The bubble economy and the Olympics.

If you want to find out about asset bubbles, don't care for dry academic work and haven't read it yet, go and buy a copy of Tulipomania, by Mike Dash. GBP 5.99 for the Kindle version, apparently. I have already had one copy 'borrowed' and never returned.

The bad photo is of a great painting by Frans Hals,  which you can find at the Alte Pinakothek in Munich. Perhaps his most famous picture, of a Laughing Cavalier, is at the Wallace Collection in London. Closer and free to see. The one in Munich is of a cloth merchant, as is obvious from the sword he's holding. Looking at it, I was struck that this is a painting of an asset bubble. The rich people who bought tulips at silly prices also paid the Dutch masters to paint their pictures so they could show off their new found wealth. This one was painted in 1629, just when the bubble was getting monstrous. Hals' later work is more sober,  reflecting what happened after the bubble burst.

I don't know what it says about this era, that bubble-beneficiaries are more inclined to buy old masters than commission new work. Or they buy houses, super-yachts and football clubs.

The current asset bubble is different from is predecessors because it's truly global. That means it  changes shape and moves around the world. It started as a credit bubble, that spawned housing bubbles. The first of those burst spectacularly. The second too, in many places. But as central banks shovel newly-minted money into bond markets, so the bubble turns up in different places. The near-zero levels of Treasury and Bund yields are obvious examples. The Swiss National Bank can only keep its currency in check by allowing a Swiss asset bubble to grow.

But if asset bubbles all have one thing in common, it is that they widen the divide between "have's" and "have not's". Money is almost free but brutally rationed. Germany can have as much is it wants, Spain can have none. Apple could borrow as much as it wanted except it has ludicrous amounts of cash sitting round, unused, already. Hals' cloth merchant was part of a small elite that wanted to show off its wealth. And even today, you can see a country in recession produce sell-out audiences to the Olympics day after day.   Huddled over laptops, Londoners try to by more tickets, not put off for a second by the prices. In the last half hour, a few tickets have been out on for sale -  GBP 450 for Tuesday's athletics, GBP 150 for a ticket to the women's hockey final? GBP 1500 for a ticket to the closing ceremony? Snapped up in an instant!

The Olympics are a huge success on many levels, and the amount of money spent by spectators will be one of the positives, even if it takes time to turn up in official data that struggle to capture something quite so esoteric. Oxford Street, after all, is much quieter than usual.   I wish I could think of the equivalent incentive  for the like of Apple and other cash-rich companies to spend more. For the most part though, in our 'bubble-economy' the assets which will do best continue to be ones the newly-minted central bank money gets to most easily. So don't be surprised to see stock markets out-perform economic growth (or profits), and don't be surprised if the yields on 'safer' government bonds remain far too low to finance a pension safely.

Overpriced Milk

Why does a skinny cappuccino cost Eur 3.20 while a skinny Latte costs a mere Eur 3 at Starbucks in Munich? Milk is cheaper than froth, something that will register with British dairy farmers, who are complaining about falling milk prices.

The Starbucks index currently puts a tall late at Eur 2.85 in Alicante, 3.00 in Munich and 3.50 in Paris and Amsterdam, but Eur 3.85 in Athens, which plays right into the hands of those who think Greece is the European economy which suffers most from excessive prices.

Mind you, CHF 6.10 for the same drink in Zurich this week is scary, while GBP 2.15 could be argued as a reason to buy the pound were it not for iPad prices. It seems the Swiss, relative to the Brits, value coffee more highly than Apples.

iPad prices are normalising

The Dollar price of an iPad 2, now and last year. Many thanks to Edward, who did the web research for me as his 'work experience' yesterday!

Some countries have seen prices come down, all countries have seen exchange rate movements, The big outlier a year ago was Brazil but Real softness is going some way towards sorting that out. Cheapest place to buy an iPad is still the USA. Japanese prices are added and highlight that years of deflation mean Japan isn't over the top expensive any more.

In the UK, we're being over-charged.....and while Switzerland is super-expensive for many things, an iPad is cheaper in Zurich than in London, apparently.

If you only traded FX on the basis of iPad prices (would have got you short real last year, but it's not really a sophisticated strategy!) you would sell the Swedish krona and buy the dollar or the yen...

Terra Mitica and the carousel of austerity

Terra Mitica, the world’s best theme park, opened in 2000, in the bright dawn of Spain’s Euro Zone membership. Money was cheap and plentiful, the economy embarking on a boom. The pound was on a high and the local economy in Benidorm was re-inventing itself from cheap package holiday destination to appeal to a wider clientele. The local savings banks were happy to finance a theme park, as well as hotels, a golf course and a nature reserve.

Twelve years on and Terra Mitica is still the world’s best theme park. For visitors, not for the Cajas who financed it. What makes it so good is partly the theme of the rides – a journey through the Ancient World, allowing a small dose of cultural education along with the thrills. More than that though, visitors can enjoy far, far smaller queues than they would at most other theme parks.

Since my children were 1 and 4 years old when the park opened, it has been a regular destination, the rides they enjoy changing gradually as they have got older. My annual season pass costs me Eur 51, and since I can visit as many times as I want, I tend to indulge the children’s appetite for frequent visits, either keeping them company for a ride or two in between cups of coffee, or simply dropping them off and heading for the gym of golf course down the road. As the chosen rides got scarier, coffee and golf started to appeal more and more.

Terra Mitica has lost several hundred million euros in its short life. It has changed ownership and management, running a profit only briefly in the halcyon days before the credit bubble burst – and is now run by a waterpark operator. I have regularly fretted that it would close down and deprive the children of one of their favourite holiday treats, but the banks are still trying to avoid writing off all their loans.

