Latest traffic data from the Association of American Railroads says much about a rebound in tangible economic activity within the U.S. as well as lingering overcapacity in the economy.
The Association of American Railroads said the seven top-tier Class I railroads in the U.S. and Canada, plus some regional lines that also report traffic through the trade group, originated 387,283 new carloads of bulk commodities and equipment for the week ending April 24, up from 384,252 units a week earlier.
Their new intermodal pickups of 264,375 were almost even with the 264,593 they had in the April 17 week. But for just the five U.S.-owned Class Is and a few others, intermodal loadings of 212,347 units in the latest week were the highest so far this year.
In all, the continent’s major railroads loaded 13.9 percent more containers and trailers last week than for the same week last year, and 16.5 percent more cargoes in bulk railcars. That put intermodal traffic up 9.9 percent for the first 16 weeks of 2010, while carloads were up 7.6 percent.
Those latest gains, and the steady increases that have persisted throughout the spring, are prompting many rail industry officials to say the economy is finally on firm footing. But they point out that traffic remains well below the levels of just two years ago, before the worst of the recession kicked in, and that is keeping lots of rail equipment sidelined.
It’s an example of how economic activity is picking up… but U.S. interest rates can be kept low since there is still a substantial output gap in the U.S. economy, ie. we’re not bumping up against the economy’s full output based on current capacity yet. Yes, this is just rail, but it’s an example of what is going on in many other industries — growth, less overcapacity, but continued overcapacity nonetheless.
The Greek government has agreed in principle to $30 billion of money-saving austerity measures, which will be required if the country is to receive financial support from the IMF.
“We have basically agreed, and as it stands now announcements will come during the weekend,” said the official, adding that the final details on the package will be completed on Friday.
The austerity measures, which will range from pension overhauls to wage cuts, come at the end of two weeks of talks between the Greek government and a visiting “troika” of negotiators from the IMF, the European Central Bank and the European Commission.
“There was not much room for us to negotiate,” the Greek official said. “This is the way the IMF works—if you want the money, you go by their terms. “
However, Greek labor unions vowed to fight further cuts in spending and entitlements. Union actions such as strikes and protests aren’t expected to derail government overhauls. But political commentators say labor unrest, combined with Greece’s slow-moving bureaucracy, might cause roadblocks that delay the implementation of austerity policies.
The hard part will be getting the Greek people to agree. Greek bonds yields, especially the two-year yield, have eased back substantially from their recent peaks, but remain elevated with the 10-year just below 10% and the 2-year at 12.9%. Still, it might be too early to think that much has changed.
Right now, “The bond vigilantes are walking out on Greece, Spain, Portugal, the U.K. and Iceland.” according to Nouriel Roubini speaking at the Milken Institute.
They could next start walking out on the U.S., even in the relatively near-term.
“Today we are at the stage at which… debt levels at the private level have stabilized… [but] there’s a massive leveraging of the public sector.”
“The thing I worry the most about right is the build up of sovereign debt.”
“Unfortunately in the U.S. the bond market vigilantes have not woken up.”
“Eventually, the fiscal problems of the U.S. will also come to the fore… The risk of something serious happening in the U.S. in the next two or three years is going to be significant”
The only way that the U.S. will be pressured to bring its debt growth under control is for bond markets to show far more concern than they do right now, he explained.
From a distance the volatile political situation appears completely confusing and chaotic.
Upon closer inspection it only becomes more so.
It’s about democracy, corruption, traditional power structures, money, and guns. Worse yet, nobody is quite sure who is on the same team, even within the military, and many thousands of people have been killed or injured.
Here we attempt to peel back some of the layers.
We have included many videos in the following slides as supplements, feel free to skim through them as needed, they can be skimmed without losing the essence of what’s going on.
T-shirt wars in Bangkok.
Color-themed groups whether they be red, yellow, or ‘multi-colored’ shirts have roamed the Thai capital Bangkok over last few years demanding political changes.
These range from the red shirts’ recent demand for fresh elections, to the pro-government yellow-shirt mob’s current goal of nothaving an election in order to protect the political party in control right now.
Life goes as if nothing is happening… usually.
The red and yellow shirts have clashed on frequent occasions with both each other and security forces, causing thousands of casualties along the way and interrupting Thailand’s usual calm with sharp and sudden bouts of violence over the last couple years.
Yet oddly, most of the time life in Bangkok goes on as usual. Bars, malls, and restaurants are still packed. Most people won’t even mention the politics in your every day life.
Still, clashes and tension has become particularly severe ever since one month ago when the red shirts took over one of central Bangkok’s main shopping areas filled with five star hotels and designer brands.
Yet violent, bloody clashes happen out of nowhere.
Reds have been particularly enraged over an April 10th attempted crackdown by the military in another part of the city that resulted in 25 deaths including some soldiers.
