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Prieur’s readings (October 15, 2009)

Prieur du Plessis — Thu, 15 Oct 2009 09:11:11 +0000

This post provides links to a number of thought-provoking articles I have read over the past few days that you may also find of interest. Please also add the links to any other worthwhile articles you would like to share to the comments section.

Goldman vs. the U.S. Economy

Contrarian Profits — Tue, 14 Jul 2009 16:00:52 +0000

divBy the time you read this column, Goldman Sachs will have probably reported a dazzling result for the second quarter. The rumors preceding this celebrated event sparked a stupendous 185-point rally on Wall Street yesterday./div p class="MsoNormal"But the trading day was not all about mere rumors. It was also about hearsay, hype and giddy optimism…/p p class="MsoNormal"Meredith Whitney, “The Woman Who Called Wall Street’s Meltdown,” according to the Fortune Magazine cover of August 18, 2008, upgraded the shares of Goldman Sachs to a “Buy,” and predicted the stock would rise 30% from current levels. “Goldman has all the benefits of the capital markets in general,” said Whitney, “Without the ‘junk in the trunk’ as I like to call it.” Goldman shares jumped 5.3%./p p class="MsoNormal"Based on#8230;/p

Video-o-rama: Fresh wave of risk aversion

Prieur du Plessis — Fri, 10 Jul 2009 08:17:23 +0000

The usual debate on the outlook for the economy and financial markets dominated the video channels over the past few days, but interesting snippets on the improved forecast of the IMF for the global economy, the viability of the Public-Private Investment Program (PPIP), the role of the US dollar as reserve currency and the prospects for the earnings-reporting season were also featured in the clips included in the Video-o-rama compilation.

