How I Learned to Quit Worrying and Love Corporate Globalization - New Deal 2.0
Robert Rubin Is Still Wrong And Joseph Stiglitz Is Still Right - Our Future
Rogoff and Reinhart Analysis Has Major Flaw - Seeking Alpha
Student-Loan Debt Surpasses Credit Cards - Real Time Economics
Trade Deficit Explodes - Tim Duy's Fed Watch
Spanish Crisis Threatens Second Front as Catalonia Rates Rise - Bloomberg
Bank Profits a sign of economic sickness, not health - Steve Keen's Debtwatch

Why Russia is not like China

- China sneezes, Russia catches a cold.. but not for banks "With Russia analysis increasingly focused on second-guessing Chinese industrial policies, we were not surprised to be asked about the potential read-across from the Chinese banks stress-test for 60% real estate price falls. Our Chinese banking colleagues conclude this is a potential negative for the sector from an earnings perspective, but not a threat for book value. For Russia, we conclude that there is very limited read-across we can reasonably see:
• the Russian real estate market is at a different point in the cycle vs the Chinese property market as prices have already corrected and activity levels remain relatively subdued
• Russian banks’ mortgage exposure is much smaller, at 6% of gross loans (vs 11% in China) and only 2.5% of GDP (vs14.8%)
• Mortgage momentum remains subdued, with mortgage y/y growth finally in positive territory in May (but up 49% in China)
We look at CBR stress-tests, which were historically more concerned with market volatility (FX, bond, equity price moves), depressed macro environment & liquidity. With 12.4% of sector loans to real estate, including construction & developers, we show that brutal assumptions of 20-50% NPLs with 40-50% recoveries lead to losses equal to 20-22% of equity. Considering non RE collateral revaluations, this adds a shortfall equal to 13% of system loans."
- 2 sector catalysts: stabilising NIMs & volume growth "We continue to favour Russian banking sector, with Sberbank our key pick in EEMEA. We believe there is a strong catch-up & rerating argument considering the performance lag to GEM peers, and we are encouraged by positive developments in 2 key variables: margins & volumes. First, volumes in both retail and corporate have turned a corner and have shown consistently improving momentum (June up 2.1% m/m, July +1.1% FX adjusted, notwithstanding the seasonality and heat-wave). Secondly and even more importantly, is the easing in corporate loans pricing pressure, a lead indicator for future margin evolution. Interest rates on corporate RUB loans rose 10bp in June to 11.5%, while retail deposit rates dropped 40bp to 6.3%, boding well for NIM stability in 2H."
- Foreign banks 2Q results – restarting the engines "With Russian banks results still to be published mid August/ beginning of September, we note the improving trends in foreign banks’ 2Q results: volumes & revenues are up, with provisions volatile q/q but still on an improving y/y trend. Unicredit reported E54m PBT, while SocGen remains loss-making (E42m PBT loss). Due to report on 31 Aug, we see RAIF post E55m PBT in Russia (vs E11m in 2Q 2009)."

Merrill Lynch Russian Banking 20100811

Gold market poised for a rally as US real rates head lower

- Gold prices have sold off on lower speculative positioning … "After rallying to a record high in June, gold prices have declined on a selloff in speculative futures positions and gold-ETF holdings. Although the sell-off in speculative positions might not be surprising given the rise to a record-high price and decreased concerns over European sovereign debt, it stands in sharp contrast to the movements in US real interest rates, which have fallen to near-decade lows."
- … however significantly lower US real rates point to higher prices "Under our gold framework, COMEX gold market positioning tends to reflect US real interest rates, with low US rates driving a high level of net speculative length in gold futures. Consequently, the recent decline in gold net speculative length, even as 10-year US TIPS yields fall below 1.00%,
suggests that the gold market is now oversold, and we expect increasing speculative long positions to carry gold prices back toward our 6-month COMEX gold price forecast of $1,300/toz."
- Renewed quantitative easing measures by the US Fed would be an effective catalyst to drive gold prices higher "We expect the current low real interest rate environment to continue as our US economics team recently lowered their US growth outlook for 2011, with the implication that the US Federal Reserve will likely keep short-term US interest rates low through 2011. This should provide further upside support to gold prices and raise the upside risk to our current gold price forecasts. In addition, our US economics team also expects that the US Federal Reserve will return to quantitative easing measures in late 2010 or early 2011. We believe that a return to quantitative easing could act as a strong catalyst to carry gold prices to higher levels."