The government has turned down requests for a broad multi-party investigation into the incident. We’ll touch on this complex situation further later because it says much about the entire situation, but here is a video of the event we posted previously, below. If you haven’t seen it before, beware that it gets quite graphic at the end.
Yesterday, clashes intensified once again.
Just yesterday, police and red shirts clashed again.
Red shirt protesters attempted to reinforce a new rally site beyond their main central Bangkok encampment, but were met by hundreds of soldiers who were reported to have fired both rubber and live ammunition.
Eighteen people were injured and one soldier was killed in what appeared to be a friendly fire incident.
Behind all the mayhem are two primary, yet potentially fragile, alliances between opposing military, business, and political interests….
The red shirts.
Image: REUTERS/Kerek Wongsa
The red shirts are the ‘United Front For Democracy Against Dictatorship’ (UDD).
They were originally Thais rallying around Thailand’s previous prime minister Thaksin Shinawatra and his political party, who were ousted in a coup during 2006. The UDD is mostly made up of lower-income Thais from both the up-country provinces outside of Bangkok and Bangkok itself.
Thaksin’s previous sweep to power was the result of the substantial attention he paid to developing and meeting the needs of Thailand’s oft-forgotten provinces. Yet despite the red’s mostly low-income origins, make no mistake of the fact that they are backed by wealthy business and military interests centering around Thaksin’s political party which has reincarnated itself as ‘Peu Thai’, which can be translated as ‘For Thais/Thailand’.
The reds recently switched to wearing non-red clothing in order to escape police and military checkpoints and make any government crack-down much more difficult. Thus they sometimes refer to themselves as ‘multi-colored’ now.
Here’s a video about how the red’s recently took over parts of Bangkok.
The yellow shirts.
The red shirts are opposed primarily by the pro-government yellow shirts, know as the ‘People’s Alliance for Democracy’. Note they use the term ‘democracy’ despite the fact they are trying to avoid elections right now. They essentially back the ‘Democrat Party’ who is currently in power, yet it is important to note that this party has never won an election since Thaksin was ousted, and they are closely aligned with military elements who instigated the 2006 coup.
The yellows are comprised mostly of middle and upper class royalist Thais, and infamously took over the Bangkok international airport with a huge sit-in in 2008. They are backed by business people and elites who were none too happy with the previous prime minister Thaksin’s rapid rise to wealth and fame.
Note the yellow’s have recently tried to ditch their yellow shirts and appear ‘multi-colored’, in a similar fashion to the red’s, in a bid to appear as if they represent ‘all Thais’. Thus the colors lines are becoming blurred, visibly at least, as each side tried to appear as the voice of the majority.
Here’s a video interview of yellow shirt protesters when they took over the airport in 2008.
This is from when yellow shirts took over the Bangkok international airport, pressing for the red-shirt friendly and elected government to step down. The key moment, in terms of understanding the current conflict over holding fresh elections, is at about 1:00 where the man says he is against holding elections.
Current situation: The new central Bangkok red shirt fortress.
Many thousands of ‘red shirt’ protesters have created an enormous bunker zone in the commercial center of Bangkok.
This bunker zone is compete with multiple tire walls reinforced with wooden stakes and lines of red shirt ‘guards.’ Inside is an encampment sustained by all kinds of daily amenities maintained by red shirt organizers. Protesters never have to leave the site, and as a whole have already been there for weeks.
The graphic below, from the BBC, gives a sense of how large the bunkered zone is. Note the scale on the graphic. The longest red zone is about 3 kilometers long. Each main entry point has barricades and red shirt-manned checkpoints.
Despite looking rather crude in photos, this is actually a highly sophisticated operation, with substantial logistics in place, in-house television broadcast capabilities, and even security features such as red-shirt monitored surveillance cameras.
The red shirts are an enormous country-wide force.
Government sources might say the crowd is only a few thousand, while sources within the zone might say it is many tens of thousands. Perhaps at times it has hit 100,000 or more, since the crowd is reported to swell at certain times of night as more supporters stream in.
There are also countless more red-shirt supporters all over the country, who have recently shown their strength by blocking military and police convoys bound for Bangkok.
Both sides are inevitably distorting the true number of red shirts in Bangkok right now, but the red shirts are undoubtedly a massive group.
If one includes their silent supporters they could easily represent the largest political constituency in Thailand since the red shirt-backed Peu Thai party has won the most votes of any party in every elections going back to Thaksin. Yellow shirts have been able to turn out in very large numbers as well, though it seems that the reds are ultimately a larger group.
Fun and games… sort of.
One of the peculiar aspects of Thailand’s political turmoil is the way that its political protests maintain a positive, carnival-like atmosphere. Key leaders sing songs to dancing crowds and perform the equivalent of stand-up comic routines before delivering vitriolic attacks against their opposition. Bands are invited to play and it is usually a big party.
