The S&P500 has made a full circle since its April 2, 2012 peak. The index closed at 1,419 on that day, but then steadily lost steam as Q1 earnings poured in. Disappointing earnings pressured the index, and by the end of the earnings season, the S&P500 had lost ~10%. The standout performers during downtrun were Telecom Services, Utilities, and Food and Staples Retailing. Not a surprise there.
The S&P500 troughed on June 1, 2012 at 1,278. It was the day May non-farm payroll surprised to the downside by a big chunk (+69K vs +150K consensus and downward revision for the prior months). The S&P500 traded lower the next day but snapped back above the 200-day moving average the day after. Thereafter it grinded higher on combination of favorable comments from the Fed and the ECB members, and on better than expected US macro data. The start of the Q2 earnings season on July 9th meant that investor focus shifted to corporate news from macro headlines. From June 1 to August 21, when the S&P500 touched 4-year high on the intra-day basis (1,426), it gained ~10%. Energy and Tech led the rallies but their outperformance was relatively muted. Telecom Services and Pharma lagged but only slightly.
The bottom line is that the defensive sectors (Telecom Services, Pharma, Food & Staples Retailing and Software and Services) have acted much better both in the downturn as well as the upturn. Cyclical sectors (Autos, Semis and Consumer Durables and Apparel) have fared the worst.
The S&P500 is hitting against important resistance levels. If it were to make a next leg up, I would bet that the cyclicals will have to do the heavy lifting. That means, if you are bullish, buy Semis, Materials, Diversified Financials and Tech Hardware.
Earl Long, the colorful late former Governor of Louisiana once offered this advice on Louisiana politics: "Don't write anything you can phone. Don't phone anything you can talk. Don't talk anything you can whisper. Don't whisper anything you can smile. Don't smile anything you can nod. Don't nod anything you can wink." That advice is equally applicable to Wall Street but with a caveat "Don't e-mail anything, you can write on paper. Don't write anything on paper, you can phone....."
1. 'You f.cking Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians'.
In October 2006, the head of the Standard Chartered’s American operations allegedly sent a panicked message to a Group Executive Director in London, saying that the bank’s handling of Iranian clients could cause 'catastrophic reputational damage'. The above is said to be the reply the American got for his troubles.
2. 'Dude. I owe you big time! Come over one day after work and I'm opening a bottle of Bollinger'.
External trader to a Barclays trader who allegedly asked for a low LIBOR submission.
3. 'Just made it to the country of your favourite clients (Belgians)!!! I have managed to sell a few Abacus bonds to widows and orphans that I ran into at the airport, apparently these Belgians love synthetic ABS CDO2!!!!'.
Fabrice Tourre, an Executive Director in Goldman's Structured Products, Group Trading unit, messaging a girlfriend.
4. Many of the 'e-mails they'd like you to forget' were sent by equity analysts. Here are some other gems which appeared in the press a few years back:
'If I so much as hear one more f.....g peep out of them, we will put the proper rating...on the stock'. (Citigroup)
'If you can't say something positive, don't say anything at all'. (CSFB)
'Question 'What's so interesting about GoTo except investment banking fees ?' Answer - 'Nothin'' (Merrill Lynch)
'Triangle is a very important client. We could not go out with a big research call trashing their lead product'. (UBS)
'For the record, I have attempted to downgrade RSL THREE times over the last year but have been held off for banking reasons each time'. (Lehman)
'I can't believe what a POS that thing is. Shame on me/us for giving them any benefit of the doubt'. (Merrill)
While on the subject of stock analysts, it would be remiss not to mention former Citigroup man Jack Grubman. Former New York State Attorney General Eliot Spitzer released 'report cards' on Grubman. These were compiled by some of Citigroup's own brokers and investment bankers.
Here's a selection of what Grubman's colleagues allegedly said about him:
'Not all four letter words are bad ones. Perhaps some of the analysts, like Grubman, should consider this one: SELL'.
'A monkey could pick better stocks than he could'.
