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Tuesday 10 March 2009
Forced selling by investors seen in next 12-18 months: GIC
A Government of Singapore Investment Corp (GIC) official said today he expects more forced selling of assets by investors in the next 12-18 months as the “de-leveraging” in financial markets continues, reported Reuters.
Forced selling by investors seen in next 12-18 months: GIC
A Government of Singapore Investment Corp (GIC) official said today he expects more forced selling of assets by investors in the next 12-18 months as the “de-leveraging” in financial markets continues, reported Reuters.
GIC also sees investment-grade corporate bonds as more attractive than equities currently, the fund’s director of economics and strategy Yeoh Lam Keong, told the Investment Management Association of Singapore conference.
“This is a very destructive process for assets,” Yeoh said, showing a slide that indicated total write downs in the financial sector could reach US$3.8 trillion by 2013 and that only about 30% of the losses had been booked so far.
GIC, one of the world’s largest sovereign funds with an estimated US$200 billion-plus in assets, had invested aggressively in troubled international lenders, picking up multi-billion-dollar stakes in Citigroup and UBS.
* GIC sees further weakness in financial markets - official
* Fancies gold; to avoid dollar, sterling currencies
By Kevin Lim and Saeed Azhar
SINGAPORE, March 10 (Reuters) - An official from the Government of Singapore Investment Corp (GIC) said he expects more weakness in financial markets in the next 12-18 months, and recommended investors hold gold and other safe assets such as government bonds.
GIC, one of the world's largest sovereign funds with an estimated $200 billion-plus in assets, has invested aggressively in troubled global lenders, picking up multi-billion dollar stakes in Citigroup and UBS in late 2007 and early 2008.
There is "systemic capital inadequacy globally", and the world will probably see "three years of a very vicious downcycle," GIC's director of economics and strategy, Yeoh Lam Keong, told the Investment Management Association of Singapore conference on Tuesday
"This is a very destructive process for assets."
Yeoh, who said he was speaking in his personal capacity, showed a slide prepared by GIC that indicated global writedowns in the financial sector could reach $3.8 trillion by 2013 and that only about 30 percent of the losses had been booked so far.
Yeoh suggested investors hold gold, sovereign bonds and currencies such as the Japanese yen, Chinese yuan and Canadian dollar.
He said he liked gold because governments were under pressure to cheapen their currencies to compensate for falling demand, and that some countries such as the United States and Britain would eventually be forced to monetise their debt by printing money.
"I would avoid these currencies like the plague," he said in reference to the dollar and sterling.
By Rachelle Younglai and Jeremy Pelofsky Mar 10, 2009
WASHINGTON (Reuters) - U.S. Regulators will consider reviving the "uptick" restriction on short-sellers of stocks and a top monetary official lent his support on Tuesday to modifying an accounting rule that has forced banks to take billions of dollars in writedowns.
Federal Reserve Chairman Ben Bernanke said he was opposed to suspending mark-to-market accounting but said the rule tended to reinforce economic trends and improvements could be made.
The prospect of the changes helped U.S. stocks to their best day in four months, cheered by Citigroup saying it was profitable in the first two months of 2009.
Barney Frank, who chairs the U.S. House of Representatives Financial Services Committee, told reporters he had spoken to the head of the Securities and Exchange Commission and hoped the uptick rule would soon be reinstated.
"I've spoken to Chair Schapiro of the SEC. I am hopeful the uptick rule will be restored within a month," Frank said.
The SEC later confirmed it may meet next month on the uptick issue but any proposal would likely be subject to a public comment period with a final rule possibly months away.
"The Commission may conduct a public meeting as early as next month to consider whether to formally propose reinstatement of the uptick rule, or consider other measures related to short sales," said SEC spokesman John Nester.
The uptick rule, adopted after the 1929 stock market crash, allowed short sales only when the last sale price was higher than the previous price. The SEC abolished the rule in 2007, after concluding that advances in trading strategies rendered it ineffective.
Senate Banking Committee Chairman Christopher Dodd said he backed the SEC reinstating the uptick rule "I wish they'd do it quickly," the Connecticut Democrat told reporters.
Short-selling is often blamed for precipitous declines in stocks but short-sellers defend their role, saying they prevent shares from becoming overvalued.
The SEC adopted short-term restrictions on short-selling last year but the measures were judged by some market watchers to have been largely ineffective.
Short-sellers borrow stocks they expect will fall in price in the hope of repaying the loans for less and pocketing the difference.
MORE ACCOUNTING GUIDANCE
Frank welcomed Bernanke's support for changes to the mark-to-market accounting rule. "I do think you're going to see major movement on mark-to-market. Bernanke kind of blessed that...," he said.
Bernanke stressed that he supported mark-to-market's goal of making financial balance sheets as transparent as possible, but also talked about its shortcomings.
"It's one of the things that tends at times to increase the severity of ups and downs in the financial system and the economy," he said in response to an audience question following a speech to the Council on Foreign Relations.
"We need to do a lot more to provide guidance to the financial institutions and to the investors about what are reasonable ways to address valuation of assets that are being traded or if traded at all in highly illiquid, fire-sale type markets," Bernanke added.
The SEC and the Financial Accounting Standards Board have said they are working on more guidance to help banks determine values of assets in illiquid markets.