The Long And Difficult Road To Wage Cuts As An Alternative To Devaluation

Manuel Alvarez-Rivera — Mon, 19 Jan 2009 16:04:00 +0000

Well it's pretty clear to me at least that there is now one, and only one, major and outsanding topic towering head and shoulders above all those other pressing and important problems those of us following the EU economies currently find lying in our macro-policy in-trays: the issue of wage cuts. Not since the 1930s has the possibility of such a generalised reduction in wages and living standards loomed out there before policymakers, and doubly so if we now hit - as I fear we may well for reasons to be explained at the end of this post - systematic price deflation in a number of core European economies. br /br /The issue that has suddenly and even violently erupted onto the European macro horizon over the last week (as if we didn't already have sufficient problems to be getting on with) is, quite simply, how, if they either don't want to, or can't, devalue, do politicians successfully go about the business of persuading the people who, at the end of the day, vote them into office (or don't) to swallow a series of large and significant wage cuts? And this is no idle and abstract theoretical problem, since in the space of the last week alone the issue has raised its ugly head in at least four EU member states - Ireland, Greece, Latvia and Hungary. br /br /In the case of the first two of these devaluation simply isn't an option, since there is no a local currency to devalue, while in the case of the latter two the presence of prior large scale foreign currency borrowing means that authorities are nervous about anything that smacks of devaluation (since the providing banks would take large losses following the inevitable defaults, and the cooperation of these providing banks is necessary in the future if the economies in question are ever to recover). This latter view (no devaluation) prevails even though many economists, (a href="http://fistfulofeuros.net/afoe/economics-and-demography/why-the-imfs-decision-to-agree-a-lavian-bailout-programme-without-devaluation-is-a-mistake/#more-4071"including myself/a), would argue that is a highly questionable one, since wage deflation on a sufficient scale will ultimately produce those very same defaults (with the added schadenfreude, a href="http://krugman.blogs.nytimes.com/2008/12/23/latvia-is-the-new-argentina-slightly-wonkish/"as Paul Krugman points out/a, that even those who have borrowed in the domestic currency are also pushed into default).br /br /strongWar of the Sicilian Vespers Part II/strongbr /br /Now, there is already quite a debate going the rounds on the merits or otherwise of devaluation in the Latvian case (see a href="http://www.rgemonitor.com/euro-monitor/254975/why_the_imf_supports_the_latvian_currency_peg"IMF Central European representative Christoph Rosenberg here/a or a href="http://www.rgemonitor.com/euro-monitor/254905/devaluation_in_latvia_why_not"RGE Monitor analyst Mary Stokes here/a), but what I want to focus on in this post is the acute difficulty faced by any elected politician when it comes to enforcing wage cuts. This has to be one of the most important arguments in favour of devaluation, at least from the practical policy point of view. And this is also why, in my humble opinion, the IMF constantly ends up being the whipping boy, since the easiest way for any local politician to try to side step the responsibility for taking difficult decisions is to throw the country to the mercy of the "dreaded" fund (or at least, as seems to have happened in last weeks Irish case, threaten to do so), and then tell everyone that there simply is no alternative, as "they" will accept nothing less. br /br /All this puts me in mind of the popular urban legend according to which mothers in Naples put the fear of god into their recalcitrant offspring by warning them that they'd better darn well behave since otherwise "the Catalans will come" (in reference to an infamous incident in the aftermath of the War of the Sicilian Vespers in which Catalan Commander Roger de Flor allegedly massacred 3000 Italian soldiers on his arrival in Constantinople - for default on a debt as it happens - simply because his mercenary troops had not been paid). Now mothers all over Europe are apparently telling their children "lock the front daw, Dominique Strauss Kahn is Coming".br /br /strongThe Irish Gaffe, Or Just Another Load Of Old Blarney?/strongbr /br /First Up this week was Irish Prime Minister Brian Cowen, whose alleged threat to call in the IMF if the trade unions did not agree there an then to all overall 5% wage cut for public sector workers (a threat which was subsequently denied) made quite a few waves in the press and even got as far as producing a href="http://fistfulofeuros.net/afoe/economics-and-demography/ireland-wont-be-going-to-the-imf/"an official denial on the part of the Fund/a. br /br /blockquotePrime Minister Brian Cowen, while at an investment conference in Tokyo on Wednesday, was reported to have endorsed the view of an Irish union leader that the parlous state of Ireland's public finances could lead to the IMF ordering mass dismissals of public sector workers. Dan Murphy, the general secretary of the Public Service Executive Union, had previously told his branch members that the Fund could intervene if public spending was not curtailed, according to the Irish Times......As for public sector wages, the prime minister's comments may simply have been an attempt to scare unions into agreeing to public sector wage cuts. That ploy "may have backfired somewhat," for all the attention it has now received, remarked Rossa White, chief economist at Davy stockbrokers.br /br /Around 20.0% of Ireland's 1.2 million-strong workforce get their salaries from the state. While that proportion is not unusual in Europe, wages are unusually high, as are their accompanying pension benefits. The Irish government is now working to scrap a 6.0% pay increase it announced last September--badly timed to have launched around the time of Lehman Brothers Holdings' collapse--and White believes another 10.0% cut is needed. /blockquotebr /br /strongLightening Trip To Hungary/strongbr /br /Cowen was swiftly followed out of the starters box by IMF Managing Director Dominique Strauss-Kahn who must certainly have been the highest profile vistor to pass through the VIP lounge at Budapest Ferihegy's airport last week as he found himself having to take time out to fly-in and offer a spine-stiffener to a government who were giving every indication of backtracking on the 8% public sector wage cut they had agreed to as one of the conditions for the 20 billion euro IMF-lead rescue loan. Strauss-Kahn arrived amidst a notable weakening in the value of the forint, and all manner of speculation about whether or not the fund was set to withhold the second tranche of the loan.br /br /br /At the heart of last week's visit were concerns about the size of Hungary's 2009 budget deficit, since while Hungary has been steadily reducing the size of the deficit as part of the austerity programme agreed to in the summer of 2006 and the deficit was down to around 3.3% of GDP last year, according to Finance Minister János Veres last Tuesday, it is not clear what impact the recession will have on the 2009 target number of 2.6%. And we still need to say "about" 3.3% for the 2008 deficit since we evidently don't have a final figure for Hungary's 2008 GDP on which to make a more precise calculation.br /br /The days before Strauss-Kahn's visit were rife with speculation that Hungary might be forced to adopt new austerity measures in order to stay on track with its deficit target, with analysts estimating Hungary could be set to overshoot the target by something in the region of HUF 200 billion-HUF 250 billion, due to the recession being deeper than expected and a sudden drop in inflation. Lower than anticipated GDP growth is important since Hungary