The Agincourt solution - how bad might it be?
Date: Friday, October 14, 2011
Author: Henry Thornton
Global economic conditions and prospects seem to be settling, although the haunting question remains 'how bad might it be?'.
A visiting American economic saleman, previously a US Fed official, Larry Meyer, has made the most sensible possible statement on the US economy.
"I don't think the US is going to have a double-dip but you have to recognise that there's a meaningful probability, maybe one in three".
Henry has long believed there is no sensible way to forecast except by stating possibilities and probabilities. Clearly Larry Meyer went to the same hard school and absorbed its messages.
Mr Meyer did say that the "recessionary risks are greater in the Euro area", showing that he also follows the economic news from non-American sources, a rare trait in an American in any field.
Australia, Mr Meyer asserted "remained in good shape" and the health of its financial system and budgets provided "unique opportunities".
China and other Asian nations have been overheating but "face a delicate task of slowing their economies down while western economies are struggling to find ways to stimulate their economies".
'Increasingly blunt warnings from central banks fail to prod bickering politicians into action' heads another press report.
Ben Bernanke: "Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the US economy ..."
Jean-Claude Trichet: "The crisis is systematic and must be tackled decisively: national governments and authorities, as well as European institutions, must rise to the challenge and act together swiftly. Further delays are only contributing to aggrevate the situation".
Mervyn King: "We're totally stuffed and I've given up". Correction, that was the Wikileaks version: "When the world changes, we change our policy response".
All this citing the authorities is as an early sanity check. It is always possible Henry might have gotten it wrong, sitting as he does in his office connected to the great and the good only by waves in cyberspace.
But no, these authorities seem to be on the same page, and that adds up to significent uncertainty.
What does it all mean for monetary policy here?
That will be decided by the result of Sunday's Rugby World cup game against New Zuland ... just joking folks, but there is little doubt that there will be a wave of hubris if the Wallabies manage to knock off the Kiwis to advance to the final.
That final will be against Wales or France and here Henry's probabilistic approach to forecasts will be of great value. Saturday's semi-final, and therefore Australia's (we hope) opponant on the weekend after this, is by no means certain.
We suspect France's great win over England in the quarter finals was their final revenge for their unexpected defeat at Agincourt and, having no equivalent enmity with Wales, they will surrender meekly. In any case, they have probably all been quaffing vin extraordinaire since belting le poms. And it must also be factored in that Wales has been playing well.
Imagine the catastrope if either Australia or NZ got belted by Wales in the final.
Assuming no catastrophic end to the Wallabies' campaign, the RBA's decision on Cup Day will depend on perceptions about the state of the local economy and the global situation.
If Mr Meyer's views still look broadly correct on November 1, there will be no rate cut.
Given the manifest uncertainties, however, and the fact that on the day that a horse race stops our nation the G20 will be about to agree (or not) on a Eurozone rescue plan, I suspect the board will give the governor approval to cut rates by up to 100 basis points in case 'or not' is the outcome and this provokes a Lehman moment for the eurozone.
But, wierd mistakes by foreigners aside, things here look not too shabby.
A massive investment boom is building strength, jobs growth has exceeded expectations (again) and retail sales have showed unexpected strength for the second month in a row.
Global economy `powering down`
Date: Tuesday, July 10, 2012
Author: Henry Thornton
Henry enters the last week of his sojourn in Prato in reasonable shape.
It has been very hot, and only beer will relieve symptoms, so a little flab may have been added to the waistline despite endless church and gallery inspections.
Also, Henry can now verify that the Leaning Tower in Pisa indeed leans.
The Eurozone crisis has come off the boil, although it is surely still simmering.
The Barclay's CEO and COO have resigned and its chairman will do so once he has found a new CEO.
With many other big banks having supposedly also fiddled their input to LIBOR, more heads are expected to roll.
The UK's inclination to seperate investment banking from commercial banking now seems a sure thing now the 'multi-banks' have been caught out so clearly, on top of 'obscene' rates of pay and a tendency to preach to regulators.
