing rate.”  This adds fuel to the “QE in Europe” debate; the Financial Times thinks that an ECB asset-purchase program would be ineffective in boosting investor confidence (alt), and that “the ECB is trying to talk the euro lower by playing fantasy QE.”  The more probable scenario for monetary easing could come from sterilization of the ECB’s Securities Market Programme.

Housing-Led Recovery?

Goldman Sachs would like you to know that mortgage-lending standards are choking a housing recovery.  That being said, we may want to temper our expectations for a housing-led recovery in the United States.  While growth in housing prices has been pretty strong over the last two years, the number of people borrowing cash against their home (cash-out refinancing) has been very little, and indicates there is “very little spending out of housing wealth currently.”  Also, “home builders have not been responding to rising home values nearly as aggressively as they did prior to the Great Recession.”

Fed: Forward Guidance: A Pattern Of Always Expecting Higher Interest Rates In Two Years

Global: Home Is Where The Money Is

TerrificHeadlines: Icahn Looking To Launch An Army Of Mini-Icahns

Robot workers of the worldClimate Change, Tigers And Flies

ExxonMobil isn’t all that worried about climate change (alt): in a report on the implications of climate change on Exxon’s business, “[Exxon] accepted that carbon dioxide emissions created by burning fossil fuels were raising global temperatures, and that warming created risks, but argued that the threat needed to be weighed against other objectives, including the need for energy in developing countries.”  Furthermore, “we are confident that none of our hydrocarbon reserves are now or will become ‘stranded’.”  Meanwhile, the latest report from the U.N. Intergovernmental Panel on Climate Change (IPCC) says “India’s high vulnerability and exposure to climate change will slow its economic growth, impact health and development, make poverty reduction more difficult and erode food security.”  Furthermore, “the report predicts a rise in global temperatures of between [0.5 to 8.6 Fahrenheit] and a rise of up to [32 inches] in sea levels by the late 21st century due to melting ice and expansion of water as it warms, threatening coastal cities from Shanghai to San Francisco…evidence suggests tourists will choose to spend their holidays at higher altitudes due to cooler temperatures or the sea level rises, hitting beach resorts.”   Meanwhile, former Chinese president Jiang Zemin is worried about a different kind of footprint (alt): “[Zemin] has urged the current leadership to rein in the toughest anti-corruption campaign in decades, which is threatening the interest of some Communist party elders…In the past few weeks, producers of high-end spirits like Diageo, Pernod Ricard and Remy Cointreau have reported double-digit first-half collapses in sales in China and have explicitly blamed Beijing’s austerity drive for their woes.”  President Xi Jinping’s effort to purge China of all its tigers and flies (alt) has become a seriously dangerous ordeal for those in China described as part Dick Cheney, part J Edgar Hoover with an annual spending budget of around $100bn.  Also, a closer look at the “anti-vice driven growth in Chinese government deposits” suggests that the anti-corruption campaign could be dragging Chinese GDP down by about 90bps.

Eurozone Recovery

“On balance [the bullish purchasing managers’ reports] suggest euro-zone manufacturing is picking up, with the French and Italian surveys beating expectations and helping to offset a slight undershoot in Germany.  Indeed, overall the survey details suggest euro-zone manufacturing performance is starting to converge at a modest but steady clip.”  Meanwhile, “German unemployment fell for a fourth consecutive month in March…highlighting the strength of the job market in Europe’s largest economy and boding well for expectations that domestic demand will drive growth this year…Germany’s unemployment rate is considerably lower than the euro zone average, where the jobless rate was at 11.9 percent in February.”

USA: Krugman Debunks The Skills Gap Myth

Paul Krugman loves to kill zombies.  Here’s the latest: “the belief that America suffers from a severe ‘skills gap’ is…a prime example of a zombie idea — an idea that should have been killed by evidence, but refuses to die…In an ever-changing economy, there are always some positions unfilled even while some workers are unemployed, and the current ratio of vacancies to unemployed workers is far below normal.  Meanwhile, multiple careful studies have found no support for claims that inadequate worker skills explain high unemployment.”  For what its worth, Boston Consulting Group concurs.  Meanwhile, the Economist asks, How productive are robots?: “There is an enormous difference in the intensity with which robots are used in the manufacturing sectors of different economies…this difference can partly be explained by the composition of the manufacturing sector; robots are used most intensively in car manufacturing, and so economies that devote a larger share of manufacturing resources to car production will use more robots.”

