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.
Thursday, November 26, 2009
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.
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