GoldmanSachs Precious Metals 20100812

Headwinds Blowing: Focus on Stable Growth/China

- Guidance not so conservative after all? "Given our economists’ recent downward revisions to their US and Japanese GDP forecasts as well as their outlook for persistent yen strength, we now anticipate a more muted earnings recovery and company guidance may not be overly conservative after all. Based on our revised JPY/US$ assumptions of ¥85 in FY3/11 and ¥90 in FY3/12, we now forecast TSE1 EPS of ¥43.4 in FY3/11 and ¥48.5 in FY3/12, representing 62% and 12% yoy growth, respectively, (versus our previous estimates of 73% and 20%)."
- Headwinds suggest more limited market upside "Using our revised earnings estimates, we now believe the market’s upside is more limited and our new TOPIX targets are: 850, 870, and 920 for the next 3-, 6-, and 12-months, respectively (from 900, 950, and 1,020 previously). The key positive risks to our outlook are a stronger US economy and a weaker yen."
- Highlight stable growth and China-exposed stocks "Against a backdrop of weaker US/Japanese growth, firm Chinese growth and a strong yen, we suggest focusing on our new basket of stable growth companies (i.e. GSSZSTGR) and China-exposed stocks (i.e. GSSZJPCN or GSSZCIND). Reflecting our more cautious near-term market outlook, we are raising our defensive exposure at the expense of cyclicals in our recommended sector weightings."

GoldmanSachs Japan Portfolio Strategy 20100811

Analysing Chinese Grey Income: New study, new findings

- Almost Rmb10 tn in hidden income, or 30% of GDP. "Based on a creative survey technique focusing on the correlation between income and spending patterns, and with over 4,000 samples across 19 provinces in China, Prof. Wang estimates that the per-capita disposable income of urban Chinese households in 2008 should be Rmb32,154, 90% above the official data. Total hidden income could total Rmb9.3 tn, 30% of GDP, with about 63% of hidden income in the hands of the top 10% of urban households."
- The potential of China’s consumer market is even bigger than we expected. "Most investors are aware that Chinese income statistics are underestimated, but the exact amount is subject to much speculation. The size of grey income revealed by Prof. Wang is striking and could help investors to understand the rationale of the Chinese government’s recent strong push for faster wage growth and a more equitable income distribution pattern – which would also help boost overall consumption."
- Big ticket items are the biggest beneficiary. "While we think that the Chinese government will try to reduce this huge income disparity problem and the size of the grey income, this is not likely to change significantly in the near future. Chinese property, European luxury goods, high-end retailing and Macao gaming could be the biggest beneficiaries of the current income distribution pattern. In particular, we think BMW, Galaxy, Hang Lung Properties, Mengniu, Swatch and Vanke will benefit most."

CreditSuisse Expert Insights 20100806

Food Prices and Inflation Surprises

- "Inflation expectations in EM could be seriously disrupted if wheat and maize prices keep rising, just as benign food price developments in Q2 played an important role in pushing inflation expectations down. Global food inflation fell from 21% in Q1 to 7.2% in June, but is now on the rise again: the FAO’s global food index for July was published last week, and shows food inflation rising to 12.5%."
- "The impact of higher food prices on CPI varies widely across countries, but broadly speaking it appears that Asia has the highest sensitivity to higher food prices, and Latin America the lowest."
- "It is difficult to generalise about how higher food prices will affect policy interest rates, particularly since the impact of more expensive cereals can be partially offset by stronger exchange rates, both for wheat-importing and for wheat-exporting countries."
- "On balance, though, we think that the risk of accelerated rate hikes should be taken seriously, given the sensitivity of inflation surprises to food prices in the past few months. And since China is one of the countries whose CPI seems to be particularly sensitive to rising food prices, the global consequences might become more visible. The market would probably not welcome a Chinese dilemma in which policymakers had to struggle against sharply higher inflationary pressure as well as a real economy slowdown."
- "An additional risk arises from the fact that foreign ownership of EM domestic fixed income markets has risen in the past few months. If food prices produce nasty inflation surprises in the next few months, the risk is that investors lighten their positions in EM fixed income markets, producing a small negative spiral of higher inflation, capital outflow and weaker exchange rates."

