As I bid farewell to 2009, I pondered what we had went through for the past year, and there is only a word I could describe it, "harrowing". For the stock market, the S&P500 has ascended almost 70% from its March lows to end of 2009, which will tend to carry through January 2010. It was definitely a roller-coaster ride year. A lot of investors had continued to sell their holdings into the March lows, believing that the major US banks would be nationalized; but missed out on the rally that began after March, fearing that it would not last.
It seemed that the global economy is back on track, and everything is hunky-dory again ala 2007. However, I would like to remind readers that we did not enter the abyss due to the Fed and US Treasury opening their floodgates to their "widest" since the Great Depression. The financial system was being stabilized; allowing the global economy to pick up from the bottom and chug along. On the other hand, the US government introduced the stimulus spending and Cash for Clunkers programs to revive the economy and encouraging consumer spending. Coupled with the Fed quantitative easing and putting a price floor on the toxic mortgages via the Public-Private Investment program (PPIP), bank balance sheets suddenly looked healthy by mid-year. By end of 2009, we have witnessed that the major banks that received cash injections by the government last year have paid back most of the money. Of course, we all know that the real motivation for paying back the money is to escape the constraints that TARP has imposed on bank bonuses payout.
There is still a caveat here. The stock market has bounced back by anticipating a great recovery to the US and global economy, but what we see missing is UNEMPLOYMENT. US unemployment has exceeded 10% in the last report, and it looked like it is likely to remain at that level for some time to come. This does not look a strong recovery because without job creations, consumers would not have the purchasing power to spend. 2/3 of US economy is based on consumption; therefore, this is a critical factor for a sustainable recovery. Nevertheless, the stock market is moving assuming that unemployment will eventually decline. 2010 will be an important year to assess this important barometer again.
Governments worldwide have also opened their spigots to stimulate their economies. As a result, most of the stock market worldwide bounced back with vengeance. China has spent Rmb2 trillion to stimulate its economy; through purchasing commodities worldwide and for consumer and enterprise lending. What we are seeing in China is a new asset bubble brewing, and the country single-handedly propping up a lot of countries economically in 2009. What will happen next is anybody's guess, but the world is seeing a new asset bubble in epic proportions with most nations' economies tightly intertwined and integrated ever as before. The carry trade is now in US dollars for years to come. Fed has committed to keep its interest rates as low as necessary, in turn, the US dollar has weakened considerably since early 2009, and commodity prices climbing higher, especially gold which touched a high of $1200 an ounce by December 2009.,
However, the recovery is not straight forward. Our sense of complacency is shattered when Dubai shocked investors worldwide by asking for postponement of its debt payment in late November. Suddenly, emerging markets became the focus and doubt is rising whether the economy would be derailed. Things quiet down after Abu Dhabi promised to lend 10 billion dollars to Dubai. To make things worse, the witch hunt has started to track the next government which will likely default. Unfortunately, Greece is downgraded by the rating agencies. Its government needs to take steps to control its deficit in order to keep its ratings. A host of governments mostly in Europe are likely to face the music in 2010. Next up to watch: Spain. In 2009, UK and Japan's credit ratings have been questioned by investors who doubt whether they would be able to maintain their prescient ratings for long. Their debt as part of GDP is reaching new highs. Therefore, we would see the same concerns in 2010. A run to US dollars and Treasuries for safety will be imminent if this scenario would ever happen.
I am sure the job ahead for financial and government regulators worldwide would not be easy in 2010. Loud calls to exit from quantitative easing and spending programs are growing louder by the day. The economy depends very much on the spending power of consumers to drive it forward. Without consumer spending, the economic recovery would not be sustainable for long. What would drive the economy for the next few years? Green technology? Carbon trading? Battery powered cars have been a hot topic in 2009, as witnessed in BYD (China) and A123 Systems stocks. The Fed is hoping that the recovery would be gradual (Goldilocks), and not turn too strong or weak. A strong recovery would presage higher interest rates in 2010, and this might derail the recovery since the US is likely maintaining its weak dollar policy. A tough job nonetheless.... If a double-dip recession were to occur, I am sure that the Obama administration would waste no time to introduce more stimuli in the future to prop up its economy. What we need are decisive actions from the government. My fervent hope for 2010 would be a sustainable recovery in the global economy.
Thursday, December 31, 2009
Thursday, November 26, 2009
Dubai - A mirage or the real deal?
Is this the start of the falling dominoes, or this is the worst to have come? Dubai World and Nakheel, both government-linked conglomerates, have asked for a standstill of six months from its creditors. Although both the Dubai and US markets are close for Eid-alAdha and Thanksgiving holidays respectively, the news have spread like virus and hammered markets worldwide. Investors are quickly having doubts on the global economic recovery since March, sending the yen high and the dollar down. Treasury yields also dropped as investors are buying bonds, and seemingly abandoning riskier assets.
Fear of a massive default and heavy losses at banks and companies worldwide holding on Dubai's debt has sent investors scurrying for exits. They doubt that the Emirate would be able to restructure their debts, which amounted close to USD80 billion. Nothing they had done publicly so far instilled any confidence to investors, therefore the shock announcement inevitably raised doubts about other countries' debts as well.
Any credibility that Dubai has built up over the years as a safe haven for investment in the Middle East, which attracted hot money going into real estate, has quickly vanished into thin air as the news broke. Investors are beginning to speculate whether the financially rich Abu Dhabi would help to bail out Dubai. If not, then Dubai has no choice but to liquidate its real estate holdings to repay.