USA: Tech Titans Are Vying To Be Your Pocketbook

“Some of the biggest technology companies are now making how they are paid a priority.  Having a hand in how people exchange money, they are realizing, has huge potential to deliver profits — and valuable data.  At stake is not only billions of dollars in revenue, but also the ability to shape how people buy, sell and pay in the future.”  Furthermore, “as smartphones enable users to take their digital wallets into brick-and-mortar locations, retailers and payment providers are reassessing how online money and in-store products might interact.  Beyond just enabling e-commerce on the go, many smartphones offer in-store purchases with digital wallets like PayPal and Google Wallet, using near field communication, or N.F.C., technology.”  Also, “Kiss Your Bank Branch Goodbye” is a common headline these days.

USA: US Equity Investors Ignore Warning Signs (Alt)

“As US equity investors bid adieu to the weakest first quarter in five years, few are dwelling on the lacklustre performance.  Indeed, many appear to be ignoring any warning signs about the economy’s prospects: a disappointing 0.5 per cent gain on S&P 500 in the first three months, set against the strong performance of long-dated bonds since January…’There is still a bit of suspicion in the bond market that there is something more to the economy’s slowdown than the cold weather.’…This has played out in the equity market, with economically sensitive sectors such as consumer and industrial stocks lagging behind, while bond-like proxies, notably utilities and real estate investment trusts, have rallied sharply.”

USA: Markets Are Efficient


Top four fined banksSurprise: “Too Big To Fail” Is Advantageous For Those “Too Big To Fail”

The Federal Reserve Bank of New York has published new research suggesting “the largest US banks have benefited from a significant funding advantage (alt) over their smaller peers;” systemically important banks (“too big to fail”) “enjoyed an extra $60m-$80m of cost savings per average new bond sale (or about 31 bps total) over their smaller competitors until 2009.”  Furthermore, “Fed researchers cautioned that regulators would have to consider trade-offs when breaking up systemically-large banks.  [For example,] capping banks’ size at 4 per cent of GDP would raise the industry’s expenses by as much as $4bn per quarter…Instead, the Fed researchers suggested that requiring big banks to issue longer-term and ‘bail-inable’ debt that can be converted into equity in times of stress, might be preferable to dismantling large lenders.”  Meanwhile, “Wall Street banks and their foreign rivals have paid out $100bn in US legal settlements (alt) since the financial crisis, according to Financial Times research, with more than half of the penalties extracted in the past year.”  Furthermore, near-future litigation costs for big banks are expected to be ~ $151bn, according to the Federal Reserve.

China Could Use More Safety Nets

“Hundreds of depositors have raced to pull their cash (alt) from a small rural bank in eastern China, forcing local officials to take emergency measures to calm the panic after the bank run began to spread…it has been a localised event, contained to one farming county where lightly regulated credit cooperatives and loan guarantee companies failed this year after mismanaging funds…At its doors, the bank broadcast a recorded message on repeat: ‘Savers’ deposits are protected by law.  There is no situation in which we cannot meet cash withdrawal demands.’”  Which isn’t totally true.  Until, at least, the Chinese government establishes the safety net of deposit insurance.  Speaking of safety nets, China will need more if it wants to rebalance the economy successfully: “China’s government is keen to promote consumer spending as a new force in the economy.  The only problem: Chinese households hate to consume.  Instead, they squirrel away their money for a rainy day — not surprisingly, since pension provision is patchy and, in the absence of a decent insurance system, medical costs weigh heavily on the sick.”  Meanwhile, here’s an update on the development of China’s shale-gas industry: “so far fewer than 100 shale-gas wells have been drilled in China, compared with around 40,000 wells in the U.S…’Relative to United States’ shale-gas plays, the [reserves] of the Sichuan and Tarim basins are potentially enormous and, if successful, could rival the Marcellus in terms of absolute scale.’”

EU: Germany’s Bundesbank Gives Its Blessing To QE In Europe

“The European Central Bank could buy loans and other assets from banks to help support the euro zone economy, Germany’s Bundesbank said, marking a radical softening of its stance on the contested policy.”  The President of the German Bundesbank is only one of several Euro policy makers who appear to be relaxing their opposition towards unconventional monetary policy.  This is probably due to three things: 1) people seem to question whether it has much of an impact at all, 2) “more economists are fretting about the risks of getting stuck in a deflationary trap,” and 3) German confidence in their economy is waning.

USA: Many Of Oculus’ Early Backers Not Part Of Facebook Riches

“The big winners of Facebook’s $2 billion deal to buy Oculus VR, a virtual reality headset maker, include a roster of elite venture capitalists who invested in the company early on.  But many who supported Oculus in its early days will walk away empty-handed.  Those would be its backers on Kickstarter, the fund-raising platform that Oculus used to raise $2.4 million in September 2012…Their goal was not to receive equity but rather to see the product come to market.  The smallest backers got merely a ‘thank you.’”  Barry Ritholtz is rather unkind to the sheep scammed by Kickstarter and, by extension, the JOBS Act.

