Friday, February 27, 2009

ECRI: Weekly Leading Index At New 13-Year Low

No comment, take it dry ... my emphasis!

Reported by Reuters, February 27, 2009:

(Reuters) - A measure of U.S. future economic growth fell to a 13-year low while its annualized growth rate remained constant in negative territory, indicating economic recovery is nowhere in sight, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index dipped to 105.6 for the week ending Feb. 20 from 107.2 in the previous week.

It was the lowest the index has been since April 21, 1995, when it read 105.6.

The annualized growth rate was steady at negative 24.1 percent, according to the weekly report.

"The WLI has dropped to a new cycle low, clearly indicating that the recession will intensify in coming months, with no recovery in sight," said Lakshman Achuthan, Managing Director at ECRI.

The weekly index fell due to higher jobless claims, weaker housing activity and lower commodity prices, Achuthan said.

Click on charts to enlarge, data courtesy of ECRI.

Thursday, February 26, 2009

BNP Paribas: A Historical Recession (Part I)

The Chief Economist Philippe d'Arvisenet of BNP Paribas gives a rather in-depth insight in the current state of major economies.

Which factors could lead to economies pulling out of recession? Philippe writes:

Obviously, they are the fiscal stimulus and accommodating monetary policies.

The decrease in interest rates, while it should not be expected to trigger a fresh wave of private indebtedness, even as priority is given to cleaning up the financial situation (calling to mind the image of monetary policy pushing a string), leads to a reduction in interest expenses in the countries where households are massively indebted at floating rates (UK and Spain for instance). Likewise, a decline in long-term mortgage interest rates has resulted in a fresh wave of mortgage buybacks in the United States.

Global liquidity is still growing at a robust pace. The fact that current-account surpluses have disappeared and there has been an inversion in capital flows have led to growth in official reserves and monetary creation coming to a stop in many emerging countries. Monetary creation now results from the quantitative policies conducted by the central banks of advanced countries.

The downward normalisation of inventories, which started from a high initial level, is dampening economic activity. Once completed, the retrenchment in inventories will no longer weigh on business conditions.

Lastly, the decline in commodity prices (first and foremost energy prices) is leading to rapid disinflation that, in view of the downward stickiness of nominal pay, is substantially boosting the purchasing power of incomes (see below). A comeback by inflation is not on the cards. The negative output gap is widening throughout the world and will continue to do so next year. This is because, even if growth returns, it will remain far lower than its potential in 2010.

And here is the economic research on emerging markets by BNP Paribas.

The Economist: Can Eastern Europe Avoid Meltdown?

The Economist runs a briefing on Eastern Europe today. There has been a lot of horror stories, but what can be done?

Against that background, what can be done? The east European countries are, belatedly, co-ordinating their approach within the EU, holding their own mini-summit on March 1st. They want to embarrass countries such as France for what they see as its protectionist approach to the crisis. They are supporting each other: the Czech Republic and Estonia were among those contributing to the Latvian bail-out.

But even co-ordinated local efforts are unlikely to make much difference, given the scale of the problem. The real lead, and the real money, must come from outside the region. That brings into play a slew of political problems. Having trumpeted their free-market principles in past years, and dismissed the stodgy approach of countries such as Germany and France, the new EU members from eastern Europe are now turning to old Europe in the hope that it can hurry up the flow of EU structural funds to counteract the downturn, bail out or prop up over-exposed banks in places like Austria, and stretch the rules of the European Central Bank to let it provide support to countries outside the euro zone. The case for such measures is strong, and it is in the interest of all Europe that contagion is contained. But that does not mean that it will happen.

Wednesday, February 25, 2009

UPDATED: Poor Standards Junked Latvia

Let's start with re-posting the key facts. Standard & Poor's Rating Services pushes Latvia into speculative grade BB+, outlook negative ...

FT Alphaville has more to say. And here is a flash note by Danske Bank. Edward Hugh has a nice overview here.

Suki Mann, the credit strategist at Societe Generale wrote in the "wrap-up" at the end of European trading yesterday:
They don't know what they're doing. It has to be said that policymakers have been flapping for a while as they throw the kitchen sink at a financial crisis that is without historical precedent. We’re no longer looking over the edge of the cliff, we’ve gone over it and while equities have been testing new lows, credit through the indices doesn’t yet see new wides. Sovereign CDS risk premia was on the up however with Austria (260/285bp, +15bp), Germany (90/96bp), France (90/98bp), Sweden (160/185bp, +10bp), the UK (164/174bp) and eastern European countries all at historical highs. Austria and Sweden widened the most after the Latvia rating downgrade/Lithuania and Estonia negative Watch actions. Through it all cash credit edged wider (non-financial corporates) while the subordinated cash financials universe remains unloved (but stable again today). Flows overall are light, activity poor and there is no liquidity as the shutters come down – again, as plummeting stocks leave the market shell-shocked. Or maybe month-end week does matter after all!
... there is much apprehension surrounding banking sector risk per se stemming from continued and escalating worries surrounding CEE market risk/exposures. And this could be another factor.
As to Latvia going forward? Well, in my view, the actions by Moody's are key, as they have rated the majority of Latvian banks. Moody's historically has assigned ratings by 1-2 notches higher than S&P. So, there is a hope (but no fundamental reason for it) that Moody's will cut, but still in the "investment grade area"? The move by S&P leaves no choice to Moody's, but to make a move too, and fairly soon... The worst in this scenario is that Moody's cuts into "junk status" too, and it MAY trigger Latvian banks to "repay early" the foreign syndicated loans... I have no clue, is government aware of that? And what about cross default clauses?

Obviously, those "two parties" that called the prime minister to step down should be responsible for the events unfolding now ...

The IMF consortia assistance in the current form was very much based on "political commitment" that is very questionable now after the resignation of prime minister.

Well, the president has promised to name the new prime minister tomorrow. But it does not change the parliament ...

Tuesday, February 24, 2009

Deutsche Bank: Germany's Shaky Export-Reliant Sectors

I have been obsessed with "export mania" for some time now. Well, just look at Japan, Germany, Korea, Taiwan, China in the last, let' s say, 6 months ... and the message should be clear! Is it not?

