There’s a pretty striking article in Vanity Fair this month by Michael “Liar’s Poker” Lewis on the Greek debt crisis:

Beyond a $1.2 trillion debt (roughly a quarter-million dollars for each working adult), there is a more frightening deficit. After systematically looting their own treasury, in a breathtaking binge of tax evasion, bribery, and creative accounting spurred on by Goldman Sachs, Greeks are sure of one thing: they can’t trust their fellow Greeks.

Some quirky nuggets include:

• The average Greek railway employee earns 65,000 euros a year – yet the nationalised train system is so broken it’s been calculated that it’d be cheaper to put all the passengers into mini-cabs.
• ‘Arduous’ pensions kick in at 55 for men and 50 for women. Among those who’ve managed to get themselves on the list are hairdressers, radio announcers, and musicians.
• No one is ever punished for not paying taxes – it is compared by one insider to not opening a door for a lady.

There’s paragraph after paragraph of this stuff. Dumbos who compare Greece with the US or UK, read it and weep tears of relief.

(Source: Vanity Fair)

If you’re going to fall on your sword, it’s best if it’s gilt-edged.

Just ask departing BP boss Tony Hayward, who is in line for the sort of payout that would have most of us running into the nearest fencing shop to get the job done ASAP.

According to Robert Peston:

Tony Hayward will be able to draw a pension of around £600,000 a year from the moment he leaves the company on October 1, I have learned.

This is his contractual entitlement under the company’s pension scheme. The rules of the scheme say that those who joined it before April 6 2006 can take the pension at any point from age 50: Mr Hayward is 53.

However the pension entitlement is bound to be hugely controversial.

Mr Hayward’s pension pot had a transfer value on 31 December 2009 of £10.8m, and he had accrued a pension of £584,000 a year. The pension pot will be worth more than that by the time of his departure.

I happen to think that BP has done a reasonable job in the wake of the disaster, as I wrote when I prematurely considered BP shares good value at 435p. With the leak sealed, they’re finally inching back towards that. (Thanks Tony, for sparing my blushes!)

What’s more, I think Hayward’s main crime was to be British. They think he has a posh lar-dee-dah voice in the US, whereas to a British ear he just sounds like a geology lecturer from Warwick University.

True, he’s committed a few PR gaffs, but on a stage this big, who wouldn’t? And what do we care about – the problem being fixed or a clumsy word along the way?

Nevertheless I find it hard to stomach that any retiring employee should find themselves with a £600,000 a year pension. I have a convoluted theory for why it might not be quite as poor an outcome as it appears, but there still seems something morally suspect about it.

If it’s an entrepreneur who built his or her own business, that feels different.

Am I suffering from muddled thinking?

(Source: Peston/BBC)

Apologies for the lack of posting recently. I am still shaking off my grim back complaint, combined with busyness with work, combined with the inevitable six-months blues of writing regularly for a blog that nobody reads yet (apart from your good self and a few dozen others, of course!)

While Stock TIckle waxes and wanes the economy keeps on recovering. And what will be hard to remember in years to come is just how against the prevailing ‘wisdom’ this expansion has been.

I’m not saying it will necessarily go on for years, but I can tell you it will go on longer than 90% of commentators predicted – because it already has – and also that it wasn’t rocket science to expect a bounceback with interest rates at barely-there percent, and hundreds of billions pumped into the economy via QE and other special measures.

This week we’ve seen:

• The UK economy growing by 1.1% in the second quarter – twice as fast as economists forecast.

• Flash PMIs from the Eurozone showing manufacturing and services both growing far faster than expected.

• German Business Confidence surge to highest level since July 2007, as measured by the IFO institute.

• Great earnings results from the likes of Caterpillar, Apple, Intel and Microsoft.

When I wrote that Britain is booming on Monevator early in 2010, I took a flyer, pretty much against consensus.

Now annualised UK GDP growth is running at over 4%, I am wondering why more people don’t read Stock Tickle, which has been noting this positive data for months!

