The Big Picture

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• 10 Tuesday PM Reads
• Fibonacci Hurricane (Sandy)
• BoJ disappoints – so what’s new
• Misunderstanding Financial Crisis: Why We Don’t See Them Coming

10 Tuesday PM Reads Posted: 30 Oct 2012 01:30 PM PDT My afternoon hurrication reads: • NYSE Expects Normal Open Tomorrow After Storm (Bloomberg) see also Behind Decision to Close Markets (WSJ) • An Oyster in the Storm (NYT) • No, Hurricane Sandy Won't Help the Economy (Bloomberg) see also New York Subway System May Take Weeks to Recover From Storm (Bloomberg) see also Hurricane Sandy Threatens $20 Billion in Economic Damage (Bloomberg) • In Defense of Narratives (Macro to Micro) • Housing Bulls Shrug Off Skeptics, Hold Ground (WSJ) see also Home Prices in 20 U.S. Cities Rise by Most in Two Years: Economy (Bloomberg) • Mass Extinction Study Provides Lessons for Modern World (Science Daily) • Amazon Is a Black Hole Threatening To Devour Corporate America (Slate) but see The Underestimated Anti-Amazon (Barron’s) • CEO Cook Remakes Apple for Post-Jobs Era, Forstall Exits (Bloomberg) • I.B.M. Reports Nanotube Chip Breakthrough (Bits) • Who Needs Facts Anyway? (Big Think) What are you reading?   Homebuilder Boom Click to enlarge Source: WSJ

Fibonacci Hurricane (Sandy) Posted: 30 Oct 2012 12:13 PM PDT click for larger image Source: Vic LeFaber, Google+

BoJ disappoints – so what’s new Posted: 30 Oct 2012 07:42 AM PDT Australian new home sales declined by -3.7% in September M/M, the 3rd consecutive monthly decline. The Australian economy is slowing and I would expect the slowdown to continue given, in particular, a weaker China;   The BoJ announced an expansion of its asset buying programme by Yen11tr to Yen91tr for the 2nd consecutive month. The announcement was accompanied by a joint statement by the BoJ and the government, emphasizing the political pressure on the Central Bank. The parties stated that they “share the recognition that the critical challenge for Japan’s economy is to overcome deflation as early as possible and to return to a sustainable growth path with price stability”. The BoJ also set up an unlimited facility to boost lending by banks, which they estimate might amount to Yen15tr. Core CPI is expected to increase by just +0.8% (lower than the 1.0% previously) in the fiscal year ending March 2015 and revised down forecasts for the years to 2015. The market expected more, given the lower inflation forecast. The Yen strengthened. However, this is just the start and I continue to believe that the Yen will decline in coming months – will look to increase short in coming weeks. The Nikkei closed down nearly -1.0% today, reflecting the disappointment;   The BoJ reduced its estimate for GDP (for the fiscal year ending March 2013) to +1.5%, from +2.2% in July – still seems too optimistic;   Japanese September industrial production declined for the 3rd consecutive month, by -4.1% M/M (-8.1% Y/Y), much worse than the -1.6% M/M in August and the forecast of a decline of -3.1%. Household spending declined by -0.9%, as opposed to a rise of +0.9% forecast;   The Indian Central Bank, the RBI, held rates at 8.0%, whilst emphasizing the inflation risk in India – +7.81% in September, well above the RBI’s “target” of 5.0% and is expected to rise to above 8.0% in the next month or so. The news will be a disappointment to the government, who had hoped that their recent announcements to reduce the budget deficit would enable the RBI to cut rates. The RBI reduced its GDP forecast for the fiscal year ending March 2013 to +5.8%, from +6.5% previously and inflation to +7.5%, from +7.0% previously. In order to inject more liquidity into the system, the RBI cut its cash reserve ratio by 25bps to 4.25%   Spanish preliminary 3rd Q GDP came in at -0.3% Q/Q, or -1.6% Y/Y, better than the -0.4% expected. October CPI came in at +3.5%, up from +3.4% in August, though lower than the +3.6% expected. Inflation is expected to decline in coming months;   Spain has set up a bad bank, the Sareb, which will have a maximum size of E90bn, with an initial transfer of E45bn of assets. The bank will buy assets from banks at a discount, ranging from 45.6% on property loans to an average of 63.1% on foreclosed properties. The Spanish authorities want private sector participation, though the discounts seem insufficient to attract investors. However, the authorities will arm twist local financial institutions to become shareholders;   German unemployment rose by +20k, higher than the increase of +10k forecast. The unemployment rate was unchanged at 6.9%. With the economy likely to contract this Q, together with weaker exports, production, EZ economy and consumer sentiment, unemployment should rise in coming months;   EZ October consumer confidence came in at -25.7, marginally lower than the -25.6 expected and -25.6 in September. The EZ sentiment index declined to 84.5, the lowest in 38 months. France was the worst performer, followed closely by Germany. An upturn was seen in Italy, Spain and Holland. The EZ October business climate index declined to -1.62, a 37 month low and down from -1.34 in September;   The UK October CBI retail sales balance was up strongly, to +30, from just +6 in September and well above forecasts of +7. The sales expectations balance was also higher at +27, from +15 previously. The number is yet further evidence that the UK is performing (much?) better than official data. There will be increasing speculation that the BoE will keep its QE programme on hold in November, which should be sterling positive;   The odds of President Obama winning have declined marginally to just over 62%;   Outlook   Asian markets closed mixed, though European markets are much firmer. US markets remain closed due to Sandy.The Euro is back above US$1.29, currently US$1.2950 – interesting given the weaker German unemployment data, worse EZ confidence numbers and declining Spanish GDP, though an Italian E7bn bond auction went better than expected. Gold is trading at US$1714, with oil at US$109.38. Low volume day again.   The Spanish PM does not appear to want to call for a bail out and discussions on Greece continue and continue, and…. The Eurogroup is to discuss Greece tomorrow – yet more hot air.   Basically, the same old, same old.   Kiron Sarkar   30th October 2012

