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________________________________________________________________________ GLOBAL ECONOMIC CRISIS BLOG Co-edited by Mo Sacirbey, former Vice-President of Standard & Poor's ________________________________________________________________________
________________________________________________________________________ Amb. Muhamed "Mo" Sacirbey is investment banking veteran. He served as a Senior Vice-President and Counsel for Standard & Poor's and the Managing Director for Structured Finance at Security Pacific Merchant Bank. Mo holds an MBA degree from Columbia University and J.D. from Tulane University. Amb. Sacirbey also assisted in Bosnia & Herzegovina's discussions and negotiations with World Bank and IMF. ________________________________________________________________________ CNBC.com: More stimulus and investment drivers needed (August 12, 2009)More stimulus measures and drivers for investment are needed to jolt the recovery process for the economy, says Paul Krugman, nobel laureate and professor of economics at Princeton University. He assesses the likelihood of an economic recovery with CNBC's Martin Soong. Link Bloomberg: Japan Economy Probably Expanded for First Time in Five Quarters (August 12, 2009)The economy's recovery hinges largely on the growth of its export markets. China, Japan's top customer, expanded 7.9 percent last quarter from a year earlier, propelled by government spending and a boom in bank lending that some economists say may lead to a bubble. The U.S. shrank an annualized 1 percent, its best performance since the second quarter of 2008. Link The Australian: Home truths from International Monetary Fund (August 10, 2009)House prices are overvalued by as much as 20 per cent and the International Monetary Fund is worried that a price correction might yet pitch Australia into recession and bring massive losses to the banks. The fund's annual review of the Australian economy identifies high levels of mortgage debt as the biggest risk it faces over the coming year. Link Chron.com: Royal Bank of Scotland loses $1.7B in 1st half (August 8, 2009)LONDON - The Royal Bank of Scotland posted a wider first-half net loss Friday, as bad debts jumped to 7.5 billion pounds ($12.6 billion) and sluggish activity in its retail and corporate businesses wiped out strong gains in investment banking. Link San Francisco Chronicle : White House mulls major Fannie-Freddie shakeup (August 6, 2009)The Obama
administration is considering an overhaul of Fannie Mae and Freddie Mac
that would strip the mortgage finance giants of hundreds of billions of
dollars in troubled loans and create a new structure to support the
home-loan market, government officials said.
Link European stock markets rose modestly Wednesday after a batch of solid corporate earnings though trading remained light as many investors awaited key economic news towards the end of the week. Link Washington Post: Economic Policy Is Working, Obama Says (August 4, 2009)In public appearances this week, President Obama will attempt to regain the initiative on the economy after what one senior administration official called several "rocky" weeks of declining support for the president and his major policy efforts. LinkBloomberg: Bailout Banks Buying Treasuries Help Keep Rates Low (August 3, 2009)U.S. lenders bailed out by the government are returning the favor by stepping up purchases of Treasuries, helping to temper a rise in borrowing costs. Bank holdings of U.S. government securities are up 15.6 percent from a year ago, almost double the average annual growth rate of about 8 percent since the Federal Reserve began tracking the data in 1973, according to the Greenwich, Connecticut-based trading and research firm MKM Partners LP. Purchases may accelerate as lenders look for places to park rising deposits as sales of federal agency debt of companies such as Fannie Mae and corporate bonds slow. Link Bloomberg: Fed Says Most Districts Report Slower Pace Decline (July 29, 2009)Government figures on July 31 may show that U.S. gross domestic product shrank at a 1.5 percent annual pace in the second quarter, less than the 5.5 percent contraction in the previous three months, according to the median of 77 estimates in a Bloomberg News survey. Link Bloomberg: U.S. Assures 'Concerned' China It Will Shrink Deficit (July 28, 2009)The new focus on the deficit and Treasuries reflects the legacy of China's record trade surpluses and its accumulation of dollars as a result of holding down the yuan. Chinese foreign- exchange reserves surpassed $2 trillion for the first time in the second quarter, and its holdings of Treasuries reached $801.5 billion in May, about 100 percent more than at the start of 2007. Link Times Online: Treasury defiant on growth despite gloom over GDP (July 26, 2009)The Treasury expects GDP to be broadly flat in the current quarter before rising strongly in the final three months of the year, by about 1%, as spending is brought forward ahead of the reimposition of Vat at 17.5% and growth benefits as companies restock. LinkLanka Business Online: Great Expectations (July 25, 2009)The International Monetary Fund has approved a 2.6 billion US dollar loan to Sri Lanka with a 322 million dollar tranche being immediately disbursed on a program that is aiming to keep the budget deficit at 7.0 percent of the economy. Link Washington Post: Fed Pushes New Curbs On Lending Practices (July 24, 2009)The Federal Reserve on Thursday unveiled a proposal to curb abusive lending practices by reining in compensation for mortgage brokers and by helping borrowers better understand the terms of loans available to them. Link Charleston Daily Mail: Dollar mixed as home sales, jobless claims rise (July 23, 2009)While the number of newly laid-off workers seeking jobless benefits rose last week, a jump in existing home sales had investors excited that the hard-hit housing market might be improving. Link Bloomberg: Goldman Sachs Pays $1.1 Billion for Treasury Warrants (July 22, 2009)The value was established by the Treasury, the New York- based firm said today in a statement. The payment is in addition to $318 million in preferred dividends that the company paid on the investment since October. On an annualized basis, the return to taxpayers was 23 percent, Goldman said. Link US lending giant CIT in $3 bln rescue deal (July 21, 2009)CIT Group looked last week to be headed for an almost certain bankruptcy after the US government rejected its plea for a fresh bailout after already providing 2.33 billion dollars despite fears of repercussions for the overall economy. Link The New York Times: Iceland Puts $2 Billion Into Collapsed Banks (July 20, 2009)The country's three biggest banks, Glitnir, Kaupthing and Landsbanki, failed in October owing more than $60 billion to creditors overseas. Under the new deal, Iceland has agreed with their creditors to inject a total of 270 billion kroner, or $2.1 billion, into the institutions to restore them to normal operations, the government said in Reykjavik. Link San Francisco Chronicle: Banks' profit can't hide default threat (July 19, 2009)Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc. earned profits this spring largely on investment banking and trading - not traditional banking businesses, which still look shaky. Strip away those money-makers, and the banks have to rely on customers who are losing their jobs or earning less money. The banks will suffer as long as their customers do. Link Detroit Free Press: Banks see light at the end of tunnel (July 18, 2009) Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc. earned profits this spring largely on investment banking and trading -- not traditional banking businesses, which still look shaky. Citi benefited from selling its majority stake in the Smith Barney brokerage. Link The New York Times: Two Giants Emerge From Wall Street Ruins (July 17, 2009) JPMorgan Chase became the latest big bank to announce stellar second-quarter earnings. Its $2.7 billion profit, after record gains for Goldman Sachs, underscores how the governments effort to halt a collapse has also set the stage for a narrowing concentration of financial power. Link The Miami Herald: China's economic growth accelerates amid stimulus (July 16, 2009) Many analysts expect China to be the first major country to emerge from the worst global slump since the 1930s. That could help pull the rest of the world out of recession as China buys more raw materials, industrial components and consumer goods from struggling economies in the United States, Europe and elsewhere. Link The New Zealand Herald: Federal deficit tops US$1 trillion - and it's set to double (July 15, 2009) The soaring deficit is making Chinese and other foreign buyers of US debt nervous, which could make them reluctant lenders down the road. It could also force the Treasury Department to pay higher interest rates to make US debt attractive longer-term. Link Bloomberg: China's Economic Growth May Accelerate to 7.8% on Credit Boom (July 14, 2009) China's 4 trillion yuan ($585 billion) stimulus package and the scrapping of lending restrictions for banks powered a revival in the worlds third-largest economy, countering a collapse in exports. Link Washington Post: Geithner Pushes Derivatives Plan (July 13, 2009)Treasury Secretary Timothy F. Geithner urged lawmakers yesterday to pass the Obama administration's plan to regulate derivatives, the exotic financial instruments that exacerbated the financial crisis. Link USA Today: Calif. leaders: We're making progress on $26B gap (July 12, 2009)The possibility of a breakthrough in resolving California's mammoth budget shortfall comes a week after the state began issuing IOUs, or promissory notes, to thousands of vendors as a cash-saving move. State workers also have begun taking three days off a month without pay, cutting the salaries of more than 200,000 government employees by 14%. Link Washington Post: US-Business Summary (July 11, 2009)The Dow industrials and the S&P 500 fell on Friday, dropping for the fourth straight week, after Chevron Corp <CVX.N> warned about its quarterly results and consumer confidence fell to it lowest level since March. Link The Australian: Stimulus and rate cuts propping up world economy (July 10, 2009)Government stimulus spending and interest rate cuts are providing most of the support for economic growth worldwide, with little evidence yet of recovery in private sector demand, the International Monetary Fund says. Link Mo Sacirbey: The "W" Economic Recovery (July 9, 2009)A bit of stimulus can be like a shortened antibiotic treatment: it can initially appear to be working but when treatment is ceased prematurely a more resistant malaise becomes ever more resurgent. It is perhaps debatable as to whether it was better to resist economic stimulus versus the huge and potentially enormous deficit building budgets, as in US. However, once economic penicillin was decided upon to combat the crisis, there is no option but to continue until the malaise is decisively overcome. I fear that shortsightedness will prevail in many capitals, and especially in the politically hypersensitive Obama Administration, and the remedial help will be curtailed prematurely, with malaise and stagflation ever more entrenched. Read more The Australian: Harper's ruling will save thousands (July 8, 2009)Australia has the highest minimum wage floor of all developed economies. The jobs fallout from pushing up the minimum wage further would be most severe during a recession. And it would mostly hit the least skilled and most vulnerable. Link Philly.com: Second thoughts on how low mortgage rates will go (July 7, 2009)A few months ago, the 4.5 percent fixed-rate mortgage was being called real estate's "sweet spot," a surefire way to spark home sales - especially in markets where prices weren't falling fast enough for eager buyers. Link Financial Times: Banks spending more to cut risks (July 6, 2009)The unpredictable and uncertain market conditions have led to a dramatic increase in spending on controlling and reducing risk: 80 per cent of the banks surveyed had increased their investment in this area over the past six months. Link. The Economist: Budget may provide for recapitalization of public sector banks (July 5, 2009)Finance Minister Pranab Mukherjee may announce on Monday recapitalisation of public sector banks to help them meet the credit demand of productive sectors, especially those hit hard by the global financial meltdown. Link Times Online: Credit card crackdown is too little, too late (July 4, 2009)No doubt the Government will argue that it did not act earlier because it had more important things to deal with. Depressingly, though, it looks as if it was willing to turn a blind eye when borrowing was fuelling the economy. Only now, as consumers try desperately to rein back their debt, has it plucked up the courage to take up the cudgel. Link Wall Street Journal: EU Derivatives Revamp Plan Puts Bankers on Edge (July 3, 2009)The European Commission is expected Friday to propose a revamp for Europe's derivatives industry that bankers fear could take a harder line than recent U.S. efforts to reduce the risks that exotic financial instruments pose to the banking system. Link China Daily: Eurozone unemployment rate hits 10-year high (July 2, 2009)The European Commission had estimated that there would be 8.5 million more people in the EU left without jobs in 2009 and 2010 due to the economic crisis, with the unemployment rate set to climb to 10.9 percent, and the eurozone would see a record rate of 11.5 percent in the two years. Link NY Times: Bank Woes Deepening in Europe (July 1, 2009)When the financial crisis struck the global economy last autumn, European governments moved swiftly to keep their biggest banks from falling into an abyss, never mind fears over nationalization. Link Wall Street Journal: Street to Log Best Quarter Since Crisis (June 30, 2009)Investor confidence in the debt markets fueled issuance of $1.5 trillion globally from the start of the second quarter through Monday, according to Dealogic. That was slightly lower than in the first quarter, but the latest results showed a rebound in high-yield issuance. Link Associated Press: European economic confidence climbs (June 29, 2009)EU officials warn against these apparent green shoots signaling an end to the recession, saying the pickup in confidence doesn't go beyond expectations and companies have not yet reported an increase in output. Link The Star: Weathering the global financial crisis (June 27, 2009)Despite strong economic fundamentals, Malaysia, being a small, open and globally integrated economy, is not spared from the effects of the global financial crisis. Private consumption fell in line with lower disposable income and cautious spending of households. Weak external and domestic demand also impacted domestic investment sentiment, which saw total investments declining significantly in the first quarter of 2009. Link Chron Business: Bid shows China still thirsting for oil (June 25, 2009)Shanghai - Sinopec, with its $7.2 billion bid for Addax Petroleum, is seeking crucial production capacity and coveted reserves in West Africa and the Middle East to help balance its heavy reliance on crude oil processing. Link BBC News: Ireland 'faces worst recession' (June 25, 2009)The IMF's senior official for Ireland, Ashoka Mody, said he remained confident that Ireland would not default on its debt obligations - but faced a long, hard slog to defend its banks and bring spending back into line with a drastically reduced tax intake. Link The Australian: Ratings agencies indicate recovery in Asia (June 25, 2009) Standard & Poor's has identified "a distinct pattern" for most countries in Asia by comparing the seasonally adjusted annual rate of growth today with that of July-August 2008, when virtually all of them shifted from positive to negative. Link Asia Times: China steels for a showdown (June 23, 2009)
Hong
Kong - China, a growing and often welcome presence in the international
financial world, appears ready to give another display of its impotence
in global corporate matters as the country's steel industry joins in
annual price talks with newly muscled-up iron ore suppliers.
