Archive for the ‘ Europe ’ Category

Euro zone banks: cheap for a reason

Yesterday my piece for Reuters on Euro zone banks finally hit the wire; you can read it here. A few more thoughts on the sector, which have obviously had a tough time, with first the financial crisis and then the euro zone crisis clearly not being the ideal cocktail for the euro zone’s financial and banking sector…

When any company trades below their accounting value, the market is pricing in some pretty serious tail risk. Draghi’s July speech seems to have removed that tail risk; so what’s holding them back? There’s a whole plethora of issues, including regulation which will jack up capital requirements, as well as the sense that bank’s balance sheets themselves may not tell the whole story, as Neil Dwane says in my article. But there’s also a sense that the rally of the summer has brought prices to a position where by recent standards banks are expensive, despite being below 1 on price to book. There’s a sense that, according to a recent JPMorgan survey, funds are, in terms of recent history, actually overweight; that is to say, because funds have been underweight on banks for so long, that they are now slightly less underweight leaves them holding more banks than at any time in recent history.

The implication is that seeking the usual valuation plays in examining price/book ratios is misplaced, because the risks that remain in the sector are enough to suggest that other stocks or assets just offer better risk-reward returns. Alan Higgins, CIO at Coutts, said he favoured Spanish banking corporate debt, with +10% yields and priority for repayment in worst case scenarios. People like Dwane or Stefan Angele see banks as very unattractive given other sectoral plays to be made.

Being below book is no longer enough to offer a compelling valuation play; the sector has to provide a good news reason why you want to bet on bank growth. That so much of the rally was fuelled by hedge funds closing out shorts on the sector means that, now these hedge fund have finished, investors have to make active decisions that euro zone banks are going to actively outperform other assets on the table. And at this point, not everyone is prepared to make that leap.

Advertisements

Food prices may feed monetary angst

Posted on Reuters’ Global Investing blog

Be it too much sun in the American Midwest, or too much water in the Russian Caucasus, food supply lines are being threatened, and food prices are surging again just as the world economy slips into the doldrums.

This week, Chicago corn prices rose for a second straight day, bringing its rise over the month to 45%, and floods on Russia’s Black Sea coast disrupted their grain exports.  Having trended lower for about nine-months to June, the surge in July means corn prices are now up about 14% year-on-year. And all of this after too little rain over the spring and winterkill meant Russia, Ukraine and Kazakhstan’s combined wheat crop would fall 22 percent to 78.9 million tonnes this year from 2011.

But as damaging as these disasters have been for local populations, their effects could be much more widely felt.

The problem is that not only do rising food prices raise the cost of living, squeezing incomes further during a downturn, but by raising inflation they severely restrict the government’s flexibility in setting monetary policy. Just as Mike argued previously on this blog that the falling oil price amounted to a green light for the cutting of interest rates, rising food prices will force many central banks to think again about the pace of monetary easing.  And the problem is most acute in developing countries where the proportion of food in consumer price baskets is far higher than in the richer western economies. For example, according to the US Department of Agriculture, an additional $1 added to income sees 56 cents more spent on food, beverages and tobacco in Burundi, compared to 5 cents more in the United States.

The Russian central bank is a timely case in point when it comes to restrictions on monetary policy. On Friday they announced that they were keeping interest rates the same; as much as growth is struggling and could do with some monetary stimulus, high inflation, fuelled by food prices, is tying the bank’s hands.

Why has this happened? According to the traditional Phillips curve, there is usually a tradeoff to be made between unemployment and inflation; they are inversely related, as prices and wages will rise when unemployment is low, and vice versa.

continue reading on Reuters

Investors hungover after wine binge

During this depression, it would appear that investors are no longer finding solace in turning to the bottle.

Fine wines are being hit hard by the global downturn, with the Liv-ex Fine Wine 100 index down 7.4 percent on the year, according to July’s Cellar Watch Market Report.

The Liv-ex Bordeaux 500 was down by 3.4 percent month-on-month – an especially disappointing showing given that the market is usually energised in June by new Bordeaux releases.

The close correlation of prices in wine and gold since 2004  had suggested that wine was proving very resilient to economic recession; concerns about its “luxury” status were perhaps outweighed by its alcoholic content.

