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Tuesday, 5 May 2009
Chinafornia, Chinazona, Chutah, and Chindaho
What if the U.S. broke up (much like the Soviet Union did in the early 1990s)? According to one Russian professor, it means that Governer Ahnold may need to learn Chinese.
What if the U.S. broke up (much like the Soviet Union did in the early 1990s)? According to one Russian professor, it means that Governer Ahnold may need to learn Chinese.
Igor Panarin, a former KGB analyst and popular patron of Russian talk shows, has allegedly drawn up a map of what America will look like after its “moral and economic collapse.” According to Panarin, after a second American civil war and the collapse of the dollar - due to “mass immigration, economic decline and moral degradation” - the United States would break into half a dozen regional sub-entities that would then somehow be taken over by foreign powers.
* Alaska would revert to Russia, and Hawaii would become Chinese or Japanese. * The West Coast (the three Pacific states, joined with Idaho, Nevada, Utah and Arizona in a Californian Republic), would fall to China or at least be under Chinese influence. * A Texas Republic, which would also include New Mexico, Oklahoma and all the other traditionally southern states (except the Carolinas, the Virginias, Kentucky and Tennessee), would similarly be either directly or indirectly under the sway of Mexico. * The aforementioned southern exceptions would join the northeastern states in forming a bloc that might join the European Union. * The rest - all midwestern and western states - would be at Canada’s mercy.
Yes, it’s completely a crack pot theory for any number of reasons (one off the top of our heads: Can you imagine Canadians actually wanting to deal with Detroit?), but it’s also kind of fun to think of a West that’s gone to China. We imagine that most parts of California would look... exactly the same.
Emerging economies such as China and Russia are calling for alternatives to the dollar as a reserve currency. The trigger is the Federal Reserve's liberal policy of expanding the money supply to prop up America's banking system and its over-indebted households. Because the magnitude of the bad assets within the banking system and the excess leverage of its households are potentially huge, the Fed may be forced into printing dollars massively, which would eventually trigger high inflation or even hyper-inflation and cause great damage to countries that hold dollar assets in their foreign exchange reserves.
The chatter over alternatives to the dollar mainly reflects the unhappiness with US monetary policy among the emerging economies that have amassed nearly $10,000bn (€7,552bn, £6,721bn) in foreign exchange reserves, mostly in dollar assets. Any other country with America's problems would need the Paris Club of creditor nations to negotiate with its lenders on its monetary and fiscal policies to protect their interests. But the US situation is unique: it borrows in its own currency, and the dollar is the world's dominant reserve currency. The US can disregard its creditors' concerns for the time being without worrying about a dollar collapse.
The faith of the Chinese in America's power and responsibility, and the petrodollar holdings of the gulf countries that depend on US military protection, are the twin props for the dollar's global status. Ethnic Chinese, including those in the mainland, Hong Kong, Taiwan and overseas, may account for half of the foreign holdings of dollar assets. You have to check the asset allocations of wealthy ethnic Chinese to understand the dollar's unique status.
The Chinese love affair with the dollar began in the 1940s when it held its value while the Chinese currency depreciated massively. Memory is long when it comes to currency credibility. The Chinese renminbi remains a closed currency and is not yet a credible vehicle for wealth storage. Also, wealthy ethnic Chinese tend to send their children to the US for education. They treat the dollar as their primary currency.
The US could repair its balance sheet through asset sales and fiscal transfers instead of just printing money. The $2,000bn fiscal deficit, for example, could have gone to over-indebted households for paying down debts rather than on dubious spending to prop up the economy. When property and stock prices decline sufficiently, foreign demand, especially from ethnic Chinese, will come in volume. The country's vast and unexplored natural resource holdings could be auctioned off. Americans may view these ideas as unthinkable. It is hard to imagine that a superpower needs to sell the family silver to stay solvent. Hence, printing money seems a less painful way out.
The global environment is extremely negative for savers. The prices of property and shares, though having declined substantially, are not good value yet and may decline further. Interest rates are near zero. The Fed is printing money, which will eventually inflate away the value of dollar holdings. Other currencies are not safe havens either. As the Fed expands the money supply, it puts pressure on other currencies to appreciate. This will force other central banks to expand their own money supplies to depress their currencies. Hence, major currencies may take turns devaluing. The end result is inflation and negative real interest rates everywhere. Central banks are punishing savers to redeem the sins of debtors and speculators. Unfortunately, ethnic Chinese are the biggest savers.
Diluting Chinese savings to bail out America's failing banks and bankrupt households, though highly beneficial to the US national interest in the short term, will destroy the dollar's global status. Ethnic Chinese demand for the dollar has been waning already. China's bulging foreign exchange reserves reflect the lack of private demand for dollars, which was driven by the renminbi's appreciation. Though this was speculative in nature, it shows the renminbi's rising credibility and its potential to replace the dollar as the main vehicle of wealth storage for ethnic Chinese.
America's policy is pushing China towards developing an alternative financial system. For the past two decades China's entry into the global economy rested on making cheap labour available to multi-nationals and pegging the renminbi to the dollar. The dollar peg allowed China to leverage the US financial system for its international needs, while domestic finance remained state-controlled to redistribute prosperity from the coast to interior provinces. This dual approach has worked remarkably well. China could have its cake and eat it too. Of course, the global credit bubble was what allowed China's dual approach to be effective; its inefficiency was masked by bubble-generated global demand.
China is aware that it must become independent from the dollar at some point. Its recent decision to turn Shanghai into a financial centre by 2020 reflects China's anxiety over relying on the dollar system. The year 2020 seems remote, and the US will not pay attention to something so distant. However, if global stagflation takes hold, as I expect it to, it will force China to accelerate its reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse.
The writer is an independent economist based in Shanghai and former chief economist for Asia Pacific at Morgan Stanley
I CAN imagine the Treasury secretary’s face turning pale as he is told by the attorney general that one of the financial institutions on government life support has been indicted by a grand jury. Worse, I can imagine the attorney general facing not too subtle pressure from the president’s economic team to go easy on such companies.
This situation is hypothetical, of course, but in March, the F.B.I. director, Robert Mueller, warned Congress that “the unprecedented level of financial resources committed by the federal government to combat the economic downturn will lead to an inevitable increase in economic crime and public corruption cases.” Yet no one has discussed the inherent conflict of interest that the government created when it infused large sums of money into these companies.
The government now has an extraordinarily high fiduciary duty to safeguard the stability and health of companies that received hundreds of billions of bailout money. At the same time, the Justice Department has the duty to indict a corporation if the evidence dictates such severe action — and an indictment is often a death sentence for a corporation. The quandary is obvious. How, then, does the Justice Department bring charges against a corporation that is now owned by the government?
The tsunami of corporate scandals that shook our economy in 2001 — Enron, WorldCom, Adelphia and others — provides us with an instructive example. The Justice Department moved swiftly to bring corporate wrongdoers to justice. But we also learned that when dealing with major companies or industries, we had to carefully consider the collateral consequences of our prosecutions.
Would there be unintended human carnage in the form of thousands of lost jobs? Would shareholders, some of whom had already suffered a great deal, lose more of their investment? What impact would our actions have on the economy? We realized that we had an obligation to minimize the harm to innocent citizens.
Among the options we pursued were deferred prosecution agreements. These court-authorized agreements were not new but under certain circumstances offered more appropriate methods of providing justice in the best interests of the public as well as a company’s employees and shareholders. They avoid the destructiveness of indictments and allow companies to remain in business while operating under the increased scrutiny of federally appointed monitors.
In September 2007, for instance, the Justice Department and the nation’s five largest manufacturers of prosthetic hips and knees reached agreements over allegations that they gave kickbacks to orthopedic surgeons who used a particular company’s artificial hip and knee reconstruction replacement products. The allegations meant that the companies faced indictment, prosecution and a potential end to their businesses.
Think of the effect on the community if these companies had been shuttered: employees would have lost their jobs, shareholders and pensioners would have lost their savings and countless people in need of hip and knee replacement would have been out of luck, as these five companies accounted for 95 percent of the market. The Justice Department could have wiped out an entire industry that has a vital role in American health care.
Instead, the companies paid settlements to the government totaling $311 million. They agreed to be monitored by private sector individuals and firms with reputations for integrity and public service, with the necessary legal and business expertise and the institutional capacity to do the job. The monitoring costs were borne exclusively by the companies, saving taxpayers tens of millions of dollars that could be then used for other investigations and law-enforcement priorities. (I was a paid monitor for one of these companies, Zimmer Holdings.) In these types of circumstances, a deferred prosecution agreement is clearly better for everyone.
The government must hold accountable any individuals who acted illegally in this financial meltdown, while preserving the viability of the companies that received bailout funds or stimulus money. Certainly, we should demand justice. But we must all remember that justice is a value, the adherence to which includes seeking the best outcome for the American people. In some cases it will be the punishing of bad actors. In other cases it may involve heavy corporate fines or operating under a carefully tailored agreement.
In 2001, we did not know the extent of the corporate fraud scandals. Every day seemed to bring news of another betrayal of trust by top executives of another company. But we learned that there was often a better solution than closing those companies. I believe that if we apply to this current crisis the lessons learned a few short years ago, we can achieve the restoration of trust in the financial system and the long-term vitality of the American economy.
John Ashcroft was the United States attorney general from 2001 to 2005.
Some of the wage cuts, like the givebacks by Chrysler workers, are the price of federal aid. Others, like the tentative agreement on a salary cut here at The Times, are the result of discussions between employers and their union employees. Still others reflect the brute fact of a weak labor market: workers don’t dare protest when their wages are cut, because they don’t think they can find other jobs.
Whatever the specifics, however, falling wages are a symptom of a sick economy. And they’re a symptom that can make the economy even sicker.
First things first: anecdotes about falling wages are proliferating, but how broad is the phenomenon? The answer is, very.
It’s true that many workers are still getting pay increases. But there are enough pay cuts out there that, according to the Bureau of Labor Statistics, the average cost of employing workers in the private sector rose only two-tenths of a percent in the first quarter of this year — the lowest increase on record. Since the job market is still getting worse, it wouldn’t be at all surprising if overall wages started falling later this year.
But why is that a bad thing? After all, many workers are accepting pay cuts in order to save jobs. What’s wrong with that?
The answer lies in one of those paradoxes that plague our economy right now. We’re suffering from the paradox of thrift: saving is a virtue, but when everyone tries to sharply increase saving at the same time, the effect is a depressed economy. We’re suffering from the paradox of deleveraging: reducing debt and cleaning up balance sheets is good, but when everyone tries to sell off assets and pay down debt at the same time, the result is a financial crisis.
And soon we may be facing the paradox of wages: workers at any one company can help save their jobs by accepting lower wages, but when employers across the economy cut wages at the same time, the result is higher unemployment.
Here’s how the paradox works. Suppose that workers at the XYZ Corporation accept a pay cut. That lets XYZ management cut prices, making its products more competitive. Sales rise, and more workers can keep their jobs. So you might think that wage cuts raise employment — which they do at the level of the individual employer.
But if everyone takes a pay cut, nobody gains a competitive advantage. So there’s no benefit to the economy from lower wages. Meanwhile, the fall in wages can worsen the economy’s problems on other fronts.
In particular, falling wages, and hence falling incomes, worsen the problem of excessive debt: your monthly mortgage payments don’t go down with your paycheck. America came into this crisis with household debt as a percentage of income at its highest level since the 1930s. Families are trying to work that debt down by saving more than they have in a decade — but as wages fall, they’re chasing a moving target. And the rising burden of debt will put downward pressure on consumer spending, keeping the economy depressed.
Things get even worse if businesses and consumers expect wages to fall further in the future. John Maynard Keynes put it clearly, more than 70 years ago: “The effect of an expectation that wages are going to sag by, say, 2 percent in the coming year will be roughly equivalent to the effect of a rise of 2 percent in the amount of interest payable for the same period.” And a rise in the effective interest rate is the last thing this economy needs.
Concern about falling wages isn’t just theory. Japan — where private-sector wages fell an average of more than 1 percent a year from 1997 to 2003 — is an object lesson in how wage deflation can contribute to economic stagnation.
So what should we conclude from the growing evidence of sagging wages in America? Mainly that stabilizing the economy isn’t enough: we need a real recovery.
There has been a lot of talk lately about green shoots and all that, and there are indeed indications that the economic plunge that began last fall may be leveling off. The National Bureau of Economic Research might even declare the recession over later this year.
But the unemployment rate is almost certainly still rising. And all signs point to a terrible job market for many months if not years to come — which is a recipe for continuing wage cuts, which will in turn keep the economy weak.
To break that vicious circle, we basically need more: more stimulus, more decisive action on the banks, more job creation.
Credit where credit is due: President Obama and his economic advisers seem to have steered the economy away from the abyss. But the risk that America will turn into Japan — that we’ll face years of deflation and stagnation — seems, if anything, to be rising.
SINGAPORE, May 5 (Reuters) - Citigroup's C.N Asian wealth management chief said business has improved in 2009 and clients were reducing their cash levels by investing in stocks and bonds, a turnaround from their defensive stance late last year.
The comments underline cautious optimism from Citi, which along with UBS and HSBC, ranks among the top three players in Asian private banking.
Wealth management suffered badly last year as Asia's rich shunned risky, high margin financial products and build up cash reserves due to mounting losses from volatile markets.
"The paranoia that gripped the market last year has eased off," Aamir Rahim, CEO Asia-Pacific of Citi Global Wealth Management, told Reuters. "People are more comfortable taking risk, but are much more disciplined about it.
"We've actually seen an improvement in the first few months of this year month-on-month in the Asian business and we continue to see that," he said in interview on Tuesday.
Rahim said clients have begun to put some money into markets.
"They are probably still 50 percent long cash. Late last year they were in the range of 70-80 percent in cash," he said.
Citigroup Wealth Management has over 1,200 people in Asia-Pacific excluding Japan and including Smith Barney staff in Australia.
Late last year Citi cut 150 jobs in its Asian wealth management arm, sources told Reuters, and in recent weeks its competitors such UBS and HSBC have cut hundreds of jobs in Asia.
Rahim, 47, who has been with Citi in Hong Kong since 1994, said the wealth management unit would try to keep costs down, but at the same time was looking to hire high-quality bankers.
"We are looking for high quality talent to bring into the private bank, we are obviously restructuring our business and our expense base in a manner that befits the current environment and our future strategy as a firm."
RALLY MAY CONTINUE
Rahim said it was difficult to predict financial markets, which were rallying because investors were sensing the global economy was bottoming as unemployment slowed and the manufacturing sector began to recover from steep declines.
"I think the rally has some more to go, but ultimately the market will refocus on fundamentals, refocus on bank strength, refocus on liquidity," he said. "These factors will likely be a deciding factor in whether it's a bear market rally or the beginning of a turnaround."
World stocks raced to their highest level in almost four months on Tuesday, leading the benchmark MSCI world equity index to turn positive for the year.
Rahim, previously co-head of fixed income, currencies and commodities at Citi, said markets would continue to remain volatile therefore Citi is advising clients to protect their downside by buying derivatives such as options.
"In that environment the best way to enter the market and capitalise on it is to actually have stop-losses and be disciplined in your trading."
But Rahim, who is also an avid collector of Chinese contemporary art, said he sees the volatile market as an opportunity to grow the business as clients want quality advice on how to build or rebuild their assets.
