Two clear lessons emerge from the recovery in emerging stock markets over the past six months. First, when all around you are reading the last rites for a region or asset class, your antennae should start twitching. The best time to buy is when it feels hardest to do so.
Second, investors should ignore the short-term noise and back the long-term investment case. When I wrote about the abandonment of the emerging markets thesis six months ago I noted that "the IMF's latest World Economic Outlook forecasts growth in developing Asia of 7.7pc, with China a bit higher and India a bit lower. These are rates the rest of us can only dream of as we head into recession."
---
Emerging markets second wind blows in the face of short-term thinking
Today the market mood has swung through 180 degrees again and the hot money is pouring into the developing world and especially into those countries blessed with reserves of energy and metals.
Perhaps not surprisingly, given the uncanny ability of many investors to buy high and sell low, that gloom marked a turning point. My observation that emerging market investors had given up hope along with half the value of their portfolios came within days of the start of a new bull market for these riskiest of assets. The MSCI Emerging Markets index bottomed out on October 27, and since then it has risen by 50pc.
As investors have rediscovered their appetite for chasing returns in far-flung places, some markets have done considerably better than this. Brazil's Bovespa index is up more than 70pc since its October low, while Russia's RTS index has very nearly doubled since January. The oil price has risen by two thirds since Christmas Eve. The FTSE 100, by contrast, is up just 8pc since October. America's S&P 500 stands at the same level it did six months ago.
A couple of weeks ago, emerging market investment funds had one of their best ever weeks, taking $4bn (£2.6bn) of new money. Since November more than $10bn has flowed into these funds compared with almost $50bn heading the other way out of developed market funds. "De-coupling", a vogue investment term a year ago but dismissed as wishful thinking six months later, is back in fashion.
Three factors have driven this sentiment yo-yo. First, the Chinese government announced a massive 4,000bn yuan (£400bn) stimulus package in November, which fuelled hopes that other emerging market exporters could switch their attention from the cash-strapped West to the world's new consumer of last resort. Twenty years ago, two thirds of emerging market exports were to developed countries. Now about half goes to other emerging markets.
Second, investors started to believe that Asia's banks were less exposed to toxic assets and so less vulnerable to nationalisation. More broadly, the high savings rates and government surpluses in the region suggested that emerging markets were actually a safer long-term bet than developed markets.
Third, investors reacted to early signs that the worst of the global recession might be over by switching from safe but over-priced assets (such as government bonds) to risky but potentially rewarding investments like emerging market equities and commodities. The price of copper, a bellwether of global economic growth, rose by 40pc in the first three months of 2009.
Can the rise continue? Overall, emerging markets don't look over-priced, having fallen from an average of 18 times earnings a year ago to just eight in October and about 11 today. But generalising about emerging market investments is dangerous when the outlooks for the Baltic states and China, for example, are so different.
The valuations of the hottest markets are starting to ring alarm bells. China's Shanghai Composite index trades on a price/earnings multiple of 30 today, three times as much as it did six months ago. Brazil's multiple has jumped from seven to 19 and its government is intervening in the currency markets to prevent the real from appreciating too quickly against the dollar.
Proponents of the emerging markets story argue that companies operating in the developing world should trade at a premium because of the greater growth potential in these markets. Per capita incomes in these fast-growth parts of the world more than doubled between 2002 and 2007 compared with an increase of less than 40pc in developed markets. Economic growth in high single digits is expected in countries like China and India, compared with falls in the industrialised world this year and then a probably anaemic recovery as rising taxes and a long process of debt reduction holds back growth. Even so, today's valuations leave little wriggle room should growth disappoint in any way.
http://www.telegraph.co.uk/finance/comment/tom-stevenson/5320360/Emerging-markets-second-wind-blows-in-the-face-of-short-term-thinking.html
Thursday, May 14, 2009
Wednesday, May 13, 2009
Credit Card Write-Offs
Banks Brace for Credit Card Write-Offs
It used to be easy to guess how many Americans would have problems paying their credit card bills. Banks just looked at unemployment: Fewer jobs meant more trouble ahead.
The unemployment rate has long mirrored banks’ loss rates on card balances. But Eddie Ward, 32 and jobless, may be one reason that rule of thumb no longer holds. For many lenders, losses are now starting to outpace layoffs.
Mr. Ward, of Arkansas, lost his job at a retail warehouse in April and so far has managed to make minimum payments on his credit card debt, which he estimates at $15,000 to $20,000. Asked whether he thinks he will be able to pay off his balance, he said, “Not unless I win the lottery.”
In the meantime, he said, “I’m just doing what I can.”
Experts predict that millions of Americans will not be able to pay off their debts, leaving a gaping hole at ailing banks still trying to recover from the housing bust.
The bank stress test results, released Thursday, suggested that the nation’s 19 biggest banks could expect nearly $82.4 billion in credit card losses by the end of 2010 under what federal regulators called a “worst case” economic situation.
But if unemployment breaches 10 percent, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express and Capital One Financial, around 20 percent of the credit card balances are expected to go bad over this year and next, according to stress test results. At Bank of America, Citigroup and JPMorgan Chase, about 23 percent of card loans are expected to sour.
Even the government’s grim projections may vastly understate the size of the banks’ credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could reach $141.5 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business. It could top $186 billion for the entire credit card industry.
