Dr. El-Erian, CEO and co-CIO of PIMCO states several reasons why QEII will backfire.
1. The Fed is going it alone, without meaningful structural reforms
2. Emerging economies burdened by capital inflows in the wake of QEII will react with currency wars, protectionism, and capital controls
3. Resultant commodity price increases will increase input costs and reduce earnings of American companies
The position of El-Erian is interesting given that PIMCO founder, managing director and co-CIO endorsed QEII as discussed in Bill Gross' Arrogant Endorsement of Fed's QE Policy he calls History's Most "Brazen Ponzi Scheme".
Unintended Consequences of QEII
Mohamed El-Erian addresses the unintended consequences of Fed policy actions and the reasons Quantitative Easing will fail in QE2 blunderbuss likely to backfire.
The Fed faces three problems, with its solo role being the first. Having warned in late August in Jackson Hole that “central bankers alone cannot solve the world’s economic problems”, Ben Bernanke, the Fed’s chairman, is now leading an institution that is virtually on its own among US policymakers in meaningfully trying to counter the sluggishness of the US economy and the stubbornly high unemployment.
The rest of the world does not need this extra liquidity, and this is where the second problem emerges. Several emerging economies, such as Brazil and China, are already close to overheating; and the eurozone and Japan can ill afford further appreciation in their currencies.
Despite polite rhetoric to the contrary in the lead up to the Group of 20 leading economies summit in Korea this month, other countries are likely to counter what they view as an unnecessarily disruptive surge in capital flows caused by inappropriate and short-sighted American policy. The result will be renewed currency tensions and a higher risk of capital controls and trade protectionism.
The third issue relates to the gradual erosion of America’s central role in the global economy – including as the provider of both the world’s reserve currency and its deepest and most predictable financial markets. No other country or multilateral institution can displace the US, but a combination of alternatives can serve to erode its influence over time. No wonder commodity prices surged higher and the dollar weakened markedly in anticipation of QE2, pointing to increased input costs for American companies and unwelcome pressures on their earnings.
Pavlov's Dogs and the "No Choice" Argument Yet Again
Although I agree with the three major points above, I certainly do not concur with El-Erian's opening gambit "Given the high market expectations, the US Federal Reserve had no choice but to announce a second tranche of quantitative easing".
Pray tell who set those expectations if not the Fed? Moreover, given the market reacted like Pavlov's Dogs to the announcement, the Fed could have and should have toned down market expectations.
Finally given that the Fed produced a bubble in junk bonds and sent commodity prices soaring the Fed had every reason to disappoint the market today.
For more on junk bonds please see ...
Thanks to Fed, Bubble Builds in Junk Bonds; We Know How Bubbles End
Mad Dash Into Junk Sets October Record
Intended vs. Unintended Consequences
Add a junk bond bubble to the list of consequences (unintended or otherwise).
Bernanke is clearly misguided enough and arrogant enough to purposely blow a junk bond bubble as an "intended consequence", even though the housing bubble bust proves without a doubt the asininity of such policies.
Thus, it's hard to say if Bernanke wants a junk bond bubble or is merely willing to live with one.
Then again, Bernanke is dense enough to not have any clues about what is happening. He did not see the housing bubble, the recession, the huge rise in unemployment, and any number of other things that happened. In fact, he even denied there was a housing bubble.
In the academic wonderland in which Bernanke lives, it is perfectly possible he is oblivious to the bubbles he is creating.
However, looking at things from every angle, given that Bernanke Admits Targeting Stock Prices, I am leaning towards the first option: Bernanke is misguided enough and arrogant enough to purposely blow more asset bubbles as an "intended consequence", hoping he can deal with them later.
Missing the Obvious
I touched on the one obvious reason QEII will fail in QEII Announced, Fed Set to Buy $600 Billion in Bonds, Reinvest $250 Billion More; Fed Micromanaged Economy to Oblivion; No Miracles Coming
Doubts? What Doubts?
There is little doubt, at least in this corner, that the plan cannot possibly work. Corporate borrowing costs are the lowest in history and that hasn't spurred hiring. Will another quarter of a point lower matter? Will QEII even lower rates that much?
Simple explanations as to why QEII will fail are best: "Money’s Already Quite Cheap"
With mortgage interest rates at all time lows, is this supposed to help housing? Why?
It is sad but true economic thinking these days that the "Fed had to do Something". Why does it make sense to do something, just for the sake of doing, when it should be crystal clear that doing just adds to problems down the road.
Fed Micromanaged Economy to Oblivion
The Fed has clearly micromanaged this economy to oblivion. Greenspan's experiment short-circuited the 2001 recession but the expense was the biggest housing bubble in the history of the world, not just in the US, but globally.
A global recession soon followed.
Now on misguided calls to "do something" the Fed is blowing a bubble in commodities that cannot possibly help margin strapped small businesses.
An excerpt from $30 Billion Offer No One Wants - Small Businesses Hit by Deflation will show why. ....
No One Has To Do Anything
It is disappointing to see El-Erian perpetuate the myth the Fed had to do something when one of the biggest reasons we are in this mess is a activist Fed under both Greenspan and Bernanke felt the need to do something about LTCM, Y2K, the Dot-Com bubble, housing, motherhood, and apple pie.
At least El-Erian is not defending what Gross calls a "Ponzi Scheme" to the same foolish extent that Bill Gross did. More importantly, El-Erian makes it clear exactly what some of the consequences are, while the Gross article sounds like "jumping the shark".
Structural Reforms
El-Erian said "Without meaningful structural reforms, part of the Fed’s liquidity injection will leak right out of the US and result in yet another surge of capital flows to other countries."
I agree, but I rather doubt we are talking the same language. This country needs to ...
Scrap Davis-Bacon
End public union collective bargaining
End the public union stranglehold on the cities and states
Fix the pension problem
Even the playing field between big and small businesses on corporate income taxes
Get the hell out of Afghanistan
Reduce military spending
Rein in entitlements
Stop being the world's policeman
Balance the budget
Return to constitutional money
Fed Fights Battle that Cannot be Won, Should Not be Fought
Given that Congress is unlikely to do many, if indeed any of those things, the Fed is fighting a battle that cannot be won and should not be fought.
We are in this mess because the Fed micro-mismanaged the economy at every critical juncture while attempting to smooth over various fiscal insanities, counter bad Congressional policies, as well as deal with the repercussions of its own monetary insanities, on a delayed chasing-its-tail basis, in a global economy that waits for no one.
Is it any wonder the Fed failed in dual mandate of price stability and maximum growth?
For more on the silliness of the Dual Mandate as well as a rebuttal to the notion "Don't Fight the Fed" please see Krugman and the Inevitable "I Told You So" - Tim Duy "Bad Things Happen When You Fight the Fed"; Final End of Bretton Woods 2?
With that key idea in mind, there are two more structural reforms glaringly lacking in the above list: Abolish the Fed and End Fractional Reserve Banking.
Thursday, November 4, 2010
Tuesday, November 2, 2010
The China Miracle Continues
By Byron Wien of BlackStone
This was my third trip to China this year and I was impressed to see the country succeeded in bringing its growth rate below 10% for the third quarter, coming in at 9.6% down from 10.3% in the second. This was important because the policy makers there fear growth in excess of 10% could result in serious inflation pressures. The level of inflation in the quarter was 3.5%, which is believed to be a reasonable and containable rate. The government has slowed the rate of monetary expansion from the stimulative levels of last year. At that time the authorities were worried that the economic recessions in Europe and the United States would have a profound impact on Chinese exports and growth would decline to levels limiting the increase in employment.
Last year’s stimulative policies were effective and growth continued to be strong, primarily as a result of internal domestic demand. The much-feared real estate bubble, which looms as a threat to China’s stability in the minds of many Western observers, is considered to be a manageable problem by most analysts within China. They acknowledge that there are a number of high-end condominiums that are unsold, but the majority of China’s housing stock is more modestly priced and the demand for it by the increasingly urbanized population is robust. Since many Chinese investors are not comfortable owning stocks and prefer something more tangible, real estate is a popular storehouse for wealth. As a result, ownership of multiple apartments is common. This results in a high cost of owning an apartment, but a more reasonable cost of renting. A friend of mine rents a 1600 square foot apartment with a $2 million market value for $2000 a month. One percent rates of return are common. A few months ago there was a story floating around that there were 64 million vacant apartments in China. Support for this statement comes from the fact that there was no electricity being consumed in the units. Local analysts, including Stephen Green, Standard Chartered Bank’s local expert on real estate, wonder where the assertions came from since few Chinese apartments have separate meters and most renters pay for electricity on an allocated basis.
At the end of October the government issued its twelfth five-year plan and there were few surprises. Previous plans have emphasized investment in infrastructure and the development of export-oriented industries. The latest plan has few quantitative objectives but clearly focuses on an expansion of the consumer’s role in continuing Chinese growth. This is viewed as a kind of “economic rebalancing.” Other phases of importance in the plan are “regional growth,” “industrial upgrading,” which I read as productivity enhancement, and “energy efficiency.” The plan also includes objectives such as “new strategic industries,” “income distribution,” “social housing,” and “land market and property tax reform” (there are no real estate taxes in China now) According to Tao Wang, the remarkably insightful economist at UBS, the structural changes in the new five-year plan will benefit technology and consumer products and services rather than traditional manufacturing. The emphasis on industrial upgrading should increase the demand for capital equipment from companies throughout the world. While the previous five-year plan (2006 – 2010) resulted in annual growth of 11.4%, even though the developed world was in recession for part of that period, government investment played a dominant role. However, the objective of reducing energy consumption per unit of gross domestic product growth made little progress.
Whether the new plan will reach its objectives is uncertain at this point, but it is clear that China continues to move forward at an impressive pace. It is now the second most important economy in the world at 9% of the world’s gross domestic product and if it maintains its present growth rate, its economy could be larger than that of the United States in twenty years. China’s per capita income is only about $4,000 versus $40,000 in America, but the country is more comparable on a purchasing power parity basis.
The problems are significant; air pollution is serious in the major cities, as anyone who has been there has experienced, and nobody knows what the long-term health implications of this will be. The filtering of information by the state limits intellectual freedom. Examples are China’s conflict with Google and its strong control of the distribution of Western films, only ten of which are allowed into the country each year. The Chinese authorities acknowledge that the human rights and intellectual freedom issues are controversial, but officials there are focused on growth and creating jobs for the hundreds of millions of citizens with current low living standards. They view dissent as a diversion which slows their forward progress. While social policies are important, there is no talk of taxes and fiscal deficits in China, a sharp contrast with the United States. The one-child policy obviously has long-term implications, as does the lack of a healthcare and retirement safety net. The prevalence of petty corruption is an embarrassment. Nevertheless the economy moves ahead relentlessly and the optimism of the people is palpable.