Deutsche Bank has a very revealing note on German exports by sectors today:

Germany’s economy depends heavily on exports. In a global economic upswing this is a blessing, as Germany may then benefit from economic growth in other countries. At present, however, what was a blessing is now becoming a curse. Export markets are cooling and this weighs heavily on the German economy.

Not all sectors are affected to the same extent, though, as export shares vary among different industries. In manufacturing, a generally export-intensive sector, exports accounted for an average 46% of total sales in 2008. The chart shows the relevant figures for Germany’s major industries. Just how important the state of the export markets is for the German economy is revealed by a comparison of order intake in its export-dependent and less export-dependent sectors. There is a clearly negative correlation between a sector’s export intensity and its overall order intake over the last year. Export-intensive industries are bearing the brunt of the current global downswing.

Chart courtesy of Deutsche Bank.

Too strong reliance on exports may be a disaster too ...

Montier: Ten Tenets Of My Investment Creed

James Montier, the world' s top ranked strategist at Societe Generale writes about his 10 tenets of investment creed:

Many times over the years I have been asked how I would approach investing. This ... attempts to codify my beliefs (and provide some evidence for them). However, before embarking upon a journey into my investment creed, it is worthwhile asking a question that doesn’t get asked often enough – What is the aim of investing? The answer to this question drives everything that follows. I feel that Sir John Templeton put it best when he said “For all long-term investors, there is only one objective – maximum total returns after taxes”. Nothing else matters. The question becomes, how should we invest to deliver this objective?

Tenet I – Value, value, value. Value investing is the only safety first approach I have come across. By putting the margin of safety at the heart of the process, the value approach minimises the risk of overpaying for the hope of growth.

Tenet II – Be contrarian. Sir John Templeton observed that “It is impossible to produce superior performance unless you do something different from the majority”.

Tenet III – Be patient. Patience is integral to a value approach on many levels, from waiting for the fat pitch, to dealing with the value managers’ curse of being too early.

Tenet IV – Be unconstrained. While pigeon-holing and labelling are fashionable, I am far from convinced that they aid investment. Surely I should be free to exploit value
opportunities wherever they may occur.

Tenet V – Don’t forecast. We have to find a better way of investing than relying upon our seriously flawed ability to soothsay.

Tenet VI – Cycles matter. As Howard Marks puts it, we can’t predict but we can prepare. An awareness of the economic, credit and sentiment cycles can help with investment.

Tenet VII – History matters. The four most dangerous words in investing are “This time is different.” A knowledge of history and context can help avoid repeating the blunders of the past.

Tenet VIII – Be sceptical. One of my heroes said “Blind faith in anything will get you killed”. Learning to question what you are told and developing critical thinking skills are vital to long-term success and survival.

Tenet IX – Be top-down and bottom-up. One of the key lessons from the last year is that both top-down and bottom-up viewpoints matter. Neither has a monopoly on insight.

Tenet X – Treat your clients as you would treat yourself. Surely the ultimate test of any investment is: would I be willing to invest with my own money?

Don't forget to use your own brains too ...

Poor Standards Junked Latvia

Standard & Poor's Rating Services pushes Latvia into speculative grade BB+, outlook negative ...

FT Alphaville has more to say.

Monday, February 23, 2009

Alert: S&P500 Desperately Seeks For Parachute

S&P500 plunges 3.47% and closes at 743, the lowest closing in the 21st century ...

"Strong Hands" have the chance to buy so cheap (at least this should be their technical driver) for the second time in 21st century. Last time it was in November 2008, when intra-day move for S&P500 was even lower as today' s close at 743, but it has not closed so low in this century ...

Dow Theorists are working hard on all fronts, interestingly that "minority dogs" (the call options C, BAC that formerly were known as banks, and the joint union-government pension fund GM - even positive for the day) were out-performers today ...

The plunge below intra-day low of November 2008 lower than 741, and close "down under" opens the door for the dark speculation of mega double tops ...

Up-to-date S&P500 chart at here. The weekly perspective of S&P500 from 1960 available here.

It is not fair, but busy evacuation was here, and the last alert was this, BUT NOT TODAY... The sleeping beauty should wait now for technical confirmation (may happen tomorrow?)! The invisible hand of government may make everyone feel like a fool, and probably seek for social assistance...

Saut: What Shape Recession...

Jeff Saut, the respectful strategist at Raymond James has posted his weekly missive, see the latest version here. Last week Jeff suggested this.

His call for this week (but read the full missive):

While many pundits argue “Dow Theory” has become an irrelevant indicator (see Barron’s Online article “Be Leery of Dow Theory” dated 2/19/09), it did indeed give participants a “sell signal” in November 2007. Regrettably, it reconfirmed that “sell signal” last week. Interestingly, however, despite the Desultory Dow the S&P 500 continues to reside above its November 2008 “lows.” Still, other than precious metals, not much is working on the “long side” year-to-date.” Verily, of all the indices we track the NASDAQ 100 is performing the best with negative returns of a -3.2% YTD, while the D-J Transports are the worst performing at -23.7%. In fact, in my universe, in addition to the precious metals, only Coffee (+2.65%), Sugar (+7.22%), Copper (+8.55%), Lead (+7.01%), Tin (+4.30%), and the U.S. Dollar Index (+6.50%) are showing positive returns year-to-date. Consequently, while we would like to be as positive as our portfolio manager friend, we need to see more technical evidence that last week’s breakdown is a false breakdown before committing more capital to stocks. We do, however, still like the strategy of accumulating distressed debt; and one of the vehicles we are using is Lord Abbett Bond Debenture Fund (LBNDX/$5.94).

Consider as a probability!

Depression Economics Toolkit

There are more and more indications, we may face the reality of Depression Economics. First, we may wish to learn more about the Great Depression as a colorful example:

Here we have a webcast with publication by Societe Generale from December 2008.
And Danske Bank has the publication today.

While I am not attaching my heart to any of opinions above, they provide fair amount of insight. For example, the opinion of Societe Generale regarding the banks and recognition of losses has proven to be false so far ... Well, the dry economic theory is deemed to be "Debt Deflation" by Irving Fisher?

There is still a discussion going on - what is coming next? Inflation vs Deflation? But it is better to be prepared ...

