Jeremy Gaunt

Good news and bad in the latest  investor confidence sounding from State Street. The overall index took a dive again -- third month in a row -- and is now barely above neutral. That's the bad news if you are keen to see risk assets do well.

The good news is that despite three months of falling the index is still above 100, showing that risk appetite remains present among the U.S. financial services firm's institutional investor cllients, albeit only just.

But add to that State Street's findings that the fall in its global index was almost entirely due to Asian investors. The regional indices for North America and Europe both rose.

So heading into the last month of the year, with questions lingering about the state of the world economy and a strong desire among many to lock in this year's profits, investors are still relatively bullish.

Will it last?

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Original Post Text:
Hard to imagine with financial markets still buoyant and newspapers full of tales of bonus greed, but there is still the possibility that captialism will end.  At least there is according to prestigious investment consultants Watson Wyatt in their latest study called "Extreme Risks".

The firm listed the demise of the system of private ownership as one of 15 threats to investors and the global economy that probably won't happen but which it reckons are worth worrying about anyway. The idea behind the report is that such things as climate change, the break up of the euro zone and war are always worth being included in an investment risk management process.

As for the future of capitalism:

In our view, the most likely scenario is moving along from one end of a spectrum where market is king (minimum regulation) towards the other end, where we could see more onerous regulations and government intervention in, and control of, the economy. The extreme risk, however, is the demise of the capitalist system and the end of the market as the primary means of resource allocation.

And the impact:

The economy would be likely to run a higher risk of failure and economic growth would be sluggish in the long run due to lower productivity.  Centrally controlled economies tend to be characterised by shortages, which are inherently inflationary. Private investment activities would collapse or even be terminated. The end of capitalism is simply the ultimate extreme risk. The economy is likely to be associated with extreme uncertainty and a large amount of wealth destruction during the transition period.

Watson Wyatt does try to give its free market clients some hope, suggesting that buying gold may be one way to hedge against the propect of capitalism's demise. But it admitted that in such a circumstance investors would probably be more concerned about the return of their investments rather that the return on them.

(Illustration called The Communist Party, from Threadless)

Hard to imagine with financial markets still buoyant and newspapers full of tales of bonus greed, but there is still the possibility that captialism will end.  At least there is according to prestigious investment consultants Watson Wyatt in their latest study called "Extreme Risks".

The firm listed the demise of the system of private ownership as one of 15 threats to investors and the global economy that probably won't happen but which it reckons are worth worrying about anyway. The idea behind the report is that such things as climate change, the break up of the euro zone and war are always worth being included in an investment risk management process.

As for the future of capitalism:

In our view, the most likely scenario is moving along from one end of a spectrum where market is king (minimum regulation) towards the other end, where we could see more onerous regulations and government intervention in, and control of, the economy. The extreme risk, however, is the demise of the capitalist system and the end of the market as the primary means of resource allocation.

And the impact:

The economy would be likely to run a higher risk of failure and economic growth would be sluggish in the long run due to lower productivity.  Centrally controlled economies tend to be characterised by shortages, which are inherently inflationary. Private investment activities would collapse or even be terminated. The end of capitalism is simply the ultimate extreme risk. The economy is likely to be associated with extreme uncertainty and a large amount of wealth destruction during the transition period.

Watson Wyatt does try to give its free market clients some hope, suggesting that buying gold may be one way to hedge against the propect of capitalism's demise. But it admitted that in such a circumstance investors would probably be more concerned about the return of their investments rather that the return on them.

(Illustration called The Communist Party, from Threadless)

An interesting post on ING's new eZonomics blog points the reader to a new study on older workers and health.  The findings -- as reported in The Lancet -- don't at first glance look terribly surprising:

A poor work environment and health complaints before retirement were associated with a steeper yearly increase in the prevalence of suboptimum health while still in work, and a greater retirement-related improvement; however, people with a combination of high occupational grade, low demands, and high satisfaction at work showed no such retirement-related improvement.

In simple terms, this is saying that if a worker is happy, their health is better. Anyone who has ever had a bad job could have told them that! But the study, of course takes it further.

Working life for older workers needs to be redesigned to achieve higher labour-market participation.

This has broad implications, given the trend away from final salary pensions and the general view that workers are going to have to work longer than in previous generations. Companies that are faced with workers who cannot easily retire because of a lack of pension savings, that need people to work longer  and that are subject to increasing anti-age discrimination will need to take the employment needs of older employees on board.

It may not be easy. As the ING post points out, the OECD looks at the issue in a 2006 report entitled "Live Longer, Work Longer". It began its report:

In an era of rapid population ageing, many employment and social policies, practices and attitudes that discourage work at an older age have passed their sell-by date and need to be overhauled. They not only deny older workers choice about when and how to retire but are costly for business, the economy and society.

