23 Dec 08
To understand the game plan, a quick brief on the state of US economy (USD13 trillions p.a.) would be able to frame the issue. Being the world's largest economy and consuming nation, her economic contraction has triggered a global financial crisis and recession.
As P. Krugman rightly point out, there is no real difference between Madoff and the overly paid bankers and the senior executives of some US largest corporations; they simply ripped cash off the balance sheets of US financial institutions and companies (and some other major nations too). In place of it, they filled the books with toxic assets or unrecoverable debts that are as good as worthless papers. Figuratively speaking, they had blown the banking system apart such that instead of the banks standing, they are all deep holes in the ground of the Wall Street where the banks used to stand.
As we know by now, US FED had poured in close to USD2 trillions of cash in to fill up the balance sheet's holes and a further projected USD700 billions was needed to reconstruct mainly financial institutions. Based on the EU 3% government deficit rule for a stable economic development, US had busted that limits, way beyond the condition of a stable economy development.
Obama's economic team has just floated a USD850 billions rescue package. In April Y08, USD120 billions were sent out as free cheques and tax rebate to US individuals or companies, which only managed to delay the recession by a few months. Obama’s USD850 billions will be the second fiscal injection or stimulus into the real economy or Main Street. This initiative will be the turning point of the US economy where currently, it is sliding into a severe recession, but again, it will be only for short upward reversal in later part of the year, instead of a linear long drawn recession. Mr. Greenspan has called for a US economic recovery in 6 to 12 months' time and he is going to be right, but only for a short while.
What about Singapore's economy? An international bank pointed out that in Y2005 that Singapore directly exported 15% to US, but there is a high correlation of 0.84 between Singapore export growth and US domestic demand, due to indirect export to US through third-countries’ export to US (example like China,...etc) As such, any US contraction and vice-versa, will have significant impact on Singapore economic growth and unemployment.
We are about to enter into the year of the slow ploughing Earth Ox. The Y08 Rat has managed to wriggle itself through the year without suffering from any obvious effect of economic downturn (on the Singapore Main Street) that is to come. Singapore will feel the growing severity as Y2009 months passes. Though US will shows signs of recovery in the later part of the year, Singapore and Asia in general will only see some form of recovery in Y2010 or the Year of the Tiger. As we all know, riding the Tiger is never an easy task.
In a following series of articles, I will delve into the details of the Obama's game plan and his team of economic architects and at the same time, other major countries' economic policies and its effects on the different sectors of economy as well as the effects on the currencies, stock, commodities and bonds markets. US has be printing lots of money and dropping tons of cash onto Wall Street, like the helicopter unloading water to douse out the raging economic fire. This policy is showing its first ugly sign, the most dramatic weakening of USD; a 15% record weakening against the EUR (and also against other currencies) in just over a week recently.
Tuesday, December 23, 2008
Tuesday, October 14, 2008
Central banks' magic wands--Alikazim
European and US governments happily guarantee most deposits and the inter-banks loans with no money upfront. As for buying up the banks, again it costs next to nothing as most of these banks' shares worth almost nothing too. The stock markets bounce up as I mentioned in my previous blog. Everything sounds too good to be true, well, you are right!
Now, the hard part, most of the banks' money had been wiped out. Money has to be injected by the central banks, so that the commercial banks can start lending again to individuals and corporations, but the fast falling demands and rising unemployment will be followed by tidal waves of bankruptcies of individuals and corporate loans, which mean more and more money will be needed. Now, Europe governments talk about EUR2tn while US, USD2tn. Money do not falls from the sky.
Europe do not believe in printing money (1930s of European's hyperinflation experience taught them of the dangers). The Europeans will bite the bullets of reducing consumption (to increase savings) and at the later stage, increase taxes. Fortunately, Europeans has savings to tide them over this rough period (though southern Europeans are poor savers, and will be more painful). There is a risk that the Southern Europeans may resolve to money printing as they have the history of doing so. Should they print money in large quantities, the EUR may be threaten.
US never has the need to print money as they were the world economic master for the 20th century and at the start of 2000, they have the benefit of borrowing from the world to finance their spending spree. US now uses its financial wizardry (or in fact, trickery) of promising to inject funds into AIG, Detroits-3, the banks...etc but in stages. At the same time, they just simply exchange USD for those worthless housing assets, giving the impression that no money is printed.
Don't be fooled. When the US FED finally needs money out there, US will have to borrow from the wary world. The interest rate (yield) they have to pay will start to rise, causing all other loans rates (and mortgage rate) to rise. US can choose to print money, and the effect on the yield is the same, up. The rising rate will strangle US economy and push it deeper into its recession of bankruptcies, unemployment and even social upheavals for many years.
I feel sad for US. If US has lost the 2nd World War, I may be kaysoon San and probably writing on behalf of some Ikuyo San. As I am still alive today, I sincerely wish US a miracle, avoiding the painful scenario that I believe is going to happen.
Now, the hard part, most of the banks' money had been wiped out. Money has to be injected by the central banks, so that the commercial banks can start lending again to individuals and corporations, but the fast falling demands and rising unemployment will be followed by tidal waves of bankruptcies of individuals and corporate loans, which mean more and more money will be needed. Now, Europe governments talk about EUR2tn while US, USD2tn. Money do not falls from the sky.
Europe do not believe in printing money (1930s of European's hyperinflation experience taught them of the dangers). The Europeans will bite the bullets of reducing consumption (to increase savings) and at the later stage, increase taxes. Fortunately, Europeans has savings to tide them over this rough period (though southern Europeans are poor savers, and will be more painful). There is a risk that the Southern Europeans may resolve to money printing as they have the history of doing so. Should they print money in large quantities, the EUR may be threaten.
US never has the need to print money as they were the world economic master for the 20th century and at the start of 2000, they have the benefit of borrowing from the world to finance their spending spree. US now uses its financial wizardry (or in fact, trickery) of promising to inject funds into AIG, Detroits-3, the banks...etc but in stages. At the same time, they just simply exchange USD for those worthless housing assets, giving the impression that no money is printed.
Don't be fooled. When the US FED finally needs money out there, US will have to borrow from the wary world. The interest rate (yield) they have to pay will start to rise, causing all other loans rates (and mortgage rate) to rise. US can choose to print money, and the effect on the yield is the same, up. The rising rate will strangle US economy and push it deeper into its recession of bankruptcies, unemployment and even social upheavals for many years.
I feel sad for US. If US has lost the 2nd World War, I may be kaysoon San and probably writing on behalf of some Ikuyo San. As I am still alive today, I sincerely wish US a miracle, avoiding the painful scenario that I believe is going to happen.
Wednesday, October 8, 2008
Rescue plan for the US economy? You must be kidding!
'Less than one week after the taxpayers rescued AIG (with USD85bn), company executives could be found wining and dining (costing USD0.4mn) at one of the most exclusive resorts in the nation,' US Congressman Henry Waxman told the House Committee on Oversight and Government Reform.
Beside the USD85bn, USD0.7trn has been designated to buy up houses from the banks at above market prices so as to stabilise the property market. Soros wisely pointed out that the banks will be glad to load off all the worst of the worst housing loans to the FED and keeping the good quality housing loans in their own books. These worst of worst housing loans will not see the light of the day. It is as good as accepting full losses on the FED's books.
Before FED is able to get on with their housing 'rescue' plan, large US companies are in such desperate conditions, that AAA company, GE has to resort to borrow at 10% from Buffet (and additional sweeties thrown in) when normally GE would pay 5% for their working capital from any banks that would usually queuing to lend GE. GM just shut down their whole Europe production because they have run out of cash. FED has to quickly fight the engulfing fire of corporate credit seizure by doing what the banks suppose to do (never before, done by the central bank, FED), provide working capital to normal companies. In short, FED is now behaving like the only bank in USA, as all the US commercial banks try to horde their cash for rainy days (bank run). It is beyond FED to know the quality from the dubious companies in lending money to them, yet FED is now the only standing hero.
As they used to say 'hero dies young' but in the case of FED, he may die cock standing. That is to say, even FED is dead, she still need to give the impression that she is still alive and full of vigor. To do that, she probably already order lots of printing machines for the humongous tasks ahead. Of course, this is a modern world, FED just has to key in additional zeros to the banks' asset values, which is being done now and more zeros as the days go by.
Beside the USD85bn, USD0.7trn has been designated to buy up houses from the banks at above market prices so as to stabilise the property market. Soros wisely pointed out that the banks will be glad to load off all the worst of the worst housing loans to the FED and keeping the good quality housing loans in their own books. These worst of worst housing loans will not see the light of the day. It is as good as accepting full losses on the FED's books.
Before FED is able to get on with their housing 'rescue' plan, large US companies are in such desperate conditions, that AAA company, GE has to resort to borrow at 10% from Buffet (and additional sweeties thrown in) when normally GE would pay 5% for their working capital from any banks that would usually queuing to lend GE. GM just shut down their whole Europe production because they have run out of cash. FED has to quickly fight the engulfing fire of corporate credit seizure by doing what the banks suppose to do (never before, done by the central bank, FED), provide working capital to normal companies. In short, FED is now behaving like the only bank in USA, as all the US commercial banks try to horde their cash for rainy days (bank run). It is beyond FED to know the quality from the dubious companies in lending money to them, yet FED is now the only standing hero.
As they used to say 'hero dies young' but in the case of FED, he may die cock standing. That is to say, even FED is dead, she still need to give the impression that she is still alive and full of vigor. To do that, she probably already order lots of printing machines for the humongous tasks ahead. Of course, this is a modern world, FED just has to key in additional zeros to the banks' asset values, which is being done now and more zeros as the days go by.
Thursday, October 2, 2008
US only real option, and with it, its implications
As CERN has come to a halt, global central bankers have been injecting tons of cash into the seized up credit market, where cash are no longer easily available to the banks and banks, in turn, are tightening loan approvals (or loaning their cash) to businesses. As the global banks' deleverage, more companies will fail. Even AIG, largest US insurance company failed, there is no such thing as large company are safe, GM has just stretched out their hands for billions of 'dole' money from the US government recently.