Link
Reuters: Dollar strength depresses gold (June 22, 2009)
The dollar gained at the expense of higher-yielders normally associated with risk seeking behaviour, reflecting investor concern about global growth prospects and jitters ahead of the US Federal Reserve's rate setting meeting -- a factor that was seen supporting gold at the lower levels. Link
Wall Street Journal: BRIC nations want diversity (June 17, 2009)
Brazil, Russia, India and China, collectively known as the BRIC nations, said after a meeting Tuesday that "it is very necessary to have a stable, predictable and more diversified currency system." Their proposal for a less dollar-centric reserve system comes from "growing concern over the creditworthiness of the U.S. and the stability of the dollar amidst aggressive U.S. monetary and fiscal stimulus," said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon. Link
Reuters: New York Times does not plan to close Boston Globe (June 10, 2009)
"The New York Times Co said on Tuesday that it does not plan to close The Boston Globe, a day after its largest union rejected a $10 million package of concessions aimed at cutting costs at the 137-year-old newspaper. But tensions are only deepening between the Globe and the Boston Newspaper Guild. The Times has said it will cut more than a fifth of union members' pay to get the savings that it needs. The union on Tuesday responded by petitioning the U.S. government to block that move." Link
Washington Post: Some banks will be allowed to repay TARP money (June 9, 2009)
The Obama administration plans to announce as soon as today that some of the nation's largest banks can repay billions in federal aid, but some officials caution that the show of progress is being underwritten by multiple layers of less visible government support. Through cheap loans, debt guarantees and a promise that big banks will not be allowed to fail, these officials say the government has created an artificial environment in which profits and stock prices have rebounded, helping banks in recent weeks to raise about $50 billion from private investors. Link
Financial Times: Geithner calls for closer ties with China (June 5, 2009)
Tim Geithner, the US Treasury secretary, arrived in China on his maiden visit on Monday with calls for China to make its currency more flexible in return for fiscal reforms on the part of the US. "A successful transition to a more balanced and stable global economy will require very substantial changes to economic policy and financial regulation around the world," he told an audience at Peking University. Link
IMF: Russia's economy in big trouble (June 2, 2009)
The Russian economy will shrink 6.5% in 2009 according to an International Monetary Fund report presented on Monday. That's in sharp contrast to growth of over 5% last year, and despite stimulus measures equal to almost 10% of GDP, according to Paul Thomsen, Head of the IMF's mission in Russia. Link
AP: Why is dollar weakening? (May 28, 2009)
The U.S. dollar spiked when the economic crisis was peaking, and it's falling now that a recovery's in sight. What gives? The relationship between the country's economy and its currency, it turns out, is more complicated now than ever as the government assumes a larger role in propping up the financial system and encouraging economic growth. Link
Washington Post: Obama revives hope for homeowners (May 26, 2009)
The Obama administration is attempting to revive a stalled government foreclosure prevention program that could restore equity to hundreds of thousands of borrowers whose home values have plummeted. After eight months, the program, known as Hope for Homeowners, has helped just one borrower secure a more affordable loan. President Obama signed legislation last week simplifying and lowering the cost of the program for lenders and borrowers. Lenders that participate also are eligible for incentive payments from government bailout funds. Link
Reuters: OECD sees chance for global recovery by year-end (May 22, 2009)
Contraction in world economic output appears to be slowing and a recovery could begin at the end of this year, Organization for Economic Development and Cooperation (OECD) chief Angel Gurria said on Friday. Indicators ranging from U.S. house sales to Chinese exports are beginning to pick up and the global economy is no longer in free fall, he said during a speech to an economic forum. Link
The Economist: Too big to swallow (May 20, 2009) One of the canards of the credit crisis, trotted out regularly by politicians and pundits, is that banks have stopped lending. It is a charge that bankers vehemently reject and the data largely back them up. It is true that overall flows of credit have fallen steeply. Link
Reuters: Paulson gave banks no chance (May 14, 2009) Reuters reports that the "documents made public on Wednesday confirm former U.S. Treasury Secretary Henry Paulson gave nine major banks no choice but to allow the government to take equity stakes in them as the Bush administration moved to address turmoil in the financial industry." Link
AFP: U.S. deficit forecasts rise by nearly $90 bln (May 12, 2009) The White House raised 2009 and 2010 deficit forecasts by nearly 90 billion dollars, reflecting costs of the worst economic crisis in generations, in a finalized 3.6 trillion dollar budget. The administration released new projections for the federal government budget for the fiscal year 2010 beginning in October, a week after announcing 17 billion dollars in deficit-reducing cuts to 121 government programs. Link
Wall Street Journal: Murdoch will revolutionize internet within 12 months (May 8, 2009) Rupert Murdoch announced that his “News Corp.'s general-interest newspapers will begin to charge for the internet content within the next 12 months”. There are also other newspapers outside of the group which indicated their intent to follow the idea. So, the free internet content will soon be a history. Murdoch’s plans are likely to change the business model of many internet newspapers and magazines, making it more profitable to publish in the internet. Link
Boston Globe: The end of the Boston Globe? (May 8, 2009)
The Boston Globe is another big newspaper in serious financial trouble. Its publisher Steven Ainsley said that "the threatened shutdown of the newspaper has been 'extraordinarily difficult' for readers, advertisers, employees, and him, but the outpouring from the community has underscored the importance of restoring the Globe to financial health. In his first extensive interview since the Globe's owner, The New York Times Co., threatened to shut the newspaper, Ainsley said he believes it was the Globe's dire financial problems, coupled with a rapidly deteriorating economy, that led to the Times Co.'s ultimatum to the paper's unions to give back $20 million in concessions." Link
Wall Street Journal: Stimulus package seems to work (May 7, 2009) The Wall Street Journal reported that "the Federal Reserve's program to get banks lending again is starting to work, and other federal stimulus efforts are also starting to show signs of success, James Dimon, chairman of J.P. Morgan Chase & Co., said Tuesday." Link
Bloomberg: EU's economy in big trouble (May 4, 2009)
"The European Union cut its forecast for the euro-area economy to show a contraction twice as deep as it projected just three months ago, and said the region’s budget deficit will swell to more than double the EU limit. The economy of the 16 countries sharing the euro will shrink 4 percent in 2009 and 0.1 percent in 2010, the European Commission, the EU executive in Brussels, said today, revising a January estimate for a contraction of 1.9 percent this year. The region’s average budget deficit will swell to 6.5 percent of output next year, when unemployment will rise to 11.5 percent, the commission said." Link
Wall Street Journal: Circulation drops at most big newspapers (May 1, 2009)
The Wall Street Journal reported that “many of the largest U.S. newspapers saw their circulation slide at an accelerated pace in the six months through March, signaling more trouble for an industry already challenged by steep declines in advertising revenue.” Among those newspapers, which suffered the biggest decline in circulations are: New York Post, New York Daily News and Houston Chronicle. Link
Investment News: State officials line up against federal risk regulator (April 29, 2009) State securities officials are lining up against congressional proposals that would create a systemic risk regulator for the financial industry, fearing that it will pre-empt their power. The risk regulator will have broad powers to oversee organizations that could cause instability in the financial markets if they fail. Link
Washington Post: U.S. forced bank board to carry out Merrill deal (April 25, 2009)
Federal Reserve Chairman Ben S. Bernanke and former Treasury secretary Henry M. Paulson Jr. threatened to remove the management and board of Bank of America if it backed out of its deal to acquire ailing investment house Merrill Lynch late last year, according to ˙documents released yesterday by New York Attorney General Andrew M. Cuomo. Link
MarketWatch: Colombia to ask for $10.4 billion credit line from IMF (April 21, 2009)
Colombia has announced that it will ask for $10.4 billion from the International Monetary Fund under its new flexible credit line, becoming the third country after Mexico and Poland to seek access to the facility. Link
Washington Post: IMF to play bigger role in global crisis (April 20, 2009) IMF is intended to play bigger role in the global crisis prevention. "The IMF would grant fresh powers to the likes of China, India and Brazil. It would have vastly expanded authority to act as a global banker to governments rich and poor. And with more flexibility to effectively print its own money, it would have the ability to inject liquidity into global markets in a way once limited to major central banks, including the U.S. Federal Reserve." Link
FT: U.S. to put conditions on TARP repayment (April 20, 2009) Strong banks will be allowed to repay bail-out funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest, a senior administration official has told the Financial Times. “Our general objective is going to be what is good for the system,” the senior official said. “We want the system to have enough capital.” Link
The Guardian: Russia's economy to contract 7% in 1 quarter (April 16, 2009) Russian officials painted a fairly glum picture of Russia's oil-dominated economy, saying the economy could contract more than 7 percent in the first quarter of this year, while consumption is falling and the difficult times could last for the next three years. In an early indication of a significant downturn, Russia's statistics servicereported a 13.7 percent industrial output slump in March in year-on-year terms, the second biggest decline since 2002. Link
GLG: Tough times for print magazines (April 16, 2009) Print magazines suffer from many of the same woes as the print newspaper, with migration of readers and ad dollars to the Internet cutting into the franchises of many old-line titles. Unlike the print daily newspaper, however, the magazine industry benefits from a creative ferment that actually brings new titles into the market as fast as old ones exit. While the overall print magazine˙sector is shrinking in size, it doesn't look˙quite as disastrous as˙newsprint from the perspective of paper companies such as AbitibiBowater, Catalyst and Kruger that are exposed both to the magazine and the newspaper market. Link
Mo Sacirbey: Inviting the Public to the Scavengers' Ball (April 10, 2009) Bussines Week: Jump-starting securitization (April 9, 2009) In March the Federal Reserve kicked off a $1˙trillion campaign to resuscitate the securitization, or structured-finance, markets. This is where Wall Street firms pool and repackage all manner of cash-flow-producing financial assets-from mortgages to credit cards-into securities, which are then sold to investors. During the boom, Wall Street stretched to dangerous extremes the system of bundling mortgages and other loans into bonds for investors. The securities are still blowing up and damaging the economy. Link ˙ ˙˙
Mo Sacirbey:
The Resurgence of Gasoline,
Like Napoleon at Waterloo? (April 6, 2009) Wall Street Journal: China's New International Assertiveness Pays Off at G-20 (April 4, 2009)
China's assertive stance in the run-up to the Group of 20 nations summit has paid off. In the two weeks before Thursday's G20 meeting, Beijing called for developing nations to have a bigger say in world financial institutions, for the International Monetary Fund to step up its surveillance of advanced economies, and for reform of the global financial system. The forthright expression of its views - in essays from the central bank governor, a press briefing and an opinion piece by a vice-premier - was unusual. With other countries in the BRIC group - Brazil, Russia, India and China - Beijing has used its assertiveness to shape the G20 agenda, helping BRIC achieve many of its goals. Link
Mo Sacirbey: G-20 Summit Successes & Obfuscations (April 3, 2009)
Mo Sacirbey: G-20 Myths & Truths (April 1, 2009)
While the current economic downturn is relatively global, it is not uniform nor linear in its effect. China is not technically even in recession. (The GDP purportedly continues to grow at 5%). However, the economy at the Chinese coast continues to experience a rather positive growth at 10% or even better. On the other hand, inland areas in China are experiencing no positive growth or worse, all with threatening social and political upheaval. Developing states, such as India or Turkey, and many who will not be represented at the G-20, are most at risk. Read more
Forbes: Ann Arbor News to publish its last edition in July (March 30, 2009)
The Ann Arbor News announced it will publish its last edition in July and replace it with an online product. The news comes as three other newspapers owned by the Newhouse family's Advance Publications - The Flint Journal, The Saginaw News and The Bay City Times - announced they were cutting print publication to three days a week starting June 1. Advance owns eight daily newspapers in Michigan. Link
Freep.com: Upheaval jolts newspapers (March 30, 2009) Newspaper advertising, which accounts for 70% to 80% of industry revenue, dropped into free fall over the past several months, mostly because of the economy but also because of advertisers moving away from print into other media. Rick Edmonds, an industry analyst with the nonprofit Poynter Institute in St. Petersburg, Fla., cautioned against expecting an early turnaround for the industry even if the economy begins to lift out of the worst downturn since the Great Depression. "The immediate news is mostly all bad," he said. Link
Mo Sacirbey:
A Return to Leverage? (March 25, 2009)
Mo Sacirbey:
EU Haves, EU Have Nots & EU Nots (March 24, 2009)
The Canadian Press: Pelosi seeks leeway in newspaper mergers (March 22, 2009) In an effort to help struggling newspapers stay in business, Speaker of the U.S. House of Representatives Nancy Pelosi is asking the Justice Department to broaden its view of media competition when reviewing any merger proposals. Pelosi sent a letter to the Justice Department, saying any antitrust concerns that arise from proposed mergers between newspapers should take into account online news sources and nearby daily and weekly papers "so that the conclusions reached reflect current market realities." Hearst Corp., publisher of Pelosi's hometown paper, the San Francisco Chronicle, has warned it may have to close the paper if expenses are not reduced quickly or a buyer doesn't step forward. The Chronicle lost more than $50 million in 2008. Link
Global Digital Media Revenues Grow 20% in 2008 (March 22, 2009) The world's top 27 digital media firms increased their earnings to $74 billion in 2008, up 20 percent over 2007 totals of $61.5 billion, according to market intelligence firm Strategy Analytics. Among the top five digital media companies, Apple's iTunes unit grew 32.7 percent in 2008, while web services giant Yahoo grew only 3.4 percent last year. Strategy Analytics adds that companies focusing on premium media downloads like music and video are faring better in the current economic downturn than rivals focusing on online advertising. Link
Bloomberg.com: Venezuelan Bolivar Tumbles (March 19, 2009) ˙ Venezuela’s bolivar plunged the most this year as speculation mounted that the government will devalue the currency after a tumble in oil exports. The bolivar declined 5.3 percent to 6.30 per dollar in the unregulated market, from 5.97 yesterday, traders said. The government pegs the currency at an official exchange rate of 2.15 per dollar under restrictions imposed by President Hugo Chavez in 2003. Venezuelans turn to the unregulated market when they can’t get dollars at the official rate. “Rumors the government will devalue are making people nervous, leading them to buy dollars to protect the value of their money,” said Nelson Corrie, head trader at Caracas-based brokerage Interacciones Mercado de Capitales. Link
Mo Sacirbey: G-20 Coordination, Not? (March 15, 2009) Mo Sacirbey:
Chinese Yuan v. US Dollar (March 12, 2009) Currency Wars Part X
International Herlad Tribune: Two visions to clean up world finance (March 11, 2009) When the leaders of 20 nations met in Washington in November to face down a grave economic crisis that imperiled them all, the air was filled with promises of a new era of global regulation intended to match a new era of global˙risk. Nearly five months later, those risks look greater than ever. But it is a measure of the growing strains over how to manage the global contagion - for which much of the world primarily blames the United States - that the world's major and emerging economic powers cannot agree on whether redoing a system created in 1944 should be Job˙1. Link
Reuters: Global bank heads to meet in London (March 11, 2009) Top executives of leading U.S., Japanese and European banks will meet in London this month to discuss regulation and other issues key to the future of the financial system, two industry sources said. The British government will host the meeting on March 24, after a gathering of Group of 20 (G20) finance ministers in London this weekend and ahead of a summit of G20 leaders there on April 2, according to the sources who declined to be identified because the meeting has not been made public. Link
The New York Times: Subprime Europe (March 10, 2009)
The 1931 collapse of the Austrian bank Creditanstalt provoked financial panic across Europe and almost single-handedly turned a bad downturn into the Great Depression. [...] After all, losses on subprime mortgages in the United States have already caused a Depression-like banking collapse. Well, believe it or not, Europe’s current crisis is scarier. For while losses on Eastern European debts may be only a small fraction of those on subprime mortgages, the continent’s problems are politically harder to solve, and their consequences may prove to be much worse. Much as in our subprime mess, Eastern Europe’s problems began with easy credit. From 2004 to 2008 Eastern Europe had its own bubble, fueled by the ready availability of international credit. In recent years countries like Bulgaria and Latvia borrowed annually the equivalent of more than 20 percent of their gross domestic product from abroad. By 2008, 13 countries that were once part of the Soviet empire had accumulated a collective debt to foreign banks or in foreign currencies of more than $1 trillion. Some of the money went into investment, much of it into consumption or real estate. Link
Mo Sacirbey: Housing Continues Slide (March 5, 2009) The new US housing data continues to define the US recession, well let's now call it depression. What is probably not yet understood and is difficult to quantify is how much this not only undermines bank performance and general economic data, but also is cripling consumer confidence, and everything from retirement accounts to spending capacity. VOX: The G20 and the Crisis (March 3, 2009)
One of the least unanticipated but potentially most momentous consequences of the Great Global Credit Crisis of 2008 is the coup staged by the Group of Twenty. The G20 has seized power from the G7/8 as the steering committee for the world economy. If you didn’t believe this before, just compare the attention garnered by the G20 summit last November with the muted response to the G7 finance ministers’ meeting in February in Rome. Link
Christian Science Monitor: Eastern Europe's fall puts Continent on edge (February 27, 2009) How quickly the European Union will or will not rally to help its most economically crippled new states in the East is becoming a major political test for the Continent. Crisis summits will be held this weekend in Brussels to confront the problem, which is escalating as Western banking capital flees the once red-hot economies of the former Soviet states. But the problems may quickly move West. “The future of Europe may be unfolding in the East,” intoned Le Monde this week. “Western Europe cannot let Eastern Europe fall apart.” Link
Bloomber.com: Obama Gambles (February 27, 2009) President Barack Obama is gambling he can dispel the cloud of uncertainty that has driven bank shares to a two-decade low by subjecting lenders to rigorous reviews and reviving the market for their toxic assets. Officials will begin so-called stress tests of about 20 of the nation’s largest banks tomorrow with the aim of ensuring they have sufficient capital to withstand the toughest of economic times. Institutions that cannot privately raise the added capital they need will get taxpayer money, regulators said yesterday. Link
Mo Sacirbey: European Leaders See "New" Global Financial System (February 23, 2009) healed); Link
Mo Sacirbey: European Banks Sliding & "New Europe" to Suffer Most (February 20, 2009)˙
European banks have been leading global markets into another down trend. The Euro currency has also˙spun into another slide. Purportedly troubled loans made in the "New Europe," (former Communist run states now within or entering the EU), are the dominant cause. However, this both misplaces the responsibility and overlooks future consequences. Can this cause fissure within a "still in the process of uniting" Europe? ˙ "New Economies" Will Suffer Most from European Banking Crisis: Indeed, if the European banking crisis continues to worsen so will the prospects for those states on the continent who were playing economic development catch up with the more mature economies of Europe. Whether already members of the Eurozone, (as Slovakia), only EU, (as Poland), or just aspiring, (as Croatia),˙they are all impacted more dramatically by the crisis. Local banks have been bought up by larger Western European counterparts and in theory these newer economies have relatively limited˙sources of domestic capital. Further, the requirements of these economies are still more˙development capital heavy as compared˙to the more mature EU˙states. This could˙also cause a crack in the EU between the haves and have nots, or perhaps more accurately in this recession: the have nots and the more have nots! As World Bank President Robert Zoellick recently stated in Financial Times interview: "It's 20 years after Europe was united in 1989 - what a tragedy if you allow Europe to split again." (See article link in January 19, 2009 post in˙Global Economic Crisis Blog, below). ˙
Bad Loans or Poor Monetary Policy? The reasons for rising troubled loans in the still more developing economies of Europe are more than one. Also, the troubles experienced in˙Poland or Hungary are not that different from other growing economies of such established EU and Eurozone members as Spain.˙Developing economies are always more prone in a recession, as are their banks and lenders. ˙
Non-Eurozone members though may be˙even more vulnerable:˙Many˙domestic and regional banks have been swallowed up recently by international behemoths and are˙potentially less responsive to domestic capital and loan˙demands. (Lending consolidation, presumably,˙starts at the periphery of a regional or international bank's territory).˙More critical, predatory action on many of these still smaller, independent currencies is necessitating a relatively defensive, high interest rate monetary policy rather than "stimulative" as seen in˙US, Japan or UK for example.˙And, even if these peripheral Eurozone economies are not directly tied to the Euro, they are˙as or more affected by the ECB, (European Central Bank), relatively tight monetary policy. Tight monetary policy is more adverse to developing economies than those that are more mature. The ECB may not be sensitive enough to the more in need of development economies within the Eurozone and those on the periphery but nonetheless most directly affected by ECB monetary policy. (See our previous article: "Euro v. Euro" of February 9, 2009 that foretell Mr. Zoellick's concern for a new European fissure).˙˙˙
International Herald Tribune: Europe falling apart? (February 19, 2009) The European Union should do more to support economies in central and eastern Europe, leading a coordinated global effort to help the region, World Bank President Robert Zoellick was quoted as˙saying. "It's got to have support from the European governments," he said in an interview published in Thursday's edition of the Financial Times. "It's 20 years after Europe was united in 1989 - what a tragedy if you allow Europe to split˙again." The euro fell to its lowest level in three months on Wednesday and shares in Europe's banks have been hurt further in recent days, undermined by fears that contagion from a sharp economic slowdown in emerging Europe could spread˙westwards. Link
Los Angeles Times: Government pension agency braces for recession (February 18, 2009)
The deepening recession spells trouble for a little-known government corporation that insures the pensions of 44 million workers and retirees.
