Showing posts from April, 2010

Beyond the Greek Crisis: Will Capitalism Survive?

Reuters reports, Greece readies austerity measures, markets steady:
Union officials said the International Monetary Fund asked Athens to raise sales taxes, scrap bonuses amounting to two extra months pay in the public sector, and accept a 3-year pay freeze."They want Greece to cut the deficit by 10 percentage points in 2010 and 2011 ... so that Greece can go back and borrow on markets in the third year of the program," said a union official who requested anonymity.Andreas Loverdos, social affairs minister, said pensions would be reformed. "There isn't much room for maneuver -- this is about saving the country from collapse," he told the FT.IMF, European Union and European Central Bank officials are in Athens to negotiate the bailout and hope to wrap up a deal within days in an effort to prevent the debt crisis from sinking other fragile EU countries.German politicians have said the aid package could be worth 100-120 billion euros ($133-160 billion) over three ye…

Toppling Goliath?

Reuters reports, Pension funds eyed debt, property in 2009:
European pension funds hired more fund managers in 2009 than in the previous year to take advantage of bargains in crisis-hit asset classes, a study by Mercer said on Tuesday.In the UK, manager searches recovered to pre-crisis levels hitting 245 from 189 in 2008 and 242 in 2007. Pension schemes in Europe and around the world are moving towards a broader investment strategy, which involves allocations to alternative assets such as property and hedge funds aside from traditional areas such as equity and bonds.The crisis accelerated this trend, allowing investors the opportunity to buy new assets at lower costs.The asset class that benefitted most according to the Mercer study was global fixed income, where manager searches rocketed to 45 from two in 2008."For both corporate bonds and real estate, an element of pent-up demand was realised in 2009 as many investors had been waiting for more realistic prices before committing …

The Goldman Goose?

Louise Story of the NYT reports, Panel’s Blunt Questions Put Goldman on Defensive:
Even before the first question was leveled inside the Senate chamber, Tuesday was going to be uncomfortable for Goldman Sachs. But then the questions kept coming — and coming and coming. Through the day and into the evening, Goldman Sachs officials met with confrontation and blunt questioning as senators from both parties challenged them over their aggressive marketing of mortgage investments at a time when the housing market was already starting to falter. In an atmosphere charged by public animosity toward Wall Street, the senators compared the bankers to bookies and asked why Goldman had sold investments that its own sales team had disparaged with a vulgarity. “The idea that Wall Street came out of this thing just fine, thank you, is just something that just grates on people,” said Senator Edward E. Kaufman Jr., a Democrat from Delaware, said. “They think you didn’t just come out fine because it was l…

Pension Bomb Ticks Louder?

The WSJ reports, Pension Bomb Ticks Louder:
The time-bomb that is public-pension obligations keeps ticking louder and louder. Eventually someone will have to notice. This month, Stanford's Institute for Economic Policy Research released a study suggesting a more than $500 billion unfunded liability for California's three biggest pension funds—Calpers, Calstrs and the University of California Retirement System. The shortfall is about six times the size of this year's California state budget and seven times more than the outstanding voter-approved general obligations bonds. The pension funds responsible for the time bombs denounced the report. Calstrs CEO Jack Ehnes declared at a board meeting that "most people would give [this study] a letter grade of 'F' for quality" but "since it bears the brand of Stanford, it clearly ripples out there quite a bit." He called its assumptions "faulty," its research "shoddy" and its…

When the Facts Change?

In my last post, I went over the IMF's latest World Economic Outlook, as well as some comments made by Bank of Israel Governor Stanley Fischer.

Interestingly, more and more experts are saying that the global recovery will be stronger than anticipated, but that once the stimulus measures wear off, and developed nations deal with their fiscal problems, growth will moderate.

There is also unanimous consensus that extraordinary policy intervention has eliminated the risk of a second Great Depression and that advanced economies don't face a deflationary threat.

I'd like to explore the deflationary threat in more detail. Why is this topic so important? Because the long-term trajectory of the global recovery, and the health of the global financial system, crucially hinge on whether inflationary forces swamp deflationary forces.

Those of you who have followed my blog know that I've been bullish on stocks since last year. Record low interests rates have been a boon for banks and he…

A Fragile Global Recovery?