International banks like HSBC and Standard Chartered are being questioned about their exposure to Dubai debts. It is anyone's guess which banks are affected, and to what degree the exposure is. It could seriously derail the nascent recovery to the global banking industry since March.
What happens next depend on a few things. Abu Dhabi, creditors and Dubai itself. If this issue could be contained within reasonable time and not allowed to fester, then the domino would stop at there. Otherwise, the guessing game of who is going to fail next will be raging.
Fear of a massive default and heavy losses at banks and companies worldwide holding on Dubai's debt has sent investors scurrying for exits. They doubt that the Emirate would be able to restructure their debts, which amounted close to USD80 billion. Nothing they had done publicly so far instilled any confidence to investors, therefore the shock announcement inevitably raised doubts about other countries' debts as well.
Any credibility that Dubai has built up over the years as a safe haven for investment in the Middle East, which attracted hot money going into real estate, has quickly vanished into thin air as the news broke. Investors are beginning to speculate whether the financially rich Abu Dhabi would help to bail out Dubai. If not, then Dubai has no choice but to liquidate its real estate holdings to repay.
International banks like HSBC and Standard Chartered are being questioned about their exposure to Dubai debts. It is anyone's guess which banks are affected, and to what degree the exposure is. It could seriously derail the nascent recovery to the global banking industry since March.
What happens next depend on a few things. Abu Dhabi, creditors and Dubai itself. If this issue could be contained within reasonable time and not allowed to fester, then the domino would stop at there. Otherwise, the guessing game of who is going to fail next will be raging.
Saturday, November 21, 2009
Obama whirlwind tour in Asia - G2 spirit still lives on
For the past week, President Obama has come and gone. He did a tour of a few Asian countries; drumming up trade for the US and at the same time ensuring partners that the US economy is on a stable path to recovery and deficits are under control.
Iran (non-proliferation) and climate change are also under the agenda, but less visible than the topic of world economy. Yet, G2 relations are the most watched by the world at the moment.
Before Obama arrived in China, the two administrations already came out and aired out their concerns to the press. China is complaining about low interest rates and weak dollar driving up global asset prices. China is worried about US monetary and fiscal policy might pose a threat to the global economic recovery. At the same time, US is complaining about China's yuan is massively undervalued. To the US, a low yuan gives an unfair advantage to Chinese exporters, while endangering other Asian exporters because their currencies are also rising. US argued that China should let the yuan rise which will raise household purchasing power and reduce the trade deficit. They also argued this would create world economic balance and beneficial to all.
Both sides have their point, yet no one is making a bold move. Indeed, China's central bank has hinted at renminbi rise, but it won't happen immediately. Tim Geithner is always reiterating strong dollar policy, yet no one believes him. The US is adamant on continuing with its quantitative easing policy as long as necessary to induce economic recovery and reduce unemployment. Yet China is worried about its 2.2 trillion dollars in foreign currency reserves, of which most are in US Treasury debts. A sudden spike in US fiscal deficit or US losing its AAA rating would force every investor to bail out of dollars and shift into gold, causing massive investment losses worldwide.
Yet, the status quo still remains. Essentially, a "wait-and-see" attitude is maintained, even though both sides will complain each other from time to time. As a result of the US crisis, the economy must be allowed to heal first before the next course of action could materialize.
Iran (non-proliferation) and climate change are also under the agenda, but less visible than the topic of world economy. Yet, G2 relations are the most watched by the world at the moment.
Before Obama arrived in China, the two administrations already came out and aired out their concerns to the press. China is complaining about low interest rates and weak dollar driving up global asset prices. China is worried about US monetary and fiscal policy might pose a threat to the global economic recovery. At the same time, US is complaining about China's yuan is massively undervalued. To the US, a low yuan gives an unfair advantage to Chinese exporters, while endangering other Asian exporters because their currencies are also rising. US argued that China should let the yuan rise which will raise household purchasing power and reduce the trade deficit. They also argued this would create world economic balance and beneficial to all.
Both sides have their point, yet no one is making a bold move. Indeed, China's central bank has hinted at renminbi rise, but it won't happen immediately. Tim Geithner is always reiterating strong dollar policy, yet no one believes him. The US is adamant on continuing with its quantitative easing policy as long as necessary to induce economic recovery and reduce unemployment. Yet China is worried about its 2.2 trillion dollars in foreign currency reserves, of which most are in US Treasury debts. A sudden spike in US fiscal deficit or US losing its AAA rating would force every investor to bail out of dollars and shift into gold, causing massive investment losses worldwide.
Yet, the status quo still remains. Essentially, a "wait-and-see" attitude is maintained, even though both sides will complain each other from time to time. As a result of the US crisis, the economy must be allowed to heal first before the next course of action could materialize.
Tuesday, July 14, 2009
Second stimulus needed? You betcha...
I am seeing this coming along since the first stimulus was passed by Congress back in February. The first stimulus was approved, and government became the provider of the last resort, propping up demand in the US economy. Three months passed, and we are seeing "green shoots" coming up everywhere like mushrooms after the rain. Despite that, unemployment is still nudging upward with a possibility of > 10% in the coming year, if not in 2009. Hence, the sudden whisper of a second stimulus to ensure the economic recovery would not wither.