Sure, there remain headwinds. I don’t expect many surprises from the European bank stress tests this afternoon. But US unemployment really does need to peak soon or the fear is going to become a self-fulfilling prophecy. In the UK, fiscal austerity will take something off future growth, although what remains to be seen.

We’ve also the unfinished business of a housing crash here, too.

For what it’s worth, the Q2 2010 GDP number seems like such a result, it’s hard not to believe there’s some degree of distortion in the data. But even if it is subsequently revised down, it will be to more like 0.8%, not to the pathetically weak 0.2% or what have you that most commentators and UK investors seem to be expecting.

Going forward, I think the global recovery will continue to hold. For now the motto must be thank goodness for Asia and the BRICS, but eventually the major developed economies should pick up the ropes, too.

The ongoing fear factor means we remain vulnerable to big shocks, while ongoing bank deleveraging means growth will regardless be slower than it might have been a decade ago. But I’m betting there will be growth.

Like everyone, I’m just offering an opinion. But UK GDP did just come in at 1.1%…

I’ll be wrong about this eventually – I’m wrong all the time, like everyone – but at least it will be my opinion, not just the same opinion everyone else is offering, seemingly copied from each other!

Even the active managers are saying there’s no point picking stocks right now.

Here’s a graph and commentary from Matt Rothman at Barclays Capital:

I just think it shows the herd running scared as a mob. But I would, wouldn't I?

It was hard to be a stock picker in the market for the last two months as the last two months have seen historically low levels of dispersion in stock returns.

As shown in Figure 2, the cross-sectional correlation across all stocks in the market was at its second highest level last month (measured back to July 1950) and recorded its third highest level this month; there have never been to two months back-to-back with anything approaching these levels.1

To belabor the obvious and put this in perspective, current levels of correlation are higher than in October 1987, anytime during the Fall of 2008, either the run-up or the bursting of the Internet Bubble, or after 9/11.

This observation holds across sectors, with the correlation of stocks within Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Technology and Utilities sectors all being at or very near historical highs.

Index trackers usually beat active managers, of course, so this sort of finding could only really excite a stock picking professional.

That said, for my sins I do indulge in a bit of individual share investing with my side portfolio and it has proved even more pointless than usual recently.

Generally, if anything does very well I’m just selling up and rolling the proceeds into the market, given how cheap shares look overall.

(Source: Investing Contrarian)

After the big slump in markets in recent months and the growing fears of a double-dip recession, it would be churlish not to admit that 2010 has belonged to Pimco’s Bill Gross.

The man who proclaimed the ‘New Normal’ would be Japanese-style returns of a few percent a year says the markets stand today on “the threshold of mediocrity”.

He has produced the following chart to show how a 60/40 equity-bond split is no longer producing the returns of the 1990s:

2009's 5-year annualised return from 60% shares/40% bonds is 4%

I’m not wildly enthused by Gross’ findings, you’ll not be surprised to hear. I totally agree that Government bonds yielding 3-4% aren’t going to do much over the next decade, which is why I don’t own any!

As for equities, however, Gross should know that recent low returns make higher returns in the future more likely.

To believe anything else is likely over the next few years means reading the economic tea leaves, getting a poor result (I expect a positive outcome), and then correlating your poor expectations with poor market returns, which is an uncertain leap at best.

(Source: Bloomberg)

The following graph illustrates another reason why I still remain 90% unperturbed by escalating sovereign debt fears:

What are you frightened of?

I start from the position that people are choosing to be frightened, as a result of bear markets and the credit coronary of 2008. Throughout last year’s rally, people continued to be bearish. Yet as earnings recovered and the economy turned around, there was less and less to be worried about.

Governments that had taken on lender of last resort responsibilities and assumed more debt were about the last thing left to panic over.

Yet in most cases, there’s no solvency issue – or at least not one that will be manifested for generations. A few marginal countries face special problems due to the artificial currency constraints they operate within (Greece, Spain) but even in those countries the ‘unsustainable Government borrowing’ was pretty much as unsustainable prior to the financial crisis.