Many foreigners speak very positively about their times with the red shirts, for example, saying how friendly, caring, and festive everyone is.
This is true for vast majority of the time. Unfortunately, both sides, red and yellow, have a thuggish minority who has engaged in extreme forms of violence. There have been clashes between rival supporters as well as mysterious bomb attacks some even blame on a ‘third hand’ hidden group trying to foment instability.
Yet it can also get very nasty. Go to 0:45 in this video. Nevertheless, please note that both sides have resorted to extreme violence, even though this video only shows one.
But… a key new development: Democracy takes over the dialogue.
Image: Links International Journal
While the red shirts may have begun as a group simply backing the previous ousted prime minister Thaksin Shinawatra and wanting his return, one shouldn’t be so quick as to write off the current conflict as simply a battle between business interests. The red shirt movement as of late has grown into something far larger.
Its rallying call has moved away from simply Thaksin Shinawatra’s past leadership and has tapped a longstanding sense of injustice felt by Thailand’s lower class citizens, especially after the 2006 coup and successive post-coup elections rendered their votes meaningless.
Thus the pro-Thaksin supporters have expanded their mandate into a broader push for democracy, and are now simply asking for fresh elections, and by doing so, have been joined by pro-democracy advocates and simply disenfranchised Thais as well.
The ‘Prai’ vs. the ‘Ammat’
The most visible proof of this evolution has been the way red shirts have rallied around the Thai term ‘Prai’, which means ‘commoner’ or even ‘serf’, and against the ‘Ammat’, which means ‘elite’.
In a brilliant subversion of a word that these days has insulting connotations, red shirts now call themselves “prai”, literally, “commoner”, much as marginalised American blacks pushed back by co-opting the insult “nigger”. But Thailand no longer has the great, deferential, unwashed mass on whom the old political system rested. As one commentator puts it, a typical red-shirt villager probably has a secondary education, a pick-up truck and a healthy scepticism of Bangkok officials. Mr Thaksin’s policies of universal health care, microcredit and so on, contributed to the change. But the red-shirt movement, for all that it remains inchoate, has outgrown Mr Thaksin.
This has turned into a revolution of rising expectations. And the chief expectation, as Federico Ferrara, an expert on Thailand, puts it, is to put the aristocracy back into the more ceremonial role it once occupied.
Media censorship and the military back story.
So, at the risk of over-simplifying things, it’s now a conflict between the red shirts asking for an election and the pro-government yellow shirts trying to block fresh elections due to concerns that the current political party can’t win an election. Yet neither side is squeaky clean, both have a minority which has resorted to violence, and both are backed by a nebulous alliance of business, military, and political interests….
The media has also progressively been censored over the last few years since the 2006 coup, most recently in an extreme fashion whereby the views of the current protesters, the ‘red shirts’ are now almost exclusively distributed through rebellious methods. The internet has been a substantial challenge for the government as the red shirts are well organized online with multiple redundant video channel sites the government censors can’t keep up with, twitter feeds, and even their own UDD media team. Speeches from their central Bangkok protest zone are broadcast with the video-editing quality of a well-funded television show. They appear far more tech-savvy than their pro-government competitors, perhaps because they must be due to massive Thai government censorship of most positive views towards their movement.
Rifts within the military.
Here’s where things start to become particularly convoluted. The conflict isn’t simply about people vs. the military, but also involves a back-door power struggle between military leaders.
For example, the current government has said that it would consider elections in one year, which might sound reasonable from afar. Yet within the context of Thailand’s military politics it is unacceptable to the red shirt protesters due to the fact that in September of this year, if the current government stays in power, a perceived hard-line Thai general, Prayuth Ocha, could take the top slot from the more moderate current military leader Anupong Paochinda.
Red shirts worry that Prayuth would be more willing to use force against protesters in the future, while Anupong has tried to avoid a large violent crackdown on the main protest site so far. Prayuth would also be a long-term problem for the ousted Thaksin to deal with. Yet Anupong has to keep Prayuth happy to some extent despite being his superior, since he’ll require protection once forced to retire in September…
The military reshuffle at the top is key.
The excerpt below might help to understand the complexity of Thailand’s military situation, it is the view of New Mandala, an academic blog at the Australian National University, and is written by a researcher who claims to have gotten behind the scenes information about Thailand’s military politics. We can’t vouch for any of it, having never been close to the military back story personally, but present it as third-party opinion.
New Mandala:
But, on the military side, that reshuffle is an extremely tense matter. Anupong is the key to this delicate transition to an Army commander from Class 12. He in turn requires Prayuth’s guarantee of safety during his retirement from investigation into corruption involving the flawed GT 200 bomb detectors and the multi-million-baht airship that has proved useless in spotting insurgents during actual operations in the Deep South. This factor is central to understanding Anupong’s need to accommodate Prayuth during the present crisis. For his part, and in addition to waiting uneasily for his promotion to Army commander in June or July at the earliest, Prayuth needs to ensure in advance his dominance of the Army during at least the first year of the projected four years that he will spend in that post.