"This is the best wealth creation opportunity we have seen in a generation," said Rahim. "I think billionaires of the future will be created in the next 24-36 months. In that environment you've got to have a view."
Economist disappointed to find he’s not that gloomy
By Jame DiBiasio 4 May 2009
Charles Dumas says things in the United States are moving roughly in the right direction; pity about China.
Charles Dumas, chief economist at Lombard Street Research, says he finds himself in an unusual position; he's not as pessimistic as most people. "I'm less pessimistic than the consensus regarding the United States," he said at the AsianInvestor and FinanceAsia-sponsored conference on Distressed & Troubled Asset Investing last week.
Dumas has been a proponent since 2004 of the argument that excess savings in China, Japan, Germany and other countries played a direct role in the financial bubble of the US and Britain. Without the 'savings glut' there would have been no extravagant consumption binge, because US interest rates and spreads on Treasuries would have soared.
"Excess savings caused the trouble, and now savings glut countries are suffering the most because of deficient demand," Dumas says.
Important trends in the current economy include the massive rise of US government debt as a proportion to GDP, which he calculates to be about 250%, including bailouts, bank guarantees and so on. They also include the reversal of three decades of leveraging, a shrinkage in Asian and European excess savings, and the emergence of China as the world's biggest source of economic growth.
Dumas says the global recession could have been healed if savings-glut countries had consumed more; instead, their incomes have collapsed because their exporters have lost their customers. Policy blunders in the US made things worse, in particular the Fed's initial moves to cut interest rates. These had no impact on mortgage rates, for example, and led instead to inflation, notably in commodity prices. This turned a downturn into outright recession in early 2008.
The collapse of Lehman Brothers meant that inflation was no longer a threat, and since then US policy has improved, Dumas says. Falling oil prices and reduced consumption means US real incomes have risen, and US savings rates have gone from zero to about 4%. That's not enough to address the global imbalances, but Dumas says the inability of households to borrow will continue to force US savings rates closer to 8-9%. The fiscal stimulus package will also improve American's income, and the Fed's subsequent quantitative easing provides a floor on prices. (The timing for interest rate cuts had changed.)
Dumas is less impressed with the Geithner plan for rejuvenating interbank lending. The stress test and the public/private investment partnership for toxic assets don't require banks to value the dodgy CDOs on their books. He says it is a conflict of interest for Geithner as the regulator to encourage banks to sell assets to private/public JVs co-owned by Geithner -- although US taxpayers may not see the problem with a Fed-owned JV making lots of money.
The upshot, however, is that Dumas predicts the US economy is likely to recover first, and its real financial assets are already attracting investor interest. Corporate profits ex-financials are making modest gains -- and he's not too bothered if the banks' profits lead to consolidation, "as we need fewer banksters". He says there is good money in both investment-grade and high-yield credit.
The problem with this outlook is Asia, and China in particular. Export growth rates in China, Japan and Germany have turned negative, dropping 20-40%, which creates GDP losses of 7-10%. Japan and Germany will experience worse recessions than America and Britain. China's fiscal stimulus has smoothed its fall, but Dumas warns the country is storing up future trouble by relying on infrastructure investment rather than boosting consumption. He doesn't think the Chinese economy can recover without US consumption improving first, particularly if China ends up building its own 'bridges to nowhere'.
Dumas says as long as Germany sticks to budget balancing, it will not enjoy real growth for several years. Moreover, all exporting/savings nations are vulnerable to the rise of protectionism in America. "China's recovery is temporary and the others are dead in the water," Dumas says. "The crisis will resume because the imbalances in savings-glut countries are not being addressed."
U.S. Banks Must Raise Debt Without FDIC to Repay TARP
By Rebecca Christie
May 5 (Bloomberg) -- Banks that want to exit from the U.S. government’s capital injections must demonstrate they can issue debt to private investors without a Federal Deposit Insurance Corp. guarantee, according to people familiar with the matter.
The Treasury will unveil conditions for repaying the Troubled Asset Relief Program money as soon as tomorrow, the people said on condition of anonymity. Banks generally must apply to the Treasury and secure permission from their bank supervisor in order to pay back the government; so far only a handful of small banks have done so.
The new guidance would come before the Federal Reserve’s May 7 publication of results of stress tests on U.S. banks. People familiar with the matter said yesterday that about 10 of the firms will be deemed to need additional capital.
Firms that don’t need stronger buffers may seek to quickly retire existing government stakes. Banks including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Northern Trust Corp. have said they want to repay the money. Both New York-based companies sold debt without FDIC guarantees in the past month, as has Chicago-based Northern Trust.
“My hope is this helps with clarity on who are the winners and who are the losers,” said Joel Conn, president of Lakeshore Capital Inc., which invests $90 million.
Bank of New York
Earlier today, Bank of New York Mellon, another bank taking part in the stress tests, raised $1.5 billion of debt, without FDIC backing. The bank said proceeds from the sale will be used to help repay the $3 billion capital injection it got from the TARP last year.
FDIC Chairman Sheila Bair has said banks need to wean themselves off the debt guarantees as financial markets heal from last year’s crisis. In March, the FDIC extended the time in which banks could issue government-guaranteed debt, while also announcing plans to raise fees on the program. FDIC spokesman Andrew Gray declined to comment today on the Treasury’s repayment policy.
The Treasury’s requirement is that banks must demonstrate an ability to borrow without the government guarantee and does not affect outstanding debt, the people familiar with the matter said. On April 14, a Goldman Sachs executive said the bank did not see a direct link between the debt guarantees and the Treasury’s capital injections.
Debt Sales
“We still have some capacity under the FDIC-guaranteed at pretty attractive spreads,” said David Viniar, the company’s chief financial officer, in an April 14 conference call with investors. “We’ll continue to use that when it’s available, but we expect to continue to raise unguaranteed debt when it’s available as well.”
For banks that need to deepen their reliance on government capital after the stress tests, officials may set limits on their dividends and political lobbying. While it’s unlikely to influence day-to-day operations at the firms, the government won’t be a “hands-off” investor and will take steps to ensure that management is “effective,” Fed Chairman Ben S. Bernanke told lawmakers today.
“It’s obviously not our intention or desire to have long- term government ownership of banks,” Bernanke said at the congressional Joint Economic Committee. Still, he added that it would likely be a “few years” before banks can end their dependence on government capital.
Officials’ “top priority” will be working with the banks to get them on a path toward repaying the taxpayer, including sales of assets or raising private capital, the Fed chief said.
The Obama administration has yet to detail how it intends to implement executive compensation guidelines enacted by Congress, another restriction faced by banks that keep taxpayer funds. The rules limit incentive pay for top executives at banks receiving at least $500 million in rescue funds from the Treasury.
DETROIT (Reuters) - General Motors Corp on Tuesday detailed plans to all but wipe out the holdings of remaining shareholders by issuing up to 60 billion new shares in a bid to pay off debt to the U.S. government, bondholders and the United Auto Workers union.
The unusual plan, which was detailed in a filing with U.S. securities regulators, would only need the approval of the U.S. Treasury to proceed since the U.S. government would be the majority shareholder of a new GM, the company said.
The flood of new stock issuance that could be unleashed has been widely expected by analysts who have long warned that GM's shares could be worthless whether the company restructures out of court or in bankruptcy.
The debt-for-equity exchanges detailed in the filing with the Securities and Exchange Commission would leave GM's stock investors with just 1 percent of the equity in a restructured automaker, ending a long run when the Dow component was seen as a bellwether for the strength of the broader U.S. economy.
GM shares closed on Tuesday at $1.85 on the New York Stock Exchange. The stock would be worth just over 1 cent if the first phase of GM's restructuring moves forward as described.
Once GM has issued new shares to pay off its debt to the U.S. government, bondholders and its major union, it said it would then undertake a 1-for-100 reverse stock split.
Such a move would take the nominal value of the stock back to near where it had been before the flood of new shares. But in the process, GM's existing shareholders would see their stake in the 100-year-old automaker all but wiped out.
The automaker said it expected to draw another $2.6 billion from the U.S. Treasury before a June 1 deadline set by the Obama administration for it to reach agreements with all of its key stakeholders.
That borrowing would take GM's debt to the U.S. government to $18 billion, and the automaker said it expected to have to borrow a total of nearly $27 billion.
GM has asked its three major creditor groups to write off at least $43 billion in debt in exchange for ownership of a restructured company.
By contrast, the current market value of GM's current 610 million shares is about $1.7 billion.
The stock has lost about 43 percent of its value since the start of the year.
GM bondholders, who are owed $27 billion, have also been offered new stock in exchange for writing off debt in a bond exchange the automaker launched last week.
The automaker is targeting a debt-reduction of at least $24 billion of its bond debt under the plan and has warned that it could be forced into bankruptcy if that cannot be achieved.
Representatives of GM bondholders, who would be given a 10-percent stake in the new company under the automaker's restructuring, have said they are being offered an unfairly low payout. They have asked instead for a majority stake in the restructured company.
But GM has asked the U.S. autos task force to accept a majority stake in a new GM in exchange for at least half of the government debt that the automaker has run up over the past four months.
Chief Executive Fritz Henderson said on Tuesday that the U.S. Treasury, which oversees the task force, was continuing to evaluate the company's restructuring plan and its progress.
"The Treasury will continue their evaluation through the month, which is fine. But we're not waiting, we're implementing. The bond exchange needed to be launched when we launched it," Henderson said. "Now we'll have to see."
In its filing, GM said it was in "ongoing discussions" with the U.S. Treasury on its proposal to swap government debt for equity in the largest U.S. automaker.
Finally, GM is negotiating with the UAW and is seeking to get the union to take GM stock in exchange for $10 billion owed to a trust fund for retiree healthcare.
Those talks were set to resume this week in Detroit, Henderson said.
GM said in its SEC filing that its three-pronged effort to slash debt could take its total authorized share issuance -- including new and existing shares -- to 62 billion shares.
In the midst of the worst economic crisis since the Great Depression, a new world order is emerging, with its center gravitating towards China. The statistics speak for themselves. The International Monetary Fund (IMF) predicts the world's gross domestic product (GDP) will shrink by an alarming 1.3% this year. Yet, defying this global trend, China expects an annual economic growth rate of 6.5% to 8.5%.
During the first quarter of 2009, the world's leading stock markets combined fell by 4.5%. In contrast, the Shanghai stock exchange index leapt by 38%. In March, car sales in China hit a record 1.1 million, surpassing sales in the US for the third month in a row.
"Despite its severe impact on China's economy, the current financial crisis also creates opportunity for the country," said Chinese President Hu Jintao. It can be argued that the present fiscal tsunami has, in fact, provided China with a chance to discard its pioneering reformer's leading guideline. "Hide your capability and bide your time" was the way former head of the communist party Deng Xiaoping once put it. No longer.
Recognizing that its time has indeed come, Beijing has decided to play an active, interventionist role in the international financial arena. Backed by China's US$2 trillion in foreign exchange reserves, its industrialists have gone on a global buying spree in Africa and Latin America, in neighboring Russia and in Kazakhstan, to lock up future energy supplies for its economy. At home, the government is investing heavily not only in major infrastructure, but also in its much neglected social safety net, its healthcare system, and long overlooked rural development projects - partly to bridge the increasingly wide gap between rural and urban living standards.
Among those impressed by the strides Beijing has made since launching its $585 billion stimulus package in September is the Barack Obama administration. It views the continuing rise in China's GDP as an effective corrective to the contracting economies of almost every other country, except India. So it has stopped arguing that, by undervaluing its currency - the yuan - with respect to the US dollar, China is making its products too cheap, thus putting competing American goods at a disadvantage in foreign markets.
The secret of China's success
What is the secret of China's continuing success in the worst of times? As a start, its banking system- state-controlled and flush with cash - has opened its lending spigots to the full, while bank credit in the US and the European Union (EU) remains clogged, if not choked off. Therefore, consumer spending and capital investment have risen sharply.
Ever since China embarked on economic liberalization under the leadership of Deng Xiaoping in 1978, it has experienced economic ups and downs, including high inflation, deflation, recessions, uneven development of its regions, and a widening gap between the rich and the poor, as well as between the urban and the rural - all characteristics associated with capitalism.
While China's communist leaders have responded with a familiar range of fiscal and monetary tools, such as adjusting interest rates and money supply, they have achieved the desired results faster than their capitalist counterparts. This is primarily because of the state-controlled banking system where, for instance, government-owned banks act as depositories for the compulsory savings of all employees.
In addition, the "one couple, one child" law, enacted in 1980 to control China's exploding population, and a sharp decline in the state's social-support network for employees in state-owned enterprises, compelled parents to save. Add to this the earlier collapse of a rural cooperative health insurance program run by agricultural cooperatives and communes and many Chinese parents were left without a guarantee of being cared for in their declining years. This proved an additional incentive to set aside cash. The resulting rise in savings filled the coffers of the state-controlled banks.
On top of that came China's admission to the World Trade Organization (WTO) in 2001, which led to a dramatic jump in its exports and an average economic expansion of 12% a year.
When the credit crash in North America and the EU caused a powerful drop in China's exports, throwing millions of migrant workers in the industrialized coastal cities out of work, the authorities in Beijing focused on controlling the unemployment rate and maintaining the wages of the employed. They can now claim an urban unemployment rate of a mere 4.2% because many of the laid-off factory workers returned to their home villages. [1] Those who did not were encouraged to enroll in government-sponsored retraining programs to acquire higher skills for better jobs in the future.
Whereas most Western leaders could do nothing more than castigate bankers filling their pockets with bonuses as the balance sheets of their companies went crimson red, the Chinese government compelled top managers at major state-owned companies to cut their salaries by 15% to 40% before tinkering with the remuneration of their workforce.
To ensure the continued rapid expansion of China's economy, which is directly related to the country's level of energy consumption, its leaders are signing many contracts for future supplies of oil and natural gas with foreign corporations.
Energy security
Once China became an oil importer in 1993, its imports doubled every three years. This made it vulnerable to the vagaries of the international oil market and led the government to embed energy security in its foreign policy. It decided to participate in hydrocarbon prospecting and energy production projects abroad as well as in transnational pipeline construction. By now, the diversification of China's foreign sources of oil and gas (and their transportation) has become a cardinal principle of its foreign ministry.
Conscious of the volatility of the Middle East, the leading source of oil exports, China has scoured Africa, Australia, and Latin America for petroleum and natural gas deposits, along with other minerals needed for industry and construction. In Africa, it focused on Angola, Congo, Nigeria, and Sudan. By 2004, China's oil imports from these nations were three-fifths those from the Persian Gulf region.
Nearer home, China began locking up energy deals with Russia and the Central Asian republic of Kazakhstan long before the current collapse in oil prices and the global credit crunch hit. Now, reeling from the double whammy of low energy prices and the credit squeeze, Russia's leading oil company and pipeline operator recently agreed to provide 300,000 barrels per day (bpd) in additional oil to China over 25 years for a $25 billion loan from the state-controlled China Development Bank. Likewise, a subsidiary of the China National Petroleum Corp agreed to lend Kazakhstan $10 billion as part of a joint venture to develop its hydrocarbon reserves.
