Morning Reading – January 4, 2010
The Telegraph: Overheating East to falter before the bankrupt West recovers
This bear is not for turning. It would be joyous indeed if a fresh cycle of global growth were safely underway, but I don’t believe it. Sorry.
Policy levers in the US, Europe, and Japan remain set on uber-stimulus with the fiscal pedal pressed to the floor and rates near zero everywhere, yet OECD industrial output has not regained the peaks of 2007-2008 by a wide margin. Leading indicators are tipping over again. We are one shock away from a liquidity trap.
Council on Foreign Relations: When Irish IOUs are Smouldering
The markets know that the carousel must stop sooner or later. At present, though, they are struggling to divine what this will mean for holders of Irish bank debt, holders of Irish public debt, holders of equity and debt in exposed European banks, and holders of debt issued by European governments which opt to absorb their banks’ debts into public debt. The web of potential private and public exposure is vast. And the so-called European Stabilization Mechanism, which is supposed to kick in for crises beginning after 2013, is sending a confused message about where the sluice will be open for private losses and where it will be closed by credible public guarantees.
Project-Syndicate: Armageddon Can Wait
As for currency collapse, the most prominent candidate has to be the euro. In an ideal world, Europe would deal with its excessive debt burdens through a restructuring of Greek, Irish, and Portuguese liabilities, as well as municipal and bank debt in Spain. At the same time, these countries would regain export competiveness through massive wage reductions.
For now, however, European policymakers seem to prefer to keep escalating the size of bridge loans to the periphery, not wanting to acknowledge that private markets will ultimately require a more durable and sustainable solution. No risk factor is more dangerous for a currency than policymakers’ refusal to face fiscal realities; until European officials do, the euro remains vulnerable.
Caixin Online: Good Tidings in 2011
The most likely candidates to trigger the next global crisis are the U.S.’s sovereign debt or China’s inflation. When one goes down first, the other can prolong its economic cycle. China may have won the last race. To win the next one, China must tackle its inflation problem, which is ultimately a political and structural issue, in 2011. If China does, the U.S. will again be the cause for the next global crisis. China will suffer from declining exports but benefit from lower oil prices.
On the other hand, if China has a hard landing, the U.S.’s trade deficit can drop dramatically, maybe by 50 percent, due to lower import prices. It would boost the dollar’s value and bring down the U.S.’s treasury yield. The U.S. can have lower financing costs and lower expenditures. The combination allows the U.S. to enjoy a period of good growth.
One could describe the global economy as a race between the U.S. and China, to see who goes down first.
This coming year is China’s opportunity.
The Big Picture: AAII Asset Allocation Survey: Bond Holdings at a 10-Month Low
Individual investors kept their portfolio allocations to equities essentially unchanged last month, according to the latest AAII Asset Allocation Survey. Stock and stock mutual fund allocations were 62.2% in December. The historical average is 60%.
The Big Picture: BofA Freddie Mac Putbacks Resolved for 1¢ on $
A premium of $1.28 billion was paid to Freddie Mac to resolve $1 billion in claims currently outstanding. But the kicker is that the deal also covers potential future claims on $127 billion in loans sold by Countrywide through 2008. That amounts to 1 cent on the dollar to Freddie Mac.
Calculated Risk: House Prices: More Pessimistic Views
Mort Zuckerman … blamed the continuing price decline on the so-called shadow inventory of foreclosed homes that’s yet to come on the market.
“That’s what’s going to put downward pressure on residential prices,” Zuckerman added, “And in my judgment, that’s going to continue for several years.”