The lion's share of the reading will hopefully be David Leavitt and to the right you can see the titles I am bringing. By no means will I get to read the lot, but since the last two are collections of short stories (The Stories and Arkansas), I hope that I will be able to read around. It all depends really on whether the usual family bug of solving crosswords completely takes over or not. We will be going five adults this time so not even the genius crosswords can count themselves too sure I think. 

My destination will be Greece and more specifically a small town 50 km outside Athens where we (my family) are renting a small flat situated right at the beach (well almost). No wifi is a given although I will be trying, of course, to see whether I can catch a wave or two from the neighboring houses. If I manage to go online I will probably drop in with some small bits.

I will return the 22nd of August.

Best Wishes

Claus

So sitting here on a Thursday evening thinking about whether I could wring out something interesting about this week's events it suddenly dawned on me. I don't have to, the Economist has already done it for me by fielding a survey on ageing populations in their latest print edition.

Here are the articles;

A slow-burning fuse

Suffer the little children

A world of Methuselahs

The silver dollar

Scrimp and save

Work till you drop

China’s predicament

Into the unknown

As ususal, such special reports (which were called surveys, I'd have you know!) come with a leader which I reproduce below.

WHEN Otto von Bismarck introduced the first pension for workers over 70 in 1889, the life expectancy of a Prussian was 45. In 1908, when Lloyd George bullied through a payment of five shillings a week for poor men who had reached 70, Britons, especially poor ones, were lucky to survive much past 50. By 1935, when America set up its Social Security system, the official pension age was 65—three years beyond the lifespan of the typical American. State-sponsored retirement was designed to be a brief sunset to life, for a few hardy souls.

Now retirement is for everyone, and often as long as whole lives once were. In some European countries the average retirement lasts more than a quarter of a century. In America the official pension age is 66, but the average American retires at 64 and can then expect to live for another 16 years. Average spending on public pensions across the OECD is now the equivalent of more than 7% of GDP (they cost America just 0.2% back in 1935). In some countries the current figure could double by 2050, to say nothing of the cost of private pensions and extra spending on health and long-term care.

Grey and proud of it

Although the idea that “we are all getting older” is a truism, few governments, employers or individuals have yet come to terms with where longer retirement is heading: the end of the whole concept (see special report). Whether we like it or not, we are going back to the pre-Bismarckian world, where work had no formal stopping point. That reversion will not happen overnight, but preparations should start now—to ensure that when the inevitable happens it is a change for the better.

It should be for the better because it is being partly driven by a wonderful thing: people are living ever longer. Life expectancy has been rising by two or three years for every ten that pass, despite repeated forecasts that it was about to reach its limit. Centenarians used to be rarer than hens’ teeth; now America alone has 100,000 of them. By the end of this century the age of 100 may have become the new three score and ten.

This imminent greying of society is compounded by two other demographic shifts. First, in most rich countries women no longer have enough babies to keep up the numbers (a prospect that may please a lot of greens but not many governments); and the huge baby-boom generation, born after the second world war, has begun to retire. In 1950 the OECD countries had seven people aged 20-64 for every one of 65 and over. Now it is four to one—and on course to be two to one by 2050. That will ruin the pay-as-you-go state pension schemes that provide the bulk of retirement income in rich countries.

It is tempting to think that some of the gaps in the rich countries’ labour forces could be filled by immigrants from poorer countries. They already account for much of what little population growth there is in the developed world. But once ageing gets properly under way, the shortfalls will become so large that the flow of immigrants would have to increase to many times what it is now. Given the political resistance to even today’s levels of immigration (as shown up in the recent elections to the European Parliament), that, alas, looks unlikely.

So individuals, companies and governments in rich countries will have to adapt. There are some signs the first two are beginning to do that. Many employers remain prejudiced against older workers, and not always without reason: performance in manual jobs does drop off in middle age, and older people are often slower on the uptake and less comfortable with new technology. But people past retirement age would not necessarily carry on in the same jobs as before. In Japan, where pensions are Spartan and lots of people are still working in their later 60s and even 70s, big companies like Hitachi have found ways of re-employing staff after retirement—but in a different capacity and, significantly, at lower pay.

Elsewhere employers have been less inventive. But retailers such as Wal-Mart or Britain’s B&Q, and caterers such as McDonald’s, have started hiring pensioners because their customers find them friendlier and more helpful. And skills shortages are already creating opportunities: in the past year or two a dearth of German engineers has caused companies to bring back older workers. Once labour forces start declining, from about 2020, employers will no longer have much choice.

As for the older workers themselves, many of them seem keen enough to carry on beyond retirement. A recent Financial Times/Harris poll showed most Americans, Britons and Italians would work for longer in return for a larger pension (though Germans were much less enthusiastic). This surely makes sense: as long as the job is not too onerous, many people benefit in mind and body from having something to get them out of the house. Many baby-boomers say they never want to bow out altogether, though they would often prefer to put in shorter hours. If they want to go on working, they will have to accept that pay can go down as well as up.

It will all work out, sort of

Can governments make sure this inevitable adjustment goes smoothly? In the recent past some policies have bordered on the demographically insane—for instance “job-creation” schemes that encourage older workers to take early retirement. Many things that make sense anyway, such as making benefits more portable, encouraging immigration, promoting private saving or reforming health care (see article), make even more sense now. Banning mandatory retirement ages in the private sector (as America has done) looks sensible, as does creating conditions in which people can retire more gradually. Above all, the retirement ages for state pensions need to be put back. Recent increases to 67 or 68 are doing no more than compensate for the likely rise in life expectancy: 70 would be a better figure. So far only Denmark has taken the radical step of indexing the pensionable age to life expectancy.

