Macro Roundup: The Sun Also Rises
The results of round two of the ECB's LTRO (Long Term Refinancing Operation) are in, with European banks borrowing €529 billion. Analysts got it right, predicting a total of roughly €500 billion; I thought there was a strong possibility of a large upside surprise, but that didn't materialize. The LTRO has certainly restored confidence in the European banking system, to the extent that a liquidity crisis has been averted. As a result, the Eurozone, which had been at the top of investor concerns, has lost some of its prominence. Lower risk aversion means higher prices for risk assets – a putative cause-and-effect relationship between LTRO and the stock market rally certainly looks very strong. Whether or not that is a sound basis for higher equity valuations is unclear – it depends whether or not you think stocks were underpriced to begin with.
Furthermore, averting an immediate liquidity crisis and addressing the longer-term solvency problem are separate challenges. In regard to the latter, LTRO may have been a step backwards, providing the means to avoid painful restructuring in a troubled banking system like Spain's, for example. Here's a startling statistic I heard today: Total U.S. bank assets represent 70% of GDP; in Europe, the equivalent figure is 300%! That's the sort of number that leads me to believe this movie is far from over; you can expect some major plot twists LTROn down the road. An Irish referendum on the proposed Eurozone fiscal pact could provide some excitement, for example.
Japan's industrial production surprised to the upside in January, as the impact of severe flooding (in Thailand, not Japan) receded. I happen to think that many Japanese companies (and their stocks) are remarkably underrated – particularly in manufacturing. Once you start looking closely, you find numerous examples of industries and product areas in which Japanese companies own the global market (not infrequently, it's a single company.) The U.S. should take a lesson from Japan; if the media were an accurate portrayal of reality, the U.S. would have no choice but to relinquish manufacturing to low-cost labor countries, with only activities like cloud computing and social networking capable of providing enough value-added to power our standard of living forward.
I won't normally write about politics – I regret to say it isn't an area that interests me to a great degree. However, I can't resist mentioning that Prime Minister Netanyahu is coming to Washington next week – to gather support for a strike on Iran, perhaps? It's unfortunate that someone who suffers from paranoia should be leading his country. I'll just mention Netanyahu's statement that anti-Semitism was "pervasive" at MIT when he was a student there. MIT has long been one of the most enlightened and progressive educational institutions in the U.S. The first female student graduated in the 70s – the 1870s, that is. The first African-American graduate took his degree in 1892. In the 1970s, there were numerous Jews on the MIT faculty. Netanyahu's claim lacks all credibility.
If you'd like to hear a Jew discuss an alternative, rational approach to dealing with the issue of Iran's nuclearization, I recommend you listen to this excerpt from an Israeli television interview of Noam Chomsky. If you're tempted to write a negative comment on Chomsky at the mention of his name, I'm going to request you watch the video first.
Glencore – the world's largest zinc trader – has struck a deal to source zinc ore without requiring a discount to the price of the refined metal. That suggests they are anticipating significant price rises. With major zinc mine closures scheduled over the next several years, that is perhaps a safe bet. Zinc now trades at less than half the all-time high it achieved in November 2006. Will zinc be the dark horse that beats investors' trifecta of oil, gold and copper?
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