EUCOM Economic Analysis - Part I

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13.27 More analysis from think tank Open Europe, who wonder whether the latest plan will doubly penalise large depositors.

Thinking about the plan in more detail, it occurred to us that this may amount to trying to burn the larger depositors twice. The plan essentially is to move all the bad assets to a bad bank, along with the large uninsured depositors (€100,000+). These assets would then be wound down or sold off at a large discount with the depositors footing the bill (and taking losses of 20pc - 40pc). This, along with the merging of Bank of Cyprus and the good bank, is how the recapitalisation costs will be reduced by €2.3bn.

So, the large depositors will take significant losses here and yet may still face a large deposit tax as well? That seems to be pushing the boundaries to us, although it is not impossible. Cyprus would not recover as destination for foreign investment for some time. One way to structure this could be for the tax only to be applied to depositors above €500,000 (as we suggest below) and the bad bank to apply to all uninsured deposits. Obviously, the bad bank scheme so far only applies to Laiki bank, but as the second largest Cypriot bank it is still likely to account for a large amount of big deposits.

Still this could see larger depositors taking up to 50pc hits in some cases. We can't imagine Moscow would take that one lying down, especially given comments earlier in the week..

Didn't Medvedev didn't look yesterday on his iPad during the PC and stated that there would be not bank levy? He must not be too happy, we will see.

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Krugman on the choice of the dancing partner. The Icelandic raiders plundered softer targets. BTW he is positive about the Icelandization. The Cypriots might have found themselves under a truly massive pile of debt without that move and European solidarity. Yes, they should arguably say thanks many times to the European taxpayer for helping them with many, many €. And that after having made them in general pay more by helping others to evade quite a few of those taxes. Of course we will hear none of that.

Cyprus Update

Well, it looks as if the Icelandization of Cyprus — at least in the sense of making offshore depositors take a big hit — is happening faster and more decisively than I feared. Great summary by Paul Murphy at FT Alphaville, ending thusly:

Big depositors in Cypriot banks stand to lose circa 40 per cent of their money here, which has drawn plenty of fury and veiled threats from Russia.

But what exactly can the Russians do about this? Sell euros? Tear up double taxation agreements? Murder Cypriot bankers? Medvedev and co could not have played a worse hand during this crisis — and it’s not immediately clear why.

Cyprus now has a binary choice: become a gimp state for Russian gangsta finance, or turn fully towards Europe, close down much of its shady banking sector and rebuild its economy on something more sustainable.

The choice is obvious.

Still, if I were a Cypriot official I might seek a bit of extra security for my family …

Indeed, with friends like that...

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Cyprus did not witness a bank run, which is not that surprising given the draconian captial controls and to a lesser degree the publicity stunt of airlifting 5 B € in cash into country under heavy security. If you and (most) others have no chance to get even a decent amount of your cash out of the banks then there is little incentive to run to your bank. You have been doomed either way.

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Bersani can not form a government alone. Berlusconi offers his greasy hand but Bersani says (rightly) no. Bersani offers his to Grillo but Grillo says **** off to all. The result? No government in sight. Elections seem sadly be the most likely answer unless we get another technical one.

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Capital claims a record share of the net income. This trend is obviously, at least in the short run, good for those who own large amounts of equity.

It is difficult to see demand in the advanced economies keeping up, as it is mostly driven by our broad middle classes. Other success economic success stories like China or Brazil certainly increased their demand for many US/European goods and services. Still we have to consider just how big the demand share of the West is compared to the rest of the globe.

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Quite a bit of Italians seemed to be worried about the status of Austria's 'Bankgeheimniss', according to some friends working in Austrian banks. 'You know the off-shore and tax stuff*'...

Over the last year I also read a lot about big catches on the Italian border with Switzerland. Certainly the tax pressure has been racheted a lot from an already terribly high level for our middle class. Housing has increasingly been seen as another source of tax revenue, targeting the biggest and dearest asset of the Italians. Older ones will also remember the last haircut on their deposits...

So I can understand why people would want to invest and deposit in 'safe' and rather 'silent' neighbouring states. The incentives are certainly stacked against the honest folk.

*Austria does tax the capital gain of foreign EU capital at around 35% IIRC and sends the money to the respective state but without telling them the name of the owner.

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Evidence and Economic Policy

Henry Blodget says that the economic debate is over; the austerians have lost and whatshisname has won. And it’s definitely true that in sheer intellectual terms, this is looking like an epic rout. The main economic studies that supposedly justified the austerian position have imploded; inflation has stayed low; the bond vigilantes have failed to make an appearance; the actual economic effects of austerity have tracked almost exactly what Keynesians predicted.

But will any of this make a difference? The story of the past three years, after all, is not that Alesina and Ardagna used a bad measure of fiscal policy, or that Reinhart and Rogoff mishandled their data. It is that important people’s will to believe trumped the already ample evidence that austerity would be a terrible mistake; A-A and R-R were just riders on the wave.