Bernanke's remarks come two days before a U.S. House Financial Services subcommittee is scheduled to meet to consider possible changes to the mark-to-market rule.
The banking industry says the rule is undermining the government efforts to stabilize the financial industry.
But the SEC, which oversees and enforces accounting policy, is "not planning a suspension," of mark-to-market, a source familiar with the matter told Reuters. The source was not authorized to speak on the matter and requested anonymity.
The SEC declined to comment.
The top Republican on the Senate Banking Committee, Richard Shelby of Alabama, said on Tuesday he opposed easing mark-to-market. "Accounting rules should be designed to ensure that a firm's disclosures reflect economic reality, however ugly that reality may be."
Bernanke also said leaders from the Group of 20 rich and developing economies should agree early next month on principles to guide nations as they revamp financial rules to prevent future crises.
Finance ministers from the G20 meet this weekend in London to lay the groundwork for an April 2 leaders summit where regulatory reform is expected to feature prominently.
"It's asking too much for a meeting like that to come out with detailed proposals in many different areas," Bernanke said.
Policymakers around the world have not shown understanding of the current crisis. It is the end of a two decade-long bubble. It is the end of the asset-based economy. It is the end of productivity dividends from IT revolution and globalization. Perhaps one tenth of the income in the global economy was from bubble activities and is permanently lost. The income will shift elsewhere. The resulting demand is different. The supply side has to change to meet a different demand mix in the post bubble economy. If governments don’t understand, the world may suffer a lost decade ahead. No, it is not Japan in the 1990s. It is Japan of the 1990s plus inflation, aka stagflation.
Stock markets around the world have fallen close to or below the lows of November 2008. Concerns over bank bailout uncertainty and deepening recession drove the decline that reversed the 20% bounce from the lows of November 2008. The delays in releasing details by the US Treasury on its bank bailout plan led to suspicions that it didn’t know what to do yet. The exposure of European banks to Eastern Europe caused concerns over their solvency. If big global banks remain mired in bad assets, credit system won’t function normally, and the global recession has no hope to end soon.
On the economic front, the news is grim: Japan’s GDP contracted by 3.3%, Euro-zone 1.5%, and the US 1% in the last quarter of 2008. The US fared better because it piled up inventories, which would lead to a worse situation later. The global economy probably contracted by 2% in the last quarter of 2008 from the previous quarter, the worst decline since the World War II. The first quarter of 2009 won’t be better. The January trade data of East Asian economies already cast a dark shadow over the quarter. All the data are portraying a global economy amidst collapsing.
Three forces are driving the collapsing. First, the collapse of Lehman Brothers triggered a sharp increase in credit cost. Its impact was similar to increasing interest rate by 3-5 percentages by all the central banks together. To cope with high cost of capital every business has been running down inventory, which is the cheapest source of fund raising. In commodity industries, inventory unwinding has been dramatic. Most commodity users kept inventories high out of fear of price rise or for speculation. When commodity prices reversed, they were stuck with a depreciating asset and had to run it down as quickly as possible. I suspect that this force accounts for half of the economic contraction at present.
Second, faced with rising credit cost and declining demand, businesses around the world have cut their capex sharply. This force is most visible in the IT sector. Japan, Korea, and Taiwan are most exposed to it. Their exports have declined dramatically, much more than China’s that has a broader mix. The tech heavy NASDAQ has lost half of its value from its recent high in 2007, despite its terrible beating during the tech burst in 2000-03 that saw the index down by 80% from the 2000 peak. (NASDAQ today is about at the same level as ten years ago. Despite technology revolutions like internet, mobile phone, digital TV over the past decade, investors have not made money in NASDAQ. It demonstrates that there is no direct relationship between making money and technology.) Semiconductor that is a major input into IT equipment is hit particularly hard. The Philadelphia Semiconductor index is down 60% from its 2007 high. Many semiconductor companies on NASDAQ are trading at market capitalization below 10% of their sales revenue. I suspect that the capex suspension is one fourth of the current economic contraction.
Lastly and the most obvious, the negative wealth effect from the evaporation of $50 trillion paper wealth is cutting into consumption. The rule of thumb suggests that the negative wealth effect is about 5%. As two thirds of the global economy is consumption, ceteris paribus, the global economy can contract by 3% just due to this effect. Its impact is not all felt yet. Most consumers will adjust slowly.
The inventory cycle and capex reduction are temporary factors in pulling down the global economy. At some point, inventories are ago, and capex is too low to cut. I suspect that inventory destocking will be completed in the first quarter of 2009, and capex stablizes in the third quarter. The global economy will probably show stability then. As fiscal stimulus kicks in around the word, we may see a significant bounce in the global economy in the second half of 2009. But, stability or stimulus-inspired bounce won’t lead to sustained recovery. Consumption weakness will haunt the global economy for a long time. The over-levered western consumer needs to pay down debt for years to come. Rising unemployment will make the problem worse. The western consumer-the driver of the global economy for the past decade is down and out for good.
