EUCOM Economic Analysis - Part I

[Firn]

The defeat of the Euro bond vigilantes?

In Europe the evolution of interest rates for governments bonds has been very different with several countries seeing very high levels and in some cases no access to funding. The fear was due to probability of default and potentially an exit from the Euro area, not so much inflation. But after a volatile period and following the statement of Mario Draghi supporting the Euro (no action yet) and the more recent agreement for funding for Greece and Spain, interest rates are coming back to levels which are not far from the historical average during the Euro period (and significantly lower than what these countries faced before joining the Euro).

With Monti in trouble the situation is better the quite a few feared. Anyway it is very difficult indeed to forecast something in Italian politics. I would hardly be surprised by the most surprising events.

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Looked again at those 3 stocks:

Xerox 5.38 up from roughly 5
HP 10.77 up from roughly 10 - bough another third under 9.5
E.ON 14.04 down from roughly 15 - invested over a third today at +- that.

GDF Suez lost over 10% today and highlights some general problems of the European utility market but also some specific French ones. In this case the French government is a major shareholder and limits the price GDF (and other companies) can ask for it's gas. GDF is fighting a legal battle

PARIS (dpa-AFX) - Frankreichs grter Gasversorger GDF Suez will die von der Regierung verfgte Deckelung der Gaspreise im vierten Quartal gerichtlich kippen lassen. Einen entsprechenden Antrag habe das Unternehmen bereits vor dem hchsten franzsischen Gericht eingereicht, sagte ein GDF-Sprecher am Freitag. Der ehemalige Monopolist beschwert sich in diesem Jahr damit bereits zum dritten Mal und folgt damit dem Vorgehen von Konkurrenten. Die franzsischen Gasversorger wollen die Begrenzung von Preiserhhungen anfechten, um Tarife verlangen zu knnen, die ihre Kosten decken.

GDF Suez, an dem der franzsische Staat mit 35 Prozent beteiligt ist, hatte im Oktober zwar die Erlaubnis erhalten, seine Preise um zwei Prozent zu anzuheben. Beantragt hatte der Versorger aber eine doppelt so starke Erhhung. GDF argumentiert, dass nur so die gestiegenen Bezugspreise gedeckt werden knnten. Die Gasversorger waren bereits gegen die Vorgngerregierung vor Gericht gezogen, um die Umlegung der Importpreise auf die Kunden durchzusetzen. Damals hatte das Gericht im Sinn der Klger entschieden./jke/stw/he

After having watch the stock for quite some time I invested in it today, at roughly 15. Certainly we have seen quite a bit of volatility this year and the 10% + drops in a single day of E.ON and GDF are amazing for such huge and long-standing companies. We will see in a couple of years, I actually was mostly interested in buying some more. Of course with the general development of the market the balance sheet lof this year looks quite bright.

[Firn]

There was certainly trouble and Monti chose to act on his own by going to Napolitano....

Anyway the manovri di palazzo and with the parties have long started. The center-left candidate wants for good or not so noble reasons no "political" Monti, who could return as a leader of the center or center-right. He should conserve himself as technical choice for times of need.

Piazza Affari was hard hit, the spread has also grown. While I have to give the the report a closer look everybody knows that Italy is no country for young women, even less so then for young men.

[Surferbeetle]

Some have suggested parallels between today's situation and Wagner's story of Lohengrin, Elsa of Brabant, and Telramund during the seasonal opening at La Scala.

La Scala under fire for choosing Wagner before Verdi in battle of the birthdays, Tom Kington in Rome, The Guardian, Tuesday 4 December 2012 15.00 EST, http://www.guardian.co.uk/world/2012...r-verdi-battle

Monti quits political theatre for opera, By Guy Dinmore in Rome, December 7, 2012 6:01 pm, Financial Times, www.ft.com

U.S. Stocks Rise With Metals on China; Italy Bond Plunge, By Stephen Kirkland & Rita Nazareth - Dec 10, 2012 2:37 PM MT, Bloomberg News, http://www.bloomberg.com/news/2012-1...o-weakens.html

The NYT has an interesting take on a country analysis (economics, politics, history, and more) of Italy at: http://topics.nytimes.com/top/news/i...aly/index.html

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Profitably traded in and out of a French Bank with southern exposure earlier in the year, might go back in depending on how much/credible fear results from the current political uncertainty.

Currently doing ok with a US construction/mining/diesel power equipment company (volatility is useful), wish I had picked up more just before the US election.
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The World In 2030: Asia Rises, The West Declines, by TOM GJELTEN, December 10, 2012, NPR, http://www.npr.org/2012/12/10/166895...-west-declines

By the year 2030, for the first time in history, a majority of the world's population will be out of poverty. Middle classes will be the most important social and economic sector. Asia will enjoy the global power status it last had in the Middle Ages, while the 350-year rise of the West will be largely reversed. Global leadership may be shared, and the world is likely to be democratizing.

But the planet may also be racked by wars over food and water, with the environment threatened by climate change. Individuals, equipped with new lethal and disruptive technologies, will be capable of causing widespread harm. Global economic crises could well be recurring.