I attended the Shanghai Expo, which is a kind of World’s Fair. It began in May and ran until the end of October. Seventy million visitors have attended and more than a million have been on the grounds in a single day. Without a special pass you can wait up to eight hours to get into a pavilion where you will spend less than an hour. I saw the presentations of three different countries and they were revealing. The videos have to be mostly without language because the visitors speak so many different ones. In the United States pavilion video both Hillary Clinton and Barack Obama spoke in English (with Chinese subtitles) about the need for world cooperation. The key presentation, however, was a symbolic film where a young girl has a dream for a vacant neighborhood lot that is filled with discarded debris. She plants a flower, and though others in the community are indifferent another flower is planted, but before the project can gain momentum a storm occurs and the flowers are washed away. When the sun comes out, a diverse group of people in the community come together to create a kind of park at the site complete with an old bathtub which has been carved out and converted into a bench. The message seems to be that America is a place of many ethnic groups who can work in harmony to achieve an objective. A cynic might say that that the message is that America has created a mess of things (fiscal deficits, deteriorating educational standards and a dysfunctional government) and it is going to take a lot of hard work to get the country back on the right course.
The French presentation was very direct: We may not be growing as fast or have as powerful military but we know how to enjoy life. A visitor takes a long escalator ride up to the fourth level and then walks down a sloping ramp looking at films and other visuals along the way. The first one, not surprisingly, is on food, but instead of extolling the great French chefs of the past, they installed cameras in the kitchen of the high-end restaurant in the pavilion to show you the skill and creativity going on there. You then pass on to views of the incomparable buildings and parks of Paris, then scenes of the Riviera and finally there are some major paintings from the Louvre. The message is clear: If you want to be a happy person, surrounded by beauty, come to France. I didn’t go to the German pavilion but those who did told me the message was: We make products that are the best in the world. They may cost a little more, but they’re worth it.
Finally, in the China pavilion the focus was, as expected, on hope for a better tomorrow. Unlike the American message of harmony and teamwork, their message was one of creating opportunities for succeeding generations. To me the most creative part of the exhibit was a huge photo mural done in the style of a Chinese scroll painting, depicting village life hundreds of years ago. The difference is that the figures in the mural moved, conducting the tasks that make up their daily activities. The message seemed to be: we have come a long way from the past and we have a lot further to go, but we’re getting there.
While I was in China I had the opportunity to talk with some executives who were operating manufacturing facilities there, and to see a high-tech factory outside of Shanghai. China is beginning to experience some of the problems encountered as an economy matures. Young people are ambitious and impatient. They are anxious to build their resumes and are always on the lookout for better opportunities. The key to success is to have global product standards, but plants need to be run by locals who can build relationships with the workers. Part of the vitality of China’s industry comes from the entrepreneurial nature of the people. There is a greater focus now on developing products for the domestic market rather than for export. One problem is that Chinese managers do not put as high a premium on safety as their American counterparts.
There is a lot of competition for skilled Chinese workers and these people are in a position to make demands. Wage pressure is likely to increase in the future and the currency is likely to be revalued upward. Both of these changes will make China less competitive, but they have such a significant advantage currently that the impact is not likely to be seen for a while. There are also some cultural problems. While workers are hard-working, I heard complaints about the short-term orientation of Chinese managers and their willingness to take shortcuts which are not usually in the best interest of the company.
There are some secular problems brewing. While enormous progress has been made developing China’s infrastructure, there is still much more to do with a population of 1.3 billion. The country still has only 20% of the railway tracks of the United States although it has trains that travel at 250 miles per hour. Agriculture is the principal occupation of 35% of the population, so urbanization has a long way to go. A significant proportion of their population now goes to college, up from 3% twenty years ago, and there is concern that the college graduates are having trouble finding work, but the number of people in the 15 to 24 age group is declining and that is where the entry level workers come from. Perhaps this is a problem that will solve itself in time.
An American business school professor who has a cautious view of China pointed out that the country has benefited from some unsustainable conditions. The savings rate is 40% and unlikely to stay there in a more consumer-oriented economy. Foreign direct investment has been huge, a trillion dollars a year in a $5 trillion economy. Productivity has been improving at a 20% rate, and that has to come down. The trade surplus plus foreign direct investment has led to an enormous build-up in reserves and in the longer term that is likely to lead to political pressures with other countries, as we are seeing in the currency battles China is having with the U.S. Imagine what would happen if China were to start to bid for American companies again as they attempted to do in 2005.
The professor also said income inequality is likely to be an issue going forward. Environmental problems may be developing faster than the government can fix them. As the standard of living rises and the population ages the inadequacy of the healthcare system could become severe. The country has more business schools than the rest of the world combined, but the quality of most of them is not high. Most graduates are very transaction-oriented and not focused on the longer-term issues related to building a great company. As the middle class expands, the lack of democracy will become a bigger issue. Finally, the Chinese government seems less willing to engage in major structural reforms than it was 15 years ago.
Putting it all together my near-term optimism about China remains undaunted. I recognize the enormity of the longer-term issues and I will be watching closely to see how they are addressed. China accounts for a third of the world’s growth today and I expect that to continue for at least the next five years. The stock market will remain volatile but it is imperative that every investor has an understanding of the considerable opportunities that are continuing to develop there.
This was my third trip to China this year and I was impressed to see the country succeeded in bringing its growth rate below 10% for the third quarter, coming in at 9.6% down from 10.3% in the second. This was important because the policy makers there fear growth in excess of 10% could result in serious inflation pressures. The level of inflation in the quarter was 3.5%, which is believed to be a reasonable and containable rate. The government has slowed the rate of monetary expansion from the stimulative levels of last year. At that time the authorities were worried that the economic recessions in Europe and the United States would have a profound impact on Chinese exports and growth would decline to levels limiting the increase in employment.
Last year’s stimulative policies were effective and growth continued to be strong, primarily as a result of internal domestic demand. The much-feared real estate bubble, which looms as a threat to China’s stability in the minds of many Western observers, is considered to be a manageable problem by most analysts within China. They acknowledge that there are a number of high-end condominiums that are unsold, but the majority of China’s housing stock is more modestly priced and the demand for it by the increasingly urbanized population is robust. Since many Chinese investors are not comfortable owning stocks and prefer something more tangible, real estate is a popular storehouse for wealth. As a result, ownership of multiple apartments is common. This results in a high cost of owning an apartment, but a more reasonable cost of renting. A friend of mine rents a 1600 square foot apartment with a $2 million market value for $2000 a month. One percent rates of return are common. A few months ago there was a story floating around that there were 64 million vacant apartments in China. Support for this statement comes from the fact that there was no electricity being consumed in the units. Local analysts, including Stephen Green, Standard Chartered Bank’s local expert on real estate, wonder where the assertions came from since few Chinese apartments have separate meters and most renters pay for electricity on an allocated basis.
At the end of October the government issued its twelfth five-year plan and there were few surprises. Previous plans have emphasized investment in infrastructure and the development of export-oriented industries. The latest plan has few quantitative objectives but clearly focuses on an expansion of the consumer’s role in continuing Chinese growth. This is viewed as a kind of “economic rebalancing.” Other phases of importance in the plan are “regional growth,” “industrial upgrading,” which I read as productivity enhancement, and “energy efficiency.” The plan also includes objectives such as “new strategic industries,” “income distribution,” “social housing,” and “land market and property tax reform” (there are no real estate taxes in China now) According to Tao Wang, the remarkably insightful economist at UBS, the structural changes in the new five-year plan will benefit technology and consumer products and services rather than traditional manufacturing. The emphasis on industrial upgrading should increase the demand for capital equipment from companies throughout the world. While the previous five-year plan (2006 – 2010) resulted in annual growth of 11.4%, even though the developed world was in recession for part of that period, government investment played a dominant role. However, the objective of reducing energy consumption per unit of gross domestic product growth made little progress.
Whether the new plan will reach its objectives is uncertain at this point, but it is clear that China continues to move forward at an impressive pace. It is now the second most important economy in the world at 9% of the world’s gross domestic product and if it maintains its present growth rate, its economy could be larger than that of the United States in twenty years. China’s per capita income is only about $4,000 versus $40,000 in America, but the country is more comparable on a purchasing power parity basis.
The problems are significant; air pollution is serious in the major cities, as anyone who has been there has experienced, and nobody knows what the long-term health implications of this will be. The filtering of information by the state limits intellectual freedom. Examples are China’s conflict with Google and its strong control of the distribution of Western films, only ten of which are allowed into the country each year. The Chinese authorities acknowledge that the human rights and intellectual freedom issues are controversial, but officials there are focused on growth and creating jobs for the hundreds of millions of citizens with current low living standards. They view dissent as a diversion which slows their forward progress. While social policies are important, there is no talk of taxes and fiscal deficits in China, a sharp contrast with the United States. The one-child policy obviously has long-term implications, as does the lack of a healthcare and retirement safety net. The prevalence of petty corruption is an embarrassment. Nevertheless the economy moves ahead relentlessly and the optimism of the people is palpable.
I attended the Shanghai Expo, which is a kind of World’s Fair. It began in May and ran until the end of October. Seventy million visitors have attended and more than a million have been on the grounds in a single day. Without a special pass you can wait up to eight hours to get into a pavilion where you will spend less than an hour. I saw the presentations of three different countries and they were revealing. The videos have to be mostly without language because the visitors speak so many different ones. In the United States pavilion video both Hillary Clinton and Barack Obama spoke in English (with Chinese subtitles) about the need for world cooperation. The key presentation, however, was a symbolic film where a young girl has a dream for a vacant neighborhood lot that is filled with discarded debris. She plants a flower, and though others in the community are indifferent another flower is planted, but before the project can gain momentum a storm occurs and the flowers are washed away. When the sun comes out, a diverse group of people in the community come together to create a kind of park at the site complete with an old bathtub which has been carved out and converted into a bench. The message seems to be that America is a place of many ethnic groups who can work in harmony to achieve an objective. A cynic might say that that the message is that America has created a mess of things (fiscal deficits, deteriorating educational standards and a dysfunctional government) and it is going to take a lot of hard work to get the country back on the right course.
