Thursday, August 11, 2011

AllPoints Communications building sold

Rexford Industrial, a privately held Los Angeles real estate investment firm, bought a fully leased industrial building in Santa Ana for $8.5 million.MacArthur

Rexford bought a 122,000-square-foot warehouse at 3441 W. MacArthur Blvd. from the Jerry Monroe Living Trust and the Monroe Family Trust, Rexford said.

An affiliate of the sellers’, Towne Inc., will continue to rent the property. Towne Inc. is the founder of AllPoints Communications, which provides support services for direct marketers.

-- Roger Vincent

Photo: Warehouse at 3441 W. MacArthur Blvd. Credit: Rexford Industrial

Markets surge up; Dow gains more than 400 points

Traders The stock market took a breather from its weeklong downhill tumble Thursday to make one of its largest advances ever.

After wild gyrations in its final minutes, the Dow Jones industrial average finished up 423 points, or 3.9%, to 11,143. The largest gain in history happened on Oct. 13, 2008, when the Dow gained 936 points.  

The S&P 500 closed up 51 points, a 4.6% increase. The Nasdaq is up 4.7%, or 111 points, to 2,493. 

Earlier in the day, the Labor Department said 395,000 people applied for jobless benefits, the lowest level since April. Hopeful investors translated the report as a sign that the economy might not be heading toward a double-dip recession.

Thursday's close was a stunning reversal of the Dow's 519-point plummet on Wednesday. Wall Street has had a suspenseful week as the market's reactions to the nation's credit downgrade and a European debt crisis veered between fear and faith.

RELATED:

Stocks bounce back on unemployment data

Some hopeful signs in otherwise grim markets

-- Tiffany Hsu

Photo: A trader works on the floor of the New York Stock Exchange in New York. Credit: Andrew Gombert / EPA

Consumer Reports: Computers may be worth an extended warranty

Laptop Is Consumer Reports softening its stance on extended warranties?

Certain items, such as computers, might be worth the coverage, the product review magazine suggests in its August issue.

A third of laptops and desktops break by their fourth year, often plagued by malware or failing hard drives, the report said. And although many may be cheap enough to just replace, researchers said that warranties may be a good call for frequent travelers or teenagers, especially those with credit cards that extend the coverage for free.

But for many other products, Consumer Reports seems to be sticking to its usual mantra: That springing for protection may not justify the cost.

Appliances tend to keep working for several years after purchase, throughout the extended warranty period, according to the report. Products that do break during that period tend to malfunction in spectacular fashion: with 30% performing poorly and half failing entirely.

But even then, according to a study of 27,404 readers with 53,218 glitchy home products, the median cost of repair is $150. That’s just a few dollars more than the $142 price tag for a warranty, which researchers said are offering increasingly sparse coverage anyway.

Still, consumers who take their chances could face major headaches come repair time. Consumer goods such as home theater systems and gas cooktops are more complicated and involve many more parts than they did a decade ago.

Repairing breakdown-prone products, such as refrigerators with ice makers and front-loading washers, could cost significant time and money, according to Consumer Reports. 

RELATED:

Peace of mind from extended warranty? Maybe not

Consumer Reports dings new Honda Civic

-- Tiffany Hsu

Photo: David Paul Morris / Bloomberg

USDA cuts crops forecast for soybean, wheat, corn

Wheat Food prices will likely remain high next year as U.S. farmers produce smaller corn, soybean and wheat crops than expected.

Volatile weather is to blame for the tight supply of key crops used for animal feed and supermarket staples, according to the U.S. Department of Agriculture.

Heavy rains and flooding in the spring delayed the planting schedule. In May, just half of the acres set aside for soybeans were planted. Then, triple-digit temperatures and dryness last month left fields parched.

The agriculture agency forecasts that farmers will grown 3 billion bushels of soybeans this year and next, 5.2% less than previously expected. The corn harvest is 4.1% slimmer than anticipated with 12.9 billion bushels. The wheat prognosis is for 2 billion bushes -– a 1.4% slip.

