Friday, February 27, 2009

My congratulations...

And salutations must go to the Bank of Nova
Scotia, which now enjoys a larger market cap
Than Citi, DB, and that egregiously socialistic
Sounding French bank Soc Gen.

Thursday, February 26, 2009

Discrepancies in the figures...

...and no large bank failures in a place replete with politically-influenced (read: State-Directed) loan policies?

Feb. 26 (Bloomberg) -- China investors should be “defensively positioned” as a decline in the nation’s tax receipts signals a steeper slowdown in spending than retail sales figures show, according to Goldman Sachs Group Inc.

“Tax data show much sharper deceleration in income and consumption in the past few months than suggested by official retail sales or income growth figures,” Goldman Sachs analysts Joshua Lu, Caroline Li and Fiona Lau wrote in a note today.

Value-added tax has “de-linked sharply” from retail sales figures, the analysts wrote. VAT rose 1 percent in the fourth quarter from a year earlier, while retail sales gained 21 percent, according to the note.

China is trying to boost domestic spending to shore up its economy as recessions in the U.S. and Europe smother demand for its exports. The nation’s growth has slowed for six straight quarters, while outbound shipments slumped 17.5 percent in January, the most in almost 13 years, customs bureau data showed this month.

Growth in China’s individual income-tax receipts “slowed down significantly” in the second half and shrank in December and January, the Goldman Sachs analysts wrote. This compares with nominal wage growth of 21 percent in the third quarter, the report said.

Wednesday, February 25, 2009

Tide rolling out...

...for more "investment management companies".

Galbraith called the phenomenon the "Bezzle":

(From "The Great Crash")
"In many ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. there is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in - or more precisely not in - the country's business and banks. This inventory - it should be called the bezzle. It also varies in size with the business cycle."

It will be interesting to see how the marks were finally convinced to invest. The behavior is inconceivable to me, and reminds me of my favorite quote from the movie "Wall Street":

Lou Manheim: "Bud, the thing about money is it makes you do things you don't want to do". Shortly thereafter in the movie Lou also goes into a Kierkegaardian (or "Johannes Silentian", if you prefer) discussion of "man vs. abyss", which is also quite memorable.

By Patricia Hurtado

Feb. 25 (Bloomberg) -- The FBI in New York today arrested four people in three separate securities fraud cases, including one case that allegedly defrauded investors out of hundreds of millions of dollars, said Jim Margolin, a spokesman for the FBI’s New York office.

Paul Greenwood and Stephen Walsh of W.G. Trading, a broker-dealer based in Greenwich, Conn., were arrested on a complaint that accuses them of conspiracy to commit securities fraud in what authorities believe is a $550 million fraud scheme that dates back to 1996.

The two are accused of soliciting funds from institutional investors, including university foundations and charities, according to a federal complaint filed in U.S. District Court in Manhattan.

One unnamed public, state-sponsored university invested more than $65 million, court papers say, including a Feb. 6 investment of about $21 million.

James Nicholson, founder of Westgate Capital Management, was taken into custody this morning by FBI agents. He was named in a criminal complaint on a charge of securities fraud in a scheme that dates back to 2004, court papers said.

Nicholson is accused of operating at least seven separate funds out of offices in Pearl River, New York, and Manhattan beginning in 1999, the federal complaint said. He falsely claimed to investors that the assets he managed in the funds were between $600 million to $900 million.

Prompted by Madoff

The scheme was uncovered in December after news of Bernard Madoff’s alleged $50 billion Ponzi scheme caused Nicholson’s investors to begin seeking redemptions, FBI Special Agent William McGrogan said in the complaint. Investors may have put at least $100 million in Nicholson’s funds, McGrogan said.

Mark Bloom, who Margolin said once worked for Greenwood and Walsh and now heads his own firm, was arrested in connection with a separate fraud scheme.

All four are expected to be presented in federal court in Manhattan later today.

To contact the reporter on this story: Patricia Hurtado in New York State Supreme Court in Manhattan at

Capitulation time...

/start Turing test post drawing closer.

End of 1st quarter should see the final bonfires.

And we should all keep in mind the impact of inflationary policies on equity prices. See the late 1970s for further guidance there.

An economic echo from 1971...

/end Turing test post

Have to keep things very non-specific on this blog...

Tuesday, February 24, 2009

Lack of Due Process risk...

Another interesting anecdote in the article below describing the dangers of investing in jurisdictions that lack a fully-fleshed out legal rule-set.

Without a definitive set of due-process rules and some concept of Habeas Corpus, a company can be without the services (or even contact) of its executives for indefinite periods.

It's no wonder Hillary is not pushing the Human Rights issue too much...another comparative advantage that America will enjoy for decades.

Institutions survive and does not.

See Douglass North for more on that. Krugman also commented on the precarious situation capital rich economies experience without correspondingly strong institutions. America is no accident in that respect.