However, since early 2011, the prices have been steadily declining, reflecting a sharp decline in the market for top end Bordeauxs in particular.

Only a fifth of the wines in the Bordeaux 500 are seeing year to-date increases, with buyers turning away from First Growths, which are traditionally seen as blue-chip investment wines, towards smaller producers. Latour is the best performing First Growth wine, posting a decrease of only 4% on the year.

continue reading on Reuters

The art of coalition building in Greece

Following yesterday’s elections in Greece, New Democracy are the largest party, and, aided by their seat bonus, will seek to form a majority coalition with PASOK this afternoon. However, the BBC are reporting that ND are looking to form a “national coalition”. Assuming this is more than a rhetorical device, we might assume that this will result in an oversized governmental coalition (that is to say, larger than the minimal-winning coalition), with all the problems of coordination and unity associated with it.

To put my comparative government hat on for the moment, there are three main reasons why such coalitions can be attractive. Firstly, they can shield the lead party from being held to ransom by their chief coalition partner. Secondly, it can shift the median of the coalition closer to the lead party’s ideal point. Finally, it can be helpful in times of national crisis.

On the first point, consider a centrist party who nearly has an absolute majority, but needs a small number of MPs, let’s say five, to achieve one. Let’s assume there are four potential partners which could provide these five MPs. If the centrist party enters with just one of them, then it is many ways beholden to them; as kingmakers, the minority party holds the balance of power. However, if the centrist party includes all four, then one party’s defection alone will not bring down the government. Moreover, if the parties are ideologically non-aligned, then coordination on when to defect will be hard.

This justification for Greek national coalition building seems infeasible. To counterbalance PASOK’s influence, the ND will have to turn to Syriza, which is unattractive for reasons I shall come on to. None of the other parties can provide a minimal-winning coalition by themselves. The fourth party, ANEL, would come one seat off, and smaller parties come further from providing it. In combination, they can provide a MWC without PASOK, guarding against defection, but no party alone can strip PASOK of its king-making ability.

This is problematic because a broad coalition, dependent on socialists and communists, may find itself having a ideal policy point within the PASOK, not ND, ideological space. The second justification of oversized coalitions is a balancing one, which is why a coalition between Syriza and the ND isn’t plausible – both can get a coalition with just PASOK, and such a coalition would be nearer their ideal point. Thus the ND, if they are seeking insurance, should look rightwards, to counterbalance PASOK’s influence. This further restricts their ability to form an oversized coalition. If they wish to exclude DIMAR and the KKE, the ND will have to depend on Golden Dawn to secure a MWC (with ANEL) and insurance against PASOK defection.

However, the truth is that none of these scenarios seem plausible for a more fundamental reason. The reduction of issue space to two dimensions is dubious at the best of times, but during a crisis such as this, it is additionally flawed. ANEL and Golden Dawn are as anti-austerity as many of the left-wing parties. Our third reason, that coalitions of national unity are likely in times of national crisis, only applies during genuinely unifying forces, against an external enemy during war, for example. The debate in Greece is polarised, but there are still two poles. Parties such as Syriza, moreover, have potentially great political gains to be made from staying in opposition. Collective action problems are manifold, because even if country stands to gain from political stability, the gains from keeping ones hands clean of being in government are potentially large for each individual party. And thus any sort of coalition building, let alone oversized coalition building, becomes all the harder.

So what do I think is going to happen? I think the ND and PASOK will form a coalition, with few, if any, other coalition partners. The problems and costs associated with oversized coalition building outweigh the benefits, even during this time of crisis. What the country needs is decisiveness, one way or the other, and excluded parties will happily provide dialectical opposition to whatever the government proposes. Moreover, the costs of defection for PASOK, as a party that wants to make the bailout work, are high enough without the ND needing to find other partners in order to hold them to their word.

Who said what? Round One: Sir Alex Ferguson vs Comrade Nikita Khrushchev

“Dissent is for losers”, apparently: an outlook that Sir Alex Ferguson happens to share with Nikita Khrushchev, former First Secretary of the Soviet Communist Party.  And it’s not the only one. Couple that with their beautiful mugs, and it can be hard to tell them apart. So, who said it, Fergie or Nikita?