Vice-president Biden has admitted the administration has misread the economy. That means the stimulus of $787 billion is not enough for the economic recovery. The financial and economic crisis has taken a hefty toll in terms of job losses, hence the first stimulus could not create jobs as fast as losing them. This is compounded by the higher savings rate, which stifle demand as people are prone to save money, rather than spending them.
Presently, Republicans are opposing any second stimulus measures, mostly concerned with the huge deficits this might engender. To me, they are trying to get political mileage out of this issue. They might not realize that down the road, the stimulus is needed to bridge the budget shortfall in states and municipalities. One good example is the state of California, where Sacramento has to issue IOUs to close its budget.
Of course no one wants to see the recovery to be dead by next year. On the other hand, people don't want to see higher deficits and interest rates as a result of a second stimulus. However, we cannot run the risk of the economy going the way of a roller coaster. The recovery should be a self-sustaining one. The Obama administration and Fed Reserve should make sure that would be the course in the coming years.
Vice-president Biden has admitted the administration has misread the economy. That means the stimulus of $787 billion is not enough for the economic recovery. The financial and economic crisis has taken a hefty toll in terms of job losses, hence the first stimulus could not create jobs as fast as losing them. This is compounded by the higher savings rate, which stifle demand as people are prone to save money, rather than spending them.
Presently, Republicans are opposing any second stimulus measures, mostly concerned with the huge deficits this might engender. To me, they are trying to get political mileage out of this issue. They might not realize that down the road, the stimulus is needed to bridge the budget shortfall in states and municipalities. One good example is the state of California, where Sacramento has to issue IOUs to close its budget.
Of course no one wants to see the recovery to be dead by next year. On the other hand, people don't want to see higher deficits and interest rates as a result of a second stimulus. However, we cannot run the risk of the economy going the way of a roller coaster. The recovery should be a self-sustaining one. The Obama administration and Fed Reserve should make sure that would be the course in the coming years.
Tuesday, June 2, 2009
The day GM lived in infamy.....
Yesterday was a defining day in American business. General Motors, once a venerable American icon of industrial prowess, filed Chapter 11 for bankruptcy protection. This is after no settlement is reached in terms of the restructuring plans, and bondholders rejected the terms offered. For the record, it is the 3rd largest filing in US, and largest in US manufacturing history.
Let's step back a bit. GM, founded in 1908 in Flint, Michigan is bankrupt after 101 years. It has provided jobs for generations of Americans who depended on its generous pension plans, and a shot to move into the middle class. GM is betting to emerge from bankruptcy after 30 days as a "leaner and meaner" new GM. By that, I would guess selling its assets as quickly as possible, and to preserve cash. It has $172.8 billion in debt and $82 billion in assets, which would make any company insolvent at the bank's discretion.
The Obama administration is providing $30 billion of funding to help it restructure, and get out of bankruptcy asap. It has effectively made Uncle Sam to be the majority shareholder again as being practised in other "distressed" financial firms. The CEO, Henderson, said "The GM that many of you knew, the GM that let too many of you down, is history". "Today marks the beginning of what will be a new company, a new GM dedicated to building the very best cars and trucks, highly fuel-efficient, world-class quality, green technology development". That is the new vision for GM. Whether this vision could succeed in the midst of the Great Recession is still a known unknown.
The CEO also cautioned in court filing, "The vicious cycle of frozen credit markets, growing supplier uncertainty and lack of consumer confidence has the potential to unravel the automotive industry and short-circuit the creation of New GM". This summed up the risks pretty well. Let's hope in the next 30 days, some deals could be hammered out. Otherwise, it will have repercussions to the American economy, and the stock market will react nastily. Certainly, the "green shoots" will turn to tumbleweed if the restructuring plans fail.
Let's step back a bit. GM, founded in 1908 in Flint, Michigan is bankrupt after 101 years. It has provided jobs for generations of Americans who depended on its generous pension plans, and a shot to move into the middle class. GM is betting to emerge from bankruptcy after 30 days as a "leaner and meaner" new GM. By that, I would guess selling its assets as quickly as possible, and to preserve cash. It has $172.8 billion in debt and $82 billion in assets, which would make any company insolvent at the bank's discretion.
The Obama administration is providing $30 billion of funding to help it restructure, and get out of bankruptcy asap. It has effectively made Uncle Sam to be the majority shareholder again as being practised in other "distressed" financial firms. The CEO, Henderson, said "The GM that many of you knew, the GM that let too many of you down, is history". "Today marks the beginning of what will be a new company, a new GM dedicated to building the very best cars and trucks, highly fuel-efficient, world-class quality, green technology development". That is the new vision for GM. Whether this vision could succeed in the midst of the Great Recession is still a known unknown.
The CEO also cautioned in court filing, "The vicious cycle of frozen credit markets, growing supplier uncertainty and lack of consumer confidence has the potential to unravel the automotive industry and short-circuit the creation of New GM". This summed up the risks pretty well. Let's hope in the next 30 days, some deals could be hammered out. Otherwise, it will have repercussions to the American economy, and the stock market will react nastily. Certainly, the "green shoots" will turn to tumbleweed if the restructuring plans fail.
Saturday, May 16, 2009
Green Shoots or Yellow Weeds? That is the conundrum...
A recent article from Prof Roubini on the state of world economy. Certainly an important question for economists to ponder at the moment.
