Shane's Feed
Jun 23, 2014
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In Beijing we trust

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China’s credit woes are bubbling up into the news again (previously here and here).

The World Bank’s top economist, Kaushik Basu, is worried about China’s reliance on credit to fuel growth. He said last week that eventually credit will catch up with it: “We’ve seen that in the U.S. in 2008, and China may have to face up to that sometime in the coming year, or couple of years because of its bloated finances.” Back in April, the IMF’s Global Stability Report warned that China was risking a financial crisis if it didn’t rein in borrowing, and that the country should settle for lower growth in order to save itself from credit calamity (the WSJ has a good summary of the report). “Pockets of stress have already begun to emerge, particularly in the trust sector, with spillovers to other parts of the financial system,” the report says.

Jun 23, 2014
via Data Dive

Housing on the rebound

Did someone say housing recovery? Existing home sales numbers for May were released this morning, handily beating economists’ expectations. Existing homes are now being sold at an annual rate 4.89 million units, up 4.9 percent month-over-month, Reuters reports. Forecasts had put the growth rate at only 2.2 percent. The number of properties on the market is also up, suggesting that the housing market is finally pulling out of its late 2013 slump.

We’re not quite out of the slump yet, however. Sales are still down 5 percent from May of 2013, particularly in the western part of the country:

Jun 20, 2014
via Data Dive

Auto industry looks up

Car companies are taking advantage of low interest rates and expanding their finance arms — so much so that they are nudging out the big banks, Reuters reported this week. Automakers made half of new car loans last quarter, up 37 percent from a year earlier. According to Reuters:

The automakers are in a position to offer the deals because their cost of borrowing has gone down as their balance sheets have improved and as bond investors have lined up to buy securities backed by loans and leases.

Jun 19, 2014
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Fed hawks

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The Fed’s Open Market Committee concluded its two-day June meeting yesterday with a moderately positive note: economic activity has rebounded from the terrible first quarter and labor market conditions seem to be improving, according to the statement. That said, because of said terrible first quarter, the outlook for U.S. economic growth is lower than it was at the last policy meeting in April: the Fed now expects the economy to grow 2.1-2.3%, compared to 2.8-3% previously.

Interest rates still remain unchanged, but Fed chair Janet Yellen cautioned the market not to be too confident that they will stay that way. “She noted there is a wide range of views even among Fed officials about where rates will be by 2016. Fed forecasts range between 0.5% and 4.25%,” writes Jon Hilsenrath.

Jun 18, 2014
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Valeant effort

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Things are getting uglier between Valeant Pharmaceuticals and Allergan, the maker of Botox. The former, with a little help from hedge-fund manager Bill Ackman, is attempting a hostile takeover of the latter (previous coverage here). Over the last few weeks, Valeant has been slowing upping its bid for the company (to $53 billion from the original $45 billion). That’s pretty normal in mergers and acquisitions, says Daniel Hoffman of Pharmaceutical Business Research Associates. What’s interesting about Valeant’s bid is that “within this same span of a few weeks, attitudes in both pharma and the investment community made a radical turn from mild approval to complete revulsion.”

The latest development in this saga, writes David Gelles, is that Valeant plans to take an exchange offer to shareholders, offering them a mix of cash and stock for their shares. Matt Levine says this is “mostly a cosmetic development” since “the shareholders can’t accept the exchange offer until Allergan rescinds its poison pill, and that’s not gonna happen unless the board agrees or is voted out at the special meeting Valeant is trying to call.” Allergan’s poison pill aims at preventing Ackman significantly expanding his 9.7% stake in the company by offering discounted shares to other stakeholders if any unapproved investor acquires 10% or more of Allergan’s stock.

Jun 18, 2014
via Data Dive

Inflating CPI

Inflation is finally looking up. US consumer prices rose 0.4% in May — the biggest one-month jump since February 2013 and twice what economists expected. This rise  could have implications for the Fed’s two-day policy meeting this week, though Reuters reports the expectation remains the same: the taper will continue, but an interest rate hike is still months off.

Reuters has more context about the CPI report:

May’s rise in consumer prices built on a 0.3 percent advance in April. With tensions escalating in Iraq, a major world oil producer, inflation is likely to push higher in the coming months.