Some of this will be unpopular. Private pensions, which might make up for some of this, last year lost nearly a quarter of their value, a terrifying $5.4 trillion. But as Herb Stein, an economist, pointed out, “if something cannot go on forever, it will stop.” Better to try to enjoy the consequences.

Now, I will of course have much more to say about this. Actually, for a demographic wonk such as me I don't expect to be dramatically surprised, but I for one believe the Economist still got it and thus drives the discoure.  I will be interested to see where it (the discourse) is at the moment. I notice that they focus much on extending retirement age which is of course all well and good; yet, why don't just say it ... we need women to have more children and we need to think long and hard how to make this fact reconcilable with modern society's structures and increasingly integrated labour market. Ok, it is printing as I type, see you later.

In another reduction of alternative indexes that use different valuations and business fundamentals to weight companies, Claymore Advisors is seeking to switch an existing exchange-traded fund to a more traditional market-cap size weighted benchmark.

But that isn't all.

In a filing dated May 21, the trust for the Claymore/Great Companies Large-Cap Growth ETF (NYSE: XGC) is asking the Securities & Exchange Commission to let it invest in much smaller companies. And while listed largely on U.S. exchanges, they'd be foreign-based businesses.

The new fund would be called the Claymore/BNY Mellon International Small Cap ETF.

The document notes that the new ETF's "investment objective is not fundamental" in nature. It clearly states the change will revert to a strictly passive indexing approach. (See filing here.)

The request to regulators by Claymore comes on the heels of PowerShares' decision to close 19 of its ETFs, a dozen of which were based on fundamental indexes created by Rob Arnott's Research Affiliates. (See related story here.)

While the existing XGC also follows an index, it's based on an investment approach by Great Companies Inc., a Tampa Bay, Fla.-based money management firm. Its managers rank companies by such factors as price-earnings growth rates, or PEG ratios, and various debt measures for assessing profitability.

Great Companies uses computers to crunch fundamental data to compare value characteristics against growth metrics for domestic large-cap names. Stocks are ranked and added to the ETF's underlying index according to the adviser's composite scoring system.

When it was launched in April 2007, XGC came with an expense ratio of 0.60%. It hasn't changed since then and it had slightly more than $3.7 million in assets through Tuesday.

Higher Price Tag 

When it was first coming to market, a Great Companies' portfolio manager acknowledged that XGC's price tag was higher than rival large-cap funds such as Vanguard and iShares. "But we're providing more of a managed-account product than a classic index-fund product," he said in a MarketWatch.com story at the time. (You can read the story here).

The new small-cap international ETF would face stiff competition as several newcomers have jumped into the asset class in the past few years. But one bone of contention for U.S.-based investors in often illiquid foreign waters is that it can be difficult to follow small-cap names held by their funds.

The new Claymore offering would address that concern by predominately investing in overseas firms with listings on major U.S. exchanges. The fund would hold mainly companies with American depositary receipts or global depositary receipts and market caps of $250 million to $2 billion.

At the end of March, such a makeup gave the underlying index a definite slant to emerging markets. The BNY/Mellon benchmark consisted of 92 stocks. The weightings by country then were: Brazil 21.37%; China 19.20%; India 7.28%; United Kingdom 6.88%; Chile 5.59%; Mexico 4.19%; Russia 3.64%; Japan 3.40%; Israel 3.10%; Netherlands 2.78%; Greece 2.64%; South Africa 2.57%; Italy 2.14%; Argentina 1.98%; Switzerland 1.96%; France 1.89%; Korea 1.79%; Australia 1.68%; Ireland 1.61%; Colombia 1.51%; Hungary 1.00%; U.S. 0.82%; Indonesia 0.50%; Hong Kong 0.46%; Denmark 0.45% and Germany 0.41%.

No expense ratio is listed in the filing. But if the new fund were in the same neighborhood as XGC's, it would seem to have a better fighting chance when competing in the small-cap international arena.

Prices for rival ETFs range from around 0.40% and up. For example, the group's granddaddy is the WisdomTree International SmallCap Dividend Fund (NYSE: DLS). Meanwhile, Vanguard entered the field in March with an ETF charging 0.38%. (For a more complete breakdown on competing international small-cap ETFs, see stories here and here.)

-- This report was submitted by IndexUniverse.com's Murray Coleman. 

However, and with the recent rate meeting one is tempted to conclude that the ECB is now seriously committed to considering alternative measures and also, as it were, drastic measures along the lines of its peers at the Fed, the BOE and the BOJ who have all in their distinct way been engaged in QE for quite some time. In the recent print edition, the Economist provides a fine overview of global central banking in the midst of the current financial crisis; what has changed, whether there will be a "normal" again, and specifically whether central banks will emerge in new clothing, as it were, with new policy targets and objectives. I think these are some important questions since there is indeed a big risk that the edifice of central bank policy which has been built up during the financial crisis may turn out to be anything but temporary. And here I am not talking about the inflationist hobby horse that central bankers may be too slow to haul back the reigns when the economy picks up again, but more so about the fact that whatever trend we will observe in the aftermath won't be anything near the one markets and policy makers expect. Of course, the good old principle of falsification will help on this one as we move forward.

One way in which the ECB has so far differed from its peers can be seen from looking at the first figure in the Economist article where it shown how the ECB has certainly expanding its lending operations (and credit facilities), specifically in the interbank market, it has not yet entered the securities market to buy up debt and equity. Some of us has been surprised by this reluctance which, together with the fact that the ECB has been relatively shy in slashing nominal rates, means that the ECB has appeared lagging in its response. Now, there is nothing wrong with being different and there is certainly nothing wrong with applying different tools to a situation which you genuinely find different. However, as one friend to me pointed out a while back, the ECB's unique, and according to some brave and prudent, response to the crisis is now a liability rather than an asset, and one has to wonder whether that strategy hasn't been subject to revision for a while now.