USD0.7 trillion rescue package is likely to be passed by US Congress this Thursday (or Friday morning Sgp time). As mentioned in my earlier blog, the US government already has USD11 trillions debt and it cannot continue to dole out cash forever. In fact, the Medicare and Social Security alone costs an average of USD4 trillions per year. With the economic downturn, tax revenues will be greatly reduced, causing even higher US government deficit.
US government has 3 options; borrow from the world, raise tax or print money. Recent data has indicated a slowdown of foreigners' willingness to lend to US, which will cause the rise of long term interest rate. Raising tax during recession is politically not possible and in fact, US Senate wants to reduce taxes, which will further widen the deficit.
The rescue package can only spread out the pain of the deep recession. US jobless rate will be climbing rapidly just as retail sales plunges. US houses prices will fall further (despite a 20% drop, it is currently still 70% above its Y2000 house prices). There will be rising mortgage defaults and wide spread bankruptcies.
US government is no different from all other governments that faces economic crisis, they tend to choose money printing. It is politically most expedient in solving economic crisis. It will indirectly reduces their debt, pump more 'steroids' into the economy and create jobs. The price; inflation. The faster the printing machine, the higher the inflation. Foreigners will be reluctant to hold USD, causing the USD to fall, real interest rates to raise. As a result, the import prices will raise, (one good example is the recent oil price hike whenever USD weakens). Long term interest rates will also raises as lenders will expect to be paid above inflation rate.
The US economic fallout will impact on other countries depending on their respective nations' economic structure; domestic vs export oriented growth, domestic demand potential, national savings, resources availability, government economic management skill, t....etc. In short, the higher the exposure to US (direct and indirect export to US, to US' financial instruments, ...etc), the greater the economic weakness going forward.
Similarly, it is also applicable to the companies, keeping in mind that the general respective market demand will weaken considerably and be watchful of the indirect and secondary demand effects. For example, a company may only have 5% direct export to US, but indirectly sold 70% of its products to a third country which ultimately are re-sold to US and, the weakening US economy will weaken Europe economy, causing Europe (secondary) demand to weaken too.
Tuesday, September 30, 2008
Global Economic Perspective of a US spiral
World's GDP (or total global economic activities) per year is about USD60 trillions in Y2008. US GDP accounts for USD13 trillions (about 22%). Due to the US multiplier effect of about 4, a growth rate of 1% by US will increase US by 4% or world's GDP by at about 1% but vice-versa, a US drop of 1% will decrease global GDP by 1%.
US total debt to-date is about USD45 trillions; Corporate debt is USD18 trillions, Govt (or national) debt is USD11 trillions, and Personal debt is USD16 trillions.(11 trillion of mortgages, 4 trillion of credit card, 1 trillions of others). Of the three, the personal debt is of most concern.
Corporate debt is considered a form of capital investment and working capital. Given the USD18 trillions corporate borrowings to the annual activities of USD13 trillions, most analysts would consider the ratio of 1.38 times as very effective capital usage where the payback shouldn't be of any concern. The Corporate USA should be self financing as its projected future earnings is expected to pay for itself. The low capital utilization is due to US high service sector component of the economy.
As for national debt, it is assumed that most of the borrowings were used for infrastructure development which is also considered a capital investment too. US govt expenditure is an exception as a sizable portion of the infrastructure development is not paid by the US government. US govt spent most of its money on wars and its war machinery, health care and some basic education expenses and as such, a sizeable national debt are for consumption and not capital investment. The US baby boomers' generation is going into retirement and with the increasing demand on health care, which in turns will put further pressure on US national debt.
The total US personal debt of USD16 trillions without any savings poses the biggest hurdle to the return of normal economic cycle as US' individuals would not be able to sustain itself and repay its debt. Though USD600 billions have been written off, it is still far from over. The recent financial seizure is just the beginning of the spiraling downward of credit crunch. Now, there is hardly any interbank loaning activities. The US banks are cutting back of normal business loans to businesses (or companies) and also to individuals. This will leads to companies cutting back on employment which will result in sizable unemployment. Unemployment and lower personal loans availability will feed into fall of consumption which will further cause the drop of businesses and further cut back of employment. As such, companies' profits will be badly hit which causes the big drop of US share prices. This vicious cycle will not only affects US economy, but the world's economy as US is the largest consumers' nation.
In 1931 where US has 300% debt against its GDP, the economy simply collapse, resulting in the 1st Great Depression. At that time, there was global contagion, resulting in the collapse of the global economies, one after another which resulted in the 2nd World War.
Today, US has 350% debt, though with the benefit of advance economic and management theories, US will enter into a severe recession, but the bigger concern is will US drag the world's economy into the 2nd Great Depression?
Thursday, September 18, 2008
Paper cannot wrap in the fire...an old Chinese saying
While the scientists are busying ramping up the CERN system, seeking to unravel the secrets to the universe's beginning, mankind on the other hand, through their greed, is also unraveling the economy (please note that it is not just the financial sector), unseen by any man that is still alive (unless he is still alive during the Great Depression era...according to Greenspan's assessment).
My Mar08 blog highlighted the key economic events which more less has come to pass. Since we are entering into the final phase of the global economic disruption, I hope to provide a roadmap of the likely outcome of the economic (including financial) meltdown as
1. Some large US financial institutions are falling apart
2. The big corporates are failing (corporate borrowings are now very constricted which will lead to corporate failures)
3. US jobs are disappearing
4. US consumers (which accounts for 70% of US economy) has decapitalated, as they have run out of assets to mortgage away while piling up credit card debt of USD4 trillions and USD12 trillions of mortgage debt with ZERO net savings and other debts of probably another USD 4 trillions.
5. US national debt stands at USD10.6 trillions or 11.3 trillions with the mortgage rescue package(US annual GDP is USD13 trillion) and still piling up USD50 billions deficit on a monthly basis.
6. Boeing machinists went on strike from recently, stopping the Boeing production over demand for higher salary and outsourcing practice.
6. Foreign investors are now having cold feet when it comes to anything American debt, as US are fire selling (or shutting down) some of the biggest companies; Lehman operations, AIG, ...etc
Many US companies and citizens are now banging on FED's door for 'rescue' money.
1. After receiving USD120 billions in May08, US citizens is asking for another USD120 billions or more (as tabled by the Democrats to the US Congress)
2. After 'footing' the bill (in the form of guarantee of bad debt) of USD30 billions for Bear Sterns debt, market is banging the door for USD85 billions in AIG bail-out and many more to come.
3. General Motors, Ford and Chyraliser are also asking for USD30 billions from FED
4. To-date, FED has dish out USD900 billions. The list will get longer as the weeks passes, as more and more companies tumble
Beside USA, Britain will be the next country that will undergo severe economic downturn. Europe will slowdown and Asia economic growth will also eases.
It is now a foregone conclusion that the developed economies are experiencing recession, but the big question is WHEN will the global economy recover from this downturn. Some are still holding to their dreams that it will be similar to recent previous recessions of 6 months, while others are looking at a 1990s Japanese recession that lasted for about 15 years. Recently, Greenspan (ex-chairman of FED) thinks that it is close to the 1930s Depression or may even surpass it (as he calls it once in a century event). Our deputy PM, Tony Tan highlighted the danger of economic meltdown effects on the global social and political stability.
I will try to offer my views on the likely outcome of this economic unraveling in my next blog.
My Mar08 blog highlighted the key economic events which more less has come to pass. Since we are entering into the final phase of the global economic disruption, I hope to provide a roadmap of the likely outcome of the economic (including financial) meltdown as
1. Some large US financial institutions are falling apart
2. The big corporates are failing (corporate borrowings are now very constricted which will lead to corporate failures)
3. US jobs are disappearing
4. US consumers (which accounts for 70% of US economy) has decapitalated, as they have run out of assets to mortgage away while piling up credit card debt of USD4 trillions and USD12 trillions of mortgage debt with ZERO net savings and other debts of probably another USD 4 trillions.
5. US national debt stands at USD10.6 trillions or 11.3 trillions with the mortgage rescue package(US annual GDP is USD13 trillion) and still piling up USD50 billions deficit on a monthly basis.
6. Boeing machinists went on strike from recently, stopping the Boeing production over demand for higher salary and outsourcing practice.
6. Foreign investors are now having cold feet when it comes to anything American debt, as US are fire selling (or shutting down) some of the biggest companies; Lehman operations, AIG, ...etc
Many US companies and citizens are now banging on FED's door for 'rescue' money.
1. After receiving USD120 billions in May08, US citizens is asking for another USD120 billions or more (as tabled by the Democrats to the US Congress)
2. After 'footing' the bill (in the form of guarantee of bad debt) of USD30 billions for Bear Sterns debt, market is banging the door for USD85 billions in AIG bail-out and many more to come.
3. General Motors, Ford and Chyraliser are also asking for USD30 billions from FED
4. To-date, FED has dish out USD900 billions. The list will get longer as the weeks passes, as more and more companies tumble
Beside USA, Britain will be the next country that will undergo severe economic downturn. Europe will slowdown and Asia economic growth will also eases.
It is now a foregone conclusion that the developed economies are experiencing recession, but the big question is WHEN will the global economy recover from this downturn. Some are still holding to their dreams that it will be similar to recent previous recessions of 6 months, while others are looking at a 1990s Japanese recession that lasted for about 15 years. Recently, Greenspan (ex-chairman of FED) thinks that it is close to the 1930s Depression or may even surpass it (as he calls it once in a century event). Our deputy PM, Tony Tan highlighted the danger of economic meltdown effects on the global social and political stability.
I will try to offer my views on the likely outcome of this economic unraveling in my next blog.
Sunday, May 4, 2008
Why 2008 US housing bust is different from the 1990-1
Art, 4 May 2008
The US unemployment or job loss in April'08 was milder, -20K than projected by the analysts, -70K. It gave hope to those who wanted to believe that the US economy is stronger than expected.