Greaves hasn’t seen or spoken to Huang, 39, since. One morning in November, the dapper, baby-faced tycoon failed to turn up, along with his Maybach limousine, at Gome’s Beijing headquarters, where he normally worked such long hours that he had installed a double bed in the office adjacent to his own.

Under Investigation

On Nov. 24, the company halted trading in its shares on the Hong Kong exchange. Three days later, Beijing police disclosed that one of China’s most celebrated entrepreneurs was under investigation for share manipulation.

Three months later, Huang and his wife and former co- director, Lisa Du Juan, remain incommunicado, along with Zhou Yafei, Gome’s former chief financial officer, somewhere in China’s penal system, leaving Greaves and his remaining co- directors scrambling to avert the company’s collapse.

Gome’s investors -- which include Capital Research & Management, a unit of Capital Group Cos., the largest U.S. manager of stock and bond mutual funds; Warburg Pincus LLC; and clients of JPMorgan Chase & Co. and Morgan Stanley -- still can’t trade the suspended stock. All four fund managers declined to comment.

Monday, February 23, 2009

Nice commentary by Hassett of Bloomberg about the Obama economic team.

Economics is not "science". There is no course of action that will lead to predictable results.

Summers knows this...or at least has written at length about the fallibility of economic analysis (See "The Scientific Illusion in Empirical Macroeconomics, Scandanavian Journal of Economics, Volume 92 No. 2). And yet there is a body of anecdotal evidence that he ignores his own medicine and comes across as intensely positivistic in the presence of other humans who may harbor differing opinions.
Drank the Water

But collectively, the team that he assembled is long on people who are predisposed to agree with him and short on those who steered clear of the Keynesian water of Cambridge.

The list of Cambridge insiders includes the chairwoman of Obama’s Council of Economic Advisers, Christina Romer (MIT); council members Cecilia Rouse (Harvard) and Austan Goolsbee (MIT); and even senior adviser Paul Volcker (Harvard). All told, of the 27 top advisers on the White House economic team or its Economic Recovery Advisory Board, 14 went to Harvard or MIT and 20 are Ivy Leaguers. As an individual, each of these team members is worthy of bipartisan praise. As a group, there is a disappointing lack of diversity.

Is it any wonder, then, that we would see a stimulus package that puts so much faith in Keynesianism? It would be like inviting only American League fans to a debate about the designated hitter.

Chinese fingercuffs...

Even Geithner's gaff about currency manipulation (or even more direct accusations of mercantilist policies employed by China) cannot deflect them from reality. It is a Faustian bargain, only we have their tangible goods and they have paper which ostensibly grants them the right to purchase our real goods at price levels we set in the future.

Of course they will buy our bonds...and the only function for all this "helping the U.S. out by buying their bonds" talk is to garner political points from the CPC, which is, or is very shortly to be, scrambling to hold its power.

China to heed Clinton's call on buying US bonds: economists
1 hour ago
SHANGHAI (AFP) — China has little choice but to follow Hillary Clinton's call and continue buying US Treasuries, as reversing course would lead to the value of its investments plunging, economists said Monday.

While in Beijing on her first overseas trip as US secretary of state, Clinton urged China on Sunday to keep buying US debt, saying it would help jumpstart the flagging US economy and stimulate demand for Chinese exports.

In fact, China has to keep investing in the United States if it wants to protect the value of its trillions in dollar holdings, said Lu Feng, an economist at Peking University's China Center for Economic Research.

"China is sitting on huge piles of foreign exchange and it will increase its holdings of US Treasuries," Lu said. "Objectively speaking, helping the US economy is good for both China and the US."

China overtook Japan last year as the United States' biggest foreign creditor, and had 696.2 billion dollars of Treasury Bills in December, according to the latest official data from Washington.

Its world-largest foreign exchange reserves, which stood at 1.95 trillion dollars as of the end of December, also mean it is the world's biggest foreign holder of the US currency.

Clinton sought to highlight the importance of the ever-building inter-dependency between the world's biggest and third biggest economies.

Saturday, February 21, 2009

Soros sails for the antipodes...

Now, the security question (the answer to which will be American presence in Sub-Saharan Africa) is less an inchoate doctrine and more inevitability.

More of this to come as the Remora follow the big fish.

Soros analysts eye Nigeria's banking sector
By Matthew Green in Lagos
Published: February 20 2009 02:00 | Last updated: February 20 2009 02:00
George Soros's $20bn hedge fund company is looking at potential opportunities in Nigeria's banking sector, where valuations have collapsed in the past year amid growing fears over the level of supervision and transparency.

Senior analysts from Soros Fund Management visited Nigeria this week to meet bankers and government officials, raising hopes in the market of a return of foreign interest after many portfolio investors fled during the course of the past year.

Remi Babalola, minister of state for finance, said he was due to brief Sharif Atta, a senior analyst at Soros Fund Management, and Ahmad Zuaiter, a portfolio manager, on the investment climate in Nigeria today.

