The Fake Richness

Yesterday's CPI (Consumer Price Index) number in US pointed what everyone was warning in recent months...US is aproacching a deflationary season (like Japan in the 90's). The inflation data it's the lowest since the 50's. Yesterday, the FED bought another 8bn of their Treasuries following the QE2 plans. But even with the support of uncle Sam (see article from Warren Buffet supporting the measures taken by the FED http://www.nytimes.com/2010/11/17/opinion/17buffett.html) it doesn't seem that US is waking up from recession...


I bet, this will be the trendline until the end of the year and beggining of 2011. The Dollar will keep devaluating against the Yen / Eur / GBP.

Which will be good to rebuild the appetite of investors in the Stock Market.
In recent weeks we have seen a very bullish stock... See below the Nasdaq evolution since September:

I think it will continue in this mood until the end of the year... with some in and outs from the investors, getting some profits for their portfolio as it happened in 8th and 10th of November trying to break the resistance at 2,580.

But from a critical point of view, is this 22% really an increase of wealthness??? For sure not, what is really creating is a "false richness/wealth" trying to encourage consumption, recover confidence, increase the exports and make them more competitive (thanks to a weak Dollar and ultimately a better Trade Balance) to give the spark for US Economy engine.

The "moving abroad" Tax

As I commented last week in my Twitter the rising of corporate and personal taxes in the UK are making big companies to move out of the UK to other places.

An example of this is Ineos, the biggest private company by sales in UK. The company realized that moving abroad it's headquarters and tax residance to Switzerland will save up to €450m in the next four years and with the plung of the economy nowadays it would be ridicolous to not save this amount of money.

In my opinion the latest tax reforms are not helping the UK recovery and I bet this will hit the future of the world's financial City.

Greece, the new Iceland?

I read a very interesting article at the February 22nd Financial Times. Mr. Alan Beattie wrote of how the “…Parties of the centre- left are in retreat. What should have been opportunity to reorder national and global economies seems to have left many ideologically adrift”.

A good example of this is Greece, with the socialist Prime Minister George Papandreou the country is living the worse Debt Crisis in its history. This is not a serious problem to Mr. Papandreou, he has only been on the charge for a few months but he is not alone in the ineptness side of Europe´s worst leaders, this position is for my president Jose Luis Rodriguez Zapatero in power since 2004.

He couldn’t foresee the crisis when half of Europe was beginning to tighten their accounts and did little to prevent the house bubble that has punished Spain more than other countries. Instead he keeps talking on television trying to please the crowd with temporary social aids rather than work on a sustainable way to get out of the crisis without increasing dramatically Spanish deficit. The reality is that one out of five Spanish is unemployed and this figure appears to continue to grow. As seen below, Spain and Greece should pay special attention to their deficit to GDP above 12. Or their economy will suffer a downward trend in rating their debt bonds.


As the article also mentions Norway and UK seems to be another plummet in the Euro-Economy and this will become the biggest test for Europe since it was founded. €uro´s health is on the bench and I hope that Germany and France begin to pull the wagon of the 16´s. It is for sure that the European Union will not allow Greece or the others to collapse because the Central Bank will have to change the rules to provide guarantees or loans, if necessary to help the PIIGS (Portugal, Italy, Ireland, Greece, and Spain).

Barclays rise up

Mr.Diamon's (CEO of Barclays) bet on Lehman, a great decision.

After 2009 net profit it is obvious that Lehman acquisition had a big impact on Barclays´s business. As the CEO said on Tuesday the Deal has been "transformational for the bank" Not only this gave them more diversification (absorbing the loans losses in 2009) but also has made Barclays to become bigger in the US. The perspectives for the equities business of Barclays will arise strong after a 2009 year with most of revenues from fixed income business.

Another great news for Barclays is that they believed their loans-loss charges reached its highest in 2009. "We are past the worst and have now seen a turning point in impairments" the banks’ risk director said.

The Double Dip Recession (W shape for me)

It´s funny how a month and a half later, Mr. Obama starts to talk about an issue that I mentioned in my twitter and in an article at this blog. Even some of my friends made fun of me when I told them about my “W shape recession” or as Mr. Obama calls it “Double-Dip”. But it also makes me proud because the signs that I saw in the past months were indicative that this recovery was partial.

For someone that doesn’t know what a double dip recession is I will say that it´s a problem after the GDP growth back again to negative numbers after a period (usually 1 or 2 quarters) of positive growth. A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession. The effect that the economy will move back again into a second recession makes the new recovery even more difficult because you have to add the loss of confidence.

Here are the probes of what I said in the pass…

In the Financial Raindrops at Facebook

In Financial Raindrops´s blog.
Even on Financial Raindrops´s Twitter:


The words of Mr. Obama during his nine day trip to Asia were collected in a interview in Beijing by most of the media cover. I took the two best ones.


