Summary of business news and analysis

Spiegel Online International: Choc Finger's Big Bet; Speculators Rediscover Agricultural Commodities, July 29, 2010

With the financial crisis fading into the past, speculation on agricultural commodities markets has returned in force. Food prices are climbing once again as hedge funds rediscover the immense profits that can be made -- led by a British chocolate baron. read more

Related:

Keywords: Agricultural Commodities, Commodities Speculation

Voxeu.org: Fetters of gold and paper, by Barry Eichengreen, Peter Temin, July 30, 2010

The world economy is experiencing tensions arising from inflexible exchange rates – particularly the dollar-renminbi peg and the Eurozone. Drawing on lessons from the gold standard, this column points out that an international monetary system is a system – nations’ policies have spillovers. Now, as in the 1930s, surplus nations’ refusals to increase spending force deficit countries to contract. Keynes drew this lesson from the Great Depression, which is why he wanted measures to deal with chronic surplus countries. Sixty-plus years later, we seem to have forgotten his point. read more

Keywords: Exchange Rates, Dollar-Renminbi Peg

Bill Gross believes that the US Government should not just flush a lot of money down the economic toilet - but focus on enhancing the competitiveness of the US economy:

Keywords: Bill Gross, Investment Outlook, Structural Problem

Dailami, Mansoor, Sovereign Debt Distress and Corporate Spillover Impacts (July 1, 2010). World Bank Policy Research Working Paper Series, Vol. , pp. -, 2010. Available at SSRN: http://ssrn.com/abstract=1649255

Abstract:

"In much of the standard corporate finance literature in which sovereign debt is treated as a risk free asset, corporate bond prices are seen to depend on idiosyncratic risk factors specific to the issuing company, with public debt playing an indirect role to the extent that it affects the term structure of interest rates. In the corporate world, however, the ability of a borrower to access international capital markets and the terms according to which it can raise capital depend not only on its own creditworthiness, but also on the financial health of its home-country sovereign. In times of financial stress, when investors lose confidence in the government's ability to use public finances to stabilize the economy or provide a safety net for corporations in distress, markets' assessment of private credit risk takes on a completely different dynamic than during normal times, incorporating an additional risk premium to compensate investors for the potential consequences of sovereign default. Using a new database that covers nearly every emerging-market corporate and sovereign entity that has issued bonds on global markets between 1995 and 2009, this paper investigates the degree to which heightened sovereign default risk perceptions during times of market turmoil influence the determination of corporate bond yield spreads, controlling for specific bond attributes and common global risk factors. Econometric evidence presented confirms that investors' perceptions of sovereign debt problems translate into higher costs of capital for private corporate issuers, with the magnitude of such costs increasing at times when sovereign bonds trade at spreads exceeding a threshold of 1000 bps. The key policy recommendation emerging from the analysis relates to the need to improve sovereign creditworthiness in order to prevent a loss in investor confidence that could trigger a panicky sell-off in sovereign debt with adverse macroeconomic and fiscal consequences. Implications for future research point to the need to develop better models of corporate bond pricing and valuation, recognizing explicitly the role of sovereign credit risk."

Keywords: Public Debt, Corporate Debt, Cost of Debt

Project Syndicate: The Hidden Future of the US Economy, by Martin Feldstein, July 27, 2010

Keywords: US Economy, Economic Forecast, Double Dip

Voxeu.org: Just how risky are China’s housing markets? by Yongheng Deng, Joseph Gyourko, Jing Wu, July 28, 2010

Keywords: Chinese Housing Market, Chinese Property Prices

Mint.com: Who Owns the U.S. Debt, July 15, 2010

Keywords: Case Shiller Index, US Home Prices, US Real Estate Market

The UBS team has also performed well in the second quarter of 2010 and presents excellent results:

Reuters: UBS outshines Deutsche Bank, as wealth turnaround nears, July 27, 2010

"UBS's (UBS.N) strong second quarter investment banking results stood out against a weak performance at U.S. banking giants Goldman Sachs (GS.N) and Citigroup Inc (C.N), lifting shares 10 percent as investors believed Chief Executive Oswald Gruebel's tough restructuring strategy was producing results.

With a Tier 1 capital ratio of 16.4 percent, investors also saw UBS as a key winner from a decision by central bankers and regulators on Monday to soften planned new bank rules, known as Basel III.

UBS, which was hit by the credit crisis and a tax probe, was able to slow a bleeding of client money to its lowest level since it started to lose assets in early 2008.

"We have fared well through the euro crisis thanks to our good risk management approach," said Gruebel, a former Credit Suisse CEO who was pulled out of retirement in 2009 to lead UBS.

"I am confident we can stop the client outflows this year," the former bond trader said.