Then comes the recommendations:

-- There must be strong financial incentives to carry on working and existing, subsidised pathways to early retirement have to be eliminated.
-- Wage-setting and employment practices must be adapted to ensure that employers have stronger incentives to hire and retain older workers.
-- Older workers must be given appropriate help and encouragement to improve their employability.
-- A major shift in attitudes to working at an older age will be required on the part of both employers and older workers themselves

Is any of this being done?

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Original Post Text:
The title of this post is taken from two sources. One was a headline in British tabloid, The Sun, in January 1979, when then-prime minister James Callaghan denied that strike-torn Britain was in chaos. The second was the title of a 1975 album by prog rock band Supertramp that famously showed someone sunbathing amidst the grey awfulness of the declining industrial landscape.

Are we now getting blasé about the latest crisis? Not so long ago, perfectly respectable economists and financial analysts were talking about a new Great Depression. The world was on the brink, it was said. Now, though, consensus appears to be that it is all over bar the shouting. The world is safe.

Wealth managers at Barclays have gone as far as telling their clients to get over it.

Move past the crisis .... The past year's events were deeply traumatic for most investors, but now is the time to move on, and take a more "business as usual" approach ...."

Such bullishness may not be comforting to the record numbers of jobless in parts of the world, but it is bordering on consensus. It is left to the likes of perma-bears such as  Nouriel Roubini to try to burst the bubble of optimism on which many are floating. The economist began one of his latest articles bluntly:

Think the worst is over? Wrong.

Roubini's main point is that unemployment is likely to get worse rather than better and that many U.S. jobs that have been lost will not come back.

Now, there can obviously be a disconnect between markets and economics, but the former tends to be based on assumptions about the latter. So which is right? Are we out of the woods? Or should Supertramp be firing up their keyboards again?

[CROSSPOST blog: 43 post: 2587]

Original Post Text:
The title of this post is taken from two sources. One was a headline in British tabloid, The Sun, in January 1979, when then-prime minister James Callaghan denied that strike-torn Britain was in chaos. The second was the title of a 1975 album by prog rock band Supertramp that famously showed someone sunbathing amidst the grey awfulness of the declining industrial landscape.

Are we now getting blasé about the latest crisis? Not so long ago, perfectly respectable economists and financial analysts were talking about a new Great Depression. The world was on the brink, it was said. Now, though, consensus appears to be that it is all over bar the shouting. The world is safe.

Wealth managers at Barclays have gone as far as telling their clients to get over it.

Move past the crisis .... The past year's events were deeply traumatic for most investors, but now is the time to move on, and take a more "business as usual" approach ...."

Such bullishness may not be comforting to the record numbers of jobless in parts of the world, but it is bordering on consensus. It is left to the likes of perma-bears such as  Nouriel Roubini to try to burst the bubble of optimism on which many are floating. The economist began one of his latest articles bluntly:

Think the worst is over? Wrong.

Roubini's main point is that unemployment is likely to get worse rather than better and that many U.S. jobs that have been lost will not come back.

Now, there can obviously be a disconnect between markets and economics, but the former tends to be based on assumptions about the latter. So which is right? Are we out of the woods? Or should Supertramp be firing up their keyboards again?

The title of this post is taken from two sources. One was a headline in British tabloid, The Sun, in January 1979, when then-prime minister James Callaghan denied that strike-torn Britain was in chaos. The second was the title of a 1975 album by prog rock band Supertramp that famously showed someone sunbathing amidst the grey awfulness of the declining industrial landscape.

Are we now getting blasé about the latest crisis? Not so long ago, perfectly respectable economists and financial analysts were talking about a new Great Depression. The world was on the brink, it was said. Now, though, consensus appears to be that it is all over bar the shouting. The world is safe.

Wealth managers at Barclays have gone as far as telling their clients to get over it.

Move past the crisis .... The past year's events were deeply traumatic for most investors, but now is the time to move on, and take a more "business as usual" approach ...."

Such bullishness may not be comforting to the record numbers of jobless in parts of the world, but it is bordering on consensus. It is left to the likes of perma-bears such as  Nouriel Roubini to try to burst the bubble of optimism on which many are floating. The economist began one of his latest articles bluntly:

Think the worst is over? Wrong.

Roubini's main point is that unemployment is likely to get worse rather than better and that many U.S. jobs that have been lost will not come back.

Now, there can obviously be a disconnect between markets and economics, but the former tends to be based on assumptions about the latter. So which is right? Are we out of the woods? Or should Supertramp be firing up their keyboards again?

Equities may be the poster child for this year's market recovery, but corporate bonds have been the runaway outperformer.