"What makes it interesting is that they are the first to come since the global financial crisis, and since the departure of most other investors from the market," Mr Babalola told the Financial Times. "It's going to be a magnet for other investors to come in."

The Soros delegation met Nigerian bankers including senior managers from United Bank for Africa and Diamond Bank during their trip to Lagos, the commercial capital, according to sources within the banks. Representatives of at least two other big US and European funds have also visited Lagos since the start of the year, according to another industry source. The Soros Fund Management declined to comment.

Thursday, February 19, 2009

Deficit Spending...

Nice, concise, operationally focused discussion of what precisely happens when the U.S. engages in deficit spending from the great Warren Mosler. As I have said before, reserve accounting in a floating currency world produces some "strange" (to mainstream economic textbook) consequences. Non-convertible currency deficit spending does not produce a "debtor nation". Inflation, inflation, inflation is the policy concern.

Operationally, this is how $100 billion of deficit spending ‘works’ to ADD to nominal savings of financial assets:

1. The Treasury sells $100 billion of treasury securities.

2. Paying for the new securities reduces member bank balances held at the Fed by $100 billion.

3. And our holdings of treasury securities increase by $100 billion.
Quick recap-

4. The Treasury spends the $100 billion it got from selling us the $100 billion of new treasury securities.

5. This increases member bank balances at the Fed by $100 billion.


Bank balances are back where they started from.

Our holdings of treasury securities, which are financial assets and saving, have increased by $100 billion.

Conclusion and proof:

Government deficit spending of $100 billion necessarily increases savings of financial assets by $100 billion.

N-11 left under BRICS

The title of this post is just silly, but I could not come up with a pithy tag-line to the "N-11" (or "next eleven countries", because the "BRIC" meme has "matured")

Some folks are trying to re-visit the N-11 despite the obvious problems nearly all of them are experiencing.

Instability in-a-box(es)


Asian box ports see alarming drop in throughput
Marcus Hand, Singapore and Sandra Tsui, Hong Kong - Tuesday 17 February 2009
ASIAN container ports are bracing themselves for a grim year ahead as they report alarming drops in volumes in January.

Box throughput at Singapore, the world’s largest container port took a 19% dive in January this year to 2m teu compared to 2.4m teu for the first month of 2008.

Singapore’s sharp drop in volumes in particular reflect the collapse in the Asia- Europe trade where it is a key relay port transhipping exports from surrounding countries to Europe and the Middle East.

The picture for world’s third busiest boxport, Hong Kong was even bleaker.

Hong Kong, saw January throughput plunge 23% in January to 1.6m teu. Its flagship Kwai Tsing Terminals moved 1.2m teu, down 19% from the same month last year.

“We think February throughput remains challenging. Suspension of trade services, especially Asia-Europe, seems to have not ended at all as announcements had been accelerating. Lay-up had increased from 300,000 teu in first half of January to about 800,000 teu in the first week of February,” said Daiwa Institute of Research analyst Geoffrey Cheng.

At Malaysia’s largest port, Port Klang, the picture was not much better. Port Klang Authority general manager Lim Thean Shiang told local press that the port had seen a 16% drop in volumes in the first month of the year compared to January 2008.

A 10% drop in throughput was projected by Port Klang for 2009 as whole, having handled 7.8m teu last year.

Wednesday, February 18, 2009

The joys of infrastructure...

...and the advantage a vigorous legal system conveys upon a nation.

Ricardian comparative advantage applies to intangibles as well. Where would you like your standing to be?

By staff reporters Fan Junli and Lu Yanzheng
From Caijing Magazine

Chinese overseas investors who tallied huge losses in recent months have sued London-based Standard Chartered Bank (China) Ltd. in its position as the largest provider of Qualified Domestic Institutional Investor (QDII) investment products.

Meanwhile, the China Banking Regulatory Commission (CBRC) has indicated authorities are reconsidering standards for access to QDII products, some of whose investors have watched their dream deals turn into nightmares.

Sources close to the regulator said banks sued by Chinese investors would face restrictions over disputed investment products.

Disgruntled investors claim Standard Chartered failed to sufficiently disclose investment risks tied to its products. They also charged bank salespeople misled investors, and that its investor complaint mechanism malfunctioned.

QDII investors were hard hit by last year’s Wall Street meltdown. Original investments declined for all 49 of Standard Charter’s current QDII products, with 32 losing more than 30 percent of principal and 10 products losing more than 50 percent.

Standard Chartered investors are not alone. A research institute affiliated with the Southwestern University of Finance and Economics in Chengdu showed that, as of December 19, investors lost principal on 63 types of QDII products tied to foreign banks, while 13 have lost 50 percent of their principal.