currently has an estimated 0.9% contraction pencilled-in for its fiscal calculations, while in reality the final outcome may be anywhere between minus three and minus five percent, depending on the view you take (in fact the EU Commission Hungary 2009 Forecast - out today has -1.9, but this is almost certainly too optimistic). Also the sudden drop in inflation is also taking everyone by surprise, since if prices are lower than expected then VAT returns etc will be down accordingly, too. Hungary's inflation stats will likely undershoot the current forecast, Veres emphasized, confirming analyst expectations for a significantly lower inflation path for Hungary (the current market consensus for annual inflation in December 2009 is 2.6%, but again personally I think this is way too high). br /br /blockquote"Currency traders in London took a sentence out of context in last night's media reports (which included Portfolio.hu coverage) which said the International Monetary Fund might cancel October's credit agreement with Hungary. This was the main reason for extreme pressure on the forint this morning," a Budapest-based trader told Portfolio.hu. After this morning's statement by Finance Minister János Veres, who claimed it was “impossible" for Hungary not to meet fiscal targets (or else the government was ready to take further austerity measures), market players began to see that the panic was unsubstantiated. As a result, we have seen an intense correction towards midday, the trader argued.br /Portfolio Hungary Report/blockquotebr /br /So Hungary's 2009 budget is in trouble, and this is partly due to exaggerated inflation and growth forecasts, and partly due to some hefty government compensation for state employees who lost their “13th month" bonus at the end of 2008. Arguably it was this latter point which was the main reason for the IMF Managing Director's visit. Strauss-Kahn met with Prime Minister Ferenc Gyurcsány, Finance Minister János Veres and National Bank of Hungary Governor András Simor, President of opposition party Fidesz Viktor Orbán, and a number of MPs, according to the IMF press release.br /br /Apart from putting a stop to any kind of "back door" compensation for wage cuts, the tangible outcome of the meeting was a battery of agreed measures intended to bring the budget deficit back into line with targets.br /br /blockquote“In order to partially offset the loss of budget revenues, we do not want to rule out the possibility of tax hikes," Hungary's Finance Minister János Veres told a morning talk show on Hungarian TV channel ATV. Veres did not make direct reference to a VAT hike, but recent press leaks and comments from analysts suggest that this may well be in pipeline. /blockquotebr /br /Naturally Strauss-Kahn explained at his post meeting press conference that the International Monetary Fund was generally satisfied with Hungary's efforts to meet the conditions for the IMF loan (he was, of course, hardly likely to say otherwise in public), and he even dangled out the possibility that the loan might be extended beyond 2010 if economic condititions made it necessary. We will return in the future to this point, since as I personally cannot see the present plan working as anticipated, I cannot help asking myself when it will be (if ever) that Hungary is able to be discharged and certfied as fit to stand on its own by the fund. Or are we about to see the creation of a new set of Fund Economic Protectorates, a possibility which I'm sure was never envisaged by the institution's founders.br /br /strongHow To Dangle Your Government On The End Of A Very Thin Thread Latvian Style/strongbr /br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SXR_pwTao6I/AAAAAAAAMNI/GXY2vXQyVtQ/s1600-h/lithuania+photo.png"img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 216px;" src="http://4.bp.blogspot.com/_ngczZkrw340/SXR_pwTao6I/AAAAAAAAMNI/GXY2vXQyVtQ/s400/lithuania+photo.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5292995817384879010" //abr /br /But things were obviously a lot hotter under the collar (despite the snow) in Riga round about the same time, since according to a href="http://www.ft.com/cms/s/0/34cc61da-e215-11dd-b1dd-0000779fd2ac.html"the Financial Times/a Latvia’s president threatened to call early elections last Wednesday after anti-government protests led to the Baltic country’s worst rioting since independence in 1991.br /br /blockquote“It’s going to bring down the Parliament, and through that the government,” said Krisjanis Karins, a member of Parliament and former leader of the opposition New Era party. “It’s already happening, and the pace is such that nobody really understands.” /blockquotebr /br /Such demonstrations - and similar ones in Bulgaria and Lituania (shown in photo) - raise doubts over whether Latvia’s government actually has enough political and social capital to implement the painful austerity plan agreed with the International Monetary Fund last month as an alternative to devaluation.br /br /blockquote“Trust in the government and in government officials has collapsed catastrophically,” President Valdis Zatlers told a news conference. “The Saeima [parliament] and the cabinet of ministers have lost links with the voters.”/blockquotebr /br /About 10,000 Latvians demonstrated in Riga’s Dome Square on Tuesday night in a rally called by opposition parties, trade unions and civic organisations. The demonstrators accused the government of corruption and of economic mismanagement and demanded that elections – not due until 2010 – be brought forward. The government now forecasts that the economy will contract 5 per cent this year and unemployment will soar to 10 per cent.br /br /blockquoteThe Latvian government is well aware that strong adjustment will be needed to ensure success. In fact, most of the tough measures—including a nominal wage cut in the public sector of no less than 25 percent—was proposed by the Latvian government itself. This shows that the economy—including the labor market and the wage-setting mechanism—is very flexible, much more flexible than in most other countries, even outside Europe. The IMF is supporting the government's policy package through a $2.4 billion loan, with the EU, the World Bank, and a number of bilateral creditors providing additional financing.br /Marek Belka, Current Head of IMF's European Department, quoted in a href="http://www.imf.org/external/pubs/ft/survey/so/2009/int011409a.htm"IMF Helping Counter Crisis Fallout in Emerging Europe/a, IMF Survey Magazine. /blockquotebr /br /br /What really seems to have angered people are the conditions attached to the €7.5bn stabilisation package agreed last month with the International Monetary Fund and the EU after the nationalisation of the country’s second largest bank shook confidence in the country’s fixed exchange rate. In particular Latvian citizens seem to have been upset by the stringency of the austerity package since in the letter of intent Latvia undertakes to limit budget spending to under 40% of GDP, and this in the context of a sharp contraction in GDP is not an easy thing to do- Clearly not of the envisaged measures are popular - cutting wages in the government sector by about 15%, freezing pensions as well as cutting back government spending on goods and services. And in addition to the cut in provision an increase in VAT is also being contemplated. All this contrasts, however, with the measures envisaged for restructuring the banking sector, including recapitalization of banks, honoring liabilities via the deposit guarantee fund and ensuring the maintenance of confidence in the various liquidity instruments, all of these areas of spending where increases in spending will be permitted. Of course, once you decide to stay on the peg there is no avoiding this, but it is hard for ordinary people to understand that this is not simply favouring Nordic banks at the expensive of Latvia's pensioners and unemployed.br /br /strongIts All Greek To