'Please do not fire Jack. He is my No.1 indicator - I do exactly what he says not to'.
5. 'Ratings agencies continue to create an even bigger monster - the CDO market. Let's hope we are all retired by the time this house of cards falters'.
'Screwing with criteria to 'get the deal' is putting the entire S&P franchise at risk - it's a bad idea'.
6. Bear hedge fund manager Matthew Tannin sent the e-mail below to his boss, Ralph Cioffi, in April 2007- months before two Bear hedge funds collapsed. Prosecutors used it to bolster their case that the two men had committed fraud.
'The supbrime market looks pretty damn ugly ... If we believe the (report) is ANYWHERE CLOSE to accurate I think we should close the funds now....the reason for this is that if (the report) is correct then the entire subprime market is toast'.
The matter ended up in court, and all over the front pages. In the end, and after a lot of aggro, both fund managers were found not guilty by a New York jury.
In his monthly Investment Outlook, Mr. Bill Gross, the Bond King had not so nice things to say about Mr. Jeremy Siegel, the Stock Guru. Basically, Gross said Siegel's argument that "Stocks are for the Long Run" does not make economic sense. Both are clearly the leaders in their respective fields and their fiesty debate on CNBC is an interesting side-show.
The long-term history of inflation adjusted returns from stocks shows a persistent but recently fading 6.6% real return since 1912.
The legitimate question that market analysts, government forecasters and pension consultants should answer is how that return can be duplicated in the future.
Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades.
The cult of equity is dying. Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors’ impressions of “stocks for the long run” or any run have mellowed as well. I “tweeted” last month that the souring attitude might be a generational thing: “Boomers can’t take risk. Gen X and Y believe in Facebook but not its stock. Gen Z has no money.” True enough, but my tweetering 95-character message still didn’t answer the question as to where the love or the aspen-like green went, and why it seemed to disappear so quickly. Several generations were weaned and in fact grew wealthier believing that pieces of paper representing “shares” of future profits were something more than a conditional IOU that came with risk. Hadn’t history confirmed it? Jeremy Siegel’s rather ill-timed book affirming the equity cult, published in the late 1990s, allowed for brief cyclical bear markets, but showered scorn on any heretic willing to question the inevitability of a decade-long period of upside stock market performance compared to the alternatives. Now in 2012, however, an investor can periodically compare the return of stocks for the past 10, 20 and 30 years, and find that long-term Treasury bonds have been the higher returning and obviously “safer” investment than a diversified portfolio of equities. In turn it would show that higher risk is usually, but not always, rewarded with excess return >>>
Last Friday's July employment report surprised to the upside. The upside came from a robust growth in private payroll. There was some hint of such outcome earlier in the week in the form of the ADP report. But be as it may, markets rallied on the back of this report.
While the report was better than what could have been, some economists raised the issue of"seasonality". July is a tough month for calculating seasonal factor because teachers are off for the summer break and auto workers stay home as plants stay idle. Even ignoring this issue, the report was not great.
Private payroll peaked in January 2008 at 138 million and troughed in February 2010 at 129 million. The latest release showed 133 million workers suggesting 130K a month job growth since the bottom. At this growth rate, job level will not reach January 2008 peak until early 2015.
We calculate monthly job growth required to get unemployment rate back to 6% by January 2015 on different population growth and participation rate assumptions. The bottom-line is that 160K is the minimum required.
From January 2008 to February 2010, 8.7 million jobs were lost. Since February 2010, 4 million jobs have been re-gained, meaning there are still 4.7 million jobs missing. Those 4.7 million jobs still missing are in manufacturing, construction and retail trade.
Other interesting facts from the report,
(1) since February 2010, 230K teachers have lost their jobs
(2) manufacturing renaissance is a myth. Only 500K jobs have been re-gained since February 2010, while job loss between January 2008 and February 2010 was 2.2 million, meaning a net loss of 1.7 million jobs since the recession.
Mario Draghi "Overpromised on July 26 and under-delivered on August 2". Markets reacted accordingly. With the earnings season in the US tapering off, macro factors, more specifically around euro survivability, will start to dominate again. Expect volatility to trend higher.