RELATED:

California farm expo benefits from a bumper crop of prosperity

Urban dwellers, far from fields, harvest millions in federal farm subsidies

-- Tiffany Hsu

Photo: A farmer harvests winter wheat in Kirkland, Ill., on July 14. Credit: Daniel Acker/Bloomberg

Goodyear developing self-inflating car tires

The auto industry’s efforts to increase fuel economy and reduce emissions looks to pay off with the development of self-inflating tires. Tires

The Goodyear Tire & Rubber Co. said it is experimenting with what it calls Air Maintenance Technology, which will enable tires to remain inflated at the optimum pressure without the need for any external pumps or electronics.  All components of the AMT system, including the miniaturized pump, will be fully contained within the tire.

The company said Thursday that it has a $1.5-million grant from the Department of Energy to launch a demonstration of the system in commercial truck tires.

The government of Luxembourg is paying for the company to conduct similar research for consumer tires at Goodyear’s Innovation Center in Colmar-Berg, Luxembourg.

“While the technology is complex, the idea behind the AMT system is relatively simple and powered by the tire itself as it rolls down the road,” said Jean-Claude Kihn, Goodyear senior vice president and chief technical officer.

“A tire that can maintain its own inflation is something drivers have wanted for many years. Goodyear has taken on this challenge and the progress we have made is very encouraging,” Kihn said. “This will become the kind of technological breakthrough that people will wonder how they ever lived without.”

Properly inflated tires increase fuel economy and reduce emissions. Goodyear said that underinflated tires result in a 2.5% to 3.3% decrease in fuel efficiency.  That adds up to about 10 cents a gallon or $1 to $2 per fill-up, depending on the vehicle.

RELATED:

Bill increases car dealer doc fees, requires salvage checks 

Used car prices continue to rise

Fuel economy ratings come up short 

-- Jerry Hirsch
Twitter.com/LATimesJerry

Photo: Goodyear racing tires at a NASCAR track in Bristol, Tenn. Credit: Associated Press

Housing affordability up in California with home price decline

HomeSale Housing affordability increased in California in the second quarter as prices dropped from the same period a year earlier, a real estate group said Thursday.

Fifty-one percent of California households could afford a single-family home priced at the median, according to the California Assn. of Realtors. That was an increase from 46% during the same period last year, when buyer tax credits fueled the market and pushed up prices. Affordability decreased from the prior quarter, but that was due to seasonal variations that pushed up prices.

Potential buyers needed to earn a minimum annual income of $63,080 to qualify for the purchase of a home priced at the state’s median, $293,580, which is the price at which half the homes sold for more and half for less. The house payment on that purchase, including taxes and insurance, would be $1,580, the group reported, assuming a down payment of 20% and an effective composite interest rate of 4.85%.

During the second quarter, affordability fell in the priciest parts of the state. San Bernardino County was the most affordable in the state, with a rate of 77%, while San Mateo County was the least affordable, with only 21% of households in the state able to afford that county’s median-priced home, the group reported.

RELATED:

Treasury sells 10-year notes at record low yield as buyers pour in

Report: Mortgage modifications decline with drop in delinquencies

Fed seeks ideas on renting foreclosed homes

 -- Alejandro Lazo

 Twitter: @AlejandroLazo

Photo: Homes have been on the market for months in the Antelope Valley, some next to new developments. Credit: Michael Robinson Chavez/ Los Angeles Times

Fewer exports push trade deficit to highest level since 2008

Trade deficit
U.S. manufacturers are in a bind as fewer sales of domestic goods such as semiconductors and raw cotton caused the trade deficit to jump to its highest level since 2008, according to a Commerce Department report.

Foreign demand for U.S. goods still isn't enough of a buffer against what acting Commerce Secretary Rebecca Blank called "a fragile time in the world economy."

Though imports shrank to $223.9 billion in June, exports of American products shriveled even more, down 2.3% to $170.9 billion -- the steepest fall in more than two years.

Fewer capital goods and industrial supplies and materials -– about $3.5 billion worth -– were shipped abroad. That includes heavy drops in exports of fuel oil, plastics, industrial engines and generators.

The trade deficit expanded 4.4% to $53.1 billion in June, from $50.8 billion in May, according to the Commerce Department. The figure is up $6.2 billion year over year to its highest point since October 2008.