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Many commentators are suggesting that the recent data from the manufacturing, housing market, labor markets suggest that the ‘green shoots’ of an economic recovery are blossoming. While there do seem to be some signs of improvement, ie that the pace of contraction has slowed, the most recent data may still suggest that the global economic contraction is still in full swing with a very severe, a deep and protracted U-shaped recession.
Although the outlook for global manufacturing and service sectors is still consistent with a significant fall in global GDP, the pace of contraction began to slow towards the end of Q1, even in Europe and Japan which have lagged the U.S. and China. Globally, surveys suggest that the manufacturing outlook has improved from the freefall of the end of Q4 2008 and early 2009. Some emerging economies like China may now be experiencing expansion based on government investment, but those of most advanced economies remain well in contraction territory. In part, inventory adjustment following the sharp destocking could contribute to a revival in demand, but a real increase in end user demand needed for a sustainable fast-paced recovery could be far off.
Another necessary condition for a global recovery is a bottoming in not only the U.S. but also global housing markets. So far in most markets, housing prices seem far from their bottom and the outstanding inventory continues to be very high.
Moreover there is a risk that the increase in commodity prices might choke off a sustainable recovery if it weighs on industrial production and consumption. The recent increase in commodity prices, driven in part by an increase in Chinese demand for crude oil and other commodities, has contributed to an increase in the Baltic Dry shipping index. Yet, given the significant inventory in commodities like oil, prices might suffer renewed declines. Moreover although trade finance is no longer quite as impaired as at the turn of the year, global trade continues to be quite weak as evidenced from recent data from China, the U.S. and other countries.
Accompanied by the rally in stocks starting in March, the wide variety of central banks’ liquidity facilities have finally started to show clear effects in the interbank lending and money markets. Stress indicators such as the 3 month LIBOR-OIS spreads have narrowed significantly as well as the TED spread. The stock market rally extended also to the bond market with spreads receding significantly and junk bonds outperforming all other asset classes in the month of April. Is the worst over or have markets overextended themselves?
-----
Many commentators are suggesting that the recent data from the manufacturing, housing market, labor markets suggest that the ‘green shoots’ of an economic recovery are blossoming. While there do seem to be some signs of improvement, ie that the pace of contraction has slowed, the most recent data may still suggest that the global economic contraction is still in full swing with a very severe, a deep and protracted U-shaped recession.
Although the outlook for global manufacturing and service sectors is still consistent with a significant fall in global GDP, the pace of contraction began to slow towards the end of Q1, even in Europe and Japan which have lagged the U.S. and China. Globally, surveys suggest that the manufacturing outlook has improved from the freefall of the end of Q4 2008 and early 2009. Some emerging economies like China may now be experiencing expansion based on government investment, but those of most advanced economies remain well in contraction territory. In part, inventory adjustment following the sharp destocking could contribute to a revival in demand, but a real increase in end user demand needed for a sustainable fast-paced recovery could be far off.
Another necessary condition for a global recovery is a bottoming in not only the U.S. but also global housing markets. So far in most markets, housing prices seem far from their bottom and the outstanding inventory continues to be very high.
Moreover there is a risk that the increase in commodity prices might choke off a sustainable recovery if it weighs on industrial production and consumption. The recent increase in commodity prices, driven in part by an increase in Chinese demand for crude oil and other commodities, has contributed to an increase in the Baltic Dry shipping index. Yet, given the significant inventory in commodities like oil, prices might suffer renewed declines. Moreover although trade finance is no longer quite as impaired as at the turn of the year, global trade continues to be quite weak as evidenced from recent data from China, the U.S. and other countries.
Accompanied by the rally in stocks starting in March, the wide variety of central banks’ liquidity facilities have finally started to show clear effects in the interbank lending and money markets. Stress indicators such as the 3 month LIBOR-OIS spreads have narrowed significantly as well as the TED spread. The stock market rally extended also to the bond market with spreads receding significantly and junk bonds outperforming all other asset classes in the month of April. Is the worst over or have markets overextended themselves?
Wednesday, April 29, 2009
It is time to regulate Wall Street! Let's hope the best would prevail...
This week, Nancy Pelosi, US House Speaker, is reviving the famous "Pecora Commission" of 1933, whereby the misdeeds of Wall Street during the 1920s were subjected to Congressional investigations. Out of that commission, we got Glass-Steagall Act, Securities Exchange Act, and the SEC.
She is reviving a second Pecora-style investigation to clean-up the corrupt Wall Street practices of the past 10-20 years. This would restore public confidence in the US financial markets. She vows to bring accountability and transparency to Wall Street, and punish the wrongdoers whom had almost destroyed the US financial system.
However, all this talk is easier said than done. WHY? First, the so-called regulators were asleep at the switch while crimes were perpetrated on a constant basis. Chris Cox is the perfect regulator who exemplified the failure of regulating Wall Street. There are others as well who are just as culpable as him.
The repeal of Glass-Steagall Act sealed the fate for the current crisis that we are experiencing now. It was repealed by former President Clinton, whom might have believed that it will do more good than harm to the economy. Now, we know the opposite is probably true. The point is that the government was too cozy to Wall Street, serving up to their whims and demands.
I hope for the best to come out of this crisis. It is time a new set of regulation to come out from Congress. Let's rebuild our trust and confidence in Wall Street. Right now, the trust is gone
She is reviving a second Pecora-style investigation to clean-up the corrupt Wall Street practices of the past 10-20 years. This would restore public confidence in the US financial markets. She vows to bring accountability and transparency to Wall Street, and punish the wrongdoers whom had almost destroyed the US financial system.