On July 26, Draghi said, "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough". Investors were caught off-guard by such unexpected comments. That caused an instant rally in the euro, the Spanish 10-year, Dax and the S&P500 future.
On August 2, Draghi could not even deliver a rate cut (benchmark rate stayed at 0.75%) let alone convince policymakers at the ECB and the wider Europe to pursue aggressive policies like Securities Market Purchase, ECM banking license etc. Not surprisingly, all the asset classes fell in unison as soon as Draghi opened his mouth at the bi-weekly post-ECB meeting press conference.
The charts on the left (click on it to enlarge) show the schizophrenic reaction of different asset classes to Draghi's comments.
Stock markets were pretty sanguine today despite being hit by trifecta of major economic data, the ADP employment pre-market, the ISM during the early morning trade and the FOMC decision before the close. The most significant and the most waited of all was the 2:15PM EST Fed announcement. Investors were anxiously waiting for Bernanke’s team to give hints of QE3. Surprisingly, they didn’t although there was a slight change in the language. Equity investors shrugged off the “bad” news. May be they are expecting “Super Mario to Save the Market” tomorrow.
From the economic standpoint, the more relevant data was July ISM. It missed economists’ estimates and was the second consecutive month of sub-50 reading. More ominously, the gap between New Orders and Inventory indices was negative for the first time since September last year. A negative reading is usually a precursor for a downturn in ISM. Last year’s negative readings (July and August) were exception mainly because the Fed embarked on QE2. Everyone is expecting the Fed to do again (QE3) in September. Bernanke may prep the market in his Jackson Hole speech like last year. If the Fed does not do QE3, for whatever reason, or even if it does but is ineffective, then the downward momentum in ISM may be unstoppable.
Corn futures have jumped massively in recent weeks. It made fresh new high today.
A record high price for corn is caused by fears of supply shock owing to (1) harsh weather condition and (2) very low inventory.
The USDA tracks the weather condition during the growing season on a weekly basis. According to the USDA, "excellent condition" has plunged to the lowest level ever.
Inventory has been plunging since 2009, thanks to a jump in usage of corn to make ethanol. In 2002, 10% of domestic corn production was used to make ethanol. In 2011, it has reached 40%, and it the amount was more than used for feedstock.
The annual revision to GDP last Friday was a non-event. The annual revision, which goes back 3 years (from 2009-Q1 through 2012-Q1), the BEA revised the growth profile marginally (2009 +0.4%, 2010 -0.6%, 2011 +0.1). The net result was that real GDP level in 2012-Q1 was 0.1% higher than before the revision.
Last year, the BEA revised down the growth profile massively (2008 -0.3%, 2009 -0.9%, 2010 +0.1%. The net result was that real GDP level in 2011-Q1 was lower by a whopping 1.6% versus before the revision.
Following the “out of the left field” annual revision last year, market started to price in QE. It eventually got one when Chairman Bernanke give hints of QE2 in a speech at the Jackson Hole Meeting. Looks like market was expecting, or more appropriately, protecting against a similar surprise.
When the annual revision came in as a “non-event”, treasuries sold-off. Last Friday, yield on treasury rose from 1.40% to 1.60% before settling at 1.55% - 20bp move in 10Y treasury is a huge move.
European equities rallied, euro/$ rate jumped over a percent and Spanish 10-year fell by 45bp. All thanks to comments by Draghi at a pre-Olyimpics Global Investment Conference in London this morning.
What did Draghi say? Two things, (1) “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough” and (2) “To the extent that the size of the sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate”.
While the timing of Draghi’s comments came as a surprise, the fact that he talked about euro and sovereign premia did not. In fact, investors were expecting it to come imminently. The simple reason is that every time Spanish yield rose above 6%, there had been some form of reaction from European policymaker, verbally or otherwise, to push the yield back to below 6%. The only difference has been that the pain threshold leading to the reaction has steadily increased over time.