RELATED:

Surprise jump in trade deficit worries economists

New test for an old idea: actually making things

-- Tiffany Hsu

Photo: The Mearsk terminal in Long Beach. Credit: Perry C. Riddle / Los Angeles Times

Consumer Confidential: Mortgage rates fall; Martha settles suits

mortgage rates at record lows Here's your through-the-looking-glass Thursday roundup of consumer news from around the Web:

--In the market for new digs or a refi? Fixed mortgage rates are at or near record lows. Freddie Mac says the average rate for the 30-year fixed mortgage fell to 4.32% this week from 4.39%. The 30-year loan hit a record low of 4.17% in mid-November. The average rate on a 15-year fixed mortgage, a popular refinancing option, fell to a record low of 3.5% from last week's record rate of 3.54%. Mortgage rates tend to track the yield on the 10-year Treasury note. A weakening U.S. economy has led many investors to shift money from stocks to bonds, which are seen as safer bets. That has pushed Treasury yields to historic lows. In theory, low mortgage rates should provide a boost to the troubled housing market. But rates have been below 5% for nearly two years and haven't helped home sales much. Rates on the 30-year fixed loan were near 6.5% five years ago and higher than 8% in 2000.

--There's been a settlement in lawsuits filed by three people who had parts of fingers snipped off by Martha Stewart lounge chairs sold at Kmart stores. Des Moines attorney Guy Cook says the cases against Martha Stewart Living Omnimedia and Kmart were settled this week. Cook's clients, a young Kentucky girl, an Illinois college student and a New York woman, claimed the chairs cut off parts of their fingers. Cook argued that the chair's legs are defective and snap forward, "serving as a guillotine" for fingers caught between the chair and the legs. No word from Martha as to whether an end to the lawsuits is a good thing.

-- David Lazarus

Photo: Want this? Mortgage rates are near record lows. Credit: Joe Raedle / Getty Images

 

How low can mortgage rates go? Descent continues

Mortgage rates are continuing to fall amid economic uncertainties and a sagging stock market, with the 30-year home loan available this week at an average 4.32% -- the lowest fixed rate of the year, according to Freddie Mac.

The typical rate for a 15-year fixed mortgage was 3.50%, Freddie Mac said Thursday -- the lowest since Freddie began tracking it in 1991.

Freddie Mac HQ with flag and blossoms -- credit Freddie Mac Despite 30-year rates averaging about 4.5% and the cheapest housing prices in eight years, home lending has slipped this year to the lowest level since 1997.

But with rates near record lows, the Mortgage Bankers Assn. says loan applications have spiked by more than 20% thanks to the latest surge in refinancings.

The increase occurred despite a slight decrease in applications to buy homes. Refinance applications were up by 30%, the trade group said Wednesday.

Greg McBride, senior analyst for rate tracker Bankrate.com, said people with large mortgages in expensive markets like California should feel a particular sense of urgency if they are considering refinancing.

As a result of the credit crisis, the limit for a conforming loan -- one that can be backed by Freddie Mac and Fannie Mae -- was increased to $729,750 in the most expensive regions to support the housing market. That increase is set to expire Oct. 1, when the conforming loan limit will fall back to $625,500.

Loans higher than the conforming limit, known as jumbos, are available -- but rates have been running at least half a percentage point more than for conforming loans. And as McBride pointed out, people refinancing into a jumbo loan are required to have more equity in their homes, typically 25% or 30% instead of the 20% requirement on smaller mortgages.

For someone refinancing a $700,000 loan, "It means you've got to get the loan closed by the end of September before the goal posts move," McBride said.

Freddie Mac surveys lenders early each week, asking them what conforming loan rates they are offering to borrowers with good credit and 20% down payments or, in the case of refinancings, at least 20% equity in their homes.

The borrowers in the latest survey would have paid 0.7% of the loan amount in upfront lender fees and discount points, along with additional payments for appraisals, title insurance and other third-party costs, Freddie Mac said.

RELATED:

Economic turmoil sparks surge in mortgage refinancing

Mortgage modifications decline with drop in delinquencies

Mortgage lending at lowest level since 1997

--E. Scott Reckard

Photo: Freddie Mac headquarters in McLean, Va. Credit: Freddie Mac

Used-car prices soaring, slowing depreciation

Normally, the value of a new car plunges as it's driven out of the dealership by its new owner.

But slumping auto sales and leases in recent years have changed that axiom by creating a shortage of late model year used cars, according to auto price information company Kelley Blue Book. Ford

The average value of a 1- to 3-year-old used vehicle has increased from $15,000 in 2008 to more than $23,000 in 2011, an annual average increase of nearly 16%, Kelley analysts said.