The Economist quotes an authority who calls the LIBOR scandal 'bankings's tobacco moment'.
Saturday Sanity Break, 7 July 2012
Date: Saturday, July 07, 2012
Author: Henry Thornton
Pushing on a string
Lord Keynes, whose name in Tea Party (and IPA) circles must never be mentioned without expectoration, sometimes literally, famously said that monetary policy easing when animal spirits are low is like pushing on a string.
This week China, the ECB and the Bank of England all cut interest rates. 'Quantative easing' (= throwing the ball of string at the problem) is the next step, but smart analysts are beginning to ask if all this monetary ease is like pushing on a string, of lashing a criminal with a feather.
Lord Keynes, like Johnny Depp in Dark Shadows, must be trying to climb out of his coffin.
Another weak US jobs report strengthens the case that pushing on a string is just not working.
Nonfarm payroll employment continued to edge up in June (+80,000), and the unemployment rate was unchanged at 8.2 percent.
The price of economic liberty
The Barclay's imbroglio has lead to some interesting semi-philosophical discussion, which we have enjoyed reporting.
Here is Henry's latest report on the work of a fine Tuscan restaurant and an (almost) all girl orchestra.
After playing as if they didn't care, and being flogged by inferior teams, Caaaarlton! last night at the'G' disposed of Collingwood, a true premiership contender.
Henry's reporter (a Collingwood supporter) said Caaaarlton!'s best were Yarran, Judd, Kruezer and Carrazzo.
There is no rational explanation for this, unless the team was told to shape up or next year's coach would be Mick Malthouse, or that Brendan Fevola was coming back.
Another correspondant said: 'The lowlight of the match was Kade Simpson ironed out in one of the most brutal shirt-fronts that you'll ever see - Wellingham was the culprit.
'I still am baffled how a man of Simpson's physique survived. It is a sad way for his uninterrupted run of 150 plus games to come to an end. The prognosis is that he'll miss between 4-6 weeks with a broken jaw'.
This report confirms Henry's view that opposing clubs have decided as a general policy to hit Carlton exceptionally hard this year. Fair enough, boys, we have to cope. But when Caaaarlton! gets the right hard man, the mayhem after that will be horrible to see.
We salute Roger Federer and Serena Williams, two former champions who have overcome great obstacles to reach the top again.
Image of the week
Life, liberty and self-gratification
Date: Friday, July 06, 2012
Author: Henry Thornton
'Why had the revolution dreamed up in the late 1960s mostly been won on the social and cultural fronts - women's rights, gay rights, black president, ecology, sex, drugs, rock,n,roll - but lost in the economic realm with old-school free-market ideas gaining traction all the time?'
This is a question asked by Kurt Anderson, author of a forthcoming novel True Believers.
There is no conflict. The economic change does not contradict the social and cultural revolution.
'From the beginning, the American ideal embodied a tension between radical individualism and the demands of the commonweal'.
Periodically, Americans have gone overboard 'indulging our propensities for self-gratification', in the booms of the 1840s, the so-called 'Gilded Age' and again in the Roaring Twenties.
Each time, the economic bust and 're-assertion of moral disapproval' restored a 'rough equilibrium' between individualism and the civic good.
After the Great Depression and second Great War conformist norms were again dominant. People complained about high income tax, but few suggested cuts below 50 %. Extramarital sex was frowned upon, divorce was outre, as was boasting of one's wealth or blaming unfortunates for their ill-fortune.
No businessman would dream of paying himself 200 to 400 times the rate of pay of his cheapest worker.
'Greed as well as homosexuality was a love that dared not speak its name'.
But in the late 1960s there was a 'kind of tacit grand bargain ... between the counterculture and the establishment, between the forever-young and the moneyed'.
Youthful masses were to be allowed as never before to indulge themselves. But capitalists would be unleashed as well, 'free to indulge their own animal spirits with fewer and fewer fetters in the forms of regulation, taxes or approbrium'.
