| Buttonwood: A developing bull market
November 26, 2009 at 6:40 am
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| Low yields on cash are sending investors far afield THE hunt for the next bubble is well advanced. Gold, which has repeatedly hit record nominal peaks, is a plausible candidate. Like a dotcom stock, it seems to lack any valuation constraints. Another option is emerging markets. Equities in developing markets have already enjoyed a phenomenal rally this year, with the MSCI emerging-markets index up by 73% as of November 25th. But what about emerging-market debt? ... |
| Pension planning: The retiree's autopilot
November 26, 2009 at 6:40 am
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| A new approach to an old-age problem IT IS a brave new world of personal responsibility. Private-sector companies have been abandoning their commitment to defined-benefit (DB) pension schemes, in which employees receive an income based on their final salary. The cost of the promise has been too great. But the replacement of DB schemes with defined-contribution (DC) plans hurts employees. Under a DB scheme, it was up to the employer to fill any hole in the fund caused by a market shortfall; in a DC plan, the employee bears all the market risk. If returns are disappointing then pensions will be, too. And employers often use the switch from DB to DC to cut their contributions. If less goes into the pot, less will come out. Employees in DC schemes can be at a loss when deciding how much to invest, where to put their money and what kind of pension to expect. To avoid this problem, many turn to “target date” funds, which invest in equities in the early years for growth and switch to safer government bonds as retirement approaches. Almost one-third of Americans with personal pensions have assets in such funds, according to the Investment Company Institute. ... |
| China's latest commodity boom: The price also stinks
November 26, 2009 at 6:40 am
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| A new twist on garden-variety speculation WORRIES about overheating in China usually focus on obvious candidates: property in big cities, mainland stockmarkets and so forth. On November 25th China tightened the rules on foreign-currency transfers by individuals in a bid to control flows of hot money into the country. But signs of frothiness are also cropping up in odd places: garlic has become an unlikely target for Chinese speculators. According to reports in China Business News, prices in Jinxiang, China’s garlic-growing capital, have seen a fortyfold increase since March. Further down the supply chain, garlic prices have jumped tenfold on wholesale markets in big cities and fourfold nationwide. That compares with a meagre doubling in the price of copper this year and a 77% increase in the Shanghai stockmarket. ... |
| German banking: Bail-out poker
November 26, 2009 at 6:40 am
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| WestLB is rescued for the fourth time in four years BANKS used to inspire trust with marble halls and granite facades. The modern equivalent is a website that touts state guarantees bailing out depositors and other creditors. WestLB, the shakiest of Germany’s state-owned wholesale banks, or Landesbanken, prominently displays an “overview” of the bank’s many “protection mechanisms” on its site. Readers who click through are taken to a document that is comfortingly entitled “Belt and Braces”. Even so, the bank teetered on November 24th. While its shareholders, a mix of local savings-bank associations and the state of North Rhine-Westphalia, were squabbling with Germany’s federal government over who should take the hit for its losses on €85 billion ($129 billion) of toxic assets, the cost of insuring its debt spiked amid reports that the bank faced insolvency by the end of the month. At issue was uncertainty over whether WestLB would have enough capital when temporary guarantees from its owners expired. ... |
| Tackling Japan's debt: A load to bear
November 26, 2009 at 6:40 am
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| Japan is not yet doomed to debt-induced penury IT IS one of the hottest shows in town. People queue up, replace their shoes with slippers, and enter a gymnasium where TV cameras are filming. What they have come to see looks like “Dragons’ Den”, a popular TV show. But bureaucrats, not entrepreneurs, are the ones begging for cash to fund their pet projects. And politicians give the thumbs up or down. This is budget-balancing, Japanese-style. The new administration of Yukio Hatoyama has come to office with big spending plans, which it intends to pay for by scrapping wasteful expenditures of the sort that, it says, helped keep its opponents in power for half a century. Judging by the TV audiences, the public is impressed. The trouble is that Japan has a fiscal hole likely to approach 10% of GDP next year, or about YEN50 trillion ($500 billion). Such gestures are like using a toothpick to fill it in. ... |
| Dubai's debt: Standing still but still standing
November 26, 2009 at 6:40 am
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| Dubai seeks a reprieve on its debts ONE of the biggest events in the Muslim calendar, Eid al-Adha, which begins this weekend, is supposed to be a festival of sacrifice. On November 25th investors in Dubai were given an early chance to get into the spirit of things. The emirate’s government asked creditors of Dubai World, one of three big government-backed conglomerates, to agree to a standstill on repayments until May 30th 2010 at the earliest. The standstill does not apply to Dubai Ports World, which operates one of the biggest container terminals in the world. But it does include the $4.05 billion due on December 14th to holders of an Islamic bond, or sukuk, issued by Nakheel, a developer responsible for the Palm Islands and other spectacular land-reclamation projects. The announcement left investors feeling wronged and wrong-footed. Only weeks ago, Sheikh Mohammed bin Rashid al-Maktoum, Dubai’s ruler, assured investors that the emirate would soon raise the funds to meet “current and future obligations”. Either he was not ready to reveal what was afoot, or he did not know. In an autocratic regime like Dubai, bad news acquires an extra coating of sugar with each step it takes up the hierarchy. ... |
| Parallels between Japan and the West: Same chords, different tune
November 26, 2009 at 6:40 am
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| There are enough similarities to worry FOR policymakers in the rich world, Japan’s plight is the stuff of nightmares. The damage from the early 1990s property and banking bust lingered for years, devastating the government’s finances and, eventually, enveloping the economy in deflation. The effects are still visible. Small wonder, then, that a desire to avoid Japan’s experience has shaped other governments’ responses to the financial crash. Their reactions, from the speed and scale with which central banks reached for unconventional monetary tools to the focus (at least rhetorically) on fixing the banking mess, all contrast with the tentative initial response to Japan’s bust. But will that be enough? Close inspection suggests that, from America to Britain, worrying similarities with Japan remain. And on some counts today’s post-bubble policy challenges are more complex than anything Japanese policymakers ever faced. ... |
| Economics focus: Systems failure
November 26, 2009 at 6:40 am
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| Two new papers explore how to regulate the financial system as a whole BANKS mimic other banks. They expose themselves to similar risks by making the same sorts of loans. Each bank’s appetite for lending rises and falls in sync. What is safe for one institution becomes dangerous if they all do the same, which is often how financial trouble starts. The scope for nasty spillovers is increased by direct linkages. Banks lend to each other as well as to customers, so one firm’s failure can quickly cause others to fall over, too. Because of these connections, rules to ensure the soundness of each bank are not enough to keep the banking system safe. Hence the calls for “macroprudential” regulation to prevent failures of the financial system as a whole. Although there is wide agreement that macroprudential policy is needed to limit systemic risk, there has been very little detail about how it might work. Two new reports help fill this gap. One is a discussion paper from the Bank of England, which sketches out the elements of a macroprudential regime and identifies what needs to be decided before it is put into practice*. The other paper, by the Warwick Commission, a group of academics and experts on finance from around the world, advocates specific reforms**. ... | | |  |
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