However, all this talk is easier said than done. WHY? First, the so-called regulators were asleep at the switch while crimes were perpetrated on a constant basis. Chris Cox is the perfect regulator who exemplified the failure of regulating Wall Street. There are others as well who are just as culpable as him.
The repeal of Glass-Steagall Act sealed the fate for the current crisis that we are experiencing now. It was repealed by former President Clinton, whom might have believed that it will do more good than harm to the economy. Now, we know the opposite is probably true. The point is that the government was too cozy to Wall Street, serving up to their whims and demands.
I hope for the best to come out of this crisis. It is time a new set of regulation to come out from Congress. Let's rebuild our trust and confidence in Wall Street. Right now, the trust is gone
Friday, April 17, 2009
Of "Green Shoots and Glimmers", by Paul Krugman
This is an article published by Krugman on New York Times on April 16.
Ben Bernanke, the Federal Reserve chairman, sees “green shoots.” President Obama sees “glimmers of hope.” And the stock market has been on a tear. So is it time to sound the all clear? Here are four reasons to be cautious about the economic outlook.
1. Things are still getting worse. Industrial production just hit a 10-year low. Housing starts remain incredibly weak. Foreclosures, which dipped as mortgage companies waited for details of the Obama administration’s housing plans, are surging again.
The most you can say is that there are scattered signs that things are getting worse more slowly — that the economy isn’t plunging quite as fast as it was. And I do mean scattered: the latest edition of the Beige Book, the Fed’s periodic survey of business conditions, reports that “five of the twelve Districts noted a moderation in the pace of decline.” Whoopee.
2. Some of the good news isn’t convincing. The biggest positive news in recent days has come from banks, which have been announcing surprisingly good earnings. But some of those earnings reports look a little ... funny.
Wells Fargo, for example, announced its best quarterly earnings ever. But a bank’s reported earnings aren’t a hard number, like sales; for example, they depend a lot on the amount the bank sets aside to cover expected future losses on its loans. And some analysts expressed considerable doubt about Wells Fargo’s assumptions, as well as other accounting issues.
Meanwhile, Goldman Sachs announced a huge jump in profits from fourth-quarter 2008 to first-quarter 2009. But as analysts quickly noticed, Goldman changed its definition of “quarter” (in response to a change in its legal status), so that — I kid you not — the month of December, which happened to be a bad one for the bank, disappeared from this comparison.
I don’t want to go overboard here. Maybe the banks really have swung from deep losses to hefty profits in record time. But skepticism comes naturally in this age of Madoff.
Oh, and for those expecting the Treasury Department’s “stress tests” to make everything clear: the White House spokesman, Robert Gibbs, says that “you will see in a systematic and coordinated way the transparency of determining and showing to all involved some of the results of these stress tests.” No, I don’t know what that means, either.
3. There may be other shoes yet to drop. Even in the Great Depression, things didn’t head straight down. There was, in particular, a pause in the plunge about a year and a half in — roughly where we are now. But then came a series of bank failures on both sides of the Atlantic, combined with some disastrous policy moves as countries tried to defend the dying gold standard, and the world economy fell off another cliff.
Can this happen again? Well, commercial real estate is coming apart at the seams, credit card losses are surging and nobody knows yet just how bad things will get in Japan or Eastern Europe. We probably won’t repeat the disaster of 1931, but it’s far from certain that the worst is over.
4. Even when it’s over, it won’t be over. The 2001 recession officially lasted only eight months, ending in November of that year. But unemployment kept rising for another year and a half. The same thing happened after the 1990-91 recession. And there’s every reason to believe that it will happen this time too. Don’t be surprised if unemployment keeps rising right through 2010.
Why? “V-shaped” recoveries, in which employment comes roaring back, take place only when there’s a lot of pent-up demand. In 1982, for example, housing was crushed by high interest rates, so when the Fed eased up, home sales surged. That’s not what’s going on this time: today, the economy is depressed, loosely speaking, because we ran up too much debt and built too many shopping malls, and nobody is in the mood for a new burst of spending.
Employment will eventually recover — it always does. But it probably won’t happen fast.
So now that I’ve got everyone depressed, what’s the answer? Persistence.
History shows that one of the great policy dangers, in the face of a severe economic slump, is premature optimism. F.D.R. responded to signs of recovery by cutting the Works Progress Administration in half and raising taxes; the Great Depression promptly returned in full force. Japan slackened its efforts halfway through its lost decade, ensuring another five years of stagnation.
The Obama administration’s economists understand this. They say all the right things about staying the course. But there’s a real risk that all the talk of green shoots and glimmers will breed a dangerous complacency.
So here’s my advice, to the public and policy makers alike: Don’t count your recoveries before they’re hatched.
Ben Bernanke, the Federal Reserve chairman, sees “green shoots.” President Obama sees “glimmers of hope.” And the stock market has been on a tear. So is it time to sound the all clear? Here are four reasons to be cautious about the economic outlook.
1. Things are still getting worse. Industrial production just hit a 10-year low. Housing starts remain incredibly weak. Foreclosures, which dipped as mortgage companies waited for details of the Obama administration’s housing plans, are surging again.