It shouldn’t surprise anyone as the USD 120 billion is about to be pushed into the pockets of consumers in May and June ‘08 and firms are gearing up to grab the that ‘free’ cheques with the buildup of their inventories. So, the 1st Qtr 08, US showed 0.6% growth instead of an expected contraction.
Similarly, the upcoming month’s economic figures on production should become more positive than initially thought, though April 08 sales will still be weak (but not bleak) as some consumers may even spend ahead of their cheques’ receipt. We should also be expecting another ‘healthy’ looking US economic data in the month of Jun 08 and Jul 08 (though slightly weaker due to its secondary effect). Aug 08 economic data will be dim, causing most investors to turn cautious. Sep 08 is where the further weak economic data starts to shaken investors’ confidence. Oct 08 is when the doubts turn into fear followed by panic, which will result in the rout of the US financial markets.
Many want to believe it is a passing storm, just like the 1990-1 housing bust.
In 1990-1, similar housing loans collapsed led to a 3 quarters’ US recession, which did not led to a global recession. Many believed it is the same this time round, but it is NOT going to be the same as the major negative factors are much amplified.
The main difference between the current 2007-8 and 1990-1 US housing loans collapsed are:
1. Income grew only 0.25% leading up to Jan 2008 vs. 1.3% before the 1990 recession
2. Savings rate is 0.3% in past six months end Jan 2008 vs. 7.1% during 1990 (In 2008, 80% of US population earns only 10% of GDP)
3. Consumer spending is already down by 0.2% at this early phase of 2008 downturn vs. down 0.1% in 1990 at its weakest moment (consumer spending account for 70% of GDP)
4. Consumer inflation, CPI is 0.3% in Mar 08 and is expected to deteriorate further with heighten food and energy prices, sucking in large portions of the expendable income, thus reducing consumption for all other items.
5. Shiller US house prices Index declined 21% from the high in 2008 vs. 4% in 1990
6. Corporate profits dropped by 17.6% in 2007 vs 15.7% in 1991. (2008 is expected to be even worse off)
7. Domestic investment is projected by some analysts to drop only by 8.9% in 2008 vs. 12.7% in 1990 but if businesses expect a weak consumption after the hand-out, and profits is falling with PPI growing at 13% annualized, then the projected 8.9% drops in 2008 is not realistic. It will be worse off.
Fed is left with only 2% and due to inflationary pressure, it has entered into a lose-lose situation where any further cuts will trigger heighten inflationary expectation, and on the other hand, tightening will weaken consumers and investment demand.
The weights of the negative factors in US will be too strong, it will go on to destroy many economic activities in its path before US economy can stabilize, possibly 3 years from now.
So, before the expansion can take can place from the USD1 trillion to USD10 trillions, the global economy will have to go through a traumatic phase of stagflation. Though Asia has reduced its exports to G3 (US, Europe and Japan) over the years, it is still at 61.3% and US accounts for about 1/5 of the Asian exports. US slowdown will also drag Europe and Japan down, though at a lesser degree. Asia will slowdown by at least 1/4 effect of US slowdown from its export pace. Singapore having high export exposure (about 70% export and re-export) to US market will suffer more.
The US unemployment or job loss in April'08 was milder, -20K than projected by the analysts, -70K. It gave hope to those who wanted to believe that the US economy is stronger than expected.
It shouldn’t surprise anyone as the USD 120 billion is about to be pushed into the pockets of consumers in May and June ‘08 and firms are gearing up to grab the that ‘free’ cheques with the buildup of their inventories. So, the 1st Qtr 08, US showed 0.6% growth instead of an expected contraction.
Similarly, the upcoming month’s economic figures on production should become more positive than initially thought, though April 08 sales will still be weak (but not bleak) as some consumers may even spend ahead of their cheques’ receipt. We should also be expecting another ‘healthy’ looking US economic data in the month of Jun 08 and Jul 08 (though slightly weaker due to its secondary effect). Aug 08 economic data will be dim, causing most investors to turn cautious. Sep 08 is where the further weak economic data starts to shaken investors’ confidence. Oct 08 is when the doubts turn into fear followed by panic, which will result in the rout of the US financial markets.
Many want to believe it is a passing storm, just like the 1990-1 housing bust.
In 1990-1, similar housing loans collapsed led to a 3 quarters’ US recession, which did not led to a global recession. Many believed it is the same this time round, but it is NOT going to be the same as the major negative factors are much amplified.
The main difference between the current 2007-8 and 1990-1 US housing loans collapsed are:
1. Income grew only 0.25% leading up to Jan 2008 vs. 1.3% before the 1990 recession
2. Savings rate is 0.3% in past six months end Jan 2008 vs. 7.1% during 1990 (In 2008, 80% of US population earns only 10% of GDP)
3. Consumer spending is already down by 0.2% at this early phase of 2008 downturn vs. down 0.1% in 1990 at its weakest moment (consumer spending account for 70% of GDP)
4. Consumer inflation, CPI is 0.3% in Mar 08 and is expected to deteriorate further with heighten food and energy prices, sucking in large portions of the expendable income, thus reducing consumption for all other items.
5. Shiller US house prices Index declined 21% from the high in 2008 vs. 4% in 1990
6. Corporate profits dropped by 17.6% in 2007 vs 15.7% in 1991. (2008 is expected to be even worse off)
7. Domestic investment is projected by some analysts to drop only by 8.9% in 2008 vs. 12.7% in 1990 but if businesses expect a weak consumption after the hand-out, and profits is falling with PPI growing at 13% annualized, then the projected 8.9% drops in 2008 is not realistic. It will be worse off.
Fed is left with only 2% and due to inflationary pressure, it has entered into a lose-lose situation where any further cuts will trigger heighten inflationary expectation, and on the other hand, tightening will weaken consumers and investment demand.
The weights of the negative factors in US will be too strong, it will go on to destroy many economic activities in its path before US economy can stabilize, possibly 3 years from now.
So, before the expansion can take can place from the USD1 trillion to USD10 trillions, the global economy will have to go through a traumatic phase of stagflation. Though Asia has reduced its exports to G3 (US, Europe and Japan) over the years, it is still at 61.3% and US accounts for about 1/5 of the Asian exports. US slowdown will also drag Europe and Japan down, though at a lesser degree. Asia will slowdown by at least 1/4 effect of US slowdown from its export pace. Singapore having high export exposure (about 70% export and re-export) to US market will suffer more.
Wednesday, April 23, 2008
The missing USD 1trillion—IMF thinks it's gone..... Really?
As mentioned before, with $100 billion in depos, these days, banks create money to the size of $10 trillions (100 times; 10 times from money creation and a multiplier of another 10 times through loans' securitization).
Now, $1 trillion turns bad/rotten. $1 trillion will be needed to be put back into the banks. Though the house buyers had signed the papers, they hardly had paid for it and they merely declared themselves bankrupt. In US, houses have gone 'bad' or unlivable anymore as they were damaged so badly that it is better off to build from scratch. BBC reported that copper pipings and any items in these houses that are worth some money have been ripped off to be sold as scraps. In short, the supposedly created asset (or house) has been wiped out, becomes non-existent and now run down like ghost houses.
But don't forget, the $1 trillion loans that turned bad had already gone to somebody else's pockets, as the banks had already paid out that money.
20% to the contractors
20% to material suppliers
10% to lawyers
10% to salesmen
10% to land owners (who sold the land)
10% gone to the government in taxes
20% to the bankers and the CEOs' bonuses
(The percentages may differ among the parties but this does not matter. What matters is that the money has gone to somebodies' pockets)
Banks need to top up that $1 trillion by asking from investors. Who are they? Most of the above listed has spent the money to pay for workers' salaries, others are spent on oil, goods and services. At the end, who is holding the money? Middle East oil men has lots of it, China, India, Singapore and Japan have some of it, but not forgetting the US bankers, hedge fund managers (Soros earns 2.9 billions last year), lawyers, and salesmen have a hand in it too. They will put in some money, for example, GIC & Temasek put in about $30 billions or so. Others like Buffet, bankers, and Middle East Prince Alayweed …etc are supposedly buying in cheap now. But it won’t be enough. The god-fathers will have to print money at the later stage to top up, they are, the central banks and a rough guess, it will be about $300 billions. The $1 trillion top-up will be re-cycled to create more loans, which probably will be 20 times this time from its original value or $20 trillions to start with.
In short, with the $1 trillion "write-offs" which will be topped-up or recapitalised (banking term), the global economy will be flooded with $20 trillions (from the same process of money creation & securitization) in probably 3 years. There will be some assets creation, but others are in a form of more paper money (like the "banana" money kind with G. Washington face on it). The world is now growing doubtful of these green papers, so, the smarter ones have already parked their money in REAL assets, cold hard gold (not cash, unless you are holding the correct currency), copper,...but you can't really eat them when you need it. So, others would prefer soft commodities, soybean, pork, wheat...etc, since the middle class of Indians and Chinese, BRIC and other oil-based nations are demanding it. Of course, black oil is still one of the favourite until the nuclear power stations litter all over the world in 5 years' time. By then, probably starting 5 years from now, oil will start its decline.
So, in view of the extra $20 trillions flooding the market, “where to make the money” you may ask. ….to be cont.
Now, $1 trillion turns bad/rotten. $1 trillion will be needed to be put back into the banks. Though the house buyers had signed the papers, they hardly had paid for it and they merely declared themselves bankrupt. In US, houses have gone 'bad' or unlivable anymore as they were damaged so badly that it is better off to build from scratch. BBC reported that copper pipings and any items in these houses that are worth some money have been ripped off to be sold as scraps. In short, the supposedly created asset (or house) has been wiped out, becomes non-existent and now run down like ghost houses.
But don't forget, the $1 trillion loans that turned bad had already gone to somebody else's pockets, as the banks had already paid out that money.