Me/strongbr /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/SUPthY7s7EI/AAAAAAAALws/SEu4fWY07xE/s1600-h/greece+photo++one.png"img id="BLOGGER_PHOTO_ID_5279324346092678210" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 189px; TEXT-ALIGN: center" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/SUPthY7s7EI/AAAAAAAALws/SEu4fWY07xE/s320/greece+photo++one.png" border="0" //abr /br /Greece, as ever, is steering a rather different course. In the Greek case it is not the IMF who is waving the big stick, but the credit rating agencies, in the shape of Standard Poor's who last week cut its credit ratings on Greece's sovereign debt, already the lowest in the 16-nation euro zone, to A- with a stable outlook from A. Greece was only one of four euro zone countries who have been warned by SP recently that they may have their ratings cut, and ideed Spain has only today had its rating cut too. br /blockquotebr /"The ongoing global financial and economic crisis has in our opinion exacerbated an underlying loss of competitiveness in the Greek economy," SP credit analyst Marko Mrsnik said. "In our opinion, the ongoing slowdown in credit growth will likely lead to a deceleration in domestic demand, thus increasing the risk of a recession and a possibly protracted adjustment."/blockquotebr /br /SP said Greece was entering the downturn with a fiscal deficit of around 3.5 percent of GDP, after repeated government failures to bring expenditure under control and reduce high debt levels despite years of economic growth averaging four percent. Following the announcement, spreads in Greek 10-year government bonds over benchmark German Bunds widened by about 10 basis points to a session high of 246.9 basis points. br /br /The extra interest Greece must pay to borrow money for 10 years as compared with Germany stands at 246 basis points, while for Ireland the figure hit 180 basis points, also a record, and spreads have widened too for Spain and Portugal. br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/SXDvtLFDBhI/AAAAAAAAMLI/xQIjPN-Nyi8/s1600-h/ten+year+bonds+two.png"img id="BLOGGER_PHOTO_ID_5291993121507444242" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 214px; TEXT-ALIGN: center" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/SXDvtLFDBhI/AAAAAAAAMLI/xQIjPN-Nyi8/s400/ten+year+bonds+two.png" border="0" //abr /br /blockquoteWage moderation and enhancing wage flexibility are important challenges. The authorities will continue with the policy of containing increases in basic wages of government employees and are hoping for a favorable signaling effect on private sector wage settlements. However, in recent years, wage increases in the private sector have been relatively large and often exceeded productivity growth.br /a href="http://www.imf.org/external/pubs/cat/longres.cfm?sk=21937.0"Greece: 2007 Article IV Consultation/a - IMF Staff Report On Greece/blockquotepbr /br /It should not surprise us then to learn that one of the key areas of controversy behind the recent Greek protests was a law which effectively ended the employees' right to collective wage contracts - a law which won approval in the Greek parliament last August. The government justified the move by saying that it wanted to clean-up debt-ridden state companies and overhaul protective employment laws in an attempt to attract more foreign investment. The now-dismisssed Greek Finance Minister Alogoskoufis recently told parliament the reform should be pushed ahead "for the sake of the Greek economy and society," since higher wages have added to state companies' debts, which ordinary Greeks had to cover with their taxes. br /br /A much fuller review of the Greek problem can be found in my "a href="http://greekeconomy.blogspot.com/2008/12/why-we-all-need-to-keep-eye-on-what-is.html"Why We All Need To Keep A Watchful Eye On What Is Happening In Greece/a" post.br /br /strongSo What Are The Options?/strongbr /br /blockquoteIMF Survey Online: The IMF appears to be advocating fiscal restraint in all of its loan programs in Europe. Wouldn't these countries recover faster with fiscal stimulus packages?br /br /Marek Belka: The answer is obvious: can a country finance its borrowing requirements or not? If only these countries could afford a larger budget deficit, fiscal stimulus would have been fine. But when a country is already in crisis, the main problem is usually to come up with enough liquidity. In these cases, fiscal restraint is necessary. Choices in a financial crisis are very constrained. /blockquotebr /br /Well really there are no very easy solutions here, and anyone who suggests there are is kidding you. In all the countries we are talking about above (and a good few more) the citizens, and the corporates (and in some, but not all, cases the governments) are very highly leveraged (indebted in relation to their realistic future income expectations) and the debt accumulation process has pushed living standards to a level which is higher than sustainable. Just think of your own household. If you push all the available credit to its limit during the first half of a year, its clear you can't live on the same level in the second half unless you keep borrowing, but when the lenders not only won't allow you to do this, but even have the nerve to ask you to pay some of your borrowings back, well then your standard of living in the second half is bound to drop, and this, of course, is what is happening across all these countries. br /br /There is an additional problem here, however, since all that "over-the-top" borrowing drove these countries forward above their normal "capacity" level, and that is also what all the above four economies have in common. This driving-forward beyond capacity is what is called "overheating", and this overheating is normally reflected in above average inflation, which is again what we have seen in these countries. The end product is that they have not only an indebtedness problem but also a competitiveness one, and that is what the IMF packages are intended to address.br /br /Of course, the problem is if you get your salary cut it becomes harder to pay back the money you owe (loan defaults) and you can't spend as much on consumption (demand slump). And on top of this, as these first two lock-in, government revenue falls (less VAT) while expenditure rises (unemployment payments and bank bailouts), so we get fiscal deficit problems. So not only do you have banks lending less, households spending less, and companies investing less (as demand drops), we also have governments finally forced to cut back (at least in the more vulnerable economies), as the ratings agencies get to work. So you get a downward spiral of falling wages, and falling prices as GDP just comes down and down. And this process can become systematic (deflation) meaning that nominal GDP starts falling even faster than real GDP, making for a car that becomes increasingly "wobbly" and difficult to steer.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/SV_H8hesHGI/AAAAAAAAL98/hXsrIKNUcXM/s1600-h/hungary+reer.png"img id="BLOGGER_PHOTO_ID_5287164330149420130" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 181px; TEXT-ALIGN: center" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/SV_H8hesHGI/AAAAAAAAL98/hXsrIKNUcXM/s320/hungary+reer.png" border="0" //abr /br /In this environment, there really is only one way to halt the spiral, and to jump start the economy, and that is to export, and to try and encourage export directed investment. But to get going with exports you need to recover competitiveness. You can achieve some of this restoration via productivity improvements, but not enough, and not quickly enough, especially if the distortion is large, and has been going on over a number of years (see the real exchange rate chart for Hungary above). So you can either do one of two things, devalue, or cut wages and prices. Neither is easy, but as we are now seeing the second is hardly universally popular either.