The most you can say is that there are scattered signs that things are getting worse more slowly — that the economy isn’t plunging quite as fast as it was. And I do mean scattered: the latest edition of the Beige Book, the Fed’s periodic survey of business conditions, reports that “five of the twelve Districts noted a moderation in the pace of decline.” Whoopee.
2. Some of the good news isn’t convincing. The biggest positive news in recent days has come from banks, which have been announcing surprisingly good earnings. But some of those earnings reports look a little ... funny.
Wells Fargo, for example, announced its best quarterly earnings ever. But a bank’s reported earnings aren’t a hard number, like sales; for example, they depend a lot on the amount the bank sets aside to cover expected future losses on its loans. And some analysts expressed considerable doubt about Wells Fargo’s assumptions, as well as other accounting issues.
Meanwhile, Goldman Sachs announced a huge jump in profits from fourth-quarter 2008 to first-quarter 2009. But as analysts quickly noticed, Goldman changed its definition of “quarter” (in response to a change in its legal status), so that — I kid you not — the month of December, which happened to be a bad one for the bank, disappeared from this comparison.
I don’t want to go overboard here. Maybe the banks really have swung from deep losses to hefty profits in record time. But skepticism comes naturally in this age of Madoff.
Oh, and for those expecting the Treasury Department’s “stress tests” to make everything clear: the White House spokesman, Robert Gibbs, says that “you will see in a systematic and coordinated way the transparency of determining and showing to all involved some of the results of these stress tests.” No, I don’t know what that means, either.
3. There may be other shoes yet to drop. Even in the Great Depression, things didn’t head straight down. There was, in particular, a pause in the plunge about a year and a half in — roughly where we are now. But then came a series of bank failures on both sides of the Atlantic, combined with some disastrous policy moves as countries tried to defend the dying gold standard, and the world economy fell off another cliff.
Can this happen again? Well, commercial real estate is coming apart at the seams, credit card losses are surging and nobody knows yet just how bad things will get in Japan or Eastern Europe. We probably won’t repeat the disaster of 1931, but it’s far from certain that the worst is over.
4. Even when it’s over, it won’t be over. The 2001 recession officially lasted only eight months, ending in November of that year. But unemployment kept rising for another year and a half. The same thing happened after the 1990-91 recession. And there’s every reason to believe that it will happen this time too. Don’t be surprised if unemployment keeps rising right through 2010.
Why? “V-shaped” recoveries, in which employment comes roaring back, take place only when there’s a lot of pent-up demand. In 1982, for example, housing was crushed by high interest rates, so when the Fed eased up, home sales surged. That’s not what’s going on this time: today, the economy is depressed, loosely speaking, because we ran up too much debt and built too many shopping malls, and nobody is in the mood for a new burst of spending.
Employment will eventually recover — it always does. But it probably won’t happen fast.
So now that I’ve got everyone depressed, what’s the answer? Persistence.
History shows that one of the great policy dangers, in the face of a severe economic slump, is premature optimism. F.D.R. responded to signs of recovery by cutting the Works Progress Administration in half and raising taxes; the Great Depression promptly returned in full force. Japan slackened its efforts halfway through its lost decade, ensuring another five years of stagnation.
The Obama administration’s economists understand this. They say all the right things about staying the course. But there’s a real risk that all the talk of green shoots and glimmers will breed a dangerous complacency.
So here’s my advice, to the public and policy makers alike: Don’t count your recoveries before they’re hatched.
Wednesday, April 1, 2009
G20 Leaders Summit in London - What to expect?
In my opinion, the expectation is that we won't be able to expect much from it anyway. Other than the usual photo ops, and some promise to overhaul the financial regulatory system, please don't be too hopeful.
Instead, expect rifts to surface, and BRIC countries demanding their rights in IMF, and China drumming for a new world reserve currency. US and UK are demanding every country to increase their stimulus bill, while EU is fighting for financial regulation. It will be a miracle if any significant achievement could be attained in this summit. At worst, nothing will be achieved, and protectionism sets in. That would be global trade's worst nightmare.
My 2 cents: We will need another summit soon after this to stabilize the global carnage that would likely ensue after this. Bloomberg has an article on this subject as well, written by Matthew Lynn.
http://www.bloomberg.com/apps/news?pid=20601039&sid=aofSy5x6fwYY&refer=home
Instead, expect rifts to surface, and BRIC countries demanding their rights in IMF, and China drumming for a new world reserve currency. US and UK are demanding every country to increase their stimulus bill, while EU is fighting for financial regulation. It will be a miracle if any significant achievement could be attained in this summit. At worst, nothing will be achieved, and protectionism sets in. That would be global trade's worst nightmare.
My 2 cents: We will need another summit soon after this to stabilize the global carnage that would likely ensue after this. Bloomberg has an article on this subject as well, written by Matthew Lynn.
http://www.bloomberg.com/apps/news?pid=20601039&sid=aofSy5x6fwYY&refer=home
Saturday, March 14, 2009
The aversion of Financial Armageddon and the arrival of spring
Over the last few weeks, things have gone from bad to worse in the US economy, and around the world. In the US, the scant details of the bank bailout has badly shaken investors' confidence, especially after Geithner's plan rolled out, but without much details on how the plan will work. The only new thing is the public-private ownership, where private investors fork out money to invest in bad assets, with government's backstop. US stocks got hammered, with the Dow hitting 6440, a new low. Again, financial+insurance stocks bore the worst, with the guillotine finally fell on the pristine AAA rating of GE and Berkshire Harthaway. Rating companies had cut the ratings of both companies, but the implication is enormous because they were known for their stability. GE Finance arm is the culprit here, having made lots of loan investments to homeowners and Eastern Europe.