All that’s happened is certain yields have spiked on impaired liquidity, which turned into a very real solvency issue – but just those few marginal countries.

Widespread austerity by numerous countries in concert could become a concern for economies. But that’s bullish for most sovereign debt, if anything.

I continue to think the market is way ahead of itself (sans Greece, which as I’ve said for months will default) about the risks of a sovereign debt default or a second banking crisis, and probably over the risks of a second downturn, too.

In the UK, for instance, the Bank of England stands ready to unleash more QE which in the short-term can probably override any impact of Government spending cuts by encouraging corporate and private asset holders to put more of their money to work.

Interest rates are low and there’s little inflation out there, so what’s stopping it?

If that changes, panic, but I can’t see it changing anytime soon.

(Source: Business Insider)

Harvard Professor Kenneth Rogoff has an interesting piece in the Financial Times today. After a potted summary of financial bubble theory, he warns that:

…when debt markets collapse, there inevitably follows a long, drawn-out conversation about who should bear the losses. Unfortunately, all too often the size of debts, especially government debts, is hidden from investors until it comes jumping out of the woodwork after a crisis.

In China today, the real problem is that no one seems to have very good data on how debt is distributed, much less an understanding of the web of implicit and explicit guarantees underlying it. But this is hardly a problem unique to China. Even as published official government debt soars, huge off-balance-sheet guarantees and borrowings remain hidden for political expedience around the world.

The timing is very difficult to call, as always, but even as global markets continue to trend up, it is not so hard to guess where bubbles might be lurking.

(Source: FT – free registration required)

Media analyst Clay Shirky has written a fantastic article on the future of the TV business.

Taking in the collapse of the Mayan civilization, how ATT bungled the economics of Internet hardware, and viral video along the way, Shirky concludes:

When ecosystems change and inflexible institutions collapse, their members disperse, abandoning old beliefs, trying new things, making their living in different ways than they used to.

It’s easy to see the ways in which collapse to simplicity wrecks the glories of old. But there is one compensating advantage for the people who escape the old system: when the ecosystem stops rewarding complexity, it is the people who figure out how to work simply in the present, rather than the people who mastered the complexities of the past, who get to say what happens in the future.

(Source: Clay Shirky via Richard Beddard)

We’re running out of oil faster, according to British scientists:

Scientist and researchers from Oxford University argue that official figures are inflated because member countries of the oil cartel, OPEC, over-reported reserves in the 1980s when competing for global market share.

Their new research argues that estimates of conventional reserves should be downgraded from 1,150bn to 1,350bn barrels to between 850bn and 900bn barrels and claims that demand may outstrip supply as early as 2014. The researchers claim it is an open secret that OPEC is likely to have inflated its reserves, but that the International Energy Agency (IEA), BP, the Energy Information Administration and World Oil do not take this into account in their statistics.

Good news for the fight to stop cooking ourselves in our fumes, I suppose.

(Source: The Telegraph)

I thought I was bearish on government bonds, but perma-pessimist and contrarian Marc Faber makes me look happy clappy on the asset class:

An extreme bubble in US Treasurys has been deflated for the moment and yields are likely to rise sharply over the next years, Faber told CNBC.com separately.

“I still think that Treasurys are overpriced,” Faber said.

Yields on 10-year US Treasurys are likely to rise to between 10 and 20 percent over the next 5 to 10 years because of inflation and oversupply, he said.

There’s a lot of ‘forevers’ in Marc Faber’s recent commentary, which doesn’t endear me to him (he thinks real US interest rates will be zero ‘forever’, for instance).

Also, it’s a long time since we’ve seen yields of 10-20%. If you’re thinking “I’d have some of that!” then remember there’d likely be massive inflation in the same scenario, so the nominal yield might be high but the real yield much  lower (think late 1970s).

Oh yeah, buy gold, Faber concludes as usual. But he’s not against stocks.

It all seems rather futile, given that in his view the Western world ends with an economic collapse. Why not spending your time partying instead?

(Source: CNBC)