Beijing continued to make inroads into the oil and gas regions of South America. As relations between Hugo Chavez's Venezuela and the George W Bush administration worsened, ties with China strengthened. In 2006, during his fourth visit to Beijing since becoming president in 1999, Chavez revealed that Venezuela's oil exports to China would treble in three years to 500,000 bpd. Along with a joint refinery project to handle Venezuelan oil in China, the Chinese companies contracted to build a dozen oil-drilling platforms, supply 18 oil tankers, and collaborate with PdVSA, the state-owned Venezuelan oil company, to explore new oilfields in Venezuela.
During Chinese Vice President Xi Jinping's tour of South America in January this year, the China Development Bank agreed to loan PdVSA $6 billion for oil to be supplied to China over the next 20 years. Since then China has agreed to double its development fund to $12 billion, in return for which Venezuela is to increase its oil shipments from the current 380,000 bpd to one million bpd.
The China Development Bank recently decided to lend Brazil's petroleum company $10 billion to be repaid in oil supplies in the coming years. This figure is almost as large as the $11.2 billion that the Inter-American Development Bank lent to various South American countries last year. China had established its commercial presence in Brazil earlier by offering lucrative prices for iron ore and soybeans, the export commodities that have fueled Brazil's recent economic growth.
Similarly, Beijing broke new ground in the region by giving Buenos Aires access to more than $10 billion in yuan. Argentina was one of three major trading partners of China given this option, the others being Indonesia and South Korea.
Will the yuan become an international currency?
Without much fanfare, China has started internationalizing the role of its currency. It is in the process of increasing the yuan's role in Hong Kong. Though part of China, Hong Kong has its own currency, the Hong Kong dollar. Since Hong Kong is one of the world's freest financial markets, the projected arrangement will aid internationalization of the yuan.
In retrospect, an important aspect of the Group of 20 summit in London in early April centered around what China did. It aired its in-depth analysis of the current fiscal crisis publicly and offered a bold solution.
In a striking on-line article, Zhou Xiaochuan, governor of China's central bank, referred to the "increasingly frequent global financial crises" that have embroiled the world. The problem could be traced to August 1971, when president Richard Nixon took the US dollar off the gold standard. Until then, $35 bought one ounce of gold stored in bars in Fort Knox, Kentucky - the rate having been fixed in 1944 during World War II by the Allies at a conference in Bretton Woods, New Hampshire. At that time, the greenback was also named as the globe's reserve currency. Since 1971, however, it has been backed by nothing more tangible than the credit of the United States.
A glance at the past decade and a half shows that, between 1994 and 2000 alone, there were at least nine countries had economic crises that had an impact on the global economy: Mexico (1994), Thailand-Indonesia-Malaysia-South Korea-the Philippines (1997-98), Russia and Brazil (1998), and Argentina (2000).
According to Zhou, financial crises resulted when the domestic needs of the country issuing a reserve currency clashed with international fiscal requirements. For instance, responding to the demoralization caused by the 9/11 terror attacks, the US Federal Reserve Board drastically reduced interest rates to an almost-record low of 1% to boost domestic consumption at a time when rapidly expanding economies outside the United States needed higher interest rates to cool their growth rates.
"The [present] crisis called again for creative reform of the existing international reserve currency," Zhou wrote. "A super-sovereign reserve currency managed by a global institution could be used to both create and control global liquidity. This will significantly reduce the risks of a future crisis and enhance crisis management capability."
He then alluded to the Special Drawing Rights (SDR) of the International Monetary Fund. The SDR is a virtual currency whose value is set by a currency "basket" made up of the US dollar, the European euro, the British pound, and the Japanese yen, all of which qualify as reserve currencies, with the greenback being the leader. Ever since the SDR was devised in 1969, the IMF has maintained its accounts in that currency.
Zhou noted that the SDR has not yet been allowed to play its full role. If its role was enhanced, he argued, it might someday become the global reserve currency.
Zhou's idea received a positive response from the Kremlin, which suggested adding gold to the IMF's currency basket as a stabilizing element. Its own currency, the rouble, is already pegged to a basket that is 55% the euro and 45% the dollar. Within a decade of its launch, the euro has become the second most held reserve currency in the world, garnering nearly 30% of the total compared to the dollar's 67%.
Treasury Secretary Timothy Geithner's immediate reaction to Zhou's article was: "China's suggestion deserves some consideration." Nervous financial markets in the US took this as a sign from the Treasury secretary that the dollar was losing its primacy. Geithner retreated post-haste, and President Obama quickly joined the fray, saying: "I don't think there is need for a global currency. The dollar is extraordinarily strong right now."
Actually, maintaining the customary Chinese discretion, Zhou never mentioned the state of the US dollar in his article, nor did he even imply that the yuan should be included in the super-sovereign currency he proposed. Yet it was clear to all that at a crucial moment - with world leaders about to meet in London to devise a way to defuse the most severe fiscal crisis since the Great Depression - that a China which had bided its time, even though it had the third-largest economy on the planet, was now showing its strong hand.
All signs are that Washington will be unable to restore the status quo ante after the present "great recession" has finally given way to recovery. In the coming years, its leaders will have to face reality and concede, however reluctantly, that the economic tectonic plates are shifting - and that it is losing financial power to the thriving regions of the Earth, the foremost of which is China.
Note
1. There continues to be considerable debate on the accuracy of statistics issued by the Chinese government. An annual report, The Analysis of and Forecasts for Social Development (or the Blue Book on Chinese Society), released in December 2008 by the Chinese Academy of Social Science, said the unemployment rate in urban areas was 9.4% at that time, twice the registered rate of 4.5% released by the Human Resources and Society Security Ministry. In March 2009, Yin Weimin, China's human resources and social security minister, said that the registered urban unemployment rate was at a three-year high of 4.2%.
* Recent short selling signals market view of CCB stake sale
* BofA's CCB stake coming unlocked is worth $8.3 bln
* BofA eligible for $165 mln CCB dividend from June 23
* CCB shares off 1.5 percent in Hong Kong
By Michael Flaherty and Parvathy Ullatil May 6, 2009
HONG KONG, May 6 (Reuters) - Bank of America could soon sell shares in China's second-largest bank that could raise about a quarter of the $34 billion in additional capital it is reported to need after a government stress test.
Bank of America is allowed to sell 13.5 billion shares in China Construction Bank -- a 6 percent stake worth around $8.3 billion -- when a lock-up period ends on Thursday.
That would draw down BofA's stake in the Chinese lender to 10.6 percent, a level CCB has already said is reasonable. Western banks are aware that selling out of Chinese banks is not always well received by Beijing politicians.
CCB shares dipped 1.5 percent in Hong Kong on Wednesday.
Three Hong Kong-based investment bankers who spoke to Reuters said it is not yet clear how much, if any, of its CCB shares BofA will sell when the lock-up ends. The bankers were not authorised to speak publicly about the matter.
"Bank of America intends to remain a long-term shareholder and strategic partner in China Construction Bank," said BofA spokesman Scott Silvestri.
Raising money by selling the CCB stake would help BofA boost its capital at a critical time for the bank, which has been deemed to need an additional $34 billion in capital after stress tests in the United States, a source familiar with the results told Reuters.
"There has been healthy short selling in CCB shares in recent days so the market is factoring in a very high chance that BOA will sell part of its shares this week," said Philip Chan, head of research at CAF Securities, the research arm of Agricultural Bank of China.
"With the stress test results also due on May 7 and the market expecting BofA to raise capital there will be pressure on the management to divest some non-core assets," he said.
BofA is eligible to receive a $165 million CCB dividend if it waits until after June 23, according to CCB's last earnings release.
In June 2005, BofA agreed to pay $3 billion for a 9 percent stake in CCB -- a shareholding that later grew to 16.6 percent. The deal, like other Western banks buying into Chinese lenders, was meant to be a long-term, cross-border partnership.
But the financial crisis has led several Western banks to sell their stakes in Chinese banks to raise much-needed cash.
Shares in CCB have risen more than 12 percent so far this year, in line with rival ICBC, but underperforming a 39 percent jump at Bank of China.
Industrial and Commercial Bank of China is the largest bank in the world by market value, while CCB is second.
"BAC (Bank of America) could increase capital through sales of businesses such as FirstRepublic and Columbia and investments such as CCB," analysts at JP Morgan wrote earlier this week.
Shares in ICBC dropped 5.9 percent on April 27, a day before a portion of the strategic foreign holding in the bank was freed for sale. The stock bounced right back after Allianz and American Express sold a part of their stake.
Market sentiment: Faber et al take on ‘green shoot ennui’
Posted by Gwen Robinson May 05, 2009
After end-of-the-world swine flu hysteria momentarily transfixed investors, sentiment appears to be shifting. The pundits are back out in droves - many predicting a robust comeback for stocks or, at the very least, peddling the “green shoots” botanical analogy that we’re already heartily sick of.
Even Marc “Dr Doom” Faber, in his latest monthly newsletter to clients, concedes that perhaps, just perhaps, the S&P500 has bottomed out and things may improve from here. Not only that — after boosting gold consistently for months, he warns that precious metal prices may correct further on the downside in coming months.
One can never expect Faber to be totally optimistic (it would ruin his reputation), so he tempers this benign view with the soothing remark: “Rest assured dear readers: economic, financial, pandemic, and increasingly social and geopolitical problems are plentiful and won’t disappear anytime soon”:
If the swine flu becomes a serious problem (as I believe it will), then obviously it will be another nail in the coffin of the global economy. I hate to think about what will happen when the Swine flu reaches Africa and countries like India and China where intensive animal husbandry methods place swine and poultry close to humans and where sanitary conditions, poverty and a poor health infrastructure will be an extremely fertile ground for the swine flu virus (also further mutations).
Just to throw in another out-of-field problem for investor sentiment, Faber adds that another key problem could emerge from Afghanistan, and neighbouring Pakistan - which, he reminds us, possesses nuclear weapons. But, as he notes from the recent string of bleak US data, the stock market “will usually respond with an upturn long before the ‘news’ turns positive”:
I suppose the key for a low is that the news becomes less bad than was expected, which was the case in the US since March 6, 2009 when the S&P 500 bottomed out at 666…
Why this might be an important low in Faber’s view is that the “market’s advance has been broadening and that more and more groups such as airlines, homebuilders and cyclicals like Dow Chemical, International Paper and Alcoa are showing signs of having bottomed out”.
For this and other reasons, however, Faber advises investors to “avoid Treasury bonds and short them on any rebound”.
Pestilence and nuclear Armageddon aside, market watchers overall appear to be moving out of their bear phase. As SmartMoney notes:
After a week dominated by swine flu fears, corporate earnings, Chrysler’s bankruptcy and debate about the government stress tests’ likely effects on wobbly banks, our pundits’ views on recovery were no firmer, but neither were they weaker.
So-called green shoots — lower jobless claims, increased consumer confidence, a lower-than-expected drop in first-quarter corporate profits and the 9.4% April rise of the S&P 500 index (its best showing since March 2000) — are starting to add up. However, a debate still rages on about whether those are genuine positive market signals or blips that will give way to more bad news next week.
Traders’ Narrative, however, warns in an earlier post on market sentiment:
You know the old Wall St. adage, “Sell in May and go away”. Well, here we are. We have now officially entered the time period which has historically been most difficult for the stock market.
So far we’ve had a tremendous rally off the March lows: the S&P 500 index gained 28.4% and for the two months of March and April, it has risen 25% with most of it coming from March. April’s gain was 8.2%
Looking at market cycles, this is rare. To see such a similar strong performance for the months of March and April we would have to go back to the 1930’s where intense bear market rallies were the norm. In those times, it wasn’t a good time to put fresh money to work (hence the label of bear market rallies and the annual cyclical nature of returns).
SmartMoney’s “naysayers” include Morgan Keegan economist Donald Ratajczak, who warned on April 27 that the emergence of a few green blades of grass only means “the lawn is dying at a slower rate”, notes SmartMoney, adding: “And then there are the market watchers who are just sick of all the prognostications — and the metaphors that come with them”.
ISI Group founder Ed Hyman sums it up with his line in an April 27 report: “This is getting old and tedious”. Unfortunately for Hyman - and for us - the clichés probably won’t end any time soon - not least because whether you believe in swine flu or not, global hype over the outbreak has probably temporarily derailed a recovery.
What’s remarkable, as SmartMoney notes, is how the Dow shook off last week’s bad news to heard for its sixth out of seven positive weeks. But according to Ed Yardeni, founder of Yardeni Research, and Thomas Lee, US strategist at JPMorgan, a bull market isn’t in the offing - yet.
In the absence of a fresh catastrophe, markets will remain range-bound, according to Yardeni, whose top forecast has the S&P hitting 1000. Lee, in a Wednesday note on the business cycle, cautioned that smart investors should use history as a guide and predicted that the next few weeks could shed light on how and when recovery arrives
As we’ve seen in nearly every recession’s bottoming process, we could be headed for a “W” shaped recovery that includes another market tumble, he warns:
“In other words, the current rally still falls within what would be regarded as the initial move prior to a retest,” he says. “A rally past the first week of May would force us to reconsider this view, as it would suggest a ‘V’ bottom is more likely.”
In its latest post, however, Traders’ Narrative points to a supposed “tsunami of cash just waiting to be invested”. Just don’t get too excited:
A build up of cash is normal in a bear market but before we can transition to a bull market it needs to be put to work. As people become convinced that the worst is behind us, they start to take more risk and begin to put their cash into the market. So unfortunately, just noticing a massive pile of cash doesn’t really help us unless we can somehow pinpoint when and with what intensity this billowing mass of liquidity will start to be invested in the stock market.
But to give you an idea of the sheer monstrosity of the potential tsunami of cash, consider this: it currently represents 50% of S&P 500 total capitalization. Needless to say, that is jaw dropping. As it is put to work, even in a trickle, it will put an impregnable floor on almost all equity indices and then drive prices higher. When that may be, can not be determined by this metric itself but by other technical, monetary and sentiment measures.
As for recent US stock rallies: here’s a word from Merrill’s chief economist David Rosenberg (no link), courtesy of Option Armageddon:
You know it’s a low quality rally when the top 50 most heavily shorted stocks are the ones that outperform the most — up 28% in April, an 1,860 basis point spread over the broad equity market.
We reckon, though, that the last word on “green shoot ennui” should go to NihonCassandra, in her latest post on Financial Gitmo:
So hearing Mobius, Cohen, and other pundits speak of bull-markets and greenshoots is predictable. But I reckon that Mssrs Schilling,and Roubini, will in time - once again - more likely be correct insofar as I believe continued recession and mild deflation will predominate longer than optimists (and inflationists)- and in particularly longs, can bear once the shorts have sufficiently covered and the intermediate term optimism rolls over with the continued bleak news flow. Then, the trend-followers will mechanically bail, and reverse positions, prescient programmes and specs, too, will re-establish their shorts, until finally the squeezed-in will, once again get squeezed-out, and those amongst us with weak constitutions will be forced to hide the pills and sharp objects to avoid …. tragedy.
Government has to show it can handle major insolvencies.
By MATTHEW RICHARDSON and NOURIEL ROUBINI MAY 5, 2009
The results of the government's stress tests on banks, to be released in a few days, will not mark the beginning of the end of the financial crisis. If we are to believe the leaks, the results will show that there might be a few problems at some of the regional banks and Citigroup and Bank of America may need some more capital if things get worse. But the overall message is that the sector is in pretty good shape.