1) “We have to swallow this bitter pill… The weak complain against the strong; the strong pay no attention and continue their insolent action” – Fergie, upset at Thierry Henry’s 90th minute winner in a 2007 league game OR Nikita, after the Soviets failed to shoot down a US spy plane?

2) “He could start a row in an empty house.” – Nikita on Lyndon Johnson, OR Fergie, on Dennis Wise?

3) “He was certainly full of it, calling me “Boss” and “Big Man” when we had [a] drink… But it would help if his greetings were accompanied by a decent glass of wine. What he gave me was paint-stripper.” – Fergie on José Mourinho after a Champions League game, OR Nikita, after a landmark meeting with Dwight Eisenhower at Camp David?

4) “We will bury you” – Nikita, referring to agents of international imperialism, OR Fergie, referring to Roberto Mancini’s Man City?

5) “If you start throwing hedgehogs under me, I shall throw a couple of porcupines under you” – Fergie, speaking to the media, OR Nikita, speaking to the media?

6) “Sometimes you look in a field and you see a cow and you think it’s a better cow than the one you’ve got in your own field. It’s a fact. Right? And it never really works out that way.” – Nikita, in reference to why East Germany would regret reunification with its seemingly more prosperous neighbours, OR Fergie, in reference to Wayne Rooney?

7) “[This] question has stuck like a dead rat in the throat of some people – they are disgusted with it and yet they can’t spit it out” – Fergie, when asked about the BBC’s allegations about his son Jason, OR Nikita, when asked about Soviet intervention in Hungary?

8) “Though you are a fiery young man and I am no longer young, I can still compete with you” – Nikita to an American talk show host OR Fergie in a touch-line encounter with Andre Villas-Boas?

9) “[so] I decided to add a little more heat. I took off my shoe and pounded it…” – Fergie, in reference to David Beckham’s forehead, or Nikita, as he made a point about General Franco?

10) “They are the inventors of the smokescreen.” – Nikita, in reference to Americans, OR Fergie, in reference to Italians?

11) “He’s not [x], he’s a piece of shit” – Fergie, (missing words “the Great One,”) in reference to Jose Mourinho, OR Nikita (missing words “the foreign minister”) referring to the Soviet foreign minister?

12) “He’s a bully, a fucking big-time Charlie”. Nikita, referring to John Foster Dulles, Eisenhower’s Secretary of State, or Fergie, referring to Paul Ince?

13) “Could that come under the description ‘desperation?’ I’ve got plenty of ammunition, don’t worry. They can try.” Fergie, speaking figuratively in reference to Carlos Tevez playing again for Man City, or Nikita, speaking literally about a possible NATO-led military solution to the Berlin question?

14) “What am I going to do without work? How am I going to live?” Nikita after his very real, enforced retirement OR Fergie musing on his potential, always-imminent but never arriving theoretical retirement?

15) ‘It’s getting tickly now – squeaky-bum time, I call it.’ Fergie, in reference to the tension of the end of the season, or Nikita, in reference to the tension of the potentially world-ending Cuban Missile Crisis?

Answers in the comment below…

Norway: Ideology has a role to play

Published on cherwell.org, 3rd August 2011

First things first: I agree with a lot of Hugh Burns’ article. I agree with his condemnation of the farcically sub-par journalism which accused al-Qaeda of the recent atrocious attacks in Norway. I agree with him that news shouldn’t been reduced to easily digestible narratives that undermine the complexity of the issues at stake. But ultimately it fails to tackle a fundamental problem at the heart of much of the media coverage: the absolute double standard between the coverage of Islamic “terrorists” and Western “gunmen”.

The most powerful example of this is the tendency of certain elements of the global media – notably among our friends across the pond – to continue emphasising the problem of Islamic terrorism in relation to the shocking events in Norway even after al-Qaeda was shown to have played no role in the attack. While Burns was right to castigate The Sun for their terrible front-page, at least they had the good sense to drop all mention of al-Qaeda in their subsequent online coverage. After such a humiliating mistake, who wouldn’t? Enter the Washington Post’s Jennifer Rubin. Having erroneously cited the tragedy as “a sobering reminder for those who think it’s too expensive to wage a war against jihadists,” she sparked fierce rebukes calling for her apology. Did she aplogise? No. Did she drop the item altogether? Nuh-uh. Did she write the following…

Read the rest of the article on cherwell.org