The French presentation was very direct: We may not be growing as fast or have as powerful military but we know how to enjoy life. A visitor takes a long escalator ride up to the fourth level and then walks down a sloping ramp looking at films and other visuals along the way. The first one, not surprisingly, is on food, but instead of extolling the great French chefs of the past, they installed cameras in the kitchen of the high-end restaurant in the pavilion to show you the skill and creativity going on there. You then pass on to views of the incomparable buildings and parks of Paris, then scenes of the Riviera and finally there are some major paintings from the Louvre. The message is clear: If you want to be a happy person, surrounded by beauty, come to France. I didn’t go to the German pavilion but those who did told me the message was: We make products that are the best in the world. They may cost a little more, but they’re worth it.
Finally, in the China pavilion the focus was, as expected, on hope for a better tomorrow. Unlike the American message of harmony and teamwork, their message was one of creating opportunities for succeeding generations. To me the most creative part of the exhibit was a huge photo mural done in the style of a Chinese scroll painting, depicting village life hundreds of years ago. The difference is that the figures in the mural moved, conducting the tasks that make up their daily activities. The message seemed to be: we have come a long way from the past and we have a lot further to go, but we’re getting there.
While I was in China I had the opportunity to talk with some executives who were operating manufacturing facilities there, and to see a high-tech factory outside of Shanghai. China is beginning to experience some of the problems encountered as an economy matures. Young people are ambitious and impatient. They are anxious to build their resumes and are always on the lookout for better opportunities. The key to success is to have global product standards, but plants need to be run by locals who can build relationships with the workers. Part of the vitality of China’s industry comes from the entrepreneurial nature of the people. There is a greater focus now on developing products for the domestic market rather than for export. One problem is that Chinese managers do not put as high a premium on safety as their American counterparts.
There is a lot of competition for skilled Chinese workers and these people are in a position to make demands. Wage pressure is likely to increase in the future and the currency is likely to be revalued upward. Both of these changes will make China less competitive, but they have such a significant advantage currently that the impact is not likely to be seen for a while. There are also some cultural problems. While workers are hard-working, I heard complaints about the short-term orientation of Chinese managers and their willingness to take shortcuts which are not usually in the best interest of the company.
There are some secular problems brewing. While enormous progress has been made developing China’s infrastructure, there is still much more to do with a population of 1.3 billion. The country still has only 20% of the railway tracks of the United States although it has trains that travel at 250 miles per hour. Agriculture is the principal occupation of 35% of the population, so urbanization has a long way to go. A significant proportion of their population now goes to college, up from 3% twenty years ago, and there is concern that the college graduates are having trouble finding work, but the number of people in the 15 to 24 age group is declining and that is where the entry level workers come from. Perhaps this is a problem that will solve itself in time.
An American business school professor who has a cautious view of China pointed out that the country has benefited from some unsustainable conditions. The savings rate is 40% and unlikely to stay there in a more consumer-oriented economy. Foreign direct investment has been huge, a trillion dollars a year in a $5 trillion economy. Productivity has been improving at a 20% rate, and that has to come down. The trade surplus plus foreign direct investment has led to an enormous build-up in reserves and in the longer term that is likely to lead to political pressures with other countries, as we are seeing in the currency battles China is having with the U.S. Imagine what would happen if China were to start to bid for American companies again as they attempted to do in 2005.
The professor also said income inequality is likely to be an issue going forward. Environmental problems may be developing faster than the government can fix them. As the standard of living rises and the population ages the inadequacy of the healthcare system could become severe. The country has more business schools than the rest of the world combined, but the quality of most of them is not high. Most graduates are very transaction-oriented and not focused on the longer-term issues related to building a great company. As the middle class expands, the lack of democracy will become a bigger issue. Finally, the Chinese government seems less willing to engage in major structural reforms than it was 15 years ago.
Putting it all together my near-term optimism about China remains undaunted. I recognize the enormity of the longer-term issues and I will be watching closely to see how they are addressed. China accounts for a third of the world’s growth today and I expect that to continue for at least the next five years. The stock market will remain volatile but it is imperative that every investor has an understanding of the considerable opportunities that are continuing to develop there.
Monday, November 1, 2010
Marc Faber: Fed's QE2 Could Trigger Market Correction
Marc Faber, publisher of the Gloom, Boom & Doom report, discusses the potential impact of further quantitative easing (QE2) by the U.S. Federal Reserve in a Bloomberg interview on Oct. 36 (clip below).
Correction Triggered by QE2?
Faber sees Democrats--"sadly enough"--would get a shot at still retaining the majority, which would mean the monetary and fiscal policy will most likely stay on its current course.
Equity has done well in September and October months; however, Faber thinks the markets are stretched in the inflation trade, and weak dollar, high commodity and precious metal prices, along with high equity valuations, all suggest a correction is overdue.
Now, with QE2 being largely priced in, anything less than $1 trillion from the Fed would disappoint the markets and may trigger a correction in U.S. stocks, which could result in more quantitative easing.
But the correction should provide a buying opportunity for investors leading to an up cycle, instead of another bear market.
Equity Better for the Next Decade
Looking at investing for the next ten years, equities-- emerging economies in particular, would be a relatively better place to invest than U.S. government bonds, and cash. However, Faber advises against financial, auto, and aircraft. He's been in the high tech sector and likes Microsoft (MSFT).
Precious Metals Due for Pullback
Faber is currently recommending agriculture commodities, and the accumulation of precious metals. On precious metals, he thinks they are overdue for "some kind of correction" by year end, and expects the next leg up in 2011.
Dollar Near An Inflection Point
Faber says the dollar is oversold, while in contrast, some of the foreign currencies such as Yen and Franc are overbought. So, an inflection point could be near for a short-term dollar rally which could temporarily push down asset prices.
He warns investors to be very careful about shorting dollar and long assets as the trade has become quite crowded.
Expect a Strong Pullback of Chinese Economy
Although not quite gloom and doom, Faber does expect a "strong pullback" on the Chinese economy due to its many imbalances.
According to Faber, the 0.25% interest rate hike effective Oct. 20 by the PBoC is "meaningless," because of skyrocketing property prices, and the cost of living inflation has gone up much more than the official figure.
He notes food prices have seen high inflation, and because of low GDP per capita where food would account for a high percentage of total expenditure, Faber estimates that the typical consumer inflation rate in countries like China, India, and Vietnam should be around 8 to 18 percent per year.
My Take on China Inflation
The inflation rate in China was last reported at 3.60 percent in September of 2010, climbing at the fastest pace in two years. However, there is some hidden rampant inflation such as 50% on apparel, 20% on food, as reported by BusinessWeek.
Many analysts as well as academics also question how China could have such a relatively moderate inflation rate given its double-digit growth and upward pressure on wages. Michael Pettis, a finance professor at Peking University, for example, estimates that "Inflation could well be 6 percent now for most people in China."
There's also another indicator--growth of money supply--which has a proven strong correlation with inflation. China's money supply, M1 and M2, has expanded by 56 percent and 53 percent respectively over the past two years. Currently, with the various tightening measures, both money supply figures are still growing at an annual rate of about 20 percent, based on Bloomberg data.
Furthermore, the continuing massive rural-to-urban migration will likely keep pushing up rents and food prices, just to name two of the many categories, and wages are expected to rise around 8 percent this year.
As consumer inflation is typically a lagging indicator, China may experience continuing higher CPI. That means Beijing is facing an increasingly difficult task of containing inflation, while maintaining sufficient growth to prevent a mass civil unrest. As such, there will likely be more tightening, which would put the markets on a few roller coaster rides in the next two years or so.
Nevertheless, since Chinese policymakers are keeping a close inflation watch, and are already taking actions (which is the key), I believe China is heading towards more sustainable growth. And if China is "on a treadmill to hell" as Jim Chanos says, you can bet that the United States will be dragged along for the ride as well.
Correction Triggered by QE2?
Faber sees Democrats--"sadly enough"--would get a shot at still retaining the majority, which would mean the monetary and fiscal policy will most likely stay on its current course.
Equity has done well in September and October months; however, Faber thinks the markets are stretched in the inflation trade, and weak dollar, high commodity and precious metal prices, along with high equity valuations, all suggest a correction is overdue.
Now, with QE2 being largely priced in, anything less than $1 trillion from the Fed would disappoint the markets and may trigger a correction in U.S. stocks, which could result in more quantitative easing.
But the correction should provide a buying opportunity for investors leading to an up cycle, instead of another bear market.
Equity Better for the Next Decade
Looking at investing for the next ten years, equities-- emerging economies in particular, would be a relatively better place to invest than U.S. government bonds, and cash. However, Faber advises against financial, auto, and aircraft. He's been in the high tech sector and likes Microsoft (MSFT).
Precious Metals Due for Pullback
Faber is currently recommending agriculture commodities, and the accumulation of precious metals. On precious metals, he thinks they are overdue for "some kind of correction" by year end, and expects the next leg up in 2011.
Dollar Near An Inflection Point
Faber says the dollar is oversold, while in contrast, some of the foreign currencies such as Yen and Franc are overbought. So, an inflection point could be near for a short-term dollar rally which could temporarily push down asset prices.
He warns investors to be very careful about shorting dollar and long assets as the trade has become quite crowded.
Expect a Strong Pullback of Chinese Economy
Although not quite gloom and doom, Faber does expect a "strong pullback" on the Chinese economy due to its many imbalances.
According to Faber, the 0.25% interest rate hike effective Oct. 20 by the PBoC is "meaningless," because of skyrocketing property prices, and the cost of living inflation has gone up much more than the official figure.
He notes food prices have seen high inflation, and because of low GDP per capita where food would account for a high percentage of total expenditure, Faber estimates that the typical consumer inflation rate in countries like China, India, and Vietnam should be around 8 to 18 percent per year.
My Take on China Inflation
The inflation rate in China was last reported at 3.60 percent in September of 2010, climbing at the fastest pace in two years. However, there is some hidden rampant inflation such as 50% on apparel, 20% on food, as reported by BusinessWeek.
Many analysts as well as academics also question how China could have such a relatively moderate inflation rate given its double-digit growth and upward pressure on wages. Michael Pettis, a finance professor at Peking University, for example, estimates that "Inflation could well be 6 percent now for most people in China."
There's also another indicator--growth of money supply--which has a proven strong correlation with inflation. China's money supply, M1 and M2, has expanded by 56 percent and 53 percent respectively over the past two years. Currently, with the various tightening measures, both money supply figures are still growing at an annual rate of about 20 percent, based on Bloomberg data.
Furthermore, the continuing massive rural-to-urban migration will likely keep pushing up rents and food prices, just to name two of the many categories, and wages are expected to rise around 8 percent this year.