As the graphic below shows, corporate debt was less volatile and moer profitable over the past nearly three years of crisis and recovery -- even "junk" bonds.

This year's performance for corporate bonds has been stunning. In December last year, the spread between global large cap company debt and U.S. Treasuries was 155 basis points, according to Bank of America Merrill Lynch. It has now narrowed to around 52 basis points.

The performance of high-yield, or "junk" bonds, has been even better. From a spread of 2,193 basis points in December, the BoA-ML global high-yield index now registers 773.

And what now? Investors still like the asset class, but there is evidence that the degree of passion may be cooling.

(Graphic: Scott Barber)

Gordon Brown is truly having a rough time. Rebuffed by the United States, International Monetary Fund and others for floating the idea of a tax on financial transactions at this weekend's G20 meeting, he has now got short shrift from the Cayman Islands.

McKeeva Bush, the veteran Caymanian politican who is now premier of the British Overseas Territory, popped in to the Reuters London headquarters for a chat this week. His main concern was to explain plans for making the islands an easier place for financial services personnel to live in. He would like some of those 8,000 hedge nearly 10,000 funds that are registered there to be more than just brass plaques. But, when asked, he also had time to dismiss the idea of a transaction tax out of hand.

"That's an old hat. I have been hearing about it for 25 years. It's just not practicable. It will not work."

And just in case the point was missed:

"We have looked at it and we do not think this is something that would work."

Bush would not be drawn on the idea that a tax on transactions could, metaphorically speaking, sink his Caribbean island homeland under the waves. But Paul Byles, a government financial services consultant who accompanied the premier, did touch on the liquid nature of the issue:

"Tax flows, and they will move somewhere else."

In July, Stella Dawson, Reuters' global treasury editor, posted some thoughts on what she called the Summer of LUV, a description of a three-pronged global economic recovery based on the idea of different patterns in the United States, Europe and Asia. Since then her LUV thesis has been picked up widely. Here is her update (as originally published in The Times newspaper).

Financial policymakers won round one. Their $5 trillion, shock-and-awe campaign of tax cuts, spending programmes and super-cheap official money has wrested the global economy from the jaws of a deep and damaging depression. Now the real test begins: withdrawing this massive monetary and fiscal support without letting their economies slide back into recession.

The outlines for the withdrawal strategy started to take shape this week from major central banks. Many analysts this summer were looking for a LUV-shaped global recovery. That's LUV as in a long, slow and L-shaped recovery in Europe (steep drop, flat-lining); a U-shaped rebound in the United States (the same but an earlier recover); and a V in Asia, namely a steep downdraft, then off to the races again.

But in recent weeks it started to feel more like a V-shaped one. China is powering ahead and set to deliver 8 percent growth this year. The United States posted a robust 3.5 percent upswing in the third quarter. Australia, Norway and Israel are sufficiently confident that they have started raising interest rates again. Manufacturing and services indices worldwide for October turned upward.

But the underlying factor remains that this economic recovery, whatever shape it might be, is a drug-induced one. It is kept alive by the unprecedented injection of money into banks coffers and citizens pockets. Only when the extraordinary measures are withdrawn will it become clear whether economies truly have regained resiliency.

Central bankers have tip-toed into those waters. The Federal Reserve last Wednesday said it will trim the amount of mortgage agency debt it buys to $175 billion from $200 billion, a minor adjustment in a $3 trillion market and one it described as technical in nature. Nevertheless, it marks its second baby step toward weaning the U.S. housing market, the epicentre of the credit crisis, off  life support.

The European Central Bank on Thursday joined in. President Jean-Claude Trichet said markets did not expect the ECB in December to renew its special programme of lending unlimited funds to banks for one year at very low rates. Decoding central bank speak, that means it is getting ready to withdraw support. Only the Bank of England on Thursday cranked up the machine. Yet its 25 billion pound expansion of asset purchases from banks to 200 billion pounds was half the increase expected. Little surprise it decided on more support when U.K. output has fallen by 6 percent since the start of 2008 and the country remains in the grip of its worst recession in at least 50 years.

But LUVers needn't worry. Inventory rebuilding lies behind much of the stronger-than-expected growth countries have enjoyed in the past six months. Real, sustainable demand is shaky. In the U.S. for example, factory inventories grew in October but new orders, exports and delivery times all fell, suggesting a one-off boost. GDP numbers also were driven by government home purchase incentives and the cash-for-clunkers car buying programme, which is expiring. The consumer cannot pick up the slack when personal debt remains high, unemployment rising and home foreclosures continue at the rate of one filing per 13 seconds.

So little wonder stock markets after rocketing ahead for seven months have slipped and the VIX index, or fear gauge, is rising. The second phase of the rebuilding from the credit crisis has only just begun. LUV hurts.