Monthly Archives: March 2013

James Mackintosh

Cue great excitement. All those pre-written articles and commentaries on the S&P 500 passing its previous closing highs can be rolled out, and there is something for the 24-hour TV to talk about other than the rather small queues at banks in Cyprus.

Just a couple of small flaws: Read more

A suggestion by Dutch finance minister Jeroen Dijsselbloem that the Cyprus deal could mean depositors at troubled banks elsewhere in the eurozone also suffering has pushed banks back into bear territory. James Mackintosh, investment editor, warns of the risk of a vicious downward spiral unless Europe and the European Central Bank can reflate peripheral economies.

The S&P 500 is gnawing at an all-time high. Bond proxy stocks are driving the rally and James Mackintosh, investment editor, warns that as companies opt for share buy-backs rather than reinvesting, future profits and investors will be the poorer.

James Mackintosh

Cyprus has finally struck a €10bn deal to become the fifth country “rescued” by the rest of the eurozone, after Greece, Ireland, Portugal and a special loan for Spain. Almost a third of the 17 countries in the single currency have now had to be rescued.

Unlike all the other deals, Cyprus gets immediate deflation, through heavy losses for depositors above €100,000 at its two biggest banks, Bank of Cyprus and Laiki. Read more

James Mackintosh

Former US Treasury Secretary Larry Summers warned of the dangers in the eurozone in his latest op-ed for the FT, and it is hard to disagree. But part of what he said bothered me:

A worrisome indicator in much of Europe is the tendency of stock and bond prices to move together. In healthy countries, when sentiment improves stock prices rise and bond prices fall, as risk premiums decline and interest rates rise. In unhealthy economies, as in much of Europe today, bonds are seen as risk assets, so they move just like stocks in response to changes in sentiment. Read more

James Mackintosh

Among phrases you don’t hear any much any more are:

  • Safe as houses
  • As sound as a pound
  • As safe as the Bank of England.

It shouldn’t be a surprise that all three are out of fashion, after the US housing bubble that brought down the world economy, the collapse of sterling and the Bank of England’s failure to control inflation over either the past 50 years or the more recent past, when it was aiming for 2 per cent (the blue line on the chart).

UK CPI inflation and the target

Yesterday’s UK Budget avoided the extra inflationary pressure that would have come from fiddling with the target, which should give some support for the pound. But don’t get too positive: outgoing governor Sir Mervyn King voted for a second time for more monetary easing, and while he was outvoted again, Mark Carney is widely expected to be both more dovish and more convincing. I discuss this in today’s Short View column and video, and in greater detail below:

 Read more

James Mackintosh

I have a lot of sympathy with the explosion of outrage both within Cyprus and internationally at the decision to default on tax depositors of its banks.

It is just wrong that depositors, even large Russian tax-avoiders, are suffering while other senior bank creditors are excluded. It is wrong that Greek depositors in Cypriot banks are excluded, even though it was the Greek assets bought in large part with those deposits which caused a lot of the problems. And it is particularly wrong that small depositors are being hit, making a mockery of the deposit guarantee scheme.

Yet, there is risk in everything, and depositors were being compensated for the riskiness of Cypriot banks through higher interest rates. This chart shows the deposit rates paid on fixed-term deposits of less than a year (much of Cypriot deposits are fixed term, although even overnight deposits pay more interest than the rest of the eurozone).

Deposit rates in Cyprus and Germany

Now, it is fair to say depositors generally don’t realise the risks they are running. Even when they do realise, they mostly don’t care (as Icesave showed in the UK): that’s the whole point of deposit guarantee schemes, after all. But in fact the compensation paid for the risk that it turned out depositors were running was about right. Read more

James Mackintosh

Just a quick update for those who love Iceland as a model (a category which unites the unlikely pair of uber-Keynesian Paul Krugman and Conservative eurosceptic Dan Hannan).

After its disastrous banking and property bubble and bust, house prices have been growing strongly again, and are within a whisker of their 2008 highs – in stark contrast to Ireland and Spain. All three (with two different measures of Spanish housing) are shown in this chart, and Iceland’s break from the Irish/Spanish pattern is clear:

House prices Iceland, Ireland, Spain

This, just like the country’s return to economic growth, looks like another justification for Iceland’s decision to refuse to bail out its banks, unlike most of the rest of the world.

Now, I’m no friend of bank bailouts, and would much rather see middle-class bank creditors take losses than taxes rise on the poor to subsidise those creditors.

But things aren’t quite as simple as the housing chart shows. As well as cleaning up its banking system through a gigantic default, in large part on foreigners, Iceland’s krona has collapsed.

When measured in foreign currencies, the people of the island are far poorer than they were, something which really matters for a place which imports virtually everything it needs other than fish and electricity.

One example is the import of cars: for the four years since 2008, the total tonnage of cars (I know, funny measure, but that’s how Iceland provides it) imported is lower than for the single year of 2006. And this isn’t only because of the extremes of the bubble: last year, even as Iceland began to recover and imports picked up, saw fewer cars imported than in any year from 1999 to the collapse.

Adjusting Icelandic house prices into euros, then, allows a fairer comparison with Spain and Ireland’s outcomes (although not a way Icelandic residents will think about it, of course). And it tells quite a different story:

Now, this doesn’t matter to Icelandic homeowners paid in krona. But it does put a bit of a damper on the idea that Iceland is having a strong recovery.

Measuring in krona, even Spanish house prices have started to rise, as you see in this next chart: Read more

James Mackintosh

To answer the question of who owns corporate America, we turn naturally enough to Goldman Sachs. In spite of all the “vampire squid” hype, the answer isn’t GS: but it does have an excellent summary of how ownership has changed (click on the chart for a bigger version).

Ownership of corporate America Read more

James Mackintosh

Reasons to worry: the S&P 500 is back above its dotcom bubble high today and just 1.4 per cent below its 2007 credit bubble high of 1,576.

This makes investors feel happy, and when they are happy they tend to buy more shares. In this sense equities are a Giffen good like a Rolls-Royce: the higher the price, the more people want them. Until, suddenly, they don’t.

For those who believe the market is truly efficient, rising shares merely reflect a changed reality, and the potential gains from here are just as good as at any other time. But the market is not truly efficient. Investors are growing complacent, which adds to the risk of a correction.

The market may well carry on up (one driver would be the combination of good news on the economy and further signs from the Fed that it will not tighten monetary policy), but the fact of its having risen should play no part in a decision to invest, momentum trading strategies aside. Watch yourself. The time to buy is when shares are cheap, not when they are expensive. Shares, particularly in the US, clearly offer less upside than they did a few months ago.

We now face a giant triple top in the markets, as this chart of the S&P 500 shows:

S&P 500 triple top Read more