Indeed, I would be unfair in omitting to mention the fact that the ECB has indeed continued to slash interest rates and that signs have emerged to indicate that the ECB may be more flexible towards non-traditional policy measures. However, if you look at the assessment of the central bank the risk of deflation is still not paramount. At the recent policy meeting where interest rates were lowered by 25 basis points to 1.25 Trichet consequently pointed towards risks being balanced and more specifically how he did not view dis-inflation as being the same thing as deflation. This suggests that the ECB is not yet ready to take steps similar to the ones being taken by the Fed, the BOE and the BOJ.

Trichet, a Man of Principles

The impending comparison in this relation is the one with the Fed and in a recent speech Trichet points towards three, well known, reasons why we should not compare the US and the Eurozone.

The first reason relates to the ECB's focus on the banking sector. Pointing to the fact that banking loans make up a substantially larger part in the Eurozone than in the US (as a percentage of GDP), the chairman defends the focus on easing bank credit issues. Moreover, and as a related point Trichet points towards the importance of small and medium sized companies in the Eurozone (SMEs) and how these companies rely heavily on banks. Far be it from me to disagree with an expert (and I do consider Trichet an expert here), but I would humbly submit the point this is not only a (credit) supply story. At this point it is very much a demand story and how those very same companies need to find investment opportunities beyond maintaining credit to smooth their short term expenses with whatever revenues they might have in prospect.

As a second reason Trichet points towards a higher risk associated with the housing market in the US and thus why the US' asset programs to purchase toxic housing assets should not be replicated in the US. Now, it is true that the wealth effect from housing is considerably higher in the US than in the Eurozone countries at large, but this is also as far as the argument goes. In essence, I really don't know what to say here, and quite frankly this is an embarrassing remark from the president. I mean, doesn't he know that Spain and Ireland are part of the Eurozone? Also the implicit narrative that Europe and the US differs because of the role of housing in the latter is extremely simplified. Take Eastern Europe for example not to mention my own country Denmark. In fact, if there ever was a call for a program to relinquish banks and credit institutions of bad mortgage assets it would be in the case of Spain. Add to this that the crisis exactly turned global the minute BNP Paripas revealed that they too would be suffering subprime related losses and after them a veritable tableau d'horreur has followed.

Thirdly and perhaps most popularly in this discourse, Trichet points to the mitigating effects of a relative high degree of price rigidities in a European context. The point goes that if prices are rigid on the downside, companies will have a harder time lowering wages and prices and thus provoking inflation. We could think of this as a structural hedge against a collapse into deflation and it is basically driven by the fact that if headline inflation did not spark core inflation growth on the up, it won't do it on the downside either. From the point of view of ECB policy however, this argument would be rather inconsistent since we all remember the horror of second round effects that the ECB tried to enshrine into markets as rates were raised back in 2006-07 to counter the increase in headline inflation. In this way, one would assume that such logic applied on the downside too and what is more, it is quite obvious that the deleveraging needed across the global economy need to be deflationary by very nature of the problem at hand. Trichet on the other hand is a man of principles and his remarks, in the context of inflation expectations, during an interview with Süddeutsche Zeitung brought a smile to my face.

But citizens can have full confidence that we will guarantee stable prices over the medium and long term. The 329 million citizens of the euro area are very clever. They would not improve their level of confidence and help restarting the economy if they had the sentiment that we were forgetting our primary medium term goal.

(...)

We should not confuse disinflation and deflation. At the moment I am speaking, we are experiencing very low inflation and in the months to come negative inflation due to the decrease of the prices of oil, energy and commodities, before it increases again at the end of the year. This is good for the purchasing power of households and is a correction of the high prices of the past.

It would be interesting to take a poll to see whether those 329 million souls really were as clever as Trichet thinks, whether they are imbued with the kind expectations assumed here, or whether they agree with the ECB overall main objective.

The ECB, a Hydra?

Meanwhile and although the President certainly seems to be keeping his discourse straight, it is not easy to get a handle of what exactly the ECB is planning as we move forward. One classic dichotomy in the context of ECB watching and one which is dearly loved by financial journalists is between Axel Weber, as a hawk, one the one side and e.g. Greek council member Athanasios Orphanides on the other. It is well known that the former on several occasions have argued against slashing the nominal interest rates below 1% whereas the latter has advocated for the ECB to engage in QE-like purchases of assets in the market place. Weber has even been quoted of arguing how the ECB should set a specific floor under how low the nominal interest rate could be slashed.

But, by no means is this only a Saxon-Hellenist skirmish.

Recently, Bloomberg ran a piece in which the Dutch and Belgian council members Noel Wellink and Guy Quaden were quoted of saying that the ECB could (potentially) serve up extraordinary measures as we move forward from the next meeting the 7th of May. On the economic outlook, it is also difficult to get a handle on what the council members think with some arguing how the economy is improving and some, on the other hand, voicing concern over downside risks to prices and economic momentum. Also, on the outlook for deflation, the opinions are many. Trichet is well known to hold the belief that we are not going to see deflation, but only dis-inflation which, in itself, is not detrimental and may even be good for households' disposable income. However, Wellink was also quoted by Bloomberg of saying that the longer this disinflationary process lingers, the higher the risk will be that we get into an unwanted situation.