The cynic in me therefore says that after a brief period of regrouping, the VSPs will be right back at it — they’ll find new studies to put on pedestals, new economists to tell them what they want to hear, and those who got it right will continue to be considered unsound and unserious.

But maybe I’m wrong; maybe truth will prevail. Here’s hoping

Roughly five years ago I expected high inflation after the waves of liquidity injected by increasingly easing central banks. As it didn't happen I read a bit around and mostly Krugman pointed me to that basic modern macro we learned back in college as undergrads. To me it made intellectually perfect sense after looking at the evidence and intrinsic logic I found and I did also adjust increasingly my personal investing to those rational conclusions.

Keynes was indeed a great mind and applied his intellect also very successfull as an investor. No wonder that he is by far the most quoted economist by Buffett.

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Sadly austerity is indeed taking it's bitter toll. Spain had a might housing bubble and far too much building in general but while the private sector (and some regions) was deep in debt the central government had actually little. Still they cut, cut, cut and cut exactly during a time when the private demand totally collapsed and helped contracting the economy.



Spain has now over 6 million unemployed, over a quarter of the populations and that despite a shrinking population.



Shockingly they are insisting and cutting deeper and deeper into the flesh of the economy. Public employment drastically austeridaded.

Dear Merkel, I agree with the part that the southern countries need the ECB to help to inject more liquidity and more credit into those economies. Good to hear that however I disagree that Germany would need a higher 'Leitzins'. In isolation maybe but we live in interconnected Europe and globalized world. A slightly higher inflation in Germany is important for the whole Eurozone and will thus help Germany indirectly far more than a tighter one. Developing economies like China and Brazil are also subject to rapidly increasing labour cost and the German advantage will just be somewhat lessened.

The Bank of England is certainly doing it's part in trying to help the British economy suffering under terrible economic policies of Mr. Cameron&Co. The ECB must act very strongly and used it's mandate and the monetary policy to it's fullest.

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Work is done for this week and I wanted to reflect a bit about taxes, speculations and investing. Last week it became public that Uli Hoeness, president of the FC Bayern did not pay taxes on a 'zocker', 'gambling' portfolio deposited on a bank account in Switzerland. I'm a fan of two international clubs, Bayern and Inter and I have always admired Hoeness for his work for Bayern. He certainly is a highly intelligent, very hard working business man with a heart for social issues but it shows once again that such persons can also make big mistakes. If he really fell under the spell of gambling & speculating a Swiss account was certainly suited to seperate that from the 'sane' business accounts.

In Deutschland handeln zehntausende Anleger exzessiv an der Brse. Genaue Zahlen gibt es nicht, nach jngsten Angaben existieren jedoch rund 67.000 CFD-Konten. CFD steht fr Contracts for Difference. Diese Differenzkontrakte sind eigens dafr geschaffen, mit hohen Hebeln den Geldeinsatz binnen kurzer Zeit zu vervielfachen. Ebenso schnell kann der Einsatz jedoch verloren gehen. Je nach Kontengestaltung muss der Anleger dann sogar Kapital nachschieen.

Ob Uli Hoene auf seinem Schweizer Konto mit CFDs gezockt hat, ist unklar. Im Gesprch mit der Wochenzeitung Zeit sprach der Prsident des FC Bayern Mnchen jedoch davon, seit etlichen Jahren an der Brse aktiv zu sein und davon in den Jahren 2002 bis 2006 an der Brse richtig gezockt zu haben - teilweise auf Basis eines Kredits in Millionenhhe durch seinen Freund und Adidas-Vorstandsvorsitzenden Robert Louis-Dreyfus.

Er habe selbst bei Fuballspielen seinen Brsenpager mit aktuellen Kursen dabeigehabt. Ich habe Tag und Nacht mit der Bank telefoniert, die haben ja alle so Nightdesks, wegen der Zeitverschiebungen, sagt Hoene. Die Sicherheiten der Bank mssen ja 24 Stunden gelten, wenn es aber in Asien nachts extreme Bewegungen gibt, wirst du trotzdem rausgeschossen. Die Bank sagt dir, du musst einen sogenannten Stopp einbauen, das heit, wenn die Sicherheit unterschritten wird, fliegst du automatisch raus.

Smart guys or guys who think they are smart guys are arguably especially in danger of becoming gamblers. I guess they see it as an intellectual challenge a bit like poker with high stakes. That a guy with so many big tasks at hand like Hoeness seemingly fell for it is sadly not so surprising. As Ben Graham wrote that is stunningly common that smart & successfull business men throw away all their sound principles once they step into the terrain of Wall Street. He personally always stated that the best approach to investment was the most business-minded. Maybe for some it is some sort of outlet.