It all depends on how events develop over the next decade, according to a new report, Global Trends 2030 [PDF], prepared by the National Intelligence Council, comprising the 17 U.S. government intelligence agencies.

Global political leadership, however, is likely to be diffused, with no single country or alliance playing a dominant role.

"A growing number of diverse state and nonstate actors, as well as subnational actors, such as cities, will play important governance roles," the report says. "The increasing number of players needed to solve major transnational challenges — and their discordant values — will complicate decisionmaking."

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Earlimart - 10 Years, Youtube, http://www.youtube.com/watch?v=bRO8seMD-gU

[Firn]

According to our dear enlightened former PM Berlusconi Monti and his german-centric are to be blamed for bad state of the Italian economy. While I do not agree with some of the policies of Frau Merkel or Mr. Cameron or more then a couple of other politicians by far the biggest share of our current troubles is home-made. And the guy with the biggest influence in the last 20 years was mostly busy with bunga-bunga, delayed actions against the law as well as breaking it and personal business affairs.

Another big slice is the unhappy impact of supply-side globalisation in traditional Italian sectors with vastly increased competition. The increase in demand resulting in more export was not able to compensate the loss. In this case Germany got dealt the better cards with specific sectors booming due to heavy international demand.

The Scala bit is really just a storm in the tea cup but Mr.Balotelli scoring in the Summer was certainly not

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I have now to clean up the portfolio to give the state as little tax money as possible. It was stupid to leave it for so late as the markets have generally gone up, should have sold some stock with negative return already during the Summer. This way I could have balanced the book with less friction.

[Firn]

The economist's view zoomed in on an interesting issue in this case with a post of Tim Taylor.

'Cautionary Details on U.S. Manufacturing Productivity'

Awhile back I asked Tim Taylor if it would be okay to reprint a post occasionally in full or in part, and he quickly and graciously said I could. As he notes, this is an important addendum to the standard story on manufacturing, productivity, and employment. The bottom line is that "the condition of U.S. manufacturing looks more ominous than the standard story" would have us believe:

Said McKinsey report states:

"A rich pipeline of innovations promises to create additional demand and drive further productivity gains across manufacturing industries and geographies. New technologies are increasing the importance of information, resource efficiency, and scale variations in manufacturing. These innovations include new materials such as carbon fiber components and nanotechnology, advanced robotics and 3-D printing, and new information technologies that can generate new forms of intelligence, such as big data and the use of data-gathering sensors in production machinery and in logistics (the so-called Internet of Things). ...

Important advances are also taking place in development, process, and production technologies. It is increasingly possible to model the performance of a prototype that exists only as a CAD drawing. Additive manufacturing techniques, such as 3-D printing, are making prototyping easier and opening up exciting new options to produce intricate products such as aerospace components and even replacement human organs. Robots are gaining new capabilities at lower costs and are increasingly able to handle intricate work. The cost of automation relative to labor has fallen by 40 to 50 percent in advanced economies since 1990."

Krugman discusses the role of the human versus the physical capital.

So the story has totally shifted; if you want to understand what’s happening to income distribution in the 21st century economy, you need to stop talking so much about skills, and start talking much more about profits and who owns the capital. Mea culpa: I myself didn’t grasp this until recently. But it’s really crucial.

I enjoyed his earlier 'wonkish' post about the role of technology. Indeed not all technology is created equal in their effects on the marginal product of labor.

So it’s wrong to assume, as many people on the right seem to, that gains from technology always trickle down to workers; not necessarily. It’s also wrong to assume, as some (but not all) on the left sometimes seem to — e.g., William Greider — that rapid productivity growth is necessarily jobs- or wage-destroying. It all depends.

What’s happening right now is that we are seeing a significant shift of income away from labor at the same time that we’re seeing new technologies that look, on a cursory overview, as if they’re capital-biased. So we could be looking at my technology B story above.

There are, however, other possibilities — including the possibility that the fact that we don’t actually have perfect competition is playing a big role here.

So that’s the story so far. And it’s important stuff.

I think it would be worthwhile to look more at this stuff also in the European context. Personally I think it is a highly interesting topic. Overall I thought that great built-up in capital in the last 60 years cpuled with the marginal product of capital and the demographic trends would result in a generally more worker-biased shift. The simplified cited model of the role of technology might be part of the answer.

[Fuchs]

( http://4.bp.blogspot.com/-9AsiPbToI1...mckinsey+5.jpg )

I'm always amused when I see such stats showing the U.S. so far ahead in national income. It's ridiculous, but the PPP method doesn't reveal it.

Two men paying no VAT for washing each others' hand pay each other a gazillion dollars for washing hands once and do so as part of business expenses - and do so on Nauru.
Boom! Nauru is now the biggest economy in the world!

Such services-inflated GDP stats are a joke, but I guess the time hasn't come to make this visible to the mainstream.
I prefer to look at the physical economy and the services trade balance instead.