The career concerns of these two officers ladder of these two generals remain crucial to the evolving political situation. They help explain why the mass rallies of the “Prai” [red shirts, ‘commoners’] are so fierce in their retaliation against the forces of the “Ammat”. [yellow shirts, ‘elite’]
And here’s why it’s, really, all gone to hell.
And here’s the curve ball where the entire situation goes topsy-turvy… on the April 10th military crackdown, which we showed in a previous video from Thai-FAQ, and which resulted in 25 deaths including soldiers, one pro-government faction of the military, suffered substantial casualties to its officer ranks…. some which may have been inflicted by mysterious black-clad and highly trained rogue fighters who seemed to come out of nowhere.
New Mandala:
But the forces of alliance…. [in the] Gen Prem alliance suffered the most damaging casualties in the 10 April clash at Dinso Road in front of Satri Withaya School. Promotions have for some time rewarded officers who enjoyed the benevolence of… Gen Prem, to the dissatisfaction of members of other classes and factions. Bed-ridden senior officers now recovering from injuries sustained on 10 April in the special ward on the twentieth floor of Phramongkut Hospital insist that the black-hooded snipers active that evening were well trained army officers. They were probably former members of Marine SEAL units, the Army’s special warfare unit in Lopburi, and another specially trained secret unit in the Air Force. “They rab job (were paid for a task) to kill us. They did not come to chase us away or to lend the Red Shirts moral support, but to undertake that single mission,” officers wounded on 10 April told this writer. These officers believe that what happened was not the work of a disbanded group of specialist military rangers or tahan pran but rather of more skilled mercenaries.
These gunmen succeeded in causing a serious loss to the Prem… alliance. For they killed a rising star in Queen’s Guard from Prachinburi, Col Romklao Thuwatham, and seriously injured a number of senior officers, including Burapha task force head Maj Gen Walit Rojanapakdi and his colonels. Among the seriously injured soldiers was Lt Col Kriengsak Nanthapotidet, half-brother of the late Lt Col Narongsak, a member of Class 8… Narongsak created and gave fame to the Queen’s Guard unit.
The mysterious ‘Third Hand’.
Here’s one video below that has been used to allege that a mysterious third party (referred to as a ‘the third hand’ in Thai) was involved on April 10th, obviously we can’t verify any of this. Suffice to say the situation is far more complicated than it seems and the closer you get the more layers of intrigue you unearth. What we’ve shown is just the tip of the iceberg even. The behind the scenes machinations are vast in Thailand, probably more so than in most countries’ politics.
Democracy is not so simple…
We don’t justify any violence that has happened, but we would like to merely point out that Thailand is another example of how the political evolution towards democracy is rarely the simple affair many think it to be.
Even if new elections are held and the current situation ends peacefully, Thailand still has a very long way to go. The yellow shirts might even come out in force to argue against new elections just as the reds are arguing for them.
Let’s just hope at least that the country’s political development keeps moving forward rather than backward.
There are a lot of good intentions involved, on both sides. In fact, from our experience with people on both sides, most of the people involved, are indeed well-intentioned. We feel they just need a free media to protect them from disinformation and representative political institutions that allow people to feel they have a say and can choose their leaders in a peaceful way.
Unfortunately, neither of these things exist in abundance right now of which the current violence is the inevitable outcome.
Finally, here’s a closing reminder why everyone needs to be extra vigilant.
Just back in 1992, the military opened fire on masses of protesters. The preceding situation sounds eerily similar to what’s happening right now. Hopefully this never repeats itself.
Major U.S. and European banks would be exposed to far more risk from the Greece crisis if they weren’t allowed to short the euro and European sovereign debt.
That’s because a collapse of Greece’s financial system, or further stress on the broader eurozone system, would have substantial negative effects on major banks through many parts of their large and varied businesses.
They’re inherently massively exposed to a Greece/euro crisis if they have anything to do with Europe. Thus they need hedges to reduce this exposure from a risk management stand point.
That’s why they are shorting the euro and European sovereign bonds including those of Greece, France, and Germany.
Banks should, by now, be protected, says the London-based market risk head at a large UK bank. “If Greece defaults tomorrow and some bank stands up and says ‘I’ve lost a billion dollars on Greece’, they should fire everybody. Greece is an old story. What we’re trying to figure out is what happens next. Is it Portugal? Italy? Spain?”
Large banks will have all kinds of assets and liabilities to balance, many of which have long-Europe exposure but which cannot be removed from the balance sheet. They need ways to balance these exposures in order to reduce risk.
Faced with this range of possibilities, banks have tried to focus on something they can get their hands around – for example, the possibility yields at the long end of the euro interest rate curve could widen substantially or, conversely, tighten. “There are scenarios where the curve should steepen a lot and ones where you could expel a bad country – which would set a precedent – and I think the long end of the euro curve would look just great as a result. So it really could break either way,” says the US bank’s market risk head.