Unhappy Investors

CBRC called QDII investing an “overseas wealth management business” when it was unveiled in April 2006. Afterward, its investment scope quickly expanded, allowing Chinese companies and individuals to invest in foreign financial markets through commercial Chinese banks.

But the lawsuits have forced banks to reflect on problems with the design, sales and risk management of QDII products. Meanwhile, banking regulators and individual investors are taking a second look at financial innovations.

To Laugh or Cry...

..."lack of due dilligence" as sort of a catch phrase for "someone is sort of accountable for this or that negative result" has been bandied about lately.

Feb. 18 (Bloomberg) -- General Motors Corp. asked the U.S. for as much as $16.6 billion in new loans, more than doubling the aid to date, and said it needs some of the cash next month to survive as it sheds brands and cuts 47,000 more jobs worldwide.

Chrysler LLC, propped up like GM with federal assistance, said it’s seeking $5 billion more from the government and will shed 3,000 more positions.

The automakers’ fates are now in the hands of the Obama administration, which must decide whether to give them the additional money or let them go bankrupt. Robert Gibbs, President Barack Obama’s chief spokesman, yesterday didn’t rule out forcing the companies to restructure through bankruptcy.

“Most of the low-hanging fruit when it comes to cost cutting is gone,” said Rebecca Lindland, an IHS Global Insight Inc. analyst in Lexington, Massachusetts. “You get to the point where you’re throwing good money after bad.”

GM and Chrysler met a deadline yesterday to report progress in revamping operations with $17.4 billion in loans granted so far and got a boost from tentative accords with the United Auto Workers to cut labor costs. Now, they must show the U.S. by March 31 that they can return to profit in order to keep the money.

‘Tighten Things Down’

“We will tighten things down and hang on as long as we can” as the new request is considered, GM Chief Executive Officer Rick Wagoner said today in a Bloomberg Television interview. The Detroit-based automaker said it will run out of cash without a payment of $2 billion in March.

Horizontal lines and P&C insurers

...all insurance companies, watch out. With nationalization (via either PPP or other hybrid structure of governmental ownership) being discussed and the FED in slow-motion rate crash mode, a flattening yield curve in the next 4 years will be a reality.

The horizontals will cause massive damage to insurance obligations on the asset/liability management side. The combined ratio will be key...a saving grace here is that jury awards and claim payments on the P&C side tend to decrease in recession at a faster rate than deflation.

Hopefully, the insurance industry can see clearly their prognosis and lobby state regulators to lessen capital requirements (less treasuries, more risk assets that with favorable yields) The difficulty lies in the macro issues and governmental action.

Tuesday, February 17, 2009

SEC *HEART* Markopolous...

Looks like the SEC is listening to the man...

Feb. 17 (Bloomberg) -- U.S. regulators accused R. Allen Stanford of running a “massive, ongoing fraud” while selling about $8 billion in certificates of deposit through Antigua- based Stanford International Bank Ltd.

The bank made “improbable and unsubstantiated” claims about its ability to generate “safe” returns of more than 10 percent, and it misled investors about exposure to Bernard Madoff’s alleged Ponzi scheme, the Securities and Exchange Commission said today in a complaint against Stanford, firms he controls and two colleagues. The agency asked the Dallas federal court to freeze assets and appoint a receiver to return money to investors.


Some Acronyms readily packaged for your consumption over the next decade:

PPP's (Public-Private Partnerships)

AFRICOM (U.S. Africa Command)

and of course the IMF.

Acceleration rates...

The stress to the Euro zone's culture and institutional ability to withstand economic crisis continues.

Resolution, one way or another, is coming quickly, and has major implications for Gold, Oil, and the Dollar.

Narrow-minded leadership hurts Europe
By Wolfgang M√ľnchau
Published: February 15 2009 19:27 | Last updated: February 15 2009 19:27
“It is justifiable if a factory of Renault is built in India so that Renault cars may be sold to the Indians. But it is not justifiable if a factory ... is built in the Czech Republic and its cars are sold in France” – Nicolas Sarkozy, president of France.

This is a troubling statement indeed. But instead of launching a tirade against Mr Sarkozy, I would like to make an observation that is perhaps not immediately evident: his statement is entirely consistent with the way the European Union has reacted to the financial crisis.

To see the link between crisis management and the rise in protectionism, look at the initial policy response to last September’s financial shockwaves. European leaders have woefully underestimated the crisis and possibly still do. The European economy is now heading towards a depression, with German gross domestic product falling at an annualised rate of almost 9 per cent. The early misjudgment of the crisis resulted in stimulus packages with two defects. They were initially too small but, more importantly, they were not co-ordinated. One important aspect of the economic meltdown is the presence of strong cross-country spillovers, both globally and inside the EU. The policy response failed to take account of these spillovers.

Sunday, February 15, 2009

Test and update

The Recapitulator has acquired a mobile computing device and is testing it's capabilities for mobile blogging. I will be posting about the stimulus bill and it's implications shortly.