In the official stress test results, regulators published losses only on credit cards held on bank balance sheets. The $82.4 billion figure did not reflect another element in their analysis: tens of billions of dollars in losses tied to credit card loans that the banks packaged into bonds and held off their balance sheets. A portion of those losses, however, will be absorbed by outside investors.
What is more, the peak unemployment level that regulators used to drive their loss estimates is roughly what current rates are on track to reach. That suggests that if the unemployment rate gets much worse, credit card losses could be worse than what regulators projected.
And many economists expect the number of job losses to climb even higher. On Friday, the unemployment rate reached 8.9 percent as the economy shed 539,000 jobs. The unemployment rate and the rate of credit card charge-offs, or uncollectible balances, have been aligned because consumers who lose their jobs are more likely to miss payments.
Banks wrote off an average of 5.5 percent of their credit card balances in 2008, while the average unemployment rate was 5.8 percent. By the end of the year, the rate of credit-card write-offs was 6.3 percent; more recent data was not available.
Experts predict that the rate of credit-card losses could eventually surpass the jobless rate because of the compounding effects of the housing crisis and lackluster consumer confidence. Shortly after the technology bubble burst in 2001, credit card loss rates peaked at 7.9 percent.
“We will blow right through it,” said Inderpreet Batra, a consultant at Oliver Wyman, which specializes in financial services.
Unlike in prior recessions, cardholders who recently lost their jobs are unlikely to be able to extract equity from their homes or draw down retirement accounts to help pay off their debts.
That means borrowers who fall behind on their bills are more likely to default, leading to higher losses.
After writing off about $45 billion in bad debts during 2008, credit card lenders are bracing for the worst year in the industry’s history. Not only are losses spiraling, but also lawmakers are on the verge of passing a set of tough new consumer protections that could have a devastating effect on profits. This week, the Senate is expected to take up the Credit Cardholders Bill of Rights after the measure passed in the House with a strong bipartisan vote of 357 to 70.
Over the weekend, President Obama pressed lawmakers to approve the new rules, which would curb the ability of card issuers to raise interest rates retroactively on consumers and would require them to reduce hidden fees and penalties. He hopes to sign the legislation by Memorial Day.
For the banks, the economics of the credit card business are increasingly troubling. As the recession has dragged on, cardholders have sharply reduced spending. New customers with strong credit histories are increasingly hard to find.
And the most troubled borrowers are so deeply mired in debt that card companies are willing to strike deals to remove late fees and reduce card loan balances. The average American household is saddled with nearly $8,400 of credit card and other revolving debt, according to Moody’s Economy.com.
Every major credit card issuer has been approving fewer new applicants, reining in credit lines and canceling unused accounts. And Meredith A. Whitney, a prominent banking analyst, expects credit card lenders to cut the lines of credit they extend to borrowers by a total of $2.7 trillion through 2010. That is equivalent to a 57 percent reduction in the credit they made available two years ago at the height of the boom.
Within the card industry, all eyes are now focused on the sharp increase in unemployment. At Citigroup, executives noted that the company’s 10.2 percent credit card charge-off rate for the first quarter had broken its “historic correlation with unemployment” and showed no sign of letting up.
American Express, Bank of America and Capital One Financial showed first-quarter loss rates that hovered around 8.5 percent, roughly tracking the unemployment rate. All three said they expected higher losses in the coming months. Even Chase Card Services, which charged off just 7.7 percent of its card loans in the first quarter, expects its loss levels to surpass unemployment by the end of the year.
Card executives say there will little improvement until the economy stabilizes and consumers are more optimistic.
Cindy Schneider of Connecticut, 53, is a long way from being confident about her finances.
She is not making any money from her job as a real estate agent and cannot find work elsewhere. Her husband’s pay was just cut 10 percent. And she worries about how they will pay off a $5,000 balance on their credit card.
When her credit card company recently raised her interest rates, saying she was three days late with a payment, Ms. Schneider transferred the balance to another card with a lower rate.
“We are borrowing from Peter to pay Paul,” she said.
http://www.cnbc.com/id/30682607
Other Article:
I Would Not Own Bank Stocks: Meredith Whitney
Watch the video here:http://www.cnbc.com/id/30687770
Saturday, May 9, 2009
Deflation Is Not An Option
A great article by former Deputy Governor of BNM Tan Sri Lin See-Yan!
Deflation is not an option (But a must)
Hi from Xiamen University. Like most large Chinese cities, Xiamen is crowded and summer is not its best month. This week, the city hosts the Asia Financial Management Association international conference.
Away from the maddening crowd, the university campus offers respite to reflect on the frightening prospect of deflation, which can readily evolve from the impact of deep global recession and lower commodity prices.
I am often asked: “What’s so wrong about deflation?” Falling prices (as opposed to inflation) should be positive since it raises the purchasing power of the ringgit. That’s clearly a simplistic and very naive micro-view.
Some perspective is useful. The current US recession is past 17 months old (already the longest since World War II). It is expected to be still there in the next six months, the Fed Chairman’s “green shoots” notwithstanding. After all, GDP in the United States had contracted in excess of 6% per annum in each of the past two quarters, the worst 6-month performance in 50 years.
To be sure, as of now, although the outlook in the United States and China seems to be better, prospects in most of Euro-zone (including Britain and Germany) and in Japan have not brightened much.
The International Monetary Fund’s (IMF) update this week predicted a “long and severe recession” for Asia’s wealthier but export-oriented economies. Prospects for an imminent rebound are weak.