The FT article is well structured, it starts with the problem using Obama´s quotes, and then it gives some data about the deficit situation. To end the article, the FT concludes with some coverage about China, the “biggest foreign holder of US Treasury bonds”, it's worrying about their investment and makes a comparison of Obama´s trip “as that of a debtor visiting his banker.”


For the Times, they give more information about the debt problem of the US administration “The National Debt has increased about $1.6 trillion on Mr. Obama's watch, and has now topped the $12 trillion mark, bringing it dangerous close to the $12.1 trillion statutory limit”. It also uses an external source, Société Générale, to alert from a future recession in 2010 putting the worse scenario with some previsions “public debt would explode within two years to 105 per cent of GDP in the UK, 125 per cent in the US” and the article ends up with a very pessimistic comparison…”The underlying debt burden is greater than it was after the Second World War”

So if they don´t change the financial system and the pillars on where to support the growth we will end up again in a longer recession. We have seen that during the past US and other countries have been laying their economy in a huge deficit, passing the problem between generations as a “hot potato”, but it´s good signal that Mr. Obama recognize this big problem as the FT article says “It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the US economy in a double-dip recession”.

I hope governments and economic institutions starts to approach such a huge problem such as “the underlying debt burden” when nowadays is even “greater than it was after the Second World War”.

Sources:

http://www.ft.com/cms/s/0/ee761ae2-d443-11de-990c-00144feabdc0.html
http://business.timesonline.co.uk/tol/business/economics/article6922325.ece
http://www.foxnews.com/politics/2009/11/18/obama-warns-double-dip-recession/

Warren Buffett´s Legacy

One of the oldest inventions of the world seems to be one of the pillars on which to support the future of United States economy. Or at least that is the vision that the investment `guru´ Warren Buffet has to make the largest purchase in his career, a $26.3 billion deal to buy Burlington Northern Santa Fe Corp (the largest US railroad operator), he called the acquisition an "all-in wager" on the U.S. economy.

Everybody knows that Mr. Buffet is not a speculator and that he bases his theories in a deep analysis of sectors. That´s why “I´m unsure about the immediate future but an efficient railroad system is vital to U.S. prosperity” Buffet says.

So...what does he see?

As the WSJ mentions in his article (Art.1) “Mr. Buffett is betting that in an era of high fuel costs, railroads will perform better than the trucking industry. More broadly, the investment is a wager on the long-term strength of the U.S. economy as it emerges from a prolonged recession.” This is how Buffett is confident that, after the recession, the world's largest economy will rebuild again and encourage the transportation of commodities and goods within its borders.

What´s behind this purchase?

There are two main reasons, first one is that oil prices will keep increasing and everyone is aware of the shortage of this good. It´s also proven than diesel trains are inherently more efficient than planes, trucks or cars. As we can see in the table below.

Another major reason for this huge investment it’s that the commodities market goes hand by hand with Burlington Northern on the index. We can see in the graph how the shares of Burlington replicate the movement of the commodities.

The coverage on the media about this news was very similar in every newspaper, for the New York Times the story was told in an objective perspective giving support to Buffett´s movement into the railroad industry to carry the U.S. economy “America’s best-known investor, Warren Buffett, is making his biggest bet yet on the nation’s economic future by buying, of all things, a railroad. They also ironically compared the new purchase with his childhood dream to get a train set form his father “His new toy will not come cheap”. Same in the Guardian where they also comment about his new toy “is buying himself an enormous train set by acquiring one of America's largest freight railway operators, Burlington Northern Santa Fe, in a deal worth $44bn (£27bn) that signals confidence in a long-term revival of the US economy.”

Warren Buffett's Legacy

To conclude this last entry it´s amazing how with 79 years and the second largest fortunes in the world, Buffett has no plans to retire, but want to be sure that the business of Berkshire will last for decades after he´s gone. He is betting that any new technology will not outdate the train and I think he may be right.

(Art.1)http://online.wsj.com/article/SB10001424052748703740004574513191915147218.html

(Art.2) http://www.nytimes.com/2009/11/04/business/04deal.html

(Art.3)http://www.guardian.co.uk/business/2009/nov/03/warren-buffett-buys-bnsf-railway

(Art.4)http://www.oilprice.net/en/articles/buffett_buys_railways_because_of_peak_oil.php

Obama´s 1st Year

After one year of Obama´s reach to the power with the slogan “Yes, We Can” I would like to analyze what he has done so far.

Although Obama has proven to be somewhat of a hero this past year, his expectations have not exceeded him. Due to things like 10% unemployment rate, an imminent war in Afghanistan, and many other non transformative ideas, super-star Obama has failed to meet America´s needs.