Since it ran into trouble, some rides have changed, and restaurants have abandoned all but the quickest fast food. Pondering the thinking about what to change or close, it is clear that one factor above all makes the difference – how labour intensive a ride, or restaurant is. So my wife’s favourite ‘cultural’ ride, a genteel water ride based on Odysseus’ journey round the Med, is no more, and the aerial climbing centre has closed down. As for the days when I could sit down and have a four course a la carte meal, they are a distant memory. 

The trouble is that since Spain joined the Eurozone, wages have risen sharply. And European labour laws have been imported. That’s not a bad thing, but closing down labour intensive jobs in a part of Spain with incredibly high unemployment doesn’t actually make sense. If labour costs were a bit lower, there would be demand for many more services, and the work would create its own demand.

Closing a ride on the grounds of labour cost while youth unemployment heads ever higher, hits local demand twice over – tourists have less to spend their cash on and locals just have less cash. Europe’s austerity-solution will be to reduce unemployment benefit, and raise consumption taxes. That will reduce demand even further, obviously.

The latest twist is a cut in unemployment benefit and an increase in VAT. Will that boost employment? Probably, but not at Terra Mitica. The successful businesses around here are small family-operated ones, where unemployed children with degrees in architecture help work in the family bar, for example. Here, prices have been cut. Are these businesses diligently reporting all their income for VAT? Who knows!

It all ends with the banks writing off the loans to finance all sorts of  infrastructure projects. It ends with freer labour markets and a scaled back social welfare system. It would be nice if there were an offset in the form of cheap money, or cheaper currency but at the moment neither is on offer. In the absence of either, tighter fiscal policy will result in weaker demand, higher unemployment, weaker tax receipts, reduced government spending, a lower credit rating, higher borrowing costs and on round and round the austerity carousel… 

Even in the depthts of an Ice Age, the sun can shine

Just in case anyone wondered - the ECB's dramatic policy shift isn't going to save the Euro Zone from recession, nor will it cure internal imbalances. But lending half-a-trillion cheap  euros to the banking system for 3 years relieves all the worries about where the money will come from to repay maturing bank debt, and the success of the frst loan will probably increase enthusiasm to come back for even more in February  - and that cash will be used to buy higher-yielding assets, boosting profits and helping the process of financial rehab.

A word on those imbalances. It's fashionable (see Martin Wolf taking to John Authers on FT video) to talk about Europe's internal balance of payments imbalances in terms of 'the surplus countries' and 'the deficit countries'.  In practise, that's a bit simplistic. Almost all of Europe's balance of payments surplus comes from just two countries - Germany and the Netherlands. And almost all the deficit comes from Spain, France, Italy, Portugal and Greece. The other ten countries don't have much of a surplus or deficit at all. Maybe it's semantics but when we say 'surplus countries' we really mean Germany, and 'deficit countries' we mean 'Club Med, plus France'.

In the US, the housing market - crucial to economic recovery - has worked off its excess inventory and is very, very slowly coming back to life. The economics profession under-estimates lags between policy action and effect, and underestimates the multipliers that cause both recovery and recession. 'New normal' growth won't be anything like 'old normal' and we can reasonably term the new economic environment an 'ice age'. But even so, there will be days, weeks and months when things fell better. This is one such day, enjoy it.

You can't just carry on as if nothing happened

There's no living with a killing, said Shane. There's no way to put Humpty Dumpty back together after he's turned into an omelette, as the King's horses and the King's men all found out. And there is absolutely no way that Europe can return to those halcyon ways when investors behaved as though neither default or departure from the euro was possible. Not unless the structure is changed to make it impossible.

Mario Monti is promising the sort of austerity that you would expect from a [roper eurocrat. Merkozy are set to get us closer to more rules and treaty changes, which they hope will help restore confidence and Draghi seems, to me anyway, closer to 'doing his bit' to make sure the ECB beefs up its crisis-response.

But I just don't think the euro can be batched up with fine-tuning of the current structure. We are going to go on seeing slow growth and go on seeing poor budget numbers, not to mention cash-strained households and banks. Confidence-building in peripheral government debt may improve a bit, but will ebb and wane. And at some point, it'll wane enough to put us right back in the mire.

What is needed is a plan that gets us to a very clear destination: A Eurobond, for a core group of countries which can and want to live with sufficiently co-ordinated fiscal policies and rules to make a Eurobond sustainable. Agree that is where we are going, agree the rules, create a precursor to a Euro bond, and get the ECB to bankroll the transition. Who is 'in'? Dunno, don't care yet. But saving the system, and then debating who is 'in' is a million times less awful than just letting it collapse because you aren't willing to recognise the need to move on from a system which may always have been flawed, but certainly is now.

Save me from ratings agencies

I was on my way to the pub when Fitch saw fit to downgrade Italy last night. I wondered whether I should talk to a few people about it, but since all Fitch are doing, is playing catch-up with cuts already made by S&P and Moody's, I didn't bother.

Markets did react, though the rating cut was more catalyst than cause. But it is a reminder of the continuing influence of organisations which were discredited in the first part of the credit crisis.

It isn't the decision to downgrade Italy (or any other European country) that bothers me. I would have thought that one of the definitional features of a 'sovereign borrower' should be it's ability to print it's own money to repay it's debt. And that is something the Euro Zone countries have given away, making every single one of them less creditworthy than the UK. Yes, even mighty Germany.

What annoys me, is that with three rating agencies each adjusting ratings and 'outlooks' as well as putting countries on credit watch, we have a steady stream of bad news for any country whose credit is under pressure, which exacerbates the market reaction. It's nonsense, made even more nonsensical by the way that bank regulation forces everyone to pay undue attention to the ratings.

Anyway, the rating focus shifts to Hungary next week, as the 'raters' come calling. Personally, if they came to my door, I'd send them packing.