20% to the contractors
20% to material suppliers
10% to lawyers
10% to salesmen
10% to land owners (who sold the land)
10% gone to the government in taxes
20% to the bankers and the CEOs' bonuses
(The percentages may differ among the parties but this does not matter. What matters is that the money has gone to somebodies' pockets)
Banks need to top up that $1 trillion by asking from investors. Who are they? Most of the above listed has spent the money to pay for workers' salaries, others are spent on oil, goods and services. At the end, who is holding the money? Middle East oil men has lots of it, China, India, Singapore and Japan have some of it, but not forgetting the US bankers, hedge fund managers (Soros earns 2.9 billions last year), lawyers, and salesmen have a hand in it too. They will put in some money, for example, GIC & Temasek put in about $30 billions or so. Others like Buffet, bankers, and Middle East Prince Alayweed …etc are supposedly buying in cheap now. But it won’t be enough. The god-fathers will have to print money at the later stage to top up, they are, the central banks and a rough guess, it will be about $300 billions. The $1 trillion top-up will be re-cycled to create more loans, which probably will be 20 times this time from its original value or $20 trillions to start with.
In short, with the $1 trillion "write-offs" which will be topped-up or recapitalised (banking term), the global economy will be flooded with $20 trillions (from the same process of money creation & securitization) in probably 3 years. There will be some assets creation, but others are in a form of more paper money (like the "banana" money kind with G. Washington face on it). The world is now growing doubtful of these green papers, so, the smarter ones have already parked their money in REAL assets, cold hard gold (not cash, unless you are holding the correct currency), copper,...but you can't really eat them when you need it. So, others would prefer soft commodities, soybean, pork, wheat...etc, since the middle class of Indians and Chinese, BRIC and other oil-based nations are demanding it. Of course, black oil is still one of the favourite until the nuclear power stations litter all over the world in 5 years' time. By then, probably starting 5 years from now, oil will start its decline.
So, in view of the extra $20 trillions flooding the market, “where to make the money” you may ask. ….to be cont.
Wednesday, March 26, 2008
Tri-polar Economic Order--final part.
Art, 26 Mar 08
Aug08: When streams of poor US economic data keep pouring in, instead of parking more money into US treasury bonds, SWF and foreign capital will move out their funds in trickle to downpour into Sep08. FED will be forced to start printing large sums of money and to attract some foreigners to buy their US bonds; the yield has to increase significantly. The impact is US economy will experience higher interest (or borrowing) costs, thus further weaken the housing market rescue efforts, dragging it deeper into recession.
Oct08: When it becomes obvious to everyone that whatever US FED or government try to do, they will still not be able to hold up the US financial markets. By then, the world will finally come to the conclusion that US economic balloon has burst. US bond yields will climb above 10% (in the ‘80s, it touch 15%). US economy will no longer the most powerful or largest economy of the world. The markets may choose to switch to using EUR or some form of basket currencies as the standard of exchange, instead of USD. S&P500 will fall to 1000 or below and hard commodities will fall rapidly too, followed by the soft commodities (but to a lesser extent). The world stock markets will also be dragged down once again, but to a lesser degree, depending on the specific country’s economic strength.
Y2009: The world will be in full recession and stagnation, ie, stagflation for the next one year. We will see the mild recovery only in Y2010 onwards.
Y2010: The world will be quite a different place where three major economic blocs (Europe, Asia and US) will be jostling for economic control and command without any clear winners. Middle-East will not become a significant force with their oil as by then, nuclear energy will start to kick in, thus reducing the demand for oil, causing a drop in its prices and the wealth that was supposed to be generated for these countries. (Just like the fall of natural rubber prices, when synthetic rubber appears on the market). Japan will still maintain its significance while Russia will be an ambivalent force, being a European and Asian country at the same time, though it will exert some economy influence through its resources and technology. South America is a minor economic force due to its weak education system except for its farming and resources. Africa will remain as a continent for exploitation for its raw materials and with AIDS spreading wildly; it also limits its scope of economic influence.
Aug08: When streams of poor US economic data keep pouring in, instead of parking more money into US treasury bonds, SWF and foreign capital will move out their funds in trickle to downpour into Sep08. FED will be forced to start printing large sums of money and to attract some foreigners to buy their US bonds; the yield has to increase significantly. The impact is US economy will experience higher interest (or borrowing) costs, thus further weaken the housing market rescue efforts, dragging it deeper into recession.
Oct08: When it becomes obvious to everyone that whatever US FED or government try to do, they will still not be able to hold up the US financial markets. By then, the world will finally come to the conclusion that US economic balloon has burst. US bond yields will climb above 10% (in the ‘80s, it touch 15%). US economy will no longer the most powerful or largest economy of the world. The markets may choose to switch to using EUR or some form of basket currencies as the standard of exchange, instead of USD. S&P500 will fall to 1000 or below and hard commodities will fall rapidly too, followed by the soft commodities (but to a lesser extent). The world stock markets will also be dragged down once again, but to a lesser degree, depending on the specific country’s economic strength.
Y2009: The world will be in full recession and stagnation, ie, stagflation for the next one year. We will see the mild recovery only in Y2010 onwards.
Y2010: The world will be quite a different place where three major economic blocs (Europe, Asia and US) will be jostling for economic control and command without any clear winners. Middle-East will not become a significant force with their oil as by then, nuclear energy will start to kick in, thus reducing the demand for oil, causing a drop in its prices and the wealth that was supposed to be generated for these countries. (Just like the fall of natural rubber prices, when synthetic rubber appears on the market). Japan will still maintain its significance while Russia will be an ambivalent force, being a European and Asian country at the same time, though it will exert some economy influence through its resources and technology. South America is a minor economic force due to its weak education system except for its farming and resources. Africa will remain as a continent for exploitation for its raw materials and with AIDS spreading wildly; it also limits its scope of economic influence.
Thursday, March 20, 2008
Turbulent Times ahead before the dawn of the Tri-polar Economic Order
Art, 20 Mar 08
Mar '08: FED cut rates, giving the stock markets some cheer. As a double edged sword, it also convinced the world that US has lost its interests in maintaining its USD value. As most things are traded in USD, commodities will be re-priced higher and higher by the day as producers know that they will be collecting a depreciating paper in their hands. In view of the premonition of high inflation period and subsequent economic slowdown, commodities are heading toward its peak, which is in a highly volatile zone, where soft commodities will gain more than hard commodities. Commodities related currencies (AUD, RUB ...etc) will also experience similar swings. Those USD pegged currencies will also be de-pegged or revalued up.
Apr '08: The US housing debts cannot be swept under the carpet for too long, as the foreclosed sub-prime houses will deteriorate to a point that it is better to demolish and rebuilt from scratch. It will take time and money which the US’ poor would not have. The US houses prices have dropped 20% and it is expected to drop further (10% or more). It will further depress the overall US housing assets values, spreading from sub-prime to alternate-A then to prime housing loans, forcing banks to further write off loans, as growing loans’ delinquencies turn to defaults.
May '08: As mentioned in my earlier blog, as inflation and unemployment build up, it will also trigger defaults of other forms of personal borrowings. US will try to stagger out the pain so as not to cause a US financial systemic failure. The FED will step in again to rescue by lowering rates further, but it won’t be of help as falling asset values or principal sum risk are much more detrimental than a few dollars saved from interest charges. USD will weaken even further against almost all other major currencies.
Jun '08: With a weakened US consumer demand, it will hit the corporate America, causing defaults of the US corporations that serve mainly American customers, e.g. the weaker American car-maker, housing companies…etc. (Though the international US MNCs will be able to survive through exports, which mean some companies will gain mildly during this period while others will fail miserably). The star of the show is US Treasury printing USD800 for each citizen to spend the money, but it will mainly be used to pay for interests to the bank with hardly anything left to spend on. Though USD has been weakened significantly over the last 7 years, from EUR/USD 0.85 to 1.6, the US export has improve marginally as the inflationary imports of oil and others has offset the export benefit, resulting in continuous high US trade deficit.
Another steriod injection of aggressive FED cuts, weakening USD, with the hope that US can export its way out of recession, but due to the above mentioned, it will only mitigate the trade deficit only to some extent but balloon the current account deficit in 2008, because, by weakening the USD too rapidly, it also pushes the USD off the cliff, ie, as the store of value, causing the world to diversify out of their high USD and US assets holdings (especially US government bonds).
Jul '08: With some free government cash in the pockets, some positive retail sales figure, and a normal cheerful summer mood, the US consumers and financial markets may gain its last confidence of the US economy.
....to be cont.
Mar '08: FED cut rates, giving the stock markets some cheer. As a double edged sword, it also convinced the world that US has lost its interests in maintaining its USD value. As most things are traded in USD, commodities will be re-priced higher and higher by the day as producers know that they will be collecting a depreciating paper in their hands. In view of the premonition of high inflation period and subsequent economic slowdown, commodities are heading toward its peak, which is in a highly volatile zone, where soft commodities will gain more than hard commodities. Commodities related currencies (AUD, RUB ...etc) will also experience similar swings. Those USD pegged currencies will also be de-pegged or revalued up.
Apr '08: The US housing debts cannot be swept under the carpet for too long, as the foreclosed sub-prime houses will deteriorate to a point that it is better to demolish and rebuilt from scratch. It will take time and money which the US’ poor would not have. The US houses prices have dropped 20% and it is expected to drop further (10% or more). It will further depress the overall US housing assets values, spreading from sub-prime to alternate-A then to prime housing loans, forcing banks to further write off loans, as growing loans’ delinquencies turn to defaults.
May '08: As mentioned in my earlier blog, as inflation and unemployment build up, it will also trigger defaults of other forms of personal borrowings. US will try to stagger out the pain so as not to cause a US financial systemic failure. The FED will step in again to rescue by lowering rates further, but it won’t be of help as falling asset values or principal sum risk are much more detrimental than a few dollars saved from interest charges. USD will weaken even further against almost all other major currencies.