BarcLehs Asks For The Helping Hand Of Her Majesty

Are the Big Swinging Dicks finally giving up? FT Alphaville has the story about the relationship, whereby BarcLehs asked for helping hand of Her Majesty. We were wondering for some time. The guys are still alienated, but it looks like Her Majesty has fallen in love - the cost of guarantee appears to be cheap, is it not?

ECRI: Slight Improvement ... In Pictures

I reported about the ECRI WLI on Friday. I post here the 1 year graph and the data since inception for a better feel of what is going on. Thanks to analysts at Nordea Markets. Click on charts to enlarge.

Dead cat bounce? The pace of decline (speed) is getting somewhat slower, but direction is down ...

European Mess

On the basis of the previous post, I felt it is necessary to draw the big European picture too.

For the lazy folks not to dig the bits themselves, Gary North offers a fairly comprehensive overview of current state of affairs. Well, be critical, don't take everything straight from lips.

The Baseline Scenario paints the basics. European leaders have made their choice over weekend. However, economists like Edward Hugh goes radical, and Wolfgang Munchau at Financial Times draws the same line. Here I quote Munchau at FT, for the quick sense:

What are the policy options? Naturally, the EU could provide financial help – through the International Monetary Fund – but it is not clear that this would stop a contagious balance-of-payments crisis in the region. If exchange rates were to drop further, household defaults could rise dramatically. Would we bail out those households as well?

In my view, the smartest answer to the prospect of meltdown is the adoption of the euro as quickly as possible. There is no need to switch over tomorrow. All we need tomorrow is a credible and firm accession strategy – one for each country – which would include a firm membership date and a conversion rate, backed up by credible policies.

Obviously, this would require the long overdue abandonment of the eurozone’s defunct entry criteria. Of those, the most nonsensical is the reference rate for inflation, calculated as the average of the lowest three national rates. Soon, this will be a deflation rate. So an aspiring member state would be in the absurd position of having to deflate as a precondition for euro entry.

The inflation criterion is not only insane, it is also in conflict with other parts of European law. Since price stability counts as an important overriding goal of EU economic policy, enforcing a deflation criterion would be a clear breach of this objective. The same goes for the exchange rate criterion. Forcing a country into a two-year sentence of membership of the exchange rate mechanism – in which its currency would fluctuate against the euro in a fixed band – is an open invitation to speculators and would risk further instability. The accession criteria are inconsistent with basic stability rules. They should be declared invalid and certainly not be abused as a bureaucratic hurdle to prevaricate in a dangerous crisis.

If calamity strikes, the EU will pay up. This is laudable, but will probably not solve the problem, especially if the crisis spreads. Granting financial aid without a firm commitment to euro membership would be irresponsible. Euroisation is the way to go.

And here is a somewhat more epic missive (styled by modern armageddon-ist mythology?) by Evans-Pritchard at UK's Daily Telegraph, for those who still feel fairly cool ...

Dire straits, indeed!

ABC News Roundtable: Nationalizing The Banks

Well, the Good/Bad bank issue has been discussed here for a while (note all the sub-links).
The Monday optimism in the global markets seems to be sparked by the rounds of Citigroup' rumours. Willem Buiter and Yves Smith are taking these issues very seriously ..

Paul Krugman, Nouriel Roubini, Suzy Welch and George Will at ABC News on 22nd of February ...
Joseph Stiglitz at Bloomberg TV via Barry Ritholtz.

And as we have touched the core of current focus in the markets, here is a visual reminder of the background ...

Friday, February 20, 2009

F-armageddon Coxe: Why It All Went Wrong

The respectful former strategist of BMO Financial Group Donald Coxe appears at the Globe Investor Magazine of "The Globe And Mail", and explains why he' s betting on inflation, China and India ...

Roubini: Europe's Banking System Faces Growing Risks

The one who saw the mess coming on Bloomberg TV, or via RGE Monitor ...

The themes discussed:

Concerns over sovereigns; Eurozone bank risks
Outlook for "massive" boost in U.S. deficit
Possible sovereign default in Eastern Europe
Stimulus; "temporary" bank nationalization
Pan-European solution to bank woes; costs
Euro; U.S. debt, stimulus efforts vs. world
Overhaul of global financial regulation

ECRI: Growth Shows Slight Improvement

No comment, take it dry ... my emphasis!

Reported by Dow Jones Newswires:

1530 GMT [Dow Jones] Growth in a leading economic indicator improved a bit in the latest week. Growth in the ECRI weekly leading index for the Feb 13 week stood at -24.0%, up from -24.5% in the prior week.

"While the WLI rose for the first time in six weeks, it still remains near its cycle low, indicating that an economic recovery is not at hand," said ECRI director Lakshman Achuthan. Growth in the January index stood at -24.5%, from -27.2% in December.

Latvia: Government Resigns

Why they do not run the country for my benefit? I thought the prime minister and president will call those "two parties" to step down ...

The flash note by Danske's Lars Christensen here !

Furtheron, Reuters reports:

LONDON, Feb 20 (Reuters) - The cost of insuring Latvian sovereign debt for five years rose on Friday by some 50 bps after the country's coalition government collapsed following the resignation of its prime minister, traders said.

Five-year credit default swaps (CDS) for Latvia were quoted at a mid-price of around 950 bps by traders, up from their Thursday close of 900 bps. This means it would cost about $950,000 a year to insure $10 million of Latvian debt over five years.


Latvian CDS rose to a high of nearly 1,000 bps in October last year, a month before it went to the IMF for emergency funds.

Domestic vortex of debility goes on ...

Thursday, February 19, 2009

Edwards: Wider Market Risks Of Japan's Economic Collapse?

The respectful Albert Edwards, the global strategist at Societe Generale, has been an ueber-bear for years. The key message today:

The rapidity of the collapse in the Japanese economy has shocked the investment community. The economic pain has been magnified by the Yen becoming the strongest major currency in the world. The Yen is seriously misaligned with economic reality. I believe the phase of Yen strength has now ended and it will begin a pronounced slide. It matters to the rest of the world that Japan will get considerably more competitive. It will also hasten a Chinese devaluation.

