Summary of business news and analysis

Find here a presentation by a professor of the University of St. Gall about causes and consequences (as related to institutional investing) of financial repression:

Institutionelle Anlagen unter veränderter finanzieller Repression und danach, Prof. Dr. Rico von Wyss, Swiss Pensions Conference, Rüschlikon, 28. 09. 2012

Keywords: Institutional Assets, Financial Repression, Real Interest Rates

Related:

Handelsblatt: Welche Länder ihre Sparer am stärksten schröpfen, August 13, 2012

Reinhart and Rogoff, many times referred to on this platform, show in their latest article on Voxeu.org that the current recovery is not slower as those in previous financial crises.

The de-leveraging process is at the best in a beginning stage. We will see much more austerity and financial repression. A kind of bad prospects on a macro level... some "animal spirit" on a micro level can make life a bit sweeter .. at least for those who are looking for entrepreneurial challenges.

Keywords: Financial Crisis, Recovery after Financial Crisis

Econbrowser: Guest Contribution: How “Different” is the Recovery from the Financial Crisis? By David Papell and Ruxandra Prodan, Oct. 23, 2012

The slow recovery from the financial crisis and recession of 2007 – 2009 has become a centerpiece of the Presidential election. In last Tuesday’s debate, Mitt Romney, picking up on a theme that has been emphasized by John Taylor, contrasted the current slow recovery with the much faster recovery from the 1981 – 1982 recession. During the past two weeks, there has been an intense focus on a comparison of the current recovery with recoveries from other financial crises. On October 11, Taylor, using historical data from a paper by Michael Bordo and Joseph Haubrich, argued that the current recovery is much slower than the average of previous American recessions associated with financial crises. This was followed by an October 14 paper by Carmen Reinhart and Ken Rogoff who argue that the aftermath of the U.S. financial crisis has been typical of the recoveries from other severe financial crises, an October 15 reply by Taylor, an October 16 rejoinder by Reinhart and Rogoff, an October 17 piece by Paul Krugman, and an October 17 reply by Taylor. read more on Econbrowser

Keywords: Financial Crisis, Revovery after Financial Crisis

Related:

Full recovery in 2016 - after the crisis began in 2007? Quite frustrating prospect. Could more "animal spirit" speed up the process?..

"animal spirit Robert Shiller"

Shiller: how animal spirits drive the economy, MarketObservation 2009

CNN Money: The next generation of pre-IPO financing? October 23, 2012

Buyout firms have a new strategy for reducing portfolio company debt.

FORTUNE -- I recently wrote about private equity's golden hangover, or the glut of large-cap companies that remain in PE portfolios after being acquired between 2005 and 2008. Conventional wisdom is that many of these companies are planning 2013 IPOs, but such offerings can face serious challenges. Namely, that capital raise targets are tied tightly to debt repayment.

Here's what I mean: read more on CNN Money

Keywords: IPO, Private Equity Leverage, IPO to Repay Leverage

We could read today in various newspapers that the IMF sees progress in the structural reforms in Southern European countries. The re-balancing of the wage levels to non-distorted conditions is a key process for long-term recovery. Following graph is amazing!

Keywords: European Crisis, Market Distortions, Re-Balancing

Keywords: Private Equity, Bain Capital, Mitt Romney

Keywords: Economic Development, Growth, Trust

Costas Azariadis and Leo Kaas, Self-Fulfilling Credit Cycles, Working Paper 2012-047A, Federal Reserve Bank of St. Louis, 2012

Abstract:

"This paper argues that self-fulfilling beliefs in credit conditions can generate endoge- nously persistent business cycle dynamics. We develop a tractable dynamic general equi- librium model in which heterogeneous firms face idiosyncratic productivity shocks. Capital from less productive firms is lent to more productive ones in the form of credit secured by collateral and also as unsecured credit based on reputation. A dynamic complemen- tarity between current and future credit constraints permits uncorrelated sunspot shocks to trigger persistent aggregate fluctuations in debt, factor productivity and output. In a calibrated version we compare the features of sunspot cycles with those generated by shocks to economic fundamentals."