His bank has been seeking to hedge a eurozone crisis scenario by shorting the euro. The European bank’s risk manager says the institution has been doing something similar, but using German and French bonds as a proxy for the eurozone and shorting them instead. Of course, those hedges might backfire if Germany did choose to walk away from the single currency. “It’s another concern. We’re very short Germany and France, as I’m sure a number of other banks are,” he says.
Thus take away shorting mechanisms from markets and banks would all simply betting on the same long-Europe trade with no way to insure themselves.
Just because they are short certain securities doesn’t necessarily mean they are net-shorting the euro, and hoping that Europe falls into chaos. Though some hedge funds could be net-short Europe in various ways. In fact most global financial institutions probably remain net-long Europe’s financial situation regardless of the short-hedges they may have in currency or sovereign bonds, since a collapse of the euro economy would probably be ugly for them, even if it were mitigated by gains on some short positions.
Despite an acceleration in Chinese inflation, Morgan Stanley remains confident that the Chinese government has longer-term inflation expectations under control.
Morgan Stanley’s Qing Wang:
Inflation rebounding in April: Following the release of weekly price data on April 25, we forecast headline CPI inflation to bounce back to +2.8%Y in April from +2.4%Y in March, translating into sequential growth of +0.3%M (versus -0.7%M in March). The higher inflation is mainly attributable to food inflation, which we expect to accelerate. The momentum of upstream inflation should remain strong, intensifying to +6.5%Y (versus +5.4%Y in March). We expect the carryover effect of CPI inflation to rise to 1.3% in April (versus 1.1% in March), and that of PPI inflation to edge down to 4.1% in April from 4.2% in March.
The chart below shows how inflation expectations in the Chinese bond market have actually been in a moderate down-trend since December 2009. They’ll need to keep this up given Morgan Stanley’s expectations of accelerating inflation.
After two RRR hikes, one in January and one in February, the PBoC has remained subdued, but it is not resting. In fact, the PBoC is working hard to withdraw the excessive liquidity released last year to cushion the economic hard-landing. After nine weeks of consecutive net withdrawal, the PBoC has drained around Rmb1 trillion of liquidity, equivalent to three 50bp RRR hikes. In this context, inflation expectations have remained tame.
We expect the PBoC to continue such quantitative tightening in the coming months, postponing the timing of interest rate hikes to adapt to the pace of the renminbi exchange rate reform. In light of the extraordinarily aggressive open-market operation (OMO), market participants are concerned that market liquidity may become stretched if this large-scale OMO continues. In our view, such worries are unwarranted, as the reference yield of the 1-year central bank bills has remained unchanged at 1.9264% since January, regardless of the massive net withdrawal seen.
(Via Morgan Stanley, China: Inflation rebounding in April, Qing Wang, 28 April 2010)
Near-zero interest rates in the U.S. and Europe have fueled demand for high-risk securities, providing companies with an opportunity to cut debt incurred during the excesses of the credit boom, Milken told an audience at the Milken Global Institute conference yesterday in Beverly Hills, California.
“It’s the individual’s fault, the individual leadership of that organization, if they are not taking advantage of today’s markets to sell equity and debt, de-leverage and push out maturities,” he said during a panel moderated by Matt Winkler, editor-in-chief of Bloomberg News.
He continued:
“Defaults were exaggerated, the risks were exaggerated,” Milken said of the recovery in high-yield bonds. “Those risks existed in mortgage-backed securities, but they didn’t exist in industrial companies, and that’s what the market is saying.”
When a company sells stock or bonds at a certain price, it’s always going to be either a good deal for the investors buying or a good deal for the company selling.
The head of Saudi Arabia’s national oil company Saudi Aramco has warned that total Saudi crude oil experts could begin declining as soon as next year according to Risk.net.
Domestic Saudi oil consumption is increasingly rapidly, and over the next two decades out to about 2028 total Saudi Arabian energy demand is expected to grow 250%.
“Along with China and India, we do expect Saudi Arabia to be one of the largest sources of global oil demand,” says Amrita Sen, oil analyst at Barclays Capital. “And given Saudi’s importance in the oil market as the swing producer, in the longer term, this can impact their ability to control the market at the margin. However, this is unlikely to have a significant impact this year, given the substantial spare capacity it is sitting on, though that buffer could get eroded sooner rather than later in the coming few years.”
He explains how the Saudi Arabian economy’s energy intensity has increased 138% since 1980 and will continue to do so as the economy diversifies into other industries such as manufacturing.
Maybe this is one reason why Saudi Arabia is trying to develop nuclear energy production. Burning oil to produce electricity, as Saudi Arabia does, is horribly inefficient as it stands because coal, natural gas, and nuclear power are generally much cheaper methods when possible.