They expect used car pricing to remain strong because it will take several years of strong new-car sales to replenish the shortage of used vehicles that is pushing prices up now.

“While depreciation typically affects a vehicle’s value most in the first two years of ownership, it will not be as pronounced as it would have been a few years ago when the used-car supply was still very high,” Said Alec Gutierrez, manager of vehicle valuation for Kelley Blue Book.

“Consumers who plan to sell or trade in a used car soon will likely see their vehicle hold its value well. Alternatively, shoppers in the market for a used car will continue to pay more, making it difficult to buy at a discount,” he said.

RELATED:

Bill increases car dealer doc fees, requires salvage checks 

Consumer Reports rips new Civic 

Fuel economy ratings come up short 

-- Jerry Hirsch
Twitter.com/LATimesJerry

Photo: New Ford Explorers await shipping from depot in Brunswick, Ga. Credit: Bloomberg News

Stocks bounce back on unemployment data

Stock markets took another break from their long downward slide Thursday morning after the government Nasdaq spencerplatt getty announced that the number of people claiming unemployment benefits last week fell to the lowest level since April.

The Dow Jones industrial average was up over 200 points Thursday morning after the Labor Department said that only 395,000 people applied for jobless benefits, down from 402,000 last month. The figures gave investors some hope that the economy may not be slowing down as much as has been feared.

The Dow was recently trading up 212.21 points, or 2.0%, to 10932.15. The broader Standard & Poor's 500 index was up even more.

"Recent stock market volatility and layoff announcements in the financial sector threaten to shut the door on hiring, but as yet the claims data have been encouraging and point to continued job increases," economists with the Japanese bank Nomura wrote to clients Thursday morning.

The bounce came after Wednesday's market plunge in the final hour of trading, which brought the Dow down 519 points for the day and continued weeks of declining share prices. Wednesday's drop was largely due to renewed concerns about the European debt crisis.

Overnight, European stock markets fell again, but they have recovered after the unemployment news out of the United States. Leading indexes were trading up 1% in Germany and 0.7% in England.

RELATED:

Asian markets close day of mixed trading

Some hopeful signs in otherwise grim markets

U.S. debt: A four-letter word or a necessary evil?

-- Nathaniel Popper

Photo credit: Getty Images/Spencer Platt.

Structural funds vs debt pooling: the real cost of two different approaches to the European debt crisis


If Germany and France are to guarantee the debts of Italy, along with Greece, Ireland, Portual and Spain, pretty much everyone agrees that will take more than €1 trillion – probably more like two or three trillion. Suppose, mirabile dictu, that approach somehow ended happily, with no defaults by anyone and the Italians and others knuckling down to pay their debts and improve their competitiveness, instead of using the Franco-German money as an excuse for not properly reforming and to run up yet more debts. Then the Franco-German guarantees would not be called upon, so there would be no actual transfers of funds.


But that doesn’t mean it wouldn’t cost the French and Germans anything. Under the €2tr scenario, as presented on the Alphaville blog, RBS estimates German debt rising to 110 percent of GDP and French debt to 112 percent, as a consequence of the guarantees. That would obviously mean the end of AAA status. To get a sense of the implications, Italy has had debt of 100-120 percent of GDP for about the past twenty years. Its credit rating has sat in the A+ to AA- territory. As a member of the euro, before the sovereign debt crisis, its spreads over German bonds were probably kept down by the single currency. But if we consider non-Eurozone sovereigns with similar credit ratings to Italy, such as South Korea, Chile or Saudi Arabia, over the past decade the average cost of their government debt has typically been 100-200 basis points (1 to 2 percent) higher than that of Germany (the iconic AAA state).


Let us assume the impact on France and Germany would be at the low end here - say, just 100 basis points.  Germany’s total government debt stock (ignoring guarantees) is about €1.9tr, whilst France’s is about €1.7tr. So adding 100 basis points to the cost of their debts would cost Germany about €19bn per year, and France about €17bn – a joint cost of about €36bn (on this fairly optimistic scenario).