Keywords: Self-Fulfilling Beliefs, Credit Cycle

Keywords: Behavioral Economics, Mental Accounting, Home Bias

Keywords: Monetary Policy, Interest Rates, Housing Market, Housing Prices

Keywords: Rental Housing, Interest Rates

WSJ: Debt Fuels a Dividend Boom; Firms Collect Payouts, and Investors Get Yield; 'Reminiscent of the Bubble Era', Oct. 18, 2012

Private-equity firms are adding debt to the companies they own in order to fund payouts to themselves, a controversial practice now reaching a record pace.

Leonard Green & Partners LP, Bain Capital LLC and Carlyle Group LP CG -2.09% are among the firms using the tactic, which rose in popularity before the financial crisis.

In these deals, known as "dividend recapitalizations," private-equity-owned companies raise cash by issuing debt. The proceeds are distributed in the form of dividends to buyout groups. read more in the Wall Street Journal

Keywords: Private Equity, LBO, Leveraged Buy Out, Recapitalization

Source: Merk Funds

Keywords: Central Banks, Monetary Policy, Central Bank Balance Sheet Expansion

Related:

Porta, Angelo, Unconventional Monetary Policies - Lessons from the Evolution of Balance Sheets of Four Central Banks (2007–2010) (March 2011). Paolo Baffi Centre Research Paper No. 2011-87. Available at SSRN: http://ssrn.com/abstract=1798444

Keywords:d Creativity, Innovation, Connected Mind

Ippei Fujiwara, Hibiki Ichiue, Yoshiyuki Nakazono, Yosuke Shigemi, Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas, 2012

Abstract:

"We test whether professional forecasters forecast rationally or behaviorally using a unique database, QSS Database, which is the monthly panel of forecasts on Japanese stock prices and bond yields. The estimation results show that (i) professional forecasts are behavioral, namely, significantly influenced by past forecasts, (ii) there exists a stock-bond dissonance: while forecasting behavior in the stock market seems to be herding, that in the bond market seems to be bold in the sense that their current forecasts tend to be negatively related to past forecasts, and (iii) the dissonance is due, at least partially, to the individual forecasters' behavior that is influenced by their own past forecasts rather than others. Even in the same country, forecasting behavior is quite different by market."

Keywords: Investing, Forecasts, Herding

Fascinating interview. Creating value does not necessarily mean to take values out of companies but to create values in order to develop firms in the long-term. And much more about the subject..

Ronald S. Burt, private games are too dangerous, 1999

Keywords: Prisoner Dilemma, Trust, Organization

"By historical standards, the current recovery from the recession that began in 2007 has been disappointing. As John Taylor of Stanford University's Hoover Institution and the Department of Economics argues in Part 1 of this discussion on the economy, GDP has not returned to trend, the percent of the population that is working is flat rather than rising, and growth rates are below their usual levels after such a deep slump.


In this episode, Taylor and Number's Game host Russ Roberts discuss possible explanations for the sluggish recovery: the ongoing slump in construction employment, the effect of housing prices on saving and spending decisions by households, and this recovery's having been preceded by a financial crisis. Taylor rejects these arguments, arguing instead that the sluggish recovery can be explained by poor economic policy decisions made by the Bush and the Obama administrations."

Keywords: US Economy, US Recovery

Good new paper by Buchheit, Gulati, exporing 5 options for the Eurozone:

The 5 Options:

Option 1: Jolly the markets
Option 2: Massage the yields
Option 3: Full bailout
Option 4: Reprofiling
Option 5: Full (Greek-style) restructuring

Buchheit, Lee C. and Gulati, G. Mitu, The Eurozone Debt Crisis -- The Options Now (October 8, 2012). Available at SSRN: http://ssrn.com/abstract=2158850

Abstract:

"The Eurozone debt crisis is entering its third year. The original objective of the official sector’s response to the crisis -- containment -- has failed. All of the countries of peripheral Europe are now in play; three of them (Greece, Ireland and Portugal) operate under full official sector bailout programs.

Keywords: Europe, European Union, European Crisis

Keywords: Decision Making, Entrepreneurship