Adding to the cacophony, executive board member Lorenzo Bini Smaghi recently pointed to the fact (get the speech here) that bringing interest rates close to the zero bound would risk distorting money markets as it could curtail interbank lending. Apart from constituting yet another voice in the wilderness of official ECB opinion makings, this is a point worth considering in the sense that financial institutions might swap what was otherwise a smoothly functioning interbank market for the soothing liquidity tap of the central bank. I think it is important to emphasise though that there is a big difference between short term and long term financing here, where one would assume the central bank to stay exclusively on the short end of the curve. In essence, Mr. Smaghi's speech is a well argued one, and I would not want to leave the impression that I am trying to present a picture of an ECB that is torn to a greater extent than is really the case.

However, it appears that I am not the only picking up the mixed discourses on the radar. Consequently, Bloomberg reporter Simone Meier has a piece which details how Trichet has decided to silence his fellow council members, at least as so far goes the measures taking during the next meeting the 7th of May.

European Central Bank President Jean-Claude Trichet has imposed a vow of silence on Governing Council members as they struggle to agree on what to do next to rescue the economy from recession.

Trichet asked council members last week to refrain from commenting on what new measures the ECB will unveil at its next policy meeting on May 7. Austria’s Ewald Nowotny confirmed the ban today, telling reporters in Vienna officials had been asked “in the name of the President not to talk about details before the May meeting.” Trichet said on April 27 that council members had agreed “not to give any further indications.”

Given the short overview above of the different voices, one can hardly fault the President for this initiative and as David Milleker, chief economist at Union Investment in Frankfurt is quoted of saying;

“They’ve created more confusion than clarity. The entire cacophony didn’t exactly give the picture of a united council in any case.”

This seems to be the point in a nutshell and in an environment where the uncertainty surrounding the ECB's strategy and play book is generally high, the confusion only increases.

Charting a Course

In many ways I think it is natural that the ECB, just as its peers, are finding it difficult to deal with the present circumstances. Nobody ever said that this was easy, but the ECB still leaves an impression that it really does not know what it wants and, more importantly, how it wants to get there. In the recent World Economic Outlook 09, the IMF heads of the description of the European economic edifice with the point that Europe is searching for a coherent policy response. The fund highlights how the severe stress that has built up in the financial system and in the real economy (especially in the context of the CEE) calls for coordination between fiscal and monetary policy. The niggle here is of course that, at present, this is difficulty achieved in Eurozone let alone European context. Moreover, the ECB's sole focus on price stability may be robbing it of looking at more flexible measures although of course, in relation to buying securities in the open market, it is not certain e.g. which countries' bonds it should buy. This is why I, and among others the IMF, have argued that Euro Bonds be considered.  

For me, there are two additional issues here. Firstly, I think the ECB is too dogmatic. Sure, you can call me excessively worried about deflation and you can argue that since we are currently sustaining a three month rally things are perhaps not as bad as they seem. However, I still believe that the myopic look on inflation expectations in the aggregate for the Eurozone as well as the idea that price stability in the long run follows naturally from anchoring these expectations constitute a severely miscalibrated compass to navigate the waters in which the economy finds itself at present. There is a fine balance between sticking to one's convention and adjusting to new circumstances, and the ECB is, in my opinion, leaning too much to former. Secondly, I think the ECB and the indeed Eurozone policy makers have a responsibility towards one the one hand, the CEE and on the other keeping the Eurozone in one piece.  I think that this responsibility should be conveyed very clearly in speech and action. You can always argue that measures already have been taking, but I think there is good chance (risk) that the whole European economic system needs a serious re-boot on the back of this crisis. Such re-structuring need to be intimately tuned to these two challenges which means that we need to be able to speak openly about them and not narrate anything in the context of one set of aggregate inflation expectations measures. If it is not, then we will truly be all at sea.

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Here are highlights from Monday's Analyst Blog:

Dynavax Surge Not Warranted

In early morning trading, Dynavax Technologies Corp. (NASDAQ: DVAX) shares shot up dramatically (36%). However, we don't see a clear reason for that.

The surge may be related to two pieces of news: phase III Heplisav data and the swine flu breakout.

The first piece of news is about its phase III candidate Heplivsav. This morning, the company announced the oral presentation of additional phase III clinical data for Heplisav hepatitis B vaccine in a session for late-breaking abstracts at the 44th Annual Meeting of the European Association for the Study of Liver Disease (EASL) in Copenhagen, Denmark.

Skyworks Gives Stellar Guidance

Despite ahead-of-expectations Q2 results and better-than-expected Q3 guidance, shares of Skyworks Solutions, Inc. (SWKS, Buy) are lower in trading today. The company posted Q2 revenue of $173 million with non-GAAP EPS of $0.12, compared to our and consensus estimate of $168 million in revenue and proforma EPS of $0.10.

The company's expansion in high-margin, high-end smart phones and push-to-talk applications along with energy management and smart grid technologies were the main drivers of growth during the quarter. The company also captured key design wins at Huawei and ZTE for 3G and 4G base station solutions, which is expected to drive growth further in Q3.

WL Beats but Gets Downgraded

Wilmington Trust Corp. (WL) reported its 1Q09 financial results this morning. 1Q09 net income came in at $21.8 million or $0.26 per diluted share, compared to a net loss of $68.5 million $1.02 per diluted share in the prior quarter and net income of $41.4 million or $0.61 per diluted share in the prior-year quarter.

On an operating basis (excluding after-tax securities gains and write-downs), net income for 1Q09 was $17.4 million or $0.19 per diluted share, compared to a net loss of $6.1 million or $0.09 per diluted share for 4Q08. Operating earnings were substantially ahead of estimates, mainly due to a lower-than-expected provision expense which more than offset the decline in net interest income and non-interest income.

MITI Updates on Drug Development

On Friday April 24, 2009, Micromet Inc. (MITI) held a briefing for investors and financial analysts in New York to provide an update on the company's drug development pipeline.