BC: IRS Says Bitcoin Should Be Considered Property, Not Currency

“The I.R.S.’s decision would treat Bitcoin as property subject to capital gains taxes.  Long-term capital gains taxes are capped at 20 percent, a more favorable rate than the top rate of 39.6 percent on federal income taxes.  Individual traders in the currency markets — the British pound, for example — are expected to treat gains or losses as regular income for tax purposes.”

Emerging Markets: MIKTA, Goats And The Yummy

Giles Merritt at Project Syndicate sees a Post-Russian world order forming as a result of their land grab in Crimea.  “The first result of the West’s standoff with Russia is that is spells the end of BRICS…The more important outcome, though, will be how Russia’s former BRICS partners realign with other major emerging economies in the G-20.  Cue the arrival on the world stage of MIKTA — a new group made up of Mexico, Indonesia, (South) Korea, Turkey, and Australia…What the MIKTA countries share are rapid economic growth and increasing influence outside of their own borders.  They have development problems, but they are also models of economic dynamism and innovation with a substantial stake in the way post-WWII global institutions and rules should be reshaped.”  Meanwhile, the G8 is now officially the G7: “If Russia did not change its behaviour, the G7 threatened to up the ante considerably by introducing ‘sectoral sanctions’ including the targeting of Russia’s vital oil and natural gas industries.”  “German Chancellor Angela Merkel said ‘at the moment the G8 does not exist either as a summit or as a format.” Meanwhile, Gary Shilling tries to separate the herd of emerging markets: “When the smoke clears, the securities of the sheep economies (possibly South Korea, Mexico, China and Australia?) may be cheap enough to be interesting.  Still, I don’t expect growth in North America and Europe to be strong enough to absorb the sheep’s exports.  The goats (Brazil, Russia, India, Indonesia, South Africa, Turkey and Argentina) may not collapse, because their government debt is mostly in local currencies, not dollars and other hard currencies, as was the case in the late 1990s.”  Finally, make way for the Yummy: “Yummy stands for ‘Young Urban Male’ and denotes a new ‘metro-sexual shift’ in men’s shopping habits that is set to drive spending on luxury goods for years to come…While HSBC thinks that the shift is a world-wide phenomenon, emerging markets will be the engines of growth in the luxury sector as urbanisation and GDP growth propel social change.  In fact, the ‘metro-sexual shift’ coincides with another trend; luxury goods buyers are getting younger.”

Federal Reserve: Large Legal Costs On The Horizon; “Prime Broker” In Repo Market

$151 billion.  That’s the amount of “operational risk” (legal costs) the Fed deducted from hypothetical future bank balance sheets last week as part of their stress test.  “An official said the Fed decided to increase the deduction by about 45 per cent because of the higher-than-expected negotiated settlements over the last couple of years.”  While mortgage backed securities litigation may be easier to calculate, there is some difficulty with estimating total future legal costs when you consider the recent interest rate/foreign exchange manipulation lawsuits, hiring “princelings” in Asia etc.  Meanwhile, reverse repo at the Fed may be working too well: “Since September, the Fed has been providing bonds from its balance sheet to lenders of cash in the repo market, who take the bonds as collateral and earn money from such activity.  It has now captured a 17 per cent share of daily trading, thus depriving established banks of a significant chunk of their business.”  Furthermore, one broker “says it looks like the Fed has become the ‘prime broker’ – providing a range of trade-related services – to the banking industry.  He adds that shadow bankers are happy to tell their clients they have the Fed as a counterparty.”  Says one Citigroup strategist, “while supporting the shadow banking system in times of crisis is potentially welcome, if it amounts to crowding out dealers and an associated reduction of liquidity in the market, that would at a minimum be a significant offset.”

Those Meddling Investors

A new study suggests that “when companies move their annual meetings a great distance from headquarters, they tend to announce disappointing earnings results and experience pronounced stock market underperformance in the months after the meeting.  Companies appear to schedule meetings in remote locations when the managers have private, adverse information about future performance and wish to discourage scrutiny by shareholders, activists and the media.”  Meanwhile, a chief justice in Delaware is calling for (alt) “a rollback of shareholder powers to prevent a ‘deluge’ of corporate governance votes that he says are distracting managements and costing companies a small fortune.”  Furthermore, without taking his proposals (e.g. “limiting the frequency of say-on-pay votes and charging investors to submit proposals to a company’s annual shareholder meeting”), Justice Strine thinks investors could “turn the corporate governance process into a constant ‘Model United Nations’ where managers are repeatedly distracted by referenda on a variety of topics proposed by investors with trifling stakes.”