Citigroup Emerging Markets Macro View 20100809

Which OECD countries will return to growth? An interpretation grid

- "In the post-crisis macroeconomic environment (brisk growth in emerging countries, determination to deleverage among companies in OECD countries), an OECD country can return to normal growth:
• if it has considerable capacity to export to emerging and commodity-exporting countries;
• if the households in this country can and want to increase their indebtedness;
• if the companies in this country, if they are faced with additional demand, have sufficient profitability to invest more;
• if the necessary reduction in fiscal deficits is not so drastic that it will kill growth."
- "The larger the number of these conditions verified by an OECD country, the more it will post vigorous growth in the next few years."
- "We apply this interpretation grid to the United States, Canada, the United Kingdom, Germany, France, Italy, Spain, the Netherlands, Sweden, Japan and Australia. The countries where it is most likely that growth will pick up permanently are Canada, Germany, the Netherlands and Australia."

Natixis Flash Economics 386 20100729

Which countries would be interested in having a strong currency?

- "We can currently see that exchange-rate policies or views about trends in the exchange rate are different from one country to the next:
• the United States is complaining about the undervaluation of the RMB, which must imply that it would want a weaker currency;
• the Europeans (United Kingdom, euro zone) are pleased about the depreciation of their currencies against the dollar;
• China and Switzerland are trying to curb the appreciation of their currency by accumulating official reserves, but accept a strong currency;
• Japan, on the contrary, is not doing anything to prevent the appreciation of the yen."
- "Is it possible to find a rational explanation of these various attitudes with respect to exchange rates? Which countries are likely to prefer a strong currency?
• countries where inflation is excessive;
• service economies, where the objective is to import industrial products at the lowest possible price;
• industrial countries that have offshored extensively, and that want to import parts, intermediate goods and components, made by foreign subcontractors, at the lowest possible price;
• countries where household savings are excessive, and where the appreciation of the exchange rate improves the terms of trade, increases real household income and stimulates consumption."
- "With this interpretation grid, the choices of exchange rate policy seem rational in China and Switzerland, but irrational in Germany, Spain and Japan. Now, China, Germany and Spain are the countries that ought to benefit from a strong currency: China and Germany have offshored to a significant extent, and Spain is a service economy."

Natixis Flash Economics 385 20100729

Renewable energies: Where will the winners be located?

- "We examine the possible developments in demand for and production of renewable energies (wind, photovoltaic) and transport technologies (electric and hybrid cars, etc.)."
- "We show that in certain countries (including France), there is an ongoing increase in the capacity installed and in the demand for these new technologies, while the French market share in the production of these equipments is very low."
- "This means that public aid for the development of renewable energies, electric cars, etc. will mainly boost imports of the corresponding equipments from countries with significant production capacity for these equipments: China, Germany, United States, Japan, Denmark."

Natixis Flash Economics 384 20100729

2Q Earnings themes: Managing to margins, cautious on recovery

- Unemployment remains a top risk for corporate managements "Managements indicated a generally positive 2H outlook tempered by caution regarding the US consumer. Views differed across sectors, with Industrials and Materials more positive and Health Care more conservative."
- Managements continue to focus on margin improvement "Many firms guided to flat or slightly higher sequential margins in 2H and seemed to place a higher priority on attaining target margin levels relative to other performance metrics. Managements indicated that large portions of previous cost cuts are likely to remain “permanent”."
- Large cash balances used for buybacks and debt reduction "Free cash flow generation has been strong and boards are authorizing fresh repurchases. Many previous authorizations have been exhausted. Debt reduction has been more prevalent than in prior quarters."

GoldmanSachs US Portfolio Strategy 20100811