Since things are a bit calmer on the European front this morning, I had planned not to begin todays letter with Eurowoes. Sorry friends, The Economist forced my hand:
Italy’s Senate passes the financial stability law – a package of budget savings and economic reforms – by a vote of 156-12. The bill is expected to pass the lower house tomorrow, at which point Berlusconi has promised to resign as PM. (Italy’s senate approves reforms)
DON’T FORGET INSURANCE COMPANIES: While banks’ exposure has been much debated, an Italian default or euro exit could devastate insurers’ capital and in turn Europe’s savings. (Italian Debt Threatens Europe’s Savers)
Europe’s insurers own an estimated €300 billion (about $408 billion) of Italian sovereign debt—equivalent to a large chunk of their €450 billion shareholders’ equity, notes JP Morgan. While banks’ exposure has been much debated, an Italian default or euro exit could devastate insurers’ capital and in turn Europe’s savings.
ECB BUYING ITALIAN DEBT FIGHTING A TSUNAMI. As I have been saying, banks and other private investors are actively reducing their exposure to potential troubles. The International Financing Review:
European banks are planning to dump more of the €300bn they own in Italian government debt, as they seek to pre-empt a worsening of the region’s debt crisis and avoid crippling writedowns – a move that could scupper the European Central Bank’s efforts to bring down soaring yields.
Still reeling from heavy losses on money they lent to Greece, lenders are keen not to make the same mistake twice.Then, under the pressure of governments and a hope that credit default swaps would protect them against heavy losses, they held on until it was too late to sell.
With the ECB providing a bid for Italian bonds that might not otherwise exist, board members at some of Europe’s largest bank say now is the time to accelerate disposals. Many are also reversing long-standing policies of buying into new Italian bond issues, denying Rome an important base of support.
Italy has a 5 year debt auction next Monday…
The WSJ runs an article about Mario Monti, an economist, that provides hope that he may be the man to get Italy in the modern industrial world (Italy Front-Runner Seen as Political Outsider). Importantly, he seems capable to make unpopular decisions and navigate within Italy’s dangerous political waters.
Among those are measures to break up barriers that make Italian businesses uncompetitive—from red tape that discourages companies from growing, to the professional guilds that cater to special-interest groups and squeeze out newcomers.
“He doesn’t owe anything to any political party. He’s not there to be a politician. He’s there to do what’s necessary,” said Gaia Gualtieri, 32, who helps her father run a small textile manufacturer in Prato. Ms. Gualtieri hopes Mr. Monti will free businesses from labor codes that make it hard to hire and fire.
THERE’S ALSO ITALIAN ASSETS
According to a 2009 Bank of Italy report, the net worth of Italian households is pushing €9,000bn. That is more than €350,000 per household, or four times total government debt. Mr Monti could also decide to sell holdings of listed companies and hurry through privatisations. There is also considerable real estate available. Altogether, a Cheuvreux report reckons these assets are worth another €110bn, or 7 per cent of gross domestic product. The irony, therefore, is not only that the eurozone easily has the funds to save Italy, but so does Italy itself. The trick becomes one of reallocation. (FT)
MEANWHILE IN SPAIN
Q3 GDP was unchanged from the previous quarter, when it expanded 0.2%. YoY, the economy expanded 0.8%.
The slowdown threatens Spain’s budget-deficit goals, the European Commission said yesterday, meaning the government that emerges from the Nov. 20 general election may have to accelerate spending cuts to prevent the nation becoming the next victim of the debt crisis. The People’s Party, which polls show will win, has pledged to regain Spain’s AAA rating and tame borrowing costs without raising taxes or cutting pensions.
Which means more spending cuts, ensuring a recession which would trigger more cuts…
REMEMBER THE “COMPREHENSIVE PACKAGE”? The cornerstone was supposed to be the EFSF “big bazooka” which, it was found rapidly, nobody really wanted to load. Now, even the existence of the bazooka is in peril and it’s all the market’s fault! Market volatility limits EFSF firepower
Regling warns of struggle to hit target for eurozone bail-out fund
“The political turmoil that we saw in the last 10 days probably reduces the potential for leverage,” Mr Regling told reporters. “It was always ambitious to have that number, but I’m not ruling it out.”
IN THE US
Where I had planned to start this morning…
This is Nov. 11 (11.11.11 if you have not noticed) and time is running short for the Supercommittee. Deficit deal eludes Washington: Parties unable to strike budget agreement
But they are still talking…
BETTER NEWS KEEP COMING: U.S. companies sold a record $180.4 billion in goods and services to foreign customers in September, up 1.4% from the prior month, the Commerce Department said. Exports now make up their largest share of the total U.S. economy in at least three decades, according to a separate Commerce Department estimate. A lower currency can do wonders to exports. The US dollar has depreciated 37% since 2002, 15% since mid-2010. QE2 worked?
