From Bloomberg this morning:
The world economy is facing the risk of both recession and faster inflation.
Global growth this quarter and next may be the slowest in four years, while inflation might be the fastest in a decade, say economists at JPMorgan Chase & Co.
The worst U.S. housing slump in 16 years, coupled with a tightening of credit by banks, has brought the world's largest economy ``close to stall speed,'' according to former Federal Reserve Chairman Alan Greenspan. At the same time, rapid growth in China and other emerging markets is driving energy and food prices higher worldwide.
``What lies ahead is a period of stagflation -- slow or no growth combined with rising inflation -- in the advanced economies,'' says Joachim Fels, co-chief global economist at Morgan Stanley in London.
Harvard University economist Martin Feldstein is among those who say it would be just a mild case of what the world endured in the 1970s and early 1980s, when a 10-fold increase in oil prices drove both unemployment and inflation above 10 percent. Still, it poses a dilemma for the Fed and other central banks as they struggle to decide which problem they should tackle first.
How they respond will go a long way in determining which danger proves to be the biggest: a slumping global economy or rising prices worldwide.
For now, traders in futures markets are betting the Fed will remain focused on supporting growth, even after the latest government inflation reading last week showed consumer prices rose in November at the fastest pace in more than two years.
Another Cut
As of Dec. 14, investors put a 74 percent probability on another quarter percentage-point cut in the Fed's benchmark overnight rate in January, down from 100 percent the day before.
``Central banks don't have as much flexibility as they'd like, with inflation rising and demand slowing,'' says David Hensley, director of global economic coordination at JP Morgan Chase in New York. His team sees global growth of 2.4 percent this quarter and next and inflation at 3.5 percent.
That's a far cry from the bad old days more than a generation ago, when world growth slowed to just 0.7 percent in 1982 while inflation ran at an annual rate of 13.7 percent, according to data compiled by the International Monetary Fund.
``The numbers now are very different than what they were then,'' Feldstein said in a Dec. 14 interview. ``We are not back to the very high inflation rates we had in the late 1970s and early 1980s, fortunately.''
Highest Rate
Even so, no less an authority than Greenspan himself expresses concern. Speaking on ABC's ``This Week'' program aired yesterday, the former Fed chairman said a period of ``remarkable disinflation'' is ending. ``We are beginning to get not stagflation, but the early symptoms of it,'' he said.
``This is a much tougher monetary-policy environment than anything I experienced,'' Greenspan told the Wall Street Journal on Dec. 14. Through the first 11 months of this year, consumer prices rose at an annual rate of 4.2 percent. That's up from 2.5 percent for all of 2006 and, if maintained in December, would be the highest rate in 17 years.
``The numbers are scary,'' says Stephen Cecchetti, former director of research at the New York Fed, who's now professor of international economics at Brandeis University's International Business School in Waltham, Massachusetts.
It isn't just a U.S. concern. Inflation in Europe last month rose at its fastest annual pace since May 2001, increasing by 3.1 percent as food costs soared.
``The oil-price boom and rising food prices have clearly accelerated inflation developments since summer,'' Austrian central bank Governor Klaus Liebscher said in Vienna on Dec. 14.
Inflation in China
Surging food prices are also pushing up inflation in China. Consumer prices in the world's fastest growing major economy rose at a year-over-year rate of 6.9 percent in November, the quickest in 11 years.
Behind the burst of inflation: rapid growth in emerging markets that is lifting prices worldwide for everything from oil to gemstones.
Uncut diamonds will get more expensive with ``increasing demand from fast-growing economies such as India and China,'' Gareth Penny, managing director of De Beers, the world's biggest diamond company, said on a Nov. 22 conference call from the company's headquarters in Johannesburg.
That's filtering down to consumers. London-based Signet Group Plc, the world's largest jewelry-store owner with shops throughout the U.S. and U.K., plans to increase U.S. prices after Feb. 14, Valentine's Day, to cover increasing costs of diamonds, gold and platinum, Chief Executive Officer Terry Burman said on a Nov. 27 conference call.
Limited Success
China and other emerging markets are trying to slow their economies to keep inflation in check by tightening monetary policy. They've had limited success, in part because some of them have tied their currencies -- directly or indirectly -- to the dollar or the euro.
That restricts their ability to raise interest rates to slow growth because it would probably also lead to an unwanted appreciation of their currencies.
