Heineken Wants to Be At Least Number Two!

Heineken's buys Femsa's beer unit. The dutch brewer may not be as big as AnheiserBush-InBev, but they know growth is to be found infast-growing emerging markets.

Confidence Down. Stocks Down. Asia Follows.

News galore and look what happened:




Consumer confidence was way down and retailers announced earnings. Not surprisingly, surprises move markets:



Dow Jones Newswires' Puja Rajeev reports that lagging consumer confidence is greeted with gloom in Asian markets:




Meanwhile the gnomes on Barron's MarketWatch discuss a new "Revolution Fund:"

Is Our National Defense As Sound as the Dollar?

In the 1950s, Egypt nationalized the Suez Canal.  Britain and France invaded.  America opposed the invasion.  The Eisenhower administration had no need to sent the marines.  It simply threatened to sell sterling bonds and vetoed IMF support for the pound forcing its devaluation. Pecunia was indeed the nervi belli.  Egypt kept the Canal.  One can picture a British gentleman, a veteran of the colonial wars, muttering over his brandy "I could understand superior arms, but the balance of payments?"

Greece, whose debt is owed in euros, a currency it can not print, is facing a major debt crisis.  While the country itself is an experienced deadbeat (Greece spent half its modern independent existence in default), its debt crisis is is putting great strain on the euro and the euro zone governments. 

Yet Greece's fiscal wantonness is not any worse than that of the U.S., which can print the currency it borrows in.  How secure are we in borrowing and borrowing?  Harvard professor Nigel Ferguson is an insightful student of financial history who knows what he is talking about. He warned in the Financial Times last week (2/10/2010) that "A Greek crisis is coming to America." 

Surveying the wreckage fiscal stimulus has wrought, Ferguson courts all the popularity of a biblical prophet by warning us "What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch."  I might add Keynes himself would agree. 

Ferguson writes, "On reflection, it is appropriate that the fiscal crisis of the west has begun in Greece, the birthplace of western civilization. Soon it will cross the channel to Britain. But the key question is when that crisis will reach the last bastion of western power, on the other side of the Atlantic."

The bond markets may seem rather remote from our national security, but beware. Great empires require sound money and a good credit rating. Constantine's solidus held its value for 700 years and the Roman empire survived another thousand years in the East. Alexander Hamilton correctly viewed Great Britain's ability to borrow funds as essential to its military success as its navy.  America's currency and its debt earned a reputation worthy of trust which we rode to becoming a superpower.

Yet, sadly, neither a sound dollar nor a triple A credit rating seem high on Mr. Obama's national security agenda.   

Sic transit gloria.

Greece and the Fed's Exit Strategy Move Bank Stocks

U.S. banks have $176 million dollar exposure to the sovereign debt of the PIGSs (Portugal, Ireland, Greece, and Spain.)

Michael Corkery in the Wall Street Journal's "Deal Journal" asks, "So just what is the exposure of U.S. banks to debt in these four nations? 'Overall, we believe that the direct risk of the large U.S. banks to Ireland, Greece, Portugal and Spain is modest,' writes Barclays analyst Jonathan Glionna in a research note.


"Barclays analysts estimate the 10 largest U.S. financial institutions have a total of $169 billion of their loans tied up in the four troubled Euro nations. That is about about 19% of those banks’ combined Tier 1 capital, or the cash cushion that banks keep to absorb bad loans. Looking at the combined exposure of the 10 largest banks and the other 63 U.S. banking firms that supply cross border information to the Federal Institutions Examination Council, the total exposure is $176 billion. By country, the overall exposure of those 73 banks is $82 billion to Ireland, $68 billion to Spain, $18 billion to Greece and $9 billion to Portugal."


Alistair Barr reports on the effect of this and the Fed's exit stretegy on Market Watch. 







Speaking of PIGS, the UK's debt is starting to smell of bacon to use Ian Bremmer and Nouriel Roubini's phrase. Sara Schaefer Muñoz reports that British banks have a heavy exposure to UK soverign debt.  What about the Yanks?

Ford is in the Black

Matthew Dolan and Jeff Bennett reported on January 29th in the Wall Street Journal "Ford Posts First Full-Year Profit Since 2005." Ford earned $2.7 billion in 2009. Any number greater than zero is a miracle in Detroit. This despite the fact that Ford is burdened with a much greater debt burden than Chrysler and GM for whom the federal government rolled its bondholders.


The easy interpretation is that is one for capitalism as opposed to socialism.  Any student of the decline of American car making will realize that Detroit's inward focused culture and its willingness to run to Washington when in trouble are better. A deeper analysis shows that Ford, by bringing in an outsider, Alan Mulally, they committed themselves to remedying the root problem: Detroit's culture.

Do You Care a Rap About the Business Cycle?

John Maynard Keynes was perhaps the most imposing economist of the Twentieth Century.  He is the father of macroeconomics (John Hicks might be called the midwife: indeed Hicks is probably the most influential, although his influence across the board in modern economic theory is so pervasive he is seldom cited.)