Larry Elliott of the Guardian reports, Western economies too weak for spending cuts, IMF warns:
The International Monetary Fund today provided a boost for Labour's campaign strategy when it warned rich western countries that their economies were too weak for spending cuts, tax increases or higher interest rates.In its influential World Economic Outlook, the IMF said the recovery in global growth over the past year had relied on "highly accommodative" policies and there was a risk of a relapse."In most advanced economies, fiscal and monetary policies should maintain a supportive thrust in 2010 to sustain growth and employment," the WEO said."Regarding the near term, given the fragile recovery, fiscal stimulus planned for 2010 should be fully implemented, except in countries that are suffering large increases in risk premiums," the IMF added.The fund's comments are likely to be seized upon by Gordon Brown, who has been arguing the UK coul…

A Group Pension Fix?

Jack Mintz's writes in the National Post, A group pension fix:
Governments are searching for new measures to help Canadians save for their retirement. One proposal among current federal consultations: Amend regulations to allow insurance companies or other providers, including government-sponsored pension plans, an opportunity to effectively provide multi-employer pensions.

Here is an alternative proposal that could have a big impact in helping business provide multi-employer plans at a relatively low cost: Eliminate the current discrimination against group RRSP plans by enabling companies to deduct their employer contributions from the tax base used to determine CPP, EI and other payroll taxes. At present, employer contributions to pension funds are deductible but not in the case of group RRSPs.

Why would this be important? Many companies are abandoning defined benefit plans — pensions with benefits based on years of service and salary levels — in favour of defined contribution plan…

Second Wave of Financial Crisis?

Jim Bianco warns, "Punishingly High" Interest Rates Coming in Second Wave of Financial Crisis: As this week's earnings show, banks are once again printing money, lots of it; and most economists believe the recession is a thing of the past, even if jobs are still hard to come by.Unfortunately, Jim Bianco President of Bianco Research in Chicago thinks this might be the eye of the storm rather than the dawn of a new day. "My fear is, history shows, we might have a second leg to the financial crisis in [the form of] a sovereign debt crisis."The crisis is of course already visible in Greece where yields on their 10-year government bonds just hit a record high as Europe works out a bailout package for the heavily indebted nation. Meanwhile, in Portugal - another one of Europe's so-called PIIGS - bond yields are also spiking, fueling suspicion the debt crisis may spread.With huge federal deficits, this something the U.S. also needs to worry about. "I'm n…

Will SEC "Witch Hunts" Hurt the Economy?

Jim Bianco was on Yahoo Tech Ticker on Tuesday saying that SEC "Witch Hunts" Could "Hurt the Economy in the Long Run":
The party may have just ended on Wall Street. Stellar earnings from Bank of America, JP Morgan, Citigroup and Goldman Sachs are all being overshadowed by the SEC's fraud charges against Goldman.Did the SEC just take away Wall Street’s punch bowl with this suit? "They might have," says Jim Bianco, President of Bianco Research in Chicago. "The structured CDO business is basically dead" but there were $40 to $50 billion of deals like this per quarter in 2007 and 2008, Bianco says, noting Goldman was just one of many banks active in the market.If the SEC wins the Goldman case, "this would have far-reaching effects," he says. "I think they're setting a precedent for many other CDO cases and many, many other fines. Not just at Goldman but basically at all investment houses." If the SEC makes CDOs the scapego…

Staving Off the Pension Crisis?

John Crocker, President & CEO of Healthcare of Ontario Pension Plan (HOOPP), writes in the Toronto Star,Staving off the pension crisis:
Canada is headed for a retirement income crisis. The last 20 years have seen a steady shift of retirement income risk from employers to workers, and studies show Canadians are not saving enough for retirement on their own.According to experts, you need about $20 of savings for every dollar of retirement income you want to receive. So if you seek an income of $50,000 a year, you need to save $1 million. If you want $25,000 a year, you need $500,000. Yet the average Canadian has only about $60,000 in his or her RRSP at the time of retirement. RRSPs simply aren’t working for most Canadians.As a result, I worry that as a country we are undoing decades of success at raising the standard of living for retired people and shrinking the scourge of elderly poverty. Canadians share my concern. According to research conducted for HOOPP this month, 8…