The Pension Benefit Guaranty Corp. already has an $11 billion deficit that seems sure to grow larger as Corporate America suffers through the worst economic crisis since the Great Depression.With companies reporting shortfalls in their pension funds, it's all but certain that the PBGC will be forced to take over the pension plans of a rising number of bankrupt businesses. Link
Mo Sacirbey: Is "Micro-lending" Alternative in US? (February 17, 2009)
Mo Sacirbey: Has Stimulus Proposal Forgotten Housing? (February 11, 2009)
This recession started with the collapse of housing. Some blamed the crisis on the bursting of the housing bubble. However, the substance of helping the homeowner and housing recover has largely lost its primacy, at least in the rhetoric of many Democrats,˙who were initially critical of the TARP's deficiency in this priority. Ironically,˙the Republicans have now adopted more homeowner aid as one of their presumed demands with respect to Obama's stimulus program. ˙ Alarming Housing Deteoration: Housing in the US has lost over $3.3 trillion. Home ownership is at the lowest level since 2001. The biggest, disproportionate drop took place during 2008, and this is despite that the home ownership affordability rate is approaching "pre-bubble" levels.˙ ˙
Can't Overcome Crisis Without Adequately Focusing, Prioritizing Housing: Well over a year earlier we warned that not only the housing crisis was emerging, but we alerted as to how critical this was for the US homeowner. (See below at beginning of this "Global Economic Crisis" blog). Housing is underpinning the˙wealth, retirement security, the confidence, the credit rating and access to everything from health insurance to jobs of most Americans. ˙
In his first news conference, President Obama obviously focused most of his attention and answers on the economic crisis including the proposed stimulus program. He also seemed to project housing as a consequence rather than the catalyst of the crisis by outlining a road map that first focused on fixing the financial system and then such would facilitate the return of credit to housing. Unfortunately this may miss the point. Plunging housing values are the cause˙undermining˙wealth, confidence and financial institutions. Credit for mortgages was to be made available through the TARP program. That has not worked, at least as promoted last fall in the waning days of George W.'s presidency. Anyway, how will new credit for mortgages help American homeowners, Now 10% or more who are delinquent on mortgages and many others who are˙suffering due to falling employment and incomes. ˙
In one of those political ironies that may be expected, this one surprised at least me in its not only switching of roles and rhetoric, but also speed. Only a few months earlier Rush Limbaugh and most Republican stalwarts were urging to allow free market forces to take˙their course. In effect, let the "irresponsible" homeowners and mortgagors lose their homes if unable to keep up with their original mortgage obligation. However, now, Republicans are claiming that the "Democratic" stimulus proposal does not adequately assist homeowners. ˙ Remedy most Effective and Prompt by Curing Ailing Housing and Homeowners: On this point, I tend to believe that the Republicans are more right, (even if some might question the motive). This crisis started with US housing and will be most effectively and promptly resolved by allocating the greatest remedy to curing ailing homeowners and thus values.
Mo Sacirbey: Euro v. Euro, Currency Wars Part IX (February 9, 2009) Will recent ECB monetary policy, (failure to cut benchmark rates including last week),˙to combat recession˙squeeze old contradictions to surface and cause chasms to widen within Eurozone?˙˙ ˙
The Euro does not represent one economy, but a multiple. While the European Central Bank, (ECB),˙may˙direct a unified monetary policy, fiscal policy is managed by each individual national government of the member states. This was a contradiction recognized from the outset, and some believed that it would cause the undermining of the Euro and the dismantling of the Eurozone long ago. That has not occurred yet. Now, though, will the economic crisis bring the unity of the Eurozone into question again, especially as the ECB acts to satisfy those urging monetary conservatism versus those who believe that more aggressive˙policy as well as stimulus is appropriate. ˙ Inflation v. Growth: The more mature economies of the EU generally favor more conservative monetary policy, focusing more on controlling inflation rather than insuring economic growth. On the other hand, the economies, particularly those of the former communist and new entrants to the Eurozone generally favor more accommodative policies allowing them to promote faster growth and catch up with the more mature economies. This tension existed from the outset, but could be expected to become more delicate during an economic downturn. ˙
Mandate to Control Inflation: The ECB, unlike the US and most other central banks has only the official mandate to control inflation and nothing is incorporated regarding balancing such with economic growth. Of course, during the current economic recession, the tension has become exacerbated, (even within more mature economies for the first time in a long time facing significant economic stall and job losses that extend beyond even those more regularly high levels). This economic downturn is unprecedented during the life of the Euro and the ECB. The ECB has responded in the most cautious manner in terms of˙monetary policy. ˙ The Unexpected: While some newer Euro members may not be satisfied with the ECB's less accommodative policy,˙states such as Slovakia, Iceland, Hungary and others may be considering joining the Eurozone out of fear that their own currencies are subject to predatory activities and value erosion. (Slovakia has already˙adopted the Euro). Without the Euro, such economies could be compelled to even further press interest rates in order to defend smaller individual currencies. Other countries, such as Bosnia & Herzegovina, whose currency is linked to the Euro by treaty, the Dayton Accords, may not even be able to consider˙perhaps˙more appropriate alternatives.˙Ironically, it is the rush to the safe harbor of the Euro's critical mass that is keeping the Euro˙from˙experiencing a more dramatic rift.˙ ˙
Nonetheless, it is my opinion that as a consequence of its too˙restrictive monetary policy and particularly the recent failure(s) to lower official rates, the Euro˙will face unprecedented˙tensions:
- The Euro is losing ground most recently with respect to˙all major currencies˙because the˙monetary policy is viewed as being so restrictive as to have the Eurozone lag other major economies in terms of projected recovery: (Traditionally maintaining higher rates is viewed as positive for˙a currencies relative valuation, but here it is having opposite effect).˙ - The less mature economies of the Eurozone and those affected most severely by recession, such as Spain,˙can be expected to suffer most. - Too tight monetary policy could even˙result in stagflation as investors lose confidence in Eurozone economic growth, (the most critical element of relative currency valuation), the Euro deteriorates and˙global commodities become more relatively expensive within Eurozone triggering inflation, but without growth. - Restrictive monetary policy could directly conflict with stimulative fiscal policy. More borrowing˙by individual state governments to fuel stimulus through spending or tax policy could become more costly than perceived as necessary, due to the higher ECB interest rates. ˙ Verdict: Prior to the recent (in)action of the ECB, (its failure to lower the benchmark rate),˙I viewed the Euro as having an advantageous profile, from˙the rush to adopt it by˙more European states to˙the huge and diverse EU market. However, it is my opinion that˙ECB policy is relatively too restrictive and could longer term undermine political and social support for Euro as well as˙probably unnecessarily risk stagflation. The ECB could start to look out of step with other larger global economies˙and much of its own constituency. Remember the relatively short˙but nonetheless meaningful˙devaluations of the Euro a few years earlier post rejection of the new EU constitution by French and Dutch voters and the perceived disconnect. The risk, in my opinion is meaningful, although by no means certain to be realized as there are also other factors promoting the Euro's significance as reserve currency and safe harbor.˙˙
Mo Sacirbey: Greater Regulation for Rating Agencies (February 6, 2009) Moving˙Bond Insurance from˙Private Capital New SEC Chair Woman˙Mary Schapiro is projecting a new approach to ratings and rating agencies. She is˙cited, including in˙The Washington Post as˙deeming the current system no longer acceptable in effect: "a conflict of interest that must be addressed." ˙ Pot of Funds, (Presumably Regulated) to Pay for Ratings: Speaking during˙her confirmation hearing,˙Schapiro said a better system might be for financial firms to contribute to a pot of money that would be used to pay for ratings. This will effectively lead to probably a regulated fee scale as well as less dynamic standards. It may also change the profile of the rating analyst to one more reflecting a regulatory mindset, for good or bad. ˙
Setting Up New˙Municipal Finance Insurers:˙ Municipal and other public institutional insurers have witnessed a drying up of appetite for their bonds and increasing debt servicing costs as traditional private bond insurers have run aground on the financial crisis. Presumably this bad steering was due insurance of various types of mortgage securities. Regardless of cause, municipalities are convinced that they can be better helmsmen as corroborated by below article from: "The Bond Buyer." Link
Mo Sacirbey: Moderation in All, Except Economic Stimulus? (February 4, 2009) Moderation is a wise philosophy in almost all, except when it comes to stimulus programs, measures intended to put the economy back on track and fend off deflation. Too little is not only potentially not enough, but it can bring about its own risks. ˙ The US House of Representatives has adopted President Barack Obama's stimulus package almost entirely along partisan lines,(all Republicans voted against). While perhaps before there appeared to be a greater consensus, the debate has now shifted to how much stimulus and in what form to put into the US economy, from spending to a variety of tax breaks. ˙ ˙ Nonetheless, Republicans, (interestingly, Republican Governors are largely supportive of the Obama package to send Federal money to their states for a variety of spending programs), have rallied around the cry that the current package has too much spending and not enough tax cuts. Only a few still question the need for dramatic action and exclusive reliance on purely market forces, although some are arguing against "too much spending that American cannot afford." It is one thing too debate which are the deserving projects and which are purely pork with no benefit toward the presumed goal. It is potentially dangerous though to rely upon the assumption that purely market forces will rescue the economy, at least without an overwhelming "shock and awe" operation within the economic realm from the US Government. ˙ Stiglitz Warns of Half Loaves: With the debate now shaping as what is too much stimulus, Professor Joseph Stiglitz counseled a more robust package. He also advised that spending was more effective over tax cuts. Precedent is indicative of measures that lack urgency and decisiveness. ˙ Japan's Experience:˙The experience of Japan, from the early 1990's to the current is an example of how a lack of a decisive dose of stimulus could forestall recovery and slip into an extended period of deflation, (from which Japan has not recovered for over 15 years). Japan's monetary and fiscal policy was designed to be limited in duration and scope, in keeping with the notion of a measured approach. Unfortunately resorting to moderation in applying stimulus has made deflation more severe. ˙ Stagflation: The other risk of an inadequate stimulus effort is that enough money is thrown at the problem to spur inflation but not sufficient to stimulate growth. An open, dripping facet of stimulus leads to no decisive victory, and a prolonged period of heightened inflation and stunted growth. ˙ A Price to Pay in The Future: Undoubtedly there will be a price to pay in the future for today's stimulus by America's businesses and citizens. This could be in the form of higher taxes, potentially heightened inflation or more emphasis on savings and less future social benefit spending. Probably, it will be some combination of the above. Those that currently hold US dollar denominated assets, particularly debt, would be subject to higher inflation risk and possible asset value erosion. ˙ There would also be a price to pay though for deflation or stagflation and an extended period of economic malaise, and in terms of cost to the United States, businesses, labor and consumers, the consequences would be even greater. Low or negative growth translates into unemployment, low tax revenues and disproportionately high social program costs. By extension, most of the rest of the world would be in economic pain as well, but the US would risk greater damage in terms of competitive standing, from currency to productivity. ˙ Consensus for More Rather than Less: President-elect Barack Obama and most policy drivers within the Federal Reserve agree with the above assessment of relative risks, costs and benefits. Janet Yellen, the respected Chair of the San Francisco Federal Reserve, described the necessary fiscal and monetary policy as: "pulling out all the stops." The question that still remains is the allocation of priorities. While many Republican Congressional representatives are concerned about the size most are focusing on the possible waste in the current manifestation of the Obama stimulus proposal. Republicans have largely focused on "pork barrel" elements of the proposal. And, in an interesting twist, many have now become the champions of home ownership and mortgage assistance, initially disdained by the Rush Limbaughs but first adopted by then Republican Presidential campaign John McCain. ˙ ˙ Waste is Preferred to Stinginess: It is not politically palatable to state that it is better to waste rather than spend not enough. However, that is theory and perhaps the reality up to now. The initial $700billion TARP, (Troubled Asset Relief Program), has been already criticized, but more because banks are not employing newly secured rescue moneys to lend to businesses and consumers rather than the notion of outright waste. TARP is perceived more as a dud in its impact, at least up to now. A new Congressional oversight report is anticipated and with similar conclusions. (Citi Bank, among others, is most recently heralding new lending to consumers and business. JP Morgan has indicated $100 billion of new lending in 4Q 2008. This is much in response that despite unprecedented government infusions little was being done to "kick start" the US economy). ˙ GMAC Employs Funds: After the extended and at time excruciating debate on the rescue of US based automobile companies, it may turn out that it was some of the best money spent, at least in terms of stimulus impact. Unlike many other recipients of TARP funds in the initial term, GMAC has committed to immediately make new liquidity available for lending, particularly auto loans. This should help keep workers employed and the economy from tumbling further. The relative negative discourse on automakers, as compared to the Wall Street bailout, from today's perspective appears disproportional. (GMAC is also now trying to lure savings through advertising of attractive certificate of deposit rates and safety made possible by its new bank holding company status and government insurance to depositors). ˙ A similar debate is now raging as to whether a spending spur by the Government is better or not as compared to tax breaks for business or individuals. Regardless of considerations of social equity or politics, tax cuts are not as a rapid, perhaps efficient tool in spurring government spending. Undoubtedly tax breaks will be a part of any package. It may also be appropriate to focus on such tax changes that would also enhance savings, retirement accounts and even home ownership. In terms of immediate economic stimulus, spending has a more tangible and earlier effect as compared to tax breaks to businesses or even individuals. Swiftness is now a crucial consideration in slowing down the recessionary slide. ˙ How to Prepare for the Future? The length and depth of this recession is not yet evident, although it is possible that current efforts to shorten it and stave off deflation through deflation will produce their own challenges. With this in mind, the American investor should consider some of the following issues in opinion of many looking forward, beyond the immediate challenges: ˙˙Overweight investments in real assets, including home, (real estate) and stocks, (both of which best protect against inflation and today can be acquired at relatively low interest expense and prices); ˙˙Bonds and other debt instruments, (particularly US Treasuries), are safest for moment, but could lose significant value as inflation and volume of debt instruments is spurred up; ˙˙Commodities can be a good hedge against inflation; however they are subject to rapid fluctuations and may be difficult to hold for the average citizen; ˙˙International assets, particularly stocks and/or ETF, (indexed funds), may also be a positive element of any portfolio for diversity, to protect against US inflation, dollar devaluation, and to take advantage of higher growth rates in some regions once reflation takes hold and the economic recovery takes more global characteristics;˙˙ Build up savings, particularly retirement accounts, to take advantage of investment opportunities still coming as well as to rebuild retirement security. (Enlarging 401(k) and 403(b) tax deductions is an appropriate option for policy makers to consider as part of current stimulus package debate and particularly confidenc