The first time Spanish yield rose over 6% was in July 2011, just a year ago. It rose steadily going into the European Banking Authority (EBA) stress tests results on July 15, 2011. When the results came in, only 8 banks failed and a mere €2.5bn of new capital was required. That along with positive comments on Greece rescue plans ahead of the July 21st EU Summit started to push Spanish yield lower. As such, the auction of Spain’s 18-month T-bill on July 19th was over-subscribed. The EU Summit confirmed investors’ expectations. At the Summit the leaders attempted to prevent Greek contagion from spreading to other peripheral European countries by providing additional help to Greece (extending the maturity of new EFSF loans and significantly lowering interest rates) and allowing the EFSF to buy bonds in secondary markets.
The second time Spanish yield rose over 6% was in November 2011. Again, concerns over the European project rose and reached a peak when the German bond auction was under-subscribed on November 23rd. Again, policymakers started to make noise going into the December 9th EU Summit, which helped push Spanish yield lower. Essentially, the debate started to move towards a fiscal union. The summit confirmed the rumors. They agreed on principal on a fiscal union but did not flush out the details.
This time Spanish bond yield jumped over 7% on concerns that regional governments are seeking financial aid from the central government. On July 22, Bloomberg reported that, “Catalonia May Follow Valencia in Bailout Request”. As the pressure kept building on Spanish bond, the market was waiting for some form of reaction from policymakers and they got one today.
The rally in risky assets is likely to be short-lived because it is short-covering.
S&P500 has broken couple of key technical levels, (1) up-trend since October 4, 2011 low and (2) 50-day moving average.
Looks like it is in the process of forming a head-and-shoulder pattern with the neck around 1,042 level, which also happens to be the 76.4% retracement from October low (1,074) to April high (1,422).
1,040 is a very key technical level. Should it break, then the index is heading to 1,290-1,300 very quickly. Apple earnings after the close today might sent the tone for the short-term move in the S&P500. Personally, I think the set-up for Apple earnings is bullish especially given that the stock has already moved lower heading into the print - it's down again pre-open following results from AT&T. We'll see what happens, we'll just have to wait.
Given that Hedge Funds underperformed the S&P500 in Q1 2012 because they didn't want to repeat the mistake of last year, i.e. they ramped up risk in Q1 but got creamed by market downturn in Q2 and Q3, means if markets survive the treacherous Q2 and Q3, then we're set up for the "mother of all rallies" in Q4 (you read it here first :).
There are lot interesting charts in the latest edition of IMF's Global Stability report. Given the focus of investors on the European sovereign crisis, here are the 4 notable ones.
The ECB has been the most aggressive among the world's central banks in providing liquidity. It seems the Fed is the most conservative, relative to the size of the US economy.
Given the ECB's aggressive stance, credit contraction has been less pronounced there than during other financial crisis. Even in the "worst case scenario", credit cruch will be nowhere as severe as in the US during the 2008-09 crisis.
The IMF estimates that European banks need to shed $1.5 trillion assets during the next year-and-half to bring Tier 1 ratio to the target level. The question is who's going to be the buyers of the assets? The ECB again? The Fed?
Europe's impact on the US banks is something to watch out for given the banks' exposure through their derivatives business. If the crisis spreads to France then the problems will get bigger. If Germany and the UK become victims, then all bets are off.
As playwright Arthur Miller once observed, "An era can be said to end when its basic illusions are exhausted." Most of the illusions that defined the last decade -- the notion that global growth had moved to a permanently higher plane, the hope that the Fed (or any central bank) could iron out the highs and lows of the business cycle -- are indeed spent. Yet one idea still has the power to capture the imagination of the markets: that the inexorable rise of China and other big developing economies will continue to drive a "commodity supercycle," a prolonged upward rise in the prices of commodities ranging from oil to copper and silver, to textiles, to corn and soybeans. This conviction is the main reason for the optimism about the prospects of the many countries that live off commodity exports, from Brazil to Argentina, and Australia to Canada.