Realistically, latest data show a mixed picture – in the United States, conditions begin to look up on the back of tentative signs of firmer household spending – the beginning of some signs of stabilisation in the housing market, and in what appears to be a sharp inventory correction.
Optimists point to the recent surge in stock markets around the world as a clear signal since this is regarded by many as a lead indicator of things to come. This is a myth. After all, these markets did not see the meltdown coming last year.
Nobel laureate Paul Samuelson says it best: “The stock markets predicted at least 12 of the last two recoveries, and nine of the last five recessions.” Even the US Fed admitted this week that activity “is likely to remain weak for a time.”
But there are “headwinds” – US private investment remains weak and conditions in commercial real estate are poor; unemployment could reach 9% very soon and will rise further before it gets better; the banking system still needs fixing and bank loans remain tight (IMF recent estimates put losses in the financial sector at US$4.1 trillion).
The US private sector debt remains high (112% of GDP in 1976, 295% in 2008) while the financial debt picture is no better (rose from 16% to 121% over the same period); and private savings (up to 4.2% currently) can rise further as households begin to restore lost wealth (to match net worth at mid-2007, they have to save or make capital gains of US$13 trillion (almost equivalent to the GDP of US); matching the mid-2005 net worth will still require US$6.6 trillion).
Green Shoots – Just Out of Freefall
The brutal truth is: “less-worse” is not recovery. The world is not out of the woods yet; no clear signs of stabilisation.
Sure, as the Fed Chairman testified this week, the economic outlook has “improved moderately as the US recession appears to be losing steam”, in the face of some positive “tentative signs.” But he also warned that even when the United States recovers, growth will remain below its long-run potential for some time.
In my view, the optimistic consensus forecast positive growth by the third quarter of 2009, +2% in the fourth quarter of 2009, and about 2% in year 2010 is not realistic.
The financial system is far from healthy; private deleveraging has about just begun; and the rebalancing of global demand has barely started. Even the Fed Chairman concedes that “financial markets are still fragile and there will not be sustainable recovery without stabilisation of the financial system and credit markets; and much more needs to be done to make further progress on this front”.
Frankly, the reality is this: No one really knows what the year-end is going to bring. There is just too much uncertainty. I think Columbia’s Professor Nouriel Roubini’s outlook makes good practical sense: -2% by the fourth quarter of 2009 and +0.5% in year 2010; i.e. “even if we are technically out of a recession, we are going to feel like we are in a recession.”
The IMF’s recent update reflects similar views. What then has changed in the last few months? Two things – the risk of a L-shaped near-depression is reduced; and for the first time, we now begin to see positive risks in the global economic outlook as well as many negative risks (including something new – a possible H1N1 flu pandemic). Indeed, the whole situation remains rather confusing.
But make no mistake. The risk of deflation is still there, with the odds falling, I think, to 15%-20% after the aggressive US and Chinese stimuli programmes and the co-ordinated actions with many others. After all, even the US Fed Chairman admitted this week that “we expect the recovery will only gradually gain momentum and that economic slack will diminish slowly.”
The Fed is also focused “like a laser beam on an exit strategy, to keep inflation low.” For 2009 as a whole, the consensus is for consumer prices to fall in the United States and Japan (close to zero now in both), while inflation in Euro-zone will be flat. For Organisation for Economic Co-operation and Development nations, consumer prices rose 0.9% for year ended March 2009 – the lowest in 38 years.
Reflecting the global recession, most countries in East Asia expects inflation to fall to historic low levels (including in China, South Korea, Taiwan, Thailand, Singapore and Malaysia); even high inflation nations like Indonesia and Philippines will experience significant price declines.
This is not surprising, given the collapse of industrial production, sharp fall in commodity prices, rising unemployment and low utilisation of the existing capacity.
In the United States, Euro-zone and Japan, there are real concerns of deflation with potentially serious consequences for especially economies with over-indebted borrowers. The risks include:
● raising already large excess capacity (stimuli on infrastructure in particular will add further to this excess);
● rising unemployment and huge wealth losses can ironically work to raise savings;
● falling demand and profits, rising risk aversion and tight credit in the face of mounting fiscal deficits and soaring debt with dire impact on incomes and consumption; and
● flight from riskier borrowers can result in a vicious downward spiral of weakening foreign direct investment flows, falling output and deteriorating asset quality. This global recession is unlike any the world has ever seen. It creates uncertainty at every turn. Indeed, its exceptional and unpredictable dynamics raise doubts about the outcome of recovery when it does come.
What is disturbing is the dynamics of the price discovery process, given uncertainties surrounding the timing of return to normalcy (i.e. sustainable fiscal clarity, viable market interest rates, and solvent financial system and credit market).
For Japan, its recent experience in achieving such normalcy is scary. Indeed, the prospect of another “lost decade” is frightening. Whatever eventually happens in the United States on whose final demand the world has come to depend, is critical.
In the worst case scenario, the real risks hinge on a shallow and hesitant economic turnaround in the face of insufficient progress at:
● deleveraging
● rebalancing global demand, and
● inducing private-led revival, at a time when the financial system and credit market remain far from healthy.
Deflation can take off in such an environment to the detriment of a solid recovery. In such an environment, the recent stock market “surge” can well become a “dead cat bounce”, heading south once again before too long. !!!!!!!!
