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Thursday
Dec212006

Happy (Holi)days ...

money.jpg... on Wall-Street; ah yes, the wonderful world of investment banking.

(From the Economist - bold parts are my emphasis) 

It has been a year to make even Croesus blush for the big Wall Street securities firms. Goldman Sachs, Bear Stearns, Morgan Stanley and Lehman Brothers have all announced record profits and beaten analysts’ expectations in the process. Bloomberg, a financial-information firm, calculates that the industry will make $29.1 billion after tax in fiscal 2006, a 43% rise on last year, which was itself a bumper one. New York’s tabloids have had a field day, splashing headlines like “Sachs of Loot” and fantasising about all the things outsized bonuses could buy.

Goldman, the best performer, is setting aside an unprecedented $16.5 billion to reward its talent, equal to $620,000 per employee across the firm. But it is now so profitable that the ratio of pay to revenue has actually fallen, to 43.7%, well below the 50% seen as a ceiling in the industry. And on Tuesday November 19th Goldman revealed that the bank’s boss, Lloyd Blankfein, would pocket $53.4m this year. This paypacket broke an industry record set only last week at Morgan Stanley—its chief, John Mack, will get around $40m for his work in 2006. The huge sums of cash and the attendant publicity prompted Mr Blankfein to call for humility as his troops reflect on their stellar year.

(...) 

The banks can thank near-perfect markets for their good fortune. Mergers and private equity are booming, as are stockmarkets (the Dow Jones Industrial Average hit another record high on Tuesday). Volatility is low, credit still plentiful. Hedge funds and others are trading derivatives at a furious pace, providing a further lift to the banks’ prime-brokerage businesses. In these conditions, the banks have (so far) profited handsomely from ratcheting up their own risk-taking. Across the industry, value-at-risk—a measure of potential losses on a bad trading day—has risen steadily. Some 70% of Goldman’s net revenues now come from trading and investing on its own account.

Thursday
Dec212006

Surplus Widens in Japan

Japan.jpgThe November data on Japan's trade is out and Bloomberg reports how the surplus has widened on the back of accelerating exports and a low yen.

Japan's export growth unexpectedly accelerated in November, easing concern that the expansion of the world's second-largest economy is cooling. Imports slowed, reflecting a decline in oil prices.

Exports rose 12.1 percent, helping the trade surplus widen to 915.9 billion yen ($7.7 billion) from 594.4 billion yen a year earlier, the Ministry of Finance said today in Tokyo. Imports gained 7.5 percent, down from 17.5 percent in October.

The yen's decline against the dollar and euro has helped reduce the effects of slower overseas demand, bolstering exports. Shipments abroad grew at the slowest pace in six months in October, causing concern that the economy would stall amid sluggish consumer spending at home.

``There is no doubt that the yen's weakness remains an engine for Japan's exports,'' said Yoshimasa Maruyama, an economist at BNP Paribas. ``Today's numbers confirm Japan's exports maintain more momentum than we had expected.''

(...)

Japan's economy expanded an annual 0.8 percent in the third quarter and would have shrunk if it weren't for strong export growth and corporate spending on factories and equipment. Consumer spending, which accounts for more than half of the economy, had the biggest decline in almost a decade.

Japan is indeed growing but ever more so on exports which, I might add, is totally in line with expectations since Japan's old and ageing population can't support growth through domestic consumption. In short; the idea of a balanced growth path is really difficult to sustain here. An interesting point here is also how the low Yen has helped to boost exports. This is of course not very complicated to understand but it should be quite clear that if exports continue to be the main driver of growth (I believe this will be the case) then the BOJ simply won't be able to raise rates. This is mirrored in the situtation on consumer spending which seems to be persistently downtrending despite an after all pretty loose monetary stance of 0.25%. This means that if Japan is going to sustain economic growth the BOJ will have to keep those rates down. Clearly, this has implications for international capital flows and as I have argued recently demographics form a considerable part of the picture. Edward Hugh's recent post on emerging markets is also very much to the point I think. In my opinion we need to look at Japan as testcase for how a country with a relatively very old (in fact, the oldest) population is positioned in the international economy and once we understand why this is we need to go to Italy and Germany and try to apply some of the same reasoning. It is, as I have said before, at this point that we can see how demograpics represent a very strong anchor to conceptualize the dynamics of the macroeconomic environment.