Why Corporate Bonds Could Be The New ‘Safe Haven’ In 2009

Eric Roseman — Mon, 29 Dec 2008 11:47:24 +0000

pGiven the implicit government guarantees, strongEric Roseman/strong says it is likely that investors will soon start to switch from low-yielding Treasury bonds to high-grade corporate debt. The Fed#8217;s balance sheet is now polluted by the toxic debt it has taken on from banks. And demand for Treasuries will not keep pace with the deluge of supply in the coming year. Eric says this could make investment grade corporate debt the new safe haven in bonds in 2009./p pThis from a href="http://www.SovereignSociety.com" class="alinks_links"Sovereign Society/a:/p blockquotepSeveral segments of the credit markets have come back to life in December after crushing losses recorded in September and October. Though it’s too early to celebrate a broad-based credit revival, the largest issuers of investment grade debt surged this month as#8230;/p/blockquote

Financial Crisis Timeline

Alex Stanczyk — Sat, 18 Oct 2008 00:58:47 +0000

A chronology of the recent global market chaos: September 14/15 - Investment bank Lehman Brothers Holdings files for bankruptcy protection; Merrill Lynch to be taken over by Bank of America Corp. September 16 - U.S. Federal Reserve announces plan for $85 billion (49 billion pound) loan to American International Group in return for an 80 percent stake [...]

Top Alternative Investment Managers | New List

Richard C. Wilson — Fri, 17 Oct 2008 05:54:42 +0000

Alternative Investment Leaders

2008 Top Alternative Investment Managers

Institutional Investor is out with a new list of the top alternative investment firms in the industry. This was created as part of their 2008 Top 300 Money Managers list. I took the top 10 firms and ran an analysis to see who really controls the most assets (or did).

Data Used:

Firm Name	Assets in Millions
Goldman Sachs	95,694
Bank of New York Mellon Corp	91,698
JP Morgan Asset Management	84,742
Credit Suisse Asset Management	84,082
State Street Global Advisors	54,467
BlackRock	41,606
Legg Mason	36,159
Farallon Capital Management	36,000
Bridgewater Associates	35,367
Lehman Brothers Holdings	33,528

The top 25 firms were:

Goldman Sachs
Bank of New York Mellon Corp
JP Morgan Asset Management
Credit Suisse Asset Management
State Street Global Advisors
BlackRock
Legg Mason
Farallon Capital Management
Bridgewater Associates
Lehman Brothers Holdings
Evergreen Investments
Renaissance Technologies Corporation
Och-Ziff Capital Management Group
D.E. Shaw Group
MassMutual Financial Group
Pualson & Co.
Barclasys Global Investors
MFC Global Investment Management
Oaktree Capital Management
Affiliated Managers Group
GSC Group
US Bancorp
Morgan Stanley Investment Management
Atticus Capital
Citadel Investment Group

Source

Related to Alternative Investment Firm Analysis:

Tags: Largest Alternative Investment Firms, Alternative Investment Funds, Alternative Investments, Top Alternative Investment Performance, Best Alternative Investments

Indian Inflation Doesn’t Budge While Forex Reserves Rise and the Rupee Falls

Edward Hugh — Sun, 28 Sep 2008 12:49:00 +0000

India's inflation held steady in the week to September 13, rising 12.14 percent from a year earlier, thus maintaining the same pace as in the previous week. The rate has now been trending slightly down from the recent peak of 12.63 percent hit on the 9 August. If this trend continues it should give the central bank the necessary room to hold borrowing costs unchanged and thus avoid placing funding pressures on a banking system which is struggling in the wake of the most recent bout of financial turmoil in the United States.

India's financial system is evidently showing signs of strain as the impact of both local policy tightening and the global credit crunch steadily take hold. The rate at which Indian banks lend to each other climbed to an 18-month high of 15.125 percent on Sept. 19, following the failure of Lehman Brothers Holdings and the U.S. government takeover of American International Group. As a result the Indian finance ministry responded by allowing companies building roads, ports, utilities and other infrastructure projects to borrow more overseas - thus giving them access to cheaper funds - while the central bank announced measures to boost cash in India's financial system.

Indian banks have borrowed an average 642.8 billion rupees from the central bank in the last two weeks, more than five times the average 113 billion rupees in the previous fortnight, further indicating a shortage of funds in the banking system.

Foreign Exchange Reserves Rise Slightly

India’s foreign-exchange reserves rose by the most in five months in the week ended September 19, according to the latest data from the Reserve Bank of India. The rise has surprised many observers, but it should be borne in mind that it coincided with the rise in the dollar against a number of other currencies (and in particular the euro, which the RBI also holds in reserves) on the back of the euphoria about the possible bailout of the US financial system.