Around the world, Eastern Europe is in a freefall, with their western brethren reluctant/unable to offer much aid/loan due to their survival is also at stake. Debt for some Latin American nations would soon default. Iceland is still in iceberg condition. World trade is stagnant, except for a glimmer of hope in China where their stimulus money is starting to kick-in. A lot of Asian countries are effectively devaluing their currencies in order to compete. To me, this is not effective at all to help their exports, since world trade is in the doldrums. Japan exports have been heavily hit, especially the automotive industry. For the first time, Toyota is asking its government for a bailout.....
However, with the arrival of spring, things are starting to turn up better in March. The mere mention of regulatory overhaul of the financial system in US by Bernanke sparked a rocket-up movement in the stock market. Congress is also mulling the "uptick rule" and "mark-to-market" accounting practices. These steps would generally help to restore investor confidence, but they are not the solutions to this financial crisis. Moreover, any idea to set the bad assets to any value, other than its real value, would distort the pricing as well as breeds mistrust. No one would buy the assets if they are marked "high". Also, financial institutions balance sheets would suddenly look good and stocks would go up. This is done so that the big banks could escape from being "Nationalized".
My predictions -> Federal Reserve and the government are trying to introduce steps to halt the economy from going to the abyss, however, these are just remedies for the symptoms, and not the cure for the root cause. Time and time again we know these strategies would not work. They are trying their might to stop the inevitable, which is Bank Nationalization. Nationalization is going to be tricky, because the government has to choose which investors to protect, i.e senior bondholders, preferreds, trust preferreds. We know the common shareholders would be Toasted in this scenario! If UncleSam does not protect the bondholders and preferreds, PIMCO and insurance companies would be TOASTED as well. At the same time, the government has to dole out money to fill the gaping hole for Fannie, Freddie, AIG and GM. Ladies and gentlemen, this is really an Economic Pearl Harbor! Money has to be spent to keep the system going, and it has to come from US taxpayers. They are truly Toast.
Around the world, Eastern Europe is in a freefall, with their western brethren reluctant/unable to offer much aid/loan due to their survival is also at stake. Debt for some Latin American nations would soon default. Iceland is still in iceberg condition. World trade is stagnant, except for a glimmer of hope in China where their stimulus money is starting to kick-in. A lot of Asian countries are effectively devaluing their currencies in order to compete. To me, this is not effective at all to help their exports, since world trade is in the doldrums. Japan exports have been heavily hit, especially the automotive industry. For the first time, Toyota is asking its government for a bailout.....
However, with the arrival of spring, things are starting to turn up better in March. The mere mention of regulatory overhaul of the financial system in US by Bernanke sparked a rocket-up movement in the stock market. Congress is also mulling the "uptick rule" and "mark-to-market" accounting practices. These steps would generally help to restore investor confidence, but they are not the solutions to this financial crisis. Moreover, any idea to set the bad assets to any value, other than its real value, would distort the pricing as well as breeds mistrust. No one would buy the assets if they are marked "high". Also, financial institutions balance sheets would suddenly look good and stocks would go up. This is done so that the big banks could escape from being "Nationalized".
My predictions -> Federal Reserve and the government are trying to introduce steps to halt the economy from going to the abyss, however, these are just remedies for the symptoms, and not the cure for the root cause. Time and time again we know these strategies would not work. They are trying their might to stop the inevitable, which is Bank Nationalization. Nationalization is going to be tricky, because the government has to choose which investors to protect, i.e senior bondholders, preferreds, trust preferreds. We know the common shareholders would be Toasted in this scenario! If UncleSam does not protect the bondholders and preferreds, PIMCO and insurance companies would be TOASTED as well. At the same time, the government has to dole out money to fill the gaping hole for Fannie, Freddie, AIG and GM. Ladies and gentlemen, this is really an Economic Pearl Harbor! Money has to be spent to keep the system going, and it has to come from US taxpayers. They are truly Toast.
Monday, February 9, 2009
US Stimulus and the new bank bailout 'most' likely would NOT work
As we are getting nearer to the Stimulus passage as well as a new bank bailout, I am fully convinced about 2 things:
1) The Stimulus plan is smaller than expected, and it is a hodge-podge of ideas, with not much specifics. Worse of all, it doesn't even have a coherent theme in it. The new administration just wanted to have bipartisan support, and succumbed to demands from all sides. Furthermore Nobel laureate Krugman has ranted about it in his blog yesterday.
My prediction is that even though the bill is signed this month, a lot of work projects would begin without a system to monitor its progress. After a few months, if unemployment still hovers or exceeds present level, and the economy has not shown any signs of life, then the world markets will slide to the abyss once again. We could have Stimulus II & III then, but it would be too late.
2) The new bank bailout plan, I believe, is still work in progress, without much clarity and certainty. We should expect the status quo to remain; American taxpayers getting hosed, and trash assets still marked at preposterous level. There is talk that "mark-to-market" would be suspended. I believe this is an act of desperation from the govt, so that they could delay the inevitable. What is it? That the bank stocks would go to zilch(0) eventually, since the financial losses have trumped the market capitalization of all banks combined. The tricky part, how much the govt needs to pay for the bad assets when the 'bad' bank is created? We will find out soon. Looks like nationalization is the only viable alternative left, although vested interests are totally against it.