Deflation Woes
Most of us, especially those who are old enough in the mid ‘70s, know what inflation is and how destructive it can be. Some may even have painful memories.
Deflation is something new in Asia – only happened in Japan. For a decade after the stock market and real estate bust in 1990, Japan bumped along at just 0.5% growth per annum, in the face of a deflation (including in wages) that so very slowly brought down unemployment that the period was dubbed “the lost decade”. For the younger generation, both phenomena are abstracts.
Persistent falling prices and the expectation that they will continue to fall reflects a broken economy. In today’s context, it can be serious enough to destabilise the recession and derail any prospect of early recovery in a number of critical ways:
● First, deflation raises the real rate of interest i.e. the nominal rate adjusted for inflation. In practice, with inflation, the real rate is less than the nominal rate; with deflation, the real rate is higher than the nominal rate. In the United States, since short-term rates are already close to zero, there is no room to bring nominal rates down further to offset the higher real rate.
So, deflation simply raises the real yield on cash; thus, encouraging more saving (a virtue, surely) which is precisely what you don’t need in recessionary times. Hence, the paradox of thrift (Keynes). Moreover, higher real rates discourage credit-based purchases by consumers and businesses. This weakens demand, leading to further falls in prices which exacerbates the recession.
● Second, deflation increases the real value of debt. In the same way, inflation helps debtors by driving down their real value. If the price level falls significantly, borrowers will really feel a double whammy – real debt servicing will rise relative to income (as wages fall with deflation); and deflation also brings with it a higher loan-to-value for home owners as house values fall. This can lead to loan defaults.
Similarly, rising real debt weakens business balance sheets and affects their access to more credit. It encourages businesses to deleverage to clean-up their balance sheets. This, of course, makes business sense. But, if all businesses did the same, we will have a financial crisis on our hands – hence, the paradox of deleveraging (Krugman).
● Third, deflation will bring with it, the paradox of falling wages (a-la Krugman). To save jobs in a recession (a good thing), workers are prepared to accept lower wages. If all businesses did this, no one gains any competitive advantage. But falling wages worsen the recession since falling incomes adversely affect household and business debt, raises mortgage payments in real terms, and dampen their propensity to spend, with disastrous impact on recession in the face of rising real interest rates.
As indicated earlier, falling wages in Japan brought about the “lost decade” – wages fell by more than 1% a year from 1997 to 2003.
● Fourth, deflation also brings damaging effects on the expectations of consumers and businesses. Essentially, with deflation the psychological impact of expecting prices to fall some more. This can well bring on a potential downward spiral of declining prices to further weaken confidence, making real recovery that much more difficult.
Crucial to breaking the downward cycle is changing expectations, among shoppers and businesses alike, that prices will keep tumbling.
Perhaps, the Japanese experience can offer an invaluable lesson. As of now, the prospective behaviour of consumers and businesses remains deeply uncertain. The dynamics of the range of risks to be managed are as complex as they are global.
As indicated earlier, it is possible that the United States, Euro-zone and even today’s Japan could find themselves in the situation of Japan in the mid-1990s – i.e. unable to power a sustainable strong recovery and requiring further stimuli.
It is clear that stabilising the recession is not good enough. A really strong recovery is needed. This could mean stronger stimulus, stronger action to restore confidence in the financial system and credit market, and stronger job creation measures. By learning from Japan’s mistakes, the United States and Euro-zone can avoid a dismal decade.
Former banker Dr Lin See-Yan is a Harvard-educated economist who now spends time promoting the public interest.
http://biz.thestar.com.my/news/story.asp?file=/2009/5/9/business/3865845&sec=business
Deflation is not an option (But a must)
Hi from Xiamen University. Like most large Chinese cities, Xiamen is crowded and summer is not its best month. This week, the city hosts the Asia Financial Management Association international conference.
Away from the maddening crowd, the university campus offers respite to reflect on the frightening prospect of deflation, which can readily evolve from the impact of deep global recession and lower commodity prices.
I am often asked: “What’s so wrong about deflation?” Falling prices (as opposed to inflation) should be positive since it raises the purchasing power of the ringgit. That’s clearly a simplistic and very naive micro-view.
Some perspective is useful. The current US recession is past 17 months old (already the longest since World War II). It is expected to be still there in the next six months, the Fed Chairman’s “green shoots” notwithstanding. After all, GDP in the United States had contracted in excess of 6% per annum in each of the past two quarters, the worst 6-month performance in 50 years.
To be sure, as of now, although the outlook in the United States and China seems to be better, prospects in most of Euro-zone (including Britain and Germany) and in Japan have not brightened much.
The International Monetary Fund’s (IMF) update this week predicted a “long and severe recession” for Asia’s wealthier but export-oriented economies. Prospects for an imminent rebound are weak.
Realistically, latest data show a mixed picture – in the United States, conditions begin to look up on the back of tentative signs of firmer household spending – the beginning of some signs of stabilisation in the housing market, and in what appears to be a sharp inventory correction.
Optimists point to the recent surge in stock markets around the world as a clear signal since this is regarded by many as a lead indicator of things to come. This is a myth. After all, these markets did not see the meltdown coming last year.
Nobel laureate Paul Samuelson says it best: “The stock markets predicted at least 12 of the last two recoveries, and nine of the last five recessions.” Even the US Fed admitted this week that activity “is likely to remain weak for a time.”