Unter dem Strich schneiden die aktiven Handelsteilnehmer daher meist sogar deutlich schlechter ab als der Marktdurchschnitt - wie Hoene offenbar auch. Der berwiegende Teil der aktiven Anleger erleidet beim Trading Verluste, sagt Alexander Surminski, Geschftsfhrer von Ayondo, einer Plattform, auf der erfolgreiche Anleger imitiert werden knnen. Nur wenige Trader, die eine jahrelange Erfahrung vorweisen knnen, erzielen eine Marktberrendite. Studien sprchen von nur 1 Prozent der exzessiv handelnden Anleger. Nach unseren eigenen Erfahrungswerten machen 85 Prozent der Trader auf Dauer Verluste.

That 85% of all those active traders suffer losses over time sounds high but it is not too unlikely. Every movement causes friction in the form of fees and most of the monetary energy gets tranfered this way into the hot pockets of the financial industry. This should hurt them especially as the last 10 years have been brilliant for a long-term investor.

Die berragende Mehrheit der an der Brse aktiven Deutschen whlt indes eine weitaus konservativere Herangehensweise. Von den 4,2 Millionen Aktienbesitzern gelten mehr als 4 Millionen als langfristig orientiert und damit auf die Dauer erfolgreich. In den vergangenen zehn Jahren hat ein breit gestreutes Depot mit deutschen Aktien im Durchschnitt eine jhrliche Rendite von 10 Prozent erbracht, in zwanzig Jahren von gut 8 Prozent und in dreiig Jahren von knapp 10 Prozent. Ob ein in Deutschland wohnender Anleger seine Brsengeschfte in Deutschland ttigt oder wie Hoene in der Schweiz, ist aus steuerlicher Sicht irrelevant. Spekulationsgewinne mssen nach deutschem Recht versteuert werden.

Keep in mind that the German DAX outperformed pretty much every other Euroepan index so the numbers look especially good. Still even with broad investments in Euroepan stocks one could get excellent returns in the long run.

The high volatility of European stocks has been actually a huge advantage for the business-minded investor and for those who wanted to reduce their tax bill. Today the state sent me back a significant amount of money because temporary downswings last year in three stocks allowed me to sell low and buy low again. Those losses on stocks (minus the fees!), which have been risen a good deal in the last months did reduce the taxable gains. Keep in mind that dividends and yields flow into the same pot, so a steep fall of recently acquired stock of a good company can be a gift, enabling you to cut taxes and buy additional stock at a cheaper price.*

Strangely the yield you get on money alone does not flow into that pot, which means that most can not profit from such moves. It is also a solution which is IMHO sensible from an accounting point of view but is as a whole quite narrowly focused on the not so poor. In this case the state got less money and the capital was not consumed but will be reinvested. So it is one of the cases in which a tax break set little incentives for additional demand. For the economy as a whole it would have made much more sense if that money had enabled consumption and increased demand.

*Of course you would have to pay even more tax if you sell that stock later at a relative higher price. But I tend to keep a good business in my portfolio unless it becomes clearly highly overvalued. and nobody knows if that is going to happen anytime soon.

P.S: I pretty much never talk about money even with friends, maybe this is typical for the region I come from. So possibly this is the reason why I like to discuss such issues on an international board with a strong focus on policy. The last time I looked at the 'discussions' on an specialized Italian board I was rather taken aback by the amount of gambling. It seems that the more you throw around things like CDS, trigger, call and stuff the cooler & smarter your are.

P.P.S: I wrote a couple of months ago that I never saw a more dominant squad in an European final which ended up losing the cup then Bayern, which absolutely dominated Chelsea, getting many huge chances and conceding pretty much nothing. I think it was about Kahneman and the element of luck. Bayern has recently shown just how strong it has become over the last years by the right strategy and tactical answers. Of coruse this doesn't mean that they will win against Dortmund in the big final.

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After having taken a quick look at the financial data of the last week this article fits the topic rather well. I have to disclose that I have bought a considerable amount of Apple stock a bit over 400 $ as the fundamentals made it look much undervalued. (RoE, margins on operations, Graham P/E, Owners Earnings & P/E, RowA all seemed good or great). The future certainly looked brighter then imagined by many. A greater $ share of the portfolio also made sense from a diversification and hedging point of view. Still I'm long on Europe.

I hoped before the shareholder meeting that Apple would drastically increase their buybacks for those very reasons and they did announce pretty much that. Doing it with bonds, the capital of others, with such a low yield for such long periods is brilliant from the two angles called equity and taxes. Sadly the stock price went up so quickly, now those buy backs will cost more. At 400 $ the EPS would have went up over 30% for the shareholder even if the earnings had stayed (inflation-adjusted) flat...

A similar sad story is the VW stock which I bought after the big fall to 140 €. (I was stupid enough not to buy it under 50 € a couple of years ago). I have some money due within a month and wanted to invest a lot more into VW as it is IMHO was undervalued and made sense to diversify the portfolio risk. (VW is big worldwide in pretty much every sector of the industry with increasingly huge economies of scale and massive financial advantages compared to practical every non-German European carmaker.) Now the stock went up despite a fall in demand in the European markets and is likely that I won't get it that margin of safety soon.