Back to school
The school holidays are
over, and parents are returning to work – if they have
any. In the finance industry, this means taking life
seriously again, and giving proper consideration to the
issues of the day. For those fortunate enough to have
been able to switch off totally, there is little that is
new but much has been put on hold. Here is a short list
of topics to consider:
1.
In
Euroland, the
Greeks have still not come up with details of how much
government debt as been concealed through swap deals,
having lied about them to Eurostat (the EU’s statistics
agency). The spread over German bunds for Greek
government debt is back at record levels. Time is
catching up with debt roll-overs for all the PIIGS, with
record government debt issuance due in September. This
raises the possibility of bond market dislocation unless
there is a helping hand from the ECB. Ireland is being
stretched by continuing bail-out demands from its banks,
notably Anglo-Irish Bank which is asking for a further
€25bn injection.
2.
Leading
indicators for the US economy are deteriorating
again, with the Weekly Leading Index negative for the
last three months and beginning to deteriorate further.
Problems in the housing market are increasing, with
$750bn HELOCs (Home Equity Lines of Credit) more or less
worthless. Expect revised estimates for budget deficits
in the coming weeks as America approaches the end of its
fiscal year. They will be grim, with some economists
revising their expectations to over $2 trillion. We
will see if this pops the Treasury bubble.
3.
In the
UK the
coalition is still trying to work out where and what
government expenditure to cut. Vince Cable floated the
idea of cutting funding for non-essential scientific
research, and as a born-again capitalist was not
convincing. If this is all they can do, the cuts are
unlikely to be as meaningful as touted, and will be
swamped by the economic downturn. The gilt market is
wildly over-valued and is an accident waiting to happen.
4.
Gold
and silver
are chipping away at new highs – hardly an endorsement
of official confidence. The number of US financial
stocks hitting new lows is at a 52 week record, and the
number of gold stocks hitting new highs is at 52 week
highs.
5.
An
increasing number of commentators are becoming aware of
difficulties ahead, including economists of all stripes.
The balance of opinion is that deflation is a greater
risk than it was three months ago, and that the central
banks must print money to stop it.
6.
BASEL
III, which
will lay down revised rules for banks’ balance sheets,
is due to report on or about 12 September. These will
further encourage banks to lend to governments at the
expense of the private sector. This is because no
haircut will be required on valuations of government
debt, and the haircut for government sponsored entities
will be a preferred rate of 15%. As well as
discriminating against the private sector, this amounts
to a huge subsidy for Fannie and Freddie, encouraging
banks to take on more of this toxic debt and ensuring
that the government guarantees for them cannot be
removed without precipitating a banking crisis.
It looks like we have a
rough autumn ahead.
8 September
