Crisis Diary as it unfolds ….

Who am I?

I am counter cyclical left-liberal. 🙂

December 27, 2008 Posted by | Uncategorized | Leave a comment

It’s Boxing Day and Toronto is shopping

Ok, so this is completely anecdotal. I don’t even have any yesteryear’s experience to compare it with. But it didn’t look all that bad at Eaton Center, Toronto. It had no hint of recession, as if entire Toronto was shopping. The queue at check-out counter of Sears made me rethink on my decision to go out shopping, I got pushed and nudged couple of times at apparel section and I even had to wait for my turn at escalator.

dsc00363 dsc00366

Well, I guess this doesn’t mean anything though. People were definitely out shopping, but that is that. It doesn’t mean they shopped for the same amount they are generally used to or if discounts were more this year to attract more shoppers.

Also, CNBC today reported that Amazon is having their best ever December sales. Part of it must be due to bad weather, but otherwise it is also because shoppers are looking for cheaper alternatives. Shoppers are more than willing to compromise the flexibility of feeling the product before buying it of the shelf of retail store for lower cost of online shopping. So the bottomline is …… grim.

December 26, 2008 Posted by | Crisis Snapshot | , , | Leave a comment

The spending crisis

Via Calculated Risk

One of the main reasons why this recessions is going to be deep and prolonged is savings rate in US had hit rock bottom and with people losing money all around, you can not expect them to keep spending at the same rate. (besides even if that happens, it will be even more disastrous) That’s why gov’t spending is so very crucial at this point.

This graph says it all,

personalsavingsrate2

December 24, 2008 Posted by | Opinions | , , , | Leave a comment

Keynes again – very good article by Martin Wolf

Leading economist and FT columnist Martin Wolf has written a superb article in today’s FT calling for pragmatic approach as a way forward.

Sir, you spoke for all of us who wished that people push aside their puritan ideologies and without going into left and right of it take pragmatic steps solving the crisis.

The article takes its inspiration from the the great John Maynard Keynes, but the theme of article is that we need Keynes’ much more than Keynes policies ditto. If there is one thing that separated Keynes from his contemporaries, according to the article, it is the fact that he took much more pragmatic approach to solving issues as against being ideologically correct.

According to the author, the three main lessons to take from JMK were (emphasis mine),

keynes1I see three broad lessons.

The first, which was taken forward by Minsky, is that we should not take the pretensions of financiers seriously. “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.” Not for him, then, was the notion of “efficient markets”.

The second lesson is that the economy cannot be analysed in the same way as an individual business. For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand. An individual may not spend all his income. But the world must do so.

The third and most important lesson is that one should not treat the economy as a morality tale. In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians – Ludwig von Mises and Friedrich von Hayek – argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions: the former in the view that individual self-seeking behaviour guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis.

We need not dump the idea of free market economy saying that markets don’t work, nor we should fool ourselves in believing that markets will find their way out of this crisis on their own. This is an unusual event that calls for radical measures which may not be ideal, but may work. Results are more important than the means right now.

The article goes on to outline the present priorities in front of us (emphasis mine),

The urgent task is to return the world economy to health.

The shorter-term challenge is to sustain aggregate demand, as Keynes would have recommended. Also important will be direct central-bank finance of borrowers. It is evident that much of the load will fall on the US, largely because the Europeans, Japanese and even the Chinese are too inert, too complacent, or too weak. Given the correction of household spending under way in the deficit countries, this period of high government spending is, alas, likely to last for years. At the same time, a big effort must be made to purge the balance sheets of households and the financial system. A debt-for-equity swap is surely going to be necessary.

The longer-term challenge is to force a rebalancing of global demand. Deficit countries cannot be expected to spend their way into bankruptcy, while surplus countries condemn as profligacy the spending from which their exporters benefit so much. In the necessary attempt to reconstruct the global economic order, on which the new administration must focus, this will be a central issue. It is one Keynes himself had in mind when he put forward his ideas for the postwar monetary system at the Bretton Woods conference in 1944.