By contrast, consider the costs to France and Germany of the sort of scheme I favour – namely a greatly extended use of EU structural funds and other monies spent at the central EU level. Two of the great success stories for structural funds were Ireland and Spain during the 1990s. Structural funds are estimated by the OECD to have delivered a direct impact of around 0.5 per cent per year. Then, of course, there would be many spillover benefits from the effects of structural fund expenditure – as higher-productivity retrained workers improved the productivity of those around them, roads reduced transport times, and so on. Finally (and perhaps most important of all), the Irish debt consolidation programme, especially that introduced after 1987 (see discussion here, p84ff), was materially facilitated and made more credible by EU structural funds. Total annual Irish growth in this period regularly reached 6 per cent.


The Spanish experience was similar. Unfortunately, experience with structural funds expenditure in Italy is not perceived to have been so successful.  Perhaps in Italy we could not expect to add – what? - 2 per cent or more to annual growth for a decade just for the sake of 0.5 percent of GDP structural funds input.


But even if we only got one for one, adding half a percent to Italian GDP would cost only around €7bn-€8bn per year. An extra half percent on the Italian growth rate, with the monies focused on the least competitive Italian regions, could well be enough to make the difference between risk of collapse of the euro and its survival, since a slightly higher growth rate for Italy would make markets much more confident it would pay its debts.  We might need to put in half as much as that again for the PIGS minus Greece (which I still believe to be gone, every which way). So €10bn per year all up. Let’s suppose we had to put in twice that much for the first three years, just to make it credible.  And let’s suppose that the French and Germans between them put up two thirds of that money. Then for the first three years France and Germany would be transferring €12bn extra per year to the problematic regions, and €6bn per year thereafter.


So, the debt pooling scheme – even if it works - costs France and Germany some €36bn (or more) per year, whilst of course violating the Treaties and creating massive moral hazard, whilst the EU structural funds extension (without Treaty problems or much moral hazard) costs them about €6bn-€12bn per year. Which do you think they should go for?



Gundlach to take the stand in trial vs. TCW Group

Star L.A. bond fund manager Jeffrey Gundlach was expected to be called to testify Thursday for the first time in the high-stakes court battle with his former employer, money management giant TCW Group.

Since the civil trial began July 28 in Los Angeles County Superior Court, the jury has heard plenty about Gundlach's personality. Lawyers for TCW, which fired Gundlach in December 2009, have described him as arrogant, greedy, disrespectful and bent on destroying the company.

GundlachGundlach's lawyers, in turn, have told the jury that TCW orchestrated a campaign to oust him so it could keep for itself the fees on tens of billions of dollars in client assets he drew to the firm because of his stellar track record in the bond market.

Gundlach launched his own firm, DoubleLine Capital, 10 days after he was fired by TCW. He was quickly joined by most of his team members at TCW, and has attracted $13 billion from investors in just 19 months.

TCW, which manages about $120 billion, sued Gundlach in January 2010, alleging that he and key aides conspired to steal massive amounts of TCW proprietary information to set up DoubleLine.

Gundlach, 51, has denied TCW's allegations and has countersued. He accuses TCW and its parent firm, the French bank Societe Generale, of firing him after 24 years at the firm to cheat him out of a huge chunk of promised income.

Each side is seeking hundreds of millions of dollars in damages from the other.

Gundlach, who has unabashedly referred to himself as “amazingly brilliant analytically,” has become a well-known figure on Wall Street because of his expertise investing in complex mortgage-backed securities. Barron's magazine this year dubbed him "king of bonds."

After everything the jury has heard about Gundlach, his demeanor on the stand could be critical in shaping their views of the case.

Over the last week the jury heard testimony from three of Gundlach's lieutenants at DoubleLine who also are co-defendants in the case: Barbara VanEvery, Cris Santa Ana and Jeffrey Mayberry.

-- Tom Petruno

RELATED:

Greed at center of Gundlach vs. TCW case

TCW, 'bond king' Gundlach set to square off in court

Gundlach wants to buy Buffalo Bills

Photo: DoubleLine Capital CEO Jeffrey Gundlach. Credit: Jessica Rinaldi / Reuters

Gilt yields are signalling a depression


As you can see from the chart below (or perhaps not given the quality of the reproduction, for which apologies), UK government bond yields have fallen to historic lows the depths of which even six months ago would scarcely have been believable – less than 2.5pc on ten year gilts. These are the sort of levels that until recently only ruled in Japan.