In a letter written in 1814, Jefferson wrote that human tendencies toward selfishness where liberty and the pursuit of happiness prevail require "correctives which are supplied by education" and by "the moralist, the preacher, and the legislator".
And perhaps the prolonged period of slow growth, involving real hardship for many, with heavily constrained opportunity for the leaders of capitalism.
The meaning of the Barclay`s fiasco
Date: Thursday, July 05, 2012
Author: Henry Thornton
'You cannot devise regulations to prevent the sort of misbehaviour that caused the loss of the Chairman, CEO and COO of Barclay's Bank'.
This is the conclusion of Henry's favourite financial historian, Niall Ferguson.
Increasingly complex regulations focus on the last set of problems and miss the main point.
Splitting the regulation of British finance between three agencies has failed.
Bagehot many years ago in his great book Lombard Street said the Bank of England should be all powerful and regulations should be simple and not overly specified.
The governor of the Bank could then regulate the system with a raised eyebrow and, if that message was not accepted, by dropping a word to the Chairman of the board.
In fact the problems that created the Global Financial Crisis were in US banking, one of the most regulated part of the financial system. QED.
Today, courtesy the BBC, we watched former Barclay's CEO Robert Diamond's being grilled by the UK parliamentary committee. It was a fiesty and brave performance, using first names ('Paul' not 'Lord Tucker'), and so on and so forth. (Made thge plot hard to follow, also highly inappropriate.)
Diamond's cheesy grin also let him down, as did his determination to lecture the committee while avoiding giving a simple answer. 'A bit arrogent' said a commentator with typical British reserve. (Diamond did however say he was 'sorry' and 'disappointed', and also 'very angry'. And that 'everone' knew about it and other banks were involved.)
Professor Ferguson rightly observed that the Barclay's case is just the tip of a large iceberg and that many more banks will be drawn into this messy business in coming days and weeks.
We agree the current system has failed, and recently Henry has provided a set of simpler regulations that Niall Ferguson would probably agree with if he had written them down himself.
We are however uncertain if simpler regulations and a powerful central banker's eyebrow is sufficient.
What about a moral revolution?
What about Adam Smith's Theory of Moral Sentiments to butress his Wealth of Nations?:
' And we concluded: 'The more we use the former, the more moral values will decline'.
Moral values have indeed declined. The issue is how best to turn back the tide.
The meaning of everything
Great to hear that a new particle, a 'boson, perhaps the Higgs boson', has been discovered.
Economic policy - dentistry or brain surgery
Date: Wednesday, July 04, 2012
Author: Henry Thornton
Iran's economy is falling apart. France is grappling with how to raise taxes and reduce government without imposing 'austerity'.
It means some hard days and nights for the relevent officials and political leaders.
Iran blames the Great Satan that is the USA. This despite President Obama's overtures to Iran early in his term as president.
The basic problem is a resource boom gone wrong. The government of President Mahmoud Ahmadinejad went on a spending spree in 2005, based on record oil prices and hence record oil revenues. (Sound familiar, gentle readers?)
The government brought so many goods from abroad that local workers lost their jobs as local factories closed.
Loss of local productive capacity made the economy highly vulnerable to the 'dastardly sanctions' (Iran's description) now oppressing the failed Persion Empire.
We also learn from the IHT today that the USA has 'quietly moved significent military reinforcements into the Gulf to deter the Iranian military from any future attempt to close the Strait of Hormuz'.
A US official said 'when the President says there are other options on the table beyond negotiations, he means it'.
The honeymoon is over for France's new president, Francois Hollande. A John Stone-like figure has showed him the numbers.
A Jim Cairns-like figure, finance minister Pierrre Moscovici, said: 'There will be tax increases; there will be spending cuts. But I reject any talk of austerity. We must avoid a budget policy that hurts economic activity'.
The immediate problem, much to everyone's surprise, is that the budget deficit is so much larger than anyone but the John Stone-like figure expected.