As consumer inflation is typically a lagging indicator, China may experience continuing higher CPI. That means Beijing is facing an increasingly difficult task of containing inflation, while maintaining sufficient growth to prevent a mass civil unrest. As such, there will likely be more tightening, which would put the markets on a few roller coaster rides in the next two years or so.
Nevertheless, since Chinese policymakers are keeping a close inflation watch, and are already taking actions (which is the key), I believe China is heading towards more sustainable growth. And if China is "on a treadmill to hell" as Jim Chanos says, you can bet that the United States will be dragged along for the ride as well.
Wednesday, October 27, 2010
5 Questions With Marc Faber
Q: What's the best investment you've ever made?
A: Usually when faced with this question people will think of investments in monetary terms. However, in our lives, our best investments are probably the ones you cannot measure the way a portfolio manager will measure his "performance".
These investments relate to education, culture, job satisfaction, eagerness to learn, and happiness through philosophy, religion, self-improvement, compassion, love, a harmonious family, friendships, readiness to do good deeds etc.
I do know some of the world's richest people. In monetary terms, they all performed very well. In terms of a fulfilling life, I am less sure.
When it comes to money, the best investments were probably the ones I did not make.
Q: How about the worst investment decision and how did it end up?
A: My worst investment decisions so far is to lend money to friends. So far, it has all came to zero.
Shorting the Nasdaq in 1998 was also a disaster, and it will remain, in my life as an investment advisor and fund manager, a very black spot. The damage was considerable.
Q. Do you think markets are becoming increasingly risky for individual investors?
A: No, but they are likely to remain extremely volatile for a long time and the key will be to preserve your capital given the people we have at the U.S. Federal Reserve, whose intention is to debase the value of paper money.
Q: What were some of the key lessons learnt during the Asian Financial Crisis?
A: Prior to the Asian Crisis, I was extremely bearish. But the severity of the crisis surprised even me.
Q: Who / what has been the biggest influence in your life?
A: The Austrian School of Economics, my history teacher, Buddha, and my best friend - Marc Faber.
A: Usually when faced with this question people will think of investments in monetary terms. However, in our lives, our best investments are probably the ones you cannot measure the way a portfolio manager will measure his "performance".
These investments relate to education, culture, job satisfaction, eagerness to learn, and happiness through philosophy, religion, self-improvement, compassion, love, a harmonious family, friendships, readiness to do good deeds etc.
I do know some of the world's richest people. In monetary terms, they all performed very well. In terms of a fulfilling life, I am less sure.
When it comes to money, the best investments were probably the ones I did not make.
Q: How about the worst investment decision and how did it end up?
A: My worst investment decisions so far is to lend money to friends. So far, it has all came to zero.
Shorting the Nasdaq in 1998 was also a disaster, and it will remain, in my life as an investment advisor and fund manager, a very black spot. The damage was considerable.
Q. Do you think markets are becoming increasingly risky for individual investors?
A: No, but they are likely to remain extremely volatile for a long time and the key will be to preserve your capital given the people we have at the U.S. Federal Reserve, whose intention is to debase the value of paper money.
Q: What were some of the key lessons learnt during the Asian Financial Crisis?
A: Prior to the Asian Crisis, I was extremely bearish. But the severity of the crisis surprised even me.
Q: Who / what has been the biggest influence in your life?
A: The Austrian School of Economics, my history teacher, Buddha, and my best friend - Marc Faber.
Saturday, October 2, 2010
Two Dinner Party Menu
Sunday
Cheese, smoked musselle, crackers
Pumpkin Soup (Japanese Pumpkin, light cream, cream cheese)
DongPu Rou
Cuban Sea Bass
Asparagus
Salad
Dessert
Tuesday
Chinese appetizer
Pumpkin Soup
Shrimp Ettoufee
Lamb Chop
Asparagus
Dessert
Cheese, smoked musselle, crackers
Pumpkin Soup (Japanese Pumpkin, light cream, cream cheese)
DongPu Rou
Cuban Sea Bass
Asparagus
Salad
Dessert
Tuesday
Chinese appetizer
Pumpkin Soup
Shrimp Ettoufee
Lamb Chop
Asparagus
Dessert
Thursday, September 30, 2010
Monday, September 6, 2010
New Chapter
I have stopped posting here for many months, finally it is time for me to start again, and this time I will not be a quitter, I hope.
To make my blog last, I will not only post articles about investment, but also books, recipes, thoughts, and last but not least, gossips.
To make my blog last, I will not only post articles about investment, but also books, recipes, thoughts, and last but not least, gossips.
Sunday, May 3, 2009
Daughter's Poem
My Obligation: To Mom
Mother’s Day is coming,
And a gift I’ve yet to find,
So I write this poem to you,
Though it is a waste of time
This is my obligation,
Which I do not want to do
But it is my way of saying:
Happy Mother’s Day to you
The spring’s warm air is stirring
Calm and hopeful, warm and breezy
And though one wouldn’t think to add,
It is also very cheesy
This is my obligation,
Which I do not want to do
But it’s my ONLY way of saying:
Happy Mother’s Day to you
Though you will not give me discounts,
And you get mad far too quickly,
Still you put hope in my future,
And you do not do it meekly
This is my obligation,
Which I do not want to do
But it’s an okay way of saying:
Happy Mother’s Day to you
When the happy day is over
And the last “thank you”‘s have gone,
Still you’ll always have this poem,
Which is almost like a song
This is my obligation,
Which I do not want to do,
But I guess it’s nice to say:
Happy Mother’s Day to you.
When the weather here is rainy
Or the economy is bad
You can always read this poem again
And you won’t feel quite as sad
It’s more than a little cheesy,
And perhaps not all heartfelt,
But I hope you will appreciate
These words to you I’ve dealt
This is my obligation
Which I do not want to do
Yet I hope you’ll like me saying:
Happy Mother’s Day to you
My “cuteness” years are over
And my teen has not begun
But still your task for raising me,
Is not even close to done
This is my obligation,
Which I don’t really want to do
But it’s meaningful to say:
Happy Mother’s Day to you
I know it’s really mushy,
But I’ll write it to you still
I’d like to say I love you,
Always have and always will
This is not my obligation
It’s something nice to do
And the message of this is:
Happy Mother’s Day to you
Mother’s Day is coming,
And a gift I’ve yet to find,
So I write this poem to you,
Though it is a waste of time
This is my obligation,
Which I do not want to do
But it is my way of saying:
Happy Mother’s Day to you
The spring’s warm air is stirring
Calm and hopeful, warm and breezy
And though one wouldn’t think to add,
It is also very cheesy
This is my obligation,
Which I do not want to do
But it’s my ONLY way of saying:
Happy Mother’s Day to you
Though you will not give me discounts,
And you get mad far too quickly,
Still you put hope in my future,
And you do not do it meekly
This is my obligation,
Which I do not want to do
But it’s an okay way of saying:
Happy Mother’s Day to you
When the happy day is over
And the last “thank you”‘s have gone,
Still you’ll always have this poem,
Which is almost like a song
This is my obligation,
Which I do not want to do,
But I guess it’s nice to say:
Happy Mother’s Day to you.
When the weather here is rainy
Or the economy is bad
You can always read this poem again
And you won’t feel quite as sad
It’s more than a little cheesy,
And perhaps not all heartfelt,
But I hope you will appreciate
These words to you I’ve dealt
This is my obligation
Which I do not want to do
Yet I hope you’ll like me saying:
Happy Mother’s Day to you
My “cuteness” years are over
And my teen has not begun
But still your task for raising me,
Is not even close to done
This is my obligation,
Which I don’t really want to do
But it’s meaningful to say:
Happy Mother’s Day to you
I know it’s really mushy,
But I’ll write it to you still
I’d like to say I love you,
Always have and always will
This is not my obligation
It’s something nice to do
And the message of this is:
Happy Mother’s Day to you
Monday, March 30, 2009
Bottom is insight (don't like this title at all!)
BEAR MOVES IN THE stock market have anticipated nine out of the past five recessions, as an economist once famously quipped. Rebounds in stock prices are no more reliable in anticipating economic recoveries.
The only way to tell if the recent rebound in stocks is truly signaling recovery is to look at supporting data. And those data continue to suggest a bottoming in the economy by the second quarter, which would then turn out to have been duly anticipated by a bottom in the stock market in early March, the first quarter's final month.
This hardly suggests the bull is about to roar. Growth of real gross domestic product in the second half of 2009 is likely to be modest, running at an annual rate of 2% to 3%. The level of real GDP by year end will still be lower than the recent peak. There is always a danger, then, that equity prices will run ahead of this modest outlook. But at least the outlook is beginning to look positive.
Among upside surprises reported last week, one was the widespread rebound in February of durable-goods orders, tracked monthly by the Census Bureau. A durable good, as you might imagine, is technically defined as a tangible item that lasts at least three years. As such, it includes items that consumers buy, like cars and computers (although not plastics like Tupperware), but mainly covers nonconsumer goods like machinery and equipment.
The Census report on durable-goods orders is therefore a useful look into the activities of the manufacturing sector. (Yes, Virginia, there really is a domestic-manufacturing sector, even if much of it is owned by foreign companies.) The February increase in orders followed six consecutive monthly decreases and only partially reversed the decline in January. It tended to confirm the picture of a manufacturing sector that is still contracting, but at a slower rate. If final demand for goods really is beginning to stabilize, then manufacturing activity should be due for a rebound.
THE STRONGER PATTERN OF final demand got further confirmation from data for real consumer spending, released Friday. In the first two months of this year, real personal consumption ran positive, virtually guaranteeing that it will be up in the first quarter relative to the fourth.
Even if consumption flattens in the second quarter, the excessive liquidation of inventories should mean that production will still be due for a pick-up. Despite crushing job losses, it is still possible consumption will trend upward.
Job losses are not the only decisive factor in determining the trend in consumption. Otherwise, we would have to wonder how consumer spending could be higher in the first quarter than it was in the fourth, when the jobless rate was lower. One key factor that should help to buoy consumption is mortgage refinancings, fueled by a mortgage interest rate of 4.85%, the lowest on record.
The low mortgage interest rate helped bring another upside surprise reported last week, the February increase in existing home sales. With strengthening home sales, the negative wealth effect from declining home prices should diminish. One key home price tracked by the Federal Housing Finance Agency actually showed an increase in January.
Already much diminished is the negative wealth effect from the decline in stocks. That, too, should help buoy consumption.
