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Swiss Economic Institute (KOF): KOF Bulletin, August 2009

"EDITORIAL BY JAN-EGBERT STURM: WHAT WILL THE SECOND HALF OF 2009 BRING?

Dear readers, in the editorial of the KOF bulletin’s January edition, I spoke of a «distinct recession» in 2009. As has been proven in the meantime, the economic figures are – unfortunately – even worse than was expected at the beginning of the year. The world economy is currently in the midst of a recession, displaying the worst decline in economic performance since the Second World War. It is not just the depth and worldwide synchronicity of the extremely severe slump since the second half of 2008 which are striking, but also the fact that the current recession has become virulent as a liquidity crisis. This means that most economies today find themselves in the situation of the socalled «liquidity trap», which has made it more difficult for the monetary policy to contribute towards economic recovery.

THE TURN-AROUND?

In most recent times, however, there has been an increasing number of cautiously positive signs; early indicators such as business expectations and consumer confidence lead us to hope – from an international point of view – for a nearing turnaround in the trend of the GDP growth rates. However, other indicators such as cargo rates hardly suggest a recovery of the world economy. There are still many uncertainties surrounding the revival of world economic dynamics. The Organisation for Economic Co-operation and Development (OECD) assumes in its current «Economic Outlook», that the trough will very soon be reached. In various regions of the world, there are signs that things will soon bottom out. According to the most recent KOF forecasts in June, the USA, for example, could swing onto a positive growth path in the second half of 2009. Europe should then follow suit after one or two quarters. And Switzerland?

SWITZERLAND, THE LATE BLOOMER

The KOF expects a 3.3% decline in the Swiss gross domestic product (GDP) for the whole of 2009 (see graph G 1). A further contraction must also be anticipated for next year. The KOF assumes a negative annual growth of 0.6%. The delay in the VAT increase and the third economic stimulus package, are not included in this forecast. The agreed measures should lessen the decline,but definitely not completely eliminate it.The shifting of recessive tendencies onto domestic economic activity means Switzerland is lagging behind the world economy, this time making it a «late bloomer». This means that it will slide into recession later than other countries, but will also emerge from it later. The Swiss economy, which has been affected by export slumps, has benefited from a comparatively stable development in domestic economic activity for a relatively long time. Now, however, also the domestic demand is being affected by the world economic crisis,however with a slight delay. As part of the expected slow recovery of the world economy, exports will nevertheless still record conservative growth in the second half of 2009. Whether this can compensate for the decline in private consumption, which will arise due to the worsening employment market situation and negative actual wage developments, is more than questionable. The crisis in the Swiss export industry will thus gradually shift to the domestic economy."

Source: KOF Bulletin linked to above

Vinzenz Schwegman restructuring expert from Alix Partners explains the major result of Alix' 2009 automotive review. Major issues are:

- global demand decrease for automotives of 15% in 2009
- many suppliers have overcapacities and will run out of cash; many will disappear from the market
- even more will go through consolidation; enterprises with liquidity will "eat" the illiquid ones; Schwegman sees chances for entreprises which have the financial strengths to become active consolidators

Welt Online: Autobranche vor dramatischem Einbruch 2010, July 3, 2009

"Bear in mind that inflation usually runs below the rate of wage change, thanks to productivity growth. So we’re really heading into Japanese-style deflation territory." (Krugman)

This is another graph which demonstrates that we are living in extraordinary times:

MarketWatch: Not easy being green, Bright investment outlook for 'cleantech' stocks is becoming cloudier, July 2, 2009

Following President Barack Obama's election and Democratic congressional victories in November, many investors expected strong political action to combat climate change and turned bullish on the green-energy sector.

But such optimism has since softened as political realities and the impact of the frozen credit markets hit the sector, also known as cleantech. read more

NYT: 467,000 Jobs Lost in June; Unemployment Reaches 9.5%, July 2, 2009

The pace of job losses quickened in June after falling sharply just a month earlier, casting a shadow over the Obama administration’s attempts to stanch months of stark declines in the labor market.

The American economy shed 467,000 jobs last month, and the unemployment rate rose to 9.5 percent, its highest level in 26 years, the Labor Department reported on Thursday. Job losses were widespread among the construction, manufacturing and business and professional services sectors.

Economists had expected 365,000 job losses for the month, and predicted unemployment would reach 9.6 percent.

The latest figures highlight a somber new reality for workers, economists said. As the recession enters its 20th month, private wages and salaries are falling, working hours are dwindling and more people are without work. In essence, economists say, months of deep, broad job losses are effectively making unemployment a way of life for millions.

The number of people who have been unemployed for more than 27 weeks has more than tripled since the recession began, to 4 million. The median time people go without a job has increased to nearly four months, from slightly more than two months at the outset of the recession in December 2007.

“We have never seen a duration of that magnitude,” Lynn Reaser, vice president for the National Association for Business Economics, said. “There are a lot of ramifications. A lot of these people become discouraged, and they drop out of the work force. It affects their spending, their whole psychological frame of mind.” read more

NYT: Facing Deficits, Some States Cut Summer School, July 1, 2009

A year ago, the Brevard County Schools ran a robust summer program here, with dozens of schools bustling with teachers and some 14,000 children practicing multiplication, reading Harry Potter and studying Spanish verbs, all at no cost to parents.