I think Europeans are too complacent at this point. With deflation and demand destruction staring in the face, ECB’s procrastination to cut rates is baffling. Also the concerted effort for fiscal stimulus, which is required to get spending back on track, seems unlikely thanks to adamant Germany. On the other hand, Chinese still wants to rely on US exports to bail their economy out as against stimulating their domestic consumption. China will do a lot good by letting RMB appreciate a bit. But alas, they want to stack up more and more US dollars and throw good RMBs at bad RMBs.

The article concludes the message as (emphasis mine),

As was the case in the 1930s, we also have a choice: it is to deal with these challenges co-operatively and pragmatically or let ideological blinkers and selfishness obstruct us. The objective is also clear: to preserve an open and at least reasonably stable world economy that offers opportunity to as much of humanity as possible. We have done a disturbingly poor job of this in recent years. We must do better. We can do so, provided we approach the task in a spirit of humility and pragmatism, shorn of ideological blinkers.

As Oscar Wilde might have said, in economics, the truth is rarely pure and never simple. That is, for me, the biggest lesson of this crisis. It is also the one Keynes himself still teaches.

Well Said!


December 23, 2008 Posted by | Opinions | , , , , , , | 1 Comment

15-Dec-08 to 21-Dec-08: Fed Acts, Markets react

The week belonged to Fed and it’s historic decision to go zero.
So how did market react to the news?

Treasuries

For quite some time all short-term treasuries were trading at zero yield due to sudden spike in risk aversion resulting in treasury bubble. If anything, this Fed decision has just salvaged the treasury bubble making sure that no one loses money when risk appetite returns everybody starts selling treasuries.

treasury-curve1

The current treasury yields are clearly record low means treasury prices are record high – 30 yr note selling as low as 2.6% yield.

TED Spreads

But real effect of Fed’s decision could be seen in TED spreads.
After long long time TED spread, the difference between rate at which banks lend each other i.e LIBOR rate and corresponding treasuries yield, dropped to 150 basis point. It is still above the normalcy level of 50 basis points, but way below all time high of 450 basis points.

TED Spread

TED Spread

Some good signs of subsiding panic and sanity returning to markets.
But we are far from any kind of recovery.

Crisis Watch:

TED spread 1.51
S&P 500 890 (+0.29%)
VIX 44.93

December 22, 2008 Posted by | Weekly News | , , , | Leave a comment

What was SEC doing?

This is a new piece of evidence WSJ has brought in light.

In Nov’2005 – yes, way back in two thousand and five – Madoff’s rival hedge fund manager Markopolos submitted this written complaint to SEC.

The title of the submission reads “The world’s largest Hedge Fund is fraud
In opening remarks he gives two likely scenarios and says scenario-2 is highly likely.
According to Markopoloas, What was this scenario-2?

Scenario-2 (Highly Likely) Madoff Securities is world’s largest Ponzi Scheme ….

Then the paper goes on to describe its premise in very compelling and coherent manner over next nineteen pages.

So what did SEC do?
SEC closed the case in Nov’07, two years later, and SEC’s conclusion can be found here.

Conclusion Reached:
The staff found no evidence of fraud. …..

Inefficient and insufficient gov’t oversight is one of the main reasons why market economy stands where it stands today – on the brink.

Thank you SEC, we’d love to have socialism back. We’d rather gov’t screwed us directly than gov’t colluded with corrupt market practices to screw us. Because in that case at least we have a visible filthy fist to fight with.

Update: (02-feb-09) Here is Markopolos prepared testimony to US finance committee

December 20, 2008 Posted by | News, Opinions | , , , , | 2 Comments

Japan goes ZIRP .. well, almost

Fighting with the worries of rising Yen, Japan was quick to react. Although, Japan probably showed some defiance by reducing the interest rate from 0.3% to 0.1% but still leaving it marginally above zero. 

At the heart of japanese worries is ZIRP (Zero Interest Rate Policy) by it’s trading partners esp. by US and probably by UK.

