Crisis Diary as it unfolds ….

19-Jan-09 to 01-Feb-09: New trade on the street – Buy hope sell reality. Sigh!

Firstly, I would like to apologize to myself for not doing recap for two weeks. Aniket, don’t be such a bum ass sloth. Secondly, I would also like to apologize to rest of the world for mostly focusing only on US in this crisis diary. But then, this crisis mainly revolves around US (..and I have better access to news and blogs out of US ), so you should not complain rest of the world. For time being we must pay attention to this big bogey bummer and straighten him up first. Hey, don’t complain. You had a chance to decouple. But instead, you decided to couple more and more. Now you are suffering from some serious STDs, not my fault, okay?

The two most important developments of last two weeks were Obama’s stimulus plan and ‘bad bank’ idea gathering momentum. But we shall deal both of them separately. Also, Davos deserves its own space. So let’s look at the rest of the news.

Market Update

When markets come to terms with reality they go down, when Mr. Obama shows his mug on TV and injects new hope they go up again. So new trade is – buy on hope, sell on reality.

Some good news out of the equity markets was the earlier November lows are still intact. Earnings season on Wall st was mix bag. Several technology companies incl. AAPL, IBM, HPQ surprised on the upside. Among industrial names CAT surprised on downside, while X declared decent numbers. Financials continue to struggle badly. Overall, earnings underscored one important fact – rest of the world is somewhat isolating itself from the worries of financials and housing.
Bond markets showed significant trend. 10-yr treasury yields increased significantly and so were the increase in TIPS spread, decrease in TED spread, decrease in commercial papers spread. These are the signs of easing credit crunch, diminishing deflation worries. Also Gold went up by more than 10% (840$/toz to 930$/toz) in last couple of weeks. This is perhaps all-time high for gold in many other currencies considering recent US$ appreciation. What does the gold movement mean? Inflation protection or safe(st) haven (with rapidly declining safe haven status of US$).

Crisis Watch for the week

TED is still signaling easing credit crunch and that is a very good news.
TED spread 0.95
S&P: 825.88 (-2.7%)
VIX: 44.84 (-2.00%)


February 1, 2009 Posted by | Weekly News | , , , , | 3 Comments

05-Jan-09 to 11-Jan-09: New year, old worries

Summary of the week in one line – the crisis is back.
~~Another half a million jobs lost in US – but not as bad as some expected.
~~Equity markets ended lower, but bond markets, libor and VIX seem to be calming down, which is a very good sign.

Some tiny bits of much awaited Obama Stimulus are now available,
– Plan will be of the size of $775 billion and will span across two years
– 40% of the stimulus is of the form of tax cuts, but not exactly the kind of tax cuts supply siders would want to see. Though, most likely, existing Bush tax cuts will not be repealed.
– The plan for 4 million job creation is detailed by Christina Romer and Jared Bernstein here.

Who says what about Obama’s stimulus plan?
Paul Krugman is not happy about the size of the stimulus and the amount of public spending. He is more unhappy and even scared here.
Greg Mankiw doesn’t think Obama team is using right multiplier for tax-cut (0.99). This report uses 0.99 as tax-cut multiplier and 1.57 as Government spending multiplier. Greg Mankiw continues his stimulus skepticism in his NYT OP-ED as well.
Alex Tabarrok of Marginal Revolution was quite satisfied with overall composition of Obama’s stimulus plan in his initial reaction.

Crisis watch for the week:
TED spread 1.19
S&P: 890.35 (-3.8%)
VIX: 42.82 (+1.00%)

January 11, 2009 Posted by | Weekly News | , , | Leave a comment

22-Dec-08 to 04-Jan-09: Year ends on a positive note

Finally, it’s over. I mean 2008 is finally over. New year, new hopes, BHO has a tough task cut out for him.
Markets are very calm and up on mostly low volumes. Also, markets are up expecting big stimulus by Obama.

Some of the economic news to look forward to in new year,
1. Decision on auto bailout
2. Obama stimulus plan – how big, who benefits
3. Eurozones response to rapidly falling inflation
4. UK struggling to stabilize the economy
5. China and exchange rate manipulation

Who said what about 2008?
Stefan Karlsson on currency movements in 2008
Justin Wolfers of Freakonomics blog about the happiness index of the year 2008
Bond Tangent on 2008 bond market

Who is hoping what from 2009?
Dani Rodrik is looking forward to 2009?
RGE blog on banking in 2009
Martin Wolfe on 2009
Brad Setser captures his view on 2009

Crisis watch at the end of Y2K8:

TED spread 1.33
S&P: 931.80 (+4.2%)
VIX: 39.19

January 4, 2009 Posted by | Weekly News | , , , | Leave a 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?


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.


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

08-Dec-08 to 14-Dec-08: GM, China, fat stimulus and bear bottoms

The news of the week includes failed auto bailout, further deterioration of Chinese economy, talk of fat Obama Stimulus and has the market bottomed?

Auto bailout

Finally, Bush gov’t little reluctantly presented bill for auto bailout in Senate inspite of strong republican opposition. Well, the democrats were pushing really hard – how can you ignore main street when you bailout wall street yada yada yada. But hardass republicans defeated the bill in senate and rightly so. The details of aftermath are here.

Some fun facts about the bailout,
– the bailout was in the form of bridge loan and amounted to only $14B
– It was intended to keep 3 American companies – GM, Ford and Crysler – afloat until Obama takes control
– It included a provision of so called ‘car czar’
– Bush decided to open TARP money to help automakers temporarily. The proposal is under consideration.