Saturday, February 14, 2009


...from the Annual Threat Assessment prepared for the Senate Select Commitee on Intelligence.

The full report:

I am primarily concerned with scenarios involving Africa:

"China’s presence has grown substantially over the past decade. Total bilateral trade between China and the continent has increased from less than $4 billion in 1995 to $100 billion in 2008, but the EU and US still remain far larger economic partners for the region. China’s objectives are to secure access to African markets and natural resources, isolate Taiwan, and enhance its international stature, all of which it has made progress on. Nevertheless, China’s role has generated local resentment as Chinese firms are seen as undercutting African competitors in securing commercial contracts and falling short of standard local labor practices. Moreover, there is little discernible evidence of Chinese investments being used to incorporate Africa into the industrial “global value production chains” that are becoming the hallmark of integrative trade and FDI flows, especially in manufacturing in other regions of the world."

We should see the U.S. move quickly on this...

Thursday, February 12, 2009

The Context.

America provides security, property law and an individual's claim on profits to nations that lack these institutions or capabilities.

This is an extremely valuable service and one that is UNIQUE in the world. You cannot replicate 800 years of piecemeal improvement in the law since Magna Carta (and more recently, Blackstone's codification of English Common Law, and even more recently the Federal Code) overnight. Nor can you duplicate the capability of the U.S. military (in conventional warfare, at least).

So, if you are China or another country lacking these institutions, exporting to the United States protects profits from domestic "leakage" (corruption, cronyism, possibility of expropriation or defalcation, etc.)

The world is not as "imbalanced" as economists who look ONLY at trade figures and capital flows believe. There is a context involved, and economics is only one facet on a very complex multi-dimensional surface.

Wednesday, February 11, 2009

The "Cause"

/start parody

Everyone thinks they know how the credit crisis began. Everyone is wrong. Only I, The Recapitulator, have the correct answer, which I am about to divest upon you.

Behold, mere mortal, my perfect chain of logic and kneel before my powers of deduction...I should get at least a cabinet position in the treasury for this incredible finding.

The crisis was caused by sub-prime mortgages. The increased demand for sub-prime mortgages was caused by a decrease in lending standards and a directive from government to the major financing providers (Fannie, Freddie). This was caused by lobbyists from said companies. These lobbyists are lawyers who are paid to influence politicians on the behalf of companies. Lawyers are educated at Law School. The first law school in the United States was Lichtefield, followed closely by Harvard and Yale.

Therefore (drum roll please), we should destroy these schools. Only then will we cease to suffer from bad policy and a general corruption at the Federal level of regulatory governance.

/end parody

Unfortunately, the above analysis is not far from some of the causal relationships being talked about in relation to the current crisis. With so many moving parts in an economy, a full and causally tight description is impossible.

The general language of Minsky provided a better model than politicians attempting to diagnose "a" cause for the bubble. Of course, this will not stop said pols from legislating regulation based on faulty premises.

Preaching to the choir... now, most of my readers realize that the Euro area is in far more trouble than the U.S. Combining monetary policy without fiscal policy is doomed to fail in floating currency regimes. Monetary creation is primarily fiscal and bank-created. Low interest rates do not "create money". In a floating foreign exchange regime, loans create deposits.

The nation that adapts more quickly than its competitors will gain first-mover advantage over a newly shaped world. The U.S. has fulfilled that function nicely, displaying a high level of activity and looking agile as compared to the China, Japan (and especially) the EU.

The U.S. Government will make mistakes, it will "misallocate" resources, create unintended consequences, "crowd out" some investment, etc.

But that is the function for the "liquidity provider of last resort", and it gives the U.S. enormous flexibility to achieve its policy goals.

But like all bubbles, the one in governmental power and authority will come to a close. Expect popular backlash against profligacy of all kinds and a return to more puritanical habits. This will include a more constrained role for government.

Other forms of government cannot do this.
European banks may need massive bail-out
European banks sitting on £16.3 trillion of toxic assets may suffer massive losses, according to a confidential Brussels document.

By Bruno Waterfield in Brussels
Last Updated: 1:51PM GMT 11 Feb 2009
A secret 17-page paper discussed by finance ministers, including the Chancellor Alistair Darling on Tuesday, also warned that government attempts to buy up or underwrite such assets could plunge the European Union into a deeper crisis.
National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors - particularly those who lend money to European governments - have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.
“Estimates of total expected asset write-downs suggest that the budgetary costs – actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states,” the EC document, seen by The Daily Telegraph, cautioned. “

Monday, February 09, 2009


..."Everyone" is talking about recession, depression (both economic and psychological). The attached picture here depicts search engine traffic based on the word "recession". Pundits go on T.V. (career-defining moment!!!) and tell us how we are only in the "3rd Inning" of an economic and social meltdown that will compel us all to burrow underground, evolve into Morlocks, and await The Time Traveller in order to explain that if only the banks had not gone under, we would not be breeding Eloi.