Total foreign-exchange reserves rose by $2.51 billion to $292 billion in the week ended Sept 19, while foreign-currency assets - which form the lions share of the reserves -climbed $2.5 billion to $282.8 billion during the week. As we can see from the chart (below) the value of foreign exchange reserves has stabilised since mid-August, so the rot, it would seem, has definitely stopped. I think it is significant that we saw a positive initial response across the key emerging markets to the proposed US bailout, and while we are now seeing considerable volatility as people become nervous about whether it will, finally, arrive.I think when the package is introduced the key emerging market economies will be the principal beneficiaries, as the so called "risk appetite" will bounce back, especially given that the aftermath of the package will be a lower growth period in the OECD economies as the cost of the bailout has to be assimilated.

Even given the recent decline, it is important to bear in mind that India's foreign-exchange reserves, including overseas currencies, gold and special drawing rights with the International Monetary Fund, have increased $56.1 billion in the past year.

Money Supply Continues To Grow

Meanwhile, money supply in India grew year on year by 21 % in the two weeks ended Sept. 12, same rate as in the previous fortnight, according to data from the RBI. M3 - which largely consists of currency in public circulation, bank deposits and money invested in other saving plans, stood at Rs 42,26,143 crore as on September 12.

M3 has been rising at an average rate of 21% since the current fiscal year began on April 1, and has been consistently above the central bank’s target of 16.5% to 17% for the fiscal year ending March. At the same time, total bank loans rose by Rs 32,914 crore in the two weeks ended Sept 12, the biggest fortnightly increase since March. Outstanding bank credit was up by 26.1% year on year and reached Rs 24, 91,248 crore. Food credit was up by Rs 847 crore to Rs 45,190 crore, while non-food credit increased by Rs 32,067 crore to Rs24,46,058 crore. Total bank deposits rose by 22.5%, or Rs 6, 25,282 crore, in the same period to Rs reach 34, 05,377 crore.

The Rupee Weakens Again

The rupee has declined almost 17 percent so far this year and is the second-worst performer among the ten most-active Asian currencies excluding the yen. This week it declined for the seventh consecutive week, the longest run in more than 2 1/2 years. The rupee was down 5.6 percent in September, and is thus headed for its worst month since the Asian financial crisis in 1997.

Foreign investors were net sellers of Indian stocks for a fifth straight month in September, and have offloaded $9 billion so far this year, according to data from the Securities & Exchange Board of India. They bought a record $17.2 billion in stocks last year. Indian stocks fell, with the benchmark posting its biggest weekly drop in six months, after talks on a U.S. credit market rescue plan stalled and Washington Mutual Inc. became the biggest bank failure in American history.

The Bombay Stock Exchange's Sensitive Index, or Sensex, fell 445, or 3.3 percent, to 13,102.18. The index had its biggest weekly drop since the week ended March 7. The S&P CNX Nifty Index on the National Stock Exchange slid 125.30, or 3.1 percent, to 3,985.25. The BSE 200 Index declined 3.2 percent to 1,590.58. Nifty futures for October delivery fell 3.9 percent to 3,995.

Standard & Poor's 500 Index futures slid 1.7 percent when negotiations on a $700 billion bailout plan for U.S. credit markets were thrown into doubt by a group of House Republicans who said the plan drawn up by Treasury Secretary Henry Paulson wouldn't work.

The decline in Indian stocks is more a reflection of global sentiment towards emerging market stocks and bonds than it is an indicator of any specific local issue. The MSCI Emerging Markets Index of stocks has been falling since last May - as can be seen in the chart below - and dropped 1.74% percent on Friday to 823.694, its lowest level since Sept. 15. The index is now down 13.6% so far this month, and 33.87% so far this year. But if you look carefully you can see that it peaked up again after 20th September, as speculation increased that there would be a major bailout of the US banking and insurance sector. This bounce back unwound towards the end of last week, as uncertainty grew about the arrival of the package.

A similar picture can be seen of the JPMorgan EMBI+ emerging bonds index (see below), which has been down significantly since the end of August. Since the US package seems now about to be approved for the US congress, as a result we should see sentiment improve significantly, and India may well be one of the principal beneficiaries of this change in sentiment. The coming weeks should clear all this up quite quickly.

AIG, Fannie, Freddie, and Lehman are Under Federal Investigation

QualityStocks — Wed, 24 Sep 2008 19:10:19 +0000

Four of the nation’s largest financial institutions, whose collapses have contributed significantly to the need for the pending government action plan currently being discussed in Washington, have also drawn attention from the Federal Bureau of Investigation. The FBI has stated its intent to commence fraud investigations of insurer AIG, investment bank Lehman Brothers Holdings, and [...]

The US Will Never Be Able to Pay Off its Debts

Gary North — Wed, 24 Sep 2008 14:40:44 +0000

We were all misled by the assurances of 'experts' over this crisis, says Gary North in The Daily Reckoning. The $700 billion Paulson plan will not be the last bailout. And the ever-growing national debt will never be paid off with the US dollar at its present value. Gary says it is time to name and shame those who tried to deceive us...

Your assignment, if you accept it . . . Help me compile statements by every so-called expert on how the financial markets were safe, the stock market was going to rise, and “people should not panic and sell stocks.”

For months, high-level government officials assured us that America’s financial markets were safe. They continued to assure us right up until Treasury Secretary Henry Paulson on September 18 said a $700 billion bailout is required to save the economy from a collapse comparable to the Great Depression.

Our leaders, including Paulson, did not have a clue as to what was going on.

The World Wide Web has preserved their assurances. It is now time to collect them in one place. I propose to call this place The Gallery of the Clueless.