The only way to tell if the recent rebound in stocks is truly signaling recovery is to look at supporting data. And those data continue to suggest a bottoming in the economy by the second quarter, which would then turn out to have been duly anticipated by a bottom in the stock market in early March, the first quarter's final month.
This hardly suggests the bull is about to roar. Growth of real gross domestic product in the second half of 2009 is likely to be modest, running at an annual rate of 2% to 3%. The level of real GDP by year end will still be lower than the recent peak. There is always a danger, then, that equity prices will run ahead of this modest outlook. But at least the outlook is beginning to look positive.
Among upside surprises reported last week, one was the widespread rebound in February of durable-goods orders, tracked monthly by the Census Bureau. A durable good, as you might imagine, is technically defined as a tangible item that lasts at least three years. As such, it includes items that consumers buy, like cars and computers (although not plastics like Tupperware), but mainly covers nonconsumer goods like machinery and equipment.
The Census report on durable-goods orders is therefore a useful look into the activities of the manufacturing sector. (Yes, Virginia, there really is a domestic-manufacturing sector, even if much of it is owned by foreign companies.) The February increase in orders followed six consecutive monthly decreases and only partially reversed the decline in January. It tended to confirm the picture of a manufacturing sector that is still contracting, but at a slower rate. If final demand for goods really is beginning to stabilize, then manufacturing activity should be due for a rebound.
THE STRONGER PATTERN OF final demand got further confirmation from data for real consumer spending, released Friday. In the first two months of this year, real personal consumption ran positive, virtually guaranteeing that it will be up in the first quarter relative to the fourth.
Even if consumption flattens in the second quarter, the excessive liquidation of inventories should mean that production will still be due for a pick-up. Despite crushing job losses, it is still possible consumption will trend upward.
Job losses are not the only decisive factor in determining the trend in consumption. Otherwise, we would have to wonder how consumer spending could be higher in the first quarter than it was in the fourth, when the jobless rate was lower. One key factor that should help to buoy consumption is mortgage refinancings, fueled by a mortgage interest rate of 4.85%, the lowest on record.
The low mortgage interest rate helped bring another upside surprise reported last week, the February increase in existing home sales. With strengthening home sales, the negative wealth effect from declining home prices should diminish. One key home price tracked by the Federal Housing Finance Agency actually showed an increase in January.
Already much diminished is the negative wealth effect from the decline in stocks. That, too, should help buoy consumption.
Monday, March 23, 2009
Soros: Ready for slow growth
Billionaire hedge fund manager George Soros has been warning of a global financial crisis for some time now. And when The Australian’s Peter Wilson interviewed the former partner of Jim Rogers lately, he noted how Soros has been handsomely-rewarded for such foresight. Wilson wrote yesterday:
And foreseeing the biggest economic crisis since the Great Depression has certainly paid off financially. In August 2007, with the first symptoms of the credit crunch on the horizon, Soros came out of semi-retirement to reassume control of his Quantum investment fund, astutely repositioning it for the tsunami about to hit. By year’s end Quantum was up almost 32 per cent for 2007, netting Soros profits of $US2.9 billion at a time when other financiers were struggling to break even.
His fortune was estimated at $US11 billion by Forbes in September 2008 and it has grown even larger amid the spreading financial carnage. That same year, in which Hedge Fund Research estimates the hedge fund industry lost a record 18.3 per cent, Soros was up another 9 per cent.
The chairman of Soros Fund Management, whose new book The Crash of 2008 and What it Means: The New Paradigm for Financial Markets is scheduled to be released before the end of this month, shared his latest outlook for the global economy with readers of the Australian publication. From the piece:
The entire world, but especially the West, should now brace for slower economic growth, he warns, and it will be at least a decade before the US sees robust growth. One important effect will be a new wariness in China about the US economic model, Soros says. “The Chinese used to look up to the West and try to imitate the West and they have now discovered that it may not be the right thing to imitate. They now feel suddenly impelled to develop their own system and in some ways they are actually ahead of us.
“For instance, they have been using variable capital requirements as a policy tool. They changed the minimum capital requirements for banks 17 times in the past year, first raising it rapidly and then lowering it. I think we will have to learn to do the same thing.”
In any case, the Chinese government can no longer be relied on to plough money into US government debt, he warns. “They will have less money to spend because their surplus is shrinking and their exports are falling, so they will have less to dispose of, so I think that there will be a definite shift.”
And foreseeing the biggest economic crisis since the Great Depression has certainly paid off financially. In August 2007, with the first symptoms of the credit crunch on the horizon, Soros came out of semi-retirement to reassume control of his Quantum investment fund, astutely repositioning it for the tsunami about to hit. By year’s end Quantum was up almost 32 per cent for 2007, netting Soros profits of $US2.9 billion at a time when other financiers were struggling to break even.
His fortune was estimated at $US11 billion by Forbes in September 2008 and it has grown even larger amid the spreading financial carnage. That same year, in which Hedge Fund Research estimates the hedge fund industry lost a record 18.3 per cent, Soros was up another 9 per cent.
The chairman of Soros Fund Management, whose new book The Crash of 2008 and What it Means: The New Paradigm for Financial Markets is scheduled to be released before the end of this month, shared his latest outlook for the global economy with readers of the Australian publication. From the piece:
The entire world, but especially the West, should now brace for slower economic growth, he warns, and it will be at least a decade before the US sees robust growth. One important effect will be a new wariness in China about the US economic model, Soros says. “The Chinese used to look up to the West and try to imitate the West and they have now discovered that it may not be the right thing to imitate. They now feel suddenly impelled to develop their own system and in some ways they are actually ahead of us.
“For instance, they have been using variable capital requirements as a policy tool. They changed the minimum capital requirements for banks 17 times in the past year, first raising it rapidly and then lowering it. I think we will have to learn to do the same thing.”
In any case, the Chinese government can no longer be relied on to plough money into US government debt, he warns. “They will have less money to spend because their surplus is shrinking and their exports are falling, so they will have less to dispose of, so I think that there will be a definite shift.”
Monday, March 16, 2009
A Continent Adrift
I’m concerned about Europe. Actually, I’m concerned about the whole world — there are no safe havens from the global economic storm. But the situation in Europe worries me even more than the situation in America.
Just to be clear, I’m not about to rehash the standard American complaint that Europe’s taxes are too high and its benefits too generous. Big welfare states aren’t the cause of Europe’s current crisis. In fact, as I’ll explain shortly, they’re actually a mitigating factor.
The clear and present danger to Europe right now comes from a different direction — the continent’s failure to respond effectively to the financial crisis.
Europe has fallen short in terms of both fiscal and monetary policy: it’s facing at least as severe a slump as the United States, yet it’s doing far less to combat the downturn.
On the fiscal side, the comparison with the United States is striking. Many economists, myself included, have argued that the Obama administration’s stimulus plan is too small, given the depth of the crisis. But America’s actions dwarf anything the Europeans are doing.
The difference in monetary policy is equally striking. The European Central Bank has been far less proactive than the Federal Reserve; it has been slow to cut interest rates (it actually raised rates last July), and it has shied away from any strong measures to unfreeze credit markets.
The only thing working in Europe’s favor is the very thing for which it takes the most criticism — the size and generosity of its welfare states, which are cushioning the impact of the economic slump.
This is no small matter. Guaranteed health insurance and generous unemployment benefits ensure that, at least so far, there isn’t as much sheer human suffering in Europe as there is in America. And these programs will also help sustain spending in the slump.
But such “automatic stabilizers” are no substitute for positive action.
Why is Europe falling short? Poor leadership is part of the story. European banking officials, who completely missed the depth of the crisis, still seem weirdly complacent. And to hear anything in America comparable to the know-nothing diatribes of Germany’s finance minister you have to listen to, well, Republicans.
But there’s a deeper problem: Europe’s economic and monetary integration has run too far ahead of its political institutions. The economies of Europe’s many nations are almost as tightly linked as the economies of America’s many states — and most of Europe shares a common currency. But unlike America, Europe doesn’t have the kind of continentwide institutions needed to deal with a continentwide crisis.
This is a major reason for the lack of fiscal action: there’s no government in a position to take responsibility for the European economy as a whole. What Europe has, instead, are national governments, each of which is reluctant to run up large debts to finance a stimulus that will convey many if not most of its benefits to voters in other countries.
You might expect monetary policy to be more forceful. After all, while there isn’t a European government, there is a European Central Bank. But the E.C.B. isn’t like the Fed, which can afford to be adventurous because it’s backed by a unitary national government — a government that has already moved to share the risks of the Fed’s boldness, and will surely cover the Fed’s losses if its efforts to unfreeze financial markets go bad. The E.C.B., which must answer to 16 often-quarreling governments, can’t count on the same level of support.
Europe, in other words, is turning out to be structurally weak in a time of crisis.
The biggest question is what will happen to those European economies that boomed in the easy-money environment of a few years ago, Spain in particular.
For much of the past decade Spain was Europe’s Florida, its economy buoyed by a huge speculative housing boom. As in Florida, boom has now turned to bust. Now Spain needs to find new sources of income and employment to replace the lost jobs in construction.
In the past, Spain would have sought improved competitiveness by devaluing its currency. But now it’s on the euro — and the only way forward seems to be a grinding process of wage cuts. This process would have been difficult in the best of times; it will be almost inconceivably painful if, as seems all too likely, the European economy as a whole is depressed and tending toward deflation for years to come.
Does all this mean that Europe was wrong to let itself become so tightly integrated? Does it mean, in particular, that the creation of the euro was a mistake? Maybe.
But Europe can still prove the skeptics wrong, if its politicians start showing more leadership. Will they?
Just to be clear, I’m not about to rehash the standard American complaint that Europe’s taxes are too high and its benefits too generous. Big welfare states aren’t the cause of Europe’s current crisis. In fact, as I’ll explain shortly, they’re actually a mitigating factor.
The clear and present danger to Europe right now comes from a different direction — the continent’s failure to respond effectively to the financial crisis.
Europe has fallen short in terms of both fiscal and monetary policy: it’s facing at least as severe a slump as the United States, yet it’s doing far less to combat the downturn.
On the fiscal side, the comparison with the United States is striking. Many economists, myself included, have argued that the Obama administration’s stimulus plan is too small, given the depth of the crisis. But America’s actions dwarf anything the Europeans are doing.
The difference in monetary policy is equally striking. The European Central Bank has been far less proactive than the Federal Reserve; it has been slow to cut interest rates (it actually raised rates last July), and it has shied away from any strong measures to unfreeze credit markets.
The only thing working in Europe’s favor is the very thing for which it takes the most criticism — the size and generosity of its welfare states, which are cushioning the impact of the economic slump.