There are several reasons why this bailout made no sense.
– The principal problem facing US car industry is that of overcapacity. Somebody has to go down for market to become competitive and profitable again. That’s how market economy works. This was not the case with banks. Credits were freezing up and survival of banking system was crucial.
– From unemployment point of view, many experts and economists were suggesting chapter-11 prepackaged bankruptcy. This column by Joseph Stiglitz says it all.

Regardless of what they do with the three auto makers, I’d like to see the equity getting wiped out before gov’t injecting any capital and take losses on tax payers’ money.

Obama Stimulus

How big is going to be Obama stimulus? The buzz is around 1T$ – mostly in infrastructure and green energy. Although some economists like Greg Mankiw are suggesting a supply side stimulus in form of payroll tax cut. Although it is also an interesting proposal, but it is more likely that Obama and his economic team will go for more classical Keynesian package. SPDR for metals and mining XME is suddenly looking attractive considering Obama stimulus.

Market Bottomed?

Has the market bottomed at November lows? Actually its practically impossible to predict bottoms. Every new bit of information that hits the market can take market lower and you never know till what level. Nouriel Roubini is predicting bottom at S&P 600-720 (EPS=60 and P/E between 10 and 12). At the end of this week, S&P was at 880 and Dow Jones was at 8630. But Nouriel can get earnings forecast right, he can never predict P/E and the market may bottom much higher even of earnings forecast holds good.
All the signs are pointing that market might have bottomed in medium term (1-2 years). Of course, any unexpected negative surprise will invalidate that argument. But expected negative news like rising unemployment, sliding consumer confidence, fading quarterly earnings are probably all priced in. What can really shatter the market is another round of write-downs in banking and financial institutions and big hedge fund or mortgage blow ups.

If this bottom holds good we have market bottom at,
Dow Jones 7600 (S&P 750)
Oil $40
EURUSD 1.26 (USD peeked)
GBPUSD 1.46 (USD peeked)
Crisis watch for the week

TED Spread: 1.9
S&P: 880 (-2.93%)
VIX: 54.28

December 15, 2008 Posted by | Weekly News | , , , , , , , | Leave a comment

01-DEC-08 to 07-DEC-08: The saga of bailout nation continues …

A pretty dull week I guess, no sensational hot news. Friday’s employment numbers from US (533,000 new jobless claims) were as dismal as they could be, market rallied 4% on the same day. I guess that was market’s way of saying F*ck you bad news, I am going up anyway.

US Auto industry is almost certainly getting a bailout, a massive stimulus is lined up. I am curious to see how USD reacts to all this. Markets are all ga-ga over proposed stimulus.

Stefan karlsson mentioned an interesting Keynes’ quote on his blog,

“If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of repercussions, the real income of the community, and its capital wealth, would probably become a good deal greater than it actually is.”

Interesting, eh?

Keeping finger crossed, waiting to see what happens next ..

Crisis Watch:

TED Spread: 2.18
S&P: -2.93%
VIX: 63.64

December 8, 2008 Posted by | Weekly News | , , , , | Leave a comment

09-Nov-08 to 16-Nov-08: Invoking god of depression economics

With severe recession staring at the face of most world economies, everyone is invoking one god – John Maynard Keynes. The only word that rules the marketplace … well, actually it’s a two word word .. ‘fiscal policy’.
Paul Krugman suggested fiscal stimulus as big as 600b$ for US whereas Roubini is calling for stimulus of somewhat similar size. There was also the push of coordinated fiscal policy measures in G-20 summit. Monetary policy could not unclog the frozen credit markets soon enough and now falling consumer confidence across the board has accentuated the threat of severe recession.

But can governments really spend their way out of this? Well, some governments can. But US has really hard task cut out in front of her. With big corporates failing right and left, with imminent cutbacks in consumer spending, and with US federal budget in such bad shape, Governmental discretionary spending is not going to come without some serious cost.

With all this pump priming everywhere, things may seem to coming back on track for a while, but will it last? What will be the cost of this in terms of inflation? Will it lead to hyperinflation or stagflation?

We’ll have to wait and see.

November 15, 2008 Posted by | Weekly News | , , | Leave a comment

03NOV08 – 09NOV08: Barack Obama, AIG, GM and more …

Barack Obama - the only headline of the week

Barack Obama - the only headline of the week

This week undoubtedly belonged to one person – Barack Hussein Obama.

Barack Obama created history when he became first African American to become president of united states. What this mean to the crisis at hand? If anything, he is a welcome news for economy. Perhaps, he is just the kind of guy the economy needs at the moment. His temperament, his willingness to work in bipartisan manner and more importantly his left ideology which will empower him to use Keynesian stimuli unhesitatingly and nationalization of big corporates if needed.
Other than the news on political front, GM and AIG were center of attention once again. GM is standing on brink of bankruptcy and so are the other
US automakers. Any of them going bankrupt would signal the death for AIG, which is anyway a dead man walking even otherwise. Soon AIG will feel pressure to post collateral for all its outstanding CDSes and will soon run to Fed for another bail-out package. Large scale nationalization seem to be only.
China announced a huge stimulus package and many governments are expected to follow the suit. Are we overdoing the deflationary pressures? Will this lead to global hyperinflation never seen before? Nobody knows. But this should prop commodities market and augurs well for commodity economies and currencies like Aussie, kiwi and loonie.

That’s it for this week.

November 9, 2008 Posted by | Weekly News | , , | Leave a comment