The assurances began in August 2007. They accelerated right through September 18.

It did not matter that Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) were nationalized without vote by Congress on a Sunday afternoon, September 7. The experts remained optimistic.

It did not matter that a week later, also on a Sunday, Merrill Lynch (NYSE:MER) sold itself without a vote by its Board of Directors to Bank of America (NYSE:BAC), which also did not ask for a vote by its Board of Directors.

It did not matter that on Monday, September 15, Lehman Brothers Holdings (NYSE:LEH) declared bankruptcy—the largest bankruptcy by far in American history, dwarfing Enron and WorldCom combined. We were assured on September 15 that everything was under control.

It was not just Paulson, Bernanke, and the President who assured us. It was also almost every talking head from the financial world who appeared on television. The main exception was Prof. Nouriel Roubini, whose grim forecasts have come true, one by one.

On Sunday, September 14, he said that no investment bank would survive. He said the model was fundamentally flawed. Two went bust within 24 hours: Merrill Lynch and Lehman. The other two were bailed out by a change in their legal structure on Friday, September 19. Both Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) surrendered their status as investment banks, switched to holding companies, thereby coming under Federal regulation, and immediately becoming eligible for bailout money.

We have seen a stream of ex-geniuses depart as multi-millionaires: Angelo Mozilo (Countywide Financial), Charles Prince (Citigroup), Stan O’Neal (Merrill Lunch), and Dick Fuld (Lehman). They join the legendary Franklin Raines (Fannie Mae), who had departed years earlier, and who today is an Obama advisor. Then there were the recent heads of Fannie and Freddie. The head of AIG will be replaced soon.

OH, YEAH?

In 1931, Viking books published a slim volume titled “Oh, Yeah?” It was a collection of quotations from the nation’s former experts of why the stock market was a great place for your money in 1928 and 1929. These quotations were identified as to who said what, when, and where.

I own a copy of this compilation. It ended with a 1931 quote from Calvin Coolidge, who was in retirement: “The country is not in good condition.” I intend to assemble a digital equivalent of “Oh, Yeah?” I will post it free of charge on the Web. I want to make it easy for journalists and historians to see just how blind the nation’s leaders were.

This collection will serve as a warning to future investors: ”Don’t trust the assurances of self-interested people whose careers and reputations are at stake.” The new Administration will return to Congress for more rounds of bailouts. Each will be presented as “the final request.” Each will be sold to Congress as last shoe to drop.

The result so far has been a gigantic increase in the nation’s debt. We have gone beyond the point of no return.

Voters know now that the national debt will never be paid off, at least not with dollars worth what they are worth today.
But they think they are helpless. They will let Congress get away with this.

WHAT I NEED FROM YOU

Do a Google search for such topics as these for 2007 and 2008:

“money is safe”, panic AND not “should not sell”, confidence AND banks, confidence AND FDIC, “economically sound” “fundamentally sound”, Paulson AND assurance, Bernanke AND assurance, Dodd AND assurance.

Maybe you can think of others. Look for links after page 1 on Google. Go as far as page 5. Look for juicy ones. Then extract the quotation using cut & paste (Ctrl-c, Ctrl- v). Paste it into an email letter (Ctrl-v). Then paste in the link to the Web source. Repeat the process using YouTube in the search box. If you find some choice videos, send them along with the links.

Put “clueless” in the subject box. Send it to garynorth@garynorth.com.

To Sign Up Click Here

Scooped?

Matt Hougan — Wed, 24 Sep 2008 05:22:40 +0000

With all due respect to David Hoffman (one of the best reporters in the business), we did not get scooped on the Lehman Brothers story, as Jim suggests.

In fact, Murray Coleman was way ahead of the story.

Murray's story on the Opta ETNs posted to our Web site at 2:27 p.m. on Friday, September 12, titled "Lehman Meltdown Raises ETN Questions." At the time, Lehman Brothers was still a going concern, and the Lehman Brothers Opta ETNs were trading as normal on the New York Stock Exchange.

Murray wrote: "With Lehman Brothers fighting to stave off bankruptcy, shareholders of the once-mighty investment bank aren't the only ones facing possible big losses. Those owning exchange-traded notes issued by the firm could face a tough time getting out of their investments at fair market value if things take a dramatic turn for the worse."

The article goes on to call the risk "small"—something I as an editor inserted, after discussing Lehman's prospects with you, Jim. But the point is, Murray put out an excellent story that warned investors about the risks of holding Lehman ETNs while those ETNs were still trading. A risk-conscious investor could have read that story and said, "The upside of holding these ETNs is limited and the downside is enormous; I should sell."

I hope they did. Anyone who held those ETNs that weekend was taking a tremendous risk for which there was no compensating reward.

That's what the best investment journalism does; alerts investors to risks while they can still do something about it.

The idea that Barclays was going to step in and pay off the ETNs as part of its agreement to buy Lehman's investment banking and trading operations was a fantasy. The Opta ETNs were general obligations of Lehman Brother's Holdings, and Barclays was very careful to exclude those debts from its buyout. It specifically did not want to take on the structured product debt from Lehman, and it could hardly pay off some but not all of the structured products. Just imagine the outcry!

Once Lehman filed for bankruptcy, those ETNs were over.