A key highlight of the presentation was the announcement that a rapid path to market has been identified in acute lymphoblastic leukemia (ALL) for the company's lead drug candidate BiTE antibody blinatumomab (MT103) with a registration trial planned for 2010. This was in addition to a dose escalation study which is currently underway of blinatumomab for non Hodgkin's lymphoma, with final results expected to be reported at the American Society of Hematology meeting in December.

Brazilian Gov't Helps Embraer

Last week, Brazil announced an increase in credit lines to trade finance with Argentina from its existing US$120 million to US$1.5 billion.

It sounds like a huge step toward the integration of Latin American economies, but it is not. Argentina is really facing a credit shortage since the unilateral debt restructuring in 2001 and, for sure, this difficult situation has not improved lately. However, this new credit line is not supposed to solve this problem.

The original amount of US$120 million was outdated and the from a total of US$1.5 billion of the new facility, US$700 million will be just to finance Aerolineas Argentinas in the acquisition of 20 MB 190 jets from Embraer (ERJ). Embraer has been facing a difficult period in the past few months as the Global crisis reduces the demand from airline companies worldwide.

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Meanwhile and here in Denmark things are definitely getting better. After a March of cold and lots of rain April the Easter days have, in particular, blessed us with a fabulous couple of days of sun and (relative) warmth. I doubt that the Spring is more beautiful anywhere else in the world than in the North mostly because the change in scenery is so striking. Judging by a number of recent analyses, comments and data points it is hard to escape the feeling that perhaps, just perhaps, markets are also feeling a bit of spring sensation too even if the signs are most tentative.

Europe, Still not Ready to Take Off

Starting off in Europe, Morgan Stanley's Elga Bartsch recently engaged in bottom fishing where she essentially voiced the sentiment that although the h01 outlook is grim the data is paving the way for a recovery in h02. To support her argument ms. Bartsch fields data on forward looking indicators such as output plans, the so-called Surprise Gap Index, and the (in)famous second derivative which has set in with respect to demand for orders. Generally though, there is plenty of juice for those who carries a more pessimistic approach. A couple of days ago, the Bank of Italy opted to lift the curtains a little bit on what is certain to be an abysmal Q1 GDP reading; as if it was not enough that Italy suffered that dreadful quake over the Easter. Over at Kaiserstrasse, the messages are getting more "interesting" by the day too. Consequently, Nowotny who heads the Austrian central bank noted that although he did personally think the interest rate should go below 1% it was, of course, open to discussion. Bloomberg interprets it as a sign that the council is split which may of course be the case, but on the other hand I also think the ECB is slowly but surely preparing markets for moves which will take the bank into an area where most believed it would not go. For example, Nowotny explicitly noted the option for the ECB to enter the corporate debt market.

“If you’re aiming at intensifying credit supply, measures which focus directly on credit supply are of interest,” Nowotny said. “For example the purchase of commercial paper, corporate bonds and similar things.”

Such moves would mean that the ECB moved in behind the Fed and the BOJ who have both been supporting credit markets through the purchase of commercial paper (A1 grading in the case of the BOJ) for some time. 

Also the Dutch representative in Frankfurt Noel Wellink voiced a similar sentiment when he noted that the Eurozone would be likely to experience negative price movements in 2009. Mr. Wellink pointed out that there is room to lower interest rates beyond its current level and that other measures could be deemed necessary too. One can only speculate what such measures would be, but something along the lines suggested by Nowotny is probably not far off.

More generally, the situation in Europe is not only tainted by the obvious crisis in EU-15 and the Eurozone, but also very much so by the lingering mess in Eastern Europe. In real economic terms we need to remember that there is indeed a strong link between the Eurozone and the CEE not least in the context of Germany's obvious dependence of exports to the Eastern European economies. Moving to financial markets we also know that many banks in EU-15 are heavily exposed to the whims of the CEE. Obviously, the new mandate for the IMF in the form of capital injection it was handed at the G20 summit will help in the strides to present a workable solution many of the most exposed countries' trouble.

The US, Tiptoeing Analysts

With regards to the US the second derivative discourse is being advanced much more timidly especially in light of the fact that payrolls once again posted an abysmal showing in March which suggests that the real economic slowdown is intensifying. 

Still, some are convinced that the near term at least may indeed bring a bit of spring sensation. Consequently Swiss investment icon Marc Faber was quoted by Bloomberg of saying that the SP500 might rise as much as to reach the 1000 mark within the next three months. If this prediction turns out to be a truism it would mark the biggest so-called sucker rally so far in this crisis and surely one worth pursuing by investors. Faber only, it has to be said, makes a short term forecast based on the fact that since the government (through the new PPIP) essentially is giving away free money and since the Fed seems to committed to reflating the economy companies may have a sound short term earnings horizon. For the equity strategists among you, this is Faber's contention;

“The market very near term has become somewhat overbought and the correction should essentially follow, but I doubt it will go and make new lows in the intermediate future,” Faber said. “The lows in early March at 666 in the S&P will hold and we’ll have another push up into July

With respect to a long term view I attach considerable significance to the report out yesterday that fundraising by US venture capitalists fell by a whopping 39% last quarter as investors understandably chose to shun these investments. The story is pretty straightforward in the sense that startups are literally not finding the same finance opportunities as before and this essentially mean many of them don't make it. Such is of course the darwinian nature of finance, but one wonders whether in fact there wasn't some genuine sound positive NPV projects sacrificed on the altar of the PPIP et al. Whether this is true or not one thing is certain, this kind of investment used to be the hallmark of the US economy and although one can't hardly make any kind of inferences based on this figure alone, seed capital for venture capitalists is probably a part of the macroeconomic investment activity which yields the strongest positive externality with respect to productivity growth (empirical studies anyone?).