This would be good news if it were credible. But the International Monetary Fund has just released a study of estimated losses on U.S. loans and securities. It was very bleak -- $2.7 trillion, double the estimated losses of six months ago. Our estimates at RGE Monitor are even higher, at $3.6 trillion, implying that the financial system is currently near insolvency in the aggregate. With the U.S. banks and broker-dealers accounting for more than half these losses there is a huge disconnect between these estimated losses and the regulators' conclusions.
The hope was that the stress tests would be the start of a process that would lead to a cleansing of the financial system. But using a market-based scenario in the stress tests would have given worse results than the adverse scenario chosen by the regulators. For example, the first quarter's unemployment rate of 8.1% is higher than the regulators' "worst case" scenario of 7.9% for this same period. At the rate of job losses in the U.S. today, we will surpass a 10.3% unemployment rate this year -- the stress test's worst possible scenario for 2010.
The stress tests' conclusions are too optimistic about the banks' absolute health, although their relative assessment is more precise, because consistent valuation methods were used. Still, with Thursday's announcement of the results, it shouldn't be a surprise when the usual suspects emerge. We fear that we are back to bailout purgatory, for lack of a better term. Here are some suggestions for how to extricate ourselves.
First, while Treasury Secretary Timothy Geithner's public-private investment program (PPIP) to purchase financial firms' assets is not particularly popular, we hope the government doesn't give up on it. True, the program offers cheap financing and free leverage to institutional investors, which will lead to the investors overpaying for the assets. But it does promote price discovery and remove the assets from the bank's balance sheets -- necessary conditions to move forward.
And to minimize the cost to taxpayers, banks must not be allowed to cherry-pick which legacy assets to sell. All the risky loans and securities banks were never meant to hold should be on the block. With enough investors participating in the PPIP program, the prices of the assets should be competitive, and there should be no issue of fairness raised by the banks.
Second, the government should stop providing capital, loan guarantees and financing with no strings attached. Banks should understand this. When providing loans to troubled companies, they place numerous restrictions, called covenants, on what these firms can do. These covenants generally restrict the use of assets, risk-taking behavior, and future indebtedness. It would be much better if the government focused on this rather than on its headline obsession with bonuses.
For example, consider the fact that the government, while providing aid to banks, did not restrict their dividend payments. A recent academic study by Viral Acharya, Irvind Gujral and Hyun Song Shin (www.voxeu.org) notes that banks only marginally reduced dividends in the first 15 months of the crisis, paying out a staggering $130 billion in 2007 and 2008. While many banks have been reducing their dividends more recently, bank bailout money had been literally going in one door and out the other.
Consider also recent bank risk-taking. The media has recently reported that Citigroup and Bank of America were buying up some of the AAA-tranches of nonprime mortgage-backed securities. Didn't the government provide insurance on portfolios of $300 billion and $118 billion on the very same stuff for Citi and BofA this past year? These securities are at the heart of the financial crisis and the core of the PPIP. If true, this is egregious behavior -- and it's incredible that there are no restrictions against it.
Third, stress tests aside, it is highly likely that some of these large banks will be insolvent, given the various estimates of aggregate losses. The government has got to come up with a plan to deal with these institutions that does not involve a bottomless pit of taxpayer money. This means it will have the unenviable tasks of managing the systemic risk resulting from the failure of these institutions and then managing it in receivership. But it will also mean transferring risk from taxpayers to creditors. This is fair: Metaphorically speaking, these are the guys who served alcohol to the banks just before they took off down the highway.
And we shouldn't hear one more time from a government official, "if only we had the authority to act . . ."
We were sympathetic to this argument on March 16, 2008 when Bear Stearns ran aground; much less sympathetic on Sept. 15 and 16, 2008 when Lehman and A.I.G. collapsed; and now downright irritated seven months later. Is there anything more important in solving the financial crisis than creating a law (an "insolvency regime law") that empowers the government to handle complex financial institutions in receivership? Congress should pass such legislation -- as requested by the administration -- on a fast-track basis.
The mere threat of this law could be a powerful catalyst in aligning incentives. As the potential costs of receivership are quite high, it would obviously be optimal if the bank's liabilities could be restructured outside of bankruptcy. Until recently, this would have been considered near impossible. However, in 2008 there was a surge in distressed exchanges of debt for equity or preferred equity.
Still, the recent negotiations with Chrysler's creditors suggest large obstacles. The size and complexity of large banks' capital structures make debt-for-equity exchanges an even taller task, particularly because creditors will want to hold out for a full bailout along the lines they have been receiving.
The government should be able to dangle an insolvency law as an incentive to cooperate. This will result in a $1 trillion game of chicken. But given the size of the stakes, and the alternative of the taxpayers continuing to foot the bill, it's the best way forward.
The last year or so has seen a large number of savings and investment “blow-ups”. The scale of some of them – such as the alleged Bernard Madoff Ponzi scheme – is mind-boggling. How did he get away with it for so long, accumulating a fund that grew to nearly $50bn, and why didn’t the SEC stop him? In addition, a number of hedge funds have failed. Some savers have lost deposits at Icelandic and other banks. Given the financial crisis, investors could well ask: is anything safe?
Of course, no investment is completely safe – even governments can eventually devalue their guarantees. The long-term history of financial markets is littered with scandals, and major banking crises seem to reoccur every 20 to 30 years.
So what are the warning signs that investors should look out for – and how can they protect themselves?
My first observation is that, before buying any investment, investors should be prepared to do some research or use an intermediary they can trust to conduct such research on their behalf. Investments should not be made on the spur of the moment in reaction to a tip, hunch or persuasive advertisement. One must be prepared to spend an hour or two looking into the background, record, ethics and credentials of the firm providing the product, its people and the characteristics of the product itself.
If performance claims or deposit returns are well above the norm, be on your guard. The key to investments is understanding products and how they work. If you don’t fully understand it, don’t invest in it.
I was very interested to read recently that David Swensen, the legendary head of the Yale endowment fund, doesn’t invest in quantitative funds (investment funds that use computer models to select securities). He defends his approach by asking “how can you tell the difference between a quant model that works and one that doesn’t? If you don’t understand it, how can you justify putting your money there?”
A good friend who runs a successful fund of hedge funds business shares Swensen’s concerns. He never invested in a Madoff fund because it was not properly explained to him how the exceptionally high and stable returns were made. Beware secrecy and “black box” approaches.
When it comes to investing, only do so with people of the highest integrity. Evaluating people is essential. Beware if there are any blemishes on their character as people normally don’t change. If there are questions about their ethics, or they appear economical with the truth, give them a wide berth.
Unreliable people often tend to be more “flashy” and extrovert. This can be used to cover up other things. Look for people who will admit to mistakes – everyone in investment makes them and they should be open about them. In my experience, people who will not admit to mistakes are dangerous.
A good way to check out a person – and one that is widely used in the private equity world but much less so, in my experience, in the public equity area – is to take confidential references. I think this is the best way to discover someone’s true nature and find out if they might have any shortcomings. Head-hunters often assess people in this way.
But even here, one needs to be on one’s guard for referees who are likely to have a particularly positive or negative bias – the more independent they are, the better. Also, one can assess people by the company they keep – who their advisers are, for example.
Particularly important is the role of auditor. A major warning sign is a fund audited by an unknown, very small audit firm. If you become a very large client, your auditor may not be fully independent.
What applies to managers also applies to advisers. If you are using an adviser, use one you really trust. As a general principle, I think investors are better served by advisers who are paid a flat fee for their advice. As Warren Buffett put it, “never ask a barber if you need a haircut”.
Similar conflicts can arise with the ratings agencies. In the world of collateralised debt obligations, the rating agencies were paid for rating new funds and new structures. I believe this may have clouded their independence.
When I first had some of the more complex structures explained to me, they made little investment sense. If a product doesn’t make sense, avoid it. The returns, and the volatility of returns, for a particular product should be reasonable for the asset class or the investment approach concerned. If they are not, and unless the manager has a very good explanation, this is another warning sign.
Finally, remember the old adage: if it looks too good to be true, it probably is.
Anthony Bolton is president, investment, at Fidelity International. Under his management, the Fidelity Special Situations fund was the top performer in its sector from its launch in 1979 until he stepped down at the end of 2007. He now has a full-time role mentoring Fidelity’s younger fund managers and overseeing Fidelity’s investment process. Next column: July 4
Anthony Bolton, who managed funds for US mutual funds giant Fidelity for almost 30 years, reckons a bull market has begun.
By Genevieve Cua May 2, 2009
WITH all the bumps and disappointments en route to a bottom, most analysts and strategists fight shy of calling a turn in markets. But one veteran is sticking his neck out.
Anthony Bolton, who managed funds for US mutual funds giant Fidelity for almost 30 years, reckons a bull market has begun. And that's despite the March rally seeming to have petered out in the past couple of weeks and the uncertainty now posed by the swine flu outbreak.
'Predicting markets is not easy,' says Mr Bolton. 'There have only been a few times when I have a strong view - and I have a strong view today.'
He cites three factors to back this view: the historical pattern of bull and bear markets, sentiment and valuations. The one factor he doesn't attach much weight to - which currently pre-occupies almost everyone else - is the economy.
'The economy generally looks bullish when the market is at a peak, and bearish when the market is at a low,' he says. 'I don't start with economic indicators. But I'm just starting to see the first economic news that's less bad, such as some of the purchasing managers' indices and manufacturing indices. In the next few months, we'll see more data confirming that the economy is less bad.'
First some background. Mr Bolton managed funds for Fidelity between 1979 and 2007, before he took a back seat to mentor younger managers and analysts. He is best known as a manager of European equities - and especially for managing the Special Situations Fund, where US$1,000 invested in 1979 would have grown to US$125,000 in 2007. This represents annual compound growth of over 20 per cent a year, beating the FTSE All-Share Index by seven percentage points a year.
Mr Bolton has also written two books. The second - Investing Against The Tide - has just been published by FT Prentice Hall. He was recently in Hong Kong, Taiwan and China, where he spoke to advisers and investors. A forum in Taiwan, for instance, was attended by more than 1,100 investors.
Meanwhile, the signs look right - as he sees things.
* First, the pattern of bull and bear markets. The current bear market is the second worst in history after the 1930s. 'Current conditions are different from that,' he says. '(The 1930s bear) followed a huge bull market in the US. We didn't have a bull market quite like that before this downturn. The past 10 years were also the worst for US equities. In terms of patterns, I think we've done enough for the bear market to be finished.'
* The second factor - sentiment - is at a low ebb and the amount of cash sidelined in money market funds is high. 'I see people more cautious now than at any other time in my career,' Mr Bolton says. 'Almost all broker circulars say March was a bear market rally. One statistic I find very compelling is the size of money market funds relative to the size of the stock market.'
In the trough of the bear market of the 1980s, money market funds comprised 25 per cent of the stock market. In the early 1990s trough, the ratio was 20 per cent; and 24 per cent in 2002. Today that ratio stands at 47 per cent. 'There is a huge amount on the sidelines and other sentiment indicators of extreme cautiousness,' Mr Bolton points out.
* Third, valuations are at historic lows. 'If you look at book values, they're at a 40-year low,' he says. 'On PEs, we're very low relative to the average level that the market gets to in a bear market. One ratio I put weight on is free cashflow. That's at a 50-year high for US companies. Those three things say this could be a new bull market.'
But don't expect a raging bull, or economies to surge like they did before the sub-prime crisis exploded. 'I'm talking about a slow upturn because of the financial crisis and debt overhang,' says Mr Bolton. 'We'll be in a low-growth environment. In terms of the stock market, we can say we're already there. We've had the worst 10 years and a very disappointing time. That's why I'm less pessimistic for stocks.'
The current bear market has called into question active management and diversification, both of which seem to have failed. Mr Bolton says crisis conditions tend to cause assets to move in tandem, and government bonds were a haven. 'I strongly feel this is a time not to be in government bonds, but to be in risk assets,' he says. 'I still believe in diversification, but maybe it's protection, as it has been in the past.'
As for active management, he says: 'I passionately believe in the ability to get alpha if you have the resources and skills necessary for it. There is a cyclical element to active management. Alpha is at times easier to get; in a sharp downturn, it is difficult to get. If I'm right and markets are turning or have turned up, alpha will become easier to get.'
He tells punters who invest directly in stocks to do their homework and monitor market sentiment. 'The best opportunity to buy is when everyone hates stocks. You need a contrarian ability. I've been in the industry so long. I think if you get it right 60 per cent of the time, you're doing great.'
The most common denominator of his mistakes is companies with weak balance sheets: 'The private investor needs to learn some accounting to understand whether companies are financially weak or strong from the balance sheet point of view. If they're buying stocks with weak balance sheets, the risks are significantly higher, particularly when conditions change for the company or industry.'
Rather than set a stop loss, investors should have an 'investment thesis' or a rationale to hold a stock, he says. Once that thesis is no longer valid, the stock should be sold - even at a loss. Mr Bolton is mainly a fundamentalist, but uses technical analysis which helps in timing and size decisions. 'If I'm looking at a stock that has done well for seven years, I look at it differently from one that hasn't done well,' he says. 'A stock that has done well has most of the good news in the price. If things change, there are lots of profits that people can take so investors are likely to suffer on the downside.'
As he writes in his latest book, investors should forget the price they paid for a share as it can become a psychological barrier when the price falls. 'The investment thesis is the key - check it regularly. If this changes for the worse and the share is no longer a buy and probably therefore a sell, you should take action regardless of the price being below what you paid. Trying to make money back in a share when you have lost money to date, just to prove your initial thesis was correct, is very dangerous. As a general rule in investment, it's not good practice to try and make it back the way you lost it.'
15 comments:
Chinafornia, Chinazona, Chutah, and Chindaho
What if the U.S. broke up (much like the Soviet Union did in the early 1990s)? According to one Russian professor, it means that Governer Ahnold may need to learn Chinese.
Igor Panarin, a former KGB analyst and popular patron of Russian talk shows, has allegedly drawn up a map of what America will look like after its “moral and economic collapse.” According to Panarin, after a second American civil war and the collapse of the dollar - due to “mass immigration, economic decline and moral degradation” - the United States would break into half a dozen regional sub-entities that would then somehow be taken over by foreign powers.
* Alaska would revert to Russia, and Hawaii would become Chinese or Japanese. * The West Coast (the three Pacific states, joined with Idaho, Nevada, Utah and Arizona in a Californian Republic), would fall to China or at least be under Chinese influence. * A Texas Republic, which would also include New Mexico, Oklahoma and all the other traditionally southern states (except the Carolinas, the Virginias, Kentucky and Tennessee), would similarly be either directly or indirectly under the sway of Mexico. * The aforementioned southern exceptions would join the northeastern states in forming a bloc that might join the European Union. * The rest - all midwestern and western states - would be at Canada’s mercy.
Yes, it’s completely a crack pot theory for any number of reasons (one off the top of our heads: Can you imagine Canadians actually wanting to deal with Detroit?), but it’s also kind of fun to think of a West that’s gone to China. We imagine that most parts of California would look... exactly the same.