Regardless, some believe Saudi Aramco is exaggerating the growth of domestic Saudi Arabian oil consumption in order to keep the oil market on its toes:
“I think this is very long term and I doubt much will change in the near future,” says Andrey Kryuchenkov, analyst and strategist for the commodities team at investment house VTB Capital. “I think they are just talking their economy and oil prices up. The original statement came from Saudi Aramco, which needs further investments to cope with growing demand and need for extra capacity. The alleged capacity is around 12.5 million b/d, but the more likely number is just below 12 million b/d at the moment. 2028 is a very, very far-fetched forecast, as they are simply adjusting the current rate of change in consumption.”
“Saudi Arabia is running out of oil and Ghawar field will exhaust itself in the end,” says Kryuchenkov. “It has been producing oil since 1948, which is unprecedented for any field and still accounts for around 55–60% of exports. The decline will accelerate from here and I think these are more immediate concerns than its consumption growing. As a rule of thumb in the oil industry, Saudi Arabia is seen as the following: a 5% decline in production and a 2% rise in consumption is approximately 15% decline in net oil exports. However, this is not the case just yet.”
So this analyst isn’t as concerned about Saudi’s growing domestic consumption as he is about the potential for Saudi output to drop.
Problem is, for those who consumer oil internationally such as the U.S., both of the above commentators seem to expect a potential reduction in international oil supply from Saudi Arabia, even if they are emphasizing different causes.
As the world’s most important swing producer of crude oi, one suspects that relatively small changes for Saudi Arabia can have a large impact on the tightness of oil supply vs. demand globally. Thus any decline for whatever reason would be bad news for oil bears.
The Economist has an interactive chart, where you can compare housing trends for countries around the world.
The example we built below shows how Australian property prices have doubled in a pretty short period of time and are way ahead of U.S. property over a twenty year period.
It’s shocking, the Australian price rise, in dark blue, appears to make the American property bubble look tame in comparison. Two indices of American prices are shown, in light blue and gray.
We’ve loved the little bit of Australia we’ve seen, the quality of life looks quite high there. The country is also surely levered to China’s strong growth right now. But would you buy into a property rise such as below in dark blue?
China’s latest 1-year bond auction failed to attract sufficient bids, reports the website Chinabond via Bloomberg.
While government intended to sell 28 billion yuan in bonds, it was only able to raise 26.67 billion yuan in bids.
The average yield was 1.49% with the highest winning bid at 1.6%. The bid to offer was just 1.22x, down from 2.12x last month according to Bloomberg.
It’s unclear why investors weren’t willing to buy the bonds, perhaps the yields in the auction were far below what investors want given expectations for interest rate hikes in China.
Thing is, these are just one-year bonds, thus if you buy the bonds, you aren’t locking in your money for very long. If interest rates are increased at any point after a year, you can take part in receiving higher yields.
Thus to us this failed auction suggests that Chinese investors very much expect a substantial hike, not just a minor hike, for Chinese interest rates within a 1-year period.
Portugal isn’t Greece. In many ways it is far better off than Greece.
The Economist highlights how Portugal has a smaller budget deficit, less debt relative to GDP, and has actually had a pretty-reform-minded government for some time already.
The government has already been working on fixing the country’s pension system and opposition to spending cuts is far less severe than in Greece.
So why are some such as Nouriel Roubini, and debt markets, worried about the nation’s finances?
One answer is that Portugal’s biggest problem is not primarily fiscal. It concerns growth—or the lack of it. Real GDP growth over the decade since Portugal joined the euro has been the slowest in the zone, despite a boom in Spain, its main trading partner. The country avoided a property bubble of the kind that burst so disastrously in Spain and Ireland. Though it doesn’t help much, Portugal’s already slow growth also made it less vulnerable to the global recession. “Spain was the wild tiger of Europe and had much further to fall when the recession came,” says João Talone, a private-equity manager. “Portuguese companies were already used to extracting value in a difficult climate.”
Low growth reflects a disastrous loss of competitiveness since the country joined the euro. Portugal has lost export-market share to emerging economies (including those of eastern Europe) that churn out similar low-value products. This is largely due to a steady rise in unit labour costs, as wage increases outstripped productivity growth (see chart). One consequence is that the Portuguese, once exemplary savers, have been borrowing heavily abroad. Household debt is now the equivalent of almost 100% of GDP and the debt of non-financial companies is nearly 140%.
So Portugal is still in deep trouble, just for different reasons.
Most of the hiring will come in 2011 and 2012, David Huether, chief economist for the National Association of Manufacturers, said yesterday after NAM President John Engler spoke on a job-growth panel at the Milken Conference in Los Angeles.
“I wish there were a silver bullet where we just walk in and just sprinkle this pixie dust,” Ron Bloom, a conference panelist and senior White House adviser for manufacturing policy, said in an interview. “But this is slow, hard work.”