Bloomberg reports

jpy

The Fed’s reduction brought the U.S. key rate below Japan’s benchmark for the first time since February 1993, making the yen a higher-yielding currency. The yen has gained 25 percent this year, eroding profits for exporters that are already cutting jobs, production and spending as global demand collapses.

 

Interest rate really didn’t matter much in Japan in last decade. It was zero thru most of the decade and recently had touched 0.5% level. But rise of zero/low interest policies across the globe, which result in dramatic JPY rise against most world currencies, put Japan in awkward spot as it started losing it’s interest differential edge.

When Japs did not know where to invest  their excess wealth and sell their excess production as their economy was not consuming enough and thereby not growing at all, they started exporting goods and financing capital to the rest of the world. Now, with this economic downturn, even world has turned its back to Jap capital and subsequently Jap goods are losing their competitive advantage due to rising Yen.

Nobody knows what’s the way out of this crisis for Japan. But one thing is sure, rate cut is not going to matter at all and vindicating this JPY reacted neutrally to the move.

December 19, 2008 Posted by | News | , , , | 1 Comment

Hey you two biggies … please don’t fight, okay?

Hey you two Biggies …. What’s going on …

Yes.. you … I am talking about you Dr. pkrug

and you Dr. gmankiw1

Both of you are, no doubt, great economists. For a novice like me, your blogs are really a source of great information.
We all respect you a lot and love reading your blogs.

But will you stop fighting like this please?
First, you fought here , here and here.
Then here and here.

Pretty please ……. please

Thanks you 🙂

May be try not reading each other’s blog for a month or so 😉

December 18, 2008 Posted by | Uncategorized | , , | Leave a comment

Fed drops the pants and goes all in

Okay, so finally Fed fired the last ammo left in its weaponry and dropped the target funds rate to zero. That’s as far as they can go. On top of it, Fed also announced that they are going to buy all kinds of shit that no one else wants on their balance sheets. In short, Fed has dropped its pants – the last piece of clothing it’d had- and came out all open in desperate effort to save financial system from imminent implosion. Possibly, the only thing on Fed’s mind while making this historic decision was the lost decade in Japan in deflation and liquidity trap. Japan was too late to respond and drop the rates to ground-zero and more importantly  japan failed to effectively manage interest rate expectations. Fed has certainly done the first thing and Fed probably wants to do the second by buying longer term treasuries to keep long term rates low as well.

Well, so far so good. But no matter what Fed does as a part of monetary policy, unless it is supported by equivalent fiscal stimulus, seems like it may not prove effective enough. Because the only effect of $ printing press by Fed so far has been demand explosion for treasuries, which kinda defeats the whole purpose.

Market is definitely happy about Fed’s move and cheered the news with 350 points bump. But will the party last?

December 16, 2008 Posted by | Opinions | , , | Leave a comment

Madoff’s Ponzi Scheme

Bernie Madoff’s hedge fund blow-up was the stunning piece of news on wall-street last week. The Ponzi Scheme that his NASDAQ ex-chairman ran amounted to a fraud of the scale of $50B. The detailed news here.

The features of his Ponzi scheme that hardly invested anything in any market,

Pay steady 10% returns to old investors from the investments of new investors

Steady and modest returns which enable him to keep it afloat for years.

Don’t ask don’t tell policy about underlying investment strategy – as long as everybody was getting steady returns nobody complained

Accounting fraud to show fake trades and profits

Several charity organizations and banks like RBS and HSBC invested in his scheme without any due diligence.

Although this was a huge news and had a potential to hurt the market sentiments further, markets were quite nonchalant about the news, which is another sign of market bottom. Worst unemployment numbers with more than half a million going out of job in one month, market goes up. Investors set to lose $50B in a ponzi scheme, market reacts neutrally. Goldman Sachs reports negative revenue and record losses, Goldman Sachs shares go up. These are all the signs of fear being overdone.

December 16, 2008 Posted by | News | , , | Leave a comment