If China loses faith the dollar will collapse
By Andy Xie
4 May 2009
Emerging economies such as China and Russia are calling for alternatives to the dollar as a reserve currency. The trigger is the Federal Reserve's liberal policy of expanding the money supply to prop up America's banking system and its over-indebted households. Because the magnitude of the bad assets within the banking system and the excess leverage of its households are potentially huge, the Fed may be forced into printing dollars massively, which would eventually trigger high inflation or even hyper-inflation and cause great damage to countries that hold dollar assets in their foreign exchange reserves.
The chatter over alternatives to the dollar mainly reflects the unhappiness with US monetary policy among the emerging economies that have amassed nearly $10,000bn (€7,552bn, £6,721bn) in foreign exchange reserves, mostly in dollar assets. Any other country with America's problems would need the Paris Club of creditor nations to negotiate with its lenders on its monetary and fiscal policies to protect their interests. But the US situation is unique: it borrows in its own currency, and the dollar is the world's dominant reserve currency. The US can disregard its creditors' concerns for the time being without worrying about a dollar collapse.
The faith of the Chinese in America's power and responsibility, and the petrodollar holdings of the gulf countries that depend on US military protection, are the twin props for the dollar's global status. Ethnic Chinese, including those in the mainland, Hong Kong, Taiwan and overseas, may account for half of the foreign holdings of dollar assets. You have to check the asset allocations of wealthy ethnic Chinese to understand the dollar's unique status.
The Chinese love affair with the dollar began in the 1940s when it held its value while the Chinese currency depreciated massively. Memory is long when it comes to currency credibility. The Chinese renminbi remains a closed currency and is not yet a credible vehicle for wealth storage. Also, wealthy ethnic Chinese tend to send their children to the US for education. They treat the dollar as their primary currency.
The US could repair its balance sheet through asset sales and fiscal transfers instead of just printing money. The $2,000bn fiscal deficit, for example, could have gone to over-indebted households for paying down debts rather than on dubious spending to prop up the economy. When property and stock prices decline sufficiently, foreign demand, especially from ethnic Chinese, will come in volume. The country's vast and unexplored natural resource holdings could be auctioned off. Americans may view these ideas as unthinkable. It is hard to imagine that a superpower needs to sell the family silver to stay solvent. Hence, printing money seems a less painful way out.
The global environment is extremely negative for savers. The prices of property and shares, though having declined substantially, are not good value yet and may decline further. Interest rates are near zero. The Fed is printing money, which will eventually inflate away the value of dollar holdings. Other currencies are not safe havens either. As the Fed expands the money supply, it puts pressure on other currencies to appreciate. This will force other central banks to expand their own money supplies to depress their currencies. Hence, major currencies may take turns devaluing. The end result is inflation and negative real interest rates everywhere. Central banks are punishing savers to redeem the sins of debtors and speculators. Unfortunately, ethnic Chinese are the biggest savers.
Diluting Chinese savings to bail out America's failing banks and bankrupt households, though highly beneficial to the US national interest in the short term, will destroy the dollar's global status. Ethnic Chinese demand for the dollar has been waning already. China's bulging foreign exchange reserves reflect the lack of private demand for dollars, which was driven by the renminbi's appreciation. Though this was speculative in nature, it shows the renminbi's rising credibility and its potential to replace the dollar as the main vehicle of wealth storage for ethnic Chinese.
America's policy is pushing China towards developing an alternative financial system. For the past two decades China's entry into the global economy rested on making cheap labour available to multi-nationals and pegging the renminbi to the dollar. The dollar peg allowed China to leverage the US financial system for its international needs, while domestic finance remained state-controlled to redistribute prosperity from the coast to interior provinces. This dual approach has worked remarkably well. China could have its cake and eat it too. Of course, the global credit bubble was what allowed China's dual approach to be effective; its inefficiency was masked by bubble-generated global demand.
China is aware that it must become independent from the dollar at some point. Its recent decision to turn Shanghai into a financial centre by 2020 reflects China's anxiety over relying on the dollar system. The year 2020 seems remote, and the US will not pay attention to something so distant. However, if global stagflation takes hold, as I expect it to, it will force China to accelerate its reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse.
The writer is an independent economist based in Shanghai and former chief economist for Asia Pacific at Morgan Stanley
Bailout Justice
By JOHN ASHCROFT
May 4, 2009
I CAN imagine the Treasury secretary’s face turning pale as he is told by the attorney general that one of the financial institutions on government life support has been indicted by a grand jury. Worse, I can imagine the attorney general facing not too subtle pressure from the president’s economic team to go easy on such companies.
This situation is hypothetical, of course, but in March, the F.B.I. director, Robert Mueller, warned Congress that “the unprecedented level of financial resources committed by the federal government to combat the economic downturn will lead to an inevitable increase in economic crime and public corruption cases.” Yet no one has discussed the inherent conflict of interest that the government created when it infused large sums of money into these companies.
The government now has an extraordinarily high fiduciary duty to safeguard the stability and health of companies that received hundreds of billions of bailout money. At the same time, the Justice Department has the duty to indict a corporation if the evidence dictates such severe action — and an indictment is often a death sentence for a corporation. The quandary is obvious. How, then, does the Justice Department bring charges against a corporation that is now owned by the government?
The tsunami of corporate scandals that shook our economy in 2001 — Enron, WorldCom, Adelphia and others — provides us with an instructive example. The Justice Department moved swiftly to bring corporate wrongdoers to justice. But we also learned that when dealing with major companies or industries, we had to carefully consider the collateral consequences of our prosecutions.
Would there be unintended human carnage in the form of thousands of lost jobs? Would shareholders, some of whom had already suffered a great deal, lose more of their investment? What impact would our actions have on the economy? We realized that we had an obligation to minimize the harm to innocent citizens.
Among the options we pursued were deferred prosecution agreements. These court-authorized agreements were not new but under certain circumstances offered more appropriate methods of providing justice in the best interests of the public as well as a company’s employees and shareholders. They avoid the destructiveness of indictments and allow companies to remain in business while operating under the increased scrutiny of federally appointed monitors.
In September 2007, for instance, the Justice Department and the nation’s five largest manufacturers of prosthetic hips and knees reached agreements over allegations that they gave kickbacks to orthopedic surgeons who used a particular company’s artificial hip and knee reconstruction replacement products. The allegations meant that the companies faced indictment, prosecution and a potential end to their businesses.
Think of the effect on the community if these companies had been shuttered: employees would have lost their jobs, shareholders and pensioners would have lost their savings and countless people in need of hip and knee replacement would have been out of luck, as these five companies accounted for 95 percent of the market. The Justice Department could have wiped out an entire industry that has a vital role in American health care.
Instead, the companies paid settlements to the government totaling $311 million. They agreed to be monitored by private sector individuals and firms with reputations for integrity and public service, with the necessary legal and business expertise and the institutional capacity to do the job. The monitoring costs were borne exclusively by the companies, saving taxpayers tens of millions of dollars that could be then used for other investigations and law-enforcement priorities. (I was a paid monitor for one of these companies, Zimmer Holdings.) In these types of circumstances, a deferred prosecution agreement is clearly better for everyone.
The government must hold accountable any individuals who acted illegally in this financial meltdown, while preserving the viability of the companies that received bailout funds or stimulus money. Certainly, we should demand justice. But we must all remember that justice is a value, the adherence to which includes seeking the best outcome for the American people. In some cases it will be the punishing of bad actors. In other cases it may involve heavy corporate fines or operating under a carefully tailored agreement.
In 2001, we did not know the extent of the corporate fraud scandals. Every day seemed to bring news of another betrayal of trust by top executives of another company. But we learned that there was often a better solution than closing those companies. I believe that if we apply to this current crisis the lessons learned a few short years ago, we can achieve the restoration of trust in the financial system and the long-term vitality of the American economy.
John Ashcroft was the United States attorney general from 2001 to 2005.
Falling Wage Syndrome
By PAUL KRUGMAN
May 3, 2009
Wages are falling all across America.
Some of the wage cuts, like the givebacks by Chrysler workers, are the price of federal aid. Others, like the tentative agreement on a salary cut here at The Times, are the result of discussions between employers and their union employees. Still others reflect the brute fact of a weak labor market: workers don’t dare protest when their wages are cut, because they don’t think they can find other jobs.
Whatever the specifics, however, falling wages are a symptom of a sick economy. And they’re a symptom that can make the economy even sicker.
First things first: anecdotes about falling wages are proliferating, but how broad is the phenomenon? The answer is, very.
It’s true that many workers are still getting pay increases. But there are enough pay cuts out there that, according to the Bureau of Labor Statistics, the average cost of employing workers in the private sector rose only two-tenths of a percent in the first quarter of this year — the lowest increase on record. Since the job market is still getting worse, it wouldn’t be at all surprising if overall wages started falling later this year.
But why is that a bad thing? After all, many workers are accepting pay cuts in order to save jobs. What’s wrong with that?
The answer lies in one of those paradoxes that plague our economy right now. We’re suffering from the paradox of thrift: saving is a virtue, but when everyone tries to sharply increase saving at the same time, the effect is a depressed economy. We’re suffering from the paradox of deleveraging: reducing debt and cleaning up balance sheets is good, but when everyone tries to sell off assets and pay down debt at the same time, the result is a financial crisis.
And soon we may be facing the paradox of wages: workers at any one company can help save their jobs by accepting lower wages, but when employers across the economy cut wages at the same time, the result is higher unemployment.
Here’s how the paradox works. Suppose that workers at the XYZ Corporation accept a pay cut. That lets XYZ management cut prices, making its products more competitive. Sales rise, and more workers can keep their jobs. So you might think that wage cuts raise employment — which they do at the level of the individual employer.
But if everyone takes a pay cut, nobody gains a competitive advantage. So there’s no benefit to the economy from lower wages. Meanwhile, the fall in wages can worsen the economy’s problems on other fronts.
In particular, falling wages, and hence falling incomes, worsen the problem of excessive debt: your monthly mortgage payments don’t go down with your paycheck. America came into this crisis with household debt as a percentage of income at its highest level since the 1930s. Families are trying to work that debt down by saving more than they have in a decade — but as wages fall, they’re chasing a moving target. And the rising burden of debt will put downward pressure on consumer spending, keeping the economy depressed.
Things get even worse if businesses and consumers expect wages to fall further in the future. John Maynard Keynes put it clearly, more than 70 years ago: “The effect of an expectation that wages are going to sag by, say, 2 percent in the coming year will be roughly equivalent to the effect of a rise of 2 percent in the amount of interest payable for the same period.” And a rise in the effective interest rate is the last thing this economy needs.
Concern about falling wages isn’t just theory. Japan — where private-sector wages fell an average of more than 1 percent a year from 1997 to 2003 — is an object lesson in how wage deflation can contribute to economic stagnation.
So what should we conclude from the growing evidence of sagging wages in America? Mainly that stabilizing the economy isn’t enough: we need a real recovery.
There has been a lot of talk lately about green shoots and all that, and there are indeed indications that the economic plunge that began last fall may be leveling off. The National Bureau of Economic Research might even declare the recession over later this year.
But the unemployment rate is almost certainly still rising. And all signs point to a terrible job market for many months if not years to come — which is a recipe for continuing wage cuts, which will in turn keep the economy weak.
To break that vicious circle, we basically need more: more stimulus, more decisive action on the banks, more job creation.
Credit where credit is due: President Obama and his economic advisers seem to have steered the economy away from the abyss. But the risk that America will turn into Japan — that we’ll face years of deflation and stagnation — seems, if anything, to be rising.
Citi Asia wealth business picks up
* Clients have 50 pct of assets in cash
* CEO says market rally has some more to go
* Citi looking to hire quality bankers
By Saeed Azhar and Jean Yoon
SINGAPORE, May 5 (Reuters) - Citigroup's C.N Asian wealth management chief said business has improved in 2009 and clients were reducing their cash levels by investing in stocks and bonds, a turnaround from their defensive stance late last year.
The comments underline cautious optimism from Citi, which along with UBS and HSBC, ranks among the top three players in Asian private banking.
Wealth management suffered badly last year as Asia's rich shunned risky, high margin financial products and build up cash reserves due to mounting losses from volatile markets.
"The paranoia that gripped the market last year has eased off," Aamir Rahim, CEO Asia-Pacific of Citi Global Wealth Management, told Reuters. "People are more comfortable taking risk, but are much more disciplined about it.
"We've actually seen an improvement in the first few months of this year month-on-month in the Asian business and we continue to see that," he said in interview on Tuesday.
Rahim said clients have begun to put some money into markets.
"They are probably still 50 percent long cash. Late last year they were in the range of 70-80 percent in cash," he said.
Citigroup Wealth Management has over 1,200 people in Asia-Pacific excluding Japan and including Smith Barney staff in Australia.
Late last year Citi cut 150 jobs in its Asian wealth management arm, sources told Reuters, and in recent weeks its competitors such UBS and HSBC have cut hundreds of jobs in Asia.
Rahim, 47, who has been with Citi in Hong Kong since 1994, said the wealth management unit would try to keep costs down, but at the same time was looking to hire high-quality bankers.
"We are looking for high quality talent to bring into the private bank, we are obviously restructuring our business and our expense base in a manner that befits the current environment and our future strategy as a firm."
RALLY MAY CONTINUE
Rahim said it was difficult to predict financial markets, which were rallying because investors were sensing the global economy was bottoming as unemployment slowed and the manufacturing sector began to recover from steep declines.
"I think the rally has some more to go, but ultimately the market will refocus on fundamentals, refocus on bank strength, refocus on liquidity," he said. "These factors will likely be a deciding factor in whether it's a bear market rally or the beginning of a turnaround."
World stocks raced to their highest level in almost four months on Tuesday, leading the benchmark MSCI world equity index to turn positive for the year.
Rahim, previously co-head of fixed income, currencies and commodities at Citi, said markets would continue to remain volatile therefore Citi is advising clients to protect their downside by buying derivatives such as options.
"In that environment the best way to enter the market and capitalise on it is to actually have stop-losses and be disciplined in your trading."
But Rahim, who is also an avid collector of Chinese contemporary art, said he sees the volatile market as an opportunity to grow the business as clients want quality advice on how to build or rebuild their assets.
"This is the best wealth creation opportunity we have seen in a generation," said Rahim. "I think billionaires of the future will be created in the next 24-36 months. In that environment you've got to have a view."
Economist disappointed to find he’s not that gloomy
By Jame DiBiasio
4 May 2009
Charles Dumas says things in the United States are moving roughly in the right direction; pity about China.
Charles Dumas, chief economist at Lombard Street Research, says he finds himself in an unusual position; he's not as pessimistic as most people. "I'm less pessimistic than the consensus regarding the United States," he said at the AsianInvestor and FinanceAsia-sponsored conference on Distressed & Troubled Asset Investing last week.
Dumas has been a proponent since 2004 of the argument that excess savings in China, Japan, Germany and other countries played a direct role in the financial bubble of the US and Britain. Without the 'savings glut' there would have been no extravagant consumption binge, because US interest rates and spreads on Treasuries would have soared.
"Excess savings caused the trouble, and now savings glut countries are suffering the most because of deficient demand," Dumas says.
Important trends in the current economy include the massive rise of US government debt as a proportion to GDP, which he calculates to be about 250%, including bailouts, bank guarantees and so on. They also include the reversal of three decades of leveraging, a shrinkage in Asian and European excess savings, and the emergence of China as the world's biggest source of economic growth.