Investor familiarity with weak economic data has reached new heights of vulgarity. We have reached the point now where utterly horrific US housing starts data hardly get noticed. The 16.8% mom decline in January starts announced yesterday comes after a 14.4% mom decline in December and a 14.6% mom decline in November. This took starts to a record low of 466,000 units, massively lower than the 530,000 economists had expected. Starts are now down 56% yoy, the fastest rate of meltdown since the US housing peak at the end of 2005. That an intensification of the US housing catastrophe merits so little shock value any longer is a sign of just how bad things have become!

Japan’s 3.3% decline in Q4 GDP did, however, shake the markets. News of the collapse even reached mainstream news bulletins in the UK. Japan is now clearly set to fall into depression (defined as a peak to trough decline in GDP of 10%). The jury is still out on the US and the UK but I feel very confident that both these Ponzi-based economies will suffer the same fate, as will the Eurozone, increasingly weighed down by problems to the east.

Amid the global economic carnage and avalanche of government stimulus measures, it is easy to miss a key event that might have far reaching economic and market implications. I believe that, unnoticed, just such an event has occurred. The Yen has just begun to unwind its long period of strength since mid-2007, associated with an unwinding of the carry trade and risk aversion. Since mid-2007 the Yen became unusually detached from the economic cycle (see chart below). This is now ending. A weak Yen has major global implications.

Serious ...

Merrill Lynch(ed): Global Fund Manager Survey

Bank of "Amerillwide" (or Countrywide Lynched America) is out with Global Fund Manager Survey today. Last month "the picture" looked like this. Key conclusions from the new February survey:

China fuels sharp bounce in growth expectations
A jump in optimism on the Chinese economy (growth expectations leaped from -70% to -21%) and further policy ease led to a marked improvement in global economic sentiment. While 90% of investors think we are currently in a global recession only a net 6% see a weaker economy in the next 12 months (versus 24% last month and 60% in October). February's optimism must now be corroborated by global lead indicators in coming months to avoid investor disappointment.

Commodity allocation up; equities & bonds down
Growth optimism did not translate into higher equity allocations however: a net 34% are underweight, back to December levels. Commodities were the beneficiary with the net overweight position (-15%) rising to its highest level in six months (note gold now seen as overvalued). Unsurprisingly after a tough January, bond overweights were trimmed.

A timid recovery in risk appetite
Cash balances were trimmed to 4.9% (from 5.3%); both investors and allocators reduced cash overweights. Having troughed at 25 back in October, our Risk & Liquidity Composite Indicator improved to 31 but remains well below the average
score of 40. The timid recovery in risk appetite is corroborated by sustained investor pessimism on bank stocks.

Regional & sector rotation shows tentative cyclical shift
US still seen as favorite developed equity market; China still favored emerging market. Asset allocators heavily reduced positions in Japan and remain UW (underweight) Europe, neutral GEM. Sector allocation reveals tentative pro-cyclical shift: big overweights in telco, staples were trimmed and recycled into tech, energy, materials, industrials & discretionary. But banks remain by far and away the least favored global sector. Meanwhile the Japanese yen is the "most overvalued" since 2002 & sterling records its cheapest rating ever.

The most loved and unloved
Most loved: cash, bonds, US, China, telco, pharma, staples. Most unloved: equities, Japan, Europe, banks, industrials, materials. Risk appetite remains structurally low so an extended cyclical rally remains dependent on policy easing, commodity prices and lead indicators maintaining February jump in growth optimism. If these were confirmed, sectors that might benefit would be energy and materials and, given views on currency valuation, this might be best played through Sterling assets.

Hell, this is key in my view: "February's optimism must now be corroborated by global lead indicators in coming months to avoid investor disappointment". Latest weekly ECRI data suggest that "recovery remains elusive".

also the divergence in the chart (click to enlarge) from the survey, courtesy of Merrill Lynch (this name has better sounding :)) ...

Wednesday, February 18, 2009

Faber: European Bailout And Equities

The legendary Marc Faber about European bailout and equity markets on Bloomberg TV.

Bylov: Could Mega Double Tops Really Be True?

Jan Bylov, chief analyst at Nordea Markets, is a "rare specie" among analysts, as he is looking himself at all asset classes and uses inter-market approach in analyzing the markets. He writes today:

Equities – Could mega double tops really be true?
Reports true to technical analysis are increasingly focusing on the risk of mega double tops forming to be confirmed if stock markets maintain breaks below the post IT bubble lows back from 2002! Could this really be true as theory then would argue for a further 50% collapse? Well, in “unprecedented” times anything is possible – not least exposed by the post 1989 Japanese case, but forecasting such a global tsunami is hardly helping anyone as most prudent money managers already (hopefully) have reduced stock market exposure to minimum allowed according to their purposes. Now, I’m an optimist believing that our animal spirits will be re-ignited by global cheap money and enormous fiscal packages ultimately, but currently with bellwether stock indices challenging November lows I still cannot observe any new selling climaxes or other well-known signals advocating attractive odds for buying S&P500.
The market is breaking below recent weeks’ range low at 797. Now, the lack of clear upside dynamic (unusual large single-day price rise) or follow-through buying suggests that the sell interest remains intact opening a new attack at the secular important 2002/2008 trough at 739 – key to an additional 50% plunge in the months/years ahead (difficult to appreciate as realistic). Conversely, a dynamic rally (unusual large single-day price rise) above 840.20 appears a minimum to suggest a resurrection of buy interest towards 875.50 and the important early January high at 942.
Consider as a probability! Keep in mind the "invisible hand of government" ...

Tuesday, February 17, 2009

"Dow Theorist" Alert

The followers of "Dow Theory" will be raising their eyebrows ... Dow Jones Transportation Average (DJTA) moves and closes into new bear market lows. (IBM) Dow Jones Industrial Average (DJIA) closed just some 100 points above November 2008 lows ... If DJTA holds here and DJIA moves below (closes below) 7449, errrrr ... Dow Theorists WILL SELL!

Watch for a decisive move. "Strong tactical trading hands" will use support levels to buy, but will be quick to reverse, if not a strong move. The more we are testing the support levels, the higher the probability that it will break to downside...

Here is the up-to-date DJTA at Click on chart to enlarge ...

Here is the up-to-date DJIA at

NOTE! The Point & Figure Chart suggests the pattern of double bottom breakdown for both DJIA and DJTA on 17th of February 2009!