Misunderstanding Financial Crisis: Why We Don’t See Them Coming Posted: 30 Oct 2012 05:00 AM PDT In his new book MISUNDERSTANDING FINANCIAL CRISES: Why We Don't See Them Coming, Gary Gorton explores how the economic "Quiet Period" from 1934-2007 left economists fundamentally unprepared for the financial collapse that was to come. Gorton offers a back-to-basics overview of financial crises, showing they are not rare events caused by a perfect storm of unconnected factors.  Rather, he argues that financial crises are due to an inherent feature of market economies: the vulnerability of short-term bank debt.  He explains that the most recent crisis revealed this vulnerability, but this time, unlike in the Great Depression, the debt was in the wholesale banking market.  Regulations that prevented crises since 1934 did not keep up with the innovation in the financial sector, due largely to misunderstandings on behalf of economists. A clear account of the intricacies of the financial market, MISUNDERSTANDING FINANCIAL CRISES provides an authoritative challenge to prominent schools of thought within economics in order to offer a better way for economists to think about markets and regulation necessary to address the threat of future financial disasters. Misunderstanding Financial Crisis Why We Don't See Them Coming By Gary B. Gorton (Oxford | Nov. 1st | Hardcover | 296 pages | $29.95 | ISBN: 9780199922901) Advanced Praise: "The book offers essential insights into the mysteries of the recent financial crisis. Gorton has the rare depth of understanding to explain the elements and similarities of a wide array of historical crises. Fascinating reading." —Robert J. Shiller, Arthur M. Okun Professor of Economics, Yale University, author of Irrational Exuberance and Finance and the Good Society "Professor Gorton has produced an excellent, readable and incisive account of the recent financial crisis in historical perspective. We, as economists, have an obligation to understand our own profession’s failings in the policy framework leading up to the financial crisis. Gorton shows us that blind faith in mathematical models of idealized economies can lead to blind spots in regulators’ view of economic reality. This phenomenon had disastrous consequences during the 2008-2009 financial crisis, as intricately documented in this book. The book presents important lessons for how financial regulatory reform should be designed and implemented in the future. In addition, it provides a cautionary tale for economists to rethink their approach to policy advice more generally." —Justin Yifu Lin, Chief Economist and Sr. Vice President, World Bank "Financial Crises have been a feature global finance for centuries, but economists and other analysts still struggle with the subject. If anything, since the events of 2007-2009 and the more recent crisis in Europe our fears have only grown larger. In this timely new book Gary Gorton reviews history, theory and evidence concerning financial crises, their causes and possible research and policy responses. It is at the same time very thorough and very interesting, and will no doubt appeal to academics and practitioners." —Arminio Fraga Neto, former President, Central Bank of Brazil, Founder, Gavea Investimentos Praise for Slapped By the Invisible Hand: “To understand the actual moment and mechanism of crisis, the definitive take is Yale economist Gary Gorton’s, in the delightfully titled Slapped by the Invisible Hand. Gorton’s is a challenging book for a non-finance type, but there is no better technical explanation of the panic.” -Slate.com "Slapped by the Invisible Hand tells us that there were bank panics—systemic crises—in 1873, 1884, 1890, 1893, 1896, 1907, and 1914. On the other hand, there were no systemic crises from 1934 to 2007. The problem, as Gorton makes clear, is that the Quiet Period reflected a combination of deposit insurance and strong regulation-undermined by the rise of shadow banking. So we have a choice: restore effective regulation or go back to the bad old days." -Paul Krugman, New York Times “Conscience of a Liberal” “It’s must-reading for anyone who wants to understand the recent economic unpleasantness.” -Matthew Yglesias, Think Progress “Slapped by the Invisible Hand is essential to understanding the deep weakness in the banking sector that led to the financial crisis. Like consumer banks before the Great Depression, the ‘shadow banking market’ is vulnerable to runs and panics and hysteria, and we are all, in turn, vulnerable to it. By looking beyond this financial crisis to the systemic flaws that make us vulnerable to all sorts of crises, Gary Gorton has created a necessary guidebook for what’s happened, and what needs to be done.” -Ezra Klein, Washington Post About the Author: Gary B. Gorton is the Frederick Frank Class of 1954 Professor of Finance at the Yale School of Management. He is the author of Slapped by the Invisible Hand: The Panic of 2007.

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