Those of us who have been calling the top of the bull market in bonds for the best part of the last two years are left with egg on our faces. I’m hardly alone. Step forward Bill Gross, John Paulson, Jim Rogers and a litany of other self styled market “experts”. And those who got it right? Well I hate to pay him the complement, but among others Paul Krugman, whose religiously preached Keynsian analysis of the crisis has, in this regard at least, been spot on. For this is not just a UK phenomenon. It’s happening just about everywhere, bar the troubled debtor nations of the eurozone, where the very real possibility of default has sent bond prices in the other direction.


If you believe much of the European press, rising bond yields in Italy, Spain and much of the rest of the eurozone even as they plummet virtually everywhere else is all an Anglo Saxon conspiracy designed to sink the euro. (See the excellent blog by my colleague, Ambrose Evans Pritchard, for more on this) Why won’t the bastards lend to us, they ask? It is because you don’t have the natural corrective of a floating exchange rate, is the answer, but Europe’s political class refuses to listen.


gilt-yield-graph


So why is this happening? Why is it that despite ever more mountainous government debt, investors want to keep buying into the non-eurozone version of it? There are three things going on here. The first is that central banks have set short term rates at close to zero in an effort to stimulate demand, and judged by comments from the US Federal Reserve and the Bank of England this week, look set to keep them there for at least the next two years. A more hawkish tone has been set by the European Central Bank, which in part explains why the bond prices of debtor eurozone nations are doing so badly, but in the round, policy is being kept as stimulative as it can.


In the hunt for yield, that drives money out of short term deposits into near cash equivalents such as longer dated government bonds, which in turn drives down the yields on those bonds.


Second, the market has begun to anticipate further bouts of “quantitative easing”, or purchases by central banks of government bonds, both in the US and Europe. If the purpose of such purchases is to drive yields lower in the hope that investors will either spend or invest the money in higher risk assets, you kind of wonder whether there’s any sense in doing any more. Bond yields are sinking without any help from central bankers. But in any case, markets anticipate more of it.


Yet the single most important factor that underlies all this is that when householders, businesses and the financial sector aren’t spending and investing, a savings surplus accumulates which has to go somewhere. In the search for safe havens, it goes first and foremost into government debt, where it is used to provide the demand which the private sector has decided to remove. When governments attempt to reduce their demand for debt, as is beginning to happen at the moment with fiscal austerity programmes, you get a self feeding pressure of excess demand on limited supply, and yields fall even further.


What these yields are pointing to then, is a depression. In such an environment, corporate profits will suffer and insolvencies will rise. Equity markets suffer accordingly.


If I was a Treasury mandarin, I’d be urging the Chancellor to bring forward his debt raising programme to take advantage of these extraordinarily low interest rates. I doubt the chance to lock in long term debt at rates of as little as 2.5pc – way below the current, near 5pc, inflation rate – will occur again for an awfully long time.


But of course, the Treasury cannot do this. In the interests of transparency, it has already announced how much it is going to raise and in what form for this financial year. The next opportunity for altering that schedule is not until the Autumn statement. You can see the amount of debt the Government is planning to issue this year from the table below – in gross terms, it is already a new record.


debt-management-2


And as the second table shows, despite ever more voluminous issuance, the amount the government is paying for its debt has been falling steadily.


debt-management-1


George Osborne, the Chancellor, likes to see this phenomenon as a vote of confidence in his deficit reduction strategy. Unfortunately, that’s only part of the story. As I say, they’ve had similar yields in Japan for years now, with no sign of a credible deficit reduction strategy in sight and public debt spiralling up towards 250pc of GDP.


Unfortunately, low gilt yields are more indicative of impaired private sector demand than they are of Government resolve. What the economy appears to need, and I really do hesitate to say this, is a good old fashioned bout of inflation, but then we’ve already got that in the UK, and to perpetuate might seem only to replace one problem with another. Yet there are few more effective ways of eroding the doomsday machine of excessive debt.



Italy, EMU and the Evil Eye


rome2

Italy has a primary budget surplus and low private debt. So why sell?


For those in Euroland convinced that Anglo-Saxon hedge funds and speculators are responsible for the sorry state of the Italian bond market (seemingly the view of EMU’s entire governing class), here is a nugget from a Swiss blue chip investment house.


Dieter Wemmer, CFO of Zurich Financial Services, said his group had slashed its holdings of Italian government bonds by €2bn since June 30, cutting its exposure to €6bn.


It also had €5bn of Spanish debt and €18bn of Greek debt.