Jun '08: With a weakened US consumer demand, it will hit the corporate America, causing defaults of the US corporations that serve mainly American customers, e.g. the weaker American car-maker, housing companies…etc. (Though the international US MNCs will be able to survive through exports, which mean some companies will gain mildly during this period while others will fail miserably). The star of the show is US Treasury printing USD800 for each citizen to spend the money, but it will mainly be used to pay for interests to the bank with hardly anything left to spend on. Though USD has been weakened significantly over the last 7 years, from EUR/USD 0.85 to 1.6, the US export has improve marginally as the inflationary imports of oil and others has offset the export benefit, resulting in continuous high US trade deficit.
Another steriod injection of aggressive FED cuts, weakening USD, with the hope that US can export its way out of recession, but due to the above mentioned, it will only mitigate the trade deficit only to some extent but balloon the current account deficit in 2008, because, by weakening the USD too rapidly, it also pushes the USD off the cliff, ie, as the store of value, causing the world to diversify out of their high USD and US assets holdings (especially US government bonds).
Jul '08: With some free government cash in the pockets, some positive retail sales figure, and a normal cheerful summer mood, the US consumers and financial markets may gain its last confidence of the US economy.
....to be cont.
Tuesday, March 18, 2008
Opportunity: Park into HongKong dollars, HKD
Art, 18 Mar 2008
HKD is pegged to USD and as such, it has fallen significantly against all other currencies. While US is trending into recession and thus, it will cools its economy, on the other hand, HK economy has been growing strongly.
The weakened HKD currency will have inflationary effect and also weakens its financial reserve positions vis-à-vis other economies like Singapore. The inverse economic trends between US and HK will put HK in a monetarily disadvantaged position and it is not likely to be in HK interest to continue its HKD pegged to USD as their two economic paths are diverging.
As China and many emerging economies have successfully adopted the trade weighted currencies’ peg approach, HK will have to seriously consider similar move.
The advantages will be to tame the HK growing inflation while allowing more flexibility in monetary management. It also strengthens its national reserves and allows HK to adopt similar model of growth by setting up the Sovereign Wealth Fund, SWF and invest overseas for diversified growth portfolio.
Basic HK economic strengths;
1. stable government
2. efficient civil servants and organisations
3. gateway between West and China
4. hard working labor force
5. China as hinterland and
6. great weather, which thus, ensuring sound HK economic growth for a foreseeable future.
SGD has strengthen against USD significantly for quite sometime, from 1.52 to 1.37 (10% gain) over the last 6 months. With Singapore’s negative labor productivity growth in 2007, Singapore government will be concerned about its relative competitiveness. Coupled with skyrocketing rentals and high inflation, Singapore government would be reluctant to let SGD strengthen much further, thus intervention is likely, so as to maintain USD/SGD rate at possibly 1.35 level for the next 6 months.
In conclusion, the SGD/HKD is likely to be in HKD favor when HK choose to de-peg from USD and adopt a weighted peg against major trading partners’ currencies. The timing of such a move is a challenge as it will be a HK major monetary policy change, though I expect it to be within this year. If you should decide to do it, do it only after US FED cuts their interest rate tonight. Since the downside is low and the upward potential is significant (assuming HKD revalue to the RMB level, the gain is 11% within the short period), it would be a reasonable bet. Another small plus for HKD is that it pays higher interest than SGD.
I would like to remind my reader that this is purely a personal assessment of mine and I have to repeat, there is no guarantee in any financial positioning except to weighs the advantages and disadvantages of each decision. Another suggestion is not to put all eggs in one basket, that is, a measured diversified investment approach is preferable.
(If you are not familiar on how to go about taking a position in HKD/SGD, please email at artlim66@gmail.com and I will provide some possible steps of doing so)
HKD is pegged to USD and as such, it has fallen significantly against all other currencies. While US is trending into recession and thus, it will cools its economy, on the other hand, HK economy has been growing strongly.
The weakened HKD currency will have inflationary effect and also weakens its financial reserve positions vis-à-vis other economies like Singapore. The inverse economic trends between US and HK will put HK in a monetarily disadvantaged position and it is not likely to be in HK interest to continue its HKD pegged to USD as their two economic paths are diverging.
As China and many emerging economies have successfully adopted the trade weighted currencies’ peg approach, HK will have to seriously consider similar move.
The advantages will be to tame the HK growing inflation while allowing more flexibility in monetary management. It also strengthens its national reserves and allows HK to adopt similar model of growth by setting up the Sovereign Wealth Fund, SWF and invest overseas for diversified growth portfolio.
Basic HK economic strengths;
1. stable government
2. efficient civil servants and organisations
3. gateway between West and China
4. hard working labor force
5. China as hinterland and
6. great weather, which thus, ensuring sound HK economic growth for a foreseeable future.
SGD has strengthen against USD significantly for quite sometime, from 1.52 to 1.37 (10% gain) over the last 6 months. With Singapore’s negative labor productivity growth in 2007, Singapore government will be concerned about its relative competitiveness. Coupled with skyrocketing rentals and high inflation, Singapore government would be reluctant to let SGD strengthen much further, thus intervention is likely, so as to maintain USD/SGD rate at possibly 1.35 level for the next 6 months.
In conclusion, the SGD/HKD is likely to be in HKD favor when HK choose to de-peg from USD and adopt a weighted peg against major trading partners’ currencies. The timing of such a move is a challenge as it will be a HK major monetary policy change, though I expect it to be within this year. If you should decide to do it, do it only after US FED cuts their interest rate tonight. Since the downside is low and the upward potential is significant (assuming HKD revalue to the RMB level, the gain is 11% within the short period), it would be a reasonable bet. Another small plus for HKD is that it pays higher interest than SGD.
I would like to remind my reader that this is purely a personal assessment of mine and I have to repeat, there is no guarantee in any financial positioning except to weighs the advantages and disadvantages of each decision. Another suggestion is not to put all eggs in one basket, that is, a measured diversified investment approach is preferable.
(If you are not familiar on how to go about taking a position in HKD/SGD, please email at artlim66@gmail.com and I will provide some possible steps of doing so)
Saturday, March 15, 2008
In layman language; CDOs, CDS, ARM, house equity-loans, and all other US major loans
Art, 15 Mar 2008
With a $100K deposit collected, Bank A then lends $1million to person X to buy a $1million house. He then uses his one million house deed as collateral to borrow $800K from Bank B where he may splurge on holidays, car and even a down payment for a second or even a third house. Bank A buys a loan default insurance on the house, then packages it as an asset-security of AAA rating (Collateralised Debt Obligation, CDO), and sells it to hedge fund investors or other banks. These investors then buy ‘insurance’ (known as Credit Default Swap, CDS) against possible defaults against these CDOs from the financial market while Bank A gets his $1million cash into the bank. Bank A can now lend out $10 million to new house buyers and this can go on and on. If we assume a multiplier effect to the power of 3, from $100K deposit, the banks will be able to loan up to $100millions. Banking rules allow only about 20 times leverage (or 5% reserves against total loans), whereas, US banks, through the above off-balance sheet bookings, can easily operate at 100 times leverage.
In the meantime, Bank B will report profits from interests charged on the house equity-loans while X believes that the property market is rising and, as such, took up further loans with little or no down payment for his second and/or third houses since the 1st year interest charged is only 1% p.a. and the interest charge will increase significantly in subsequent years (Adjustable Rate Mortgage loan, ARM). Everything is fine as long as the house prices continue to rise and X remains in employment to pay for his mortgages loans and he is able to sell his houses and take profits before the new high interest charges kick in. At the same time, there is no inflation which can reduce X’s ability to pay for his mortgages in the meantime.
Currently, we are witnessing the reversal.
US housing loans
1. USD1 trillion of loans have been made to people without any proof of income or assets (Sub-prime loans)
2. Alternate-A mortgage loans are made to those with proof of income but without known assets ‘seize-able’ if the loan defaults.
3. Prime housing loans are made to those with proof of income and own assets that can be seized as collateral. Alternate-A and Prime housing loans total about USD5+ trillions.
4. Total equity-loans against the house value stands as USD635 billions.
5. CDS exposure now at USD40 trillions
6. Commercial properties exposure is significant, guesstimated to be at USD4 trillion. It has dropped by 2% followed by 5% in 4th Qtr 2007.
Other personal loans:
Credit Card loans of about USD800 billions
Cars mortgage loans of about USD800 billions
Corporate loans stands at USD40 trillions
Projected write-off from the above items: (assumed failure rate)
Sub-prime = USD300 billions (30% failure rate)
Alt-A & Prime = USD250 billions (5% failure rate)
Home-equity = USD127 billions (20% failure rate)
Commercial pty = USD600 billions (15% failure rate)
CDS = USD 17 billion (netting effect)
Car-loans = USD 80 billions (10% failure rate)
Creditcard = USD 80 billions (10% failure rate)
Corporateloan = USD500 billions (1.5% failure rate)
Total: USD1.954 trillions
To-date, sub-prime USD150 billions have been written-off whilst the rest are still hardly written down. US is about 15% from the total projected write-off. When bank write off loans (assets), recapitalisation is needed or new cash injection would be needed to meet the banking reserve requirement.
In short, it is far from over.
With a $100K deposit collected, Bank A then lends $1million to person X to buy a $1million house. He then uses his one million house deed as collateral to borrow $800K from Bank B where he may splurge on holidays, car and even a down payment for a second or even a third house. Bank A buys a loan default insurance on the house, then packages it as an asset-security of AAA rating (Collateralised Debt Obligation, CDO), and sells it to hedge fund investors or other banks. These investors then buy ‘insurance’ (known as Credit Default Swap, CDS) against possible defaults against these CDOs from the financial market while Bank A gets his $1million cash into the bank. Bank A can now lend out $10 million to new house buyers and this can go on and on. If we assume a multiplier effect to the power of 3, from $100K deposit, the banks will be able to loan up to $100millions. Banking rules allow only about 20 times leverage (or 5% reserves against total loans), whereas, US banks, through the above off-balance sheet bookings, can easily operate at 100 times leverage.