As for the overall sweep in terms of a macroeconomic snapshot we can do a lot worse than visit Morgan Stanley's Ted Weiseman and Richard Berner and their respective analyses. If anything Monsieurs Weiseman and Berner seem set to debunk any talk of the second derivate, something which Weiseman addresses specifically when he says;

The key round of early economic figures for March released over the past week was uniformly terrible in absolute terms, though somewhat mixed directionally. A particularly bad employment report stood out, however, against directionally mixed ISM surveys, though with both remaining well below the 50-breakeven level, and some improvement, though to a still-dreadful level, in motor vehicle sales. Weakness in other data, notably in the construction spending and factory orders reports, also pointed to a weaker trajectory for 1Q growth, and we cut our 1Q GDP estimate to -6.0% from -5.1%.

So; Morgan Stanley, for what is worth, is cutting their growth forecasts for the US economy and if you have the stomach for a thorough parsing of the recent US data, Weiseman is the place to go. If Weisman implicitly tried to shy away from the second derivative punt, Berner is very explicit. His main point is consequently that while markets (equities in particular) are embracing the idea of a positive second derivative the recession does not look to be any less sharp and long than it did when we entered 2009. In this respect, I think that the talk of a recovery in early 2010 is largely irrelevant since we need to calibrate first what exactly we mean when we talk about a recovery. If positive or neutral growth is the criteria so be it, but I hardly think that we will be back to normal in any sense of the word.

Asia, a Chinese Conundrum and Japanese Debt Woes

If I am fairly certain that we are not standing before an impending recovery in Europe or the US recent data from China seriously prompts me to consider whether in fact the great tiger is ready to pounce and perhaps save the global economy in the progress. What has caused a lot of commotion was consequently that the Chinese PMI for march actually rose above 50 which indicates expansion. Or did it? As Edward details here there has been considerable confusion over which reading to use, but that did not deter Bloomberg to narrate China (and its recent stimulus package) as the economy to pull its global peers out of the current mire. Add to this that industrial production clocked in a healthy 8.3% increase in March and you get plenty of ammunition on which to build a recovery and even rebalancing story. Of course, this is all a bit of a lame, ermm, Peking duck I think [1] since as Brad Setser eloquently points out with great force, recent trade data indicates that imports are declining more rapidly than exports which makes the fact that exports are not declining more slowly rather innocuous. This is also a point Edward uses to neatly summarize the overall message;

(...) with a growing surplus (at this point, and on a year on year basis) China's economy isn't going to pull the rest of the world anywhere, since essentially it is still draining-off demand from elsewhere.

For more on the recent, mystifying, data from China Pettis' latest tour de force is a fine piece of work and of course Bloomy itself proxied by Kevin Hamlin takes some of the sting off of the bullish China story with today's piece about cooling Chinese growth.

Meanwhile, in Japan things continue to look murky. In particular it seems that investors have realized the growing debt burden of the Japanese society at the worst of times since now would really be a nice time for investors to allow Japan to seriously turn on the fiscal stimulus machine. Of course this is not possible and as we learned recently that while observers certainly realize that the proposed stimulus package by PM Aso totalling some $153 billion will mitigate the situation in the short term, it will also serve to make the future debt burden even more unsustainable. Also do note, that the discourse of Japan's ageing population is popping up all over the place in relation to the immediate short term outlook which suggests to me that we may be close to an inflection point. Basically, yields are beginning to climb for the MOF as it attempts to issue paper to pay for the politicians' plan and it appears that yields, at least in part, are driven by the obvious problem Japan will have in servicing the liabilities as we move forward. This means that the BOJ will have to seriously contemplate how to inflate their way out of this one since this is really the only solution, barring of course that everybody else realizes that this is what Japan has to do in order to avoid deflation. It is of course this last part which is the niggle and which will cause much debate as we move forward. My guess is that we will soon see a BOJ not only buying up short term paper, but indeed trying to manage the whole yield curve.

All this is not without consequences for the JPY, and it is difficult not to concur with Macro Man's Easter poetry styling that it may very soon be raining yen. Meanwhile, the spring sensation in markets is not passing by the JPY either as Bloomberg serves up one of those familiar headlines that the JPY is weakening while the AUD, NZD et al. are strengthening on the back of a heightened appetite for risk.

“There’s some optimism in the markets, which supported yen selling,” said Hidetoshi Yanagihara, senior currency trader at Mizuho Corporate Bank in New York.

This sell JPY on optimism punt is something I have dealt with extensively here at Alpha.Sources not least in the context of this working paper. I recently had a look at the paper and realized that it needs a thorough re-write. So this is, in part, what I am working on at the moment. Of particular interest is the fact that I am trying to model the currency pairs (not the stock indices) as a function of the VIX which has so far given me some quite interesting, if of course entirely intuitive, results. In short, stay tuned on this one.

Spring Time?

While there is still plenty of bad news to focus on, it certainly seems as if markets just as well as Denmark may now be entering a more mild season. Spring in Denmark, however, is known to be extremely volatile. If the Easter served up a nice sunny abode the next week may be rainy and even snowy. One has to think that the same reasoning can be applied to the newfound spring sensation in markets. Far be it from me to take away the punch of the bulls out there, but I would simply note that the fundamentals have not changed one bit since the crisis began. Deleveraging is only begun, unemployment is bound to rise further, and all parts of the real sector are stretched to the limit with respect to spending capacity. Add to this that everyone wants someone else to do the spending for them and you end up with a recipe for a long hard walk upwards. Perhaps it is the second derivative punt that is being misunderstood. Evidently, we were always going to see this effect given the almost cataclysmic way in which all economic data points and indices suddenly cratered. However, the point is not so much whether we are still on our way down (which I think we still are), but more so how long we will stay down and how far we will move back up from the mire and indeed who will be able to lift their economies within a reasonable time frame. It is here that I am still fundamentally pessimistic. Consequently, I too am enjoying Spring time, but as a Dane I am well taught not to get my hopes up.