…
“The United States represents 21 percent of the world’s manufacturing output today and we’re still the world’s largest manufacturing economy,” Engler said in an interview. “We ought to be building on that.”
According to Bloomberg, research firm Global Insight forecasts that total U.S. employment (not just manufacturing) will return to its past peak of 138 million jobs not before 2013.
According to Bloomberg, Greece’s 2-year bond continues to rout, and now yields 15.07%. The 10-year is moving in the same direction, now yielding 9.76%. Remember, even at previously lower yields, Greece looked set on the path for default:
‘[Before:] In order for Greece to simply stop increasing its total outstanding debt, it thus has to achieve a primary budget surplus of about 7.44% if interest payments are not to push the budget into deficit, according to Mr. Münchau. This is assuming the economy doesn’t grow. If the economy can manage 2% growth, then Greece needs a 4.96% budget surplus just to tread water.”
The above analysis, originally from Eurointelligence, used the simple yet effective ‘debt sustainability rule’ to calculate what budget surplus is necessary to keep the total national debt from growing, based on interest rates and GDP growth.
It is calculated as “the break-even primary balance (PB) requires a country to sustain the debt-to-GDP ratio (b), with marginal interest on future bond issues (i) and the rate of nominal growth (g): PB = b*(i-g).” In Greece’s case a recent value for debt-to-GDP (b) is 123%.
But… it was based on the older, lower bond yields. Now things are even worse. If we plug the latest 9.76% 10-year bond yield into the equation, we get the following. (Note we aren’t even plugging in Greece’s 2-year yield, assuming the country would borrow for ten years instead to fund itself. It works for our purposes, this is a back of the envelope)
This table shows that even with strong 4% GDP growth, Greece would need to achieve a huge 7.08% budget surplus just to keep its debt to GDP ratio from rising further. Too bad Greece’s economy is expected to contract this year, rather than grow, and it has a budget deficit, rather than a surplus!
Thus the latest spike in yields means Greece is truly a goner. Note this is even with the planned IMF 45 billion euro bailout. Markets know the bailout is coming yet are still pushing yields higher.
The math above makes it clear. Debt/GDP will likely rise rapidly this year due to a shrinking economy and a huge budget deficit. As debt/GDP rises, it only makes the equation above even uglier — It becomes harder and harder to dig yourself out of the hole.
Greece is blaming speculators for the falling confidence in its financial situation, rather than its own financial management over the last decade.
Now U.S. states are doing the same.
Credit default swaps have existed for U.S. municipal bonds for years. Now that the financial health for many states is in question, CDS’s are being used to short states such as California or Ohio.
The proliferation of the derivatives is angering treasurers around the country, who say the derivatives are sending a negative message and possibly driving up their costs of borrowing at a time when they need all the help they can get. California planned to send out letters as soon as this week to big Wall Street firms that sell its bonds, seeking in-depth information about their roles in selling derivatives.
“Firms that are underwriting our bond sales are then telling the purchasers maybe they need to buy a CDS reflecting some risk,” California Treasurer Bill Lockyer said in an interview. “They are speaking with two tongues, and we want to find out whether that impacts us in an adverse way.”
Ha, so now it’s nefarious to offer insurance protection on a bond.
“Like other states, the Ohio Treasury is concerned about the increase in CDS’s and other shorting instruments,” Simone Wilkinson, the state’s press secretary, said in an email. In Connecticut, Treasurer Denise Nappier has been monitoring whether CDS are affecting the price of the state’s bonds.
Some observers say the swaps don’t have an impact. Brian Yelvington, a trader at Knight Securities, is among experts who have offered advice to state officials seeking information about whether the instruments are being used for manipulation, which he says isn’t happening. “It takes a 10-minute tutorial for them to understand,” he says, that the bets aren’t nefarious and that they are traded too thinly to affect the market for bonds or a state’s bond rating.
You know it’s bad news when U.S. states start sounding like Greece, shooting the market ‘messenger’ rather than focusing on why people are shorting state securities. The day that U.S. federal government start attacking federal debt CDS speculators is the day it’s all over for America’s finances.
Andy Xie unflinchingly describes China’s economy as overheated.
And if the country wants to avoid a banking crisis, he thinks it needs to crank interest rates ASAP.
Recent attempts to cool the economy have meant little since money is still too cheap for banks. The only way to truly cool things down is to make money more expensive, thus removing liquidity from the system.
Further, prolonged negative real interest rates – that is, rates below inflation – are the driving force of the bubble. Unless this is corrected, after a brief pause, the bubble will grow big again. Such a vicious cycle only ends when banks have insufficient liquidity – that is, households don’t increase their deposits but want to borrow as much as possible. Indeed, recent data suggests this scenario is coming.
