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Readings

Pellegrini & PSQR Capital's Last Insight Before Returning Capital - Market Folly
Productivity Down... Is this Finally the Employment Bottom? - EconomPic Data
The Taylor Rule Does Not Say Minus Six Percent - Economics One
Is the Taylor Rule Really a Rule? - EconLog
Noise, economic indicators and human action - Abnormal Returns
Contagious FTAs: New evidence on the domino theory of regionalism - VoxEu
Bond Market Instability in a Liquidity Trap - Andy Harless

Our country has innovative minds! Curtain up ...

- "Having analysed Germany‟s strengths and weaknesses in the study “Your country needs innovative minds!” this paper now turns its attention to an assessment of the sixteen German federal states’ innovation performance."
- "Our simple model comprising eight indicators for the assessment of Germany‟s regional innovative strength shows the most innovative states to be in the south of the country, whereas the eastern states continue to lag behind in terms of absolute levels."
- "However, if we consider the dynamic, i.e. the changes over the period 2003 to 2007, the picture looks different. The states in the east of Germany – spearheaded by Saxony – are on course to narrow the gap to the highly innovative federal states."

DeutscheBank Current Issues 20100830

Back to School: The Credit Market Outlook 2H10

- Keep Calm and Carry On "We are constructive on corporate credit globally, and expect he Asian risk premium over Developed markets to gradually compress. A US growth lowdown to 2% but short of a a double dip, although raising the probability of tail-risks, will eep DM credit in a relative ‘sweet spot’ of low rates and a lid on credit-unfriendly actions, while valuations and liquidity support Asia in spite of ‘equity-friendly’ growth rates."
- Technicals and Valuations support Asia "We expect Asian credit spreads to ncreasingly converge with DM spreads, driven by asset allocation trends, healthy balance heet liquidity and an increasingly reduced emphasis on liquidity premiums."
- The Future of Asian Credit Markets "The Asian credit markets are in the midst of a secular change. Both the demand side and supply side are growing much faster than the historical norm. We expect the next five years to be very different to the past five years and expect the non-Financial credit market in Asia to quadruple in 2015. ."
- Key themes in Asia:
• "Prefer HY over IG, due to unusually steep credit quality curves, shrinking all- in yields, unusually strong corporate liquidity profiles and a supportive cyclical backdrop;
• Prefer China Property within Asian HY, powered by valuations, a policy cycle increasingly on hold and an improving Chinese credit cycle ; and
• Prefer Bank Capital, as regulatory change represents a powerful, credit friendly de-risking trend and valuations still look compelling."
• "Cautious on Australian banks, due to concerns about significant funding needs for 2010-2011 and increasingly bubble-like housing valuations."
• "Uncomfortable with Quasi-sovereign valuations. Global quasi-sovereign valuations are increasingly stretched and Asia is richer than CEMEEA and LATAM. Our Quasi-sovereign score provides guidance."

Morgan Stanley Asia Credit Strategy 20100831

Fog on the recovery road

- "We continue to think that economic recovery is on track in most of the developed world and that emerging Asia will continue to expand robustly. On the other hand, recent U.S. developments cannot be ignored. Though we trace much of the expected Q3 slowdown in U.S. domestic demand to the unwinding of temporary stimulus, the recovery remains fragile."
- "Fiscal policy is a key source of uncertainty. At this writing the future of the Bush tax cuts, set to expire at the end of this year, is still up in the air. Unfortunately, political dithering in Washington and the resulting lack of clear guidance to investors on this issue means that the road to recovery is now fogged over– all the more so in that this fall’s midterm elections could provide a platform for protectionist rhetoric (not good either stocks or bonds)."
- "Though equity markets are likely to move higher in the coming months, the risk-reward outlook no longer warrants an overweight stance. Until some of the political dust settles, we are raising the cash portion of our model portfolio to 10% and reducing our equity exposure to a neutral 55%. Among the implications of this shift are a redistribution of our equity holdings among global regions and a realignment of our sector allocation to a somewhat more defensive stance."
- "Despite growing uncertainty, there are pluses in the prospects for equities. Double-digit earnings growth over the last few quarters has plumped up corporate treasuries, boosting their reserves of cash and other highly liquid assets. This bodes well for M&A activity down the road."
- "We are revising down our year-end index targets – the S&P/TSX to 12,100 from 12,700 and the S&P 500 to 1120 from 1280. These downgrades follow from our downward revision of real GDP growth and profits for Q3 and Q4. For the U.S. index we have also reduced our earnings multiple. Our EPS targets are now 740 for the S&P/TSX (down 7.5%) and 83 for the S&P 500 (down 2.4%)."

NBC Monthly Equity Monitor Sep2010

World: A soft landing in 2011

- "Europe’s cyclical momentum means that the chances of its dragging down global growth have lessened in recent months. However, a slowdown of the advanced economies next year is likely to bring a soft landing in 2011."
- "The U.S. badly needs more private-sector job growth to reduce its unemployment rate and keep the Fed from moving to additional quantitative easing. BEA revisions of past GDP numbers have reduced our expectation of 2010 growth, but we have revised up our outlook for 2011 in response to a higher savings rate and a less aggressive reversal of fiscal policy."
- "Since rock-bottom interest rates have encouraged Canadians to borrow from the future for spending on housing and consumption, the recent performance of the economy is no guarantee of its future as household dissaving comes to an end. We expect that strong 3.3% growth in 2010 will be followed by a deceleration of consumer spending and GDP in 2011."