But there are “headwinds” – US private investment remains weak and conditions in commercial real estate are poor; unemployment could reach 9% very soon and will rise further before it gets better; the banking system still needs fixing and bank loans remain tight (IMF recent estimates put losses in the financial sector at US$4.1 trillion).
The US private sector debt remains high (112% of GDP in 1976, 295% in 2008) while the financial debt picture is no better (rose from 16% to 121% over the same period); and private savings (up to 4.2% currently) can rise further as households begin to restore lost wealth (to match net worth at mid-2007, they have to save or make capital gains of US$13 trillion (almost equivalent to the GDP of US); matching the mid-2005 net worth will still require US$6.6 trillion).
Green Shoots – Just Out of Freefall
The brutal truth is: “less-worse” is not recovery. The world is not out of the woods yet; no clear signs of stabilisation.
Sure, as the Fed Chairman testified this week, the economic outlook has “improved moderately as the US recession appears to be losing steam”, in the face of some positive “tentative signs.” But he also warned that even when the United States recovers, growth will remain below its long-run potential for some time.
In my view, the optimistic consensus forecast positive growth by the third quarter of 2009, +2% in the fourth quarter of 2009, and about 2% in year 2010 is not realistic.
The financial system is far from healthy; private deleveraging has about just begun; and the rebalancing of global demand has barely started. Even the Fed Chairman concedes that “financial markets are still fragile and there will not be sustainable recovery without stabilisation of the financial system and credit markets; and much more needs to be done to make further progress on this front”.
Frankly, the reality is this: No one really knows what the year-end is going to bring. There is just too much uncertainty. I think Columbia’s Professor Nouriel Roubini’s outlook makes good practical sense: -2% by the fourth quarter of 2009 and +0.5% in year 2010; i.e. “even if we are technically out of a recession, we are going to feel like we are in a recession.”
The IMF’s recent update reflects similar views. What then has changed in the last few months? Two things – the risk of a L-shaped near-depression is reduced; and for the first time, we now begin to see positive risks in the global economic outlook as well as many negative risks (including something new – a possible H1N1 flu pandemic). Indeed, the whole situation remains rather confusing.
But make no mistake. The risk of deflation is still there, with the odds falling, I think, to 15%-20% after the aggressive US and Chinese stimuli programmes and the co-ordinated actions with many others. After all, even the US Fed Chairman admitted this week that “we expect the recovery will only gradually gain momentum and that economic slack will diminish slowly.”
The Fed is also focused “like a laser beam on an exit strategy, to keep inflation low.” For 2009 as a whole, the consensus is for consumer prices to fall in the United States and Japan (close to zero now in both), while inflation in Euro-zone will be flat. For Organisation for Economic Co-operation and Development nations, consumer prices rose 0.9% for year ended March 2009 – the lowest in 38 years.
Reflecting the global recession, most countries in East Asia expects inflation to fall to historic low levels (including in China, South Korea, Taiwan, Thailand, Singapore and Malaysia); even high inflation nations like Indonesia and Philippines will experience significant price declines.
This is not surprising, given the collapse of industrial production, sharp fall in commodity prices, rising unemployment and low utilisation of the existing capacity.
In the United States, Euro-zone and Japan, there are real concerns of deflation with potentially serious consequences for especially economies with over-indebted borrowers. The risks include:
● raising already large excess capacity (stimuli on infrastructure in particular will add further to this excess);
● rising unemployment and huge wealth losses can ironically work to raise savings;
● falling demand and profits, rising risk aversion and tight credit in the face of mounting fiscal deficits and soaring debt with dire impact on incomes and consumption; and
● flight from riskier borrowers can result in a vicious downward spiral of weakening foreign direct investment flows, falling output and deteriorating asset quality. This global recession is unlike any the world has ever seen. It creates uncertainty at every turn. Indeed, its exceptional and unpredictable dynamics raise doubts about the outcome of recovery when it does come.
What is disturbing is the dynamics of the price discovery process, given uncertainties surrounding the timing of return to normalcy (i.e. sustainable fiscal clarity, viable market interest rates, and solvent financial system and credit market).
For Japan, its recent experience in achieving such normalcy is scary. Indeed, the prospect of another “lost decade” is frightening. Whatever eventually happens in the United States on whose final demand the world has come to depend, is critical.
In the worst case scenario, the real risks hinge on a shallow and hesitant economic turnaround in the face of insufficient progress at:
● deleveraging
● rebalancing global demand, and
● inducing private-led revival, at a time when the financial system and credit market remain far from healthy.
Deflation can take off in such an environment to the detriment of a solid recovery. In such an environment, the recent stock market “surge” can well become a “dead cat bounce”, heading south once again before too long. !!!!!!!!
Deflation Woes
Most of us, especially those who are old enough in the mid ‘70s, know what inflation is and how destructive it can be. Some may even have painful memories.
Deflation is something new in Asia – only happened in Japan. For a decade after the stock market and real estate bust in 1990, Japan bumped along at just 0.5% growth per annum, in the face of a deflation (including in wages) that so very slowly brought down unemployment that the period was dubbed “the lost decade”. For the younger generation, both phenomena are abstracts.
Persistent falling prices and the expectation that they will continue to fall reflects a broken economy. In today’s context, it can be serious enough to destabilise the recession and derail any prospect of early recovery in a number of critical ways:
● First, deflation raises the real rate of interest i.e. the nominal rate adjusted for inflation. In practice, with inflation, the real rate is less than the nominal rate; with deflation, the real rate is higher than the nominal rate. In the United States, since short-term rates are already close to zero, there is no room to bring nominal rates down further to offset the higher real rate.