I call this illusion commodity.com, for it is strikingly similar in some ways to the mania for technology stocks that gripped the world in the late 1990s. At the height of the dotcom era, tech stocks comprised 30 percent of all the money invested in global markets. When the bubble finally burst, commodity stocks -- energy and materials -- rose to replace tech stocks as the investment of choice, and by early 2011 they accounted for 30 percent of the global stock markets. No bubble is a good bubble, and all leave some level of misery in their wakes. But the commodity.com era has had a larger and more negative impact on the global economy than the tech boom did.
The hype has created a new industry that turns commodities into financial products that can be traded like stocks. Oil, wheat, and platinum used to be sold primarily as raw materials, and now they are sold largely as speculative investments. Copper is piling up in bonded warehouses not because the owners plan to use it to make wire, but because speculators are sitting on it, like gold, figuring that they can sell it one day for a huge profit. Daily trading in oil now dwarfs daily consumption of oil, running up prices. While rising prices for stocks--tech ones included--generally boost the economy, high prices for staples like oil impose unavoidable costs on businesses and consumers and act as a profound drag on the economy.
That is how average citizens experience commodity.com, as an anchor weighing down their every move, not the exciting froth of the hot new thing. The dotcom sensation broke the bounds of the financial world and seized the popular imagination, attracting thrilled media hype around the world and enticing cubicle jockeys to become day traders. There was the dream of great riches, yes, but also a boundless optimism and faith in human progress, a sense that the innovations flowing out of Silicon Valley would soon reshape the world for the better.
Tech CEOs became rock stars because they promised a life of rising productivity, falling prices, and high salaries for generating ideas in the hip office pods of the knowledge economy, or for trading tech stocks from a laptop in the living room. It was impossible in those days to get investors interested in anything that did not involve technology and the United States, so some of us started talking up emerging markets as "e-merging markets," while analysts spent a lot of time searching for the new Silicon Valley, which they dutifully but often implausibly discovered hiding in loft offices everywhere from Prague to Kuala Lumpur.
A decade later the chatter was all about the big emerging markets and oil, but with a darker mood. Commodity.com is driven by fear and a total lack of faith in human progress: fear of a rising phalanx of emerging nations with an insatiable demand led by China, of predictions that the world is running out of oil and farmland, coupled with a lack of faith in the human capacity to devise answers, to find alternatives to oil or ways to make agricultural land more productive. It's a Malthusian vision of struggle and scarcity: of prices driven up by failing supplies and wages pushed down by foreign competition.
Excitement about rising commodity prices exists only among the investors, financiers, and speculators who can gain from it. Commodity.com has inspired many an Indian and Chinese entrepreneur to go trekking across Africa in search of coal mines, yet it has no positive manifestation in the public mind at all. At the height of the tech bubble millions of American high school students aspired to become Stanford MBAs bound for Silicon Valley; today the growing number of oil, gas, and energy-management programs represents a small niche inside the MBA world. The only popular manifestations of commodity.com are complaints about rising gasoline prices and outbreaks of unrest over rising food prices in emerging markets.
It is well-justified unrest. If anything, the negative impact of sky-high commodity prices on the larger economy is underestimated. The price of oil rose sharply before ten of the eleven postwar recessions in the United States, including a spike of nearly 60 percent in the twelve months before the Great Recession of 2008 and more than 60 percent before the economy lost momentum in mid-2011. When the price of oil trips up the United States, it takes emerging markets down with it. In 2008 and 2009 the average economic growth rate dropped by 8 percentage points in both the developed and the emerging world, from its peak pace to the recession trough.