Even for a left-winged newspaper like the New York Times, “the tears and euphoria of Grant Park feel like a thousand years ago.”(Art.1).The article is one of the best articles I´ve read, very interesting and with a constructive criticism using some formal speakers that comment on Obama´s first year.


With his epics speeches in the rain and the President-elect Obama's Grant Park speech “He has discovered that the oratory that proved so powerful on the campaign trail does not as easily move votes on Capitol Hill,” New York Times says.


I also enjoyed reading a Fox News opinion article completely opposite to the New York Time´s it was very vice. Opinions like “the biggest "change" he can point to is that he's our first black president and he's not President Bush!” proves that they are not very into the Obama phenomenon and the way people think he´s a savior because of his amazing campaign and skin color.

In a recession time I don’t think it’s a good idea to change one of the most important (and expensive) systems in the country. The Health Care reform should wait if they don´t want to collapse the new system with the drowned American citizens. Who is going to pay the icing of Obama´s cake? The last legislation estimated the cost of the plan in more than $1 trillion while Obama “has put the threshold at $900 billion for a suitable plan” (Art.2)

My suggestion is this, WAIT, wait until you pull out the troops of Iraq as you said “By August 31, 2010, our combat mission in Iraq will end” (art. 4) , wait until you solve the biggest financial crisis since the Great Depression and wait until you prove to the world that you have already accomplished something bigger than a better image for the US after Bush hegemony (something relatively easy). The controversy with the imported tires in china were US became protectionism is not the way to solve the crisis that started in the US.

I want to clear my opinion expressed here may seem that I don´t like Obama, that´s not true, what I don´t like it´s to elevate Obama like a savior and the captain of a New America when hasn’t done anything notorious to achieve awards and merits like the Nobel Prize. With some time I hope he does a good job leading the world most powerful economy.

(Art.1) http://www.nytimes.com/2009/11/04/us/politics/04obama.html
(Art. 2) http://abcnews.go.com/Politics/HealthCare/health-care-reform-public-option-employer-mandate-remain/story?id=8881163
(Art.3) http://www.foxnews.com/opinion/2009/11/02/jon-kraushar-obama-year-later/?test=latestnews
(Art.4) http://news.bbc.co.uk/1/hi/7914061.stm

US Little Recovery

After a long year for the world's largest economy, the end of a recession that has cost more than 7 million jobs and prompted the biggest response since the Great Depression. What should be done when the financial system proves that something was going wrong? Where do you sustain the growth?

The answer is consumer spending, residential investment and strong government spending. My point of view is more laissez-faire because it’s better for the economy and the development of a country but when it comes to these times, when the economy is questioned, you need a minimal interference by the government to start building up the system again. With this strategy US has started to get back in the growth shape. The Wall Street analysts forecast that the economy would grow by 3.2 per cent was right and this result has been the most commented news in the business sector.

The FT blames in the policy measures that were put in place in the US economy, for example some measures have been seen, like the cash for clunkers that encouraged the huge car industry in the States. “According to the White House’s Council of Economic Advisers, the stimulus added more than 2 per cent to real GDP growth in the third quarter.” (Art.1)

After you give the spark to reactivate the economy, it’s a natural effect that automobile industry (in this case) is going to start to maintain a reasonable movement of cash flow for the complementary services that it is linked to (exports, imports, Loans, Oil, tires, manufactures...), even though in the beginning the support given to General Motors and Chrysler by the Obama Administration was widely unpopular. An April Washington Post poll found that 41% of Americans approved of the actions. The truth is as Christian Menegatti, head of global economic research at Roubini Global Economics, said ahead of the report, “These types of take-it-or-leave-it incentives are very effective in the short term.” (Art.1)

But if you read in depth the FT (Art.1) coverage of the US revival it is shown that not everything that shines is gold. “Many analysts say the rate of growth will slow after the third-quarter jump, as the initial effect of the stimulus wanes”. This is also mentioned in the Telegraph, “While acknowledging that the economy has rebounded, experts are divided on how strong the recovery will be. Some reckon there is a significant risk that the economy will fall back into recession.”

The Bloomberg article (Art.2) also takes the same data from the Commerce department (same in the FT) and it is also clear that “federal assistance to the housing and auto industries, can be sustained into 2010 and generate jobs”

I think that the US economy is going to go down again, to form a W shaped recovery until issues, like unemployment has been solved. A sign of this REAL recovery will be the appreciation of the Dollar and the increase of the interest rates.

Art.1 http://www.ft.com/cms/s/0/16073bb0-c47f-11de-912e00144feab49a.html?nclick_check=1
Art.2 http://www.bloomberg.com/apps/news?pid=20601103&sid=aL3jHqTqtocU
Art.3 http://business.timesonline.co.uk/tol/business/economics/article6895362.ece
Art.4 http://www.telegraph.co.uk/finance/economics/6459950/US-emerges-from-recession.html

Living Wills

The most interesting news of the week in the financial world that will affect several large British banks it’s the draw up of a “Living will” by the end of the year. This will help them to outline the procedures to be dismantled more easily in any future financial crisis.