In the meantime, Bank B will report profits from interests charged on the house equity-loans while X believes that the property market is rising and, as such, took up further loans with little or no down payment for his second and/or third houses since the 1st year interest charged is only 1% p.a. and the interest charge will increase significantly in subsequent years (Adjustable Rate Mortgage loan, ARM). Everything is fine as long as the house prices continue to rise and X remains in employment to pay for his mortgages loans and he is able to sell his houses and take profits before the new high interest charges kick in. At the same time, there is no inflation which can reduce X’s ability to pay for his mortgages in the meantime.
Currently, we are witnessing the reversal.
US housing loans
1. USD1 trillion of loans have been made to people without any proof of income or assets (Sub-prime loans)
2. Alternate-A mortgage loans are made to those with proof of income but without known assets ‘seize-able’ if the loan defaults.
3. Prime housing loans are made to those with proof of income and own assets that can be seized as collateral. Alternate-A and Prime housing loans total about USD5+ trillions.
4. Total equity-loans against the house value stands as USD635 billions.
5. CDS exposure now at USD40 trillions
6. Commercial properties exposure is significant, guesstimated to be at USD4 trillion. It has dropped by 2% followed by 5% in 4th Qtr 2007.
Other personal loans:
Credit Card loans of about USD800 billions
Cars mortgage loans of about USD800 billions
Corporate loans stands at USD40 trillions
Projected write-off from the above items: (assumed failure rate)
Sub-prime = USD300 billions (30% failure rate)
Alt-A & Prime = USD250 billions (5% failure rate)
Home-equity = USD127 billions (20% failure rate)
Commercial pty = USD600 billions (15% failure rate)
CDS = USD 17 billion (netting effect)
Car-loans = USD 80 billions (10% failure rate)
Creditcard = USD 80 billions (10% failure rate)
Corporateloan = USD500 billions (1.5% failure rate)
Total: USD1.954 trillions
To-date, sub-prime USD150 billions have been written-off whilst the rest are still hardly written down. US is about 15% from the total projected write-off. When bank write off loans (assets), recapitalisation is needed or new cash injection would be needed to meet the banking reserve requirement.
In short, it is far from over.
Thursday, March 13, 2008
The end of NEVERLAND is near!
Art, 13 Mar 2008
US excesses will not get off the hook, except that the world will bear some of the fallouts due to their exposures in US assets (mortgages, bonds and equities). Given the extreme leverages by the US economy, we should be looking at least, 3 to 5 years of recession or close to zero growth and inflation.
US is determined to weaken their USD against all other major currencies, cutting interest rates in the face of inflation, as a way of exporting their way out of recession. By pushing it too hard, in the face of credit seizure, it will instead drive out investors of their bonds (US bond prices will drop significantly soon), thus pushing their US bond yields to even higher levels, which will further aggravate the mortgage, personal and corporate borrowing problems.
Europe is a close competitor, e.g. Unilever vs. Procter and Gamble. Unilever will suffer a loss of its competitiveness vis-à-vis the exchange differences. Fortunately, as all their productions are in third countries, China or India, the costs will be the same for either the US or European firms. As long as the Europeans are able to manage their overhead costs, Europeans will still be quite insulated from the US onslaught. They will not be competitive outside of EU countries due to transportation costs, except for those that have production in other major emerging countries. US will improve their exports, but at less than its weakening USD rate, given that their products face low-costs substitutes from emerging markets' products too.
Japan has been on the quiet, but not for long as their JPY has also been rising. Japan was not as successful as the US or Europeans in tapping on the Chinese and Indian production engines due to cultural and political factors. As Japan still maintains a sizable production within the country, as such, their costs will rise with the rising JPY, thus weakening their competitiveness. For other Japanese MNCs that have diversified their production centres, they will be in a position to compete well, against the US companies, e.g. cars though Japan still faces stiff challenge from the European counterparts.
As Middle-East oil money builds up, with crude oil at USD100 per barrel and at the rate of USD800 billions excess fund a year, it will a major source of fund for investment. Given the high holding of three key USD, EUR and GBP asset holdings, they will be diversifying into emerging markets for better yields of their funds.
BRICs will slowdown significantly for 2008 but they will gradually pick up in 2009 on the strengths of their own economies as they learn to manage their internal economic growth.
Investment opportunities
1. Buy value-for-money business, eg Wal-mart which offers no frill products as economical prices and MacDonald for economical food. Dump companies selling mid-range brands as income and asset values fall
2. Buy companies that offer low fuel consumption companies, e.g. buy trains or bus services, and dump US car making, airlines or taxi companies
3. Buy emerging markets utilities, eg Telcomm and power stations
4. Buy medical care companies, those that are well managed and with good brands
5. By generic drug producing companies
6. Buy companies with high cash hoard, eg tobacco companies
7. Park into emerging stable countries currencies.
In short, in difficult times, people go back to basics as they still need to eat and sleep to stay alive.
US excesses will not get off the hook, except that the world will bear some of the fallouts due to their exposures in US assets (mortgages, bonds and equities). Given the extreme leverages by the US economy, we should be looking at least, 3 to 5 years of recession or close to zero growth and inflation.
US is determined to weaken their USD against all other major currencies, cutting interest rates in the face of inflation, as a way of exporting their way out of recession. By pushing it too hard, in the face of credit seizure, it will instead drive out investors of their bonds (US bond prices will drop significantly soon), thus pushing their US bond yields to even higher levels, which will further aggravate the mortgage, personal and corporate borrowing problems.
Europe is a close competitor, e.g. Unilever vs. Procter and Gamble. Unilever will suffer a loss of its competitiveness vis-à-vis the exchange differences. Fortunately, as all their productions are in third countries, China or India, the costs will be the same for either the US or European firms. As long as the Europeans are able to manage their overhead costs, Europeans will still be quite insulated from the US onslaught. They will not be competitive outside of EU countries due to transportation costs, except for those that have production in other major emerging countries. US will improve their exports, but at less than its weakening USD rate, given that their products face low-costs substitutes from emerging markets' products too.
Japan has been on the quiet, but not for long as their JPY has also been rising. Japan was not as successful as the US or Europeans in tapping on the Chinese and Indian production engines due to cultural and political factors. As Japan still maintains a sizable production within the country, as such, their costs will rise with the rising JPY, thus weakening their competitiveness. For other Japanese MNCs that have diversified their production centres, they will be in a position to compete well, against the US companies, e.g. cars though Japan still faces stiff challenge from the European counterparts.
As Middle-East oil money builds up, with crude oil at USD100 per barrel and at the rate of USD800 billions excess fund a year, it will a major source of fund for investment. Given the high holding of three key USD, EUR and GBP asset holdings, they will be diversifying into emerging markets for better yields of their funds.
BRICs will slowdown significantly for 2008 but they will gradually pick up in 2009 on the strengths of their own economies as they learn to manage their internal economic growth.
Investment opportunities
1. Buy value-for-money business, eg Wal-mart which offers no frill products as economical prices and MacDonald for economical food. Dump companies selling mid-range brands as income and asset values fall
2. Buy companies that offer low fuel consumption companies, e.g. buy trains or bus services, and dump US car making, airlines or taxi companies
3. Buy emerging markets utilities, eg Telcomm and power stations
4. Buy medical care companies, those that are well managed and with good brands
5. By generic drug producing companies
6. Buy companies with high cash hoard, eg tobacco companies
7. Park into emerging stable countries currencies.
In short, in difficult times, people go back to basics as they still need to eat and sleep to stay alive.
Tuesday, March 4, 2008
Navigating through tumultuous economic uncertainty, which stars do we follow?
Art, 2 Mar 2008
(In November ‘07, when I called for a US economic recession, heading towards stagflation, some readers thought I was extremist, too pessimistic in my views. Now, US recession is an accepted fact, though many are still doubtful of a US stagflation. In my analysis, I seek to be a realist, as my FX and stock market investment do not have room for wishful thinking. US being the largest world economy, has been the engine of growth for the rest of the world and as such, a major change of US economy will inadvertently affect the global economy till a new economy order arises and that will take a while.)
The changing economic stars, where a key star has risen but many still don’t believe in what they are now seeing with their eyes, choosing to believe it is only a comet that burn brightly and will vanish in no time and on the other hand, one key fading star was cling to religiously where it is in fast decline.
The new rising star of inflation will be here to stay for a while. As surely as you can observe the Arius star during the winter, the global inflation will become clearer by the weeks. (Please note that the period of inflation is not at the similar length to that of the stars in the sky as major economic cycle varies from 3 to 15 years)
What is the basis of the new sightings? Many would ask. It is back to the basic of demand and supply. (In economics, it only seeks to measure real demands, not wants which the poor Africans have, but do not count as they do not have the money to pay for their wants)
Global demand shift
1. The growing middle class in China, India (which has 1.3 and 1 billions populations respectively), Russia and Brazil, or BRICs will push demand to the limit where the CPI data generally represent.
2. The changing global demographics of the economic well to-do (high to middle income) baby boomers (age 45-55) are shifting its growing demand to health care from goods and other services purchases (and baby boomers are also in productivity decline too). Would you be chasing the latest iPhone/fashionable restaurants or you would rather walk the gardens or catch up with friends, when we are in our sixties or above, in view of the declining health?
Global supply shift
1. China and India, the world’s two largest producing nations for the last decade or so have been experiencing rising wages, especially the last three years. It has come to the point that these wage increases are pushing the final manufactured goods and (through the IT and related services) other services prices rapidly upward. The long declining birth rate of middle incomes and one-child China policy has been reducing young bodies for work (or growth)
2. Given the limited global land and raw materials, the growing surge of demand is pushing supply catch-up to its limit too. Land that was set aside for crops and animals’ raising and the mining of raw materials is not able to expand proportionally to meet the demand surge, causing the raising prices of commodities.
The fast fading star of economic growth will be greeted with great disbelieve. Many cling on to it as if it is the permanent star of heaven. Why should it fade off, when it has been around for years, (since 1993). It shall return in due time, in different form, but not in the near future. The current rapid decline is due to man’s folly of greed and trickery.