Financial Times: The Game Changer (January 30, 2009) George Soros writes "in the past, whenever the financial system came close to a breakdown, the authorities rode to the rescue and prevented it from going over the brink. That is what I expected in 2008 but that is not what happened. On Monday September 15, Lehman Brothers, the US investment bank, was allowed to go into bankruptcy without proper preparation. It was a game-changing event with catastrophic consequences." Link
Mo Sacirbey: Gold Wars! Gold v. US Dollar, Gold v. All Paper Currencies (January 28, 2009) Currency Wars Part VIII ˙ Gold has again been rising against the US Dollar and almost all other paper currencies over the last few weeks. It could have been anticipated, for two fundamentally contradictory drivers though: Another round of fear is taking its turn primarily as a byproduct of today's economic turmoil. And while today's enemy is deflation, there is an expectation, down the road, of reflation, of˙stimulus programs that will generate inflationary consequences. ˙ Rational Fears? The economic turmoil today seems even more dramatic and dynamic than most analysts had anticipated this fall, (including myself who predicted the recession and severe consequences for consumers more than a year earlier: See early postings in this "Global Economic Crisis Blog."). President Bush used the term "depression" inadvertently perhaps. The depth and breadth has left investors with few options to keep their money safe. Further, the current stimulus efforts are not only likely to but are specifically designed to pump liquidity into the system and reflate the economy with clearly inflationary potential, (as or greater than experienced just a couple of years earlier, or perhaps, more ominously,˙the stagflation of the late 1970's and early 1980's). ˙ "Flight to Safety": Gold and to an extent "reserve currencies" seem to be favored by fear driven investors abandoning smaller currencies and economies. Gold though appears the most favored safe harbor for investors, perhaps harping to the neo-primal conflicts that made the metal representative of power, wealth and victory. Is this flight to gold rational even if the motivating fears are, and are there better alternatives? ˙ Troy, the Queen of Sheba, the Conquistadors to the Gladiators of Wall Street: Gold has limited utilitarian worth, beyond that which is perceived from the same perspective as that of the plunderers of Troy or the conquistadors ravaging the New World. Gold has been the motive of wars and the conquest of kings. Ownership of gold was perceived as seductive and associated with wisdom as well as power. However, how wise is it to invest in gold now? ˙ Owning gold over certain other currencies or paper assets may be the wiser option today. However, here are a few contradictions to consider: ˙Most "gold analysts" will advise that an investor own gold physically rather than through paper. According to them, there is much more paper gold than physical gold. An investor could find himself actually left with worthless paper or worse, perhaps even the victim of misrepresentations or fraudulent schemes. Most investors though do not have royal treasuries to store away safely their physical gold. ˙Gold was lagging oil and most other "real assets"˙in the last boom or reflationary period. If it was undervalued in relative terms then, now though gold appears to be overvalued. What are the dynamics in the future of these relationships? ˙Along with most other commodities, the commodity currencies have fallen sharply, (including those of large gold producers such as Australia, South Africa and Russia). Why is not the anticipated rising value of gold reflected in other commodities or gold producing commodity currencies? ˙ Alternatives to Gold & "Capital Preservation": When it comes to fear of an absolute global economic collapse, I'm not certain that gold will be an effective option for "capital preservation," (wealth retention), and especially "paper gold." That is a scenario where the rules of economics would be as unpredictable as that for˙our social, political and legal fabric. ˙ It can be a clever tactic to take advantage of others proclivity for gold as a consequence of their fear. However, such will only deliver profit to the extent that an investor is capable of getting into gold but also out before the bubble bursts. ˙ Anticipating the consequences of reflation and heightened inflation from current stimulus programs though is a rational exercise, in terms of long term investment strategy. And the stimulus programs currently under consideration and ultimately implementation will implicitly encourage new asset bubbles along with inflation. An investor though cannot afford to stay on the sidelines and just keep cash. Currencies, some more than others, could be subject to substantial depreciation due to inflation, that is once the current foe, deflation, is overcome. It may take anywhere from 6 months to up to 2 years for us to˙see this turnaround. Bubbles Forming & Bursting, Alternating Risks of Deflation & Inflation: Future as the Past! In the meantime, investors can consider rational and reasonable alternatives to counter future risks of heightened inflation. "Real Assets," including commodities are effective options. Commodities˙are more suited for the most well to do; however other real assets are both within reach and functional. Home ownership is still the most effective and efficient option, especially with interest rates so low. (Real assets as a class tend to appreciate when carrying costs, interest rates on mortgages and loans to purchase such are low. While homes continue to suffer value depreciation as a consequence of the current economic downturn and "bubble bursting," already low mortgage rates˙can be expected to reenergize home ownership and ultimately values). It may appear that the future is back in the past, with the same cycle of forming and bursting bubbles. Nonetheless, the˙optimum strategy˙is to be nimble in the face of alternating risks of economic collapse and deflation then followed by reflation and the potential of inflation.˙ Commercial real estate is another asset class that may be at risk now but could be appropriate in a reflationary environment. While retail and even office space may be riskier, logistics, (warehouse and distribution), and multifamily housing tends to be more stable. ˙ Finally, equities of appropriately selected enterprises, global and US, may be an oportune investment option in a reflationary environment. This can be a particularly good alternative for retirement accounts, which should be typically managed with a longer term horizon perspective. In fact, this may be a time for governments to review further means to encourage growth of retirement accounts, understanding such as a symbiotic vehicle to rebuild the economy and consumer confidence in the future. ˙ Verdict:Gold has been a relatively successful instrument in this round of economic turmoil, and it may continue to rise in conjunction with fear now and down the road with inflationary pressures from stimulus and reflation. Nonetheless, better options for capital preservation should be evaluated especially real assets reflecting more utilitarian worth. The future may look similar to the past, if we are fortunate. ˙˙˙˙˙˙˙
Mo Sacirbey: Is Davos & Elitism out of Style? (January 26, 2009)
Some of Obama Team & Corporate Leaders Cancel Davos Attendance ˙ Do not bet against Davos. Rather, the current economic environment makes it unfashionable, perhaps public relations risky, to be seen in the pursuit of elitist company. Perceived manifestations of elitism are viewed as impolite when so many political and corporate constituents are suffering. Recall the business efficiency of corporate jets being replaced with the egalitarian drive of auto company heads from Detroit to Washington, around 12 hours with bathroom stops. In similar fashion, Obama Team members want to send the message that they will not be distinguished from their popular constituency. Neither can corporate CEOs receiving government assistance afford even the perception of insensitivity. ˙ Davos has continued to grow rapidly from the couple of times when I was a guest speaker over a decade earlier. CNN and other media now make it also a more open, if not personally accessible event. And, while the setting is Alpine exotic it is also rather Swiss utilitarian. Certainly some go to Davos for the same reason that the Oscars are a big draw in Hollywood. However, with so many political, economic and cultural leaders gathered, it is an efficiency in meet and greet. ˙
Trend toward Regional World Economic Forum Settings in Tough Economic Times? Nonetheless, in these economic times, it is interesting to observe whether the Obama Team is setting a new trend and will corporate leaders perceive it as such and follow suit in Davos attendance and at the several regional World Economic Forum gatherings. The latter may become more significant relatively as regional gatherings also have a practical promotional and functional formula for the hosts.
Mo Sacirbey: Obama Team Signals Another Change for "TARP" (January 22, 2009)˙ The US Congress has expressed broad dissatisfaction regarding both the execution of and accountability for TARP's (Troubled Asset Relief Program), initial $350 billion commitment during the last few months of the Bush Administration. It appears that the Obama team agrees, if at least in word. ˙
It was a rather odd moment as President Obama's nominee for Treasury Secretary, Timothy Geithner,˙agreed during his Senate confirmation that there was a need to start fresh.˙Timothy Geithner˙was˙the NY Fed Chairman and presumably part of the Bush team during the initial phase of TARP executed under then Bush Treasury Secretary Hank Paulson. In fact, Geithner was presumably selected by Obama, at least in part, because he represented continuity from the Bush team. ˙ It is a new moment though now. My guess is that the Obama team will look to pursue a fresh start, if˙for no other reason than to establish the impression that the mistakes of the past, real and perceived, are behind us.˙Not a bad idea when the past˙appears filled with mistakes, u-turns and indecision. Confidence is now at a premium.˙Undoubtedly Hank Paulson and his team, fair or not, will˙carry most of the blame, and it will be increasingly publicized. It is˙an amazing change in fortune for Paulson who walked into the Administration from Goldman Sachs as a recognized financial guru. ˙ Now, it is about˙America's, the globe's economic future, and the world must have confidence in the new reign.˙˙˙˙
Mo Sacirbey: Closer to Nationalization (January 21, 2009)
A Bank in The UK &˙Rating Agency for Europe ˙
The British Government˙stepped in and effectively nationalized the Royal Bank of Scotland. Other banks on the continent are˙undergoing a similar fate. Bank equity prices tumbled in Europe, the US and around the globe for fear that nationalization was the shared fate. There is a˙tangible fear that banking will soon become government business. ˙ Trend toward Bank Nationalizations: Prime Minister Gordon Brown publicly blamed the management of the Royal Bank of Scotland for investing in mortgages in the United States, sub prime or otherwise, through its purchase of ABN Ambro Bank and assets. This was especially telling in that it could be interpreted and probably was intended as˙a˙directive˙for future investment to remain within national borders.˙ ˙
National or Regional v International Rating Institutions & Methodology: French President Nicholas Sarkozy has followed up on his persistent campaign for a new international regulatory order with the idea now of establishing a European debt rating agency. Is this an elaboration on the previous initiative, a˙negotiating ploy˙or a reversal˙in favor of a regional over an international approach?˙Standard & Poors, Moodys and the other global rating agencies are largely a product of the American financial system and are private institutions with albeit quasi regulatory influence. The new French aspiration could have the effect of establishing such institutions as government regulatory agencies and applying criteria that may have only national or regional weight. Ratings may no longer have international currency but only be valued within national/regional economies. National policy may become˙the relevant factor in the analysis as compared to objective financial and economic considerations. (See our posting of October 22, 2008 - "Rating Agencies at Center of Reformulated Global Financial Markets Order.") ˙ Potential for Chaos & Discord: Obviously the rules are changing. It would be wise though to have institutions and methodologies that will have broad international acceptance and relevance. Neither nationalization of banks or rating agencies should create chasms between regional economic systems as such could˙not only be the start of global economic regression but basis for˙potential˙turmoil, if not conflict.˙
Mo Sacirbey: British Pound v. Euro (January 17, 2009)
Currency Wars Part VII ˙
Since Prime Minister Margaret Thatcher's˙overhaul of the United Kingdom economy,˙Britain has been perceived as more capitalist˙progressive than Continental counterparts. London has developed into probably the second most significant money center and equity market after Wall Street. Yet the British Pound has˙suffered a substantial depreciation within the last 6 months or so including with respect to the Euro. Only a couple of weeks earlier, the Euro approached to par with the Euro. What are the causes and can this perceived trend be expected to continue? ˙
The UK economy certainly has been harder hit than most others. This could be expected to drive down a currency. However, by comparison, the US has˙suffered even a more dramatic economic collapse, but it has not had as negative effect on the US Dollar in relative terms.˙There are other factors at work beyond current economic health. ˙
While the Eurozone as a whole perhaps has more systemic economic obstacles to overcome, it also has the benefit of new EU members who have or are expected to˙adopt the Euro. Many of these states have more rapidly growing economies playing catch up for decades˙of communist malaise. Also,˙more members in the Eurozone will presumably translate into greater economic might. This current economic crisis has initiated an acceleration toward˙adoption of Euro, from Slovakia to Denmark, (motivated in part as a defensive engagement˙against predatory attacks on smaller national currencies - See: "Can Small Currencies Survive?", Currency Wars Part VI in previous Global Economic Crisis posting). ˙
Reserve Currency: However, The British Pound may continue to suffer another relative slide. While the Euro is increasing its status as a "reserve currency," the British Pound has continued to gradually diminish. It is clearly now behind the US Dollar, the Yen and the Euro. ˙ Both economic growth and reserve currency factors should continue˙to favor the appreciation of the Euro over the British Pound longer term. Also, because the ECB, (European Central Bank), is exclusively focused on inflation, (as compared to most other central banks which also have the mandate to take into consideration national economic growth when formulating monetary policy), it has exhibited an inclination to relatively higher interest rates within the Eurozone. While this could hurt a currency's value due to economic growth concerns, it could also be an advantage in terms of relative interest rates and the inter currency movements that such encourages: (generally higher rates attract fund flows across international economic boundaries).˙London's status as international money and exchange center will˙continue as an advantage for the British Pound; however the current global economic downturn˙relativizes this benefit.˙ ˙ Verdict: Euro appreciates gradually over British Pound.