1) The Stimulus plan is smaller than expected, and it is a hodge-podge of ideas, with not much specifics. Worse of all, it doesn't even have a coherent theme in it. The new administration just wanted to have bipartisan support, and succumbed to demands from all sides. Furthermore Nobel laureate Krugman has ranted about it in his blog yesterday.
My prediction is that even though the bill is signed this month, a lot of work projects would begin without a system to monitor its progress. After a few months, if unemployment still hovers or exceeds present level, and the economy has not shown any signs of life, then the world markets will slide to the abyss once again. We could have Stimulus II & III then, but it would be too late.
2) The new bank bailout plan, I believe, is still work in progress, without much clarity and certainty. We should expect the status quo to remain; American taxpayers getting hosed, and trash assets still marked at preposterous level. There is talk that "mark-to-market" would be suspended. I believe this is an act of desperation from the govt, so that they could delay the inevitable. What is it? That the bank stocks would go to zilch(0) eventually, since the financial losses have trumped the market capitalization of all banks combined. The tricky part, how much the govt needs to pay for the bad assets when the 'bad' bank is created? We will find out soon. Looks like nationalization is the only viable alternative left, although vested interests are totally against it.
Thursday, January 29, 2009
The US 'Aconomy'?
An interesting post.....
What does the word "economy" mean to you?
Answer: The allocation of scarce resources by mankind within limited constraints.
However, America is the only country in the world that does not adhere to this meaning per se.
Why?
In short, because it can borrow and spend at will without any limitations. That is why it is called a US 'aconomy', not US economy.
It has the global reserve currency, and its debts/bonds are highly sought after by investors. In this crisis, the government is raising trillions of dollars to stimulate the 'aconomy' without fear. So much money is raised to resuscitate the country that if it doesn't work, the downside could be the world is staring at a bottomless abyss in the next few years.
http://clusterstock.alleyinsider.com/2009/1/can-the-us-maintain-its-iaiconomy
What does the word "economy" mean to you?
Answer: The allocation of scarce resources by mankind within limited constraints.
However, America is the only country in the world that does not adhere to this meaning per se.
Why?
In short, because it can borrow and spend at will without any limitations. That is why it is called a US 'aconomy', not US economy.
It has the global reserve currency, and its debts/bonds are highly sought after by investors. In this crisis, the government is raising trillions of dollars to stimulate the 'aconomy' without fear. So much money is raised to resuscitate the country that if it doesn't work, the downside could be the world is staring at a bottomless abyss in the next few years.
http://clusterstock.alleyinsider.com/2009/1/can-the-us-maintain-its-iaiconomy
Saturday, January 24, 2009
January updates...
It is barely a month into the new year, and we are witnessing again another freefall in financial stocks that has threatened the very survival of Citigroup and Bank of America. Citigroup again?! And to think the government has to hand out TARP money again for Citi's further losses. How outrageous! Merrill Lynch has revealed further losses, and BAC had nearly pulled out of the merger deal in mid-December if Uncle Sam had not provided backstop to the deal. If the deal unraveled, it would bring "post-Lehman" Part 2 scenario once more. That is why the hush hush.
Personally, I was intrigued as why no one in the financial regulatory agency has brought forward the Swedish model for rescuing its banks?? It worked, and it could work in the US; rather than we are faced with meltdown uncertainty every 2 months...
The Swedish model works because all banks write down their bad debts to 0, and governments could re-capitalize the banks afterwards. With this, only the private sector will start to invest in the banks again. Voila, we can go back to square again, which is to take deposits and lend out money again. Consumers would not be strapped, bcos presently, most banks are hoarding their money to offset further writedowns.
Presently, we are faced with the second negative loop in the deleveraging process, which is the economy and unemployment. Big companies are laying off their employees in a massive scale, and freezing/cutting pay for remaining workers. If the stimulus bill is not approved soon, it could lead back to the first negative loop in the next few months; in this case further writedowns to account for all kinds of loans/defaults, and potentially bankrupt a few more banks.
What we are seeing today is the possible bankruptcy of the UK government, and Russia floating the rouble to save its reserves. Both Pound and Rouble are dropping like stones. I don't have a good feeling on these developments...
Personally, I was intrigued as why no one in the financial regulatory agency has brought forward the Swedish model for rescuing its banks?? It worked, and it could work in the US; rather than we are faced with meltdown uncertainty every 2 months...
The Swedish model works because all banks write down their bad debts to 0, and governments could re-capitalize the banks afterwards. With this, only the private sector will start to invest in the banks again. Voila, we can go back to square again, which is to take deposits and lend out money again. Consumers would not be strapped, bcos presently, most banks are hoarding their money to offset further writedowns.
Presently, we are faced with the second negative loop in the deleveraging process, which is the economy and unemployment. Big companies are laying off their employees in a massive scale, and freezing/cutting pay for remaining workers. If the stimulus bill is not approved soon, it could lead back to the first negative loop in the next few months; in this case further writedowns to account for all kinds of loans/defaults, and potentially bankrupt a few more banks.
What we are seeing today is the possible bankruptcy of the UK government, and Russia floating the rouble to save its reserves. Both Pound and Rouble are dropping like stones. I don't have a good feeling on these developments...
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