Morning Links 7-27
Fitch: Five firms hold 80% of derivatives risk (CFO) The five banks—Chase, Goldman, Morgan Stanley, Citi and BofA—also account for 96% of exposure to credit derivatives among 100 companies studied.
The end of the end of the recession (Scribd) Tyler D. collects lots of charts from David Rosenberg to make the point that the economy is hardly climbing out of recession. At best we’re going to stagnate for some time before de-leveraging re-accelerates.
Loans shrink as fears linger (WSJ) Speaking of de-leveraging, banks are cutting back on loans. This is what drives deflation. Since credit is money, less credit means less money. Less money chasing goods, services (and assets) means prices fall. But this is good. Lending needs to fall (and capital needs to rise) for banks to heal their balance sheets.
Real Yields highest since 1994 aid record debt sales (Bloomberg) Despite low interest rates, “real” yields on Treasuries remain high. This is another sign of deflation. As money (& credit) in circulation declines, the purchasing power of the dollar increases. So you don’t need high interest rates to increase your purchasing power from one year to the next. This is the argument folks use to dismiss concerns that rising debt will drive higher interest rates. When deflation rules, demand for government debt will keep a lid on rates. It’s a good argument….in the short run.
Japan’s cheap debt reassures Treasury bulls (WSJ) Japan’s public debt outstanding has spiked since their bubble collapsed 20 years ago. Borrowing to fund “stimulus” has left them with gross debt to GDP over 200% compared to about 90% here in the U.S. And yet their interest rates remain at rock bottom levels thanks to deflation. This is the argument guys like Krugman make to allay concerns that additional stimulus will cause interest rates to spike. In the short run, I agree. What concerns me is the long-run. Borrowing to infinity may work for a time. Until it doesn’t. When confidence is finally lost in America’s ability to pay back debt, we’ll become Argentina circa 2001. We’ll be forced to repudiate debt and the world economy, which will still be dollar-based, will stop.
Schumer wants “flash orders” banned (Reuters) This is the system that enables certain traders with powerful computers to front-run the market. After the story finally made it onto the front page of NYT on Friday (see Friday’s links), Schumer said he wants to see action. When NY’s senior senator speaks about financial market regulation, things can happen quickly.
“Princelings” rule Chinese corporate world (Singapore Times) 90% of Chinese billionaires are the children of high-ranking officials. And you thought income inequality was bad in the West?
DeBeers sales/profits crushed by recession (Telegraph) With sales off 57% and profit off 99%, the world’s biggest diamond merchant provides more evidence that luxury goods have been hit hard by the recession.
California finds pot a huge cash cow (Seattle Times) Gotta find revenue somewhere….