---

[1] - Sorry

The IMF will lend Iceland $2.1 billion, and Finland, Sweden, Norway and Denmark will loan $2.5 billion to help the country re-float its currency and shore up its banking sector.

The Icelandic krona, or crown, has lost about 70% of its value since the nation’s financial crisis first began. The government put restrictions on currency trade as it wrestled with the crisis, however one of the stipulations of the IMF loan is that Reykjavik once again float…

OK… Whew! What an awful day yesterday for the currencies… In the morning, they ere in rally mode with the euro gaining ground to well within the 1.27 handle. But then the Trading Theme set in, and those gains were wiped out. The Trading Theme was set off by the awful Housing data, which reminded everyone of the deep, dark , dangerous days ahead… I bought some euros, and watched them rise, and went off to do something else… When I returned, they had fallen… UGH! The Japanese yen, however, rallied, as is the case with the Trading Theme……

This from Taipan Publishing’s emerging markets blog:

As climate change and energy independence have headlined a number of events during the past two years of presidential campaigning, I’m happy to see alternative energy back in the investment ring.

Surprisingly, many top-notch European companies see the U.S. as a major growth region for the renewable energy business, and they are coming over in droves to set up shop.

Let’s take a look at just one of the technologies…

Source: Loungani (2008)

The house price decline during 2008 has actually been more modest in the U.S. than in countries such as Denmark, New Zealand, the U.K., and Spain, though the price decline has been going on for much longer in the U.S. and it is the cumulative decline from the price peak that is the key determinant of the extent of mortgage defaults. Loungani notes from previous international and U.S. regional experience that the bigger the real estate price decline, the more severe the economic downturn we might expect.

Source: Loungani (2008)

The Wall Street Journal also has some neat interactive graphics on international movements in stock prices and exchange rates.

Technorati Tags: macroeconomics, housing, credit crunch

Source: Loungani (2008)

The house price decline during 2008 has actually been more modest in the U.S. than in countries such as Denmark, New Zealand, the U.K., and Spain, though the price decline has been going on for much longer in the U.S. and it is the cumulative decline from the price peak that is the key determinant of the extent of mortgage defaults. Loungani notes from previous international and U.S. regional experience that the bigger the real estate price decline, the more severe the economic downturn we might expect.

Source: Loungani (2008)

The Wall Street Journal also has some neat interactive graphics on international movements in stock prices and exchange rates.

Technorati Tags: macroeconomics, housing, credit crunch

Source: Loungani (2008)

The house price decline during 2008 has actually been more modest in the U.S. than in countries such as Denmark, New Zealand, the U.K., and Spain, though the price decline has been going on for much longer in the U.S. and it is the cumulative decline from the price peak that is the key determinant of the extent of mortgage defaults. Loungani notes from previous international and U.S. regional experience that the bigger the real estate price decline, the more severe the economic downturn we might expect.

Source: Loungani (2008)

The Wall Street Journal also has some neat interactive graphics on international movements in stock prices and exchange rates.

Technorati Tags: macroeconomics, housing, credit crunch

Platinum followed gold lower in the late day trading, skidding back below the $1000 mark to end at $987/oz., down $49. For the week, platinum actually gained 2.6%.

Silver fared even worse than gold, plummeting from $12.20 in Hong Kong to $9.50 in early Globex trading, before clawing back over the $10 mark to close at $10.17/oz., down a ghastly $1.90. For the week, silver was off just under 9%. (Click here for charts)

Not much to say about Friday’s debacle in the precious metals, other than that’s what it was. Gold should have been helped by equities markets that continued to tank, but was undoubtedly laid low by slumping crude prices and the perplexing stampede into the US dollar, which apparently still has safe haven status.

Despite yesterday’s setback, it’s well to remember that gold posted a solid gain for the week, although silver—with its stronger connection to the industrial market—continues to look very, very weak.

The Hightower Report wrote of the day’s action in the gold market: “Perhaps some longs we're simply inclined to bank profits ahead of the weekend or perhaps seeing the US Dollar give off the impression of finishing the week strong discouraged some players. As suggested in the midday coverage just saying discussions of a stock trading holiday in some foreign markets would seem to leave high anxiety in place into next week. Certainly the G7 will attempt to shore up confidence with weekend actions and that could be another reason why some gold longs decided to bank profits around the highs of today.”

Panic elsewhere is also playing in as Friday’s selling clearly indicates “some fund liquidation desperate to raise cash,” said Peter Spina, president of GoldSeek.com. “The true gold market price is nothing close to the current paper gold price.” Spina added that, “The disconnect between paper gold price and the physical gold price will not last.”

If it does, there is surely something rotten in the state of Denmark (and everywhere else).

Source: Gold Endures Frightful Selloff

"I had a better feeling about Sunday’s eurozone summit. It produced a detailed and co-ordinated national response to recapitalise the banking system, and to provide insurance to revive the inter-banking market. But as far as I could ascertain, this was still agreement on ground rules for national plans, and it is not clear how well this agreement would cover the numerous cross-border issues that have arisen. There is no doubt that, in the eurozone at least, we have come a long way since Friday. It is an okay policy response, but I wonder whether this is going far enough at a time when global investors are pondering whether to pull the big plug."