The strongest common thread connecting the dotcom and commodity.com eras is the fundamental driver of all manias: the invention of "new paradigms" to justify irrationally high prices. We heard all sorts of exotic rationales at the height of the dotcom boom, when analysts offered gushy explanations for why a company with no profits, a sketchy business plan, and a cute name should trade at astronomical prices. It was all about the future, about understanding why prices in a digitally networked economy "want to be free," while the "monetization" problem (how to make money on the Internet) would solve itself down the line. The dotcom mania, while it lasted, was powerful enough to make Bill Clinton -- who campaigned as the first U.S. president to fully embrace the "new economy" -- a living emblem of American revival, just as the commodity price boom played a role in making Vladimir Putin a symbol of Russian resurgence and Inácio Lula da Silva the face of a Brazilian recovery. When the rapture is over, the nations and companies that have been living high off commodities will also share the sinking feeling that followed the dotcom boom.
Low-wage Lessons By John Schmitt Center for Economic and Policy Research [Full Link]
The economics of "economic distribution" is not only relevant to politics but also to investment. Given that the US has a such a large share of low-wage earners and the share of that has been trending up for 20 years, it is good news for companies cater to that segment of the demographics like the Wal-Mart and Dollar stores of the world.
According to the OECD, in 2009, about one-fourth of U.S. workers were in low-wage jobs, defined as earning less than two-thirds of the national median hourly wage.
Not only has the U.S. the highest share of low-wage workers in the OECD countries, the incidence of low-wage work has been rising for at least three decades, from just over 20 percent in 1979 to just under 30 percent in 2010.
The minimum wage in the U.S. has been set at a level that is well below the threshold for low-wage work. As a result, it has had little or no impact on the share of the workforce experiencing low pay by the standard definition.
The Federal program, the Earned Income Tax Credit (EITC) which reimburses low-income earners (27 million families, $60 billion in 2009 with complicated eligibility rules (max benefit 4.8K and max earnings 39K) may have exacerbated the low-wage problem in the U.S. because it increased the supply of low wage workers who then do not become eligible for the EITC or get the EITC that is too small.
The Paradox of Low-Risk Stocks By Kent Hargis and Chris Marx [Full Link]
A white-paper by Kent Hargis and Chris Marx, portfolio managers at AllianceBernstein argues that the best stock investment strategy for the long-run is "low-volatility, high-quality".
That begs the question, why low-vol portfolio outperform in the long run? The simple answer is "compounding". A more volatile stock does outperform in upturns but also underperforms significantly during downturns. And following downturns, they take long longer to get to break-even point.
The second question is why does this "anomoly" persist? The authors cite two reasons (1) behavorial biases and (2) agency issues.
From portfolio standpoint low-vol stocks provide additional benefit because they do not share many characteristics with "growth" or "value" stocks. That means their inclusion in a portfolio will enchance the portfolio's efficient frontier.
The third question is, there must be a catch! Yes there is, and that is investors must have "long horizon". So it is ideal for pension fund managers especially given new pension-accounting and insurance-solvency regulations.
Edward J. DeMarco, the acting director of the FHFA gave a speech at the Brookings Institute and talked in details about the US Treasury's programs to help struggling mortgage borrowers. DeMarco said that 11 million homeowners are under-water and raised issues over principal reduction.
Goldman Sachs has developed a "House Price Index" that estimates the percentage of zip-codes with year/year increase in house price. Like the Case-Shiller index, it is bouncing at the bottom. What is not exactly clear is how many zip-codes GS analyzes to create the index but I think it is certainly less than 43,000 zip-codes (43,191 to be precise) in the US.
There seems to be lot going in the Money Market Funds (MMFs). The SEC proposed a rule late last year to let NAV of MMFs fluctuate and to require them to impose higher reserves and restrictions on withdrawals. The SEC has been tightening rules over MMFs since 2008 crisis. In October 2008, Reserve Primary Fund, the oldest MMF "broke the buck" because it held $785 million in Lehman debt out of $64.8 billion in total assets. In May 2010, a SEC rule shortened the average maturity of assets held from 90 to 60 days, required that 10% of a fund be in cash or securities that mature in one day and that 30% of a fund must mature within 60 days. But looks like the SEC's new proposal is dead on arrival owing to push-back from powerful industry players.