Mo Sacirbey: Redirecting TARP Bailout, Again (January 15, 2009)˙
Employing the London School of Economics as the platform, US Fed Chairman Ben Bernanke tried to provide his vision of how to get the US and globe out of the current recession, (or perhaps "depression" as President Bush characterized it during his farewell news conference). In an extended formal presentation, Bernanke's words did not overtly reveal disagreement with˙Bush Administration policy up to now. Perhaps it is recognized that calibrating˙the proper approach is˙most difficult under the circumstances. Nonetheless, Bernanke did offer˙his own view of how the recovery˙must be achieved. While explicitly and implicitly embracing the "pull out all the stops"˙approach with its broad range of measures, from fiscal to monetary policy, Bernanke emphasized that the fundamental step needed now is restoring the financial system.˙ ˙
According to Bernanke, TARP moneys must be made available for Fed Government purchases of troubled assets from financial institutions. This was the originally stated rationale for TARP when sold to the US Congress. Somewhere along the way though this original methodology˙evolved,˙but to a level where apparently˙much of Congress and US citizens are not recognizing the original purpose or justifications, right or wrong.˙Those delegated to oversee the program on behalf of the US Congress have also been critical. Many US Congress persons feel misled.˙The public and many of their Congressional representatives feel that the only beneficiaries of TARP so far have been banks and other financial institutions, with little trickling down to businesses or the average citizen. ˙ It is not a situation that is optimum for Bernanke's call to action or one that fosters confidence in discretionary authority of Government officials. President Obama has requested that Congress˙approve the˙release of funds for the second installment, around $350 billion.˙The fact that there is resistance to this request of a˙highly popular Obama even before he has put his hands into the bailout˙funds is indicative of the divisiveness ahead. ˙
Obama has tried to set his own, perhaps clearer vision for TARP. It calls for also direct means of assistance to homeowners and˙consumers.˙That may also be the necessary˙measure to put financial institutions and the US economy back on track. Regardless, it appears that most of˙US voters and their Congressional representatives want to see direct benefits for them from TARP rather than believe in the˙trickle down˙that may not be evident for months, or perhaps years.˙ ˙ The way it is setting up, it will be political over economic selling points that will prevail this time around.˙˙˙˙˙
Mo Sacirbey: "This Depression Worse than Great Depression!" (January 13, 2009)˙
President George W. Bush held his last news conference in the White House.˙In a lengthy reflection upon his Presidency with frequent efforts at humor, (in my opinion mostly failed), endearment˙and rationalizations,˙he˙disclosed more regarding the advice that he received regarding the current recession and the breadth and depth of it even apparent several months earlier. He also, perhaps unwitngliy, revealed and employed a more severe characterization of the current economic crisis:
-- The warning: "that this depression could be worse than the Great Depression,"˙President Bush received from economic advisors in the second part of 2008 and reflected a concern that went beyond that associated with a˙more standard˙recessionary trend. Undoubtedly this prompted the Bush Administration's urgent rush toward the TARP program as well as sidelining traditional ideological hesitancy.
-- President Bush used the term "depression,"˙to describe the current recession.
Mo Sacirbey: Will Freeze Further Distance˙Europe˙from Russia (January 11, 2009)˙
People, particularly the economically and physically vulnerable, are suffering under the current deep freeze covering much of Europe. The Russian strategy in cutting off gas flowing to such people˙through pipelines crossing Ukraine has made it so much worse, and with apparent intent. Regardless of the legitimacy of Russia's contention with Ukraine for the non-payment of its purported bill, the Russia's political establishment has chosen the moment when it is the coldest and European citizen's are most exposed. By Russia's own admission, the dispute is no fault of any of the freezing Europeans or their states, from Bosnia & Herzegovina to Romania, and it in no way restores the lifeline for Russia to acknowledge that the fault from their perspective is purely that of the Ukranians. Nonetheless, the Russian strategy has been designed to make the purely innocent Europeans into˙levers in the dispute. And, this is not the first time. Rather, over the last decade or so, this lever has been˙habitually applied when much of Europe, particularly SE Europe, and its citizens are˙most vulnerable.˙ ˙
The Russian strategy may also have geo-political considerations: to˙impress upon much of its former satellites and the rest of Europe, as well as the Ukranians,˙the necessity to defer to Russian interests. Ukraine is gripped by its economic dependence on Russia. Much of the rest of Europe fears that Russian energy could be used as a political weapon, especially when now applied so callously for purportedly economic demand. ˙
However, the long term implications for Russia's strategic interests may be rather negative. Much of Europe, particularly former communist states are seeking to distance themselves further from dependence on Russia.˙Middle East sources, including the natural gas rich Qatar, are viewed as more reliable sources, partners in the energy business. LNG ports and storage are under greater consideration. Russia may find itself losing both its leverage and the revenues and economic, (interaction, trade, cooperation), that flows through those pipelines. ˙
The signing of an agreement between˙Russia and the European Union to monitor gas flow through the Ukraine may mollify the dispute and tame the inclination from dependence on Russian energy. However, the question continues to be asked by most average citizens and political officials within Europe, "is Russia a reliable energy supplier," and more broadly, strategic economic partner. Ukraine still remains in the balance, and not many doubt that the current Russian political leadership˙could reapply the precedent of using energy as lever.˙˙˙
MSNBC/CNN: U.S. Porn Industry seeks federal bailout as well (January 8, 2009) TMZ, MSNBC and CNN are reporting that Hustler's Larry Flynt and "Girls Gone Wild" creator Joe Francis are asking for a $5 billion federal bailout of adult entertainment because "the economy has made America's appetite for sex go limp." The Web site TMZ claims adult DVD sales are down 22 percent in a year, numbers which are sure to deflate expectations at this weekend's AVN Adult Entertainment Expo in Las Vegas. As they claim the "Americans can live without car, but not without sex industry." Link
Mo Sacirbey: "Pulling Out All the Stops" to Stave Off Deflation & Save the Economy (Jan. 6, 2009)
Janet Yellen, the respected San Francisco Fed Governor, uttered these words at American Economic Associations annual meeting in San Francisco. This is not the type of open language one usually hears from a US Fed Governor, and when uttered it should be heard as˙alarm bells heralding an unprecedented threat. The Fed though has already shot most or all of its "silver bullets" to stop deflation. So what more can be done? ˙ Not in My Carrer: "If ever, in my professional career,˙there was a time for active, discretionary stimulus, it is now," Yellen proposed. "The financial and economic firestorm we face today poses a serious risk of an extended period of stagflation - a very grim outcome," she added.˙ ˙ Stimulus rather than Tax Cuts Preferred: Yellen suggested that the International Monetary Fund probably was more on the right path than those more focused on and proposing tax cuts. Yellen elaborated that "spending on goods and services with higher rather than lower social value." Yellen cautioned though that if long term interest rates rise due to a general view that˙government spending is not temporary, then this could also "undercut(ing), conceivably overwhelm(ing), the short term stimulus."˙ ˙ Too Much Stimulus Better than Too Little, Which Could Risk Stagflation: The expectation is now that we will have an almost Trillion Dollar Stimulus Package by the incoming Obama Administration. The normally cautious Fed Governors are encouraging such rather than the normal strong caution despite some concerns regarding longer term inflation and interest rates. A "moderate" stimulus might not be˙adequate to beat deflation but just enough to push the US economy into "stagflation."˙
Mo Sacirbey: GMAC Puts New Money To Loans Immediately (January 2, 2009)
Auto Loans may be the Bridgehead of US Reflation ˙
GMAC, (General Motors Acceptance Corp), only last week qualified for TARP, (Troubled Asset Relief Program), cash infusions. It was a complex process intertwined with such considerations as the broader auto bailout program, renegotiating with bondholders and being reborn as a bank holding company. Now, having secured access to new money, up to $6 billion, GMAC˙has˙indicated that it will˙immediately put such liquidity into new loans. In conjunction it has stated that it also intends to lower the credit requirement for new˙purchasers. ˙
Banks˙& Armadillos: Unlike˙most banks that have absorbed TARP money to bolster balance sheets, fend off predators or make acquisitions, GMAC is one of the first to step out front with new lending, presumably the original objective of TARP when Congress adopted it now three months earlier.˙ Other beneficiaries of TARP have been slow, reluctant or totally insensitive to making access to new funds available to consumers or business suffocating due to liquidity crisis. The difference may be that GMAC has always had as a primary goal the˙advancement of product sales.˙Also, unlike most other financial institutions, GMAC is not exposed to or perhaps does not have reason to fear˙attack from˙financial markets predatory activity that has seen most banks become armadillos. ˙
More importantly, this may be the first tangible indication of reflation directly linked to˙TARP and˙anticipated stimulus programs. Deflation still remains the only enemy to˙economic resurrection that counts.˙Once under way, though,˙I would expect that relfation will snowball and bring about its own side effects, including˙real asset value appreciation and inflation.˙
Mo Sacirbey: Can Small Currencies Survive? (December 30, 2008)
Currency Wars Part VI ˙ The Global economic crisis has put many smaller economy currencies on the brink of extinction. A few, like the Icelandic Krona, is suffering from self inflicted wounds. Others, including the Danish Krona have˙sound˙fundamentals underpinning them, but seem to be under attack and susceptible purely on the basis of the limited size of Denmark and its economy. ˙ ˙ Size Does Matter: At least when it applies to currencies, size does matter. The smaller economies, more accurately their currencies, are under immense pressure. Some may be exposed due to fundamental weaknesses of varying degrees. However, others are suffering, or more accurately the target of predatory assaults for no other reason than size. The "jungle" methodology has now more explicitly revealed itself in the currency markets. ˙ ˙
Rush to the Euro? While currencies in Latin America, Asia and Africa may have few options in defending themselves, (beyond traditional mechanisms or linking to bigger, stronger currencies such as the US Dollar), many of the EU states who resisted joining the Euro Zone are reconsidering their position. From Poland, Hungary to Denmark, the Euro has gained new popularity among the public as well as government officials. ˙ Beyond Economic Implications:˙ This could also have further global implications by˙advancing the˙perceived desirability of the Euro versus other larger economy or "reserve" currencies. (The British Pound has already reached historical lows versus the Euro, although the cause is not necessarily clear). The dramatic drop of some other larger currencies, such as the Russian Rubble, could have political implications beyond the economic. ˙
The momentum is clearly against the smaller currencies and in favor of the "reserve" currencies, particularly the Euro, Yen and the US Dollar. To what extent this is a˙prolonged trend or one largely driven by immediate predatory behaviour remains yet to be fully revealed. Nonetheless, as more smaller economies suffer currency pressures and opt for linking or switching to reserve currencies, such as the Euro, this will expose those that remain˙independent˙to even further predatory assault.
Mo Scirbey: All About the "Crack Spread" (December 26, 2008) Beyond the Global Economic Slowdown: Undoubtedly the current global economic slowdown is the driving force compelling energy prices to retreat. However, is this the only factor of substance, especially in view that prices have dropped from almost $150 to under $40, (a˙fall of around˙75%),˙in merely˙half a year? How is it possible that oil prices were still rising, and sharply, in the first half of 2008 even as the US was already leading the globe into a recession, (now confirmed to have started in December of 2007)? ˙ There was much talk of energy shortages in the future˙presumably rationalizing the 2008 summer's unprecedented prices. As the energy prices surged geometrically, there in fact had been no˙current shortages. In hindsight, the quick rise and˙even faster tumble are indicative of speculative, even manipulation driven factors. By the summer of 2008, liquidity had begun to˙significantly dry-up; however the stampede˙pushing energy prices up was still being driven by traders and speculators engineering prices reflective of˙monetary objectives rather than supply and demand considerations. ˙
Predatory Capitalism: Traders˙presumably exploit market imperfections. However, increasingly it appears that some may have been˙creating, exaggerating the perceived market conditions which would wildly swing prices and produce huge financial profits. Although there probably was no explicit arrangement, speculators have potentially replaced OPEC as the most effective cartel dictating prices. Perhaps as speculation, manipulation of˙energy prices dictated prices up in the fist half of 2008, this now seems to be pressing prices downward in the second half of 2008. (Indicative of manipulation was the price of crude on December 19, 2009, when the differential between January 2009 and February˙2009 delivery was˙around $10 per barrel or 25%. Economic and supply/demand rationale cannot explain this. Rather, it˙was openly described in industry media as a˙"squeeze" or consequence of˙financial driven manipulation). ˙
Paying the Price: Global consumers have already paid for˙high, probably manipulation driven prices˙when they surged up. The current global economic downturn has also been˙worsened by the surging and unwarranted energy costs of the first half of 2008. So, why should the consuming nations and˙public not˙now be exuberant in the falling prices of˙crude? ˙ Simply,˙very low prices now could extinguish much of the conservation and alternative energy programs that had been only recently instigated. If capitalism is to truly be effective, prices must be reflective of market conditions rather than speculative and manipulative driven terms. Wild swings generally are neither indicative of supply/demand conditions nor conducive to planning and development of alternatives or conservation. It had become too easy, for reasons of cultural bias and politics, to blame OPEC and oil producing states for both disruptions and high prices. This has allowed other factors and players to remain concealed and not confronted. However, the current anomalies and fluctuations have been born out of predatory capitalism in the financial and commodity markets in our own yard including the commodity trading platforms˙such as NYMEX and London. ˙
Future Price Trends: It is difficult to chart future energy price trends especially since much of what has just passed is not a reliable indicator of past or current market conditions. OPEC is not capable of dictating prices, but only influencing at most. (Oil producers were at least in part protected from price drops as long as the US Dollar also continued to rise, since crude is generally priced in the US Currency and most monetary reserves of oil producers, including sovereign funds, are denominated in the same. However, now the US Dollar has begun to retreat again, having experienced the single greatest drop in a two day period in mid-December[ See "Currency Wars" in previous postings I-VI]). ˙ Once the global economy begins to recover and current economic stimulus programs begin to reflate our financial markets, energy prices are likely to move upward. However, how much and how fast depends on many factors including: conservation and˙consumer habits, alternative energy sources and production costs. (New crude sources can cost from only a few dollars to possibly as much as $65 per barrel; however current reserves of US oil companies are valued at less than $10 when taking into consideration such company market valuations). ˙ The biggest consideration to future price trends may be addressing market disruptions, abuses and possible manipulation. If Bernie Maddoff ripped off $50 billion through a rudimentary Ponzi scheme then have we even yet to see revealed the billions appropriated through the manipulation of commodity and financial˙markets? The call for a new global financial regulatory order, methodology is only now in the talking phase. However, if realized, as is likely, it is also probable to address the potential for˙and abuse of commodity markets, including energy. ˙
Avoiding Alternating Surges in Inflation & Deflation, Recession and Rapid Expansion: Excluding the probability for significant speculative/manipulative factors, crude prices are probably bottoming out now. On the other hand, the potential for a resurgence of prices to pre-July 2008 levels cannot be rationalized by˙such logic. The often heralded˙energy shortfalls predicted for the mid-term only 6 months earlier˙can not be rationalized as the current global economic situation has˙put-off anticipated demand increases by at least˙5-10 years, by which time˙alternative energy, conservation and newly explored sources will be ready to add to supply. Certainly current economic conditions and energy prices could˙discourage such new sources, alternatives and energy. Further, energy producing and consuming nations could be subjected to political and social upheavals reflecting the dramatic price swings. ˙ Several factors could impact future energy costs.˙Infrastructure, power distribution,˙affects the utility of alternative energy˙and presumably will be impacted by President Obama's upcoming initiatives. There may also come a review and regulatory policies from the new US Administration that would impact upon speculation and/or manipulation.˙ A return to˙the wild fluctuations experienced over the last few years would be exhaustive to˙the global economy and˙consumers. If allowed, it would also prompt another plunge in global economic downturn that could signal˙supercharged alternating periods of˙recession and expansion, inflation and deflation.˙˙
OECD: World jobless total could rise by 25 million (December 22, 2008)
The number of people unemployed throughout the world could rise by up to 25 million by 2010 because of the global financial and economic crisis, the head of the OECD Angel Gurria said on Monday. "We're heading for a loss of between eight and 10 million jobs in the OECD area... and 20 to 25 million in the world as a whole between now and 2010," Gurria said on France's BFM radio. Gurria said that the construction sector would be especially badly hit because its activities had "stopped in a brutal way," affecting in particular countries such as Spain and Ireland. Link
Gustavo Coronel: Economic, Social and Political Crisis Hits Three Petrostates (Dec. 20, 2008) ˙ Iran, Russia and Venezuela are experiencing almost identical symptoms as a result of rapidly declining oil prices.˙ Inflation rate in Venezuela will reach almost 30% this year, food prices approaching a 40% increase. Iran has a 25% inflation with food and drink prices reaching 35% in September of this year. In Russia 2008 inflation will end at over 12%. Budget deficits for 2009 will be huge. The Wall Street Journal reports a $50 billion deficit for 2009 in Iran. The chaotic Venezuelan budget will have a gap of $20 billion at an average oil price of $60 per barrel. An even greater gap is faced by the Russian budget at current prices. The Russian ruble has lost 12% of its value during the recent months. All three countries ara thinking of a devaluation that could reach 30% in the Venezuelan case. Food shortages and increasing signs of poverty contrast with the $65 million airbus of Venezuelan President Chavez or the $15,000 Breguet watch of Svetlana Medvedeva, the wife of the Russian president, while in Iran the stock market is at a five year low and the government continues to spend billions of dollars in a nuclear program that will not bring food to Iranian tables.
