The Politburo Standing Committee is likely to be packed with conservatives, omitting two reform-minded protégés of party general secretary Hu Jintao. A conservative line-up will dash hopes for bold political reforms.
Australian court finds S&P liable for ratings opinion | Bloomberg
An Australian judge has found S&P [MHP] liable for its opinion in assigning AAA ratings to two ABN Amro structured debt issues in 2006, which lost over 90% of value during the GFC — the first time a ratings agency has been held liable for such an opinion.
S&P was “misleading and deceptive” in its rating of two structured debt issues in 2006, Federal Court Justice Jayne Jagot said in her ruling released today in Sydney.
via McGraw-Hill Plummets After Australian Court Ruling – Bloomberg.
Treasury yields warn more of the same
Inflation has fallen over the last quarter-century, so one would expect to find Treasury yields have fallen, but there is more than just benign inflation at work. The Fed has also been suppressing long-term interest rates, with QE1, QE2, Operation Twist and now QE3.
The yield on 10-year Treasuries is now below the Fed’s long-term inflation target of 2 percent, offering savers a negative return on investment unless they are prepared to take on risk. The Fed’s aim is to induce investors to take on more risk, in the hope that increased capital spending will stimulate employment and lead to a recovery. But they risk leading savers into another disaster, with falling earnings or rising yields ending in capital losses.
Corporations are reluctant to expand and will remain so until they see a sustainable increase in consumption. Fueled by new jobs — not short-term credit. Low interest rates without job growth could cause another speculative bubble, with too much money chasing too few opportunities.
Without jobs, no monetary policy is likely to succeed.
Australia: Falling job ads
ANZ job ads fell 4.6 percent in October after a 3.9 percent fall in September. The index is down 15 percent over the last year.
From ANZ:
“The ANZ job advertisement series measures the number of jobs advertised in the major daily newspapers and Internet sites covering the capital cities each month. It has historically proved to be a very good indicator of future labour market conditions and thus, is extensively relied upon for forecasting employment growth.”
WPR Article | Sudan May Become Hot Spot for Iran-Israel Tensions
Catherine Cheney refers to a suspected Israeli airstrike on a munitions factory in Khartoum, Sudan. She quotes Katherine Zimmerman from the American Enterprise Institute:
“Sudan has served as Iran’s toehold on the African continent and has provided sanctuary to Iranian proxy groups, as well as al-Qaida operatives, and serves as a key conduit for Iran’s arms smuggling network supporting Hamas in Gaza…..”
If Israel did in fact conduct the reported airstrike in Khartoum, [Zimmerman] said, it could be an early indicator of escalating hostilities between Israel and Iran….
via WPR Article | Sudan May Become Hot Spot for Iran-Israel Tensions.
Nationalbanken Defends Sub-Zero Bemoaned by Banks | Bloomberg
Peter Levring and Frances Schwartzkopff write that Denmark’s central bank has taken an unusual step to defend the krone from capital inflows similar to those experienced earlier by Switzerland.
The central bank has kept its deposit rate at minus 0.2 percent since July, in an effort to fight off a capital influx and maintain the krone’s peg to the euro.
Deposits held at the central bank are charged a fee of 0.2%, rather than paid interest as in the US.
At the same time, the industry is still paying its customers to hold their deposits in an effort to attract stable funding and reduce reliance on wholesale financing. That’s turned deposit banking in Denmark into a losing business.
The measure would encourage banks to increase lending, loosening credit standards to avoid the charge on excess reserves. It would also reduce the rate paid on call deposits, while increasing bank competition for more stable time deposits.
via Nationalbanken Defends Sub-Zero Bemoaned by Banks: Nordic Credit – Bloomberg.
On Investment Time Horizons – Seeking Alpha
David Merkel observes that Shiller’s CAPE10 ratio and Tobin’s Q-ratio both “indicate that stocks are not likely to return a lot over the next 10 years”.
The CAPE10 ratio is a long-term, smoothed PE-ratio first popularized by Yale Professor Robert Shiller in his book Irrational Exuberance. CAPE10 compares the current S&P 500 index value to the average of the last 10-years annual earnings. James Tobin’s Q-ratio compares current price to net worth (total company assets minus liabilities).
Merkel points out, however, that “the same is true of most high-quality bond investments …. and high-yield investments when expected losses are netted out…..I am not crazy about buying bonds here. The risk-reward is awkward, but the same is true of stocks.”
Bottom line is investors are being starved of yield by the Fed’s Twist and QE3 operations. Investors may be forced to take on additional risk in order to boost yields, but that could end in disaster, with capital losses if yields rise or earnings fall. Where possible, the safest strategy would be to tighten your belt and sit this out.
Middle-income traps in Asian countries | FRBSF
Excerpt from a paper by Israel Malkin and Mark M. Spiegel at the Federal Reserve Bank of San Francisco. The two believe that China’s richest provinces, Beijing and Shanghai, are experiencing a slow-down in GDP growth (per capita) as they experience a classic middle-income trap, while China’s poorer provinces continue to experience high GDP growth rates.
What evidence exists for middle-income traps in a group of Asian economies that, like China, experienced episodes of rapid growth? We pool data for Hong Kong, Japan, Korea, and Taiwan from 1950 to 2009……. growth of these economies slowed markedly after they reached middle-income status.
Growth rates for these economies are highest just below the $10,000 per-capita-income level and then slow down rapidly as income increases. …..[the] economies grew on average at a 4.8% rate when per capita income reached $17,000, down from a high of 7.2% at the $7,800 level.
Interestingly, the middle-income trap appears to arise in Asia at lower income levels than has been found for broader groups of emerging-market economies. It may be that large Asian countries with relatively low prevailing wages cause the dynamic of the middle-income trap to shift. In Asia, countries may begin to become uncompetitive for certain labor-intensive activities at lower income levels than in other parts of the world……
via FRBSF Economic Letter: Is China Due for a Slowdown? (2012-31, 10/15/2012).
Fiscal Cliff: Two Candidates, Two Approaches
By ERIC PIANIN and MERRILL GOOZNER, The Fiscal Times
[Romney and Obama] agree that a stopgap measure is needed before January 1 to temporarily extend the raft of Bush era tax cuts and other measures set to expire. However, Obama has signaled his intent to veto even a few months’ extension of tax cuts unless families earning more than $250,000 a year are made to pay higher rates.
……. Romney, Boehner and Senate Republican Leader Mitch McConnell of Kentucky insist that the Bush tax cuts be extended for all Americans, arguing that any increase in rates would discourage investments and job expansion by small businesses. Moreover, Romney has proposed further tax cuts of 20 percent across the board in exchange for capping tax breaks……..
Yield Is The Last Refuge Of Scoundrels – Seeking Alpha
By David Merkel:
What’s that I see? We’re at a 50-year low for yields on low investment-grade-rated bonds. Surely the economy should be booming. What, like the Great Depression, we are in a liquidity trap? Seems that way…….