Debt and Deleveraging: Uneven progress on the path to growth McKinsey Global Institute, Jan 2012 [Full Link] [Full Report in PDF]
Safely reducing debt and clearing the way for economic growth in the aftermath of the global credit bubble will take many years and involve difficult choices, as MGI’s 2010 report showed.
Two years later, major economies have only just begun deleveraging. In only three of the largest mature economies—the United States, Australia, and South Korea—has the ratio of total debt relative to GDP fallen. The private sector leads in debt reduction, and government debt has continued to rise, due to recession. However, history shows that, under the right conditions, private-sector deleveraging leads to renewed economic growth and then public-sector debt reduction.
These are the principal findings of MGI’s latest perspective on deleveraging, which revisits the world’s ten largest mature economies to see where they stand in the process of reducing debt ratios (United States, Japan, Germany, France, United Kingdom, Italy, Canada, Spain, Australia, and South Korea). It focuses in particular on the experience and outlook for the United States, United Kingdom, and Spain—three countries covering a range of deleveraging and growth challenges. It also examines the relevant lessons from history about how governments can support economic recovery amid deleveraging, and identifies six key markers business leaders can look for to monitor progress of specific countries.
Highlights of the research include:
* The deleveraging process has only just begun in most countries. Based on data up to Q2 2011, total debt has actually grown across the world’s ten largest mature economies since the 2008–09 financial crisis, due mainly to rising government debt. Only three countries in the sample—the United States, Australia, and South Korea—have seen the ratio of total debt to GDP decline.
* The deleveraging processes in Sweden and Finland in the 1990s offer relevant lessons today. Both endured credit bubbles and collapses, followed by recession, debt reduction, and eventually a return to robust economic growth. Their experiences and other historical examples show two distinct phases of deleveraging. In the first phase, lasting several years, households, corporations, and financial institutions reduce debt significantly. While this happens, economic growth is negative or minimal and government debt rises. In the second phase of deleveraging, GDP growth rebounds and then government debt is gradually reduced over many years.
* The historic deleveraging episodes reveal six critical markers of progress: the financial sector is stabilized and lending is rising; structural reforms unleash private-sector growth; credible medium-term public deficit reduction plans are in place; exports are growing; private investment has resumed; and the housing market is stabilized and residential construction revives.
* As of January 2012, the United States is most closely following the Nordic path towards deleveraging. Debt in the financial sector has fallen back to levels last seen in 2000, before the credit bubble, and the ratio of corporate debt relative to GDP has also fallen. US households have made more progress in debt reduction than other countries, and may have roughly two more years before returning to sustainable levels of debt. Deleveraging in the United Kingdom and Spain is proceeding more slowly, and these countries could face many years of gradual debt reduction ahead.
* Understanding the course of deleveraging will be of critical importance both to business leaders, who will need to take a granular approach to strategy, and to governments. The report examines implications for business strategy and suggests that current macroeconomic models do not fully capture the impact of deleveraging on demand—so companies must develop their own views of how deleveraging is proceeding to find pockets of opportunity in the near term. Overall growth in the time of deleveraging is likely to be restrained, but the pace of debt reduction varies across nations and sectors and from place to place within nations. No single country has all the conditions in place to revive growth.
The World Bank lowered its 2012 growth forecast to 2.5% (down from 3.6% forecast in June). Developing countries should expect 5.4% growth (from 6.2%) and developed countries 1.4% (from 2.7%). Euro Area will be in a recession with -0.3% (from +1.8%) growth and China's growth will be at a "dismal" 8.4%.
The FDIC now requires 37 banks with more than $50 billion assets (total $4.14 trillion) to provide "living will" for dismantling them if they collapse. Banks with excess of $10 billion are required to conduct regular "stress test".
The National Science Board released a new report where it outlines trends in U.S. global competitiveness in Science and Technology (S&T). The interesting takeaway is that between 1999 and 2009, the U.S. share of global R&D dropped to 31% (from 38%), whereas Asian share grew to 35% (from 24%). China's R&A grew 28% just in one yar (2008 to 2009) to propell it to the 2nd position behind the US.
Book Excerpt: Breakout Nations