The political impact of this economic and social crisis is also being felt in the three countries. In Venezuela President Chavez has lost much of his previous aura of invincibility, after losing much of his original following and the last two electoral events. In Iran the people are increasingly restless,˙ wanting˙ to know what Ahmadinejad has done with over˙ $200 billion of oil income. In Russia Vladimir Putin is facing the wrath and fears of millions who see the country, again, in danger of collapse since oil and gas account for over 80% of Russian export earnings.˙
The three petrostates seem to be drowning in a lake of unwanted oil and they have no other sources of income.
AP: Lukashenko asks the United States for $5 billion in financial help (December 19, 2008) Associated Press reported that Aleksandr Lukashenko, Belarus' authoritarian president, whom the United States has called "Europe's last dictator," is asking the U.S. for a $5 billion loan. But Alexander Lukashenko is telling Belarusian TV he isn't hopeful the cash-strapped ex-Soviet republic will get the money. Link
Mo Sacirbey: Fed Looks to Make Money "Cheaper" (December 17, 2008) It's All About Fighting Deflation ˙ Acknowledging that deflation is the predominant adversary of economic health, the FOMC, the "Fed" took some unprecedented steps to drive more liquidity into the US and global economic system. The most notable of the Fed's actions undertaken December 16, 2008: -- Fed would continue to buy mortgage and other asset backed˙securities. Fed would also purchase US Treasury bonds. Presumably this would not only create additional liquidity, but also enhance mortgages and other asset lending. -- The new Fed target˙rate was lowered from 0.75% to a range of 0 -˙0.25%. This is both˙beyond expectation in depth and the notion of a range. -- The Fed announced that˙it would maintain such rates for an extended period of time. This would presumably˙spur investors and others to buy˙real assets˙by decreasing the cost of holding such assets for a more extended period. This, along with the now ground level interest rates,˙could encourage investors,˙users and speculators to return to˙the market in search of attractive real asset buys with "cheap" longer term money as funding sources.˙ ˙
The consequences of the Fed's actions have yet to be realized, beyond the immediate rise in the US equity markets. The˙effect though should be another, probably most pronounced step, toward undercutting the current recession, potential depression, through an aggressive˙strategy of reflation. There may be also unwanted consequences, including a surge inflation in the longer term. However, that is battle for the future, and one that the US Fed would eagerly substitute for the current˙war˙with deflation. ˙ US Dollar Drops: Currency Wars Part V: Another consequence has been the drop of the US Dollar. This˙again may be not so an inadvertent˙result. Regardless, the US Dollar had been rising for the last several months as part of the "flight˙to safety," and the reversing of the "carry trade." The current drop still has the US Dollar around 15% above its lows versus the Euro. (See previous postings for further elaboration on˙"Currency Wars.") ˙ One more puzzling effect was a direct drop in petroleum prices even as the US Dollar was sinking. It went against the grain of most other real assets appreciating as a consequence of the Fed action.˙ ˙ Whether the Fed action ultimately reverses the current economic slide on Main Street remains to be seen. Nonetheless, the US equity and probably global equity markets have signalled the bottom. Still, do not expect now an extended rise in equity markets. As previously noted, history indicates that in the immediate turnaround equity markets may recover up to 1/3 of the drop, while˙in previous downturns it has taken more than 3 years for US equity markets to recover previous highs.
Wall Street Journal: Russia’s Industrial Production Output Plunges (December 16, 2008) Russian industrial output plunged in November, exceeding even the most pessimistic expectations and affirming that the country's economic fundamentals are too fragile to fend off fears of a recession. Industrial production, hit by liquidity shortages and falling export demand, slumped an unadjusted 8.7% from November 2007, data released Tuesday by the Federal Statistics Service, or Rosstat, showed. Most economists expected a decline in industrial output, but the consensus called for a 1.5%-2.0% slide. Link
Globe and Mail: China’s Economy Shrinks (December 12, 2008) China released data showing that its exports to other countries, the driver of its pell-mell growth for three decades, shrank last month for the first time in seven years. It was the most serious sign yet that the economic miracle that has rescued hundreds of millions of Chinese from poverty may be coming to an end. The figures, much worse than expected, showed how the deepening international economic crisis is confounding conventional wisdom around the globe. Just a few months ago, the world was marvelling at China's success, displayed in the glittering store window of the Olympic Games. As recently as July, China's exports grew by 26.9 per cent. The worst that most economists were predicting was a slowing of that frantic pace. Link
Mo Sacirbey: US Dollar v. Commodity Currencies; The "Other" Dollars (December 9, 2008) Currency Wars Part IV ˙ Commodity currencies, such as the Australian Dollar, Canadian Dollar and certain Latin American, African and Asian currencies, had generally˙appreciated sharply as everything from oil and metals to lumber and˙other building˙materials had been experiencing a similar price rise. This had also fueled wealth growth and inflation in many of such economies. However, now that commodities are dropping in price reflecting the global economic downturn, these currencies are dropping to pre-boom levels. This would perhaps not be such a bad thing except for new forms of dislocation that it could cause. ˙
The commodity currencies are likely to continue the slide until there is a new equilibrium reached in the underlying commodities. Perhaps that is close to current levels, although the global economy still is receding. The counter to the US, European, Japanese and most developed countries' downturn is the continued development of infrastructure in China and perhaps India. This should maintain close to current commodity and probably currency values of Australia and other similarly situated states providing raw materials to these two giants. CNNMoney: More Traditional Newspapers in Financial Trouble (December 8, 2008) The New York Times is collapsing financially. The Company has a $400 million debt payment due in five months, and management has not yet explained how it plans to meet this. The company is nearly out of cash, its operations are now burning cash, and its attempts to sell assets have, so far, been unsuccessful. Link Last month it was reported that other traditional newspaper fell into financial trouble as well and as a result decided to shut down their printed editions. The Christian Science Monitor, US News & World Report and the PC Magazine will become digital only next year - a course which is likely to be followed by the New York Times sometime in the future as well. Link
Mo Sacirbey: Unemployment Hits New Age Heights (December 5, 2008)˙ Late in reaction and now more costly consequences ˙ The US lost over 1million jobs in just the last 3 months, and almost 2 million in this year. Similarly, recent data has confirmed our previous assessment that the recession had been˙underway sine December 2007. It is also indicates that financial regulators and central bank officials probably were "behind the curve," slow to respond to the early indications of trouble. Perhaps there was some ideological conflict as well in spurring˙government action for˙stimulus to avert the recession. ˙ If government action had perhaps been more timely and in the necessary proportion initially, the depth, breadth and length of this recession could have been mitigated. Unfortunately now the implications will be more painful and expensive for the US, and by extension, for much of the rest of the world. ˙ Another Indication of Bottoming Out: Indicatively though while the economic news was again worse than expected, the US equity˙markets rallied after initially retreating. This is indicative that investors believe that the worst has been already incorporated in today's prices and that equity indexes have bottomed out.
CNNMoney: Oil falls under $44 a barrel as global economy falters (December 4, 2008) Oil prices fell to nearly a 4-year low Thursday, dipping below the $44-a-barrel mark, as concern about the economies of Europe and the United States continued to weigh on energy demand. U.S. crude for January delivery fell $3.12 to settle at $43.67 a barrel on the New York Mercantile Exchange. It was the lowest closing price since Jan. 5, 2005 when oil settled at $43.39 a barrel. Prices have fallen more than $100 a barrel from $147.27 in mid-July, as the worldwide economy has driven down demand for petroleum-based fuel. Link
Financial Times: EU members differ in how to approach the financial crisis (December 1, 2008) Poland has no intention of trying to spend its way out of the looming economic slowdown, Donald Tusk, the prime minister said. His comments align the country with Germany rather than the US and the UK as international divisions grow over how to handle the financial crisis. Angela Merkel, the German chancellor, criticised the US and other countries last week for making "cheap money" a central tool of their recovery strategies. Link
Bloomberg: Russia's Ruble Collapses (November 28, 2008)
Russia’s ruble headed for its biggest weekly decline against the euro in at least five years as the central bank let the currency depreciate and raised interest rates to halt an exodus of foreign capital. Russia is among a handful of countries raising interest rates after it drained $148 billion from the world’s third largest foreign-currency reserves since August to arrest a 16 percent currency slide against the dollar. BNP Paribas SA estimates that investors pulled $190 billion out of the country since August as oil prices fell below the $70-a-barrel average required to balance Russia’s budget in 2009. Link
Mo Sacirbey: Premium for Predictability (November 26, 2008) Financial Markets Fearing ˙Uncertainty & Searching for Political˙Leadership ˙ The US stock market appeared ready to collapse down to another plateau last Friday, (November 21), and then news`was leaked regarding President-elect Obama's choice for Treasury Secretary.˙The˙selection of Timoty Geitner was not unexpected, although˙the confirmation of this highly regarded choice was welcomed by most market participants and observers. The same can be said for Lawrence Summers and his introduction as economic advisor to Obama. Then why did the markets react so dramatically in turning toward the positive, as much as a 10% around in the US stock market? ˙ "Zig-Zag," Contradictory Impulses of Ideology vs. Pragmatism. The markets have been most weary˙ of uncertainty, and they have either lost confidence or already consider the current Bush team passe in handling the crisis through its coming depths. The zig-zag pattern left by the current Bush team in its dealing with the current crisis, perhaps only reflected the rapidly evolving problem, data and notions of potential solutions. Fair or unfair though, it has also helped create an impression of a team not in full control and stumbling over contradictory pragmatic and ideological considerations. ˙ "Predictability". The naming of the new Obama team ready to take charge from day one has helped mitigate the most critical psychological hurdle dragging down markets and undermining economic revival: uncertainty. Geitner, Summers and now Paul Volcker, (also added to Obama's team this week),˙are known commodities. There is no guarantee that they will be any more capable in ultimately addressing the problem, but the market now is placing a high premium on known personalities and particularly the predictability associated with their track records. ˙ Perhaps the one underlying commonality in the projected approach of the Obama team: a head first, perhaps even reckless dive into economic stimulus. Nonetheless, the general view is that reflation even with high risk of inflation is needed to overcome the already discernible tumble into deflation. Regardless, the focus now is as much on who will be in the driver's seat as it is on the course.