Governments must understand the lasting nature of the current downturn. The bursting of the credit bubble triggered the fall. The mismatch between income and demand could delay a sustainable recovery for years. During the bubble era income distribution became more and more skewered towards asset-based activities. For example, the profit share of financial activities among the US listed companies quadrupled. Similar trends happened in many countries. The income for the workers in finance increased in a similar fashion. The bulging income from the financial sector was quite concentrated among a small group that spent money in luxuries and financial investment. This is the most important factor for rising concentration of income distribution around the world in the past decade.
The bursting of the bubble will destroy most income in financial activities. The amount lost could be one tenth of GDP. From limo drivers to luxury homebuilders the multiply effect from the financial meltdown will leave unemployment across many industries and countries. The recovery becomes sustainable only when supply side is restructured to cater to a different demand mix. This process would take a long time to complete. But, governments could prolong the downturn by making the wrong decisions. For example, governments around the world are engaging in fiscal stimulus. To some extent they are choosing winners. If the choices of spending are way off what market would support, the stimulus would delay recovery. Stimulus is necessary in a severe downturn like now. It just needs to match the structural changes to come.
Let us think through the problem facing an unemployed banker and his ex-driver. The banker was making 20 times his driver’s. He could splash and hire the driver. Of course, in addition, he was paying for his florist, tailor, maid, masseur, etc. On average, he spent 70% of his income on the equivalent of 15 people like his driver full time serving him and put 30% back in financial investment like in a hedge fund. Now, the ex-banker moves to Kansas City and becomes a high school teacher. His current income is the same as his ex-driver’s. He drives to work, cleans his own house, and forgoes massage. The economic problem is what happens next to the fifteen people who were serving him.
The banker’s income before came from asset market activities, essentially redistributing income to himself by manipulating asset prices. As he stops doing that, the cost for economic activities goes down by the amount equal to his income. But, the people serving him have lost their income. The net result is that the economy contracts by the same amount as the banker’s income plus 15 unemployed people. In addition, the 15 unemployed people can’t spend. The multiplier effect magnifies the banker’s income contraction, possibly by a factor of 2. The world looks worse off with a smaller economy and more unemployed.
When the government steps in to stimulate, it is essentially borrowing the equivalent of banker’s ex-income to spend. The purpose is to keep the 15 people employed. However, the government won’t spend on drivers, nannies, florists, or masseurs. The mismatch means the government can’t get the economy back with stimulus. It shouldn’t. The driver must find new consumers. The banker is gone for good. What the government should target is to stop the multiplier effect from the 15 people that the banker no longer hires. If these 15 people get unemployment insurance, it goes a long way to mitigate the multiplier effect. The economy can come back when it is restructured so that the 15 people find new employment.
The world will eventually be better off. The banker was just redistributing income to himself. The money would lead to more productivity if it could be directed to more productive people. It’s just that the process of adjustment could be long. The world has experienced an asset-based economy for two decades. It has led to extreme income distribution. In the last few years, large manufacturing companies like GE and GM came to depend on financial activities for profits. Their industrial activities were really used as a fund raising platform. In China manufacturing companies depended on property development or stock market speculation for profits. The profit margins from their main businesses kept dwindling. Reversing the trend of the past two decades would take a long time. If governments don’t understand and try to bring back the ‘good time’ of the past, it will prolong the adjustment. The risk is high that the world may suffer a lost decade.
Japan suffered a lost decade characterized by stagnation, rising fiscal deficit, deflation, and strong yen. These characteristics were supported by Japan’s high savings rate and export competitiveness. The world as a whole could not replicate Japan’s experience. The US, for example, must borrow from foreigners to fund its budget deficit. Its currency is likely to be weak for years to come. As dollar is the currency for trade, capital flows and foreign exchange reserves, its weakness will lead to worldwide monetary expansion. The loose monetary condition will sooner or later lead to commodity speculation. The resulting inflation would lead to wage demand by organized labor, which opens up the channel between money supply and inflation. When I look at the government policies around the world, I fear for prolonged stagflation ahead.
While we need to worry about the long term stimulus effectiveness, the short term effectiveness is not yet secure. With global banks still mired in toxic assets, they won’t be able to lend normally. If stimulus pushes up economic activities, businesses that want to invest to meet new demand may not get loans. In an upward virtuous cycle, rising demand leads to investment that leads to more jobs and more demand. Without a functioning banking system, this virtuous cycle is not possible. Instead, stimulus just perks up economy temporarily, i.e., it would be wasted.
The immediate task is to repair the banking system, especially in the US. The US Treasury is promising overwhelming force now and details later. This may be a stalling tactic. The prices of big bank stocks and toxic assets already assume nationalization. The US government is right to be concerned of the permanent damage to its financial system from nationalization. But, to avoid it, the government has to grossly overvalue the toxic assets. The US taxpayers wouldn’t agree to throw taxpayers money at failed banks. If the US doesn’t fix its banking system, the $780 billion fiscal stimulus will be wasted.
The right approach is to nationalize these banks, separate the toxic assets into a different entity, and relist the healthy halves. The proceeds from selling down the healthy banks could be used to pay for absorbing the losses from disposing toxic assets. This is what China did to repair its banking system. It may be the only way out for the US.
Second, the West must contain the cost of its entitlement programs, beginning with healthcare in the US. If the US doesn’t institute radical reforms to contain its healthcare cost, it will go bankrupt, possibly within a decade. If Europe doesn’t reform its pension and unemployment benefits, it will have to raise taxes or run bigger budget deficits permanently, and its economy would stagnate.