The Lehman Brothers story drives home an important point: Credit risk is very real in the ETN business, and it is also digital. Either the bank stays solvent and you receive 100% of the index return, or the bank goes bankrupt and you're toast. There is no Mr. In Between.

Let's hope investors understand that.

Lehman Brothers’ Chinese JV Mystery

Biz China Update — Wed, 17 Sep 2008 18:20:32 +0000

China Railway Erju Co. said that bankrupt U.S. investment bank Lehman Brothers Holdings has not contacted the company over the current status of their joint venture project, Dow Jones Newswires reports.

Lehman Bankruptcy Proceedings Commence

QualityStocks — Tue, 16 Sep 2008 20:46:26 +0000

Tuesday marked the first hearing of the largest bankruptcy case in the history of the United States. 158-year-old Lehman Brothers Holdings is expected to seek the initial approval of Judge James Peck with respect to asset sales, however, final sales would have to be approved by the court. British bank Barclays has agreed to the [...]

A lot of commotion, but what’s new?

Jack Crooks — Mon, 15 Sep 2008 15:16:48 +0000

Lehman Brothers Holdings has declared Chapter 11 Bankruptcy. Any potential bidders have fled the scene and so far the Treasury doesn’t plan on bailing them out.

Bank of America, however, has agreed to acquire Merrill Lynch for $50 billion.

AIG is in rough shape and their fate hangs in the balance as this week opens up.

The Bank of China has decided to cut short-term rates to encourage liquidity and support economic growth in the face of increased market risk flowing from the US.

The Bank of England and the European Central Bank have pumped additional funding (5 billion pounds and 30 billion euros of loans) into their respective markets in an effort to shore up confidence and avoid panic in the face of the US banking fiasco.

The Bank of Australia joined the money party and unleashed a few billion into their markets, an amount more than they originally estimated would be sufficient in shore up market needs.

The Federal Reserve has widened its lending facilities, offering additional funds and accepting even more types of collateral.

And a group of 10 banks have set up a $70 billion dollar fund to help with liquidity issues in the event of ongoing struggles among major US financial institutions.

How have the currencies behaved?

Well, the US dollar opened up in the Asian session in much the same way it finished out the day on Friday – falling sharply against most all the majors. But that sell-off didn’t last, and the buck bounced back with a vengeance.

In fact, a massive risk-aversion flow of capital has benefited the dollar greatly. But besides the US dollar’s big reversal against the likes of the pound, euro and Aussie, the risk aversion is also greatly supportive of the Japanese yen and, to a lesser extent, the Swiss franc.

In spite of all this commotion, our theme of money flowing back into the center is holding firm thus far. Take a look at the price of US 30-year bonds ...

Money is flooding into this class of investment. And while prices are pulling back from their highs this morning, we’ve already seen a large breakout of the weekly closing high going back to the middle of March. In all likelihood we expect to see this continue.

Perhaps the selling from Friday and into the opening of the Asian session is enough to washout the sellers and send the dollar back higher on a continued flow of risk aversion and deleveraging flushing money into dollar-denominated assets.

Regards,

Jack & JR

Most National Banks Lose Ground

QualityStocks — Thu, 11 Sep 2008 00:38:56 +0000

The percieved instability of Lehman Brothers Holdings, the fourth largest investment bank in the US, has contributed to drops in share price for the majority of national banks this mid-week. These included Washington Mutual, Inc. and Wachovia Corp., falling 22 and 6 percent respectively. Financial securities remain on shaky ground, despite a healthy surge in [...]

S&P 500 Winners and Losers

Trader Mark — Mon, 08 Sep 2008 13:09:00 +0000

Hmm... here I thought we were positioned well for a big up day, having cut back our short exposure and getting quite long Friday. How very wrong. Always interested on days like this when we are trailing the market so badly to see what is winning and what is losing - below are [...]

Lehman Saga Continues

Zacks Market Commentaries — Fri, 22 Aug 2008 09:04:51 +0000

Yesterday, it was reported that beleagured U.S. investment bank Lehman Brothers Holdings (LEH) may not be receiving its hoped-for $5 billion bailout from the Korean Development Bank (KDB). No public statements were issued, but we did point out that a former Lehman executive had left the firm earlier this year to head up the KDB. So we knew we didn't have the full story as of yesterday's close.

However, before the market opens today, new speculation surfaces that Lehman could become a hostile buyout candidate. Who might buy them out, you ask? Why, none other than the Korean Development Bank. Shares of LEH shot up 11% in pre-market trading, or $1.50, to roughly $15.25 per share.

This would bring a major investment portfolio to the Far East country of South Korea, though Lehman is rife with problems that have been well documented. Analysts continue their swarm to downwardly revise estimates for both the company's third quarter (ends August) and fiscal year 2008 (ending November).

We don't know whether to make more of this new development than we did of yesterday's contradictory news story, so we will do our best to keep up to date either way. Lehman Brothers currently rates a Zacks Rank #4 (Sell).

"LEH" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

Lehman Brothers Holdings Inc (LEH) Looks to Raise Capital

QualityStocks — Fri, 06 Jun 2008 00:53:28 +0000

Lehman Brothers (LEH:NYSE) is one of the nation’s major investment banks. Lehman was founded in 1850 and has a rich history on Wall Street. However, Lehman’s stock price has been taking a beating this year as they have been painted with the same brush as Bear Stearns. There are rumors floating around Wall Street nearly [...]