The most effective actions for containing the bubble are: one, raising interest rates to above the expected inflation rate; and, two, raising capital requirements for banks. China should quickly raise interest rates by 2 percentage points; current rates are ridiculously low. When this is the case for too long, it leads to a property bubble, resource misallocation, and, eventually, a financial crisis.
China’s interest rates are probably five percentage points too low. Yuan appreciation expectations have provided money holders with a substitute for interest rates. Indeed, such expectations have driven up yuan demand so rapidly that the central bank has increased its foreign exchange reserves three times, to US$ 2.4 trillion, in the past five years. China’s asset prices have risen by about the same magnitude. Inflation has followed.
“It’s more likely than not that we’ll need an IMF program in at least one more country in the euro area over the next two to three years,” Rogoff, a former IMF chief economist who has co-authored studies of financial and sovereign debt crises, said in a telephone interview. “The budget cuts needed in Europe in many countries are profound.”
He sees a higher than 50% chance that other Eurozone nations will need IMF financial support. He also affirms that Greece will require far more financial support than is currently being negotiated. Note that yesterday, it was suggested that Greece could require as much as 300 billion euros.
“The stakes are very high for Europe as it wants to avoid contagion,” said Rogoff, who in 2008 predicted the failure of some large U.S. banks prior to the collapse of Lehman Brothers Holdings Inc.
“I wouldn’t say they have to have an IMF program, but it’s possible,” said Rogoff of Spain, Portugal and Ireland. “It’s hard to say, as so much depends on political will and the numbers.”
…
“Recovery will mitigate the debt problems,” Rogoff said. “It’s very hard for Europe to get a sustained recovery.”
Forget bailouts, that’s the real bomb he just dropped.
Continuing our digestion of recent sector and industry performance data, this chart below shows how multiple U.S. transportation industries (namely Trucking, Water Transport, Railroads, and Air Freight) underperformed the S&P 500 last week, despite outperforming during the last trailing month.
This is highlighted by the dark grey vs. red bars below.
On a year-to-date basis, all industries below have underperformed the S&P 500 except for Air Freight.
Thus the one-month rally vs. the S&P 500 has been aborted (we’re talking relative performance here), perhaps due to concerns over the strength of the global recovery going forward. Continued high oil prices might be another factor, which translate into elevated fuel prices for both transport companies and the U.S. consumers whose retail demand many transport names depend on. Note everything above is on a relative basis to the S&P 500, absolute total returns are below.
Goldman’s Gerald Moser outlines a long oil, short retail pair trade in his latest portfolio strategy piece. The argument is that oil stocks have underperformed both many other industries as well as the rally in oil prices. Thus they should be buoyed by oil’s strength in the upcoming quarters while stocks hurt by rising oil prices will start to feel the impact of them, particularly retail.
Goldman:
We have long been overweight the oil sector in our portfolio. With the recent breakthrough in oil prices, we reiterate our positive view. But increasing oil prices should start to have negative effects on other sectors as oil-related costs, such as transport and packaging, rise. Retail is among the sectors that could be affected the most. This comes at a time when other potential headwinds could weigh on the retail sector, especially general retailers. We recommend positioning for long oil vs. short retail.
Higher oil prices can of course negatively affect some sectors. Retail is one of them. There is the direct effect of higher transport, energy and packaging costs and the indirect effect, as consumers have to pay more for gasoline and hence have less to spend on other items.
There might be a valuation argument behind the trade as well. We believe the charts below encompass the firm’s global oil and retail coverage.
(Via Goldman Sachs, Strategy Expresso: Oil vs. retail, Gerald Moser, 23 April 2010)
The above table from the FDIC and Foresight Analytics reveals the steady climb in the number of people living in their homes but not paying for them. The data, which go back 9 quarters (and include an estimate for the first quarter of 2010), show that 14% of the approximately 52 million residential mortgages outstanding in the U.S. were delinquent in the first quarter. This amounts to 7.3 million mortgages. Only 5.5% were on nonaccrual status, however. This amounts to 2.9 million mortgages.
…
Assuming that all loans on nonaccrual status represent vacant properties, it means at least 4.4 million (7.3 – 2.9 = 4.4) are occupied by people who are not paying for them, for whatever reason. This number has increased by 3 million since the end of 2007.
Mr. Smith equates this group with ‘squatters’ and believes their number has yet to peak. Most of these households are probably experiencing extreme financial duress. So it’s not as if most of these people are exactly cruising even if they don’t need to pay for their living space (though of course, there are likely to be a few gaming the system).
What we’d like to add is that 4.4 million households means that more than 4.4 million Americans might actually be in this situation, given that the average household has more than one person. So we think it’s fair to imagine that at least 4.4 million Americans are ‘squatters’ right now.
Four underwater vehicles have been deployed under the plan outlined by the Coast Guard and US Minerals Management Service. They will dive unmanned to the ocean floor to activate a blowout preventer, a giant series of pipes and valves that could staunch the leak.