Words like "meltdown", "destruction", "imploding", "collapse", etc. are being used to describe 2% declines in stocks. This is not a geological physical event where we will all become extinct. Yes, things will get "worse", relative prices will continue to adjust, uncertainty will prevail into the 4th quarter and perhaps beyond. However, there are indications that, after the first quarter, equity markets will recover somewhat...and even Keynes said "when the facts change, I change my mind".

But springtime in the northern hemisphere should provide a respite from the unending parade of economists who think their forecasting powers are now more accurate after the chastening experience of Gotterdamurung or whatever fantastical label they affix to a necessary component of a market based economy.

Thursday, February 05, 2009

Confused and Moody...

...or rather Moody's is confused.

The following excerpt from their remarks concerning U.S. debt illustrate the extent of misunderstanding even the largest investment services display when conceptualizing the real economic causes and effects of debt issued by the U.S. in its own currency.

1. The notion of "creditors" is misguided as it ignores the other half of the equation - the desire (indeed the massively lustful need) to save U.S. financial assets. "Creditor" nations do not "finance" our spending as much as we "finance" their saving.

2. Moody's gets the relative argument correct (other nations debt levels increasing as well), but fails to delineate if those nations are issuing in their own currency or if the debt is denominated in foreign currency. If foreign currency, then it is very much a problem as that nation must obtain the stated foreign reserves to pay the obligations. Export-heavy emerging market economies get caught in this all the time when they issue debt denominated in foreign currency. An obligation to pay back in dollars is based on "getting" dollars from exports. If net exports declines, there are less dollars forthcoming and vultures start circling. See Argentinian economic history in the 80s and 90s.

3. Government spending is not revenue constrained. I have repeated this many times recently. Again, the U.S. does not have to "get" dollars from anyone. U.S. interest payments will never bounce. The ability to pay in U.S. dollars is NOT a function of tax revenue. INFLATION is the issue, not SOLVENCY or "ability" to pay.

4. So the question to Moody's is "so what?" Where do they put their money?

(ADDENDUM) This may also be Moody's (no doubt other rating agencies will follow as well) attempt at remaining relevant and "tough".

(ADDENDUM II) I point readers to Japan's bond performance (compared and contrasted with contemporaneous Moody's rankings) given their Debt/GDP ratio of nearly 150%. Why use this measure if it does not describe or predict?

"The US government's financial position is projected to worsen considerably
over the coming two years as a result of measures taken to aid the financial
sector, the effects of the recession and the upcoming stimulus package, says
Moody's... At the end of fiscal year 2008, debt borrowed from creditors
outside the federal government, the most relevant measure of federal
government debt, amounted to $5.8 trillion, equivalent to 40.8% of US GDP.
"Compared with the central government debt of other Aaa-rated countries,
this is a moderate level. However, total debt held by the public is
projected to rise by more than half during the coming two years, reaching
$9.0 trillion, or 62% of GDP by the end of fiscal year 2010... In the
meantime, however, most other Aaa governments will see their debt metrics
deteriorate as well." Moody's also examines the ratio of this debt to the
federal government's own revenue, which is a measure of the resources
available at any moment to repay the debt."

An Oracle hugging Gnomes...Swiss Re continued

I thought in my Dec. 16 post that governmental capital infusion was imminent...turns out they got the next best thing.

Swiss Re to get $2.6B from Buffett, warns of loss
Swiss Re to receive $2.6 billion capital injection from Warren Buffett after full-year loss

Thursday February 5, 2009, 8:28 am EST
ZURICH (AP) -- Swiss Reinsurance Co. said Thursday it will get a capital injection of 3 billion Swiss francs ($2.6 billion) from U.S. financier Warren Buffett after warning investors it expects to lose 1 billion francs ($869 million) for the full year.

The company, which based its expected net loss on preliminary figures, said it will seek a further 2 billion francs on the capital markets.

Writedowns of approximately 6 billion francs ($5.2 billion) for the full year offset strong underwriting performance, Swiss Re said.

Investors reacted to the news by dumping the company's stock, which fell 24.40 percent to 22.80 francs ($19.62) on the Zurich exchange in morning trading.

"We are disappointed with our overall results in 2008, but our core business -- Property and Casualty and Life and Health -- is performing well," said Chief Executive Jacques Aigrain.

"We have taken steps to protect our capital strength to ensure the continued trust of our clients," he said in a statement. "Warren Buffett's agreement to invest in Swiss Re is a testament to the strength of our franchise."

Buffet has long-standing interests in the insurance business, including General Re Corp.

Through his Omaha, Nebraska-based company Berkshire Hathaway Inc., Buffett already holds a 3 percent of Swiss Re shares. The increase in stake is subject to approval by Swiss Re's shareholders.