Mo Sacirbey: Deflation is the Enemy (November 19, 2007)˙ Wednesday's CPI, (Consumer Price Index), for the United States has confirmed deflation as the primary enemy now, and one that could send the US and global economies into depression, beyond the severe recession already underway. Similar data has been reported in Western Europe, United Kingdom, Japan with only China still officially showing moderate inflation, if the latter data can be trusted. ˙ Other macroeconomic data, from housing prices and construction to employment and wages is pointing in the same direction. Energy prices, which still fueled inflation concerns only a couple of months ago, are now˙withdrawing to almost 2 year lows. This data makes the concerns regarding heightened inflation of some central bankers as late as this September now look silly. Perhaps, but it is evident that governments and bankers have been slow to recognize the rapidly sweeping danger of deflation. ˙ Deflation is a greater enemy than inflation for an economy. It is like an engine seizing-up, and it cannot be restarted quickly. That is why trillions of dollars are being now hurled at the economy, as stimulus to keep it from seizing-up. If the problem had been recognized and addressed earlier, the remedy would have been both much cheaper and more certain to produce the desired result. It would have been much less painful for Main Street as well as Wall Street. Equity markets around the globe are today reflecting this high cost and˙uncertainty, and have now reached previous lows of˙mid October.˙
Mo Sacirbey: Do not Panic! (November 17, 2008) The economic news is going from bad to worse. Firms are cutting jobs and capital markets are again moving in negative direction. Recent˙action by the Bush/Paulson team seems to have lost its luster,˙even to point that fairly or unfairly the TARP,˙"bailout" program is viewed as rudderless.˙Other industries, such as automobile manufacturers are clamoring for their own rescue, with bankruptcy and significant consolidation as the only other apparent alternative. In meantime, for some observers President-Elect Obama˙is moving too slowly in identifying key members of his Cabinet, particularly Treasury Secretary. ˙ This is˙uncertainty adding to more˙chaos and uncertainty.˙It is a big adversary of both capital markets and stability. If anything, capital markets value predictability˙especially in times of high uncertainty.˙Even in the area of new regulations, including a heightened, reformulated international methodology,˙no one really has a grasp what˙will be˙the final outcome.˙The situation is bad, but it is not one that warrants panic. If you wanted to take evasive measures, it should have been starting a year˙earlier when we already warned in our writing for the European Courier that were were headed for a recession and with unprecedented consequences especially in terms of housing and the consumer. However,˙today is not the moment for panic, and this is why:˙ ˙ Financial˙Markets have Already Undergone Worst of Panic: The liquidity crunch of the previous couple of months is already receding.˙New liquidity is˙being introduced, from "bailout" equity to government supported˙commercial paper programs. Panic selling by others, from hedge funds to more traditional investors, is probably mostly over. Admittedly though the new funds flowing to the financial institution recipients have yet to make it out to Main Street, to consumers and businesses. ˙
Any New International Regulatory Methodology will take Time to Evolve, as revealed by Communique of Washington G-20 Global Economic Crisis Summit: The current crisis has already evidenced that rear view mirror inspired new regulations and panic application˙can be both counterproductive and lead to new problems. This crisis has been˙worsened and broadened by so called remedies meant to correct past abuses. Perhaps because of the transition˙in the White House, a new regulatory environment will take both time and will be probably considered under more thoughtful circumstances. ˙ The Capital Markets are Probably not Heading Lower, but currently Testing the Bottoms: US equity markets could fall by another 20% or so from˙the lowest levels reached a month ago, but it is my considered opinion that the current drop is testing that previous bottom from mid October. The equity markets˙are more likely to hold and partially rebound. "P/E," Price to Earnings ratios are indicative of a market that is now more rather than less favorable. Of course, P/E ratios are based on anticipated earnings, and the market could still be wrong, (and anticipating too high profits). However, with economic stimulus kicking in just now, the upside is more likely than the low range of estimates for earnings over the next couple of years. ˙ The Relative Stabilization of the $US Dollar and Euro Exchange Rate˙Indicates Stability: Panic,˙investors pouring in US Dollars and US Treasuries as a "safe haven", and the reversal of the "carry trade" are no longer the dominant trend. (See our˙previous posts in this Blog on˙Currency Wars for further elaboration). The Euro˙stopping its decline versus the $US Dollar indicates that forced selling of assets has largely been concluded.˙ ˙ Panic has˙worsened the current crisis. It could also keep investors from benefiting from what is more likely to be a period of reflation, rapidly growing liquidity probably similar to the˙2003-2005 period. Of course, we may be˙returning to the same crossroads˙that helped produce˙inflation and˙various asset˙bubbles, but in relative terms that is˙the day after tomorrow's risk and challenge.˙Currently, the risk and˙battle is against deflation.˙
Mo Sacirbey: Economic Crisis Summit, 19 Countries & EU Meet in Washington DC (Nov. 15, 2008) ˙ Sarkozy & Allies Bring Struggle for New Global Hierarchy to the Home of Current Champion? ˙ The Washington Summit on the Global Economic Crisis, scheduled a couple of weeks before the US elections, arrives in town while the main host is packing up to leave the White House. It appears like odd timing to really get anything concluded, but perhaps French President Sarkozy and EU Chief Barroso did have a goal in mind. ˙ President W. Bush could not offer an affirmative proposal, but he, (as well as his Treasury Secretary Paulson), has been suddenly consumed in defending American style capitalism. More accurately, it has been a mitigation of the role of his Administration and US responsibility for the crisis. By delivering the "Summit" on the doorsteps of the White House, the French President and the EU Chief were bringing the new battle to the home turf of the current economic champion adversary. And, perhaps they were preempting the response of the Obama Administration coming to power. ˙ Obama probably wants little to do with defending the economic policies of his predecessor's Administration. On the other hand, he will be reluctant to unilaterally cede US economic ascendancy, especially without having opportunity to be part of the bargain. Undoubtedly, Sarkozy and the EU will try to set the course, and Obama must deflect without seeming RESISTANT to CHANGE. ˙ Former Secretary of State Madeline Albright and former Iowa Congressman Jim Leach, (a Republican supporter of Obama), have been assigned to be Obama's Representatives to the Washington Summit starting November 15. It is noteworthy that both Madeline and Jim are better positioned to parry the pre-emptive assault diplomatically rather than engage in substantive negotiations. Perhaps Obama's team also sees something more at stake, global hierarchy, rather than simply a fine tuning of the global economic apparatus. ˙
Mo Sacirbey: Paulson Reverses Course on Troubled Asset Purchases (November 13, 2008)˙ A Needed Change in Course or Chaos in Leadership? ˙ On Wednesday, (November 12, 2008), US Treasury Secretary Paulson announced that US will not be buying up "troubled" or performing assets. This came a bit as a surprise, especially since only a couple of days earlier at the Securities Industry, (SIFMA), "summit," we were informed that asset purchases were still an integral and critical part of TARP, the "bailout. " even if not yet defined or initiated. ˙ Paulson instead has now: -- re-emphiseized continuing equity infusions into banks and other potentially eligible financial institutions; -- matching private equity to government infusions; -- new emphasis and flexibility on individual mortgage restructurings, (badly needed and overdue for some time); -- most interestingly, a return to the future: back to "securitization," in addressing the need to re-establish liquidity through asset backed debt, from auto loans and credit cards to student loans and mortgages. ˙ Unfortunately for Paulson and the market some of this redirection, probably appropriate, is now being redefined in terms of a loss of confidence in the diagnosis and the remedies offered. Chaos was discovered rather than tangible solutions. The stock market plummeted.
Mo Sacirbey: Financial Professionals˙"Summit" in New York on "Bailout" (November 11, 2008) Still defining TARP, the Bailout, and application to purchases, restructuring, reverse engineering of troubled and performing assets ˙ SIFMA, (Securities Industry and Financial Markets Association), the˙top association of financial industry professionals held˙its "summit" in New York to address questions regarding the recently announced "bailout" program or TARP, (Troubled Asset Relief Program). The conference was presided over by such luminaries as Senator Charles Schumer, Senate Committee on Banking, Housing and Urban Affairs, and Neel Kashkari, formerly of Goldman Sachs and currently Interim Assistant Secretary of the Treasury for Financial Stability and Assistant Secretary for International Economics and Development. I was among several hundred other participants, and will try to provide˙the reader with some insights. ˙ The conference actually had only limited insight to provide regarding the˙actual purchase of troubled assets. That is still very much in development, and yet to be functional. ˙ Rather the˙insight and initial focus˙is much more on the equity infusions into banks and˙an expanding list of other potential˙"financial institutions. " The reformulated plan for AIG had been just disclosed early that morning, and seemed to be restructured to fit into the predominant model now in application for almost a month. ˙ Other more noteworthy observations, at least for this initial review of the "Summit":˙ -- Senator Schumer referred to the bailout or TARP as the establishment of a "US sovereign fund;" -- Senator Schumer seemed predisposed toward a˙UK model of a super regulator, one for all; -- Senator Schumer recognized the pressure and probable need for a revitalized or˙perhaps new international regulatory role; -- The US Government, Treasury was making conscious decisions regarding which institutions should be allowed, even rushed to fail while others may be forced into˙mergers, (potentially at expense of current shareholders); -- Criteria for such decisions was vague and generally there was a lack of insight if not transparency into the process. ˙ Ironically, there was only limited discussion of international ramifications even from the top˙representatives of the globe's major financial players. ˙ The Asset˙Purchase program was still needed, along with potentially a˙"re-securitization" and reinsurance program. However mechanics were still untested, and in vague conceptual formulation. Similarly, the application˙with respect to and˙effect on individual homeowners was in development. ˙ Finally, more in scope and depth of government programs would be needed to turn the crisis and economy around. However, the general trend was toward reflation as the underlying remedy.˙˙
Mo Sacirbey: Credit Spreads Tighten (November 9, 2008) Over the last two weeks credit spreads have significantly tightened, the spread between US government debt and private debt, such as˙commercial paper and LIBOR rates. This is in large part due to various elements of the "bailout" package coming into effect, as identified in our article of˙October 28, 2008 in the Global Economic Crisis Blog: "Crucial Week for Financial Market Stability."˙ We correctly anticipated that the equity markets would then rise, as they did. ˙ However, why then are equity markets still so volatile, especially the sharp drop mid last week? ˙ The tightening of the credit spreads has signaled the bottoming out of the liquidity squeeze. Lending though˙is still not anywhere reflecting normal economic times.˙In fact, the economic data that came out mid last week was substantively worse than expected, from unemployment and consumer confidence to production and forward looking economic factors.˙While the expectation was for "bad," the data indicated "worse." The situation is especially gloomy and painful on Main Street and the retail level. ˙
Last weeks equity markets dip was reflecting this harsher economic reality that we frankly anticipated but apparently many investors did not. Nonetheless, we believe that the equity markets have bottomed out, although we certainly will need a long time to rebound to equity˙prices that persisted less than a year ago. (See our Article of November 2, 2008 on GEC Blog: "US Capital Market Rebound: Recovery to Previous Highs is 31/2 Years").
CFR: BRIC will suffer most (November 9, 2008) As the current financial storm spread from a U.S. housing market problem to a credit crisis to a full-blown economic hurricane, its impact on emerging markets was initially confined to share prices. Equity indices in the so-called BRIC nations (Brazil, Russia, India, and China), which experienced a heady run-up from 2005 through 2007, all suffered losses far greater than their counterparts in western Europe and the United States. Link
TheNews.pl: Financial help for Iceland (November 9, 2008) Poland has decided to join the consortium of states which will financially support Iceland, following the crisis in its banking system. The consortium will most likely consist of the International Monetary Fund, Scandinavian states, Great Britain, Holland and Poland. It is planned that the consortium will allot in total some 6 billion US dollars to help Iceland. Polish contribution is likely to amount to some 200 million US dollars. Link
Mo Sacirbey: Yen v. Euro (November 6, 2008) Currency Wars Part III The Yen has had one of the most conspicuous appreciations versus the Euro. In part, the Yen reflects the same logic as the US Dollar v. the Euro, but only more exaggerated. In particular, the reversing of the carry trade has been a spur for the rise of the Yen against almost all currencies. ˙
The rise of the Yen may seem to be a "contrarian" trend when viewed with respect to a Japanese economy that has been sluggish for years, decades. However,˙Japanese interest rates are˙already at˙almost zero. On the other hand, the consensus is that the European Central Bank will have to lower its own rates, (and today it finally˙has along with Bank of England). There has also been a longstanding view that the yen and some other developed economy Asian currencies have been kept undervalued artificially. Thus, the predominant trend during this crisis has been˙Yen rising with respect to the Euro. ˙
When, however,˙the capital markets have been calming or rising, (as was the case end of last and beginning of this week), the Euro makes˙a resurgence with respect the Yen and US Dollar. The "volatility index" is trending toward less tumultuous˙capital markets. There are even some signs of a re-surging "carry trade" and a return to more risk taking. The next couple of days or week could signal a critical turnaround in the rise of the Yen witnessed over the last couple of months, although the tide by no means is certain in direction.
AP: GM’s sales fall 45%, the lowest since World Was II (November 4, 2008)
According to the Associated Press, U.S. auto sales dropped to their lowest level in more than 17 years last month as consumers frightened by Wall Street turmoil stayed away from showrooms, prompting some auto company executives to predict dire consequences if the market doesn't improve. By the time all automakers reported their numbers Monday, sales had dropped 32 percent to just over 838,156 vehicles, the lowest monthly sales figure since January 1991, according to Autodata Corp. and Ward's AutoInfoBank. Link
Mo Sacirbey: PM Brown Sees Arab Gulf States as Key to Recovery (November 3, 2008) opposition they received in previous efforts to invest in some enterprises: remember "Port's deal." of recent crisis, and find some fault with how whole matter has been (mis)managed. Mo Sacirbey: U.S. Capital Market Rebound? (November 2, 2008) Recovery to Previous Highs on Average is 3+ years We˙anticipated early this week that the U.S. stock markets would˙rebound this week: (We expected US Treasury to start implementing its "bailout" operations, the U.S. Fed cut rates and end of October has historically signalled previous bottoms in down markets). However, do not expect any huge bounce back. There is another historical factor to consider: It takes on the average˙more than 3 years for a market to recover to its previous level after a bear downturn.
This˙time around though it˙could even be longer than the average. The motor of the U.S. economy, the U.S. consumer˙has never been hurt as badly, in view of housing, credit and inadequate savings. The U.S. economy will need more time perhaps than usual. On the other hand, the˙level of economic stimulation induced into this market is unprecedented. That may prove to be the right formula, for a quicker recovery and accelerated inflation.˙There is another historical factor to consider: While full rcapture of previous highs in U.S. stock markets may take more than 3 years from reaching low,1/3˙of˙value, equity prices, is regained within first couple of months˙after rebounding off botom.˙The last week already saw 15% of a rebound from lows reached in October.˙˙
Mo Sacirbey: Euro v. Dollar II (October 31, 2008) Currency Wars, Part II After the US Dollar had dropped precipitously, almost embarrassingly from its perceived perch and was predicted by some to continue the fall in Weimar style, it has had an amazing resurgence. The factors contributing to such recovery should not have been unexpected even if such may appear contradictory with respect to a global financial crisis having its epicenter in the United States: ˙ "Flight to safety:" Once the crisis spread beyond the US, capital sought the perceived greatest safety, US Treasury bills and bonds, (and perhaps some other very high quality US based securities). This flight of capital to the US also triggered a rapid rise in the $US. Soon, it became a vicious cycle. ˙ Repatriation of $US: While in good times US investors were seeking more speculative, higher yielding investments, now they are returning to US for safety, but also to meet "margin calls" and liquidity demands. ˙ Reversing the "Carry Trade": Investors borrowed money in low interest rate currencies, (such as $US and particularly Yen), and then invested in higher rate currencies. The global economic downturn has undercut markets and investments in high yielding currencies, (as commodity currencies), as well as prompting investors to seek safety, liquidity and to repatriate capital. ˙ Commodity Price Fluctuations: Economies substantively dependent on commodities, (such as Australia, South Africa, Canada and Chile), had seen their currencies significantly appreciate for a few years due to rising value of their exports. As their GDP's also rapidly increased, many also raised central bank rates to stem inflation. As the crisis now has reversed commodity prices, there has also been a reversal of carry trade and trend to repatriation. ˙ Interest Rate Differentials: Stronger currencies are a reflection of the underlying economies, but they also tend to be indicative of anticipated interest rate differentials. If inflationary, fundamental economic or other factors forecast a future rise in rates then so will relative currency values. ˙ "Trend is Your Friend," & Momentum Trading: The financial institutions and speculators go in a herd. This tends to reinforce any trend, due to rational investment techniques or possibly speculative driven spikes. ˙ European Central Bank, Behind the Curve?: All of the above may explain more why the US Dollar has risen with respect to developing country and/or commodity currencies; however what is the reason for the exaggerated move in the relationship between the Euro and the US Dollar? In part, there is a repatriation process on way from Europe to US, by many institutions and perhaps hedge funds that sought out what was perceived as a more favorable investment return potential in the Euro zone and related currencies. The flight to quality may also be prompting some to prefer $US over Euro's just because of the relative familiarity, volume and availability of US Treasuries. ˙˙˙˙ ˙ Second, though, there is the anticipation that the US economy, although first in recession, will be also the first back toward growth. This may also imply that while the European Central Bank still has more cuts in interest rates to come, the US Fed is at the bottom and will be the first to raise, even if in a year or two. In relative terms, US rates and perhaps economy may not be on way up; however Euro zone has still some way to go further down. Ironically, in this manner ECB not cutting rates may be actually weakening the Euro as it is seen being "behind the curve." It does not matter whether I actually think that this rationale is valid. It matters what the market is reflecting as a whole, and remember: "the trend is your friend!"