Much of the capital flight from Italy is crossing into Switzerland, so the Swiss have a good insight into the behaviour of the Italian financial elites.They know what Italy’s insiders are doing.


The ZFS announcement follows a revelation by Deutsche Bank that it had cut its exposure to Italy from €8bn to €1bn by hedging (ie, buying insurance) through the CDS market.


These are not hedge funds. They are real money accounts, and they give us a glimpse into what is happening.


Italy has a primary budget surplus, the best fiscal profile of the G7, and low private debt. So why do Swiss investors want to pull out?


Why are other countries with their own sovereign currencies and central banks able to borrow at barely over 2pc for ten years despite awful public finances, while Italy had to pay 6pc until the ECB intervened this week, and still has to pay 5pc now?


I hate to keep repeating an elementary point but currency unions switch exchange rate risk into default risk. Italy’s current travails are a direct result of — and function of — EMU membership.


The deeper issue is that Italy is 20pc over-valued within EMU and is now trapped in very low growth and a stubborn current account deficit. This is a slow rot. It is directly linked to EMU membership.


Italy could have used the decade and half since Euroland’s currencies were locked together after Maastricht to free up labour markets and carry out the `micro’ reforms needed to make EMU viable. It did not do so. It is very late in the day now.


Yes, before Euroland readers all scream “what about the mess in Britain?”, let me repeat for the millionth time that I don’t write about Britain. The rest of the Daily Telegraph is giving blanket coverage to the current stew of riots, knife attacks, and anarchy in British cities.


Britain is of course in a terrible mess, but Gilt yields nevertheless fell below 2.5pc this morning. The UK is very lucky that it still has the sovereign instruments to mitigate the fiscal disaster left by Gordon Brown.


Italy has the ECB, and behind it stands Germany. Whether Germany will continue to stand behind the Project as the cost rises is the great unknown. That angst is what is really eating away at markets.


Linde chief Wolfgang Reitzle caught the mood when he said: “I am fundamentally for the euro, but not at any price — above all not at the price of socializing the debts of other countries.”


I suspect that is the true voice of Germany, whatever the German ministers may say to please peers in Brussels.



Asian markets close day of mixed trading

Asia Stocks 2

Trading was mixed in Asian markets Thursday as investors remained jittery over the European debt crisis and faltering global economy.

Japan's Nikkei 225 stock average fell 0.6% to 8,981.84 on a day of wild swings for the yen. Hong Kong's Hang Seng index declined 1% to 19,595.14, Taiwan's Taiex lost 0.2% to 7,719.09 and Australia's S&P/ASX 200 index ended down 0.5% to 4,140.8.

Advancing were China's Shanghai Composite Index, which gained 1.3% to 2,581.51, and South Korea's Kospi, which rose 0.6% to 1,817.44, the second day of gains after the country's Financial Services Commission banned short selling.

The regulating agency's chairman said on a radio program Thursday that South Korea would fare better than it did in the 2008 financial crisis if another global recession were to arise, Reuters reported.

--David Pierson

Photo: Pedestrians are reflected on a display board showing the current Nikkei share average in Tokyo. Credit: Kim Kyung-Hoon / Reuters

 

Another Round of Bailouts?

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

In the wake of recent equity market declines, the clamor for bailouts of various kinds grows ever louder around the world. Influential voices call for “leadership” from the United States and Western Europe, and for policy makers in those countries to “get ahead of the curve.” This is all code for a simple and familiar plea: Do something that will protect investors, particularly creditors who have lent a lot of money to banks and countries that now appear to be in serious difficulty.

Today’s Economist

Perspectives from expert contributors.

But providing another round of unconditional creditor bailouts in this situation would be a mistake. What we need is a combination of transparent losses where bad loans were made, combined with a ring-fencing approach that protects sound governments and companies. There is no sign yet that policy makers are willing to make that distinction clear.

Perspectives from expert contributors.

The situation around the world is undeniably bad. As Peter Boone and I argued in a Peterson Institute policy paper released a couple of weeks ago, Europe is most definitely “on the brink” of a serious economic crisis that could involve widespread defaults or significant inflation or both. At the same time, Bank of America shares this week fell to their lowest in two years; with other large banks under pressure, there is a legitimate fear of rerunning the parts of the financial crisis of 2008-9.