The biggest economic challenge among developed economies is aging, which leads to escalating pension cost and exponentially rising healthcare cost. While the wrong policies allowed the credit bubble to happen, the desire to defend lifestyle during escalating social overhead cost associated with aging was a major contributing factor. It allowed the western economies to delay the hard choices. The current system was set when aging was not a big challenge. The only viable course forward is to increase retirement age and ration healthcare access.
Third, emerging economies must decrease export dependency. Export-led development usually reflects weaknesses in political economy-the inability to efficiently turn savings into investment. The causes are usually lack of the rule of law and income and wealth concentration. The export orientation is to import the global system. The model has worked for a long time. From Japan one century ago to the Asian Tiger economies fifty years and China thirty years ago, the model has made fast development possible.
The problem with the model today is that it is crowded. Developing economies are already 30% of the global economy at current price and nearly half on a purchasing power basis. The export model cannot thrive for shortage of customers. Developing countries have to trade more with each other and develop domestic demand. It would require painful reforms to their political economies. The heart of the reforms is property rights and income distribution. The two must go hand in hand. Lack of domestic demand tends to result from income concentration, which is due to uneven playing field in opportunities. Many developing countries, like South American and Southeast Asian countries, have stagnated in the past decade due to their inability to reform their political economies.
Bursting of the credit bubble is triggering the biggest recession since the World War II. Repairing the global economy requires complex and difficult reforms. Simple stimulus couldn’t bring back prosperity. While stock markets may improve in the second and third quarter, it is merely a bear market rally. When inflation concerns hit the market towards the end of 2009, stock markets could fall sharply again. Indeed, the ultimate bottom in the current cycle could happen in 2010.
6 comments:
Forced selling by investors seen in next 12-18 months: GIC
A Government of Singapore Investment Corp (GIC) official said today he expects more forced selling of assets by investors in the next 12-18 months as the “de-leveraging” in financial markets continues, reported Reuters.
GIC also sees investment-grade corporate bonds as more attractive than equities currently, the fund’s director of economics and strategy Yeoh Lam Keong, told the Investment Management Association of Singapore conference.
“This is a very destructive process for assets,” Yeoh said, showing a slide that indicated total write downs in the financial sector could reach US$3.8 trillion by 2013 and that only about 30% of the losses had been booked so far.
GIC, one of the world’s largest sovereign funds with an estimated US$200 billion-plus in assets, had invested aggressively in troubled international lenders, picking up multi-billion-dollar stakes in Citigroup and UBS.
Singapore's GIC sees more distress in markets
* GIC sees further weakness in financial markets - official
* Fancies gold; to avoid dollar, sterling currencies
By Kevin Lim and Saeed Azhar
SINGAPORE, March 10 (Reuters) - An official from the Government of Singapore Investment Corp (GIC) said he expects more weakness in financial markets in the next 12-18 months, and recommended investors hold gold and other safe assets such as government bonds.
GIC, one of the world's largest sovereign funds with an estimated $200 billion-plus in assets, has invested aggressively in troubled global lenders, picking up multi-billion dollar stakes in Citigroup and UBS in late 2007 and early 2008.
There is "systemic capital inadequacy globally", and the world will probably see "three years of a very vicious downcycle," GIC's director of economics and strategy, Yeoh Lam Keong, told the Investment Management Association of Singapore conference on Tuesday
"This is a very destructive process for assets."
Yeoh, who said he was speaking in his personal capacity, showed a slide prepared by GIC that indicated global writedowns in the financial sector could reach $3.8 trillion by 2013 and that only about 30 percent of the losses had been booked so far.
Yeoh suggested investors hold gold, sovereign bonds and currencies such as the Japanese yen, Chinese yuan and Canadian dollar.
He said he liked gold because governments were under pressure to cheapen their currencies to compensate for falling demand, and that some countries such as the United States and Britain would eventually be forced to monetise their debt by printing money.
"I would avoid these currencies like the plague," he said in reference to the dollar and sterling.
Uptick rule eyed, Fed chief backs accounting tweak
By Rachelle Younglai and Jeremy Pelofsky
Mar 10, 2009
WASHINGTON (Reuters) - U.S. Regulators will consider reviving the "uptick" restriction on short-sellers of stocks and a top monetary official lent his support on Tuesday to modifying an accounting rule that has forced banks to take billions of dollars in writedowns.
Federal Reserve Chairman Ben Bernanke said he was opposed to suspending mark-to-market accounting but said the rule tended to reinforce economic trends and improvements could be made.
The prospect of the changes helped U.S. stocks to their best day in four months, cheered by Citigroup saying it was profitable in the first two months of 2009.
Barney Frank, who chairs the U.S. House of Representatives Financial Services Committee, told reporters he had spoken to the head of the Securities and Exchange Commission and hoped the uptick rule would soon be reinstated.
"I've spoken to Chair Schapiro of the SEC. I am hopeful the uptick rule will be restored within a month," Frank said.
The SEC later confirmed it may meet next month on the uptick issue but any proposal would likely be subject to a public comment period with a final rule possibly months away.
"The Commission may conduct a public meeting as early as next month to consider whether to formally propose reinstatement of the uptick rule, or consider other measures related to short sales," said SEC spokesman John Nester.