"What has been done over the last three days should provide elements of reassurance,'' Dominique Strauss-Kahn, chief of the International Monetary Fund said on French radio Europe 1 today. The worst of the financial crisis ``may be behind us.''

``We are looking at our entire system of guarantees and we can imagine new measures to enlarge access to our system of guarantees,'' Trichet said.

So what does all this add up to? Well, to do some simple rule of thumb arithmetic, just to soak up the builders debts and handle the cedulas mess, we are talking of quantities in the region of 500 to 600 billion euros, or more than half of one years Spanish GDP. Of course, not every builder is going to go bust, and not every cedula cannot be refinanced, but the weight of all this on the Spanish banking system is going to be enormous...............So it is either inject a lot of money now - more than Spain itslelf can afford alone - or have several percentage points of GDP contraction over several years and very large price deflation - ie a rather big slump - in my very humble opinion. And it is just at this point that we hit a major structural, and hitherto I think, unforeseen problem in the eurosystem (although Marty Feldstein was scratching around in the right area from the start). The question really we need an answer to is this one: if there is to be a massive cash injection into Spain's economy, who is going to do the injecting? Spain alone will surely simply crumble under the weight, and it is evident that the problem has arisen not as the result of bad decisions on the part of the Spanish government, but as a result of institutional policies administered in Brussels and monetary policy formulated over at the ECB. And yet, the Commission and the ECB are not the United States Treasury and the Federal Reserve, no amount of talk about European countries being similar to Florida and Nebraska is going to get us out of this one: and it is going to be step up to the plate and put your money where your mouth is time soon enough.

1 Page Guide to Hedge Funds in France

• Great in depth, thorough overview of hedge funds by the Bank of France
• France's alternative investment industry has taken a major step forward with the approval by the Autorité des Marchés Financiers, of the first funds under a regime known as ARIA EL. The French acronym stands for Agréé à Règles d'Investissement Allégées, à Effet de Levier, and signifies that the fund is authorized to operate under less constrained investment rules and to use leverage.
• Survey indicates rapid growth of French hedge fund market: Total assets under management: France ranks second after Luxemburg in terms of retail assets under management with EUR 982 billion and is one of the countries with the most diversified range of products. France has traditionally had one of the highest saving rates in Europe.
• If there is one thing that unites both candidates in France's presidential run-off this Sunday, it is a shared belief that Anglo Saxon hedge funds are the great villains of modern civilization. Nicolas Sarkozy, the neo-Gaullist favorite, has vowed to "hit predators" with a tax on speculative investments - apparently a version of the Tobin tax, a staple of populist discourse in Europe for years.
• The French right has now joined the game of ECB bashing. European newspapers report with bewilderment yesterday's radio interview by prime minister, Dominque de Villepin, who called for a "clarification" over who is responsible for the euro area's strong exchange rate. What Mr. de Villepin presumably did not know is that this issue has in fact been clarified some time ago, though perhaps not in the way he wishes.
• In the past decade significant progress has been made in achieving a single European market for investment funds. The ratio of cross-border fund flows has reached an estimated level of more than 20%, and in some European countries the number of registered non-domestic investment funds exceeds that of domestic funds. These are important achievements for the industry. A true single market in the fund business is not just ‘nice to have’. Only an enlarged and unified single market will allow the industry to achieve economies of scale. Today, the average fund size in the U.S. is six times that of Europe.
• Another great overview to the hedge fund market in France
• Further indications of the financial damage done by the collapse of Sentinel Management Group started to emerge on Wednesday when Capital Fund Management, a Paris hedge fund, said it stood to lose 10 per cent of its assets as a result of the cash management firm’s troubles.CFM said in a letter to 600 clients that its Discus Master Fund probably faced losses of $407m. Sentinel’s collapse contributed last week to wild swings in global stock and credit markets.
• Activist hedge funds have struck their first victory in France, building on successes in Britain and the Netherlands, where their aggressive tactics have forced several companies to bend to their will. Centaurus Capital and Pardus Capital Management got their way at French IT services company Atos Origin on Wednesday, with the ouster of Chairman Didier Cherpitel and appointment of Jean-Philippe Thierry as chief executive and the creation of a strategy committee.
• With high net worth individuals in mind the French regulator has introduced rules to provide for structures that are allowed to invest in hedge funds. The prospect of jail may still face foreign hedge funds caught marketing in France, but the rules governing investment in alternative assets by French mutual funds (OPCVM) have just been relaxed. The Autorité des Marchés Financiers (AMF) has introduced regulations to provide for new OPCVM structures that are allowed to invest in hedge funds.
• Another in depth article that tackles French hedge funds from a legal and regulatory perspective.
• When "the European hedge fund market" is mentioned, it is usually in reference to the trading that goes on in London. According to hedge funds statistics firm Eurekahedge, about two-thirds of all European hedge funds are domiciled in the UK, and these account for about two-thirds of the total assets under management (AUM) of European funds. While hedge funds certainly trade in continental European securities, relatively few have a legal base in those countries.
• When Pardus Capital, an American activist fund, built a stake in Valeo, a French maker of car parts, its partners, Karim Samii and Behdad Alizadeh, frequently criticized the company’s strategy. Local advisers told them to keep quiet. To get anywhere in France Inc, Pardus learnt, it needed to be polite. Shareholder activism in France is on the rise. Several big firms, including Saint- Gobain, a building-materials firm, and Carrefour, a retailer, have recently accepted shareholders onto their boards. But even for the most well-mannered and long-established investment funds, trying to influence corporate strategy is proving controversial and difficult.
• ADI, one of France’s oldest and best known hedge fund managers, has been forced to close five of its funds after failed bets on Lehman Brothers, in what is expected to be the first of a series of casualties in the industry since the collapse of the US investment bank.
  

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