NBC Monthly Economic Monitor Sep2010

Unusually uncertain times

- "In recent weeks, economic data have continued to be disappointing. U.S July durable goods orders were much weaker than projected suggesting business investments which have been an important source of growth so far might be running out of steam. It appears evident the U.S. economy will continue to need additional stimulus in order to close the current output gap and reduce the unemployment rate. Therefore, monetary policy can be expected to remain extremely accommodative well into the second half of 2011."
- "With the uncertainty about the U.S. economic outlook having increased in recent weeks, we believe the BoC will want to take a pause before further reducing the level of monetary stimulus. However as we expect the North American economy to avoid the feared double-dip, we still see the Bank raising its target rate from the current 0.75% to 1.50% in 2011."

NBC Monthly Fixed Income Monitor Sep2010

Why Japan Dislikes Lengthy Terms in Power

- "Public opinion is a curious thing. Public support for the DPJ has recovered. Figure 1 plots public support rates for the DPJ and LDP since the DPJ’s election win exactly one year ago on August 30, 2009 (source: the Fuji Television New Report 2001 TV program)."
- "Let’s look back over the last 12 months. In a poll conducted immediately following the changeover in power, after the DPJ’s landslide election victory, public support for the DPJ stood at 31.8%, against 11.4% for the LDP. Thereafter, support for the DPJ rose to 39.6% in October and then immediately turned down, dropping all the way to 12.2% by April this year, as the DPJ allowed itself to be overtaken by the LDP. In June, in an effort to stem the downtrend, the DPJ changed its leader from Hatoyama to Kan. Although support for the DPJ then temporarily rose back to 32.8%, one could hardly expect that to last long. And, on July 11, right after the upper house elections, support for the DPJ had again dropped to 21.8%."
- "Now, with the upper house election past and the DPJ in frantic preparation ahead of its election for party president on September 14, public support for the party has risen to 33.4% in the most recent polls. Looking at the change in public support ratios over the five weeks since the election, the DPJ has risen by 11.6ppt, the LDP has fallen by 0.2ppt, and Your Party has fallen by 0.4ppt—the latter two being essentially unchanged. The major change in the polls has been in the “undecided” category: this category fell from 41.8% to 28.2%, a 13.6ppt drop. It seems that many “votes” moved from undecided to supporting the DPJ."
- "Figure 2 shows how these undecided voters have moved since the start of the Abe administration in September 2006. This is the first time the “undecided” category has fallen below 30%. The average level of the undecided category has been 42.6% over these four years, with a standard deviation of 5.6%. Thus, the fall below 30% is an anomaly. Perhaps this is the effect of calling a DPJ presidential election."

JPMorgan Japan Equity Strategy 20100831

India Rural Consumption : The Tipping Point

- Information age is impacting rural consumption. "Rising awareness levels driven by increased media penetration and higher distribution reach by national companies is leading to a more demanding and discerning rural consumer. Quality and brand perception is becoming an important parameter for purchase decision; ‘premiumisation’ across segments is underway. Discretionary spends particularly on durables, housing, automobiles and private education are rising."
- Societal changes are spurring new consumption trends and issues. "Nuclearisation of families bodes well for demand for new homes, durables, automobiles etc. Also increasing emphasis on education will create opportunity/inputs for a growing service economy. Saving levels are trending down and bank credit is gaining wider acceptance particularly for increased discretionary purchases. Higher land prices have further amplified the ‘wealth’ effect visible in rural consumption. Rising labor shortage is raising cost of farming, though it is also pushing the pace of farm mechanization."
- Opportunity for growth is large, but fight for share of wallet will become increasingly expensive. "Rising income levels in rural areas will definitely brighten revenue growth prospects for FMCG companies. However increasing fragmentation of consumer-spends, imply that competitive costs (marketing/distribution) for players will rise as fight for share intensifies as consumer pull becomes stronger than retailer push. Distribution advantage of market leaders (like HUL) is receding as other companies are gaining ground. Best rural consumption plays in our coverage universe are ITC (OW), United Spirits (OW), Nestle India (N) and Mahindra & Mahindra (OW)."

JPMorgan India Consumer Insights 20100831

What could lead to inflation coming back in the United States and the euro zone?

- "Before looking at the ways in which the risk of inflation can be hedged in investors’ portfolios, we need to consider whether inflation can come back (we look at the United States and the euro zone) and what might be the causes of a comeback by inflation. In principle the following possible causes can be reviewed:
• domestic wage costs in the United States and the euro zone;
• the robust growth of the money supply (of central bank money);
• inflation imported from emerging countries;
• the rise in commodity prices;
• the exchange rate’s depreciation;
• population ageing."
- "We examine these different causes one after the other:
• unit wage costs are declining;
• there has not been a lasting link after the crisis between monetary policy and inflation;
• emerging countries are not exporting any inflation;
• commodity prices will likely surge from the late 2010s onwards;
• there might be slightly higher imported inflation in the United States;
• population ageing is not necessarily inflationary, and can even be deflationary as we saw in Japan."
- "All in all, the only cause of inflation, from the late 2010s onwards, should be a rise in commodity prices."

Natixis Flash Economics 411 20100825