Saturday, November 29, 2008

Econoblogosphere and the state

Real Time Economics , WSJ's blog took note of Peter R Orszag's appointment by Obama. The blog said that Orszag's appointment means that the econoblogosphere has lost an important voice since he spent time correcting media's wrong interpretations to the lightening changes in regulations over the last few months. Orszag put up a post at the Congressional Budget Office's blog that he would miss the CBO. He has been appointed for the Office of Management and Budget job. Mr Orszag has an interesting view on why the $ 700 billion bail-out package may not have a lasting fiscal impact on the government's balance sheet - depending on whether the transactions are a net gain or a loss to the government.
I think this is an interesting development when key future budget officials are in touch with the junta (for all non-Indians, 'junta' is a word used in Hindi to describe the common man.) I think it says as much about blogging as a medium as it does about the new generation public official.
I cannot conceive of Indian budget makers being so open to the media and the world at large! They are usually sequestered in the finance ministry both before and after the annual budget exercise. To be fair, there have been many officials who take it as their mission to educate government/economic reporters on the actual consequences of a budgetary allocation or accounting changes, but they are few and far in between.
This culture of speaking to the media - by the rank and file of the administration stems very much from the top. Many senior journalists in Delhi tell me, if the minister in question is 'open' to the media, it comes across with the way bureacrats in revenue, expenditure and economic affairs deal with the media. Have strong reasons to believe that the current administration is far from being courteous to economic journalists.
Coming back to the Obama administration, am sure American journalists are looking to having access to a more open government over the next few years, given that it was preceded by the most all-inclusive Presidential campaign.

The politics induced liquidity crunch

That we live in bizzare times has long been accepted, but I guess never fails to surprise us ever so often. Here is a report on how banks on the Gaza strip are facing a liquidity crunch as a result of sanctions by Israel. The Associated Press reported, "The Israeli shekel is a widely used currency in the Gaza Strip, and the territory needs at least 400 million shekels, or about $100 million, each month in new currency to replace aging notes and to pay salaries......The main source of currency is the moderate Palestinian President Mahmoud Abbas' government in the West Bank, which sends in currency shipments each month to pay its civil servants. The government dominated by the Fatah faction still claims authority over Gaza, despite losing control of the territory last year to the rival Hamas militant group." Gazans are pushed to using tattered notes. One newspaper noted that the term 'financial meltdown' has taken a whole new meaning here.

This is even when Israel's banks will be infused with $2.75 billion to shore up the banking sector to ensure credit availability. Merrill Lynch cut earnings estimates for Israeli banks by 40% in 2009. A MarketWatch article critiques the measures taken by the Treasury Department in Israel.

Saturday, November 22, 2008

Capital Losing Color

Taking stock of currencies:
1. The Chinese currency has remained virtually unchanged because it is contained within a narrow trading band. China's currency has a 'crawling peg' to the U.S. dollar but is still not fully convertible.
2. The Singapore Dollar - among Asia's worst performing currencies this quarter after the central bank - the Monetary Authority of Singapore (MAS) shifted a 'zero-percent appreciation' stance last month. It has fell 6.2% against the dollar since October.
3. The Indian Rupee: This currency has shed 21% this year trading over Rs 50 to a dollar. The RBI has been selling dollars in the currency market either directly or through government-onwned banks to prop up the falling rupee
4. Of all the currencies in the world, the worst performing is the Icelandic Krona because the country essentially went bankrupt. The currency is down 55.70% year to date.
5. The Russian Ruble has already fallen significantly this year but the Argentinian Peso has only dropped 5%. But weakness is expected in both. Russia used up a quarter of its forex reserves (fell by $144.6 billion) since August as the central bank struggled to contain its worst financial crisis since 1998. The ruble slumped 15% against the dollar since July 31 and 5.5% versus a basket (which comprises of 55% dollars and the rest Euros)
6. South Korean Won has lost 40% and touched a 11 year low last week. One investment bank sent out the following note to investors : "We painfully realised that our 1.1 percent growth forecast for Korea in 2009, while being consistently the lowest on the street, is just too optimistic if our deleveraging theme plays out. Thus we are lowering the 2009 GDP forecast to minus-3 percent."
7. The Citigroup news is putting the dollar in a spot today, it is helping both the Yen and the Euro. But overall there is still confidence in the greenback despite fundamentals.
8. Relative to the dollar, the euro is weakening. Investors have lesser confidence in the Euro than in the dollar. (Notwitsdtanding the current scenario)
9. The yen rose against the dollar. It also gained against the Australian and New Zealand dollars on the speculation the carry trades will be reversed as the credit squeeze hurts profits of companies.