In a sign of modest labor market improvement, initial claims for jobless insurance fell last week to 390,000 from 400,000 (revised from 397,000) during the week prior. The 4-week moving average of claims slipped to 400,000, also its lowest since April.
BUFFETT VS ECRI: ADVANTAGE BUFFETT
The chance of a recession has fallen in the U.S., from 1 in 3 just 2 months ago to 1 in 4, according to economists surveyed, but a middling expansion could be derailed by events in Europe where recession risks are 2-in-3. the US GDP is seen rising 1.7% in 2011 and 2.3% in 2012. Just to make you comfy with these forecasts, note that the January consensus was for 3.5% growth in 2011. (Economists Cut Chance of U.S. Recession)
More than half of the 1,600 business executives surveyed by the FT/Economist Global Business Barometer in October expected global conditions to get worse in the next six months, while fewer than 15 per cent expected them to get better. In the previous survey in July, 34 per cent of respondents expected conditions to worsen.
Respondents have also become more pessimistic about the prospects for their own industries and companies, though not to the same extent.
About eight out of every 10 survey respondents in October were more worried about the eurozone than they were six months ago, and 45 per cent said they were altering their investment decisions because of the crisis.
NO CONFIDENCE BUILDER
President Obama used to be fond of “shovel-ready projects.” He’s also demanding that Congress pass his jobs bill immediately because 9% unemployment is a crisis, and, by the way, he’s for making the U.S. less reliant on energy from tyrants. So how about putting 20,000 Americans to work on a North American energy project that’s as shovel-ready as they come? Sorry, Mr. Obama is voting present.
The $7 billion project is TransCanada’s Keystone XL, a 1,700-mile underground pipeline that would deliver 830,000 barrels of heavy crude oil a day from Alberta to refineries in Oklahoma and Texas. (…) In April 2010 and again this August, State produced multivolume environmental impact statements that concluded the pipeline would have “no significant impacts” on the environment. That should have ended the matter.
But the President’s environmentalist friends have decided to make Keystone a test of his green virtue.(…)
And, what a surprise, suddenly the government is finding new reasons to delay its decision. The State Department’s inspector general announced Monday that he is ordering a special review to examine alleged irregularities in the drafting of the impact statements. Then yesterday the White House said it would postpone any decision in order to “undertake an in-depth assessment of potential alternative routes in Nebraska.” Expect that assessment to arrive after November 2012.
Note here that TransCanada has studied 12 alternative routes, including 8 in Nebraska.
The Administration is taking cover behind some not-in-my-neighborhood gripes by Nebraska politicians. But those politicians seem to have no problem with some 25,000 miles of pipeline that already crisscross the Ogallala Aquifer that is supposedly at the center of the Administration’s concerns. (…) (WSJ)
US SMALL BIZ OWNERS KEEP FINDING IT TOUGH OUT THERE: Positive for inflation but there clearly is a demand problem. (Bespoke Investment)
The monthly report of Small Business Economic Trends always has some interesting information regarding factors impacting small businesses in the United States. (…) Upon looking through each of the various subcomponents, the one indicator that stands out like a sore thumb is the question regarding pricing. According to the survey, the net percentage of businesses that have raised prices in the last three months is negative 1%, down from last month’s reading of +6%. As shown in the chart below, the last time the net percentage saw this large of a monthly drop (7%+) was back in late 2008 and early 2009.
THANKSGIVING INFLATION IS HIGH
The retail cost of menu items for a classic Thanksgiving dinner including turkey, stuffing, cranberries, pumpkin pie and all the basic trimmings increased about 13 percent this year, according to the American Farm Bureau Federation.
The big ticket item – a 16-pound turkey – came in at $21.57 this year. That was roughly $1.35 per pound, an increase of about 25 cents per pound, or a total of $3.91 per whole turkey, compared to 2010. The whole bird was the biggest contributor to the final total, showing the largest price increase compared to last year. (…)
In addition, “the era of grocers holding the line on retail food cost increases is basically over,” Anderson explained. “Retailers are being more aggressive about passing on higher costs for shipping, processing and storing food to consumers, although turkeys may still be featured in special sales and promotions close to Thanksgiving.
CHINA INFLATION TRENDS LOOK MUCH BETTER. This PPI chart from ISI shows that the sharp slowdown in YoY PPI is likely to continue as MoM inflation has turned negative. The close relationship between China’s PPI and the CPI means that CPI trends will continue down for a while, allowing Beijing to ease in the not too distant future.
11.11.11: CORDUROY DAY!!!
“It’s the day that most closely resembles corduroy ever,” says Ms. Pieloch, a 35-year-old graphic designer. “It’s the date we’ve been preparing for.”
Ms. Pieloch is referring to the ribbed textile’s biggest fans, and in particular, the roughly 5,000 members of the Corduroy Appreciation Club, which boasts chapters nationwide and as far away as South Africa and London. (WSJ)