Just a quick important side-track, that is, growth comes in two forms. One is through headcount growth, which increases total growth, assuming stable employment, but it is actually zero growth per capita. The more important growth is productivity growth where the same person is able to produce the same quantity of goods/service at lesser time, thus allowing him to produce more with the usual amount of working hours.
One of the main global growth drivers was man’s invention of computers and internet which has significantly increase productivity, thus growth for the last fifteen years. The productivity has since then comes to gradual plateau. Recently a reputable financial news channel sang a new hollow song of growth engine through alternative energy technology. It is not to be believed. One of their anchor hosts keep harping the belief of goldilocks’ US economy of growth, where there is virtuous growth cycle in US economy and downturn is always shallow and short before US economy returns to healthy growth again.
The truth is that man has also planted its own seed of fast economic decline. The main culprit lies in the creation of money through complex financial engineering to its extreme where poor quality assets are sold off as top grade assets and rehashing them in different forms to the maximum, thus leading to rapid expansion of money. The global slowdown will be severe. The new economic order will likely to be multi-polar, consisting of Europe, Asia and America, instead of one main economic engine of US. The likely outcome will contain certain similarity to the old classic Chinese text of the three states’ rivalry. I will stay to the economic (and financial) course in this series, while the political and cultural rivalry will form a body of interesting discourse, should there be any interest by my readers.
As a seasoned navigator, how are we to chart the course, so as to avoid the treacherous water, so that we are able to continue our journey, till dawn breaks and the new found land is in sight? While we care about the distant future, we also need to pay attention to the immediate waters around us. I will seek to offer some suggestions in the following series of articles as to what choices of investment are available, even in uncertain markets. The Chinese word for danger is risk and opportunity and I seek to propose those opportunities that are available in current times like this.
(If you are still in the camp of Jack Welch, ex-GE’s chairman and CEO, believes that some of the US corporates have strong balance sheets that will power US economy back to health, I can understand that persuasive viewpoint. The missing element in that view is the balance sheet is not strong anymore where valuation is done in the new light and US’ demand deteriorates rapidly, leading to machineries that stand still, though still showing a great balance sheet figure of capital in the books. Till the new economy order is in place where the flow of global demands build up, and growth of capital in appropriate machinery, intellectual knowledge (in this generation, it will be medical) and services, we will be still be facing the tumultuous ocean of change that will last for many years to come.)
Art, 2 Mar 2008
Delta Fund Investing
(In November ‘07, when I called for a US economic recession, heading towards stagflation, some readers thought I was extremist, too pessimistic in my views. Now, US recession is an accepted fact, though many are still doubtful of a US stagflation. In my analysis, I seek to be a realist, as my FX and stock market investment do not have room for wishful thinking. US being the largest world economy, has been the engine of growth for the rest of the world and as such, a major change of US economy will inadvertently affect the global economy till a new economy order arises and that will take a while.)
The changing economic stars, where a key star has risen but many still don’t believe in what they are now seeing with their eyes, choosing to believe it is only a comet that burn brightly and will vanish in no time and on the other hand, one key fading star was cling to religiously where it is in fast decline.
The new rising star of inflation will be here to stay for a while. As surely as you can observe the Arius star during the winter, the global inflation will become clearer by the weeks. (Please note that the period of inflation is not at the similar length to that of the stars in the sky as major economic cycle varies from 3 to 15 years)
What is the basis of the new sightings? Many would ask. It is back to the basic of demand and supply. (In economics, it only seeks to measure real demands, not wants which the poor Africans have, but do not count as they do not have the money to pay for their wants)
Global demand shift
1. The growing middle class in China, India (which has 1.3 and 1 billions populations respectively), Russia and Brazil, or BRICs will push demand to the limit where the CPI data generally represent.
2. The changing global demographics of the economic well to-do (high to middle income) baby boomers (age 45-55) are shifting its growing demand to health care from goods and other services purchases (and baby boomers are also in productivity decline too). Would you be chasing the latest iPhone/fashionable restaurants or you would rather walk the gardens or catch up with friends, when we are in our sixties or above, in view of the declining health?
Global supply shift
1. China and India, the world’s two largest producing nations for the last decade or so have been experiencing rising wages, especially the last three years. It has come to the point that these wage increases are pushing the final manufactured goods and (through the IT and related services) other services prices rapidly upward. The long declining birth rate of middle incomes and one-child China policy has been reducing young bodies for work (or growth)
2. Given the limited global land and raw materials, the growing surge of demand is pushing supply catch-up to its limit too. Land that was set aside for crops and animals’ raising and the mining of raw materials is not able to expand proportionally to meet the demand surge, causing the raising prices of commodities.
The fast fading star of economic growth will be greeted with great disbelieve. Many cling on to it as if it is the permanent star of heaven. Why should it fade off, when it has been around for years, (since 1993). It shall return in due time, in different form, but not in the near future. The current rapid decline is due to man’s folly of greed and trickery.
Just a quick important side-track, that is, growth comes in two forms. One is through headcount growth, which increases total growth, assuming stable employment, but it is actually zero growth per capita. The more important growth is productivity growth where the same person is able to produce the same quantity of goods/service at lesser time, thus allowing him to produce more with the usual amount of working hours.
One of the main global growth drivers was man’s invention of computers and internet which has significantly increase productivity, thus growth for the last fifteen years. The productivity has since then comes to gradual plateau. Recently a reputable financial news channel sang a new hollow song of growth engine through alternative energy technology. It is not to be believed. One of their anchor hosts keep harping the belief of goldilocks’ US economy of growth, where there is virtuous growth cycle in US economy and downturn is always shallow and short before US economy returns to healthy growth again.
The truth is that man has also planted its own seed of fast economic decline. The main culprit lies in the creation of money through complex financial engineering to its extreme where poor quality assets are sold off as top grade assets and rehashing them in different forms to the maximum, thus leading to rapid expansion of money. The global slowdown will be severe. The new economic order will likely to be multi-polar, consisting of Europe, Asia and America, instead of one main economic engine of US. The likely outcome will contain certain similarity to the old classic Chinese text of the three states’ rivalry. I will stay to the economic (and financial) course in this series, while the political and cultural rivalry will form a body of interesting discourse, should there be any interest by my readers.
As a seasoned navigator, how are we to chart the course, so as to avoid the treacherous water, so that we are able to continue our journey, till dawn breaks and the new found land is in sight? While we care about the distant future, we also need to pay attention to the immediate waters around us. I will seek to offer some suggestions in the following series of articles as to what choices of investment are available, even in uncertain markets. The Chinese word for danger is risk and opportunity and I seek to propose those opportunities that are available in current times like this.
(If you are still in the camp of Jack Welch, ex-GE’s chairman and CEO, believes that some of the US corporates have strong balance sheets that will power US economy back to health, I can understand that persuasive viewpoint. The missing element in that view is the balance sheet is not strong anymore where valuation is done in the new light and US’ demand deteriorates rapidly, leading to machineries that stand still, though still showing a great balance sheet figure of capital in the books. Till the new economy order is in place where the flow of global demands build up, and growth of capital in appropriate machinery, intellectual knowledge (in this generation, it will be medical) and services, we will be still be facing the tumultuous ocean of change that will last for many years to come.)
Art, 2 Mar 2008
Delta Fund Investing
If u want 2 punt the mkt, watch out for the 5 bullets that can hurt the bear badly
Art, 14 Feb 2008
Please be careful on buying for the up move as any more credit problem announcement will cause stock markets to slide down anytime; orThe 5 strong bullets that can injure the stock market bull, bringing in the bear;
1. Downgrade of Ambac, MBIA, Financial Guaranty Insurance (FGIC) …mortgage guarantee companies, (by Fitch, or Moody or S&P rating agencies)
2. increase provision of credit card losses, (by Amex, First Cap Corp, Mastercard, Visa or the banks that are issuing these cards)
3. housing loan (prime and sub-prime) defaults (by housing loan companies, eg Freddie, Finnie Mae, banks)
4. general loans (car, personal…etc) default (by GM, Ford, Chrysler loan companies, and the banks
5. corporate loans defaults (from SIV, eg StdChart's Whistle, Fitch possible downgrading of US Airlines bonds, Moody or S&P, and banks announcement, eg Credit Suisse write-offs. Most of the banks announcements are during their quarterly reporting which has a time-table. The Fitch, Moody and S&P downgrading is hard to time as they decide as and when to announce their own assessments without a published time-table.These are all loaded bullets that are waiting to be fired anytime, though without doubt it will be fired, except the timing of the announcement is hard to assess.
Art, 14 Feb 2008
Delta Fund Investing
Please be careful on buying for the up move as any more credit problem announcement will cause stock markets to slide down anytime; orThe 5 strong bullets that can injure the stock market bull, bringing in the bear;
1. Downgrade of Ambac, MBIA, Financial Guaranty Insurance (FGIC) …mortgage guarantee companies, (by Fitch, or Moody or S&P rating agencies)
2. increase provision of credit card losses, (by Amex, First Cap Corp, Mastercard, Visa or the banks that are issuing these cards)
3. housing loan (prime and sub-prime) defaults (by housing loan companies, eg Freddie, Finnie Mae, banks)
4. general loans (car, personal…etc) default (by GM, Ford, Chrysler loan companies, and the banks
5. corporate loans defaults (from SIV, eg StdChart's Whistle, Fitch possible downgrading of US Airlines bonds, Moody or S&P, and banks announcement, eg Credit Suisse write-offs. Most of the banks announcements are during their quarterly reporting which has a time-table. The Fitch, Moody and S&P downgrading is hard to time as they decide as and when to announce their own assessments without a published time-table.These are all loaded bullets that are waiting to be fired anytime, though without doubt it will be fired, except the timing of the announcement is hard to assess.
Art, 14 Feb 2008
Delta Fund Investing
Aftermath of the falling knife
Art, 22 Jan 08
Since I last wrote about a week ago, the market did dropped like a very sharp knife, but what will it be like from here on? The latest sell-down over last few days in Asia is triggered by fears and margin calls, given the significant drop of the most markets.