The World Bank: Central European economies will suffer from financial crisis (October 30, 2008)
According to the newest World Bank’s report, the economies of the Central European countries will suffer from the global financial crisis. Latvia’s and Estonia’s GDP will decrease, while the rest of the economies in the region will experience considerable slowdown. The economies of Poland, Bulgaria, Slovenia and the Czech Republic will be most resilient to the crisis. Link
Mo Sacirbey: Euro v. Dollar (October 30, 2008) Currency Wars, Part I A currency is a reflection of the relative strength of the economy that underlies it, but only in part. The rapid rise of the $US versus the Euro and especially "commodity" and most developing currencies involves complex interrelationships, but it also involves the unwinding of past correlations, trends and currency flows. Over the next few blog postings, "Currency Wars,"we will look at what are coming trends between some of the major global currencies and the driving forces. ˙ Some of the key factors that have recently driven the rise of the $US include: -˙˙˙˙ "flight to safety," -˙˙˙˙ "repatriation" of $US, -˙˙˙˙ reversing the "carry trade," -˙˙˙˙ drops in commodity prices, as such impacts commodity currencies, -˙˙˙˙ Interest rate differentials, -˙˙˙˙ "the trend is your friend," momentum trading, ˙ Still though we come back to the apparent paradox: how can it be that the United States was the epicenter of this economic crisis, but on the other hand the $US is outperforming the Euro? Well, it is not an absolute but relative set of relationships. Is the $US still sought out as the "world's reserve currency?"˙˙ Is it perhaps that the US economy is still perceived as the most resilient? Is the European Community Bank potentially seen as lagging in rate cuts and thus in relative terms prolonging the European wide economic downturn and the weakness of the Euro? ˙ First, it should be noted that the Japanese Yen has been the most appreciating currency versus the $US as well as the Euro. On the other hand, such diverse smaller economis from Hungary and Iceland to Pakistan and Serbia, have seen their currencies drop, some collapse and are awaiting the help of IMF or raising interest rates sharply. We will take a look at all, or most of the above factors, over the next few blog postings, and try to anticipate the causes if not actually anticipate relative currency movements. However one preliminary "guess-estimate:" The rise of the $US versus the Euro has also reached a plateau. We will explain why in next: "Currency Wars."
Mo Sacirbey: Crucial Week for Financial Market Stability? ˙(October 28, 2008) U.S. Treasury Programs Kick in this Week˙ & historically, the last week in October has signalled the bottom of previous U.S. capital market falls ˙ The liquidity squeeze is still evident in the capital and credit markets. LIBOR rates have curved downwards. Nonetheless,˙the spreads between US Treasury bonds/bills and "investment grade" paper persist at˙historic highs. Fear rather than ration holds sway with investors. Some global markets are still coming to terms with the notion of an extended recession, perhaps worse. Capital markets in Asia and Europe are at lows, in some cases not tested for decades. In the US,˙financial markets are anticipating several key steps this week. ˙ Rate Cuts?: The US Fed is entering a two day meeting that could result in further rate cuts. My best guess is that the Fed will ease, perhaps by as much 1/2%. This may not though have˙immediate pragmatic effect since credit markets are still largely frozen or just now thawing. Fed rate cuts could be made more psychologically and practically effective if˙such were also coordinated among the big central banks.˙The European Central Bank is seen as particularly lagging, even to point were the delay is actually having impact of sending Euro lower rather than the normally anticipated opposite effect. ˙ ˙˙
Fed˙Backstop of Commercial Paper: The previously announced US Fed programs are only now kicking into practice. One of the most critical undertakings is the US Government backstop, purchase of commercial paper, (a short term maturity debt instrument preferred by the most credit worthy institutions to finance shorter term needs/operations), and at levels significantly below LIBOR. ˙ Other programs,˙including infusion of direct equity into financial˙institutions, (such as banks), has yet to take practical effect.˙Lending from such banks to business and retail borrowers is still largely not evident. Some political and consumer groups are starting to complain that big banks are using˙these capital investments from the US to˙go on a purchase spree for smaller banks rather than to return to˙lending. However, it is just as likely that these acquisitions˙are part of the net yet fully seen encouragement toward consolidation. ˙ End of October: Trick or Treat!: Nonetheless, this week holds more promise than potential fear.˙The big negative unknown is how much investors, and "hedge funds" in particular, have to unwind. What had made such hedge funds so profitable in the past in market up-moves,˙leveraging of their position with geometric effect on results, currently makes them, (and perhaps the whole financial system),˙more vulnerable during this hyper de-leveraging period.˙However, besides the "bailout" programs gradually now coming into practical effect, this week˙is a˙historically significant˙signal. For today's equity markets spooked by fear, end of October and Halloween have signalled the bottom of previous downward cycles.
Mo Sacirbey: Beijing Hosts Economic Crisis Summit, French President Sarkozy takes lead in forging consensus (October 26, 2008) "Effective and comprehensive reform of the international monetary and financial systems." ˙
This weekend the Chinese Government has been host to 43 states discussing the current global economic crisis. The ASEM biannual gatherings between˙European and Asian states has taken on the more˙pronounced agenda of forging a common position for the already˙scheduled summit in Washington˙on November 15 of the most significant economic powers, (announced the previous week˙in meeting between French President Sarkozy, EU Chief Barroso and US President Bush). ˙
President Sarkozy is already trying to imprint his˙direction on the Washington summit next month.˙There are calls for new global economic rules. The draft statement includes a statement for "effective and comprehensive reform of the international monetary and financial systems." The French President had already identified the US based rating agencies, S7P, Moody's and Fitch for transformation. He has˙now emphasized that the IMF must take the lead, not only in rescuing the troubled national economies, but also˙setting the new global rules. The IMF is traditional led by a French national. "Leaders agreed that the IMF should play a critical role in assisting countries seriously affected by the crisis..."
The˙ASEM˙meeting could pass as˙mostly a rhetorical response to a crisis seen as largely having its source in the US. With the US undergoing an election between now and the scheduled November 15, 2008 summit in Washington, one might wonder why bother˙now.˙Neither John McCain or Barack Obama has committed to participate in the˙November 15 Washington meeting. Perhaps though President Sarkozy˙understands this to be˙a period of vacuum and even distrust for˙US economic leadership, and thus the opportunity for˙France to forge a new˙consensus and agenda in the past largely formulated under US leadership.˙"Europe would like Asia to support our efforts and would like to make sure that on the 15th of November, we can face the world together and say that the causes of this unprecedented crisis will never be able to happen again," President Sarkozy implored in his openning statement.˙
Mo Sacirbey: Where Do Oil Prices Go? (October 24, 2008)
The global economic crisis has also cut petroleum and energy prices over the last 3 months from a July high. Perhaps it took some time for prices and speculators to collide head-on with the reality of this hundred year economic downturn. However, once the crackup occurred, it was inevitable that oil would take the tumble despite the fact that it had appeared resistant to the economic downturn for almost a year as petroleum prices rose to their July high of just under $150 per barrel. The question now is how low crude prices will fall from current levels of around $70 per barrel?
Mo Sacirbey: Rating Agencies at Center of Reformulated Global Financial Markets Order? (Oct 22, 2008) ˙ Rating Agencies, the majors being Standard & Poor's, Moody's and Fitch, are at the edge of a new evolution, like it or not. President Nicolas Sarkozy of France has singled out the rating agencies by name as institutions that need to be reformed to fit into a new global financial regulatory order. The US Congress today was hearing testimony from rating agency executives. ˙ The rating agencies have been under attack for purportedly missing the call on mortgage backed securities as well as ratings on more recent complex derivative instruments. Some will focus on the blame game; however the key question is: how will the role of the rating agencies evolve? ˙ ˙ Rating Agencies Not Regulators: The rating agencies do not see themselves as regulators. Rather, they perceive their role as being an integral part of the process, providing both an independent analysis from the inner periphery as well as a rating that serves to standardize and commoditize. Yes, there is a delicate balancing act, (and one that I was intimately evaluating and bound to secure as legal counsel and then Senior VP for Structured Finance at Standard & Poor's in my previous life two decades earlier. In writing this and similar columns, I must preserve any considerations of legal confidentiality and fiduciary responsibility). However, it is evident that some would look to reformulate the role of rating agencies, both in terms of substance and scope. ˙ Reformulation of Essential Role: Decoupling from US Capitalism: Rating agencies are critical, from legal investment laws and capital requirements of institutional investors to market reputation of debt issuers and standardization, (commoditization), of structured finance and general obligation issuers, (corporate and government). This critical role cannot be eliminated. Therefore, many have targeted the rating agencies for fundamental transformation. President Sarkozy is trying to trend the evolution in two fundamental directions: 1.˙˙˙˙ Rating agencies more with responsibility of regulators; 2.˙˙˙˙ Rating agencies less US centric and more globally accountable, (the rating agencies were born and have evolved out of US financial markets and largely accountable to US regulators and US political forces). ˙ President Sarkozy's initiative would make rating agencies more as gatekeepers, bureaucratic or otherwise. It would dampen innovation, as perhaps only mandate of rating agency will be to protect, (and not afford any level of unforeseen risk). Finally, the proposal would at least begin the decoupling of the rating agencies from US regulators and American style capitalism. ˙ This will be an extended, but rather urgently addressed process. We will elaborate further on considerations and consequences.
Financial Times: Recession reaches Central and Eastern Europe (October 19, 2008) Latvia and Estonia are suffering the region’s first recessions in a decade, while growth in oil-rich Kazakhstan has slowed to a crawl. Even in Poland, where Donald Tusk, the prime minister, insists his country is “an island of stability”, the crisis has raised doubts about Warsaw’s euro entry plans. Economic growth is slowing sharply, with the IMF forecasting a decline in real gross domestic product growth for central and south-east Europe from 5 per cent this year to just 3.5 per cent in 2009. For Russia and the former Soviet Union, it predicts around 7 per cent for this year and 5.5 per cent for 2009. Link
The Moscow Times: Russia in no rush for crisis summit (October 20, 2008) The Kremlin signaled Sunday that it was in no hurry to confirm its participation in an international summit called by U.S. and EU leaders to tackle the global financial crisis over the weekend. The apparent reluctance to join other world leaders came as a senior government official said that unlike in the West, there was no crisis in Russia. Link
American Style Capitalism Goes Way of Dinosaur? (October 19, 2008) This last month has served as an asteroid strike upon the global economy. Individuals, corporations and local governments have lost trillions of dollars. Even whole countries are on the verge of bankruptcy. There is no speedy renewal. To the contrary, the question is whether American style capitalism is on the way to extinction? If not extinction than there appears to be a hurried evolution in the global economic genealogy. Read more
Mo Sacirbey: Capital Markets form Bottom, Economy to Head Further Down (October 16, 2008) ˙ It's good news, bad news! ˙ Capital Markets form Bottom: The last 5 days of trading have been rocked by wild swings in stock market indexes. Besides the fact that many investors with queasy stomachs having lost their lunch and savings, this has nonetheless produced a new trading range for US and global markets. And, most critically, it APPEARS to be signaling the new bottom. This process of "forming the bottom" is critical to bringing stability and investors back into the market. Nonetheless, investors probably remain for a roller coaster ride, as indicated by the volatility index. ˙ Capital Markets at Record Highs for Volatility Index: In the last 5 trading days, the US equity markets have been swinging by almost 20%, (when in more traditional times a 2% variance would be considered volatile). The Japanese and European equity markets have been swinging just or even more widely and wildly. Developing markets have tried to shield themselves by various control mechanisms, including temporary halts to trading. The "volatility index" has to go down significantly from current levels before financial markets start restoring order consistent with investment rather than speculative psychology. ˙ Economic Conditions Continue to Worsen: While capital markets may have PERHAPS hit the bottom range, they are leading indicators, and the US and most of global economy still has further to decline. Jobs continue to be lost and overall economic and production activity continues to fall. (Best guess: US jobless rate will grow to 7-9%, not even considering wage deterioration). The sharp drop in petroleum and other commodity prices is indicative of this slowdown, even if welcome from consumer perspective. The credit crunch, or lack of liquidity for business activity, remains the greatest obstacle. The US consumer and housing still has not hit bottom. (Note Presidential Candidate McCain's effort to resurrect housing and his campaign by diverging from most conservative Republicans, and proposing far reaching mortgage and housing relief). The downward spiral is too far along, (probably confronted too late by regulators and politicians), and will pull down the entire global economic environment.
Have Financial Markets Hit Bottom? (October 12, 2008) John McCain understands that his campaign is lost without a "relief" package aimed at the suffering homeowner, at least to match the perceived unprecedented "bailout" for Wall Street. During the October 7 debate with Democratic candidate Barack Obama, McCain reversed upon a position of most dogmatic Republican legislators and commentators, such as Rush Limbaugh, who had been contending that the mortgage crisis was due to fraud and non-creditworthy home mortgagors, (borrowers), and that free markets would ultimately wash out the bad lot and the good would survive and become stronger than ever. Read more
Wall Street Bailout: Welcome to the Jungle! (September 28, 2008) ˙ This "Guns 'N' Roses" blue collar song title should be hanging at the entrance to Main Street as well as Wall Street. While there is cannibalism at the top of the capital markets food chain, at the Main Street level there is the most pain. For certain, there will be some big winners along with the many losers, (and the bailout of Fannie Mae and Freddie Mac should have some trickle down to the middle class).˙As the˙US Congress now evaluates˙a more comprehensive bailout, (including a purchase of illiquid assets), of hard hit financial institutions; however it's Main Street that will be bleeding for some time. Read more ˙
Housing Market Collapse (July 24, 2008) ˙ ˙˙ ˙ Will it get worse before it gets better? Yes. [...] There is always the risk of buying someone else’s junk, but America has continuing, perhaps even unrivaled, value in this environment. Regardless of an Obama or McCain election, the U.S. is a country more likely to be in tune with global economic and political trends, perhaps recapturing much of the leadership role evaporated under the current Administration. Read more Energy Price Manipulation? (June 8, 2008) ˙ Will some devious speculator pay some Nigerian guerrilla group to blow up a pipeline just as oil begins to reverse? Will some terrorist organization become also a speculator with the ability to steer prices? Can a Latin American dictator steer the direction of prices as much by heated rhetoric as production cuts? Can a reasserted imperial Russia become the new political power broker applying energy to secure its agenda as well as setting price trends? Read more
U.S. Economy: Phoenix Rising or Wounded Duck Flying? (March 1, 2008) Economic expansion rises like a phoenix from the ashes of the preceding economic recession! Well, that’s been the pattern for more recent US economic booms. A US recession is underway. What is less clear though whether it will be followed by a bounce? Further, is this recession contaminative with respect to the global economy as a whole, as has been the previous pattern? Read more
U.S. Economy: Recesion or Transition? (January 27, 2008) ˙˙˙˙ ˙ Ultimately though, the US Dollar had to lose its exclusivity and standing, but how this would be reflected domestically, within the US remained to be determined. The US Federal Reserve was faced with contradictory alternatives. The option selected, wittingly or not, has placed the largest burden of transition upon the US wage earner. Read more
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