This is no small matter. Guaranteed health insurance and generous unemployment benefits ensure that, at least so far, there isn’t as much sheer human suffering in Europe as there is in America. And these programs will also help sustain spending in the slump.
But such “automatic stabilizers” are no substitute for positive action.
Why is Europe falling short? Poor leadership is part of the story. European banking officials, who completely missed the depth of the crisis, still seem weirdly complacent. And to hear anything in America comparable to the know-nothing diatribes of Germany’s finance minister you have to listen to, well, Republicans.
But there’s a deeper problem: Europe’s economic and monetary integration has run too far ahead of its political institutions. The economies of Europe’s many nations are almost as tightly linked as the economies of America’s many states — and most of Europe shares a common currency. But unlike America, Europe doesn’t have the kind of continentwide institutions needed to deal with a continentwide crisis.
This is a major reason for the lack of fiscal action: there’s no government in a position to take responsibility for the European economy as a whole. What Europe has, instead, are national governments, each of which is reluctant to run up large debts to finance a stimulus that will convey many if not most of its benefits to voters in other countries.
You might expect monetary policy to be more forceful. After all, while there isn’t a European government, there is a European Central Bank. But the E.C.B. isn’t like the Fed, which can afford to be adventurous because it’s backed by a unitary national government — a government that has already moved to share the risks of the Fed’s boldness, and will surely cover the Fed’s losses if its efforts to unfreeze financial markets go bad. The E.C.B., which must answer to 16 often-quarreling governments, can’t count on the same level of support.
Europe, in other words, is turning out to be structurally weak in a time of crisis.
The biggest question is what will happen to those European economies that boomed in the easy-money environment of a few years ago, Spain in particular.
For much of the past decade Spain was Europe’s Florida, its economy buoyed by a huge speculative housing boom. As in Florida, boom has now turned to bust. Now Spain needs to find new sources of income and employment to replace the lost jobs in construction.
In the past, Spain would have sought improved competitiveness by devaluing its currency. But now it’s on the euro — and the only way forward seems to be a grinding process of wage cuts. This process would have been difficult in the best of times; it will be almost inconceivably painful if, as seems all too likely, the European economy as a whole is depressed and tending toward deflation for years to come.
Does all this mean that Europe was wrong to let itself become so tightly integrated? Does it mean, in particular, that the creation of the euro was a mistake? Maybe.
But Europe can still prove the skeptics wrong, if its politicians start showing more leadership. Will they?
Wednesday, March 11, 2009
Real S&P 500 chart - inflation adjusted:
When you have to look at the same chart over and over again it can get a bit boring so here’s the ‘real’ S&P 500 - inflation adjusted:
The chart shows monthly data from 1900 to February 2009 and is logarithmically scaled so that a percentage move in any year is comparable to other years. I’ve used the CPI (monthly) data available from official US government sources. Some say it is under-reported but what other real alternatives do we have? Removing the distorting effect of inflation is important for long term charts and also because we know that the Fed is doing all it can to create inflation. The most recent data shows the largest one year increase in money supply.
Like walking down your hometown streets, things look similar but different. For example, the chart doesn’t show the massive double top that is now recognized by everyone. Also, from 1900 to 1950, the market tread water after inflation. Then a roaring bull market followed, to then be deflated by an equally intense bear market.
Most interesting is that the bear market low is July 1982 - not 1975 as we usually see on non-inflation adjusted charts. This is where the bull market that followed next was launched. The inflation adjusted level of 238 acted as support, just as it had acted as resistance on so many occasions (temporarily pierced only by the roaring bull market of the 1920’s).
A similar situation is setting up today. We had a bull market that took us to new inflation adjusted levels and subsequently almost all the air was let out because the market is now back to where it broke out from the 1968 top. To be accurate we have a little more air to let out before the market ricochets off that level once again.
Assuming that this is the playbook the market is following; and if not, cheer up! we can only go to zero.
Friday, March 6, 2009
Unemployment Number
1974 (Half of the work force)
November - 368K
December - 602K
January -360k
February -378k
March -270k
April -186k
May +160k
June -104k
2008
November - 533K
December - 589K
January - 655K
February - 651K
Stay tuned.
November - 368K
December - 602K
January -360k
February -378k
March -270k
April -186k
May +160k
June -104k
2008
November - 533K
December - 589K
January - 655K
February - 651K
Stay tuned.
Monday, March 2, 2009
Saturday, February 28, 2009
Fix the bank
EVEN AFTER CITIGROUP'S HIGHLY DILUTIVE DEAL with the government on Friday, battered bank stocks managed to end the week up 11%, well above the lows set Feb. 20. One reason is that guidelines for the government's "stress test" for banks, unveiled Wednesday, proved less onerous than expected. A second reason is that capital levels at the nation's regional banks now look fairly sturdy.
The Citi deal has everyone on Wall Street suddenly talking about a measure of financial strength called tangible capital, which is a bank's tangible common equity divided by its tangible assets. Citi (ticker: C) ranks as one of the worst institutions by this measure, with a tangible-capital ratio of 1.5%. Now that Citi has announced that the government and private investors will have the opportunity to convert their preferred shares into common shares, Citi's tangible capital ratio looks likely to jump to 4%. Many analysts and investors think 4% will emerge as the government's targeted minimum.
Prior to the Citi deal, regulators had focused on Tier 1 capital, which includes preferred stock and has been criticized for overstating banks' financial strength.
John Kuczala for Barron's
Troweling on the dollars alone won't put a lasting patch on the broken banking system.
Citi's Tier 1 capital appears healthy at 11.9%, double the regulatory minimum despite the bank's major problems. Because all Tier 1 capital cannot be easily used to absorb losses, investors are looking beyond that measure to tangible common equity. Now it appears that regulators are doing the same.
As shown on the table below, the change shouldn't pose a problem for many of the nation's large regional banks, many of them with tangible-capital ratios exceeding 5%.
Among the largest banks, JPMorgan Chase (JPM) is nearly at the 4% threshold, with a tangible-capital ratio of 3.8%. JPMorgan could easily hit the 4% mark by building capital over time. It took a step in that direction last week, announcing plans to cut its dividend 87%. This should add $5 billion to Morgan's tangible capital this year, pushing it to the 4% mark.
The new emphasis on tangible capital is a thornier issue for Bank of America (BAC), with a 2.6% tangible-capital ratio, and Wells Fargo (WFC), with a 2.8% ratio. Like Citi, they could meet a 4% minimum by having the government or private investors convert some preferred shares to common. The problem is that such a conversion would leave current holders of common stock owning less of Bank of America and Wells Fargo.
Table: A Capital DebateFears of this dilution pushed Bank of America stock down 25% Friday to 3.95, while Wells shares fell 16% to 12.10.
Executives at both BofA and Wells have said they don't see the need to raise capital right now, and there may be merit to that view. They could argue that their assets have already been marked down in value more than the assets of other banks, in part because Bank of America recently acquired Merrill Lynch and Wells acquired Wachovia. Indeed, Merrill Lynch marked its assets down substantially before selling itself to Bank America, while Wells took large write-downs of Wachovia's assets while completing the acquisition.
What does all this mean for investors? For the brave and the bold, it could mean opportunity. Given many false dawns for bank stocks in the past year, it is hazardous to call a bottom. But there is a case to be made that last week's rally in bank stocks could continue. Most banks look inexpensive, based on the ratio of their stock prices to tangible book value, a conservative measure of shareholder equity that excludes goodwill from acquisitions. A sizable slice of the industry is trading below tangible book value for the first time since 1990, including Bank of America, Capital One (COF), KeyCorp (KEY), SunTrust Banks (STI) and Comerica (CMA).
No question, bank profits will be depressed this year, and perhaps into 2010, with many institutions showing losses in 2009, as banks set aside reserves for growing loan losses. Some investment pros are steering clear of the group in favor of other depressed financial outfits, including asset managers and insurers.
Dividends, once hefty throughout the banking sector, are likely to be trimmed, as even relatively strong institutions reduce payouts to bolster capital. Analysts say dividend cuts are possible at Wells Fargo, U.S. Bancorp (USB) and PNC Financial (PNC). Oddly enough, JPMorgan's dividend cut didn't hurt its stock. Investors have become less focused on dividends than financial strength, particularly tangible book value. Anything that enhances book, including a payout cut, has come to be seen as a plus.
Four banks -- Bank of America, Citigroup, JPMorgan and Wells Fargo -- now dominate the industry, with combined assets of $7 trillion. No. 5 PNC has less than a quarter of the assets of No. 4 Wells Fargo. Bernstein analyst John McDonald's favorite megabank is JPMorgan, because it has a very "attractive risk-reward" ratio. It is trading at 23, just above its tangible book of $22. McDonald thinks JPMorgan's profit in 2011, the year that many analysts have targeted for a full-fledged economic recovery, could top $4 a share. His one-year price target is $38.
Among JPMorgan's most valuable assets is Jamie Dimon, arguably the best chief executive at any big financial company. Such praise, however, might be going to Dimon's head. In announcing the dividend cut Monday, he lauded his bank's "fortress balance sheet." Yet JPMorgan is still leveraged more than 25-to-1, based on its tangible equity. At a true fortress like Warren Buffett's Berkshire Hathaway (BRK-A), the leverage is just 3-to-1.
McDonald's colleague at Bernstein, Kevin St. Pierre, favors Comerica and U.S. Bancorp among the regionals. Comerica is now headquartered in Dallas and has significant exposure to depressed Michigan, but it also has one of the industry's highest capital ratios, based on common equity. U.S. Bancorp historically has had some of the sector's highest returns and should be in the black this year, too.
Investors didn't react well to Citigroup's announcement Friday that the government would convert up to $25 billion of its current preferred-stock investment under the Troubled Asset Relief Program into Citi common shares, giving Uncle Sam a 36% stake in the beleaguered bank. That action, combined with Citi's offer Friday to exchange some $27.5 billion of private and publicly held preferred into common shares, sent Citi shares down 96 cents, or 39%, to $1.50 on enormous volume: nearly two billion shares.
Investors are worried about several issues, including dilution, corporate governance and future business mix. If all the preferred is converted into common, Citi's share count will balloon to 22 billion from about 5.5 billion, massively diluting the positions of existing common holders, who will own just 26% of Citi shares.
The bull case on Citi now is that it has dealt with its capital shortfall and that the stock is appealing, trading well below the likely new tangible book value of $3.70 a share. "Investors are asking: 'Is Citi investable?' " says Bernstein's McDonald.