But this year Florida’s budget crisis has gutted summer school. Brevard classrooms are shuttered, and students like 11-year-old Uvenka Jean-Baptiste, whose mother works in a nursing home, are spending their summer days at home, surfing television channels or loitering at a mall. read more

FT: Sweden warns EU of further pain, July 1, 2009

The European Union’s financial sector faces potential losses so large that the bloc’s governments cannot afford the risk of borrowing more money to boost Europe’s economy, Fredrik Reinfeldt, Sweden’s prime minister, said on Tuesday.

In an interview with the Financial Times marking Sweden’s assumption today of the EU’s rotating presidency, Mr Reinfeldt said his government would guide the 27-nation bloc for the next six months on the assumption that Europe’s financial sector was still not out of crisis territory.

Mr Reinfeldt’s emphasis on the need to halt and then reverse the rise in EU budget deficits and public debts was broader in its implications than the recent warnings of leaders such as Angela Merkel, ­Germany’s chancellor, because he specifically mentioned the difficulties facing Europe’s financial sector.

“We are warning that we are not through the financial crisis. There is still a financial crisis affecting the financial sector. We have exactly these discussions – what kind of losses are still out there?” Mr Reinfeldt said.

“That’s another reason for me to say, ‘Don’t push on with more stimulus packages, because you might face additional ­problems with the financial sector.’ ” read more

FT: Swiss declare war over tax evasion, June 28, 2009

An economic war has broken out between Switzerland and the rest of the world after the crackdown on Swiss banking secrecy, according to one of Geneva’s leading private bankers.

Yves Mirabaud, a managing partner at Swiss private bank Mirabaud, told the Financial Times that nothing was easier than dodging tax in the US and UK.

In rare public comments, the Swiss private banker said: “There is a feeling in the banking community, and also in the population . . . that we are in an economic war. read more

From an economic point of view, destroying low tax jurisdictions is probably the wrong way to go. Mihir Desai, professor at Harvard, has following answer:

"Tax policy toward American multinational firms would appear to be approaching a crossroads. The presumed linkages between domestic employment conditions and the growth of foreign operations by American firms have led to calls for increased taxation on foreign operations - the so-called end to tax breaks for companies that ship our jobs overseas. At the same time, the current tax regime employed by the U.S. is being abandoned by the two remaining large capital exporters - the UK and Japan - that had maintained similar regimes. The conundrum facing policymakers is how to reconcile mounting pressures for increased tax burdens on foreign activity with the increasing exceptionalism of American policy. This paper address these questions by analyzing the available evidence on two related claims - i) that the current U.S. policy of deferring taxation of foreign profits represents a subsidy to American firms and ii) that activity abroad by multinational firms represents the displacement of activity that would have otherwise been undertaken at home. These two tempting claims are found to have limited, if any, systematic support. Instead, modern welfare norms that capture the nature of multinational firm activity recommend a move toward not taxing the foreign activities of American firms, rather than taxing them more heavily. Similarly, the weight of the empirical evidence is that foreign activity is a complement, rather than a substitute, for domestic activity. Much as the formulation of trade policy requires resisting the tempting logic of protectionism, the appropriate taxation of multinational firms requires a similar fortitude."

New York Times: Our Crisis of Regulation by Richard A. Posner, June 24, 2009

"Politicians are instinctively drawn to plans for government reorganization, because such plans are cheap and visible and dramatic. But planning is the easy part; execution is where the American government falls down. Adding bureaucratic layers will not cure the pathologies of regulation, which are rooted in our regulatory culture — the timidity of civil servants, the contamination of public administration by politics and interest groups, and the power of the “office consensus” to marginalize independent thinkers for not being team players."

Source: Excerpt from article linked to above

Knowledge Wharton: Jeremy Siegel: 'The Market Will Stage Another Recovery', June 24, 2009

"Knowledge@Wharton: The market just had its first weekly [decline] in a number of weeks. What was driving that?

Siegel: I think there are two principal concerns in the market. One is the rising commodity prices -- particularly energy prices and oil. And the other is the rising interest rates, which are in turn caused by fears of huge deficits, as well as rising commodity prices. My feeling is, the market would have been up last week, too, if it didn't have to contend with those. And now, it's concerned that those [factors] might push the economy down. Today [June 22], we had a decline in energy prices and in the market. But ... energy prices and interest rates [are] our main concerns."