Discipline over confidence!

Ritholtz: S&P500 Earnings In The 1st Quarter 2009

Barry Rithotz has an interesting post at The Big Picture on S&P500 1st quarter 2009 earnings...

Saut: NOT the Great Depression

Jeff Saut, the respectful strategist at Raymond James has posted his weekly missive, see the latest version here. Last week Jeff suggested this.

His call for this week (but read the full missive):
The Who will be playing on the Street of Dreams this week, and the song will be, “Won’t Get Fooled Again.” Speaking of “fooled,” over the weekend the “cry” went up that the current economy is as bad as the Great Depression. While we don’t want to sugar-coat the current environment, this is NOT the Great Depression. As our friends at GaveKal opine, “This is not the 1930’s all over again. The government and the central banks are not sitting idly by as banks fail this time around. We have automatic stabilizers in place like welfare and unemployment insurance. Back in the 30’s, GDP plunged 27%, real private investment collapsed 87%, consumer spending contracted by 41%, industrial production plunged 54%, personal income fell 25%, the unemployment rate soared to 30%, and half the nation’s homeowners defaulted (not 10%), and 10,000 banks failed; and as over-saturated as we may be today, we don’t have that degree of excess capacity in the financial sector.”

Consider as a probability!

Krugman's Outlook?

Paul Krugman is out with an "economic outlook" - "Slumps and spontaneous remission (wonkish)". Here are some key excerpts:

Instead, it’s like the 1929-33 recession — or the recession of 1873-1879 — a slump brought on by the collapse of an investment and credit bubble. And monetary policy, at least in its conventional form, has already reached its limits.
... and Hicks elaborated on this quite a lot.

What’s notable about this theory is that it made no use of the self-correcting mechanism expounded in every principles textbook, mine included — the mechanism in which falling prices lead to a rising real money supply, which shifts the aggregate demand curve out. Why? Well, as we’ve now learned the hard way, a sufficiently severe bubble-bursting pushes you into the liquidity trap, and makes the aggregate demand curve more or less vertical.

Instead, recovery comes because low investment eventually produces a backlog of desired capital stock, through use, delay, and obsolescence. And eventually this leads to an investment recovery, which is self-reinforcing.
As autos go, so goes the capital stock. In the long run, we will have a spontaneous economic recovery, even if all current policy initiatives fail. On the other hand, in the long run …

So, is the Obama's "Kiss" written off completely? No! He writes: "... if all current initiatives fail."

El-Erian: High Risk Of Additional Collateral Damage...

Mohamed El-Erian, the chief executive of PIMCO, famous fund manager and economist, has a wise article at Financial Times (FT) today. Here's the key message, in my view:


Looking forward, there are two factors that suggest a high risk of additional collateral damage and limited effectiveness in the months ahead. First, it is not clear government balance sheets can carry the burden imposed on them.

Mushrooming government financing needs must be covered at a time when many holders of debt are turning from buyers to sellers. No wonder the Federal Reserve is "prepared" to buy Treasury bonds. But will the world be comfortable with two US public agencies offsetting operations that ultimately must be supported by someone else?

Second, virtually every country now seeks to implement fiscal stimulus and rescue national champions. Yet those with weak initial conditions will find it difficult to keep up.

Instead they face a lose-lose proposition: maintain the pace of policy activism and lose control over funding costs and, in some cases, exchange rates; abandon it and see the economy hollowed out by the actions of others.

Fortunately, such clouds have a silver lining. As the risks become clearer, a greater degree of international policy co-ordination may emerge. This is not just about regulatory harmonisation. It is also about the urgent need for policy principles that limit the risk of this new type of beggar-thy-neighbour phenomenon. Otherwise, the policy activism of some countries will undermine those of others and, by implication, the welfare of the global economy.

This is very much similar and complementary to what the FT Columnist Wolfgang Munchau wrote on Sunday:

Expect to see three effects with progressively destructive force. The first is that the stimulus is much less effective than it could otherwise have been. When everybody tries to gain a competitive advantage over each other, the effects usually cancel out.

Second, the stimulus and bank rescue packages harm the single European market directly. The French subsidies are more blatant, as is the protectionist rhetoric of its president. But everybody in Europe plays the same game. It is not as though the single market is the default position for European commerce. Much of the service sector is exempted. Europe lacks an effective pan-European retail infrastructure and retail banking system. Reversing this programme long before it is completed would be a mistake.

Third, and most destructive, the combined decision on stimulus and financial rescue packages poses an existential threat to monetary union. A blanket loan guarantee to every bank, as most governments have granted, in combination with indiscriminate capital injections and a reluctance to restructure, will mean the transformation of private into sovereign default risk – aggravated further by the economic downturn. Some insolvent banks are now owned by the state, while the bulk of damaged, not-yet-insolvent banks are lingering on, hoarding cash. This programme is a drain of resources with no resolution in sight.

I would now expect several eurozone countries with weak banking sectors to get into serious difficulties as the crisis continues. There is a risk of cascading sovereign defaults. If this was limited to countries of the size of Ireland or Greece, one could solve this problem through a bail-out. But solvency risk is not a problem confined to small countries. The banking sectors in Italy, Spain and Germany are increasingly vulnerable.


The right course would be to solve the underlying problem – to shift at least some of the stimulus spending to EU or eurozone level and, ideally, drop those toxic national schemes altogether and to adopt a joint strategy for the financial sector, at least for the 45 cross-border European banks. But this is not going to happen. It did not happen in October, and it is not going to happen now. As a result of the extraordinary narrow-mindedness of Europe’s political leadership, expect serious damage to the single market in general and the single market for financial services in particular. As for the eurozone, I always argued in the past that a break-up is in effect impossible. I am no longer so sure.

Monday, February 16, 2009

Bylov: Inter-Markets Trading View

Jan Bylov, chief analyst at Nordea Markets, is a "rare specie" among analysts, as he is looking himself at all asset classes and uses inter-market approach in analyzing the markets. He writes in the summary today:

Equities – Little global coordination

We all know that the economic situation is extremely challenging and the lack of coordinated intervention by G7 will do little to nurse investors’ fear that things may evolve in favour of the doomsday prophets. Still, during “unprecedented” times I believe that we are better off relying on our common sense based on how extreme cheap money and huge fiscal packages ultimately will influence our animal spirits! Consequently, I maintain that it is encouraging that few asset classes/instruments are trading at new “bear” extremes as this observation advocates that the economic reality is well discounted; hence, the unprecedented global public intervention should be given the benefit of the doubt. I’ll be waiting for a new selling climax or other well-known signals which advocate attractive odds for buying S&P500 once again.