Off-shore (especially Western Hemisphere) jurisdictions are coming under increasing pressure to open their collective financial books and investors to the scrutiny of U.S. authorities. The hearings yesterday from the Mad0ff scandal will only add urgency to that charge.

I won't get into the long-term implications here. (but I will say that Bermuda, the Cayman's, Cuba, and perhaps even the Loyalist Bahamas will enter U.S. statehood at some point)

I don't know how this increased attention will effect the several thousand off-shore captive insurance companies operated by U.S. companies, and any remarks to that effect would be appreciated.

The net result is the U.S. still has a monopoly on well-functioning capital markets and security...and it will start charging a little more vig to play the game.

Atavistic Convictions...

New Hampshire passes a "resolution affirming State's rights based on Jeffersonian principles". One hope's this causes debate instead of rancour.

"In questions of power, then, let no more be heard of confidence in man, but bind him down from mischief by the chains of the Constitution. That this State does therefore call on its co-States for an expression of their sentiments on acts not authorized by the federal compact. And it doubts not that their sense will be so announced as to prove their attachment unaltered to limited government, whether general or particular. And that the rights and liberties of their co-States will be exposed to no dangers by remaining embarked in a common bottom with their own. That they will concur with this State in considering acts as so palpably against the Constitution as to amount to an undisguised declaration that that compact is not meant to be the measure of the powers of the General Government, but that it will proceed in the exercise over these States, of all powers whatsoever: that they will view this as seizing the rights of the States, and consolidating them in the hands of the General Government, with a power assumed to bind the States, not merely as the cases made federal, (casus foederis,) but in all cases whatsoever, by laws made, not with their consent, but by others against their consent: that this would be to surrender the form of government we have chosen, and live under one deriving its powers from its own will, and not from our authority; and that the co-States, recurring to their natural right in cases not made federal, will concur in declaring these acts void, and of no force, and will each take measures of its own for providing that neither these acts, nor any others of the General Government not plainly and intentionally authorized by the Constitution, shall be exercised within their respective territories; and

That the said committee be authorized to communicate by writing or personal conferences, at any times or places whatever, with any person or person who may be appointed by any one or more co-States to correspond or confer with them; and that they lay their proceedings before the next session of the General Court; and

That any Act by the Congress of the United States, Executive Order of the President of the United States of America or Judicial Order by the Judicatories of the United States of America which assumes a power not delegated to the government of United States of America by the Constitution for the United States of America and which serves to diminish the liberty of the any of the several States or their citizens shall constitute a nullification of the Constitution for the United States of America by the government of the United States of America.

Wednesday, February 04, 2009

Name another country...

While the rest of the world prevaricates, U.S. companies are taking this opportunity of "lowered" expectations to expose all the skeletons in their collective closets.

This is nothing to fear. The U.S. can slash, burn, and grow again while the other more ossified nations conceal and confirm their ineptitude. Name another country that has this kind of transparency and public excoriation of its appointed officials (such as the SEC hearings today)

I am becoming more and more bullish beginning in the late 1st quarter.

February 4, 2009, 12:31 PM
Losses Mount Up
This just in: The Standard & Poor’s 500 is on its way to the first quarter it has had — the data goes back to 1936 — in which the companies in it will report overall losses rather than profits.

Howard Silverblatt, S.&P.’s index maven, reports that with almost three-quarters of the companies in the index having reported fourth-quarter numbers, the loss per S.&P. share is now $6.32. Most of that is write-offs, not operating losses, of course, and over all the companies are reporting operating profits. But the write-offs are not just in the banks. Time Warner’s big hit for writing off its AOL folly is one example.

A Uni-polar world...

All of this talk about global "non-polarity" and "decoupling" was based on high and increasing commodity prices and a belief that domestic demand among Emerging Markets had hit critical mass.

Note the responses by these countries in the face of adversity, and compare them to the response from America. The fact is that we have the best set of stress-tested democratic rule sets in the world.

and we will see more of the below from those countries that lack the institutions and rules to effect rapid change.


Tuesday, February 03, 2009

All your data are belong to us

What if the data from which you derived your conclusions changes over time?

I recall reading the previous paper discussing this phenomenae, and am happy to report the authors have drafted a follow-up paper that sheds some light on what appears to be a wide-spread practice of retroactive rating changes from sell-side analysts.

The conclusions are still disturbing, but going forward this little game appears to be over.

We document widespread ex post changes to the historical contents of the I/B/E/S analyst stock recommendations database. Across a sequence of seven nearly annual downloads of the entire recommendations database, obtained between 2000 and 2007, we find that between 1.6% and 21.7% of matched observations are different from one download to the next. When we use a cleaned-up version of the 2007 tape as a point of comparison, we find that between 10% and 30% of all observations on the earlier tapes are now recorded differently on the 2007 tape.

Monday, February 02, 2009

Confidence of prediction

Just before 2008, here were forecasts from top analysts for the S&P 500. I have redacted the sense in schadenfreude in this pedagogical lesson.