So far markets have been kind to France, unlike the belting given to Spain and Italy. But France is presumably about to learn that Merde-ish journalists love finding a new victim.
But the two examples of France and Iran suggest a deeper conclusion.
John Maynard Keynes - the genuis who is so disliked by the Tea Party Republicans - once said he looked forward to the time when economics is like dentistry, practiced by unassuming but competent men (it was before the time of modern feminism) who knew what they needed to do.
France and Iran could use some of the old-time, practical, competent economic dentistry now.
One suspects France will find her very own Bill Hayden to sort out its economic mess.
But Iran is an altogether different case, possibly requiring the economic equivalent of brain surgery, delivered by the US Fifth Fleet, and the Israeli airforce.
RBA sits tight ... Plus Barclay`s CEO and COO go
Date: Tuesday, July 03, 2012
Author: Henry Thornton
... On the easy side of neutral.
If continuity and consistencystand for anything, as they surely do in the case of the Reserve Bank, today will be a no change day for Australian monetary policy.
The Reserve Bank board following its early June meeting said the arguments had been finely balanced.
'Recent domestic data generally had not suggested a significant weakening in conditions compared with the forecasts a month earlier.' Inflation was low and expected to remain near the bottom of the target zone.
And, in any case, there had not been time to assess the effects of the earlier reductions in the cash rate.
The big worry was 'clear evidence suggesting a softening in global conditions', and increased uncertainty about the future in Europe, with the possibility of increased 'precautionary behaviour' here.
Now Europe has reached some sensible compromises, providing hope there will be more in due course. The domestic situation has not weakened, employment has been strong and indeed increased export volumes have offset weaker commodity prices.
If ever there is an iron-clad case for the Reserve to sit tight, with monetary policy on the easy side of neutral, today presents such a case.
The more general conclusion is worth pondering. The Eurozone crisis has a long way to go yet, and this will inhibit Eurozone growth. China and America are growing more slowly than we are used to seeing, as did Japan after its great crisis of 1989.
Perhaps this is the new condition for us all, and it would not be all bad if it was.
The RBA delivered according to the script at 2.30 PM today.
Glenn Stevens concluded: 'As a result of the sequence of earlier decisions, there has been a material easing in monetary policy over the past six months. At today's meeting, the Board judged that, with inflation expected to be consistent with the target and growth close to trend, but with a more subdued international outlook than was the case a few months ago, the stance of monetary policy remained appropriate'.
He hoped to stay but, if it was good enough for his Chairman to do so, it was inevitable for the CEO. Especially is nhat a previous job in the bank was overseeing the mob that dudded the numbers. If he did know then he was complicit; and if he didn't know then he should have stopped it. And the COO, Probably a few more - what about the Chief Risk Officer (CRO).
Nowhere to go but out, really.
Our view late last week was: 'The Barclay's CEO and other senior colleagues have offered to forgo bonuses. They should be offering to resign and to forgo retirement benefits. Dudding his own customers got Bernie Madoff and other fraudsters several lifetimes in goal, and Barclay's actions is only different in being fraud on a smaller and meaner scale'.
Commodity prices plunge
Date: Monday, July 02, 2012
Author: Henry Thornton
Happy new year gentle readers, one that has started in frustration for dear old Henry.
In our constant search for news worth reading, we found today an article in the WSJ with the headline 'Prices of Raw Goods Plunge on Slowdown' Like the girl in the street of Prato whose t-shirt message was 'Juicy', this was clearly a goer.
Like the girl, the teaser provoked interest for obvious reasons: 'The economic downdraft has caused one of the biggest and broadest declines in commodities prices since the financial crisis, surprising producers and creating a glut of raw materials around the world'.
The only problem is that the article nestles in privacy behind the WSJ firewall. Here is the link. (To be provided)
No problems, comrade, Henry is a subscriber. 'No you ain't' says Rupert's robot reply service, more decisive than Telstra's corresponding service but sadly no better.