The uptick rule, adopted after the 1929 stock market crash, allowed short sales only when the last sale price was higher than the previous price. The SEC abolished the rule in 2007, after concluding that advances in trading strategies rendered it ineffective.
Senate Banking Committee Chairman Christopher Dodd said he backed the SEC reinstating the uptick rule "I wish they'd do it quickly," the Connecticut Democrat told reporters.
Short-selling is often blamed for precipitous declines in stocks but short-sellers defend their role, saying they prevent shares from becoming overvalued.
The SEC adopted short-term restrictions on short-selling last year but the measures were judged by some market watchers to have been largely ineffective.
Short-sellers borrow stocks they expect will fall in price in the hope of repaying the loans for less and pocketing the difference.
MORE ACCOUNTING GUIDANCE
Frank welcomed Bernanke's support for changes to the mark-to-market accounting rule. "I do think you're going to see major movement on mark-to-market. Bernanke kind of blessed that...," he said.
Bernanke stressed that he supported mark-to-market's goal of making financial balance sheets as transparent as possible, but also talked about its shortcomings.
"It's one of the things that tends at times to increase the severity of ups and downs in the financial system and the economy," he said in response to an audience question following a speech to the Council on Foreign Relations.
"We need to do a lot more to provide guidance to the financial institutions and to the investors about what are reasonable ways to address valuation of assets that are being traded or if traded at all in highly illiquid, fire-sale type markets," Bernanke added.
The SEC and the Financial Accounting Standards Board have said they are working on more guidance to help banks determine values of assets in illiquid markets.
Bernanke's remarks come two days before a U.S. House Financial Services subcommittee is scheduled to meet to consider possible changes to the mark-to-market rule.
The banking industry says the rule is undermining the government efforts to stabilize the financial industry.
But the SEC, which oversees and enforces accounting policy, is "not planning a suspension," of mark-to-market, a source familiar with the matter told Reuters. The source was not authorized to speak on the matter and requested anonymity.
The SEC declined to comment.
The top Republican on the Senate Banking Committee, Richard Shelby of Alabama, said on Tuesday he opposed easing mark-to-market. "Accounting rules should be designed to ensure that a firm's disclosures reflect economic reality, however ugly that reality may be."
Bernanke also said leaders from the Group of 20 rich and developing economies should agree early next month on principles to guide nations as they revamp financial rules to prevent future crises.
Finance ministers from the G20 meet this weekend in London to lay the groundwork for an April 2 leaders summit where regulatory reform is expected to feature prominently.
"It's asking too much for a meeting like that to come out with detailed proposals in many different areas," Bernanke said.
谢国忠：一个时代的结束
By Andy Xie
2009-03-03
Policymakers around the world have not shown understanding of the current crisis. It is the end of a two decade-long bubble. It is the end of the asset-based economy. It is the end of productivity dividends from IT revolution and globalization. Perhaps one tenth of the income in the global economy was from bubble activities and is permanently lost. The income will shift elsewhere. The resulting demand is different. The supply side has to change to meet a different demand mix in the post bubble economy. If governments don’t understand, the world may suffer a lost decade ahead. No, it is not Japan in the 1990s. It is Japan of the 1990s plus inflation, aka stagflation.
Stock markets around the world have fallen close to or below the lows of November 2008. Concerns over bank bailout uncertainty and deepening recession drove the decline that reversed the 20% bounce from the lows of November 2008. The delays in releasing details by the US Treasury on its bank bailout plan led to suspicions that it didn’t know what to do yet. The exposure of European banks to Eastern Europe caused concerns over their solvency. If big global banks remain mired in bad assets, credit system won’t function normally, and the global recession has no hope to end soon.
On the economic front, the news is grim: Japan’s GDP contracted by 3.3%, Euro-zone 1.5%, and the US 1% in the last quarter of 2008. The US fared better because it piled up inventories, which would lead to a worse situation later. The global economy probably contracted by 2% in the last quarter of 2008 from the previous quarter, the worst decline since the World War II. The first quarter of 2009 won’t be better. The January trade data of East Asian economies already cast a dark shadow over the quarter. All the data are portraying a global economy amidst collapsing.
Three forces are driving the collapsing. First, the collapse of Lehman Brothers triggered a sharp increase in credit cost. Its impact was similar to increasing interest rate by 3-5 percentages by all the central banks together. To cope with high cost of capital every business has been running down inventory, which is the cheapest source of fund raising. In commodity industries, inventory unwinding has been dramatic. Most commodity users kept inventories high out of fear of price rise or for speculation. When commodity prices reversed, they were stuck with a depreciating asset and had to run it down as quickly as possible. I suspect that this force accounts for half of the economic contraction at present.
Second, faced with rising credit cost and declining demand, businesses around the world have cut their capex sharply. This force is most visible in the IT sector. Japan, Korea, and Taiwan are most exposed to it. Their exports have declined dramatically, much more than China’s that has a broader mix. The tech heavy NASDAQ has lost half of its value from its recent high in 2007, despite its terrible beating during the tech burst in 2000-03 that saw the index down by 80% from the 2000 peak. (NASDAQ today is about at the same level as ten years ago. Despite technology revolutions like internet, mobile phone, digital TV over the past decade, investors have not made money in NASDAQ. It demonstrates that there is no direct relationship between making money and technology.) Semiconductor that is a major input into IT equipment is hit particularly hard. The Philadelphia Semiconductor index is down 60% from its 2007 high. Many semiconductor companies on NASDAQ are trading at market capitalization below 10% of their sales revenue. I suspect that the capex suspension is one fourth of the current economic contraction.