Tuesday, November 18, 2008

Degrees of crises

Indicators of financial market stress: Bank credit default swap rates
(An average of 5 year CDS rates on bank's senior debt)

COUNTRY---------ROUTINE -------TURMOIL-------CRISIS---------NOW
PERIOD-----------AUG 07-----------SEP 08----------OCT 08---------NOV 08
1. USA-------------21-----------------158--------------271-------------142
2. EURO AREA----13------------------79---------------170-------------127
3. U.K.-------------10-----------------97----------------177-------------115
4. 3 MNTH--------39-----------------125---------------321-------------189

Source: OECD

Sunday, November 16, 2008

Crystal Ball

A brief gist of a seminar at the Stern School of Business last week - 'On advising the next president on global finance' :

*China’s stimulus package has set the tone for other emerging economies where there is a realization that they cannot export their way out of the problem. External deficits for some of these countries have stopped growing. The issue is that some economies are net borrowers that worsens the situation. So there is a dire need to ensure liquidity to these economies particularly Eastern European ones.

*It was pointed out that we are not living in an era of free floats of currencies after all, lets stop deluding ourselves – the yuan is pegged to the dollar, Russia’s currency is pegged to the euro and the dollar, the Japanese Yen is not a free float currency, nor is the Indian Rupee.

*An interesting observation was that 75% of the total banking assets in the country are across six bank-holding companies. Economists did not agree with each that it was a good thing. Some suggested that such is the situation that GMAC may become a bank soon!

*The International Accounting Standards Board (IASB) is being persuaded to give greater discretion to banks on how they must account for the value of the assets on their books.

* Pace of new regulations - Technically the Fed is not supposed to do unsecured lending, it is precisely doing that by stepping in for institutions it does not regulate. Will these widespread changes in regulatory policies prove to be costly mistakes in future?

*Can IMF help? With $200 billion to spare to ‘help’ out economies, that’s a pittance, panelists felt.

*A member of the Roubini camp – painted a worst case scenario –
1. Oil at $30 a barrel
2. Commodity exports contract further
3. Eastern European economies do worse
4. China’s stimulus does not work
5. Current account surpluses go up
6. Deflation feeds into the U.S.

Monday, November 10, 2008

No Credit No Food

Even as developing countries struggle to feed their millions, developed countries are witnessing a fall in their food inflation.
In Pakistan for example, the Consumer Price Index (CPI) inflation rose by 25%, mainly on the back of unprecedented increase in the prices of essential food items during the month of October in current fiscal against the same month of previous year. Contrast this with the falling food inflation in economies like the U.K.
The World bank has said that despite weakening global demand that has pushed food and fuel prices down, many governments continue to pay a higher price than before to feed their starving millions. The global food import bill will rise 23% in 2008, with developing countries mostly bearing the brunt of increased import costs. Agricultural output will be affected to due to the slowdown in these countries that have been affected by drop in export demand, remittances and lower commodity prices.
The Food and Agriculture Organisation (FAO) has said in a report this week that a recent fall in food prices should not create "a false sense of security". It has said that the credit crisis could deepen the food crisis by next year. This will increase the number of hungry people in the world from the current estimate of 923 million, it said.
The World bank has said “For the very poor, reducing consumption from already very low levels, even for a short period, can have important long-term consequences.”

Scary picture this.

And Life Goes On....

While revolution swept the United States – here’s whats been happening in the rest of the world...
1. China's 4 trillion yuan ($586) billion economic stimulus plan – How will China finance this? Well, it will have to sell large number of U.S. securities including treasuries that it holds. This is estimated at $1 trillion. This will add pressure when the U.S. government is trying to issue more securities to finance its own stimulus plan. This will impact bond yields which will fall since borrowing costs will now go up.
2. U.K. - The biggest cut in the history of the Bank of England. (ECB and Swiss National bank followed). As a result of which the LIBOR fell to a 4 year low to 2.29%.
3. Japan - Registered a 10 year low when its machinery orders plunged to 10.4% last quarter, as manufacturers cut investment plans in line with the global slowdown. This is at a time when Japan's 0.3% target lending rate is the lowest among major economies.
4. India – The central bank abandoned the "inflation vigil'' Bloomberg said. "For the first time since 1997, the Reserve Bank of India on Nov. 1 deployed all three of its main tools to shore up growth after inter-bank lending rates climbed to 21%". (Signs of preparing for elections? After all inflation is still twice as high as the central bank target)

The Irish Times says the President has to address common interests across Washington, Tehran, Baghdad, Kabul and Islamabad. The Jerusalem Post quotes Israel's foreign minister Livni "STAY TOUGH ON IRAN" . Interestingly the website of the Post has a permanent link called The Iranian Threat. So many voices....Force be with The New White house Man.

Saturday, November 8, 2008

The Far Left is the Far Right ?

Pardon the preoccupation with politics. It will wear off sooner than later. Always fascinating to see an administration in transition. Newspapers are awash with changes in Washington. A superb article in the Wall Street Journal talks about the changing dynamics of power But beats me, why it should make a story. Its a great story alright, but there is a lot of scrutiny on who will be a part of the coterie. The country is having such conversations aloud, trying to come to terms with the magnanimity of the change it just ushered in. As an outsider just two months into the old country, I am amazed how connected I feel the new country.

