Opinion

James Saft

Bad bank funding drives out good: James Saft

Mar 13, 2012 12:16 UTC

By James Saft

(Reuters) – Official funding has a nasty habit of driving away free market money, as Europe’s banks may yet discover.

Struck last year by a lenders strike, Europe’s banks have seen their immediate funding fears eased in recent months by a host of measures, such as cheap funding from the European Central Bank and a related boom in the issuance of “covered” bonds, those secured by bank assets.

These forces have eased fears of bank failures but ironically have made banks less and less attractive institutions to which to lend.

Think of it almost as an analog to Gresham’s Law, the famed observation that bad money drives out good, as the introduction of a new, debased currency with less precious metal content causes the old purer stuff to disappear into people’s mattresses. Who’d spend a silver coin when there are so many made of nickel and copper of the same legal value?

In the same way, who will lend to a European bank when so many of its assets are pledged elsewhere, either to secured bonds or pledged in one way or another to powerful official creditors like the ECB? The bad, or faux, funding is driving out the good.

Ireland, debt and democracy risk: James Saft

Mar 12, 2012 14:17 UTC

By James Saft

(Reuters) – Ireland’s decision to hold a popular vote on Europe’s new fiscal treaty adds some unpredictable and much-needed risk to the seemingly inevitable course of the euro bailout steamroller.

While turkeys have on occasion voted for Thanksgiving, especially if told a “no” vote will only bring the feast day forward, Irish voters have reason to be furious and also have a strong track record of rejecting euro zone initiatives.

Ireland can’t by itself block the treaty, which will come into force if adopted by a quorum of 12 European Union states, but a rejection can, and just might, serve as a rallying point for those disaffected by the crisis resolution process.

Playing the 3-D printing revolution

Mar 12, 2012 14:15 UTC

By James Saft

(Reuters) – It may be the biggest thing to hit the global economy since the assembly line, and how you play it might just determine your success as an investor in the coming decades. Additive manufacturing, or 3-D printing, has the potential to radically change how products are designed, where they are built and what labor and material inputs are used. If it takes off, it could radically change global trade flows, delivering a huge boost to the indebted and aging developed world, while threatening the fundamentals which underpin manufacturing success in China and some other emerging markets. 3-D printing is a process under which highly customizable products are literally sprayed into existence using something not too dissimilar from an ink-jet printer. Originally used mostly to provide build prototypes, it is now being used for actual production, notably by a unit of EADS which is working on developing 3-D printing-produced aircraft parts. The advantages are huge: easier customization, lower labor costs and, potentially, a severing of the reliance on a supply chain, a feature of manufacturing since the days of Henry Ford.

WHO BENEFITS – GEOGRAPHICS The global supply chain system, with parts of a product built in Asia or Europe for final assembly in the U.S., for example, has built up in response to the huge economies of scale needed in old-fashioned manufacturing. Build a factory in high-wage Germany, for example, and make it work through excellence and with huge investment in equipment to make production economic. Or build in low-wage China or Vietnam and arbitrage low wages Since 3-D printing may not need these economies of scale, look for production to move closer to the end consumer. Also, because so much of the value a 3-D printing operation is in its intellectual property, look for companies to favor places that offer better legal protection of IP rights. That makes this great news for the U.S. and terrible for China. And though Germany and Japan offer better IP rights, they may well suffer because both have such huge sunk costs in the existing global supply chain system. So broadly, this is dollar and U.S. asset positive, while being a negative for the emerging markets and other places that have done well out of the existing system. “America’s dominance in this field will be a feature for a very, very long time,” George Magnus, senior economic adviser at UBS in London said. “If not the end of outsourcing, it is a big shock to the outsourcing system.” A U.S. manufacturing renaissance based on 3-D printing would also, of course, be hugely positive U.S. debt, which would benefit from the improved fiscal position this implies. It really is hard to over-state what a lucky break this could be for the U.S., playing to its strengths and compensating for its weaknesses. It may also not be all bad news for China, Japan and Germany, all of which face tough demographics in coming years. As 3-D printing requires less labor it may offer a way to pay for all of those retirement benefits and retire all of the debt that now looks worrisome.

SECTORAL WINNERS Playing the sectoral winner and losers is even more speculative, as this is going to be a long process rather than simply an event. That said, the rule of thumb is that successful implementation of 3-D printing in a given industrial space will be a threat to incumbents with a strong franchise. Those existing manufacturers and component makers will have huge sunk investments that they needed to achieve economies of scale, and will have to decide if they will switch, and adapt new techniques, or accept managed decline. This implies a lot more volatility in the value of manufacturing shares, with big winners and big losers. That may actually be an argument for investing broadly in sectors that implement 3-D techniques, on the theory that profitability will rise in the sector and that returns will rise overall to compensate for volatility and a temporary increase in the need for capital. On this view, trying to pick winners and losers within a sector may be too risky, with the big call being how well a given sector is to using 3-D techniques. Again though the ability to customize and to innovate that is engendered by 3-D techniques means that a there will presumably be Apple-like category-busters, with new products at high price points, which arise. Finally, one group that will undoubtedly be hurt by the rise of additive manufacturing are those companies that provide logistics and shipping to the existing supply chain. Why pay to ship a fly a part around the world when you can spray one on site? I have to emphasize, again, that this is all highly speculative and will play out over a huge distance of time and space. It will be a long road, and there will be a lot of money made, and lost.