One concern among investors is that more than half of Citi's prospective common equity of $81 billion will consist of a deferred tax asset of $44 billion, which would protect some future earnings from taxes. The worry is that a wounded Citi may not be able to earn enough to use that shield.
Citi's $15 billion of preferred shares rallied on the news, although they are trading way below their face value. The company's Series P preferred finished Friday at $8.05, up $2.57 on the session, but still a fraction of the face value of $25.
Citi's preferred exchange offer created considerable confusion among investors because important details weren't released Friday. Citi is offering to swap common shares for preferred stock held by the public, but the precise exchange ratio probably won't be known until this week. Citi's publicly held preferred could rally if the terms are as generous as those accepted by the government and private investors, who are converting into common at about 45 cents on the dollar. In contrast, the publicly held preferred, trading at $8, is now valued at just 33 cents on the dollar.
Preferred holders probably should convert because Citi will stop paying dividends on unconverted preferred. Citi will continue to pay dividends on some $23 billion of outstanding trust preferreds.
If Citi's public preferred holders fare worse than the government, expect investor complaints. Congressional critics of TARP, too, could be upset at the Treasury's initial 55% loss on the conversion.
The Citi deal has everyone on Wall Street suddenly talking about a measure of financial strength called tangible capital, which is a bank's tangible common equity divided by its tangible assets. Citi (ticker: C) ranks as one of the worst institutions by this measure, with a tangible-capital ratio of 1.5%. Now that Citi has announced that the government and private investors will have the opportunity to convert their preferred shares into common shares, Citi's tangible capital ratio looks likely to jump to 4%. Many analysts and investors think 4% will emerge as the government's targeted minimum.
Prior to the Citi deal, regulators had focused on Tier 1 capital, which includes preferred stock and has been criticized for overstating banks' financial strength.
John Kuczala for Barron's
Troweling on the dollars alone won't put a lasting patch on the broken banking system.
Citi's Tier 1 capital appears healthy at 11.9%, double the regulatory minimum despite the bank's major problems. Because all Tier 1 capital cannot be easily used to absorb losses, investors are looking beyond that measure to tangible common equity. Now it appears that regulators are doing the same.
As shown on the table below, the change shouldn't pose a problem for many of the nation's large regional banks, many of them with tangible-capital ratios exceeding 5%.
Among the largest banks, JPMorgan Chase (JPM) is nearly at the 4% threshold, with a tangible-capital ratio of 3.8%. JPMorgan could easily hit the 4% mark by building capital over time. It took a step in that direction last week, announcing plans to cut its dividend 87%. This should add $5 billion to Morgan's tangible capital this year, pushing it to the 4% mark.
The new emphasis on tangible capital is a thornier issue for Bank of America (BAC), with a 2.6% tangible-capital ratio, and Wells Fargo (WFC), with a 2.8% ratio. Like Citi, they could meet a 4% minimum by having the government or private investors convert some preferred shares to common. The problem is that such a conversion would leave current holders of common stock owning less of Bank of America and Wells Fargo.
Table: A Capital DebateFears of this dilution pushed Bank of America stock down 25% Friday to 3.95, while Wells shares fell 16% to 12.10.
Executives at both BofA and Wells have said they don't see the need to raise capital right now, and there may be merit to that view. They could argue that their assets have already been marked down in value more than the assets of other banks, in part because Bank of America recently acquired Merrill Lynch and Wells acquired Wachovia. Indeed, Merrill Lynch marked its assets down substantially before selling itself to Bank America, while Wells took large write-downs of Wachovia's assets while completing the acquisition.
What does all this mean for investors? For the brave and the bold, it could mean opportunity. Given many false dawns for bank stocks in the past year, it is hazardous to call a bottom. But there is a case to be made that last week's rally in bank stocks could continue. Most banks look inexpensive, based on the ratio of their stock prices to tangible book value, a conservative measure of shareholder equity that excludes goodwill from acquisitions. A sizable slice of the industry is trading below tangible book value for the first time since 1990, including Bank of America, Capital One (COF), KeyCorp (KEY), SunTrust Banks (STI) and Comerica (CMA).
No question, bank profits will be depressed this year, and perhaps into 2010, with many institutions showing losses in 2009, as banks set aside reserves for growing loan losses. Some investment pros are steering clear of the group in favor of other depressed financial outfits, including asset managers and insurers.
Dividends, once hefty throughout the banking sector, are likely to be trimmed, as even relatively strong institutions reduce payouts to bolster capital. Analysts say dividend cuts are possible at Wells Fargo, U.S. Bancorp (USB) and PNC Financial (PNC). Oddly enough, JPMorgan's dividend cut didn't hurt its stock. Investors have become less focused on dividends than financial strength, particularly tangible book value. Anything that enhances book, including a payout cut, has come to be seen as a plus.
Four banks -- Bank of America, Citigroup, JPMorgan and Wells Fargo -- now dominate the industry, with combined assets of $7 trillion. No. 5 PNC has less than a quarter of the assets of No. 4 Wells Fargo. Bernstein analyst John McDonald's favorite megabank is JPMorgan, because it has a very "attractive risk-reward" ratio. It is trading at 23, just above its tangible book of $22. McDonald thinks JPMorgan's profit in 2011, the year that many analysts have targeted for a full-fledged economic recovery, could top $4 a share. His one-year price target is $38.
Among JPMorgan's most valuable assets is Jamie Dimon, arguably the best chief executive at any big financial company. Such praise, however, might be going to Dimon's head. In announcing the dividend cut Monday, he lauded his bank's "fortress balance sheet." Yet JPMorgan is still leveraged more than 25-to-1, based on its tangible equity. At a true fortress like Warren Buffett's Berkshire Hathaway (BRK-A), the leverage is just 3-to-1.
McDonald's colleague at Bernstein, Kevin St. Pierre, favors Comerica and U.S. Bancorp among the regionals. Comerica is now headquartered in Dallas and has significant exposure to depressed Michigan, but it also has one of the industry's highest capital ratios, based on common equity. U.S. Bancorp historically has had some of the sector's highest returns and should be in the black this year, too.
Investors didn't react well to Citigroup's announcement Friday that the government would convert up to $25 billion of its current preferred-stock investment under the Troubled Asset Relief Program into Citi common shares, giving Uncle Sam a 36% stake in the beleaguered bank. That action, combined with Citi's offer Friday to exchange some $27.5 billion of private and publicly held preferred into common shares, sent Citi shares down 96 cents, or 39%, to $1.50 on enormous volume: nearly two billion shares.
Investors are worried about several issues, including dilution, corporate governance and future business mix. If all the preferred is converted into common, Citi's share count will balloon to 22 billion from about 5.5 billion, massively diluting the positions of existing common holders, who will own just 26% of Citi shares.
The bull case on Citi now is that it has dealt with its capital shortfall and that the stock is appealing, trading well below the likely new tangible book value of $3.70 a share. "Investors are asking: 'Is Citi investable?' " says Bernstein's McDonald.
One concern among investors is that more than half of Citi's prospective common equity of $81 billion will consist of a deferred tax asset of $44 billion, which would protect some future earnings from taxes. The worry is that a wounded Citi may not be able to earn enough to use that shield.
Citi's $15 billion of preferred shares rallied on the news, although they are trading way below their face value. The company's Series P preferred finished Friday at $8.05, up $2.57 on the session, but still a fraction of the face value of $25.
Citi's preferred exchange offer created considerable confusion among investors because important details weren't released Friday. Citi is offering to swap common shares for preferred stock held by the public, but the precise exchange ratio probably won't be known until this week. Citi's publicly held preferred could rally if the terms are as generous as those accepted by the government and private investors, who are converting into common at about 45 cents on the dollar. In contrast, the publicly held preferred, trading at $8, is now valued at just 33 cents on the dollar.
Preferred holders probably should convert because Citi will stop paying dividends on unconverted preferred. Citi will continue to pay dividends on some $23 billion of outstanding trust preferreds.
If Citi's public preferred holders fare worse than the government, expect investor complaints. Congressional critics of TARP, too, could be upset at the Treasury's initial 55% loss on the conversion.
Friday, February 27, 2009
Stanford: The First Arrest is Made
It's most frustrating being on a plane at JFK and reading the complaint against Laura Pendergest-Holt, knowing that you won't be able to blog it for another eight hours or so. It's a curious thing: basically she's been arrested on obstruction of justice charges because she wasn't completely forthright when she testified in early February, at the time that the Stanford story was breaking all over the press. But she was clearly set up as the patsy: because Allen Stanford himself, along with his CFO James Davis, refused to testify at all, they can't be arrested on similar charges.
On the other hand, there was some really big stuff that Pendergest-Holt knew and didn't say to investigators, not least that $1.6 billion of Stanford International Bank's "assets" consisted of a loan to Allen Stanford himself. And that the $541 million "capital contribution" that Sir Allen made to the bank in December was made up largely of real-estate holdings which the bank already owned, having bought them for $88 million earlier in the year.
Meanwhile, the FT has dug up an NASD arbitration proceeding from 2003 in which a former Stanford employee, Leyla Basagoitia, accused Stanford of running a Ponzi scheme. The NASD -- which later became Finra -- wasn't buying it:
Ms Basagoitia's allegations were denied by Stanford Group Company and dismissed by the dispute resolution panel. She was ordered to pay Stanford $107,782 in damages, in repayment of a loan advanced to her while an employee of the company.
Michael Falick, the lawyer who acted for Ms Basagoitia, said his client contacted the SEC about the alleged fraud in tandem with her NASD complaint. Mr Falick said: "It was really troubling, because the NASD was meant to be a regulatory body."
Note that this was an NASD proceeding, not an SEC proceeding (although Basagoitia did inform the SEC as well as the NASD of her suspicions). So Blodget's off base here:
Mary Schapiro wasn't running the SEC when it muffed this latest scam, so she can blame it on her predecessor.
Not true! The vice-chairman of the NASD at the time that Basagoitia made her allegations was one Mary Schapiro. And true to the NASD's nature, the arbitration panel reflexively sided with the company rather than the employee.
And elsewhere on the Stanford-victims front, I just got an email from a Stanford employee:
Employees in all U.S. offices were told by the Receiver that "Payroll would be met and benefits were still in effect" as part of their initial communication to employees (in person) as they closed offices. Funds for payroll are reportedly in Stanford's Treasury department, employees were called in to process payroll, but the Receiver has not approved the transfer of funds to meet this payroll obligation. Funds should have been transferred into employee bank accounts at midnight tonight, and paper checks mailed tomorrow.
