THE wrap-up from Davos: One of the best weeks ever! A big dump in mid-January left a solid base of 1.5 metres in the valley and 2.5 metres at the summit. This was topped up last week, bringing a nice dusting of powder on the immaculately groomed slopes.
The only drawback was reports of crowds of rich old people on the Rinerhorn – and too many Americans, refugees perhaps from the horrific ski season in the US. Forecast: cautious optimism.
IN the wake of the World Economic Forum, the US Congress voted through another $US1.2 trillion hike in the debt ceiling and borrowings rose by $US120 billion to $US17.5 trillion in just one week.
Can President Barack Obama make it to the election in November without another hike in the debt ceiling? It will go down to the wire.
Good news is the US economy is displaying signs of recovery, albeit tepid. It will need to recuperate to meet its interest bills alone. Bad news is Europe seems to be getting worse, although bond yields have come down from red-alert levels, thanks to the bellicose stimulus by the central bank.
This year, the G7 nations need to borrow $US7.3 trillion – yes, seven thousand three hundred billion. Twelve zeros. They have to come up with $US570 billion just to pay their interest bills, more than twice what they thought they would need at last year’s chinwag in Davos.
Governments will be competing with their corporations, too, who have taken advantage of desperately low interest rates to gear up. They need to roll almost $US1 trillion this year as well. All up, against prospects of slowing growth in Europe and meagre growth in the US, some $US18.5 trillion in debt has to be rolled over the next four years.
Is this mathematically possible? Markets have risen of late, though volumes have been pitiful, almost foreboding. Still, equities are the only place to get a half-decent yield, and this is sustaining the sharemarket.
Also competing for capital on global credit markets are the good old Aussie banks. Roughly a third of their funding is sourced from overseas. This is why they cry poor. It is pre-emptive crying. If these markets dry up, so do funds for the hallowed Aussie mortgage market.
Their problem is the banks have been crying poor forever, it seems – while drumming up record profits and racheting their bonuses into the stratosphere – so when the crunch comes, or if it comes, few may lend credence to their wailing and gnashing of teeth.
The issue comes to the fore again soon as the Big Four quarterly updates start to flow before the Commonwealth Bank unveils its results on February 15. Macquarie Equities is predicting a net profit of $3.62 billion for the half-year, up a mere 3.4 per cent.
And since demand for credit is unlikely to suddenly rebound, expect cost cuts to keep earnings ticking along. This week’s jobs pogrom by Westpac is a sign of things to come.
MEANWHILE down the road, a few hours’ west of Davos is the tax haven of Zug, where the boys from Glencore finally went public with their bid to mop up Xstrata. The $80 billion merger proposal, slapping together the secretive commodities trader with the big commodities producer, should bequeath a cleaner, less shady structure.
The deal should have implications for Rio Tinto and BHP, which also boasts offices in Zug. It presents an integrated, even bigger player in coal, copper and iron ore, and one with big assets in Australia.
If this were the deal of most moment, the deal of most interest is the Facebook float.
Priced at $US75 billion-plus, the float looks expensive. Net profit is just $US1 billion and revenue $US3.7 billion. We are talking a PE multiple of 75 when Google trades on 19.5 and the mighty Apple on 12.5.
And, as opposed to Apple, which just handed in a 100 per cent rise in quarterly profit, Facebook’s growth was 40 per cent last year, tailing off from 165 per cent the year before.
A terrific reach, and a beautiful margin, but unless they can refashion their model to leverage their users, without intruding too much, the price of Facebook is a “dislike”.