Dumas says the global recession could have been healed if savings-glut countries had consumed more; instead, their incomes have collapsed because their exporters have lost their customers. Policy blunders in the US made things worse, in particular the Fed's initial moves to cut interest rates. These had no impact on mortgage rates, for example, and led instead to inflation, notably in commodity prices. This turned a downturn into outright recession in early 2008.
The collapse of Lehman Brothers meant that inflation was no longer a threat, and since then US policy has improved, Dumas says. Falling oil prices and reduced consumption means US real incomes have risen, and US savings rates have gone from zero to about 4%. That's not enough to address the global imbalances, but Dumas says the inability of households to borrow will continue to force US savings rates closer to 8-9%. The fiscal stimulus package will also improve American's income, and the Fed's subsequent quantitative easing provides a floor on prices. (The timing for interest rate cuts had changed.)
Dumas is less impressed with the Geithner plan for rejuvenating interbank lending. The stress test and the public/private investment partnership for toxic assets don't require banks to value the dodgy CDOs on their books. He says it is a conflict of interest for Geithner as the regulator to encourage banks to sell assets to private/public JVs co-owned by Geithner -- although US taxpayers may not see the problem with a Fed-owned JV making lots of money.
The upshot, however, is that Dumas predicts the US economy is likely to recover first, and its real financial assets are already attracting investor interest. Corporate profits ex-financials are making modest gains -- and he's not too bothered if the banks' profits lead to consolidation, "as we need fewer banksters". He says there is good money in both investment-grade and high-yield credit.
The problem with this outlook is Asia, and China in particular. Export growth rates in China, Japan and Germany have turned negative, dropping 20-40%, which creates GDP losses of 7-10%. Japan and Germany will experience worse recessions than America and Britain. China's fiscal stimulus has smoothed its fall, but Dumas warns the country is storing up future trouble by relying on infrastructure investment rather than boosting consumption. He doesn't think the Chinese economy can recover without US consumption improving first, particularly if China ends up building its own 'bridges to nowhere'.
Dumas says as long as Germany sticks to budget balancing, it will not enjoy real growth for several years. Moreover, all exporting/savings nations are vulnerable to the rise of protectionism in America. "China's recovery is temporary and the others are dead in the water," Dumas says. "The crisis will resume because the imbalances in savings-glut countries are not being addressed."
U.S. Banks Must Raise Debt Without FDIC to Repay TARP
By Rebecca Christie
May 5 (Bloomberg) -- Banks that want to exit from the U.S. government’s capital injections must demonstrate they can issue debt to private investors without a Federal Deposit Insurance Corp. guarantee, according to people familiar with the matter.
The Treasury will unveil conditions for repaying the Troubled Asset Relief Program money as soon as tomorrow, the people said on condition of anonymity. Banks generally must apply to the Treasury and secure permission from their bank supervisor in order to pay back the government; so far only a handful of small banks have done so.
The new guidance would come before the Federal Reserve’s May 7 publication of results of stress tests on U.S. banks. People familiar with the matter said yesterday that about 10 of the firms will be deemed to need additional capital.
Firms that don’t need stronger buffers may seek to quickly retire existing government stakes. Banks including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Northern Trust Corp. have said they want to repay the money. Both New York-based companies sold debt without FDIC guarantees in the past month, as has Chicago-based Northern Trust.
“My hope is this helps with clarity on who are the winners and who are the losers,” said Joel Conn, president of Lakeshore Capital Inc., which invests $90 million.
Bank of New York
Earlier today, Bank of New York Mellon, another bank taking part in the stress tests, raised $1.5 billion of debt, without FDIC backing. The bank said proceeds from the sale will be used to help repay the $3 billion capital injection it got from the TARP last year.
FDIC Chairman Sheila Bair has said banks need to wean themselves off the debt guarantees as financial markets heal from last year’s crisis. In March, the FDIC extended the time in which banks could issue government-guaranteed debt, while also announcing plans to raise fees on the program. FDIC spokesman Andrew Gray declined to comment today on the Treasury’s repayment policy.
The Treasury’s requirement is that banks must demonstrate an ability to borrow without the government guarantee and does not affect outstanding debt, the people familiar with the matter said. On April 14, a Goldman Sachs executive said the bank did not see a direct link between the debt guarantees and the Treasury’s capital injections.
Debt Sales
“We still have some capacity under the FDIC-guaranteed at pretty attractive spreads,” said David Viniar, the company’s chief financial officer, in an April 14 conference call with investors. “We’ll continue to use that when it’s available, but we expect to continue to raise unguaranteed debt when it’s available as well.”
For banks that need to deepen their reliance on government capital after the stress tests, officials may set limits on their dividends and political lobbying. While it’s unlikely to influence day-to-day operations at the firms, the government won’t be a “hands-off” investor and will take steps to ensure that management is “effective,” Fed Chairman Ben S. Bernanke told lawmakers today.
“It’s obviously not our intention or desire to have long- term government ownership of banks,” Bernanke said at the congressional Joint Economic Committee. Still, he added that it would likely be a “few years” before banks can end their dependence on government capital.
Officials’ “top priority” will be working with the banks to get them on a path toward repaying the taxpayer, including sales of assets or raising private capital, the Fed chief said.
The Obama administration has yet to detail how it intends to implement executive compensation guidelines enacted by Congress, another restriction faced by banks that keep taxpayer funds. The rules limit incentive pay for top executives at banks receiving at least $500 million in rescue funds from the Treasury.
就业恶化 未见尽头
王 冠 一
06 五月 2009
美国联储局会议声明指经济放缓步伐已减慢,加上近期公布的数据大部份表现胜预期,令投资者憧憬美国经济於下半年有望复苏,美股亦连日急升。若根据股市走在经济前头6至9个月的传统智慧,美国经济今年内复苏的机会绝对存在。
不过,市场对就业市场前景仍然悲观,认为即使经济真箇有起色,短期仍改变不了职位持续流失的势头。美国本周五公布的最新就业报告,相信会显示失业率进一步攀升。
根据《彭博》所作的调查,美国4月失业率会由8.5%跃升至8.9%,再创25年新高,职位流失将连续第五个月超越60万,把2007年12月经济衰退期开始至今蒸发的职位增至逾570万份,成为二次世界大战后职位流失最多的一次衰退。市场亦已预期失业率在年底将升至9.5%,明年底更会见双位数字,挑战1982年对上一次出现严重衰退时的10.8%,不过该次衰退期内蒸发的职位仅280万份,远较今次为少。
纵使大部份企业首季业绩皆较预期优胜,但裁员之风并未因而纾缓,企业仍然积极节流,希望维持利润,甚或逆境求存。
汽车业继续是裁员重灾区,因为销量每况愈下,刚公布的4月汽车销售仅930万辆,较3月的990万再跌60万辆,相信车厂仍需要进一步减产。刚被政府推向破产漩涡的克莱斯勒估计,若与意大利快意车厂合夥的建议遭法庭否决,代价将会是38500职位;另一正在苦苦挣扎的通用汽车正计划大幅减少经销商数目,估计删除的代理职位多达137330份。
除了汽车业外,金融业会是另一重灾区。经过今次金融海啸后,一些职位将会跟随投行永久消失。美国金融从业员至今减少了4.5%,以人数计多达37.6万,业界估计银行业裁员潮仍会陆续有来,上周瑞银便宣布其美国财富管理部门将进一步裁减2000职位。
另外,出版业亦饱受压力,原因是不少读者投向互联网,报章要面对广告收入急跌的问题。过去6个月,395张报章每日平均发行量减少了7.1%,而从业员数目自衰退开始至今亦下降了接近8%。股神毕菲特於周日的股东大会上亦不讳言报章没有前景。
分析家估计,经济增长要有2.5%,才可每月创造10万职位吸纳新增劳动力,但何时才可回复该增长步伐,确实天晓得,失业率持续上升,必然会影响消费市场,拖慢复苏速度,美股能否延续上升浪,周五的就业报告力足左右大局。
GM details plans to wipe out current shareholders
By Kevin Krolicki
May 5, 2009
DETROIT (Reuters) - General Motors Corp on Tuesday detailed plans to all but wipe out the holdings of remaining shareholders by issuing up to 60 billion new shares in a bid to pay off debt to the U.S. government, bondholders and the United Auto Workers union.
The unusual plan, which was detailed in a filing with U.S. securities regulators, would only need the approval of the U.S. Treasury to proceed since the U.S. government would be the majority shareholder of a new GM, the company said.
The flood of new stock issuance that could be unleashed has been widely expected by analysts who have long warned that GM's shares could be worthless whether the company restructures out of court or in bankruptcy.
The debt-for-equity exchanges detailed in the filing with the Securities and Exchange Commission would leave GM's stock investors with just 1 percent of the equity in a restructured automaker, ending a long run when the Dow component was seen as a bellwether for the strength of the broader U.S. economy.
GM shares closed on Tuesday at $1.85 on the New York Stock Exchange. The stock would be worth just over 1 cent if the first phase of GM's restructuring moves forward as described.
Once GM has issued new shares to pay off its debt to the U.S. government, bondholders and its major union, it said it would then undertake a 1-for-100 reverse stock split.
Such a move would take the nominal value of the stock back to near where it had been before the flood of new shares. But in the process, GM's existing shareholders would see their stake in the 100-year-old automaker all but wiped out.
The automaker said it expected to draw another $2.6 billion from the U.S. Treasury before a June 1 deadline set by the Obama administration for it to reach agreements with all of its key stakeholders.
That borrowing would take GM's debt to the U.S. government to $18 billion, and the automaker said it expected to have to borrow a total of nearly $27 billion.
GM has asked its three major creditor groups to write off at least $43 billion in debt in exchange for ownership of a restructured company.
By contrast, the current market value of GM's current 610 million shares is about $1.7 billion.
The stock has lost about 43 percent of its value since the start of the year.
GM bondholders, who are owed $27 billion, have also been offered new stock in exchange for writing off debt in a bond exchange the automaker launched last week.
The automaker is targeting a debt-reduction of at least $24 billion of its bond debt under the plan and has warned that it could be forced into bankruptcy if that cannot be achieved.
Representatives of GM bondholders, who would be given a 10-percent stake in the new company under the automaker's restructuring, have said they are being offered an unfairly low payout. They have asked instead for a majority stake in the restructured company.
But GM has asked the U.S. autos task force to accept a majority stake in a new GM in exchange for at least half of the government debt that the automaker has run up over the past four months.
Chief Executive Fritz Henderson said on Tuesday that the U.S. Treasury, which oversees the task force, was continuing to evaluate the company's restructuring plan and its progress.
"The Treasury will continue their evaluation through the month, which is fine. But we're not waiting, we're implementing. The bond exchange needed to be launched when we launched it," Henderson said. "Now we'll have to see."
In its filing, GM said it was in "ongoing discussions" with the U.S. Treasury on its proposal to swap government debt for equity in the largest U.S. automaker.
Finally, GM is negotiating with the UAW and is seeking to get the union to take GM stock in exchange for $10 billion owed to a trust fund for retiree healthcare.
Those talks were set to resume this week in Detroit, Henderson said.
GM said in its SEC filing that its three-pronged effort to slash debt could take its total authorized share issuance -- including new and existing shares -- to 62 billion shares.
The world melts, China grows
By Dilip Hiro
May 6, 2009
In the midst of the worst economic crisis since the Great Depression, a new world order is emerging, with its center gravitating towards China. The statistics speak for themselves. The International Monetary Fund (IMF) predicts the world's gross domestic product (GDP) will shrink by an alarming 1.3% this year. Yet, defying this global trend, China expects an annual economic growth rate of 6.5% to 8.5%.
During the first quarter of 2009, the world's leading stock markets combined fell by 4.5%. In contrast, the Shanghai stock exchange index leapt by 38%. In March, car sales in China hit a record 1.1 million, surpassing sales in the US for the third month in a row.
"Despite its severe impact on China's economy, the current financial crisis also creates opportunity for the country," said Chinese President Hu Jintao. It can be argued that the present fiscal tsunami has, in fact, provided China with a chance to discard its pioneering reformer's leading guideline. "Hide your capability and bide your time" was the way former head of the communist party Deng Xiaoping once put it. No longer.
Recognizing that its time has indeed come, Beijing has decided to play an active, interventionist role in the international financial arena. Backed by China's US$2 trillion in foreign exchange reserves, its industrialists have gone on a global buying spree in Africa and Latin America, in neighboring Russia and in Kazakhstan, to lock up future energy supplies for its economy. At home, the government is investing heavily not only in major infrastructure, but also in its much neglected social safety net, its healthcare system, and long overlooked rural development projects - partly to bridge the increasingly wide gap between rural and urban living standards.
Among those impressed by the strides Beijing has made since launching its $585 billion stimulus package in September is the Barack Obama administration. It views the continuing rise in China's GDP as an effective corrective to the contracting economies of almost every other country, except India. So it has stopped arguing that, by undervaluing its currency - the yuan - with respect to the US dollar, China is making its products too cheap, thus putting competing American goods at a disadvantage in foreign markets.
The secret of China's success
What is the secret of China's continuing success in the worst of times? As a start, its banking system- state-controlled and flush with cash - has opened its lending spigots to the full, while bank credit in the US and the European Union (EU) remains clogged, if not choked off. Therefore, consumer spending and capital investment have risen sharply.
Ever since China embarked on economic liberalization under the leadership of Deng Xiaoping in 1978, it has experienced economic ups and downs, including high inflation, deflation, recessions, uneven development of its regions, and a widening gap between the rich and the poor, as well as between the urban and the rural - all characteristics associated with capitalism.
While China's communist leaders have responded with a familiar range of fiscal and monetary tools, such as adjusting interest rates and money supply, they have achieved the desired results faster than their capitalist counterparts. This is primarily because of the state-controlled banking system where, for instance, government-owned banks act as depositories for the compulsory savings of all employees.
In addition, the "one couple, one child" law, enacted in 1980 to control China's exploding population, and a sharp decline in the state's social-support network for employees in state-owned enterprises, compelled parents to save. Add to this the earlier collapse of a rural cooperative health insurance program run by agricultural cooperatives and communes and many Chinese parents were left without a guarantee of being cared for in their declining years. This proved an additional incentive to set aside cash. The resulting rise in savings filled the coffers of the state-controlled banks.
On top of that came China's admission to the World Trade Organization (WTO) in 2001, which led to a dramatic jump in its exports and an average economic expansion of 12% a year.
When the credit crash in North America and the EU caused a powerful drop in China's exports, throwing millions of migrant workers in the industrialized coastal cities out of work, the authorities in Beijing focused on controlling the unemployment rate and maintaining the wages of the employed. They can now claim an urban unemployment rate of a mere 4.2% because many of the laid-off factory workers returned to their home villages. [1] Those who did not were encouraged to enroll in government-sponsored retraining programs to acquire higher skills for better jobs in the future.
Whereas most Western leaders could do nothing more than castigate bankers filling their pockets with bonuses as the balance sheets of their companies went crimson red, the Chinese government compelled top managers at major state-owned companies to cut their salaries by 15% to 40% before tinkering with the remuneration of their workforce.
To ensure the continued rapid expansion of China's economy, which is directly related to the country's level of energy consumption, its leaders are signing many contracts for future supplies of oil and natural gas with foreign corporations.