Bonds – A major trading range

While the poker game with Fed continues to pressure US treasuries the European dire economic situation with an ECB generally considered well behind the curve of events have generated strong buying of German and UK bonds. Now, combining the recent strong buying of e.g. German Bunds with the hefty sell pressure during January then we have most likely witnessed the emergence of a new wide trading range between 121.33 – 125.56! Overall, market themes remain dominated by 1) dovish central banks putting a hand behind long bonds in support of cheap house financing and attractive prices to issue bonds, and 2) the perception that we are facing a major bond bubble due to supply fear. Being away on vacation I missed the recent buy signal, but I’ll be looking to buy on a potential weak setback within the overall range.

Commodities – Quiet

Outperformance by precious metals continue even in the aftermath of the December/early January best recovery in commodities since the 2008 collapse. That recovery continues to argue that the general commodity collapse has come to a halt, and I expect prolonged range trading ahead of the next major directional price move. Further, I maintain that the transient investment theme of “global deflation and economic recession” very well could have been discounted by the price extremes experienced during late 2008.

Currencies – Wide trading ranges emerging everywhere

Asian USD currencies (“trading”/commerce currencies) are trading within a well-defined range since October 2008… as are AUD and CAD (commodity currencies) and other developed currencies (savings currencies), and interestingly cross rates like EUR/SEK and EUR/GBP recently appeared to be joining such a ranging behaviour (strong buying in EUR/SEK near 10.40 and EUR/GBP cementing a reaction low on 10 February via a bullish Key Day Reversal pattern). Unfortunately, the latter price pattern caused my short EUR/GBP to be stopped out at a loss. Now, the presence of such wide trading ranges evolving is probably tightly related to markets trapped between two themes: 1) economic doomsday prophets turning out being right and 2) unprecedented cheep money and fiscal packages will ultimately revitalise economic growth. The trading ranges suggest that investors are undecided what to believe in. Finally, as a consequence of this I chose to cash in profits from my long USD/JPY position as successful range trading is depended on counter-trading the range extremes.

Consider as a probability ...

Friday, February 13, 2009

ECRI: Business Cycle Recovery Remains Elusive ...

No comment, take it dry ... my emphasis!

Reuters, February 13, 2009
Reuters) - A measure of U.S. future economic growth slipped further along with its annualized growth rate in the latest week, indicating a hazy reading of economic recovery, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 106.1 for the week ending Feb. 6, from a revised 106.6 in the previous week.

The index's annualized growth rate fell to minus 24.8 percent from a revised minus 24.5 percent, hitting its four-week low since Jan. 9 when it read negative 25.2 percent.

"With WLI growth falling once again, a business cycle recovery remains elusive," said Lakshman Achuthan, the Managing Director at ECRI.

The index fell to a nine-week low, the lowest reading since Dec. 5, 2008, when it was 105.7.

Achuthan said the weekly index slipped due to slower housing activity and money supply growth, partly offset by higher commodity prices.

BIS: Long-term Sustainability vs. Short-term Stimulus

This one appears to be very important in the context of current financial and economic mess. The speech by Herve Hannoun, the Acting General Manager of the Bank for International Settlements (BIS), is a good reminder. Here is the full transcript (HT Alea), but here is the conclusion by Hannoun for lazy folks:
Policymakers may be taking actions that will slow, or possibly prevent, necessary adjustments. Most informed observers agree that the capital structures of the US and European economies need to change. That is, there is too much debt relative to equity. What has been commonly called “deleveraging” is the process of converting debt into equity. Some of the economies that are in trouble clearly also need to make big adjustments in their industrial structure. For one example, the global financial system is almost surely too big. And in some countries the residential construction industry is unsustainably large. The point is that fiscal policymakers must take care that their expansionary policies do not simply delay needed adjustments. If there is such a delay, we could be in for a very long haul.
It is a legitimate goal of policy to mitigate the macroeconomic recession and slow the spin of the negative feedback loop. However, expansionary policies that fail to take the crisis of confidence sufficiently into account run the risk of becoming ineffective beyond the very short term. To restore confidence in a sustainable way, policy actions should be embedded in a credible longer-term perspective and pay due attention to their effects on the expectations of economic agents.
Policymakers have therefore to be aware of the risk of providing “too much” demand stimulus and should not exclusively focus their attention on the risk of “not doing enough”.
The crucial actions are to develop consistent medium-term policy frameworks (and, in particular, preserve fiscal discipline), plan sufficiently in advance for how current policies will be unwound when normal conditions return, and develop a consistent approach to macrofinancial stability. Together, these measures would ensure that short-term policy actions do not sow the seeds of tomorrow’s boom and bust episodes.

Nasing Spesal: 100 Fat Lats

Sleeping Beauty Discovers 18 Trillion Nuke In Her Bed?

I have not been a fan of banks/bankers and their habits ...

But now, suddenly the "Sleeping Beauty Europe" discovers to be sleeping with the EUR18 trillion nuclear banking bomb? Well, I was somewhat sceptical about the article in the UK's Telegraph, as the picture of - armageddonist of modern mythology - Evans-Pritchard appears on the same page, but note the web link: Those trillions on Telegraph's web-page are assumed to be British pounds, as the link on the right side of page (and that link appears to be broken) suggests. It appears like European Intelligence Services (what-ever) have been quick to remove that form the public eyes ...

However, the analysts at Societe Generale came out with a research note on ECB Watch "Thinking the unthinkable: Can a country leave European Monetary Union?", that research note should be available from this portal of Economic Research. And they wrote:

But there are certainly risks. On Wednesday the Daily Telegraph reported what it claims is a leaked European Commission document that estimated that the impaired assets amount to 44% of European Union bank assets. This would put the total figure for such assets at EUR18tr or about 150% of total European Union GDP. This is a huge sum of money, far in excess of what most European Governments are willing or able to take on. Ultimately there are limits to the amounts of assistance governments will offer to the banking sector which suggests such losses may have to be borne by the private sector. This is a recipe for long period of negative growth reminiscent of Japan's lost decade but not necessarily a recipe for Government default or the break of monetary union.
Ohhhh Lord...