Ireland, debt and democracy risk

Mar 6, 2012 15:09 UTC

By James Saft

(Reuters) – Ireland’s decision to hold a popular vote on Europe’s new fiscal treaty adds some unpredictable and much-needed risk to the seemingly inevitable course of the euro bailout steamroller.

While turkeys have on occasion voted for Thanksgiving, especially if told a “no” vote will only bring the feast day forward, Irish voters have reason to be furious and also have a strong track record of rejecting euro zone initiatives.

Ireland can’t by itself block the treaty, which will come into force if adopted by a quorum of 12 European Union states, but a rejection can, and just might, serve as a rallying point for those disaffected by the crisis resolution process.

The wisdom of exercising patience in investing

Mar 2, 2012 12:41 UTC

By James Saft

(Reuters) – “Don’t just do something, stand there!” might just be the best least-followed advice in investing.

If there is one statistic that is, if anything, more depressing than the last empty decade of equity returns it is the fall and fall of average stock holding periods.

While the average holding period of a NYSE-traded stock was 10 years in the late 1930s the trend since 1995 has been down and down, driven by ever more frenetic trading. By 2010 the length of time the average share is held is down to a mere six months, according to NYSE data, a real testament to the eternal triumph of hope over experience.

SAFT ON WEALTH: The wisdom of exercising patience

Mar 1, 2012 21:11 UTC

March 1 (Reuters) – “Don’t just do something, stand
there!” might just be the best least-followed advice in
investing.

If there is one statistic that is, if anything, more
depressing than the last empty decade of equity returns it is
the fall and fall of average stock holding periods.

While the average holding period of a NYSE-traded stock was
10 years in the late 1930s the trend since 1995 has been down
and down, driven by ever more frenetic trading. By 2010 the
length of time the average share is held is down to a mere six
months, according to NYSE data, a real testament to the eternal
triumph of hope over experience.

Private money flees Portugal

Mar 1, 2012 16:11 UTC

By James Saft

(Reuters) – The most telling thing the ECB did on Wednesday’s leap day wasn’t the 530 billion euros in party favors they handed out to banks, but rather the paltry sum they were forced to commit to shoring up Portugal’s government bond market.

Around 800 euro area banks availed themselves of the three-year loans offered by the European Central Bank, money many analysts expected to be recycled into euro area government bonds. It was a clever plan: keep the banks alive with easy money and they in turn will support the ailing governments on Europe’s periphery, pocketing the spread.

It doesn’t seem to be working out that way, at least in Portugal’s case. Portuguese borrowing rates have remained stubbornly high and on Wednesday spiked higher, with 10-year borrowing rates above 13 percent. That brought the ECB into the market to make its first purchases of government bonds in two weeks.

A farewell to yuan whines

Feb 28, 2012 16:11 UTC

By James Saft

(Reuters) – Nobody seems to like picking on China any more.

Not only did the official communique issued by G20 central bankers and finance ministers assembled in Mexico City not mention the yuan, China was actually praised by U.S. Treasury Secretary Tim Geithner.

What a change it makes from summits past, when complaining about the undervaluation of the yuan was a seemingly fixed item on the agenda.

“China has played I think a really responsible, stabilizing role, despite its relative newcomer status,” Geithner said in Mexico City. “There’s been a dramatic change in the organization and structure of the economy towards domestic demand.”

We are all junior investors now

Feb 23, 2012 16:29 UTC

By James Saft

(Reuters) – If the Greek bailout has proved one thing it is this: we are now all creatures of government.

The rescue itself is only of passing interest – it won’t be the last and Greece’s virtual default will become real one of these days. Instead, it is the way in which the interests of private investors have been officially subordinated to public claims that will have a lasting impact.

Under the terms of the deal the European Central Bank and national central banks will be excused from taking any losses on their holdings of Greek debt. Private investors, in contrast, will take a loss of about 75 percent and are expected to be made subject to collective action clauses now wending their way through legislation in Greece. Those CACs will force investors to tender their bonds and take a hit, all while central banks skate serenely away. The ECB and national central banks will remit their profits on Greek bonds to the Greek government, a helpful gesture, but one which is cold comfort to an investor who now finds their interests subordinated.

Italy needs miracle, not just Monti

Feb 14, 2012 20:58 UTC

By James Saft

(Reuters) – Italy is going to need considerably more – in luck, growth and cohesion – than is likely to be delivered by premier Mario Monti’s technocratic charms.

Monti, unelected and a former European Commissioner, is so much more reliable and authoritative than the opera buffa figure of Silvio Berlusconi that it is tempting to think that Italy, now enjoying the qualified backing of the ECB and financial markets, is past the worst. And in truth, progress in a few short months has been impressive; Monti makes the right noises on structural reforms and has been rewarded by a sharp fall in Italian interest rates.

And yet the country still faces enormous risks and uncertainties with multiple paths for the uncertainties to magnify the risks. Italy is only in the very early stages of a recession that could last for years, it is hostage to outside shocks from other weak euro zone members and there is no guarantee that the political consensus for reform will survive the effects of the resulting austerity.

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