Energy security
Once China became an oil importer in 1993, its imports doubled every three years. This made it vulnerable to the vagaries of the international oil market and led the government to embed energy security in its foreign policy. It decided to participate in hydrocarbon prospecting and energy production projects abroad as well as in transnational pipeline construction. By now, the diversification of China's foreign sources of oil and gas (and their transportation) has become a cardinal principle of its foreign ministry.
Conscious of the volatility of the Middle East, the leading source of oil exports, China has scoured Africa, Australia, and Latin America for petroleum and natural gas deposits, along with other minerals needed for industry and construction. In Africa, it focused on Angola, Congo, Nigeria, and Sudan. By 2004, China's oil imports from these nations were three-fifths those from the Persian Gulf region.
Nearer home, China began locking up energy deals with Russia and the Central Asian republic of Kazakhstan long before the current collapse in oil prices and the global credit crunch hit. Now, reeling from the double whammy of low energy prices and the credit squeeze, Russia's leading oil company and pipeline operator recently agreed to provide 300,000 barrels per day (bpd) in additional oil to China over 25 years for a $25 billion loan from the state-controlled China Development Bank. Likewise, a subsidiary of the China National Petroleum Corp agreed to lend Kazakhstan $10 billion as part of a joint venture to develop its hydrocarbon reserves.
Beijing continued to make inroads into the oil and gas regions of South America. As relations between Hugo Chavez's Venezuela and the George W Bush administration worsened, ties with China strengthened. In 2006, during his fourth visit to Beijing since becoming president in 1999, Chavez revealed that Venezuela's oil exports to China would treble in three years to 500,000 bpd. Along with a joint refinery project to handle Venezuelan oil in China, the Chinese companies contracted to build a dozen oil-drilling platforms, supply 18 oil tankers, and collaborate with PdVSA, the state-owned Venezuelan oil company, to explore new oilfields in Venezuela.
During Chinese Vice President Xi Jinping's tour of South America in January this year, the China Development Bank agreed to loan PdVSA $6 billion for oil to be supplied to China over the next 20 years. Since then China has agreed to double its development fund to $12 billion, in return for which Venezuela is to increase its oil shipments from the current 380,000 bpd to one million bpd.
The China Development Bank recently decided to lend Brazil's petroleum company $10 billion to be repaid in oil supplies in the coming years. This figure is almost as large as the $11.2 billion that the Inter-American Development Bank lent to various South American countries last year. China had established its commercial presence in Brazil earlier by offering lucrative prices for iron ore and soybeans, the export commodities that have fueled Brazil's recent economic growth.
Similarly, Beijing broke new ground in the region by giving Buenos Aires access to more than $10 billion in yuan. Argentina was one of three major trading partners of China given this option, the others being Indonesia and South Korea.
Will the yuan become an international currency?
Without much fanfare, China has started internationalizing the role of its currency. It is in the process of increasing the yuan's role in Hong Kong. Though part of China, Hong Kong has its own currency, the Hong Kong dollar. Since Hong Kong is one of the world's freest financial markets, the projected arrangement will aid internationalization of the yuan.
In retrospect, an important aspect of the Group of 20 summit in London in early April centered around what China did. It aired its in-depth analysis of the current fiscal crisis publicly and offered a bold solution.
In a striking on-line article, Zhou Xiaochuan, governor of China's central bank, referred to the "increasingly frequent global financial crises" that have embroiled the world. The problem could be traced to August 1971, when president Richard Nixon took the US dollar off the gold standard. Until then, $35 bought one ounce of gold stored in bars in Fort Knox, Kentucky - the rate having been fixed in 1944 during World War II by the Allies at a conference in Bretton Woods, New Hampshire. At that time, the greenback was also named as the globe's reserve currency. Since 1971, however, it has been backed by nothing more tangible than the credit of the United States.
A glance at the past decade and a half shows that, between 1994 and 2000 alone, there were at least nine countries had economic crises that had an impact on the global economy: Mexico (1994), Thailand-Indonesia-Malaysia-South Korea-the Philippines (1997-98), Russia and Brazil (1998), and Argentina (2000).
According to Zhou, financial crises resulted when the domestic needs of the country issuing a reserve currency clashed with international fiscal requirements. For instance, responding to the demoralization caused by the 9/11 terror attacks, the US Federal Reserve Board drastically reduced interest rates to an almost-record low of 1% to boost domestic consumption at a time when rapidly expanding economies outside the United States needed higher interest rates to cool their growth rates.
"The [present] crisis called again for creative reform of the existing international reserve currency," Zhou wrote. "A super-sovereign reserve currency managed by a global institution could be used to both create and control global liquidity. This will significantly reduce the risks of a future crisis and enhance crisis management capability."
He then alluded to the Special Drawing Rights (SDR) of the International Monetary Fund. The SDR is a virtual currency whose value is set by a currency "basket" made up of the US dollar, the European euro, the British pound, and the Japanese yen, all of which qualify as reserve currencies, with the greenback being the leader. Ever since the SDR was devised in 1969, the IMF has maintained its accounts in that currency.
Zhou noted that the SDR has not yet been allowed to play its full role. If its role was enhanced, he argued, it might someday become the global reserve currency.
Zhou's idea received a positive response from the Kremlin, which suggested adding gold to the IMF's currency basket as a stabilizing element. Its own currency, the rouble, is already pegged to a basket that is 55% the euro and 45% the dollar. Within a decade of its launch, the euro has become the second most held reserve currency in the world, garnering nearly 30% of the total compared to the dollar's 67%.
Treasury Secretary Timothy Geithner's immediate reaction to Zhou's article was: "China's suggestion deserves some consideration." Nervous financial markets in the US took this as a sign from the Treasury secretary that the dollar was losing its primacy. Geithner retreated post-haste, and President Obama quickly joined the fray, saying: "I don't think there is need for a global currency. The dollar is extraordinarily strong right now."
Actually, maintaining the customary Chinese discretion, Zhou never mentioned the state of the US dollar in his article, nor did he even imply that the yuan should be included in the super-sovereign currency he proposed. Yet it was clear to all that at a crucial moment - with world leaders about to meet in London to devise a way to defuse the most severe fiscal crisis since the Great Depression - that a China which had bided its time, even though it had the third-largest economy on the planet, was now showing its strong hand.
All signs are that Washington will be unable to restore the status quo ante after the present "great recession" has finally given way to recovery. In the coming years, its leaders will have to face reality and concede, however reluctantly, that the economic tectonic plates are shifting - and that it is losing financial power to the thriving regions of the Earth, the foremost of which is China.
Note
1. There continues to be considerable debate on the accuracy of statistics issued by the Chinese government. An annual report, The Analysis of and Forecasts for Social Development (or the Blue Book on Chinese Society), released in December 2008 by the Chinese Academy of Social Science, said the unemployment rate in urban areas was 9.4% at that time, twice the registered rate of 4.5% released by the Human Resources and Society Security Ministry. In March 2009, Yin Weimin, China's human resources and social security minister, said that the registered urban unemployment rate was at a three-year high of 4.2%.
BofA mulls $8 billion China bank stake sale
* Recent short selling signals market view of CCB stake sale
* BofA's CCB stake coming unlocked is worth $8.3 bln
* BofA eligible for $165 mln CCB dividend from June 23
* CCB shares off 1.5 percent in Hong Kong
By Michael Flaherty and Parvathy Ullatil
May 6, 2009
HONG KONG, May 6 (Reuters) - Bank of America could soon sell shares in China's second-largest bank that could raise about a quarter of the $34 billion in additional capital it is reported to need after a government stress test.
Bank of America is allowed to sell 13.5 billion shares in China Construction Bank -- a 6 percent stake worth around $8.3 billion -- when a lock-up period ends on Thursday.
That would draw down BofA's stake in the Chinese lender to 10.6 percent, a level CCB has already said is reasonable. Western banks are aware that selling out of Chinese banks is not always well received by Beijing politicians.
CCB shares dipped 1.5 percent in Hong Kong on Wednesday.
Three Hong Kong-based investment bankers who spoke to Reuters said it is not yet clear how much, if any, of its CCB shares BofA will sell when the lock-up ends. The bankers were not authorised to speak publicly about the matter.
"Bank of America intends to remain a long-term shareholder and strategic partner in China Construction Bank," said BofA spokesman Scott Silvestri.
Raising money by selling the CCB stake would help BofA boost its capital at a critical time for the bank, which has been deemed to need an additional $34 billion in capital after stress tests in the United States, a source familiar with the results told Reuters.
"There has been healthy short selling in CCB shares in recent days so the market is factoring in a very high chance that BOA will sell part of its shares this week," said Philip Chan, head of research at CAF Securities, the research arm of Agricultural Bank of China.
"With the stress test results also due on May 7 and the market expecting BofA to raise capital there will be pressure on the management to divest some non-core assets," he said.
BofA is eligible to receive a $165 million CCB dividend if it waits until after June 23, according to CCB's last earnings release.
In June 2005, BofA agreed to pay $3 billion for a 9 percent stake in CCB -- a shareholding that later grew to 16.6 percent. The deal, like other Western banks buying into Chinese lenders, was meant to be a long-term, cross-border partnership.
But the financial crisis has led several Western banks to sell their stakes in Chinese banks to raise much-needed cash.
Shares in CCB have risen more than 12 percent so far this year, in line with rival ICBC, but underperforming a 39 percent jump at Bank of China.
Industrial and Commercial Bank of China is the largest bank in the world by market value, while CCB is second.
"BAC (Bank of America) could increase capital through sales of businesses such as FirstRepublic and Columbia and investments such as CCB," analysts at JP Morgan wrote earlier this week.
Shares in ICBC dropped 5.9 percent on April 27, a day before a portion of the strategic foreign holding in the bank was freed for sale. The stock bounced right back after Allianz and American Express sold a part of their stake.
Market sentiment: Faber et al take on ‘green shoot ennui’
Posted by Gwen Robinson
May 05, 2009
After end-of-the-world swine flu hysteria momentarily transfixed investors, sentiment appears to be shifting. The pundits are back out in droves - many predicting a robust comeback for stocks or, at the very least, peddling the “green shoots” botanical analogy that we’re already heartily sick of.
Even Marc “Dr Doom” Faber, in his latest monthly newsletter to clients, concedes that perhaps, just perhaps, the S&P500 has bottomed out and things may improve from here. Not only that — after boosting gold consistently for months, he warns that precious metal prices may correct further on the downside in coming months.
One can never expect Faber to be totally optimistic (it would ruin his reputation), so he tempers this benign view with the soothing remark: “Rest assured dear readers: economic, financial, pandemic, and increasingly social and geopolitical problems are plentiful and won’t disappear anytime soon”:
If the swine flu becomes a serious problem (as I believe it will), then obviously it will be another nail in the coffin of the global economy. I hate to think about what will happen when the Swine flu reaches Africa and countries like India and China where intensive animal husbandry methods place swine and poultry close to humans and where sanitary conditions, poverty and a poor health infrastructure will be an extremely fertile ground for the swine flu virus (also further mutations).
Just to throw in another out-of-field problem for investor sentiment, Faber adds that another key problem could emerge from Afghanistan, and neighbouring Pakistan - which, he reminds us, possesses nuclear weapons. But, as he notes from the recent string of bleak US data, the stock market “will usually respond with an upturn long before the ‘news’ turns positive”:
I suppose the key for a low is that the news becomes less bad than was expected, which was the case in the US since March 6, 2009 when the S&P 500 bottomed out at 666…
Why this might be an important low in Faber’s view is that the “market’s advance has been broadening and that more and more groups such as airlines, homebuilders and cyclicals like Dow Chemical, International Paper and Alcoa are showing signs of having bottomed out”.
For this and other reasons, however, Faber advises investors to “avoid Treasury bonds and short them on any rebound”.
Pestilence and nuclear Armageddon aside, market watchers overall appear to be moving out of their bear phase. As SmartMoney notes:
After a week dominated by swine flu fears, corporate earnings, Chrysler’s bankruptcy and debate about the government stress tests’ likely effects on wobbly banks, our pundits’ views on recovery were no firmer, but neither were they weaker.
So-called green shoots — lower jobless claims, increased consumer confidence, a lower-than-expected drop in first-quarter corporate profits and the 9.4% April rise of the S&P 500 index (its best showing since March 2000) — are starting to add up. However, a debate still rages on about whether those are genuine positive market signals or blips that will give way to more bad news next week.
Traders’ Narrative, however, warns in an earlier post on market sentiment:
You know the old Wall St. adage, “Sell in May and go away”. Well, here we are. We have now officially entered the time period which has historically been most difficult for the stock market.
So far we’ve had a tremendous rally off the March lows: the S&P 500 index gained 28.4% and for the two months of March and April, it has risen 25% with most of it coming from March. April’s gain was 8.2%
Looking at market cycles, this is rare. To see such a similar strong performance for the months of March and April we would have to go back to the 1930’s where intense bear market rallies were the norm. In those times, it wasn’t a good time to put fresh money to work (hence the label of bear market rallies and the annual cyclical nature of returns).
SmartMoney’s “naysayers” include Morgan Keegan economist Donald Ratajczak, who warned on April 27 that the emergence of a few green blades of grass only means “the lawn is dying at a slower rate”, notes SmartMoney, adding: “And then there are the market watchers who are just sick of all the prognostications — and the metaphors that come with them”.
ISI Group founder Ed Hyman sums it up with his line in an April 27 report: “This is getting old and tedious”. Unfortunately for Hyman - and for us - the clichés probably won’t end any time soon - not least because whether you believe in swine flu or not, global hype over the outbreak has probably temporarily derailed a recovery.
What’s remarkable, as SmartMoney notes, is how the Dow shook off last week’s bad news to heard for its sixth out of seven positive weeks. But according to Ed Yardeni, founder of Yardeni Research, and Thomas Lee, US strategist at JPMorgan, a bull market isn’t in the offing - yet.
In the absence of a fresh catastrophe, markets will remain range-bound, according to Yardeni, whose top forecast has the S&P hitting 1000. Lee, in a Wednesday note on the business cycle, cautioned that smart investors should use history as a guide and predicted that the next few weeks could shed light on how and when recovery arrives
As we’ve seen in nearly every recession’s bottoming process, we could be headed for a “W” shaped recovery that includes another market tumble, he warns:
“In other words, the current rally still falls within what would be regarded as the initial move prior to a retest,” he says. “A rally past the first week of May would force us to reconsider this view, as it would suggest a ‘V’ bottom is more likely.”
In its latest post, however, Traders’ Narrative points to a supposed “tsunami of cash just waiting to be invested”. Just don’t get too excited:
A build up of cash is normal in a bear market but before we can transition to a bull market it needs to be put to work. As people become convinced that the worst is behind us, they start to take more risk and begin to put their cash into the market. So unfortunately, just noticing a massive pile of cash doesn’t really help us unless we can somehow pinpoint when and with what intensity this billowing mass of liquidity will start to be invested in the stock market.
But to give you an idea of the sheer monstrosity of the potential tsunami of cash, consider this: it currently represents 50% of S&P 500 total capitalization. Needless to say, that is jaw dropping. As it is put to work, even in a trickle, it will put an impregnable floor on almost all equity indices and then drive prices higher. When that may be, can not be determined by this metric itself but by other technical, monetary and sentiment measures.
