Everyone from the US Treasury to the European Commission to our very own Martin Wolf is upset about Germany’s export-driven growth model – as I said on Saturday, it’s acting as a parasite on the rest of the world.
The blame can be laid on Germany’s savers – they just refuse to go on the sort of debt-fuelled spending binges Brits and Americans love so much – as well as on the German government for not encouraging them to spend more, or stepping in to spend in their stead.
But the blame should also be put on the euro. If Germany still had the Deutschmark, the country’s current account surplus would have led to some natural rebalancing, with the currency strengthening to make BMWs and other German exports more expensive, and so less competitive. The euro has risen a bit, but not nearly enough.
This chart shows exactly how competitive Germany has become, thanks to the Hartz reforms of the labour market of 2003-2005, and self-imposed austerity.
Where are all the bears? Even some of the usual suspects have stopped growling, with David Rosenberg of Gluskin Sheff going so far as to dispute the idea that he’s a permabear. There are a few still carrying the flame – Russell Napier, the stock market historian, thinks the S&P 500 will fall to 500 – but with the S&P now at 1,772 there are few willing to listen to the growls. Read more
Money has been piling into European shares as fears of the euro imploding recede, the economy shows signs of life and investors look for the next trade after Japan.
But the “eurozone shares are cheap” theme might have run its course. This chart shows the discount of eurozone forward price-to-earnings compared to the US, as a percentage (using MSCI indices). Read more
FT Alphaville today has a nice chart suggesting London house prices are down by more than a quarter in real terms.
Here’s an alternative thought: the quality of measurement of London house prices has collapsed. This chart shows London house prices after inflation as measured by LSL/Acadametrics, the Office for National Statistics, Nationwide, and the Halifax index Alphaville used. I used CPI, rather than the discredited RPI, for most of them, but showed the effects of both RPI and CPI for the Acadametrics series.
Halifax down at the bottom there is clearly out of line with the rest, although Nationwide’s index still shows a hefty real terms loss, of 9 per cent. Read more
Investors have used all sorts of valuation models in the past 20 years. Which to use for Twitter, now that it is preparing to float?
Here’s another handy measure: price per worker. Twitter is more than its staff, of course. But it’s a useful sanity check on any valuation. The higher the value, the more investors have to assume there’s something really special about their assets – factories (a carmaker), intellectual property (think cure for cancer), innovative culture (Apple?), near-monopoly position (once Microsoft, now Google). Read more
With the US government missing in action, the statisticians who usually draw up Friday’s non-farm payrolls numbers are kicking their heels at home. In their absence, the market is likely to turn to today’s estimates from payrolls processor ADP – which has direct access to data on about a fifth of total pay packets.
This should make ADP’s numbers more reliable than those from the government. But because investors focus on the government survey, rather than ADP, what really matters is how close the ADP estimates are to the official figures. At first glance they look pretty good:
Here’s the market reaction to the shutdown of (some of) the US government:
- Benchmark US 10-year Treasury yields rose 0.05 percentage points immediately
- The dollar index fell 0.4 per cent immediately
- US equities dropped 0.6 per cent in the build-up yesterday, but the fall was still less than the 0.73 per cent fall in developed world equities.
- The e-mini S&P 500 futures contract is up 0.4 per cent since the shutdown took effect at midnight in Washington
All of which suggests that investors really aren’t that bothered. Here is conventional wisdom on why: Read more
A rally of 150 per cent – the rise in the S&P 500 since its intraday low of 666 in March 2009 – looks like the very essence of a bull market.
Adjust for inflation and it is possible to see as merely a bear market rally – perhaps the biggest dead cat bounce of all time. The real capital value of an investment in the S&P 500 is still below where it was in 2007 or 2000. After both of those peaks and subsequent crashes, shares were pumped up by central banks keeping interest rates much too low. Read more
The Bank of England has finally snapped. It is fed up with being constantly criticised for messing up its forward guidance on interest rates, and this week began what looks like a co-ordinated campaign to hit back.
Three of its policymakers have made speeches so far defending the policy, and their key points are simple. Here’s what they said, then some charts. Read more
Economists often seem to be living in a different world, not least when their forecasts of future recessions – or more precisely the lack of them – are examined.
Now two economists have confirmed that economists are on a quite different plane to the rest of the population, by exploring their views on policy issues facing America. Two Chicago-based finance professors, Paola Sapienza of Northwestern and Luigi Zingales of Chicago Booth, tried to identify issues on which economists generally agreed.
Only two issues garnered complete agreement: every single economist questioned (as part of a regular survey) said it was hard to predict share prices, and not one thought US healthcare was sustainable.
By contrast only a small majority of Americans (55 per cent) agree that share prices are tough to forecast, and two-thirds think US healthcare is financially sustainable.
This might just suggest that the average American hasn’t paid enough attention, since shares are patently hard to forecast (not necessarily impossible, as the efficient market theory beloved of so many economists posits, but certainly very difficult). Equally, even America’s politicians agree that healthcare spending at the current level is unsustainable; part of the original justification of Obamacare was to reduce costs, after all.
But the general pattern is continued on many other topics: the views of economists are furthest from the general public on those issues where the economists agree the most. Read more