Everyone knew what was going to happen.

The most conservative forecast comes from Morgan Stanley. His prediction?1520

1675 is the prediction from Goldman Sachs and Citigroup

1625 is the prediction of Banc of America Securities

1590 is the prediction from JPMorgan Chase

1580 is the prediction from Wachovia Securities

1575 is the prediction from A.G. Edwards

Today, Everyone still knows what will happen. The experts in Davos have spoken: doom and gloom will prevail. What comfort.

Some academic assumptions...

...regarding basic macroeconomic theory are wrong.

We do not live in a closed economy with one export.

We do not live in a world with commodity-backed currency.

The U.S. does not need to "finance" its debt. It does not need to "get" dollars in order to spend them. It does not need to exchange gold for currency. It does not need to go hat in hand to "creditor nations" in order to spend its currency. "Financing" is not the problem. Inflation is the problem.

So when I read that a very famous financial economist (closely associated with a certain midwest school that is my alma mater) has entered the debate with the following:

"1. Bailouts and stimulus plans must be financed.

2. If the financing takes the form of additional government debt, the added debt displaces other uses of the funds.

3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.

Are any of these statements incorrect?"

I must answer the question "yes". "Financing" is a misnomer for the U.S., armed with the world's only reserve currency. The Treasury market itself is best thought of as an interest-rate management system than a "financing" system for spending.

As for point 2., we are still stuck in the "sources and uses" type of thinking about "debt" here. This is not a U.S. company or municipality borrowing to spend. This is a sovereign with full control and ownership of its currency engaging in deficit spending...

Too often, brilliant people fail to question their assumptions. The chain of logic that results is often beautiful, but unfortunately of no use in understanding or prediction.

Cat bonds correlate with everything else

One of the appeals for Catastrophe bonds was their "non-correlative" properties and structure of probable ("expected") returns.

Since the weather is not governed by market swings or the games men play, contracts based on outcomes from same would provide attractive properties for players seeking independence of returns.

Turns out, in recessions, everything correlates. The below article has some confusing language regarding the contract structure, but the gist of the problem is that counter-party risk trumps acts of G0d. (Option guys would say the gamma of risk is no-where near constant)

By Neil Unmack and Oliver Suess

Feb. 2 (Bloomberg) -- A catastrophe bond sold by Allstate Corp. faces “imminent” default, according to Standard & Poor’s, because of losses caused by the collapse of Lehman Brothers Holdings Inc., only the second such security to fail in a decade.

New York-based S&P downgraded $250 million of debt sold by Allstate’s Willow Re Ltd. to D, the lowest grade, from CC, according to a Jan. 30 statement. Northbrook, Illinois-based Allstate sold the bonds in 2007 to protect against losses caused by U.S. hurricanes.

“The issuer has notified Standard & Poor’s that it will not have sufficient funds to make the scheduled interest payment,” S&P analyst Gary Martucci in New York wrote in the statement.

Insurers started using so-called cat bonds in the 1990s to transfer the risk of claims that could threaten their solvency. Bond investors in Zurich Financial Services AG’s Kamp Re 2005 Ltd. lost money when property damages caused by Hurricane Katrina in 2005 exceeded the threshold that entitled Zurich to keep investor funds.

Allstate Chief Executive Officer Tom Wilson is cutting 1,000 jobs and reviewing products sold by the life insurance business after injecting $1 billion of capital into the unit in October and removing its president in December. Moody’s Investors Service downgraded the largest publicly traded U.S. auto and home insurer, last week to A3 from A2, citing “significant investment losses, weak earnings, and reduced capitalization.”

Returns Guaranteed

Willow Re is one of four catastrophe bonds that used contracts sold by Lehman Brothers to guarantee returns on collateral backing the notes and to make interest payments. Lehman’s collapse in September nullified the guarantees, leaving the securities open to market value losses on the collateral.

Unsecured swap lines...

The danger of unsecured swap lines to foreign banks is getting some press now. Again, there is incredible moral hazard here. The incentive for Euro-area banks to fund dollar obligations (and to loan dollars on favorable terms to their "preferred" clients) in a haphazard manner is there.

The Fed has a tremendous amount of faith in the established global economic structures. I agree with their moves, but the fact that the risks were not properly presented or addressed is troubling.

Europe's Growing Crisis Puts the Fed at Risk
TO AID THEIR AILING COMMERCIAL banks, central banks in Europe have relied on huge currency swaps, borrowing nearly $400 billion from the U.S. Federal Reserve. But as European commercial banks and European currencies deteriorate, repaying all that money to the Fed is becoming ever more difficult.

"[Fed Chairman Ben] Bernanke's assurances aside, I don't see how they can easily be repaid," warns Gerald O'Driscoll, senior fellow with the Cato Institute and formerly with Citigroup and the Dallas Fed.