Stanford employees were told they were not terminated last week, that in fact "it was business as usual" per the Receiver's email to global Stanford employees. "Consider it a paid vacation," a Stanford employee was told in Memphis, Tennessee. This means employees were not able to begin the process to file for unemployment or make other arrangements with creditors that their income had been suspended.
In fact, many employees were called in to assist the Receiver in many departments. All employees have been working under the assumption that the Receiver would honor the commitment made to meet payroll. Were these employees called back under false pretenses? Funds are in-house to pay employees per Receiver's promise - Receiver now apologizes for the hardship. Why is Receiver now denying to release the monies? Arethe lawyers and other "outside experts" hired by the Receiver being paid with funds promised to meet payroll?
While criminal charges against Allen Stanford or Jim Davis have not been filed, most employees feel that a crime has been committed against them by the Receiver.
Said employees almost certainly include former Fed governor Lyle Gramley. Has anybody got around to asking him anything about his employer yet?
On the other hand, there was some really big stuff that Pendergest-Holt knew and didn't say to investigators, not least that $1.6 billion of Stanford International Bank's "assets" consisted of a loan to Allen Stanford himself. And that the $541 million "capital contribution" that Sir Allen made to the bank in December was made up largely of real-estate holdings which the bank already owned, having bought them for $88 million earlier in the year.
Meanwhile, the FT has dug up an NASD arbitration proceeding from 2003 in which a former Stanford employee, Leyla Basagoitia, accused Stanford of running a Ponzi scheme. The NASD -- which later became Finra -- wasn't buying it:
Ms Basagoitia's allegations were denied by Stanford Group Company and dismissed by the dispute resolution panel. She was ordered to pay Stanford $107,782 in damages, in repayment of a loan advanced to her while an employee of the company.
Michael Falick, the lawyer who acted for Ms Basagoitia, said his client contacted the SEC about the alleged fraud in tandem with her NASD complaint. Mr Falick said: "It was really troubling, because the NASD was meant to be a regulatory body."
Note that this was an NASD proceeding, not an SEC proceeding (although Basagoitia did inform the SEC as well as the NASD of her suspicions). So Blodget's off base here:
Mary Schapiro wasn't running the SEC when it muffed this latest scam, so she can blame it on her predecessor.
Not true! The vice-chairman of the NASD at the time that Basagoitia made her allegations was one Mary Schapiro. And true to the NASD's nature, the arbitration panel reflexively sided with the company rather than the employee.
And elsewhere on the Stanford-victims front, I just got an email from a Stanford employee:
Employees in all U.S. offices were told by the Receiver that "Payroll would be met and benefits were still in effect" as part of their initial communication to employees (in person) as they closed offices. Funds for payroll are reportedly in Stanford's Treasury department, employees were called in to process payroll, but the Receiver has not approved the transfer of funds to meet this payroll obligation. Funds should have been transferred into employee bank accounts at midnight tonight, and paper checks mailed tomorrow.
Stanford employees were told they were not terminated last week, that in fact "it was business as usual" per the Receiver's email to global Stanford employees. "Consider it a paid vacation," a Stanford employee was told in Memphis, Tennessee. This means employees were not able to begin the process to file for unemployment or make other arrangements with creditors that their income had been suspended.
In fact, many employees were called in to assist the Receiver in many departments. All employees have been working under the assumption that the Receiver would honor the commitment made to meet payroll. Were these employees called back under false pretenses? Funds are in-house to pay employees per Receiver's promise - Receiver now apologizes for the hardship. Why is Receiver now denying to release the monies? Arethe lawyers and other "outside experts" hired by the Receiver being paid with funds promised to meet payroll?
While criminal charges against Allen Stanford or Jim Davis have not been filed, most employees feel that a crime has been committed against them by the Receiver.
Said employees almost certainly include former Fed governor Lyle Gramley. Has anybody got around to asking him anything about his employer yet?
Thursday, February 26, 2009
Jeremy Grantham Invests Cautiously These Days
Meanwhile, GMO chairman Jeremy Grantham is more upbeat — though he does expect more pain to precede any recovery.
Looking back at historic bear markets, Grantham draws comparisons to 1974 and 1982, when the S&P 500 lost roughly half its value. Since he estimates the current S&P 500 fair value at 900, Grantham puts his worst-case bottom at a hair-raising 450.
“That’s fairly scary, but on the one hand we look at the massive stimulus, and then on the other we try to work out the fact that the global economy is in worse shape than it was in ‘74 or ‘82,” says Grantham. “I’d say there are three-to-one odds that we go to a material new low. We should count on [the S&P 500] hitting 600 for a little while, and we should hope like mad it doesn’t get deep into the 500s.”
Patience rules. Another looming threat is that the market may enter an extended period of drops and rebounds that flatten long-term returns and strand buy-and-hold investors for decades.
Japan’s stalled stock market is one recent example, but the U.S. has had its shares of quagmires, too. Grantham likes to point out that investors who bought at market crests in 1929 and 1965 had to wait 19 years each time just to break even.
Still, Grantham says buy-and-hold still makes sense for long-term investors when stocks are trading below fair value. He especially favors U.S. blue chips, and his fund is on a strict, slow schedule to invest as valuations dip even lower.
“If you don’t have a schedule for investing, you will not do it,” he says. “When the market goes down, it reinforces the hoarding of cash. By the bottom, you suffer what we called in 1974 terminal paralysis — you cannot pull the trigger. Almost everyone who avoids the great pain is very slow to get back.”
Looking back at historic bear markets, Grantham draws comparisons to 1974 and 1982, when the S&P 500 lost roughly half its value. Since he estimates the current S&P 500 fair value at 900, Grantham puts his worst-case bottom at a hair-raising 450.
“That’s fairly scary, but on the one hand we look at the massive stimulus, and then on the other we try to work out the fact that the global economy is in worse shape than it was in ‘74 or ‘82,” says Grantham. “I’d say there are three-to-one odds that we go to a material new low. We should count on [the S&P 500] hitting 600 for a little while, and we should hope like mad it doesn’t get deep into the 500s.”
Patience rules. Another looming threat is that the market may enter an extended period of drops and rebounds that flatten long-term returns and strand buy-and-hold investors for decades.
Japan’s stalled stock market is one recent example, but the U.S. has had its shares of quagmires, too. Grantham likes to point out that investors who bought at market crests in 1929 and 1965 had to wait 19 years each time just to break even.
Still, Grantham says buy-and-hold still makes sense for long-term investors when stocks are trading below fair value. He especially favors U.S. blue chips, and his fund is on a strict, slow schedule to invest as valuations dip even lower.
“If you don’t have a schedule for investing, you will not do it,” he says. “When the market goes down, it reinforces the hoarding of cash. By the bottom, you suffer what we called in 1974 terminal paralysis — you cannot pull the trigger. Almost everyone who avoids the great pain is very slow to get back.”
Wednesday, February 25, 2009
Major phases of a bear market
Historically, major bear markets have also followed distinct patterns.
1. First phase
There is a sharp initial fall that removes much of the 'froth' from the market.
2. Middle phase
There is a strong rally in prices for several months, which may lull some investors into thinking that the bear market is over. The rallies can be dramatic, but have lower trading volume than the initial sell-offs. And the advances tend to be concentrated on a few selected stocks, not the whole market.
3. Third phase
There is a long slow downward grind in prices, accompanied by low volume and periodic false dawns until the bear phase ends quietly as share valuations reach rock bottom. At this point, few investors from the earlier buoyant phase in the market are interested in anything other than the most conservative investments.
1. First phase
There is a sharp initial fall that removes much of the 'froth' from the market.
2. Middle phase
There is a strong rally in prices for several months, which may lull some investors into thinking that the bear market is over. The rallies can be dramatic, but have lower trading volume than the initial sell-offs. And the advances tend to be concentrated on a few selected stocks, not the whole market.
3. Third phase
There is a long slow downward grind in prices, accompanied by low volume and periodic false dawns until the bear phase ends quietly as share valuations reach rock bottom. At this point, few investors from the earlier buoyant phase in the market are interested in anything other than the most conservative investments.
Tuesday, February 24, 2009
Worst on Records
Economists were expecting today's report on Consumer Confidence for February to come in at 35, which would have been the lowest level on record. The actual number, however, came in much lower at a level of 25. Not only is this the lowest reading on record, but it is also the fifth worst report versus expectations since at least 1999. In the chart below, we highlight the monthly readings of the Consumer Confidence report going back to 1967 (recessions highlighted in gray).
Friday, February 20, 2009
Paul Krugman
Nobel Laureate Paul Krugman made a stop at Wharton this week to give his assessment of the economy and the stimulus. He gave his standard message: Government spending is the only way out, but the current stimulus is too small.
What caught our eye was his prediction for how the economy would eventually recover:
Eventually, even with inadequate policy measures, there will likely be a spontaneous recovery. Goods "wear out, rust away," and people will someday want to buy new technologies that will be clearly superior to what they have now. "Look at auto sales," Krugman said. "At current buying rates it would take 23.9 years to replace the current stock." Obviously it's not going to take that long, he added. Buying rates will eventually pick up.
So wait, the economy will recover when our capital stock wears out and rusts away? This sounds suspiciously like our old friend the "broken-window fallacy" the silly idea that a broken store window is good for the economy because the shopkeeper has to replace it, helping everyone in the window and glass industries.
Nobody seriously believes that's true, though you sometimes hear that logic trotted out when there's a hurricane or tornado, and someone talks about all the jobs the rebuilding will create.
Under Krugman's logic, perhaps we should sabotage our equipment so that the wearing-out could happen a little faster, bringing about our recovery.
What caught our eye was his prediction for how the economy would eventually recover:
Eventually, even with inadequate policy measures, there will likely be a spontaneous recovery. Goods "wear out, rust away," and people will someday want to buy new technologies that will be clearly superior to what they have now. "Look at auto sales," Krugman said. "At current buying rates it would take 23.9 years to replace the current stock." Obviously it's not going to take that long, he added. Buying rates will eventually pick up.
So wait, the economy will recover when our capital stock wears out and rusts away? This sounds suspiciously like our old friend the "broken-window fallacy" the silly idea that a broken store window is good for the economy because the shopkeeper has to replace it, helping everyone in the window and glass industries.
Nobody seriously believes that's true, though you sometimes hear that logic trotted out when there's a hurricane or tornado, and someone talks about all the jobs the rebuilding will create.
Under Krugman's logic, perhaps we should sabotage our equipment so that the wearing-out could happen a little faster, bringing about our recovery.
Subscribe to:
Posts (Atom)