Thursday, February 12, 2009

Kenneth Rogoff: Nationalise The Banks

Ken Rogoff, a professor at Harvard University and former chief economist of the International Monetary Fund talks at BBC HardTalk.

... and here' s an older post at NYT DealBook on Global Credit Drought.

Nassim Taleb Explains The "Black Swan"

Even if you don't agree with it, it is an interesting video.

Nassim Nicholas Taleb, essayist and former mathematical trader, is Distinguished Professor of Risk Engineering at New York University’s Polytechnic Institute, explains the "Black Swan" quite in detail, while arguing with Daniel Kahneman, Eugene Higgins Professor of Psychology, Princeton University, and Professor of Public Affairs, Woodrow Wilson School of Public and International Affairs. He is winner of the 2002 Nobel Prize in Economic Sciences for his pioneering work integrating insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty.

Inflation vs Deflation: Irving Fisher On Debt Deflation

We reminded about "the mother of all problems" already some time ago ...
And we have been keen to sort out the inflation vs deflation issues too.

Irving Fisher wrote in "The Debt-Deflation Theory of Great Depressions", Econometrica, 1933:

Assuming, accordingly, that at some point of time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both. Then we may deduce the following chain of consequences in nine links: (1) debt liquidation leads to distress selling and to (2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes (3) a fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be (4) a still greater fall in the net worth of business, precipitating bankruptcies and (5) a like fall in profits, which in a "capitalistic", that is, a private-profit society, leads the concerns which are running at a loss to make (6) a reduction in output, in trade and in employment of labor. These losses, bankruptcies, and unemployment, lead to (7) pessimism and loss of confidence, which in turn lead to (8) hoarding and slowing down still more the velocity of circulation.
The above eight changes cause (9) complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.

There were some new rounds of deflation discussions among Paul Krugman, Brad DeLong and Greg Mankiw yesterday ... Robert Ophele of Banque de France has his "Deflation or disinflation?" opinion at yesterday, or Sheldon Liber with "Pick your economic poison: Inflation vs. deflation" at BloggingStocks, also yesterday!

Enrique G. Mendoza has more on Fisher's debt-deflation at today here.

And here is one more post "Thinking about debt deflation" by David Merkel at The Aleph Blog with an excellent compilation of links!

Hoooh, be careful!

Tuesday, February 10, 2009

American Bailout Nation Gets The Golden Life Raft v.2.0.

US Treasury Secretary Geithner was supposed to bring out the "big thing" about the banks, we have covered these issues in the days before ...

The announcement:
US economic stimulus plan $838 billion
US financial stability plan $2 trillion

S&P500 finishes the day 4.9% down (click on charts to enlarge)...
S&P500 March 2009 Futures contract, intra-day chart, Latvian time, courtesy of Reuters

S&P500 chart, 6 months, courtesy of

and here is the reaction by economists/commentators:
The Wall Street Journal (WSJ) Real Time Economics with a compilation of opinions, and up-to-date live blog of Geithner at Senate
FT Alphaville
Paul Krugman
Felix Salmon
John Jansen @ Across the Curve
jck @ Alea
WSJ MarketBeat
Floyd Norris @ NYT
NYT Economix with a compilation of opinions
and the GOLD is UP! RICI Agri, Energy, Industrial Metals Indexes all are down, but Precious Metals UP! Yields of government bonds are down, 10year notes 18 bps down ...

Mary Stokes Goes On Eastern European Crisis Watch

Mary Stokes has a short entry at RGE Monitor today - Eastern Europe: On Crisis Watch. It is worth getting the full picture. But here is a short conclusion:

The extent of external imbalances ... are not the only determinants of the probability of getting into a financial crisis. But what the indicators ... do show is that countries in the region are extremely vulnerable to the drying-up of foreign capital inflows. That’s why the IIF’s projection that net private capital inflows will drop off from some $254 billion in 2008 to some $30 billion in 2009 is such a major concern. Moreover, given the similar vulnerabilities across the region, my concern is that a crisis in one country has the potential to blow up into a regional financial crisis.
The giant part of Latvian imbalances come from foreign trade, as describer in the previous post ...

Latvia: Exports Plunge 4.6% On Month, 11.1% On Year in December 2008

The Central Statistical Bureau reports data of foreign trade in December of 2008. According to press release:

Total foreign trade turnover at current prices in December 2008 reached 819.4 mln lats – less by 12.3 mln lats or 1.5% than a month before and less by 130.7 mln lats or 13.8% than in December 2007, according to provisional data of Central Statistical Bureau data.

The exports plunged 4.6% on month in December 2008, and 11.1% on year.

Compared to December 2007, in December 2008 there was exports increase of cereal crops (exported mostly to Denmark, Morocco and Yemen) – 3.3 times, of alcoholic and non-alcoholic beverages – by 33.5%, of essential oils, perfumery and cosmetics – by 45.5%, of machinery and mechanical appliances – by 24.4%. In its turn, the exports of iron and steel decreased by 54.5%, of motor vehicles (including rail transport) and parts thereof – by 34.6%, of rubber and articles thereof – by 41.4%, of wood and wood products – by 39.3%, of furniture, articles of bedding and lighting equipment – by 32.8%.
The imports increased by 0.4% on month in December 2008, but decreased by 15.2% on year.

Compared to December 2007, in December 2008 the most notable decrease had imports of wood and wood products – by 63.0%, of motor vehicles and parts thereof – by 43.6%, of articles of iron or steel – by 36.4%, of rubber and articles thereof – by 30.0%, of electrical machinery and equipment – by 27.3%, of articles of apparel, not knitted or crocheted – by 23.0%. In its turn, imports of pharmaceutical products increased by 40.9%, of fish – by 25.3%, of meat and offal – by 20.0%, of meat and fish products – by 10.8%.