It's free for several weeks, I'll just resubscribe and sort it out later. (This strategy left Henry to pay three times for The Economist for a year or so, but the venerable mag eventually produced a refund of sorts.)
So Henry subscribed again, taking careful note of the user name and password and providing credit card details, home address, and mother's maiden name.
Now I can get in was the feeling, but no, Rupert's robot was determined not to allow entry despite acquisition of a subscription from Henry in perpetuity unless Henry spends the days no doubt required to cancel said subscription. Not even an upmarket brothel in ancient Sodom or Gomorrah would have behaved so badly, taking the shekels (?) and refusing to produce the girl, (Henry not being a sodomite readers will understand the latter point).
Anyway, apologies for the lack of a really good story today. Nothing else seemed worth the effort, and you will have read the story in today's Oz in any case.
Later today, please look for 'Henry goes shopping' and then, on the stroke of midnight, Henry's latest comment on Australia's monetary policy.
No firewall here, gentle readers.
Saturday Sanity Break, 30 June 2012
Date: Saturday, June 30, 2012
Author: Henry Thornton
'For Barack Obama, who staked his presidency on a once-in-a-generation reshaping of the social welfare system, the Supreme Court’s health care ruling is not just political vindication. It is a personal reprieve, leaving intact his hopes of joining the ranks of Franklin D. Roosevelt, Lyndon B. Johnson and Ronald Reagan as presidents who fundamentally altered the course of the country'.More here.
And the Eurozone leaders seem to have (again) avoided disaster at their nineteenth (19 th!) summit since the Global Financial Crisis that started in 2007-08.
Jonathan Demme’s ‘Neil Young Journeys’ was released overnight in New York and Los Angeles.
'Thunder rumbling up from the center of the earth with scraggly flashes of lightning amid fire and flood: that describes the sound of Neil Young’s amplified guitar in Jonathan Demme’s compelling new concert film, “Neil Young Journeys.” The roar from below evokes huge chunks of rock displaced in a continual blasting operation. Heard over this man-made earthquake, Mr. Young’s passionate cracked whine assumes an oracular power. As always in his singing and songwriting, time weighs heavily. The cantankerous old man and the lost little boy are one and the same'.
Henry cannot even open the clunky Australian newspaper sites from the laptop in his Prato apartment - not even from the balcony where the signal strength is sometimes described as 'excellent'.
Do not miss Village Roadshow's announcenent about the injection of over a quarter of a billion dollars into its part-owned movie and music production business.
The net result will be more movies produced by Village Roadshow Entertainment Group, including Chinese movies, one or two of which are already in production.
Quote of the week
The essence of banking, expressed by a Frenchman during the banking panic of 1855 at Tecumseh Sherman's bank in San Francisco: 'If you got thr money, I no want him; but if you no got him, I want it like the devil'.
Quoted by H W Brands, The Age of Gold, p 358.
The sporting life
It makes yer proud to be an Aussie.
Our champion sprinter, Black Caviar, won race number 22 on a heavy track at Royal Ascort, despite 'pilot error' when the jockey slowed her up before the line with other horses still in with a sniff.
No matter, this girl won't be beat, and accelerated again to win by a head, when one quarter inch would have done.
Caaaarlton!, in strong contrast, got belted by Hawthorn overnight and its season is all but over, with Collingwood to come next week, seeking revenge for our win earlier this year.
We shall have to follow Italy in the world game, having accounted for Germany in last night's semifinal, making Angela Merkel decide (we suspect) that a concession or two at the Eurozone Summit would be politic.
Greed and incompetence - why are we not surprised?
Date: Friday, June 29, 2012
Author: Henry Thornton
Barclay's bank has been hit with a massive fine for fiddling the reporting of borrowing rates.
In effect, this enabled them to improve margins, effectively ripping off their own customers.
If this was the action of a single rogue bank it would be bad enough. But there are deep suspicions that this has been a widespread practice, and other leading global banks are being investigated by relevant regulators.
