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Tuesday, December 02, 2008

Gave Me A Nasty Shock, This Did

EU wants to loosen insurer regulations?
U.K. Chancellor of the Exchequer Alistair Darling will oppose loosening solvency rules that govern Europe’s insurance industry, saying the European Union should demand that insurers hold larger reserves of cash.

Representatives of the 27 EU nations on Nov. 20 tentatively endorsed a plan to adjust how much money insurers set aside in case of losses. They opted to give stock holdings more favorable treatment within capital formulas of insurers, letting them count on long-term returns to outweigh short-term volatility, when determining how much money to set aside.
The problem is that long term gains don't pay for short term payouts. Granted, this would help insurers buy low and presumably sell high later, and perhaps the theory is that this measure would support stock prices. However experience suggests higher losses in downturns, so I think solvency over the near term ought to be a pretty big concern.

An interesting article on the Swiss National Bank's options now that its interest rate is effectively zero. Since the US is at 1%, consider it a preview of US options.

BASF downgraded at ING:
“We see the chemicals arena today as analogous to an earthquake zone,” London-based ING analyst Paul Satchell wrote today in a note to investors. “The breadth and depth on demand dislocation are profound, and we expect another round of estimate downgrades, threatening stock prices further.”
Not good news, and this is a basic industry. When prices begin to fall as much as they have on basic inputs, it can be hard to figure out what the real action is. Are the cited export drops due to price drops or volume drops? However, when basic industries providing those inputs see a drop in demand, it's a pretty good indicator that volume and not just price is impacted.

Interestingly, few realize that volume matters in many manufacturing application as to pricing. If demand drops enough, one could see the situation in which partial runs have to be done at factories, thus increasing the unit cost of the product. That is the nightmare scenario, in which economic efficiency decreases even as economic activity decreases.

In the Great Depression, one of the features after the first couple of years was that the price of many basic commodities rose even in the midst of deflation because of the withdrawal of capital from production and such factors. I have a book containing an essay from the 1930s in which the wife of a university professor complains that 10% of their household income goes to buy milk for their children. She writes that the plumbers make it, the milkman make it, but that the "gentle people" are going to the wall.

Update: See Walker on China. It appears I'm not the only one that sees China as being in an outright recession:
House prices in Shanghai, Shenzhen and Guangzhou are plunging, and the global economy may grind almost to a halt next year because of it.

Construction of homes, offices and factories fell at least 16.6 percent in October after rising 32.5 percent a year earlier, according to Macquarie Securities Ltd. That's squeezing an economy already slowed by recessions in the U.S., Japan and Europe that have cut demand for exports. Building is the biggest driver of China's expansion, contributing a quarter of fixed- asset investment and employing 77 million people.
Walker pegs Chinese growth at 0%-4% in 2009. In China, the wealth effect drove a lot of investment, and the wealth effect has quite a contractionary effect when it reverses. A wealth effect surge rarely stabilizes if it is significant. Hong Kong home sales fell 79% by unit and 87% by value in November.

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