So, deflation simply raises the real yield on cash; thus, encouraging more saving (a virtue, surely) which is precisely what you don’t need in recessionary times. Hence, the paradox of thrift (Keynes). Moreover, higher real rates discourage credit-based purchases by consumers and businesses. This weakens demand, leading to further falls in prices which exacerbates the recession.
● Second, deflation increases the real value of debt. In the same way, inflation helps debtors by driving down their real value. If the price level falls significantly, borrowers will really feel a double whammy – real debt servicing will rise relative to income (as wages fall with deflation); and deflation also brings with it a higher loan-to-value for home owners as house values fall. This can lead to loan defaults.
Similarly, rising real debt weakens business balance sheets and affects their access to more credit. It encourages businesses to deleverage to clean-up their balance sheets. This, of course, makes business sense. But, if all businesses did the same, we will have a financial crisis on our hands – hence, the paradox of deleveraging (Krugman).
● Third, deflation will bring with it, the paradox of falling wages (a-la Krugman). To save jobs in a recession (a good thing), workers are prepared to accept lower wages. If all businesses did this, no one gains any competitive advantage. But falling wages worsen the recession since falling incomes adversely affect household and business debt, raises mortgage payments in real terms, and dampen their propensity to spend, with disastrous impact on recession in the face of rising real interest rates.
As indicated earlier, falling wages in Japan brought about the “lost decade” – wages fell by more than 1% a year from 1997 to 2003.
● Fourth, deflation also brings damaging effects on the expectations of consumers and businesses. Essentially, with deflation the psychological impact of expecting prices to fall some more. This can well bring on a potential downward spiral of declining prices to further weaken confidence, making real recovery that much more difficult.
Crucial to breaking the downward cycle is changing expectations, among shoppers and businesses alike, that prices will keep tumbling.
Perhaps, the Japanese experience can offer an invaluable lesson. As of now, the prospective behaviour of consumers and businesses remains deeply uncertain. The dynamics of the range of risks to be managed are as complex as they are global.
As indicated earlier, it is possible that the United States, Euro-zone and even today’s Japan could find themselves in the situation of Japan in the mid-1990s – i.e. unable to power a sustainable strong recovery and requiring further stimuli.
It is clear that stabilising the recession is not good enough. A really strong recovery is needed. This could mean stronger stimulus, stronger action to restore confidence in the financial system and credit market, and stronger job creation measures. By learning from Japan’s mistakes, the United States and Euro-zone can avoid a dismal decade.
Former banker Dr Lin See-Yan is a Harvard-educated economist who now spends time promoting the public interest.
http://biz.thestar.com.my/news/story.asp?file=/2009/5/9/business/3865845&sec=business
Thursday, May 7, 2009
If Business is Good, You Don't Have To Cut Rates!
If businesses are really good, central banks dont have to cut rates. Why the needs to cut rates? One of the reason is to spur investments. Lower interest rates will attract people to borrow money. And as demand for loans increases, the central banks will gradually adjust the interest rates upward.
Where in the world can you see the central banks are increasing interest rates now?? Arent you wondering why the world seems like stop functioning for a while?? The economy needs time to recover. Its not a one day or one month or even one year efforts. It needs several years to get things back to normal. Like Buffett said, I dont know when the economy will recover, but I believe the economy will be better in five years time. Maybe you still have three years to decide whether to be back in the market.
Is Europe the next to cause chaos to financial markets?? Lets wait and see..
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ECB cuts rates to record low of 1%
FRANKFURT/BERLIN: The European Central Bank (ECB) cut interest rates to a record low of 1% on May 7, giving shares another reason to rise as German data gave further evidence the downturn is bottoming out.
With central banks still battling recession, the Bank of England (BOE) increased the size of its asset purchase programme by £50 billion (RM264.2 billion) as it left interest rates at a record low of 0.5% for a second month.
Markets were also looking ahead to results of US government-inspired health checks or "stress tests" on 19 leading US banks, due later in the day and set to show more than half in need of billions of dollars in extra capital.
But US Treasury Secretary Timothy Geithner said no US banks screened by regulators face the risk of insolvency and also said the pace of the US economic decline was slowing, even as the economy faced enormous uncertainty.
"There are some places where we're seeing things starting to improve, but the main thing is a sense of stability," Geithner said.
The pan-European FTSEurofirst 300 index of top shares jumped to a four-month high, with banks leading the advance. In Germany a surge in foreign demand unexpectedly pushed manufacturing orders 3.3% higher in March, their first increase in seven months.
"Today's number offers some relief for a battered industry," said Carsten Brzeski at ING Financial Markets. "The car scrap scheme and some new foreign orders indicate the free fall has come to an end and give hope that the worst might be over."
Signs of recovery in the bank sector continued as Britain's Barclays Plc said first-quarter (1Q) profit rose 15% on a strong performance in investment banking, boosting its shares to a seven-month high.
European banks as a whole gained more than 3%.
The ECB's quarter point rate cut, as expected, could be followed by further policy measures to get the economy back on its feet, such as quantitative easing, or the repurchase of government debt with new money created by the central bank.
Economists await any comments by President Jean-Claude Trichet at his 1230 GMT news conference on whether the ECB has reached a floor or still has room to go lower.