Lastly and the most obvious, the negative wealth effect from the evaporation of $50 trillion paper wealth is cutting into consumption. The rule of thumb suggests that the negative wealth effect is about 5%. As two thirds of the global economy is consumption, ceteris paribus, the global economy can contract by 3% just due to this effect. Its impact is not all felt yet. Most consumers will adjust slowly.
The inventory cycle and capex reduction are temporary factors in pulling down the global economy. At some point, inventories are ago, and capex is too low to cut. I suspect that inventory destocking will be completed in the first quarter of 2009, and capex stablizes in the third quarter. The global economy will probably show stability then. As fiscal stimulus kicks in around the word, we may see a significant bounce in the global economy in the second half of 2009. But, stability or stimulus-inspired bounce won’t lead to sustained recovery. Consumption weakness will haunt the global economy for a long time. The over-levered western consumer needs to pay down debt for years to come. Rising unemployment will make the problem worse. The western consumer-the driver of the global economy for the past decade is down and out for good.
Governments must understand the lasting nature of the current downturn. The bursting of the credit bubble triggered the fall. The mismatch between income and demand could delay a sustainable recovery for years. During the bubble era income distribution became more and more skewered towards asset-based activities. For example, the profit share of financial activities among the US listed companies quadrupled. Similar trends happened in many countries. The income for the workers in finance increased in a similar fashion. The bulging income from the financial sector was quite concentrated among a small group that spent money in luxuries and financial investment. This is the most important factor for rising concentration of income distribution around the world in the past decade.
The bursting of the bubble will destroy most income in financial activities. The amount lost could be one tenth of GDP. From limo drivers to luxury homebuilders the multiply effect from the financial meltdown will leave unemployment across many industries and countries. The recovery becomes sustainable only when supply side is restructured to cater to a different demand mix. This process would take a long time to complete. But, governments could prolong the downturn by making the wrong decisions. For example, governments around the world are engaging in fiscal stimulus. To some extent they are choosing winners. If the choices of spending are way off what market would support, the stimulus would delay recovery. Stimulus is necessary in a severe downturn like now. It just needs to match the structural changes to come.
Let us think through the problem facing an unemployed banker and his ex-driver. The banker was making 20 times his driver’s. He could splash and hire the driver. Of course, in addition, he was paying for his florist, tailor, maid, masseur, etc. On average, he spent 70% of his income on the equivalent of 15 people like his driver full time serving him and put 30% back in financial investment like in a hedge fund. Now, the ex-banker moves to Kansas City and becomes a high school teacher. His current income is the same as his ex-driver’s. He drives to work, cleans his own house, and forgoes massage. The economic problem is what happens next to the fifteen people who were serving him.
The banker’s income before came from asset market activities, essentially redistributing income to himself by manipulating asset prices. As he stops doing that, the cost for economic activities goes down by the amount equal to his income. But, the people serving him have lost their income. The net result is that the economy contracts by the same amount as the banker’s income plus 15 unemployed people. In addition, the 15 unemployed people can’t spend. The multiplier effect magnifies the banker’s income contraction, possibly by a factor of 2. The world looks worse off with a smaller economy and more unemployed.
When the government steps in to stimulate, it is essentially borrowing the equivalent of banker’s ex-income to spend. The purpose is to keep the 15 people employed. However, the government won’t spend on drivers, nannies, florists, or masseurs. The mismatch means the government can’t get the economy back with stimulus. It shouldn’t. The driver must find new consumers. The banker is gone for good. What the government should target is to stop the multiplier effect from the 15 people that the banker no longer hires. If these 15 people get unemployment insurance, it goes a long way to mitigate the multiplier effect. The economy can come back when it is restructured so that the 15 people find new employment.
The world will eventually be better off. The banker was just redistributing income to himself. The money would lead to more productivity if it could be directed to more productive people. It’s just that the process of adjustment could be long. The world has experienced an asset-based economy for two decades. It has led to extreme income distribution. In the last few years, large manufacturing companies like GE and GM came to depend on financial activities for profits. Their industrial activities were really used as a fund raising platform. In China manufacturing companies depended on property development or stock market speculation for profits. The profit margins from their main businesses kept dwindling. Reversing the trend of the past two decades would take a long time. If governments don’t understand and try to bring back the ‘good time’ of the past, it will prolong the adjustment. The risk is high that the world may suffer a lost decade.
Japan suffered a lost decade characterized by stagnation, rising fiscal deficit, deflation, and strong yen. These characteristics were supported by Japan’s high savings rate and export competitiveness. The world as a whole could not replicate Japan’s experience. The US, for example, must borrow from foreigners to fund its budget deficit. Its currency is likely to be weak for years to come. As dollar is the currency for trade, capital flows and foreign exchange reserves, its weakness will lead to worldwide monetary expansion. The loose monetary condition will sooner or later lead to commodity speculation. The resulting inflation would lead to wage demand by organized labor, which opens up the channel between money supply and inflation. When I look at the government policies around the world, I fear for prolonged stagflation ahead.
