Buttonwood's notebook
Financial markets
The euro zone crisis
A Dutch exit?
Mar 5th 2012, 16:04 by Buttonwood
MOST political discussion has focused on whether the Greeks (and others from the south of Europe) will leave the euro. The possibility of a German exit has been mooted but few have seen it as a serious option, for political reasons. and if the Germans don't leave the euro, other countries in the strong currency camp surely won't go either.
The euro zone crisis
When is a default not a default?
Mar 1st 2012, 13:56 by Buttonwood
YOU know when you try to claim on your car insurance and it turns out that the policy only pays out if your car is crashed into by Elvis Presley riding Shergar? Greek creditors might feel that way today. The Greeks aren't paying private sector creditors back in full or anything like it (the loss in net present value may be up to 75%); and "not paying a debt back" might seem to be a common sense definition of default.
The international monetary system
The role of gold
Feb 29th 2012, 16:43 by Buttonwood
CHATHAM House yesterday launched a report on the role of gold in the international monetary system. It is a noteworthy event, not least because the group's last study on the issue was in September 1931, just as Britain was about to leave the gold standard, accelerating the system's demise (Keynes was on the original working group).
Pension funding
Raiding the coffers
Feb 28th 2012, 10:49 by Buttonwood
THE New York Times has an excellent piece today on how state pension plans are borrowing from their pension plans to fund their own pension contributions. This Alice-in-wonderland approach is a salutary reminder of the dangers of funded pension plans; they create a pot of money that politicians are tempted to use for their own devices.
Investing
The long-term or reversion to the mean
Feb 27th 2012, 14:05 by Buttonwood
JEREMY Grantham of GMO is in philosophical mood in his latest quarterly letter, ranging widely across issues such as climate change and the tax deductibility of interest. But what is attractive to this blogger is GMO's focus on the likely long-term returns from various asset classes.
Demography
The vanishing workforce
Feb 24th 2012, 16:12 by Buttonwood
HAVING argued last year that demography is the key factor in the pensions issue, I'm struck at how relatively little attention is paid to the issue with regard to long-term economic prospects. Basically, economic growth comes from having more workers, making them more productive or a combination of the two. If a country has fewer workers, productivity has to do all the work, and even then real growth is likely to be slow.
Equity investing
Globalisation and diversification
Feb 23rd 2012, 16:46 by Buttonwood
DIVERSIFICATION is always cited as a good thing when investing. Spread your bets, and you will not be exposed to a sudden collapse in a single company, sector of economy. But for equity investors the task is getting harder and harder. International markets seem to be increasingly correlated.
In part, this may be down to the diversification process itself. Investors buy an exchange-traded fund based on the MSCI world index, or US mutual funds venture into more exciting emerging markets.
Foreign exchange
What a carry-on
Feb 22nd 2012, 15:11 by Buttonwood
FEW articles on the foreign exchange markets are complete without a mention of the carry trade, under which investors borrow in low-yielding currencies and deposit the proceeds in higher-yielding currencies, in the hope of making a turn.
The Greek debt deal
Thumbs down
Feb 21st 2012, 13:52 by Buttonwood
AFTER another all-night summit, a deal between Greece and the troika (the EU, ECB and the IMF) has finally been reached. It involves the expected combination of measures - a private sector write-down, more loans from the EU in return for austerity measures and enhanced monitoring of Greek compliance. After all that effort, Greece will still have a debt-to-GDP ratio of 120%, which looks more than it can afford.
Fiscal crisis
Could the American government default?
Feb 20th 2012, 16:05 by Buttonwood
WHILE Greece continues to inch its way towards a deal with its EU partners, the creditors of a much-larger debtor, the US government, appear to be untroubled. Ten-year Treasury bonds still yield just 2%. But the issue of how the US addresses its long-term fiscal problems is, as yet, unresolved. A series of papers from the Mercatus Centre at George Mason University in Washington DC, called “Tipping Point Scenarios and Crash Dynamics” attempts to address the issue.
Credit ratings
The bulldog bit
Feb 14th 2012, 15:30 by Buttonwood
SO Moody's has accompanied downgrades of several European nations by putting the UK on negative outlook. Some will doubtless argue that this is a nonsense, as they did when S&P downgraded the US in August; a country with access to the printing press and that has issued debt in its own currency cannot default. The UK is also relatively immune to a funding squeeze; the average maturity of its debt is almost 14 years.
The euro zone crisis
Political commitment
Feb 10th 2012, 13:23 by Buttonwood | DALLAS
THE running conflict between creditors and democracies reached a new stage with the battle over Greek debt. The EU is demanding that Greek leaders add €325m of cuts, pass the rules through Parliament and that all three main party leaders commit to the deal so that they cannot renege after the next election. This might not be sufficient. As David Zervos of Jefferies points out, Pasok (the former governing party) is on 8% in the polls.
Money talk
Radio days
Feb 9th 2012, 22:54 by Buttonwood/DALLAS
TRAVELLING round America one can only be struck by the vibrancy of the media market. Yes, we can all shudder at the wilder shockjocking, but there seems to be plenty of intelligent programming around if you know where to find it.