The economist article is the most complex of the ones I read, I have to say that even looking up some words it´s not easy to understand technical references that are not familiar to usual readers. What I like the most about the article it’s that they actually propose a solution for future liquidity crisis and the death of huge banks. The ringed fences it´s a decent solution so “If banks were run as federations of self-contained units, it would be easier to swoop in and save some parts while allowing others to die” (Art.1). But this is an idea that most of the banks don´t like because of the legal problems and how having different subsidiaries can affect to the reputation of a mayor bank entity. This separatism could also affect the lending viability making it harder for trading operations.

The Times is a well structured article, I like it because of how easily they explain the problem and the resolution of the organisms, which will change the financial system. In one side it’s the FSA “The regulator has strongly backed the idea of living wills in contrast with the Bank of England (The other side), which has called for banks to be split up so that they are not too big to fail.” (Art.2)

It´s interesting how the Bank of England “has called for banks to be split up so that they are not too big to fail.”(Art.2) I didn´t think that they could ever say something like that, a country that PRESUME of being the most liberal system in the world when in fact the creator of economic liberalism shouldn’t disturb into the banks rules by restricting them. A better way in my point of view will be the FSA approach about how the Banks:


• Should be required to produce recovery and resolution plans
• Banks which are deemed to be so big that they have an impact on the entire financial system must be forced to hold more capital.
• The need for more capital to support riskier parts of their business, such as proprietary trading.



It also mentions the problem about the bonuses in the investment banks, about that, the FSA said “The priority use of high investment bank profits must be to enhance capital levels rather than to support excessive bonus payments"

The Bloomberg news it´s as usual, short and concise, they give you a brief idea of the proposal that the FSA asked for the largest banks in the UK and they use the FSA words to explain the new regulation “Banks will have to hold more capital against trading books and derivatives will be cleared through a central clearinghouse, the FSA proposed.” (Art.3)

Art.1 http://www.economist.com/businessfinance/displaystory.cfm?story_id=14558456
Art.2 http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6885273.ece
Art.3 http://www.bloomberg.com/apps/news?pid=20601102&sid=aSocSdoWp8p0

*FSA: The Financial Services Authority (FSA) is an independent non-governmental body an independent body that regulates the financial services industry in the UK.

The Tom Sawyer Effect

In this new entry I will try to criticize an effect that happens all the time in media and communications. It´s known as the Tom Sawyer effect and it is always present in the press and in the financial announcement.

What happens?
The stock market’s reaction to the publication of results of companies is often surprising. Good results sometimes lead to a downward reaction on the stock market and vice versa because it was different than expected. The human response to a given, as are the results, is based on the information provided previously. Such behavior is known as "Tom Sawyer effect" this was studied in a Working Paper of the Federal Reserve Bank of Boston and entitled "Tom Sawyer and the Construction of Value. (Art.1)

I will try to explain this with the announcement of results from JP Morgan in the past week. In the article from the Guardian (Art.2) the headlines tells you everything “JP Morgan smashes expectations with $3.6bn profit” the title captures the attention of readers but when you read the whole article, it is well structured and it shows that the reporter does a good job explaining the reason for such benefits.

The New York Times (Art.3) is where the story unfolds more through the use of relevant people in the financial world, giving more objectivity to the story using more formal language and the headline is less flamboyant “JPMorgan Chase Reports Strong Profit of $3.6 Billion”

For the Independent article (Art.4) it is interesting how they see the profits of JP Morgan as an incentive for the Dow Jones to pass over the 10.000 after 12 months. It also seems that investment banking profits could be saving US financial firms from weaknesses elsewhere. In this article, we see more objectivity, because instead of focusing only on JP Morgan it also talks about the financial system, competitors like Goldman Sachs and “one of the main reasons that Wall Street is once again expected to pay boomtime-style bonuses at the end of this year.”

So… the Tom Sawyer effect can be seen in the price of the JP Morgan shares and the increase of the Dow Jones over the 10.000 the day of the announcement of results.




The conclusion is convincing. The assessment we make of the same information varies depending on the expectations that they previously had. Our reactions are different than we expected


Art.1 http://www.bos.frb.org/economic/wp/wp2005/wp0510.pdf
Art.2 http://www.guardian.co.uk/business/2009/oct/14/jp-morgan-beats-profit-forecast
Art.3 http://www.nytimes.com/2009/10/15/business/15bank.html?bl
Art.4 http://www.independent.co.uk/news/business/news/jpmorgan-results-help-dow-power-past-10000-1802782.html