Unstructured Finance

Most overvalued asset in the rich world is?

The following is a contribution from our chief Federal Reserve reporter, who is out in the field  at The Economist magazine’s annual economics conference:

By Jonathan Spicer

What is the most overvalued asset across the world’s advanced economies? Vincent Reinhart, the chief U.S. economist at Morgan Stanley, posed that rhetorical question on Thursday at one of New York’s signature economics conferences. After a pause: “The answer is, voters’ expectation of the net present value of the entitlements they … are expecting. Why? Because they by and large don’t have a tax system to support that,” Reinhart said.

It was a cold shot of reality as the United States roars toward the so-called “fiscal cliff” on Jan. 1, when a series of automatic tax rises and spending cuts will take hold and seriously damage the economy – unless lawmakers step in to prevent them. Most economists and investors are still betting the worst of the cliff will be avoided, probably by putting off tough questions on tax reform and longer-term government spending. That means Congress kicking the can down the road – yet again – on finally setting a plan to meaningfully reduce the massive U.S. debt after three straight years of budget deficits topping $1 trillion.

Reinhart, a former U.S. Federal Reserve official, continued his argument at the conference hosted by The Economist magazine: “So the most important thing to do to get fiscal consolidation right is to have a conversation with your population that they are not as wealthy as they think they are.” That conversation has not happened so far in the presidential election campaign. And not that it will before the Nov. 6 vote. The problem, as panel moderator Philip Coggan of The Economist pointed out, is getting “the 2013 Congress to commit the 2015 Congress” to such painful programs.

For other views on the fiscal cliff, please see my interview earlier this week with Joseph Stiglitz, a Columbia University economics professor and Nobel Prize winner, who said that that is his biggest economic fear. He also said millionaires are keeping some of their income in offshore locations like the Cayman Islands to protect it from taxes. Youtube URL: http://www.youtube.com/watch?v=tCKcTMfdOVk

UF Weekend Reads

Two weeks of speechifying by the Dems and Reps has come to an end. Well not really–but the conventions are over. And for all the talk, there is one issue that got short-shrift–a solution to the nation’s still unfolding housing crisis.

Oh sure, there was talk about foreclosures and people struggling to pay the mortgages on their homes, but not a lot time for potential solutions.  And that’s unfortunate because as has been noted many times before, it’s going to be hard for the U.S. economy to take off as long as too many consumers are being crushed by mortgage debts they can barely afford.

Indeed, the disappointing August jobs report is a sober reminder of just how much work remains to get the economy humming again.  As we’ve said many times before on U,F it all still comes down to fixing housing, housing housing.

Daniel Loeb goes long Chesapeake bonds; leaves activism to others

Daniel Loeb, who runs $8.7 billion at his hedge fund Third Point, has been an opportunistic buyer in the bonds of Chesapeake Energy, the embattled natural gas producer, according to sources familiar with the matter.

But Loeb, known to rattle the cages of companies for years (see: war with Yahoo), isn’t piggybacking on Carl Icahn’s or O. Mason Hawkins’s activist role in Chesapeake, demanding changes in management or the overhaul of its business practices.  Indeed, all the elements are there for a veteran agitator like Loeb, as Chesapeake has been embroiled in scandal over a controversial investment program involving CEO Aubrey McClendon.

But the New York-based hedge fund manager, who told his investors in June that Chesapeake is now his fund’s fourth largest position, could simply be making a straight investment play and leaving the rest to Icahn and Hawkins. Imagine that?

Eminent Domain reader

Jenn Ablan and I have done a lot reporting on Mortgage Resolution Partners’ plan to get county governments and cities to use eminent domain to seize and restructure underwater mortgages. As we’ve reported, it’s an intriguing solution to the seemingly intractable problem of too much mortgage debt holding back the U.S. economy. But it’s also a controversial one that threatens to rewrite basic contractual rights and the whole notion of how we view mortgages in this country.

And then there’s the issue of just who are are the financiers behind Mortgage Resolution Partners and whether they’ve gone about selling their plan in the right way.

The debate over using eminent domain has sparked a lively debate on editorial pages, on blogs and in other media, and that debate is likely to continue now that Suffolk County, NY says it is looking at eminent domain just like San Bernardino County, Calif.  So here’s a bit of sampler of some of the differing views and coverage on this important topic:

UF Weekend Reads

Nice weather today in NYC. Enjoy it today before Sunday’s deluge. Here’s Sam Forgione’s picks. You can now follow Sam on twitter @samuelforgione

 

From The New Yorker:

Nicholas Lemann explores new books that illustrate the ties between politics and the economy.

From BusinessWeek:

Lazard’s Michele Lamarche takes on the tough task of courting debt-strapped nations.

Einhorn’s Field of Dreams

By Matthew Goldstein

David Einhorn’s decision to plunk $200 million on the cash-strapped NY Mets could be a bullish development for investors holding the bonds to finance the baseball team’s new stadium.

At last look, most of the bonds that were sold in 2006 to finance the construction of Citi Fields were selling for between 79 cents and 85 cents on the dollar. The distressed price for the $547 million bond issuance is a reflection of the dire financial situation the Mets are in and the reason principal owner Fred Wilpon is selling a big minority stake to Einhorn.

But if Major League Baseball approves the deal with the Greenlight Capital hedge fund manager, it could boost the value of those stadium bonds.

Cheyne hedge fund spots RBS opportunity

M&A is on the up again and hedge funds are getting ready – last week we revealed Cheyne Capital had raised over $100 mln for an event-driven fund.

The fund will concentrate on ‘hard’ news (as opposed to rumours of deals), but, as suggested in their name, such funds can look at a wider range of events than just M&A, including restructurings, debt refinancings, asset sales, share buybacks and so on.

In Cheyne’s case, it has spotted what it thinks is a great opportunity in Royal Bank of Scotland debt.

Check Out Line: More good news about rebounding consumers

SHOPPERS2Check out the latest encouraging news about U.S. shoppers dusting themselves off and shelling out their hard earned cash again.

U.S. consumers spent more in February than expected, despite buying fewer cars and being stuck at home shoveling record amounts of snow in many parts of the country.  The U.S. Commerce Department said on Friday that total retail sales rose 0.3 percent, from necessities to luxury items. Excluding motor vehicles and parts, retail sales rose a bigger than expected 0.8 percent in February.

This comes on top of better than expected February sales reported last week at many top U.S. retail chains.

DealZone Daily

Auto maker General Motors is grappling with the future of its European units Saab and Opel after one sale collapsed and the other was pulled, targeting the bulk of its 9,000 job cuts at Opel’s German factories.

Bookseller Borders UK called in the administrators yesterday, adding its name to a growing list of failed British high street retailers. Administrator MCR is hoping to sell the business, bought by Valco (the private equity arm of turnaround specialist Hilco) in July this year, as a going concern.

Lachlan Murdoch, son of News Corp chief executive Rupert Murdoch, sold some $27.6 million of his shares in his father’s company as he bought 50 percent of Daily Mail & General Trust’s radio operations in Australia.

Reliance aims big with $12 bln bid for LyondellBasell

Ranked by Forbes as India’s richest man with a net worth of $32 billion, Mukesh Ambani is no stranger to taking risks.

The move by conglomerate Reliance Industries, controlled by Ambani, to bid for bankrupt LyondellBasell is a calculated one. Markets seem to think this is a bargain and investors pushed up Reliance’s stock nearly 4 percent on Monday.

If the deal, which sources say may be worth $12 billion,  goes through, it would catapult Reliance into the ranks of top petrochemical makers such as Saudi Arabia’s SABIC, Germany’s BASF and Dow Chemical Co.

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