Latvia was running a 227 million LVL (ca. 323 million EUR) trade deficit in December 2008, for the whole 2008 the trade deficit was 3.07 billion LVL (ca. 4.365 billion EUR). The trade gap in December is some 29 million LVL lower than the average for 2008. Note, Latvia cannot run trade deficit (well, adjust it for services and transfers) without external financing ...

The monthly dynamics were negative for exports, but not anymore the 20% plunge on month seen in November.

Monday, February 09, 2009

Mega-Bears Gathering - Roubini & Taleb on CNBC

Entertaining, in the worst case ...

Here's an update on CNBC with more video...

I am not sure that Paul Krugman is joining the gangs of strong-conviction-bears. Well, not yet. But here's his, somewhat desperate(?), latest stimulus update with political sauce.

Consider as a probability!

Roubini: Anglo-Saxon Model Of (Financial) Regulation Has Failed ...

The Anglo-Saxon model of supervision and regulation of the financial system has failed, Nouriel Roubini, chairman of RGE Monitor and professor of economics at New York University, told the Financial Times on Monday. Also available at RGE Monitor!

Hey, others appear to be more gloomy ...

Saut: "Light" Will Triumph?

Jeff Saut, the respectful strategist at Raymond James has posted his weekly missive, see the latest version here. Last week Jeff suggested this.

His call for this week:
We were bullish between the October 10, 2008 “capitulation “low” and the eventual “price low” of November 20th, believing the equity markets were in a bottoming sequence. We stayed constructive into the envisioned mid-January timeframe when we turned cautious. Last week, for the first time since turning cautious, we recommended “long” trading positions on Tuesday’s open for the aforementioned reasons. Our sense was that the equity markets would shake off the worse than expected economic numbers and rally with the “carrot in front of the horse” being the stimulus package and the bank rescue plan. Interestingly, last Tuesday’s action reinforced those views since it was only the third time since 1990 that the SPX rallied more than 1%, while the financials fell more than 1%, which we thought was indicative of a stock market that wanted to trade higher. This week the battle between “light” and “dark” resumes; and this morning “dark” has the edge since the economic stimulus package has not been passed. We think, however, that like last week “light” will triumph and the equity markets will re-rally. That said, this is no lead pipe cinch, so keep your stop-loss orders, and downside hedges, in place. We’ll talk to you next week.

Consider as a probability!

Latvia Plunges Hard As 4th Quarter GDP Contracts by 10.5% On Year

Central Statistical Bureau of Latvia reports the flash estimate of GDP for the 4th quarter of 2008 today:

In the 4th quarter of 2008, compared to the same period of 2007, gross domestic product (GDP) value has decreased by 10.5%, according to flash estimate of the Central Statistical Bureau.

In the 4th quarter of 2008 decline of economic development continued both in fields of manufacturing and of services. Volume of manufacturing has decreased by 11.3%, of retail trade – by 15.6%, of hotels and restaurants services – by 24.8%. Also the value of collected product taxes has dropped significantly.

At the same time the data for consumer price level in January 2009 is reported as follows:

Compared to December 2008 the average consumer price level in January 2009 rose by 2.2%. The average prices of goods rose by 2.1%, but of services - by 2.3%.

Compared to January of previous year, consumer prices have increased by 9.8%, of which prices for goods increased by 8.9%, but for services – by 12.2%.

The annual average rate of change in January 2009 was 14.9%.

Chart (click to enlarge) courtesy of Nordea Analytics.

Here are flash notes by Danske Markets on GDP and inflation!
Lars Christensen and Violeta Klyviene of Danske Markets write in the note:

It is notable that the drop in GDP in Latvia is now of a similar size as the crisis in Argentina in 2001-02, Turkey in 2001 and South East Asia in 1997-98 – and much worse than during the Nordic banking crisis of the 1990s.

Latvia: What To Learn From Great Depressions Of The Twentieth Century?

This entry is also very much linked to good/bad bank discussions...

Michael Pettis, a professor at Peking University's Guanghua School of Management, runs the article "Will China have to choose between social stability and long-term growth?" on his blog today.

The basis of discussion is a research paper by Gonzalo Fernandez de Cordoba (Universidad de Salamanca) and Timothy J. Kehoe (University of Minnesota), called “The Current Financial Crisis: What Should We Learn from the Great Depressions of the Twentieth Century?”

According to Pettis:

The main point the paper seems to want to make is that intervention in the allocation of credit had a huge impact on the way the country was able (or not) to recover from the crisis and regain productivity growth:

Japan suffered a financial crisis in the early 1990s and followed similar sorts of policies as Mexico, keeping otherwise insolvent banks running, providing credit to some firms and not others, and using massive fiscal stimulus programs to maintain employment and investment. Japan has stagnated since then. Finland also suffered a financial crisis in the early 1990s and followed similar sorts of policies as Chile, paying the costs of reform and letting the market dictate the allocation of credit to the private sector. The Finnish economy has grown spectacularly since then.

What implications this might have for Chinese policy-making in response to the current crisis? Again, we always need to protect ourselves from conclusions that owe more to ideology than evidence, but at the very least we should consider the possibility that massive intervention in the banking system, for all the short-term countercyclical benefits (i.e. banks are forced to expand, to satisfy policy interests, rather than contract, to satisfy commercial interests) can create serious enough distortions that Chinese growth for the next decade or so might be sharply constrained. In their words:
We need to avoid implementing policies that stifle productivity by providing bad incentives to the private sector. With banks and other financial institutions in crisis, the government needs to focus on providing liquidity so that banks can provide credit at market interest rates, and using the market mechanism, to productive firms. Unproductive firms need to die. This is as true for the automobile industry as it is for the banking system. Bailouts and other financial efforts to keep unproductive firms in operation depress productivity. These firms absorb labor and capital that are better used by productive firms. The market makes better decisions than does the government on which firms should survive and which should die.
But should this happen in the midst of a global crisis? On the one hand, in China – and probably most other countries – real reform only seems to occur after a crisis, and so this is an important opportunity to get things right. On the other hand global conditions are too ugly for China to allow bankruptcies to take their swiftest course, and so undermining the social pact, so a strong case can be made for intervening heavily now and reforming later. Ultimately this is a political question that the Chinese must make: is there a tradeoff between long-term growth and short-term instability, and if so, which should China choose?
What is the right way for Latvia?