The decoupling theory is dead. US is still the leading stock market and any crashing will leads to further crashing of almost all other markets. As such, I will from hereon assume global coupling markets.
The mid-term view, or three months' view is still down. What about this week?
No major US econ news till Friday, Existing home sales and Weekly unemployment claims benefits. Home sales is expected to stablised and Unemployment claims is expected to be increased (ie. more unemployed) but it is a weekly data, not so consequential, unless it is much worst than expected. Stimulus budget is still cooking (earliest March08) and FED rates cut is end Jan08, next week.
Key to this week US stock market's retracement, or moving UP slightly will come from corporate results on Wed evening (Sgp time) of APPLE, Johnson & Johnson, Dupont (DJ component stocks) which will likely meet expectation, but it is their projection of next 2 quarters that will greatly affect the sentiment. Given that their businesses are global, they are likely to be more sanguine about business growth than the CITIs and Merrill. BOA will reports weaker results, though not at the same level as CITIBANK.
Friday evening may be a challenge, Microsoft may report poorer results which can affects market sentiment again and US econ data of unemployment and housing sales may weaken the sentiment. By then, Asian markets will be close and all investors will be holding on to their chairs (or pants) hoping that the following week, Bernanke, FED chairman is gutsy enough to cut .75% instead of the current market expectation of .5% on 30 Jan08. A cut of 0.75% will give US stock markets a short term boost.
If you trades short term, you might consider buying calls option which is cheap and should the market totally goes against you, you only lose the option premium, eg STI at 3200 level is valued at .015 cents (expiring 28Feb08). As long as the markets move up to 3000, your call options will be about .025 (40% gain) or even more if above 3200 level, and should it falls all the way to 2000, your call option is worth 0 cent, comes end Feb08.
(If Bernanke cuts 0.75%, the USD will weaken and if you have some cash, it is worthwhile to consider the dual currency (AUD/SGD) that yr private banker can offers you. Eg. AUD/SGD is at 1.2400 and if it is for one month, certain bank is willing to pay you 9.5% interest p.a. pro-rated, but if it drops to 1.2250, your SGD will be convert to AUD. Current SGD deposit rate is 1% or less
Gold has dropped from USD913 to USD880. Is the story of as good as GOLD over? No, by next week when Bernanke cut FED rates by .5%, it will stablise, but if it cuts .75%, Gold will climb again. Now, there is a 50% chance that FED may cuts .75%)
Art, 22 Jan 2008
Delta Fund Investing
Since I last wrote about a week ago, the market did dropped like a very sharp knife, but what will it be like from here on? The latest sell-down over last few days in Asia is triggered by fears and margin calls, given the significant drop of the most markets.
The decoupling theory is dead. US is still the leading stock market and any crashing will leads to further crashing of almost all other markets. As such, I will from hereon assume global coupling markets.
The mid-term view, or three months' view is still down. What about this week?
No major US econ news till Friday, Existing home sales and Weekly unemployment claims benefits. Home sales is expected to stablised and Unemployment claims is expected to be increased (ie. more unemployed) but it is a weekly data, not so consequential, unless it is much worst than expected. Stimulus budget is still cooking (earliest March08) and FED rates cut is end Jan08, next week.
Key to this week US stock market's retracement, or moving UP slightly will come from corporate results on Wed evening (Sgp time) of APPLE, Johnson & Johnson, Dupont (DJ component stocks) which will likely meet expectation, but it is their projection of next 2 quarters that will greatly affect the sentiment. Given that their businesses are global, they are likely to be more sanguine about business growth than the CITIs and Merrill. BOA will reports weaker results, though not at the same level as CITIBANK.
Friday evening may be a challenge, Microsoft may report poorer results which can affects market sentiment again and US econ data of unemployment and housing sales may weaken the sentiment. By then, Asian markets will be close and all investors will be holding on to their chairs (or pants) hoping that the following week, Bernanke, FED chairman is gutsy enough to cut .75% instead of the current market expectation of .5% on 30 Jan08. A cut of 0.75% will give US stock markets a short term boost.
If you trades short term, you might consider buying calls option which is cheap and should the market totally goes against you, you only lose the option premium, eg STI at 3200 level is valued at .015 cents (expiring 28Feb08). As long as the markets move up to 3000, your call options will be about .025 (40% gain) or even more if above 3200 level, and should it falls all the way to 2000, your call option is worth 0 cent, comes end Feb08.
(If Bernanke cuts 0.75%, the USD will weaken and if you have some cash, it is worthwhile to consider the dual currency (AUD/SGD) that yr private banker can offers you. Eg. AUD/SGD is at 1.2400 and if it is for one month, certain bank is willing to pay you 9.5% interest p.a. pro-rated, but if it drops to 1.2250, your SGD will be convert to AUD. Current SGD deposit rate is 1% or less
Gold has dropped from USD913 to USD880. Is the story of as good as GOLD over? No, by next week when Bernanke cut FED rates by .5%, it will stablise, but if it cuts .75%, Gold will climb again. Now, there is a 50% chance that FED may cuts .75%)
Art, 22 Jan 2008
Delta Fund Investing
The global stock markets have corrected significantly since the beginning of the year. Is it time to jump in now?
Art, 16 Jan 2008
The answer is a big NO. US economy has just experienced the classic economic downturn with the falling house prices, which have hurt the banks badly. Economically speaking, this is just the beginning of the downturn. The next thing to come is the growing default of car loans (GM finance mentioned that the 3rd Quarter default was up slightly from 2.4% to 2.6%, but no mentioned of the 4th Quarter default rate). Credit card default will be the next to fall invariably as it is used to ‘support’ other outstanding loans until it cannot be done anymore. Credit card loans is estimated to be close to USD1 trillion currently outstanding. Capital One (US-based credit card company) is already reporting higher delinquency rate. With a 24% to 30% charge rate, it can come very fast. Even the prime housing loans default will not be spared subsequently, though at lesser degree but from a very sizable amounts base figures. Finally, the corporate loans default which is currently almost at all time low is likely to rise to the ‘normal default rate of 1.25% (or equivalent to about USD500 billions) as reported by FT, 12 Jan 08’ or likely to overshoot it, (it is beginning to hurt some Credit Default Swaps, CDS issuers).
I repeat, we are currently ONLY just after the first stage, the sub-prime housing loans. Who is going to save the US economy from recession? There will be some false dawning from FED rates’ cuts and fiscal stimulus. Don’t bet on it that it can be easily overcome the grip of US recession by the cutting of FED rate to even 0%, (despite the financial futures market having already priced in a 0.5% cut to 0.75% by end Jan 08 (to 3.75% or 3.5%), and yet last night Dow Jones Index was down by 280 points.) Though last night, PPI came in tame, but with the raising commodities’ prices, CPI will have a problem of staying low for too long. Some economists now are talking about stagflation though undoubtedly US recession is here. Like an auction party during this US presidential election year, the presidential candidates are all shouting higher and higher rescue fiscal stimulus package to the tune of USD75 billions coupled with more tax cuts. How much will the world stomach the borrowings to fund the world largest, which is US economy (or merry-making) this time round when US has already accumulated trillions of fiscal deficits (currently about twenty over percent of her GDP, of about USD12+ trillions?
Has the world economies decoupled? Just look at the stock markets around the world where last few nights of drops in the US stock market triggered dropped of almost all other markets which is very telling that it is not as decoupled as many have hoped for.
A last word of advice is, taken from the fund managers, ‘never try to catching a falling knife’.
Art, 16 Jan 08
Delta Fund Investing
The answer is a big NO. US economy has just experienced the classic economic downturn with the falling house prices, which have hurt the banks badly. Economically speaking, this is just the beginning of the downturn. The next thing to come is the growing default of car loans (GM finance mentioned that the 3rd Quarter default was up slightly from 2.4% to 2.6%, but no mentioned of the 4th Quarter default rate). Credit card default will be the next to fall invariably as it is used to ‘support’ other outstanding loans until it cannot be done anymore. Credit card loans is estimated to be close to USD1 trillion currently outstanding. Capital One (US-based credit card company) is already reporting higher delinquency rate. With a 24% to 30% charge rate, it can come very fast. Even the prime housing loans default will not be spared subsequently, though at lesser degree but from a very sizable amounts base figures. Finally, the corporate loans default which is currently almost at all time low is likely to rise to the ‘normal default rate of 1.25% (or equivalent to about USD500 billions) as reported by FT, 12 Jan 08’ or likely to overshoot it, (it is beginning to hurt some Credit Default Swaps, CDS issuers).
I repeat, we are currently ONLY just after the first stage, the sub-prime housing loans. Who is going to save the US economy from recession? There will be some false dawning from FED rates’ cuts and fiscal stimulus. Don’t bet on it that it can be easily overcome the grip of US recession by the cutting of FED rate to even 0%, (despite the financial futures market having already priced in a 0.5% cut to 0.75% by end Jan 08 (to 3.75% or 3.5%), and yet last night Dow Jones Index was down by 280 points.) Though last night, PPI came in tame, but with the raising commodities’ prices, CPI will have a problem of staying low for too long. Some economists now are talking about stagflation though undoubtedly US recession is here. Like an auction party during this US presidential election year, the presidential candidates are all shouting higher and higher rescue fiscal stimulus package to the tune of USD75 billions coupled with more tax cuts. How much will the world stomach the borrowings to fund the world largest, which is US economy (or merry-making) this time round when US has already accumulated trillions of fiscal deficits (currently about twenty over percent of her GDP, of about USD12+ trillions?
Has the world economies decoupled? Just look at the stock markets around the world where last few nights of drops in the US stock market triggered dropped of almost all other markets which is very telling that it is not as decoupled as many have hoped for.
A last word of advice is, taken from the fund managers, ‘never try to catching a falling knife’.
Art, 16 Jan 08
Delta Fund Investing
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