Source: Excerpt from interview linked to above

Reuters: Top five private equity deals of '09

"Private equity dealflow sank in the first half of the year to a 17-year low as leverage continued to be elusive. Year-to-date deals added up to $22.4 billion, down 82 percent from the first half of 2008 and accounted for just 2.6 percent of overall M&A activity for 2009, the lowest share since the first half of 1998, Thomson Reuters data said. On a quarterly basis, global private equity deals added up to $10.4 billion, the smallest amount since the fourth quarter of 2001. Quarterly U.S. private equity deals totaled $3.7 billion in the first quarter, 2.9 percent of total volume and the lowest level since the first quarter of 2002. These are the top five global deals for 2009 to date":

Oriental Brewery [INTBB.UL], KKR, $1.8 bln
IndyMac Bancorp (IDMCQ.PK), JCFlowers, others, $1.55 bln
Votorantim Celulose e Papel, BNDES Participacoes, $1.35 bln
New City Residence, Lone Star, $1.1 bln
Wood Mackenzie, Charterhouse Capital, $903.2 mln

Source: Reuters

Moral and Social Constraints to Strategic Default on Mortgages, Luigi Guiso European University Institute, EIEF, & CEPR Paola Sapienza Northwestern University, NBER, & CEPR Luigi Zingales University of Chicago, NBER, & CEPR

Paper Abstract:

"We use survey data to study American households¡¥ propensity to default when the value of their mortgage exceeds the value of their house even if they can afford to pay their mortgage (strategic default). We find that 26% of the existing defaults are strategic. We also find that no household would default if the equity shortfall is less than 10% of the value of the house. Yet, 17% of households would default, even if they can afford to pay their mortgage, when the equity shortfall reaches 50% of the value of their house. Besides relocation costs, the most important variables in predicting strategic default are moral and social considerations. Ceteris paribus, people who consider it immoral to default are 77% less likely to declare their intention to do so, while people who know someone who defaulted are 82% more likely to declare their intention to do so. The willingness to default increases nonlinearly with the proportion of foreclosures in the same ZIP code. That moral attitudes toward default do not change with the percentage of foreclosures in the area suggests that the correlation between willingness to default and percentage of foreclosures is likely to derive from a contagion effect that reduces the social stigma associated with default as defaults become more common."

Gulf Times: Reforming the World's Financial Institutions by Barry Eichengreen, June 2009

"The reason for the contradiction is straightforward. Countries putting money on the barrelhead want assurances that their resources will not be used frivolously, and they want to know that they will be repaid.

But regional neighbours find it hard to criticise one another’s policies and demand course corrections. Political sensitivities run especially high in Asia. Even in Europe, with its long history of co-operation, surveillance and conditionality are outsourced to the IMF. Revealingly, the Fund, not the European Union, has taken the lead in negotiating emergency assistance packages for Hungary and Latvia.

Delinking the CMIM from the IMF will require Asian countries to undertake hard-hitting reviews of one another’s policies and to demand difficult policy adjustments. Here Asean+3 talks the talk. Its May agreement included a commitment to establish a regional surveillance unit."

Source: Excerpt from article linked to above

FT: M&A activity lowest in five years, June 25, 2009

Record levels of capital markets activity during the first six months of the year failed to lift the volume of worldwide mergers and acquisitions as chief executives remained cautious about launching big deals.

Non-financial groups raised almost $887bn in the bond markets in the first half, 64 per cent more than the same period last year when $540.3bn was raised, according to data from Dealogic.

However, this did not translate into higher levels of M&A activity, which totalled just $1,100bn, the lowest semi-annual volume since the first half of 2004. This was in spite of a flurry of activity across sectors including Xstrata’s $48.3bn hostile approach for rival mining group Anglo American. read more

FT: ECB pumps €442bn into banking system, June 25, 2009

The European Central Bank on Wednesday pumped hundreds of billions of euros in one-year loans into the eurozone’s weakened banking system, making record amounts of emergency finance available in a bid to unlock credit markets and revive the region’s economies.

The move came as the US Federal Reserve pushed back against expectations of an early rise in US interest rates.

In a dramatic step dubbed “stimulus by stealth” in financial markets, the ECB lent €442.2bn for 12 months to more than 1,100 banks at its current benchmark interest rate of 1 per cent.

The high demand for the funds, in what was the ECB’s first ever auction for one-year loans, reflected a growing realisation by the banks that emergency funding may not be available again on such favour-able terms.

The central bank’s action could boost the eurozone’s recovery prospects by lowering market interest rates and creating more scope for banks to lend to the private sector. read more

University of Connecticut: Global Ranking of Economics Institutions, May 2009

Rank Institution
1 Harvard University, Cambridge, Massachusetts (United States)
2 University of Chicago, Chicago, Illinois (United States)
3 University of London, London, United Kingdom
4 University of California-Berkeley, Berkeley, California (United States)
5 Princeton University, Princeton, New Jersey (United States)
6 New York University, New York City, New York (United States)
7 Stanford University, Palo Alto, California (United States)
8 Massachusetts Institute of Technology (MIT), Cambridge, Massachusetts (United
States)
9 Columbia University, New York City, New York (United States)
10 World Bank Group, Washington, District of Columbia (United States)

This is an excellent overview. We have come already a long way down.

Scientific American: The Science of Economic Bubbles and Busts, July 2009

The worst economic crisis since the Great Depression has prompted a reassessment of how financial markets work and how people make decisions about money read about the key concepts