BOE left interest rates at a record low 0.5% and said it would increase the size of its asset purchase programme to £125 billion.
"Despite the biggest stimulus in UK history, the recession continues to deepen. But don't panic, the policies put in place will work eventually," said Stephen Boyle at Royal Bank of Scotland.
So far the BoE has bought more than £50 billion of assets, mainly government bonds. -- Reuters
http://www.theedgemalaysia.com/business-news/13674-ecb-cuts-rates-to-record-low-of-1.html
Where in the world can you see the central banks are increasing interest rates now?? Arent you wondering why the world seems like stop functioning for a while?? The economy needs time to recover. Its not a one day or one month or even one year efforts. It needs several years to get things back to normal. Like Buffett said, I dont know when the economy will recover, but I believe the economy will be better in five years time. Maybe you still have three years to decide whether to be back in the market.
Is Europe the next to cause chaos to financial markets?? Lets wait and see..
----------
ECB cuts rates to record low of 1%
FRANKFURT/BERLIN: The European Central Bank (ECB) cut interest rates to a record low of 1% on May 7, giving shares another reason to rise as German data gave further evidence the downturn is bottoming out.
With central banks still battling recession, the Bank of England (BOE) increased the size of its asset purchase programme by £50 billion (RM264.2 billion) as it left interest rates at a record low of 0.5% for a second month.
Markets were also looking ahead to results of US government-inspired health checks or "stress tests" on 19 leading US banks, due later in the day and set to show more than half in need of billions of dollars in extra capital.
But US Treasury Secretary Timothy Geithner said no US banks screened by regulators face the risk of insolvency and also said the pace of the US economic decline was slowing, even as the economy faced enormous uncertainty.
"There are some places where we're seeing things starting to improve, but the main thing is a sense of stability," Geithner said.
The pan-European FTSEurofirst 300 index of top shares jumped to a four-month high, with banks leading the advance. In Germany a surge in foreign demand unexpectedly pushed manufacturing orders 3.3% higher in March, their first increase in seven months.
"Today's number offers some relief for a battered industry," said Carsten Brzeski at ING Financial Markets. "The car scrap scheme and some new foreign orders indicate the free fall has come to an end and give hope that the worst might be over."
Signs of recovery in the bank sector continued as Britain's Barclays Plc said first-quarter (1Q) profit rose 15% on a strong performance in investment banking, boosting its shares to a seven-month high.
European banks as a whole gained more than 3%.
The ECB's quarter point rate cut, as expected, could be followed by further policy measures to get the economy back on its feet, such as quantitative easing, or the repurchase of government debt with new money created by the central bank.
Economists await any comments by President Jean-Claude Trichet at his 1230 GMT news conference on whether the ECB has reached a floor or still has room to go lower.
BOE left interest rates at a record low 0.5% and said it would increase the size of its asset purchase programme to £125 billion.
"Despite the biggest stimulus in UK history, the recession continues to deepen. But don't panic, the policies put in place will work eventually," said Stephen Boyle at Royal Bank of Scotland.
So far the BoE has bought more than £50 billion of assets, mainly government bonds. -- Reuters
http://www.theedgemalaysia.com/business-news/13674-ecb-cuts-rates-to-record-low-of-1.html
Fed Sees Up to $599 Billion in Bank Losses!!!
Fed Sees Up to $599 Billion in Bank Losses (I would expect more, probably more than $1 trillion!!!)
Worst-Case Capital Shortfall of $75 Billion at 10 Banks Is Less Than Many Feared; Some Shares Rise on Hopes Crisis Is Easing
The federal government projected that 19 of the nation's biggest banks could suffer losses of up to $599 billion through the end of next year if the economy performs worse than expected and ordered 10 of them to raise a combined $74.6 billion in capital to cushion themselves.
The much-anticipated stress-test results unleashed a scramble by the weakest banks to find money and a push by the strongest ones to escape the government shadow of taxpayer-funded rescues.
The Federal Reserve's worst-case estimates of banks' total losses and capital shortfalls were smaller than some had feared. Optimists interpreted the Fed's findings as evidence that the worst is over for the industry. But questions remain about the stress tests' rigor, in part since the Fed scaled back some projected losses in the face of pressure from banks.
The government's tests measured potential losses on mortgages, commercial loans, securities and other assets held by the stress-tested banks, ranging from giants Bank of America Corp. and Citigroup Inc. to regional institutions such as SunTrust Banks Inc. and Fifth Third Bancorp. The government's "more adverse" scenario includes two-year cumulative losses of 9.1% on total loans, worse than the peak losses of the 1930s.
Treasury Secretary Timothy Geithner said Thursday that he is "reasonably confident" that banks will be able to plug the capital holes through private infusions, alleviating the need for Washington to further enmesh itself in the banking system.
Banks also said they will consider selling businesses or issuing new stock to meet the toughened capital standards.
The information provided by the stress tests will "make it easier for banks to raise new equity from private sources," Mr. Geithner said. Still, he added, "We have a lot of work to do...in repairing the financial system."
Some of the banks told to add capital raced to accomplish that by tapping public markets. On Thursday, Wells Fargo & Co., which the Fed said needed to raise $13.7 billion, laid plans for a $6 billion common-stock offering. Morgan Stanley, facing a $1.8 billion deficit, said it will sell $2 billion of stock and $3 billion of debt that isn't guaranteed by the U.S. government.