Net profit was 2 billion Swiss francs (1.2 billion pounds), UBS' third quarterly profit in a row after big losses in 2008 and 2009, and above forecasts of 1.34 billion francs."

It is not too long a ago when a substantial amount of journalists and alleged experts believed that UBS could only recover by getting rid of its investment banking activities. We have seen this more differentiated, as a website entry of April 2008 shows:

MarketObservation: Forderung nach einer differenzierten Betrachtung des Investment Bankings, April 26, 2008

Keywords: UBS, Swiss Banking, Investment Banking

Marginal Revolution: Why I've been wrong about Europe, by Tyler Cowen, July 27, 2010

Why I've been wrong about Europe

"If only mentally, I predicted a worse summer for the European economies than they seem to be experiencing; furthermore the euro is back up in the 1.30 range. Why was I wrong? I was believing those economies have more wage stickiness than they actually do. In this regard a lot of Keynesians and market-oriented economists have been making similar mistakes, albeit for different reasons. Sticky wages are a core part of the Keynesian worldview, whereas many non-Keynesian economists are quite skeptical of European labor markets and their inflexibilities.

These days I browse British, Irish, Spanish and German newspapers with reasonable frequency. I am struck by how many accounts of falling nominal and real wages I see. Outside of Germany, the proverbial cat hasn't quite bounced, but it seems to have hit the pavement.

One theory is that most wages are actually fairly flexible, but we don't usually like to cut wages or have wages fall. When needed, many wages can fall quite readily. In other words, sometimes it is easier to cut wages by a lot than by a little.

I hardly think the European economies, or the Euro, are in the clear. Differential rates of productivity growth, and the absence and impossibility of a common fiscal sovereign, still will make the arrangement unworkable. But it's worth explicitly noting that so far my forecast has been off the track."

Source: MarginalRevolution

Keywords: Principal Agent Problem

The Economist: A weakling no more, July 26, 2010

WHILE most of our attention has been on the equity and government bond markets, the foreign exchange market has undergone one of its occasional changes in trend. The euro is no longer the whipping boy. Having dipped below $1.19 in early June, the European single currency is in sight of $1.30.

In part, this is down to the recent economic data. Whereas most European data (such as last week's Ifo survey) have been stronger than expected, the US numbers have been generally weaker. To the extent that investors were buying the American growth story in the first half of the year, they are now less convinced. It helps of course that the talk of imminent euro break-up has subsided a bit.

However, is growth likely to be the driver of currency movements over the long term? From time to time, other factors have driven the markets, such as yield differentials and current account deficits. Two of the strongest currencies over the long term have been the Swiss franc and the Japanese yen, neither of which has been renowned for their growth performance over the last 20 years. Instead, they are known as low-inflation countries. read more

Keywords: Currencies, Exchange Rates, Growth and Exchange Rates

Fixed Ideas of Money; Small States and Exchange Rate Regimes in Twentieth-Century Europe; Series: Studies in Macroeconomic History, Tobias Straumann, University of Zurich

"Most European countries are rather small, yet we know little about their monetary history. This book analyses for the first time the experience of seven small states (Austria, Belgium, Denmark, The Netherlands, Norway, Sweden, and Switzerland) during the last hundred years, starting with the restoration of the gold standard after World War I and ending with Sweden's rejection of the Euro in 2003. The comparative analysis shows that for the most part of the twentieth century the options of policy makers were seriously constrained by a distinct fear of floating exchange rates. Only with the crisis of the European Monetary System (EMS) in 1992–93 did the idea that a flexible exchange rate regime was suited for a small open economy gain currency. The book also analyses the differences among small states and concludes that economic structures or foreign policy orientations were far more important for the timing of regime changes than domestic institutions and policies.

• First book to treat monetary history of seven small European states across the twentieth century • Shows the crucial importance of economic ideas and monetary theories in policy making • Results are relevant for understanding the current financial and economic crisis"

Keywords: Monetary Policy, Exchange Rates

It is sometimes fun to take a look back! Fascinating!

Head of capital markets at Churchill Financial Holdings about three factors driving uptick in midmarket dealmaking:

Keywords: Mid Market M&A, Dealmaking

Where to draw lines: stability versus efficiency, by Thomas J. Sargent, New York University and Hoover Institution, July 2, 2010

Abstract:

"What kinds of assets should financial intermediaries be permitted to hold? What kinds of liabilities should they be allowed to issue? Should a government or a central bank offer explicit deposit insurance or implicit deposit insurance by acting as a lender of last resort? This paper reviews how tensions involving stability versus efficiency and regulation versus laissez faire have for centuries run through macroeconomic analysis of these questions."

Project Syndicate: Who Should Safeguard Financial Stability? by Robert J. Shiller, July 22, 2010