While we need to worry about the long term stimulus effectiveness, the short term effectiveness is not yet secure. With global banks still mired in toxic assets, they won’t be able to lend normally. If stimulus pushes up economic activities, businesses that want to invest to meet new demand may not get loans. In an upward virtuous cycle, rising demand leads to investment that leads to more jobs and more demand. Without a functioning banking system, this virtuous cycle is not possible. Instead, stimulus just perks up economy temporarily, i.e., it would be wasted.
The immediate task is to repair the banking system, especially in the US. The US Treasury is promising overwhelming force now and details later. This may be a stalling tactic. The prices of big bank stocks and toxic assets already assume nationalization. The US government is right to be concerned of the permanent damage to its financial system from nationalization. But, to avoid it, the government has to grossly overvalue the toxic assets. The US taxpayers wouldn’t agree to throw taxpayers money at failed banks. If the US doesn’t fix its banking system, the $780 billion fiscal stimulus will be wasted.
The right approach is to nationalize these banks, separate the toxic assets into a different entity, and relist the healthy halves. The proceeds from selling down the healthy banks could be used to pay for absorbing the losses from disposing toxic assets. This is what China did to repair its banking system. It may be the only way out for the US.
Second, the West must contain the cost of its entitlement programs, beginning with healthcare in the US. If the US doesn’t institute radical reforms to contain its healthcare cost, it will go bankrupt, possibly within a decade. If Europe doesn’t reform its pension and unemployment benefits, it will have to raise taxes or run bigger budget deficits permanently, and its economy would stagnate.
The biggest economic challenge among developed economies is aging, which leads to escalating pension cost and exponentially rising healthcare cost. While the wrong policies allowed the credit bubble to happen, the desire to defend lifestyle during escalating social overhead cost associated with aging was a major contributing factor. It allowed the western economies to delay the hard choices. The current system was set when aging was not a big challenge. The only viable course forward is to increase retirement age and ration healthcare access.
Third, emerging economies must decrease export dependency. Export-led development usually reflects weaknesses in political economy-the inability to efficiently turn savings into investment. The causes are usually lack of the rule of law and income and wealth concentration. The export orientation is to import the global system. The model has worked for a long time. From Japan one century ago to the Asian Tiger economies fifty years and China thirty years ago, the model has made fast development possible.
The problem with the model today is that it is crowded. Developing economies are already 30% of the global economy at current price and nearly half on a purchasing power basis. The export model cannot thrive for shortage of customers. Developing countries have to trade more with each other and develop domestic demand. It would require painful reforms to their political economies. The heart of the reforms is property rights and income distribution. The two must go hand in hand. Lack of domestic demand tends to result from income concentration, which is due to uneven playing field in opportunities. Many developing countries, like South American and Southeast Asian countries, have stagnated in the past decade due to their inability to reform their political economies.