Full Art: http://online.wsj.com/article/SB124172137962697121.html
Tuesday, May 5, 2009
The Next Selldown To Begin??
Bank of America needs additional US$34b in capital !!!!!!!!!!
WASHINGTON: Bank of America has been deemed to need an additional US$34 billion in capital, according to the results of a government stress test, a source familiar with the results said on May 5, according to Reuters.
A Bank of America spokesman declined comment.
The amount is far higher than published reports had speculated the largest bank might need. It is certain to increase the pressure on Chief Executive Kenneth Lewis, whom shareholders ousted as chairman last week.
It may also unnerve investors who had hoped the results of the stress tests on Bank of America and 18 other banks might show the industry was in less dire condition than had been feared. Shares of major U.S. banks have nearly doubled since bottoming out in early March.
The government has spent the last three months conducting stress tests on the 19 largest U.S. banks to determine their revenue, losses and capital needs, should economic conditions deteriorate even further than many economists' estimates.
Officials plan to release results of the tests on late May 7, and are expected to reveal both aggregate figures and the results of the examinations on the 19 institutions' holding companies.
Bank of America has been at the top of the list of banks believed to need more capital, as it is facing significant credit losses and a challenging combination with Merrill Lynch & Co.
The US$34 billion figure more than triples previously published reports of Bank of America's capital needs.
The bank's shareholders voted to oust Lewis last week as chairman of the board, possibly laying the groundwork for his eventual departure from the company.
The bank has already received US$45 billion in capital from the federal government.
The Federal Reserve and Treasury declined comment.
Most of the 19 U.S. banks being stress-tested intend to hold press conferences on May 8 to explain the results of the government's assessments, the source said, adding that many of the banks are in the process of crafting capital recovery plans. - Reuters
http://www.theedgemalaysia.com/business-news/13506-bank-of-america-needs-additional-us34b-in-capital.html
Monday, May 4, 2009
Buffett Sees No Signs of Recovery in Housing, Retail!!
Buffett Says He Sees ‘No Signs’ of Recovery in Housing, Retail (Listen to the businessman plus investor - instead of the journalists)
May 2 (Bloomberg) -- Billionaire investor Warren Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc., said he’s seen no indication of recovery from the real estate slump that helped cause the U.S. recession.
“There’s no signs of any real bounce at all in anything to do with housing, retailing, all that sort of thing,” said Buffett, 78, in a Bloomberg Television interview before the Omaha, Nebraska-based company’s annual shareholder meeting today. “You never know for sure, even if there’s a leveling off, which way the next move will be.”
Paul Volcker, one of President Barack Obama’s economic advisers, said this week that the economy was “leveling off at a low level” and doesn’t need a second fiscal stimulus package after the $787 billion plan signed by Obama in February. The U.S. economy contracted at a 6.1 percent annual rate in the first quarter, weaker than forecast, making this recession the worst since 1957-1958.
The annual meeting gives Buffett and Vice Chairman Charles Munger a platform to discuss markets, the economy and Berkshire’s businesses. Shareholders were expected to attend in record numbers this year after Berkshire reported five straight quarters of profit declines, ratings companies took away the firm’s top AAA credit grade, and Buffett confessed to an ill- timed investment in oil producer ConocoPhillips.
The loss of the top credit grade in the last two months from Moody’s Investors Service and Fitch Ratings “has no economic impact” on Berkshire, Buffett said.
Wounded Pride
“It just doesn’t,” he said. “We don’t use borrowed money in any real significant sense. My pride may be wounded just a bit.”
Berkshire, with a U.S. stock portfolio of $51.9 billion, has been pressured as equity markets dropped and U.S. unemployment rose to its highest in 25 years. Berkshire shares have plunged 31 percent in the past 12 months.
More than 500 U.S. financial institutions have won approval for government bailouts with the total value exceeding $390 billion, and federal programs are buying distressed assets, backing debt and insuring customer deposits to prop up the economy and encourage banks to lend.
Buffett, in his most recent letter to shareholders in February, said he supported the U.S. government actions, while predicting bailouts will cause “unwelcome aftereffects” including inflation.
International Appeal
Known as the “Oracle of Omaha,” Buffett has grown into a cult figure among investors who admire him as much for his homespun aphorisms as for his stock-picking savvy. Visitors from 43 countries were expected to fill the arena and the overflow rooms, and students from 45 universities have been invited to watch from a ballroom in the Omaha Hilton across the street.
Buffett and Munger have used recent meetings to promote Berkshire as a buyer of non-U.S. businesses and distinguish their operations from what they consider the sometimes reckless behavior they see on Wall Street. Their pronouncements reach shareholders, potential customers and ratings firms.
Berkshire’s profit has fallen on deteriorating results at insurance units and liabilities from derivative bets on world stock markets. Buffett will announce first-quarter results May 8, the company said this week. Berkshire said Feb. 28 that book value, a measure of assets minus liabilities, had dropped by about $8 billion from $109.3 billion on Dec. 31.
Wells Fargo
Book value per share, a measure Buffett highlights in his yearly letter to shareholders, slipped 9.6 percent in 2008, the worst performance since Buffett took control in 1965, on the declining value of the derivatives and holdings in financial companies including Wells Fargo & Co. The Standard & Poor’s 500 Index has declined about 38 percent in the past 12 months.
http://www.bloomberg.com/apps/news?pid=20601170&sid=aGH_rFa9KgqY
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