The Financial Stability Oversight Council’s recently released first annual report does not provide particularly up-to-date numbers, but most of the global warning lights discussed in Chapter 7 must now be flashing red. As recently as 2008-9, there were three kinds of government support available to the American and European economies when such systemic financial trouble hit. But all three traditional forms of bailout are now much harder to pull off.

First, over the last 30 years interest-rate cuts and other forms of expansionary monetary policy became standard practice in the face of potential financial market disruption — this is the original meaning of the “Greenspan put.” But short-term interest rates are already very low in the United States. The European Central Bank (E.C.B.) has room to cut rates — but both the E.C.B. and the Federal Reserve fear that inflation may soon return. Now, unlike in the fall of 2008, they are reluctant to respond to the latest round of stock market declines with a dramatic easing of monetary policy.

Second, after the initial monetary policy response in fall 2008, it was fiscal policy that took the lead in preventing global economic free fall — with significant attempts to provide countercyclical stimulus in the United States, much of Western Europe, and China.

Now the euro zone faces a series of fiscal crises (see my paper with Peter Boone). Further stimulus is out of the question — the issue in Europe is who will do what kind of austerity and how fast.

The fiscal crisis in the United States is more imagined than real. The Standard & Poor’s downgrade of long-term United States government debt prompted a huge sell-off — but not in government debt. Investors around the world vote with their feet; they see United States government assets as among the safest available. Still, further fiscal stimulus is most definitely not on the political table in Washington.

And even Chinese fiscal policy shows signs of tightening — as the authorities try to prevent any overheating that could accelerate inflation.

Third, in 2008-9, monetary and fiscal policies were complemented by government capital injections directly into United States and European banks. But these became harder to do under the Dodd-Frank financial reform legislation — unless there is a large-scale systemic approach, which would be very hard to get through this Congress.

The worst financial-sector problems are in Europe. But the recent banking stress tests there were completely unrealistic as they did not include default events that now appear inevitable. To run one set of misleading stress tests (in 2010) might be considered excusable; to do this twice during the same crisis is unconscionable. There is no coherent financial sector policy within the euro zone.

What are the policy options now? The people in charge of European and United States policy would clearly prefer to do nothing or postpone dealing with the underlying issues. This is a bad idea as it puts markets in charge — and these markets are panicked.

The core to any feasible strategy must be bank capital. As Anat Admati and her colleagues have been arguing, large banks and other financial institutions without sufficient capital are prone to failure — this is what spreads failure and panic far and wide. The Basel III framework, negotiated just last year, is crumbling before our eyes; the failure to ensure sufficient capital is at the heart of the European meltdown — and why the pressure on United States banks is mounting.

The Europeans have to decide, once and for all, which governments will restructure their debts and which will be protected — to an unlimited degree — by the European Central Bank (again, my paper with Peter Boone has more details and proposals). A full-scale bank recapitalization program is required, along with management changes at almost all major European financial institutions.

If the Europeans fail to get a grip on their economic situation, the Federal Deposit Insurance Corporation will be pressed to use its Dodd-Frank resolution powers to take over and manage the unwinding of a major American financial institution. In that scenario, creditors are supposed to face losses that are transparent and clearly understood; the theory is that this will stabilize market expectations. The F.D.I.C. has argued that it could have done this in the case of Lehman Brothers. I have my doubts.

The Dodd-Frank reform process decided not to break up global megabanks, but rather to handle them under the F.D.I.C.’s resolution framework. We’re about to find out if this was a good idea — or if we are just on the brink of more unconditional bailouts.

Umami Burger to open flagship location at the Grove

Umami Burger, the rapidly growing Los Angeles burger chain, will open its biggest location yet at the Grove shopping center this fall. Umami

The 3,000-square-foot flagship location will be the brand's ninth restaurant and will feature house-ground meat, locally sourced produce, house-made ingredients and chef-inspired burgers. The indoor-outdoor location at the Grove will seat 175 and will be built with a sustainable green design including recycled building materials and solar panels.

The news was part of a wider announcement that Umami Restaurant Group has partnered with hospitality and lifestyle company SBE and investment firm Nimes Capital to grow the burger chain nationwide.

-- Andrea Chang

Photo: Umami founder Adam Fleischman at the chain's Hollywood location. Credit: Kirk McKoy / Los Angeles Times

Comment

Comment