These are leading examples of a banking sector that required widespead bail out at the height of the Global Financial Crisis. The Barclay's CEO and other senior colleagues have offered to forgo bonuses. They should be offering to resign and to forgo retirement benefits. Dudding his own customers got Bernie Madoff and other fraudsters several lifetimes in goal, and Barclay's actions is only different in being fraud on a smaller and meaner scale.
Henry once lead the fund management business of one of Australia's major banks. These banks are generally well run and well regulated, certainly by global standards.
The fund management business had not previously been well run, and it was no great achievement to increase its net profit by almost three times in two years.
But a key factor was a one word mission statement - 'Customers' - and the reformation of processes and products that placed the needs of customers above all other objectives of the business.
When Henry presented this philosophy to the main board of the bank there was an embarrassed silence. After the meeting one (sympathetic) old snoozer approached Henry. 'We in the bank understand the focus on customers'. he asserted. 'We focus on getting every last drop of blood from every last customer'.
Barclays too no doubt understand this philosophy only too well, and it may emerge that so did a number of other former successful and respected banks.
There is another banking news item today that is no surprise.
Five nations have already asked for help to bail out their banks. As the Eurozone's nineteenth (19th!) summit about the slow-moving train wreck that is the Eurozone crisis, a new headline hits the street.
The text includes the following chilling paragraphs: 'Three of the four largest French banks had capital shortfalls even by the relatively lenient standards applied by European regulators, and the fourth has suffered a 27 percent share decline so far this year because of its exposure to Greece.
'Germany, considered the strongest economy in the euro zone, is still dealing with publicly owned landesbanks that made bad investments in boom times. Even Deutsche Bank, the country’s largest, faced a downgrade by Moody’s last week because of what the ratings agency said was too much dependence on trading revenue'.
Blimey, readers. This is seriously serious, but should come as no surprise.
But still Angela Merkel says 'Nein!'
Stop press - Eurozone progress
Date: Friday, June 29, 2012
Author: Henry Thornton
After an all-night negotiating session, the Eurozone summit has made some apparently useful steps forward.
Equity markets surged and bond markets are expected to do the same when they open shortly.
Crucially, as well as moves to settle markets and relieve fears of Spanish and Italian bank failure there is a small stimulus componant - providing some hope for the dispossessed.
There is also said by one expert to be 'remorseless' momentum for eventual closer political union.
The BBC reports: 'EU leaders have agreed to use the eurozone's bailout fund to support struggling banks directly, without adding to government debt.
'Speaking after 13 hours of talks in Brussels, EU chief Herman van Rompuy also said a eurozone-wide supervisory body for banks would be created.
'Officials said the plans could be finalised during July.
'Analysts say Germany appears to have given ground after pressure from Spain and Italy to provide more support.
'The two southern European countries had withheld support from an earlier plan for a growth package worth 120bn euros (£96bn; $149bn).
'They wanted measures to lower their borrowing costs.
'The euro surged against the dollar in Asian trade after the news from Brussels.
'Announcing the deal, Mr Rompuy said it would break the "vicious circle" between banks and national governments.
'The BBC's Andrew Walker in Brussels says although Germany appears to have compromised, Chancellor Angela Merkel has managed to ensure that Brussels has more control over the finances of eurozone countries, something she had wanted.
'The deal came about after new French President Francois Hollande appeared to throw his weight behind Italy and Spain.
"I'm here to try to find rapid solutions for those countries facing pressure from the market, despite having made huge efforts to balance their budgets," the socialist French president said.
'The new growth package, announced by Mr Rompuy, is made up of:
-A 10bn-euro boost of capital for the European Investment Bank, expected to raise overall lending capacity by 60bn euros -Targeting 60bn euros of unused structural funds to help small enterprises and create youth employment -A pilot launch of EU project bonds worth 4.5bn euros for infrastructure improvements, focusing on energy, transport and broadband'.