EU: Interactive Chart: How Europe Can Replace Russian Gas

EM: Secret Handshakes In India Rackets Fuel Inflation

“The [Reserve Bank of India] in January cited agriculture market cartels for exacerbating price spikes as Governor Raghuram Rajan raised the benchmark repurchase rate to 8 percent.”

EU: France’s Far-Right National Front Party Makes Gains

USA: Nearly 33% Of Americans Have Been Banking Without The Branch

“The survey specified that using an ATM didn’t count as having gone to a bank.”

USA: A Look At Case-Shiller By Metro Area

Client assets under managementFailure Is Not An Option (Except For Zions Bank)

Goldman, Morgan Stanley, BofA, Citi, JPM, and Wells all passed the Fed’s Dodd-Frank mandated stress test.  Zions failed.  In fact, “of the 30 banks that were part of the Fed’s stress test, Zions Bancorp is the only one that missed the Fed’s 5% minimum allowance.  Banks logged an average Tier 1 common ratio of 8.4%.  The test simulates a severe recession in the U.S. that results in unemployment hitting 11.25% in mid-2015, real gross domestic product falling nearly 5% by the end of 2014 and a 25% decline in house prices.”  A professor (presumably of linguistics) at MIT says, “While it’s safe to say that banks are safer, they’re far from reformed.”  Here’s a list of the expected dividend increases from Wall Street’s biggest banks (ignore Zions for now); Citigroup and BofA top the list as they have taken their time with increasing dividends since the financial crisis.  Meanwhile, the Office of the Comptroller of the Currency (OCC) says “the Volcker Rule will cost U.S. national banks as much as $4.3 billion to implement as it forces them to sell restricted investments at a loss.”  Then again, their estimates range “between $413 million and $4.3 billion”, reflecting “the uncertainty of the final rule’s impact on the market value of banks’ investments.”

Eurozone Is Getting A Banking Union (Fingers Crossed)

“After a marathon negotiation stretching until dawn, the European parliament and EU member states finally settled terms on the unified system (alt) for handling crises.  Lenders will be policed by the European Central Bank, the EU’s top bank supervisor, and wound down by a central authority — if necessary against the wishes of its home state — using a €55bn rescue fund.”  The €55bn rescue fund “will be built up over eight years, rather than 10 as originally foreseen.  Forty percent of the fund will be shared among countries from the start and 60 percent after two years…Mark Wall, Deutsche Bank’s chief euro zone economist, said new rules to impose losses on the bondholders of troubled banks would reduce the burden on the fund but warned that its size was too modest…The fund will be able to borrow against future bank levies but will not be able to rely on the euro zone bailout fund to raise credit.”  Here’s something to consider: €55bn = $76bn; it took $85 billion (and then some) to bailout AIG in 2008.  For some reason they are really proud of what they can accomplish just before dawn: “The European parliament is powerful.  We can wake up Wolfgang Schäuble at 5.30am — and he actually made concessions.”  Meanwhile, the Dutch are ready in case this whole Eurozone thing goes belly up.  Also, Eurozone stock valuations are still attractive relative to US stocks, however the periphery (Spain, Italy, Portugal and Greece) is looking more expensive and will need two things for the rally to continue: more reform and higher earnings.

USA: Banks Pull Out All The Stops For The Ultra-Rich (Alt)

“From helping with the purchase of a plane to organizing college tours for children — and even finding assisted-living facilities for sick relatives or evacuating them from foreign locales — some banks are drastically expanding the menu of ‘concierge’ services they offer to prized customers.”  “Last year, private and commercial banks managed 38% of the investible assets of individuals with $10 million or more, down from 42% in 2007…Over the same period, independent wealth advisers, which tend to charge less than large banks and say they offer a more-personalized service, doubled their market share to 8%.”

USA: The Hidden Cost Of A Cramped Airline Seat

Matthew Klein at Bloomberg argues there may be hidden inflation in the degrading quality of services: “Although the BLS and BEA have a lot of experience adjusting electronics, clothes, construction costs and textbooks for changes in quality, they mostly ignore other things people spend money on.  This is because it’s harder to gauge changes in the quality of a service [rather than the changes in] screen resolution or processing power.”

UK: Osborne Woos The Silver-Haired And Savers (Alt)

“The chancellor stunned the pensions industry [on Wednesday] by announcing plans to give people far more freedom to choose what they do with their pension pot, outlining plans to change rules which effectively force people to buy an annuity at retirement.”  Also, every picture of Chancellor George Osborne has him posing really intentionally with a red briefcase, so I looked into it.  This is what I found.

NoWay: Mt. Gox Says It Has Found 200,000 Bitcoins In “Old-Format Wallet”

TSLA: Tesla Can Topple The Car-Dealer Monopoly

USA: Inside The Madness Of The Stock Market

USA: Unemployed?  You Might Never Work Again