Jun 17, 2014
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Argentina’s bills come due

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Argentina lost not one but two Supreme Court cases on Monday regarding paying back bonds that it issued before its 2001 default. First, in what Noah Feldman calls a “legally surprising, financially worrisome, and internationally questionable” move, the court declined to hear Argentina’s appeal regarding the Second Circuit decision last fall. In that case, the court found in favor of Paul Singer’s hedge fund Elliott Management, a “holdout” bondholder that did not agree to Argentina’s debt restructurings in 2005 and 2010 after its 2001 default. Second, and somewhat tangentially, the court found in a 7-1 decision that NML Capital, a subsidiary of Elliott, can seek information about Argentina’s finances to get its money back from the country.

By declining to hear the big case, the court “made final and binding” lower court decisions that Argentina is required to treat its bondholders equally says SCOTUSblog. (Felix Salmon has a good explanation of that ruling, and a video explainer of the whole case here.) This is big not only for Argentina, but for future sovereign debt cases litigated in the United States. “Pari passu will now be enshrined as a powerful enforcement device in New York-law sovereign debt”, says Joseph Cotterill. Peter Eavis thinks this could be a good thing, writing, “Once countries realize that it is harder to get an advantageous deal when defaulting, they may be less likely to take on too much debt”. (Salmon disagrees.) Practically, this “raises the cost to banks which are still dealing with Argentina or other defaulting nations”, says Tyler Cowen.

Jun 16, 2014
via Counterparties

Oil shock

The violence in Iraq continues as radical Islamist militants from the Islamic State of Iraq and the Levant (ISIL) try to seize more territory in the northern part of the country. Iraq is the second largest oil producer in OPEC (after Saudi Arabia) and the conflict is likely to affect production in the region. The price of brent crude oil climbed from just over $108 per barrel last Monday to more than $113 today, closing at $112.94. Mark Shenk reports for Bloomberg that analysts expect the price to average $116 by later this year, although prices won’t necessarily go too much higher if the fighting stays in the north of the country, where comparatively little oil is produced.

While ISIL was fighting in Mosul, the independence-minded Kurds seized the opportunity to take control of Kirkuk, an oil-rich city in northeast Iraq (great background on that in Al Jazeera). “This crisis is a lifeline for the Kurds”, political risk analyst Kirk Sowell says in Vox. Earlier this year, Baghdad cut off money to the semi-autonomous Kurdish region because of a political dispute over exporting oil to Turkey. By May, the region was nearly insolvent. However, now that they’ve taken control of Kikurk, the Kurds can pump oil directly to Turkey without intervention from Baghdad. In the short term, though, the Kurds still have problems. A major pipeline to Turkey was destroyed in the fighting last week, and “the violence will doom attempts to repair the pipeline anytime soon, delaying major Kurdish oil exports”, says Nick Cunningham.

Jun 16, 2014
via Data Dive

FIFA sponsors get involved in Qatar bribery allegations

Earlier this month, the Sunday Times published allegations that a Qatari official bribed FIFA to choose Doha for the 2022 World Cup. Since, there’s been lots of back and forth on what happens now. Qatar has denied the allegations, but there are rumors that FIFA told the United States to be ready if the organization decides to move the event (which, for the record, FIFA has denied).

Last week, Reuters reported that one group that can’t easily be ignored has gotten involved. Some of FIFA’s biggest corporate sponsors began publicly calling on the organization to take a thorough look into the allegations. Such public concern from sponsors is rare, and indicates that FIFA has a lot of money to lose if it handles this the wrong way. Here’s what the financial picture looks like:

Jun 13, 2014
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Bratinomics

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Three days after the Primary That Shook the Universe, we know what next year’s Congress won’t include: House majority leader Eric Cantor. In his place there will be lots (more) partisan rancor, a decent chance of another debt-ceiling battle, and an economics professor named David Brat. Brat ran at Cantor from the right, and his academic pedigree means that he’s left a long paper trail over the years.

When Brat gave credit to God in his victory speech, it wasn’t just posturing. “In his writings, Brat seems eager to fuse Christianity and the generally secular field of academic economics”, says Kevin Roose. Brat’s work often focuses on what makes countries rich or poor, and he closely links Protestant beliefs with free markets. In a 2004 paper he wrote, “give me a country in 1600 that had a Protestant-led contest for religious and political power and I will show you a country that is rich today”. Protestantism, he says, “provides an efficient set of property rights and encourages a modern set of economic incentives”. That’s not an entirely new idea. “Sociologist Max Weber said essentially the same thing (only much, much better)” back in 1905, saysCandida Moss.