Everyone is looking forward to a roaring first quarter of 2010, but a few days ago, Bill Gross of Pimco has fired the first warning salvo on US and UK debts. The markets barely registered the news as everyone is focusing on how great the first quarter results would be.
Pimco is reducing the holdings of both US and UK because their governments increased borrowings to record levels. Furthermore, Pimco is cautious on corporate bonds and mortgage-backed securities. As the economy recovers, the inflation expectations are going to be leaning on the high side. As a result, the Fed would be under the gun to perform the appropriate action, i.e. increase Fed rates. But in reality, the Fed is not inclined to do so because unemployment is still stuck in a rut. However, long-term 10-year Treasury yields have already increased to approach 4%. Outstanding U.S. public debt has climbed 58 percent to $7.175 trillion as of November from $4.537 trillion in December 2007 as the government has borrowed to fund two stimulus programs and fund record budget deficits. The U.S. budget deficit reached $1.4 trillion for fiscal 2009.
According to Bill, investors will face lower than average returns coupled with heightened government regulation and scrutiny and slower economic growth.
Pimco's money managers favor sovereign debt, corporate bonds and currencies in emerging markets. Bill also likes Germany, where the government is more fiscally conservative as it pledges to balance its budget by 2016.
This serves as a wake-up call for the US, UK and particularly Japan because 2010 would not be any easier on the government finances as in 2009. Quantitative easing and stimulus measures are only effective up to a point, and should be withdrawn appropriately after.
Wednesday, January 6, 2010
Thursday, December 31, 2009
2009 - A year of roller-coaster ride to end the first decade of 21st century
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.
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, 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?
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