On that positive note - please read this phenomenal piece in the FT, that says how The Election has punctured anti-Americanism. Phillip Stevens says in this article "In demonstrating the infinite capacity of the US to reinvent itself by rediscovering idealism, Mr Obama robs friend and foe of their alibis....." Then goes on to conclude : "The world may be disappointed. One of Mr Obama’s most dangerous enemies will be the impatience of our age: the ever present demands that tomorrow’s problems be fixed yesterday. Perhaps the new president will lack the decisiveness that is an essential partner to careful deliberation. But this is a moment for optimism. Once in a while, politicians do change the course of history."

An Indian newspaper has reported that the one of the advisory members of the Obama team has close connections with a Hindu right-wing organisation. I was in denial for at least 30 minutes. Very troubled if you ask me.

I remember walking into a new government soon after elections in 2004 in New Delhi when popular vote threw out the right-wing ruling party. One could easily sense the change just walking around in north bloc on Raisina Hill - how quickly power equations change. The brokers of the erstwhile government now powerless. But these things change so quickly. The more they change, the more they remain the same. Wait for incumbency to gather under the new administration. No one knew what the Left brought to the table five years ago, when they became the ultimate power brokers in the coalition government holding every reform and every piece of legislation to ransom.

Wait and Watch Washington.

Investors as citizens

I was curious to see how the markets reacted to the Obama moment on Tuesday. Regret that this post comes so late in the day. I guess I was too overwhelmed by the event itself!
Am asking a rather naive question. When do investors cease to become citizens/voters. What does it mean when they say markets had priced in the results of the elections?
That a new President heralds a transition and brings in optimism is too passe for the markets. The policies of the newcomer may not have a favourable effect on certains sectors of the economy, but the direction in which the governance and the economy would move, I thought was sufficient to spread optimism. Clearly not. There is some dispute if the markets do better under a democrat. Forbes had a story 'Has Obama’s Rise Caused the Markets to Fall?' mapping each time the market fell - discussing causality and correlation.

That the week brought in dark data on labour, unemployment and manufacturing did not help the markets despite witnessing one of the most sublime moments in recent history. Jobless rate jumped to a 14 year high of 6.5% in October, number of people receiving unemployment benefits rose to a 25 year high. Instead of adding 100,000 jobs per month, the economy shed 240,000 jobs monthly. Manufacturing growth fell to a 26 year low to 38.9 on the index of national factory activity, even as productivity rose 1.1%. Not surprising then that amid such gloomy data, investors could not help but be pessimistic.

Tailpiece: Here is an interesting development in Singapore, when investors became more politically awakened in the aftermath of the financial crisis.

Sunday, November 2, 2008

The Day The Oracle Sighed - Atlas Shrugged ?

Not many imagined that they would see The Oracle apologise for his prophecies. Most newspapers carried the larger-than-life picture of the grim-faced octagenarian. When Alan Greenspan acknowledged his role in the current crisis in a Congressional hearing last month, it was a shock for the markets - after all his tenure spanned the greenest years in American Capitalism. That (no) regulation did not keep pace with market innovation is hardly an excuse. Aren't regulators supposed to be ahead of the curve? Of the realms and realms written about this once-in-a-century event, this piece in The Guardian was funny. But the unfair thing was those who spoke highly of him, have now gathered to boo him. In my conversation with a senior banker recently, he admitted that while rest of the world stood in awe waiting for the next pronouncement, he often thought that The Oracle was an "empty suit" as he put it. But the point, is more and more people will claim to have felt the same way. I think it has a lot to do with the way the media makes a hero of personalities just as quickly as it would strip any one of the aura it bestowed. Or may be the contrarians are never heard loud enough.

Half a world way - another regulator is being celebrated. In my brief stint as a journalist, I had the great opportunity to be writing on the Reserve Bank of India when governor Dr Y V Reddy was quelling inflationary pressures and talking down irrational exuberance(s). Reckoned as the king of conservatism, he was pretty unpopular with the bankers and a government that was gloating on higher growth and a less tight monetary policy. Friends back in newsrooms in India tell me how everyone is now singing eulogies for Dr Reddy. Known for being upright, Dr Reddy was transferred more than half a dozen times, as a young bureaucrat. His appointment itself, may have been political - but what a great choice! Dr Reddy loved surprising the markets (not a good thing?!). He raised risk weights for real estate loans, that went a long way in tackling "overheating" as he called it. Prime Minister Manmohan Singh had once remarked that the job of a central banker as "the loneliest job in India". Dr Reddy whose term concluded in September this year, will also be remembered for his wit. He would always have journalists in splits during his post-monetary policy press conferences (so much so that I would sometimes, actually scribble some of his witty remarks!). Of course, he was extremely tight-lipped about what would be going on in his mind - except smile the Buddha-smile. His take on the current crisis - “historically significant redefining of the concept of the central bank”.

Autonomy of central banks, has long come under pressure. Political pressures from governments on central banks are unavoidable. Barring exceptions like Dr Reddy, very few can stave off pressure from governments.