Friedrich von Hayek developed the ideas of Wicksell and the Austrian School theory of capital based on Boehm-Bawerk and von Mises into a coherent theory of the business cycle which does much to explain the mess we are in.

Keynesian economics justifies the use of stimulus programs such as are being used around the world to revive the world economy.  Nations around the world are following President Richard Nixon when he said, "We are all Keynesians now."

One should not assume Keynes would approve of current economic policy.  At a meeting of American economists shortly before he died, Keynes remarked "Perhaps I am the only non-Keynesian in the room." (as quoted in Bran Domitrovic's Econonoclasts: the History of the Supply-Side Revolution.)





Many thanks to both Ryan Pendleton and the Kansas Policy Institute who alerted me to this.

Are the Dogs of the Dow Back?

The Recovery: Write Less Off, Mail More Offers

Good News For Banks; Good News For the Postal Service

Credit card losses are down for major issuers. This bodes well for postal volumes and, as a lagging indicator, it is further confirmation that the economic recovery is well under way.  The U.S. Postal Service could use some good news with postal volumes and revenues falling at terrifying rates.

December Was Six Months Past the Bottom

My estimate is that the business cycle trough was last June.

Credit card solicitations have been a significant use of the mail over the years.  Losses reduce the ability and willingness of credit card issuers to solicit the more profitable lower credit customers , although it increases their need for higher quality customers: a plus for First-Class mail and thus USPS itself.  Higher losses mean greater capital is needed: a scarce and expensive requirement for the nations' banks. While they can borrow at virtually no cost, equity capital costs are punitive.  Think of Citi's recent dilutive offering.

Aparajita Saha-Bubna (with a little help from Joe Bel Bruno and Tess Stynes),  reported in Saturday's Wall Street Journal that delinquency rates fell off "for most credit-card issuers in December, but losses stemming from souring credit-card loans remain elevated."

Capital One:  delinquencies  5.78% down from 5.87% in November

                      write-offs       10.1% up from 9.6% in November

Discover:      delinquencies  5.49% down from 5.65% in November

                      write-offs        8.68% down from 8.98% in November (securitized assets)

American Express:  delinquencies  3.7% down from 4.1% in November

                                write-offs         7.1% down from 7.6% in November

For the quarter:       delinquencies  3.7% down from 3.9% in the third quarter

                                write-offs        7.5% down from 8.9% in the third quarter

Bank of America:  charge-offs       13.5% up from 13% in November

Chase:                write-offs  7.1% down from 8.8% in November

For the quarter:  write-offs  9.3% down from10.3% in the third quarter

Chase is a unit of J.P. Morgan Chase Co

According to the same article, JPMorgan's "Chief Financial Officer Mike Cavanagh said the recent improvement in credit-card losses mightn't continue as the U.S. economy continues to claw its way out of the financial crisis.

"Mr. Cavanagh, speaking to the media after the bank reported fourth-quarter earnings, expects a $1 billion loss for credit cards in the first and second quarters."

Dr. Hoenig, the Hawk: We Need More of Them

Dr. Thomas Hoenig, President of the Kansas City Federal Reserve Bank, has been known as a monetary policy hawk in the past. If he has been part of the Federal Open Market Committee's consensus supporting negative real interest rates, he is a dove no longer. He told the American Economics Association (AEA) meetings, “Experience both in the US and internationally tells us that maintaining large amounts of stimulus over an extended period risks creating conditions that lead to financial excess, economic volatility and even higher unemployment at some point in the future.” Amen!

Hoenig vs. Bernanke

Hoenig and our current Fed Chairman, Ben Bernanke offered opposing views of history at the AEA meetings.

As George Santayana taught us, "Those who cannot learn from history are doomed to repeat it." So at issue is what role monetary policy played in creating the real estate bubble that caused the so called Great Recession of 2007-9. To Hoenig and to me it is clear that the over-expansion of credit that inflated the bubble had as its root cause the Fed's war against the paper dragon of deflation. Negative real interest rates in 2002-2005 and much too low rates in 2006 subsidized the creation of ever more esoteric securities which was the stuff from which Wall Street's leverage binge was made.  Negative real interest rates inflate investment bankers' profits and bonuses, misdirect productive resources into speculation, cause a dangerous correlation of returns, and subsidize the ever increasing financial roundabout production we saw during the recent bubble. Short term interest rates are the price for the raw materials with which investment banks create leverage in securities markets and financial engineers manufacture designer securities.Subsidize the raw materials and increase the supply.

Bernanke is a better student of the Great Depression of the 1930s than of the recent bubble. As John Cassidy relates, that Ben Bernanke "[r]ather than conceding that he and his predecessor, Alan Greenspan, made a hash of things between 2002 and 2006, keeping interest rates too low for too long, he said the Fed’s policies were reasonable and the main cause of the rise in house prices was not cheap money but lax supervision." Cassidy is moved to wonder in the Financial Times whether Ben Bernanke is "Decended From the Bourbons?" recalling "Talleyrand’s quip about the restored Bourbon monarchs: 'They have learned nothing and forgotten nothing.'”