Austerity politics
Echoes of 1931
Feb 9th 2012, 11:15 by Buttonwood
READING the daily headlines on Greece, a lot of historical parallels come to mind - notably the situation of Britain in 1931. Then a minority Labour government was told by a committee, headed by a City grandee Sir George May, that it needed to make public spending cuts in order to keep on the gold standard. What stuck in the craw of the cabinet was a demand to cut unemployment benefit by 20%.
Monetary policy
The big zero
Feb 8th 2012, 12:46 by Buttonwood
ONE of the most remarkable things about the modern economy is how quickly we have got used to rates of near-zero per cent. This is unprecedented in history. The Bank of England did not cut rates below 2% for 300 years and the old saying was "John Bull will stand many things but not 2 per cent". Savers want some return on their money.
Financial markets
A good day
Feb 3rd 2012, 16:11 by Buttonwood
AS this blog has been negative on the economic outlook, it is only right to admit that today's numbers look very good indeed. First the non-farm payrolls jumped 243,000 and the unemployment rate fell to 8.3%. I was half-expecting a disappointing number given the evidence that seasonal adjustment had boosted the December figures (BCA Research pointed out that 42,000 of the announced gains came from the couriers and messengers category). and there might still be distortions.
The euro zone crisis
ECB = FDIC
Feb 2nd 2012, 17:06 by Buttonwood
A SHARP point from the monthly note of the Bank Credit Analyst (always one of the best research reads). The writers agree that the ECB's LTRO loans have stopped the possibility of a dangerous bank run in the euro zone. To have confidence in money, citizens need to be reassured that the government stands behind the banks. But
such a backstop can only be credible if there are no doubts about the government's solvency.
The euro zone crisis
Bonus time at the ECB?
Feb 2nd 2012, 14:14 by Buttonwood
AN intriguing note from Simon Smith at fxpro deals with the position of the ECB regarding the Greek bonds it holds. As is well known, private sector creditors are negotiating a haircut of 65-70% but official creditors, including the ECB, are refusing to take a loss.
Democracy and markets
Misinformed voters
Feb 1st 2012, 13:02 by Buttonwood
THE issue that intrigues me most at the moment is the effect of the financial crisis on the workings of democracy, neatly illustrated this week by the FT story about the idea of an EU commissioner to oversee Greek budget plans. This is quite a complex area. If you want to borrow money, you have to convince someone - a private sector creditor or an official creditor - to lend you money. They thus need to be confident you can pay it back.
Bankers pay
How can you judge a bank CEO?
Jan 30th 2012, 12:04 by Buttonwood
THE battle over RBS CEO Stephen Hester's pay has absorbed an awful lot of weekend press and media in Britain - one might call it a bout of Hesteria. Mr Hester has sensibly backed away from his bonus, since the position of "banking public enemy" is not one to be relished - ask Sir Fred Goodwin.
There is a defence to be made of the bonus. Mr Hester did not create the mess at RBS; he is clearing it up.
The euro zone crisis
The export league
Jan 27th 2012, 15:54 by Buttonwood
PATRICK Artus, the chief economist at Natixis, was telling me how Spanish exports were booming so I thought it was worth looking up the data. With austerity on the menu in many countries, the hope is that export growth can compensate for sluggish domestic demand. Of course, since the biggest export market for many European nations is other EU nations, this might seem a lost cause. But at least, there was a general export increase last year.
Top marks to Estonia.
The euro zone crisis
Portuguese peril and official obstinacy
Jan 27th 2012, 9:13 by Buttonwood
WHILE Italy and Spain are enjoying a welcome breather from debt pressures, Portugal is still under the cosh. Two-year yields were 16.1% yesterday and five-year yields were 20.8%. It all looks like an ominous replay of Greece's problems.
Markets and monetary policy
Things are terrible. Whoopee!
Jan 26th 2012, 10:07 by Buttonwood
SO THE Federal Reserve has indicated that it will need to keep interest rates low until late 2014 (rather than 2013). Should that really be the cause for an equity market rebound, as occurred last night?
Otherwise intelligent people tend to reason as follows. The price of a stock should equal the discounted value of future cashflows. If the discount rate is lower, then the present value is higher (one heard this argument a lot during the dotcom bubble).
Violence in history
A cause for celebration
Jan 25th 2012, 18:25 by Buttonwood
PUT aside your worries about the financial markets and the euro-zone economy for a moment. Consider what Steven Pinker, in his magnificent new book The Better Angels of Our Nature, describes as "the most significant and least appreciated development in the history of our species" - the decline of violence.
It may be that, when you first consider the idea, you experience a visceral rejection of the concept (that was my instant reaction). Wasn't the 20th century incredibly violent? What about the Holocaust or Mao's famine? But Mr Pinker builds his case, logically and convincingly, over 700 pages.
UK economy
What's to blame?
Jan 25th 2012, 12:34 by Buttonwood
FIGURES released today show that the UK economy contracted 0.2% in the fourth quarter of 2011, with many people predicting a further decline in the current three months. That would meet the technical definition of a recession and would not be good news for the government's austerity strategy.
So what's to blame? The temptation will be to look at Europe so it's unfortunate that Germany's Ifo survey, also released today, shows the third consecutive rise.
In this blog, our Buttonwood columnist grapples with the ever-changing financial markets and the motley crew who earn their living by attempting to master them. The blog is named after the 1792 agreement that regulated the informal brokerage conducted under a buttonwood tree on Wall Street.
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