As for recent US stock rallies: here’s a word from Merrill’s chief economist David Rosenberg (no link), courtesy of Option Armageddon:
You know it’s a low quality rally when the top 50 most heavily shorted stocks are the ones that outperform the most — up 28% in April, an 1,860 basis point spread over the broad equity market.
We reckon, though, that the last word on “green shoot ennui” should go to NihonCassandra, in her latest post on Financial Gitmo:
So hearing Mobius, Cohen, and other pundits speak of bull-markets and greenshoots is predictable. But I reckon that Mssrs Schilling,and Roubini, will in time - once again - more likely be correct insofar as I believe continued recession and mild deflation will predominate longer than optimists (and inflationists)- and in particularly longs, can bear once the shorts have sufficiently covered and the intermediate term optimism rolls over with the continued bleak news flow. Then, the trend-followers will mechanically bail, and reverse positions, prescient programmes and specs, too, will re-establish their shorts, until finally the squeezed-in will, once again get squeezed-out, and those amongst us with weak constitutions will be forced to hide the pills and sharp objects to avoid …. tragedy.
We Can't Subsidize the Banks Forever
Government has to show it can handle major insolvencies.
By MATTHEW RICHARDSON and NOURIEL ROUBINI
MAY 5, 2009
The results of the government's stress tests on banks, to be released in a few days, will not mark the beginning of the end of the financial crisis. If we are to believe the leaks, the results will show that there might be a few problems at some of the regional banks and Citigroup and Bank of America may need some more capital if things get worse. But the overall message is that the sector is in pretty good shape.
This would be good news if it were credible. But the International Monetary Fund has just released a study of estimated losses on U.S. loans and securities. It was very bleak -- $2.7 trillion, double the estimated losses of six months ago. Our estimates at RGE Monitor are even higher, at $3.6 trillion, implying that the financial system is currently near insolvency in the aggregate. With the U.S. banks and broker-dealers accounting for more than half these losses there is a huge disconnect between these estimated losses and the regulators' conclusions.
The hope was that the stress tests would be the start of a process that would lead to a cleansing of the financial system. But using a market-based scenario in the stress tests would have given worse results than the adverse scenario chosen by the regulators. For example, the first quarter's unemployment rate of 8.1% is higher than the regulators' "worst case" scenario of 7.9% for this same period. At the rate of job losses in the U.S. today, we will surpass a 10.3% unemployment rate this year -- the stress test's worst possible scenario for 2010.
The stress tests' conclusions are too optimistic about the banks' absolute health, although their relative assessment is more precise, because consistent valuation methods were used. Still, with Thursday's announcement of the results, it shouldn't be a surprise when the usual suspects emerge. We fear that we are back to bailout purgatory, for lack of a better term. Here are some suggestions for how to extricate ourselves.
First, while Treasury Secretary Timothy Geithner's public-private investment program (PPIP) to purchase financial firms' assets is not particularly popular, we hope the government doesn't give up on it. True, the program offers cheap financing and free leverage to institutional investors, which will lead to the investors overpaying for the assets. But it does promote price discovery and remove the assets from the bank's balance sheets -- necessary conditions to move forward.
And to minimize the cost to taxpayers, banks must not be allowed to cherry-pick which legacy assets to sell. All the risky loans and securities banks were never meant to hold should be on the block. With enough investors participating in the PPIP program, the prices of the assets should be competitive, and there should be no issue of fairness raised by the banks.
Second, the government should stop providing capital, loan guarantees and financing with no strings attached. Banks should understand this. When providing loans to troubled companies, they place numerous restrictions, called covenants, on what these firms can do. These covenants generally restrict the use of assets, risk-taking behavior, and future indebtedness. It would be much better if the government focused on this rather than on its headline obsession with bonuses.
For example, consider the fact that the government, while providing aid to banks, did not restrict their dividend payments. A recent academic study by Viral Acharya, Irvind Gujral and Hyun Song Shin (www.voxeu.org) notes that banks only marginally reduced dividends in the first 15 months of the crisis, paying out a staggering $130 billion in 2007 and 2008. While many banks have been reducing their dividends more recently, bank bailout money had been literally going in one door and out the other.
Consider also recent bank risk-taking. The media has recently reported that Citigroup and Bank of America were buying up some of the AAA-tranches of nonprime mortgage-backed securities. Didn't the government provide insurance on portfolios of $300 billion and $118 billion on the very same stuff for Citi and BofA this past year? These securities are at the heart of the financial crisis and the core of the PPIP. If true, this is egregious behavior -- and it's incredible that there are no restrictions against it.
Third, stress tests aside, it is highly likely that some of these large banks will be insolvent, given the various estimates of aggregate losses. The government has got to come up with a plan to deal with these institutions that does not involve a bottomless pit of taxpayer money. This means it will have the unenviable tasks of managing the systemic risk resulting from the failure of these institutions and then managing it in receivership. But it will also mean transferring risk from taxpayers to creditors. This is fair: Metaphorically speaking, these are the guys who served alcohol to the banks just before they took off down the highway.
And we shouldn't hear one more time from a government official, "if only we had the authority to act . . ."
We were sympathetic to this argument on March 16, 2008 when Bear Stearns ran aground; much less sympathetic on Sept. 15 and 16, 2008 when Lehman and A.I.G. collapsed; and now downright irritated seven months later. Is there anything more important in solving the financial crisis than creating a law (an "insolvency regime law") that empowers the government to handle complex financial institutions in receivership? Congress should pass such legislation -- as requested by the administration -- on a fast-track basis.
The mere threat of this law could be a powerful catalyst in aligning incentives. As the potential costs of receivership are quite high, it would obviously be optimal if the bank's liabilities could be restructured outside of bankruptcy. Until recently, this would have been considered near impossible. However, in 2008 there was a surge in distressed exchanges of debt for equity or preferred equity.
Still, the recent negotiations with Chrysler's creditors suggest large obstacles. The size and complexity of large banks' capital structures make debt-for-equity exchanges an even taller task, particularly because creditors will want to hold out for a full bailout along the lines they have been receiving.
The government should be able to dangle an insolvency law as an incentive to cooperate. This will result in a $1 trillion game of chicken. But given the size of the stakes, and the alternative of the taxpayers continuing to foot the bill, it's the best way forward.
Heed the alarms
By Anthony Bolton
May 1 2009
The last year or so has seen a large number of savings and investment “blow-ups”. The scale of some of them – such as the alleged Bernard Madoff Ponzi scheme – is mind-boggling. How did he get away with it for so long, accumulating a fund that grew to nearly $50bn, and why didn’t the SEC stop him? In addition, a number of hedge funds have failed. Some savers have lost deposits at Icelandic and other banks. Given the financial crisis, investors could well ask: is anything safe?
Of course, no investment is completely safe – even governments can eventually devalue their guarantees. The long-term history of financial markets is littered with scandals, and major banking crises seem to reoccur every 20 to 30 years.
So what are the warning signs that investors should look out for – and how can they protect themselves?
My first observation is that, before buying any investment, investors should be prepared to do some research or use an intermediary they can trust to conduct such research on their behalf. Investments should not be made on the spur of the moment in reaction to a tip, hunch or persuasive advertisement. One must be prepared to spend an hour or two looking into the background, record, ethics and credentials of the firm providing the product, its people and the characteristics of the product itself.
If performance claims or deposit returns are well above the norm, be on your guard. The key to investments is understanding products and how they work. If you don’t fully understand it, don’t invest in it.
I was very interested to read recently that David Swensen, the legendary head of the Yale endowment fund, doesn’t invest in quantitative funds (investment funds that use computer models to select securities). He defends his approach by asking “how can you tell the difference between a quant model that works and one that doesn’t? If you don’t understand it, how can you justify putting your money there?”
A good friend who runs a successful fund of hedge funds business shares Swensen’s concerns. He never invested in a Madoff fund because it was not properly explained to him how the exceptionally high and stable returns were made. Beware secrecy and “black box” approaches.
When it comes to investing, only do so with people of the highest integrity. Evaluating people is essential. Beware if there are any blemishes on their character as people normally don’t change. If there are questions about their ethics, or they appear economical with the truth, give them a wide berth.
Unreliable people often tend to be more “flashy” and extrovert. This can be used to cover up other things. Look for people who will admit to mistakes – everyone in investment makes them and they should be open about them. In my experience, people who will not admit to mistakes are dangerous.
A good way to check out a person – and one that is widely used in the private equity world but much less so, in my experience, in the public equity area – is to take confidential references. I think this is the best way to discover someone’s true nature and find out if they might have any shortcomings. Head-hunters often assess people in this way.
But even here, one needs to be on one’s guard for referees who are likely to have a particularly positive or negative bias – the more independent they are, the better. Also, one can assess people by the company they keep – who their advisers are, for example.
Particularly important is the role of auditor. A major warning sign is a fund audited by an unknown, very small audit firm. If you become a very large client, your auditor may not be fully independent.
What applies to managers also applies to advisers. If you are using an adviser, use one you really trust. As a general principle, I think investors are better served by advisers who are paid a flat fee for their advice. As Warren Buffett put it, “never ask a barber if you need a haircut”.
Similar conflicts can arise with the ratings agencies. In the world of collateralised debt obligations, the rating agencies were paid for rating new funds and new structures. I believe this may have clouded their independence.
When I first had some of the more complex structures explained to me, they made little investment sense. If a product doesn’t make sense, avoid it. The returns, and the volatility of returns, for a particular product should be reasonable for the asset class or the investment approach concerned. If they are not, and unless the manager has a very good explanation, this is another warning sign.
Finally, remember the old adage: if it looks too good to be true, it probably is.
Anthony Bolton is president, investment, at Fidelity International. Under his management, the Fidelity Special Situations fund was the top performer in its sector from its launch in 1979 until he stepped down at the end of 2007. He now has a full-time role mentoring Fidelity’s younger fund managers and overseeing Fidelity’s investment process. Next column: July 4
Announcing the end of the bear market
Anthony Bolton, who managed funds for US mutual funds giant Fidelity for almost 30 years, reckons a bull market has begun.
By Genevieve Cua
May 2, 2009
WITH all the bumps and disappointments en route to a bottom, most analysts and strategists fight shy of calling a turn in markets. But one veteran is sticking his neck out.
Anthony Bolton, who managed funds for US mutual funds giant Fidelity for almost 30 years, reckons a bull market has begun. And that's despite the March rally seeming to have petered out in the past couple of weeks and the uncertainty now posed by the swine flu outbreak.
'Predicting markets is not easy,' says Mr Bolton. 'There have only been a few times when I have a strong view - and I have a strong view today.'
He cites three factors to back this view: the historical pattern of bull and bear markets, sentiment and valuations. The one factor he doesn't attach much weight to - which currently pre-occupies almost everyone else - is the economy.
'The economy generally looks bullish when the market is at a peak, and bearish when the market is at a low,' he says. 'I don't start with economic indicators. But I'm just starting to see the first economic news that's less bad, such as some of the purchasing managers' indices and manufacturing indices. In the next few months, we'll see more data confirming that the economy is less bad.'
First some background. Mr Bolton managed funds for Fidelity between 1979 and 2007, before he took a back seat to mentor younger managers and analysts. He is best known as a manager of European equities - and especially for managing the Special Situations Fund, where US$1,000 invested in 1979 would have grown to US$125,000 in 2007. This represents annual compound growth of over 20 per cent a year, beating the FTSE All-Share Index by seven percentage points a year.
Mr Bolton has also written two books. The second - Investing Against The Tide - has just been published by FT Prentice Hall. He was recently in Hong Kong, Taiwan and China, where he spoke to advisers and investors. A forum in Taiwan, for instance, was attended by more than 1,100 investors.
Meanwhile, the signs look right - as he sees things.
* First, the pattern of bull and bear markets. The current bear market is the second worst in history after the 1930s. 'Current conditions are different from that,' he says. '(The 1930s bear) followed a huge bull market in the US. We didn't have a bull market quite like that before this downturn. The past 10 years were also the worst for US equities. In terms of patterns, I think we've done enough for the bear market to be finished.'
* The second factor - sentiment - is at a low ebb and the amount of cash sidelined in money market funds is high. 'I see people more cautious now than at any other time in my career,' Mr Bolton says. 'Almost all broker circulars say March was a bear market rally. One statistic I find very compelling is the size of money market funds relative to the size of the stock market.'
In the trough of the bear market of the 1980s, money market funds comprised 25 per cent of the stock market. In the early 1990s trough, the ratio was 20 per cent; and 24 per cent in 2002. Today that ratio stands at 47 per cent. 'There is a huge amount on the sidelines and other sentiment indicators of extreme cautiousness,' Mr Bolton points out.
* Third, valuations are at historic lows. 'If you look at book values, they're at a 40-year low,' he says. 'On PEs, we're very low relative to the average level that the market gets to in a bear market. One ratio I put weight on is free cashflow. That's at a 50-year high for US companies. Those three things say this could be a new bull market.'
But don't expect a raging bull, or economies to surge like they did before the sub-prime crisis exploded. 'I'm talking about a slow upturn because of the financial crisis and debt overhang,' says Mr Bolton. 'We'll be in a low-growth environment. In terms of the stock market, we can say we're already there. We've had the worst 10 years and a very disappointing time. That's why I'm less pessimistic for stocks.'
The current bear market has called into question active management and diversification, both of which seem to have failed. Mr Bolton says crisis conditions tend to cause assets to move in tandem, and government bonds were a haven. 'I strongly feel this is a time not to be in government bonds, but to be in risk assets,' he says. 'I still believe in diversification, but maybe it's protection, as it has been in the past.'
As for active management, he says: 'I passionately believe in the ability to get alpha if you have the resources and skills necessary for it. There is a cyclical element to active management. Alpha is at times easier to get; in a sharp downturn, it is difficult to get. If I'm right and markets are turning or have turned up, alpha will become easier to get.'
He tells punters who invest directly in stocks to do their homework and monitor market sentiment. 'The best opportunity to buy is when everyone hates stocks. You need a contrarian ability. I've been in the industry so long. I think if you get it right 60 per cent of the time, you're doing great.'
The most common denominator of his mistakes is companies with weak balance sheets: 'The private investor needs to learn some accounting to understand whether companies are financially weak or strong from the balance sheet point of view. If they're buying stocks with weak balance sheets, the risks are significantly higher, particularly when conditions change for the company or industry.'
Rather than set a stop loss, investors should have an 'investment thesis' or a rationale to hold a stock, he says. Once that thesis is no longer valid, the stock should be sold - even at a loss. Mr Bolton is mainly a fundamentalist, but uses technical analysis which helps in timing and size decisions. 'If I'm looking at a stock that has done well for seven years, I look at it differently from one that hasn't done well,' he says. 'A stock that has done well has most of the good news in the price. If things change, there are lots of profits that people can take so investors are likely to suffer on the downside.'
As he writes in his latest book, investors should forget the price they paid for a share as it can become a psychological barrier when the price falls. 'The investment thesis is the key - check it regularly. If this changes for the worse and the share is no longer a buy and probably therefore a sell, you should take action regardless of the price being below what you paid. Trying to make money back in a share when you have lost money to date, just to prove your initial thesis was correct, is very dangerous. As a general rule in investment, it's not good practice to try and make it back the way you lost it.'
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