Bursting of the credit bubble is triggering the biggest recession since the World War II. Repairing the global economy requires complex and difficult reforms. Simple stimulus couldn’t bring back prosperity. While stock markets may improve in the second and third quarter, it is merely a bear market rally. When inflation concerns hit the market towards the end of 2009, stock markets could fall sharply again. Indeed, the ultimate bottom in the current cycle could happen in 2010.
曾淵滄：國 泰 面 對 雙 重 打 擊
2009-03-11
昨 日 匯 豐 控 股 （ 005 ） 股 價 終 於 回 升 至 前 日 收 市 前 競 價 最 後 3 秒 鐘 前 的 價 格 ， 這 進 一 步 證 實 ， 那 300 萬 股 33 元 的 沽 盤 有 問 題 ， 是 明 顯 的 造 市 。
今 日 是 匯 控 最 後 一 日 除 權 前 的 買 賣 ， 供 與 不 供 ， 沽 與 不 沽 之 間 還 有 許 多 選 擇 ， 其 一 就 是 今 日 沽 出 正 股 ， 其 後 買 入 供 股 權 供 股 ， 不 少 不 想 供 股 的 小 股 民 可 能 會 把 供 股 權 賣 掉 ， 因 此 供 股 權 可 能 出 現 折 讓 價 。
匯 控 供 股 對 香 港 的 零 售 飲 食 業 也 起 了 立 竿 見 影 的 作 用 ， 過 去 一 個 多 星 期 與 之 前 的 一 段 時 間 裏 ， 中 高 級 餐 館 的 顧 客 大 量 減 少 ， 減 幅 驚 人 ， 相 信 在 那 些 餐 館 工 作 的 員 工 ， 已 開 始 擔 心 飯 碗 問 題 了 。
前 個 周 末 到 北 京 ， 上 個 周 末 到 上 海 ， 來 回 四 趟 旅 程 ， 飛 機 座 位 僅 20 至 30% 滿 ， 空 得 可 怕 ， 是 金 融 海 嘯 加 上 兩 岸 三 通 的 雙 重 打 擊 。 可 是 我 一 看 航 機 ， 單 是 國 泰 （ 293 ） 與 港 龍 ， 就 幾 乎 每 小 時 就 有 一 班 飛 機 來 往 香 港 與 上 海 ， 相 信 過 去 這 些 航 班 的 主 要 乘 客 是 台 灣 商 人 。
兩 岸 三 通 談 了 多 年 ， 國 泰 與 港 龍 高 層 應 該 知 道 ， 馬 英 九 一 上 台 ， 兩 岸 很 快 會 三 通 ， 為 何 沒 有 為 兩 岸 三 通 預 先 做 點 準 備 、 削 減 航 班 ？ 過 去 幾 年 ， 國 泰 遇 上 兩 個 災 難 ， 一 是 911 ， 二 是 沙 士 ， 幸 好 兩 者 的 打 擊 時 間 都 不 長 ， 我 也 相 信 金 融 海 嘯 終 有 一 天 會 過 去 。 但 是 ， 兩 岸 三 通 則 是 不 可 能 走 回 頭 路 的 事 了 ， 將 來 就 算 民 進 黨 再 執 政 ， 也 不 可 能 取 消 兩 岸 三 通 ， 香 港 飛 內 地 的 航 班 所 受 的 影 響 是 長 期 的 。
等 業 績 發 掘 超 值 股
現 在 每 天 都 有 企 業 公 佈 業 績 ， 我 特 別 留 意 那 些 去 年 上 市 的 企 業 。
去 年 剛 剛 上 市 的 企 業 有 一 個 好 處 ， 是 上 市 時 集 了 一 筆 現 金 ， 我 們 只 要 在 該 企 業 公 佈 業 績 後 ， 查 一 查 那 筆 現 金 到 了 那 裏 ， 還 在 不 在 ？ 如 果 還 在 ， 這 些 股 是 超 值 股 ， 因 為 去 年 上 市 的 企 業 ， 股 價 已 普 遍 下 跌 75% 甚 至 更 多 。
一 家 新 上 市 的 企 業 ， 假 設 發 行 1 億 新 股 集 資 ， 每 股 1 元 ， 一 般 上 新 股 是 總 股 數 的 25% 左 右 ， 因 此 上 市 後 總 股 數 該 是 4 億 股 ， 如 果 該 新 股 股 價 由 1 元 的 上 市 價 跌 0.25 元 ， 而 同 時 上 市 時 集 資 的 現 金 沒 用 掉 ， 這 等 於 每 股 的 淨 現 金 額 就 會 有 0.25 元 ， 企 業 其 餘 的 資 產 全 是 免 費 的 ， 還 不 是 超 值 嗎 ？
當 然 ， 這 些 企 業 一 日 未 公 佈 業 績 ， 我 們 還 不 敢 肯 定 他 們 會 不 會 在 去 年 花 掉 手 上 的 現 金 。
王 冠 一：大行闖禍 細行付鈔
週二, 10 三月 2009
美國上周再有一家地區銀行──喬治亞州自由銀行(Freedom Bank of Georgia)被接管，成為美國今年第17家倒閉的銀行，而自從經濟於2007年12月步入衰退以來，已有42間銀行在金融海嘯下遭淹沒。
不少地區銀行投訴要為華爾街的貪婪分擔代價。其中一家打算短期內把TARP注資退還政府的TCF Financial Corp.稱，借貸一向審慎，自1995年至今從未錄得虧損，亦未曾參與過次按放款業務，卻要向聯邦存款保險公司(FDIC)奉獻多達10億美元的保費，既無奈又無辜。
逾5000會員的美國獨立社區銀行公會(ICBA)亦對這些強行徵收的保費大表不滿，尤其社區銀行的資金大多來自客戶存款，而FDIC的保險徵款是以存款為計算基礎，令這些銀行的保費不合理地偏高。他們對要為監管機構的無能和華爾街的貪婪承擔後果，感到不是味兒。公會發起一行一信致函FDIC運動，對不合理的徵費提抗議。
事實上，越來越多人對政府救助銀行的做法不滿。銀行委員會成員之一的共和黨參議員沙比(Richard Shelby)警告，美國不可效法日本90年代向經營不善銀行狂泵錢，這樣做只會延長經濟滑坡周期。他認為應該埋葬死去的銀行，與小銀行一視同仁，好向市場傳遞正確訊息。在總統大選中敗陣的麥凱恩亦和議，批評新政府不讓大銀行倒閉的做法愚蠢。兩者均避用「國有化」字眼，以免予人美國邁向社會主義的印象。
高盛行政總裁布蘭克費恩於接受德國周刊訪問時，反對全面國有化銀行，指在極端的情況下，政府可以持有銀行股份，但要避免全面控制銀行。具有影響力的美國商會亦走出來挺政府救銀行的做法，指爭辯應否讓一家已經與環球經濟融為一體的銀行倒閉，乃不切實際，該討論的是把毒資產剝離銀行的方法。
至於堪薩斯聯儲銀行行長霍尼格則指責，政府雖已向金融體系注入數以千億美元，可惜干預大型銀行時猶豫不決和採用斬件式的做法，未有效處理金融體系的根本問題，無助於解決危機。雖然一再獲政府注資，但市場仍揣測花旗這個「壞孩子」最終仍難逃被國有化的命運，上周股價跌穿1美元，是否市場對其前景用腳投票的表現。
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