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About Krugman; it's astonishing, but he misses the wood while walking past trees. (Yeah, I totally forgot how the saying works in English.)

I suppose the decisive influence factor at work is simply power asymmetry. He's totally in a dead end with his look at who owns the capital. This decides who gets the capital income, not how much of the income becomes allocated to the capital owners. He probably needs more sleep or something.

Power asymmetry; this is largely picked up from a professor of mine, Prof. Homburg, years ago (not my invention, if this helps its credibility ):
Imagine the labour market. A corporation seeks a worker for a job, workers apply, one gets the job. This is a monopoly situation, with monopoly power and even worse; the corporation can squeeze a rent out of the worker by only offering a small wage. There are plenty other workers, after all.

Now the workers form a labour union AND there's little unemployment. The labour unions adds bargaining power to the workers and this leads to a shift of income to labour.

Now good policy would be to push -with whatever policies- for power symmetry. This way the labour union cannot take a power rent from the capital owners (and occasionally crash some companies) and the corporations cannot exploit the workers either. Furthermore, good policy is to regulate conflicts in a way which means the nearly symmetric powers can agree on new wage levels without many harmful strike days.

Power asymmetry is a form of market failure for which mainstream recognition isn't well-developed yet either, though.


OK, what happened instead ?
(1) Unemployment because of poor adaptation to changing circumstances and because the employer lobby actually likes unemployment while labour unions don't get hurt by it much in the short term (and are often distracted by trying to avoid creative destruction): ~40 year old problem.
(2) A largely successful 30-year campaign of the U.S. right wing to break labour unions, step by step, sector by sector, state by state.


So now the U.S. has an economy with an unemployment rate which capital elites actually like if not promote (see how the public discussion is dominated by the budget, not by jobs?), with almost powerless labour unions, with a race to the bottom by states in regard to worker benefits and worker power.


Isn't it obvious that this leaves a trace on the capital / labour income balance (especially if you look at executive compensations as a third share, not mixed up with worker's pay)?


Related:
The effect of Germany's Agenda 2010, which basically forced the poorest 20% into accepting ridiculously low pay and much-lowered security*:

http://www.scribd.com/doc/116046526/Agenda-2010

It transferred about 7% of national income from labour income to capital income in a mere two years. This shift had no parallel since the 50's, and the reached level of capital income share wasn't seen for decades either.
(Our social democrats don't deserve their name any more; part of the reason why their left half parted ways and joined the former communists or greens or abstained from politics or voting.)

*: Such as courier drivers who used to have a normal job with 40 hour week and good job security now being forced into pseudo-entrepreneurship with 1-man businesses needing to take a loan for an own truck, work 50-60 hours/week, have huge insecurity and in the end no money left for retirement savings or only proper insurances.

[Firn]

( http://4.bp.blogspot.com/-9AsiPbToI1...mckinsey+5.jpg )

I'm always amused when I see such stats showing the U.S. so far ahead in national income. It's ridiculous, but the PPP method doesn't reveal it.

Two men paying no VAT for washing each others' hand pay each other a gazillion dollars for washing hands once and do so as part of business expenses - and do so on Nauru.
Boom! Nauru is now the biggest economy in the world!

Such services-inflated GDP stats are a joke, but I guess the time hasn't come to make this visible to the mainstream.
I prefer to look at the physical economy and the services trade balance instead.

I do not agree, at least not fully but I will have to tackle that another time.

________

About Krugman; it's astonishing, but he misses the wood while walking past trees. (Yeah, I totally forgot how the saying works in English.)

I suppose the decisive influence factor at work is simply power asymmetry. He's totally in a dead end with his look at who owns the capital. This decides who gets the capital income, not how much of the income becomes allocated to the capital owners. He probably needs more sleep or something.

What the man wrote earlier:

But there’s another possible resolution: monopoly power. Barry Lynn and Philip Longman have argued that we’re seeing a rapid rise in market concentration and market power. The thing about market power is that it could simultaneously raise the average rents to capital and reduce the return on investment as perceived by corporations, which would now take into account the negative effects of capacity growth on their markups. So a rising-monopoly-power story would be one way to resolve the seeming paradox of rapidly rising profits and low real interest rates.

He is just a good economist, looking at the evidence and then around what might explain it and can be tested against:

As they say, this calls for more research; but the starting point is to realize that there’s something happening here, what it is ain’t exactly clear, but it’s potentially really important.

Last but not least:

I think our eyes have been averted from the capital/labor dimension of inequality, for several reasons. It didn’t seem crucial back in the 1990s, and not enough people (me included!) have looked up to notice that things have changed. It has echoes of old-fashioned Marxism — which shouldn’t be a reason to ignore facts, but too often is. And it has really uncomfortable implications.

Anyway I agree that power asymmetry should be a bigger topic in general. Why nations fail did really put the link between politics and economics on the 'agenda 2012'. We have of course many models of markets up to monopolies but the political impact on the framework of the economy has been not given much attention in the last twenty years. In the US and Europe the reforms and policies of the last thirty years have certainly not weakened (large) capital relative to labour...