``Global inflation pressures emanate mainly in the emerging countries, where growth is strong and monetary policy is relatively expansionary,'' Fels of Morgan Stanley says.
The same emerging-market nations have also helped stoke inflation by sheltering their consumers and companies from rising oil prices through subsidies. That's kept energy demand in China, India and other countries high because domestic prices are still low.
Pressure to Cut
If the global economy faced only the risk of faster inflation, the policy prescription would be clear: higher interest rates. Yet with growth slowing in the U.S. and Europe, central banks remain under pressure to cut.
The Fed has already reduced its benchmark rate by a full percentage point in the last four months, while the European Central Bank has held borrowing costs steady rather than tightening credit as previously planned.
U.S. growth will slow to 1 percent in the fourth quarter as consumer spending cools and the housing slump enters its third year, according to a Bloomberg survey of economists from Dec. 3 to 10. The economy expanded 4.9 percent in the third quarter.
``I'm not going to put a happy face on the slowing U.S. consumer,'' Jeffrey Immelt, chief executive officer of General Electric Co., told analysts in New York on Dec. 11. ``Our businesses that touch housing in the U.S. are going to be challenged.'' Fairfield, Connecticut-based GE is the world's third-biggest company by market value.
Pared Forecasts
In Germany, two institutes that advise the government separately pared their growth forecasts for Europe's largest economy on Dec. 13, as rising energy costs sap consumers' spending power and the euro's appreciation hurts exports.
The Munich-based Ifo institute cut its growth prediction to 1.8 percent in 2008 from a June forecast of 2.5 percent. The Kiel-based IfW institute reduced its outlook to 1.9 percent from a September forecast of 2.4 percent. Germany's economy grew 2.9 percent in 2006.
Feldstein, who heads the national bureau that serves as the arbiter of when U.S. recessions begin and end, says the combination of a stalled economy and rising inflation could be seen as a form of stagflation.
``It depends on how you want to define it,'' he says. ``If you say an inflation rate of 3.5 percent and a recession is stagflation, then we could have stagflation.''
Monday, December 17, 2007
Thursday, December 13, 2007
ECB Warns of Off Balance Sheet Risk
From the FT this morning:
ECB warns of danger of a wider liquidity squeeze
By Gerrit Wiesmann and Ivar Simensen in Frankfurt
Published: December 13 2007 02:00 | Last updated: December 13 2007 02:00
The eurozone's 21 largest banks hold €244bn (£175bn, $359bn) in off-balance sheet assets that may have to be brought back on to their balance sheets and could trigger a credit squeeze in the wider economy, the European Central Bank warned yesterday.
Fears that banks could be forced to take these assets on to their books have fuelled the liquidity squeeze.
Liquidity in the inter-bank money markets has dried up as banks have shored up funds as a precaution to taking these assets on their books, the ECB said in its biannual report on financial stability in the eurozone.
The ECB said the top 21 banking groups in the eurozone faced additional funding requirements of €244bn if they had to take their total exposure to asset-backed commercial paper and leverage loans - asset classes that have been the hardest hit by the credit crunch - back on their books.
With an average exposure of €11.1bn or 6 per cent of loans, the ECB said all banks would remain adequately solvent even if all assets were downgraded from their current mostly high ratings of AAA and AA to below investment grade and transferred to balance sheets. But it warned that could raise the banks' own funding costs, forcing them to cut payouts to shareholders and seek new capital. It could also erode banks' ability to lend, which could foster "a credit crunch in the wider economy".
Lucas Papademos, vice-president of the ECB, said yesterday the added liquidity provisions were needed in order to "mitigate the spill-over effect from the money markets into other markets, particularly the credit market". Problems stemming from the US subprime mortgage market rippling into the global credit markets have left the eurozone more exposed to shocks in its own private and commercial loan markets, the ECB warned. It said banks and investors could face a "challenging" adjustment process that could leave the system "more vulnerable than before to the crystallisation of other risks".
It said risks to financial stability had "materially increased" since its previous assessment mid-year, which was all the more startling given that the report was concluded at the start of November, when market distortions appeared to be easing. Mr Papademos said the pressure on market conditions had "elevated" in the month since the report was concluded.
The central bank for the 13-member currency area said a "substantial increase" in household debt coupled with signs of declining house prices in some markets added to the credit risk facing banks "in the short to medium term".
The economic outlook of the eurozone remained "broadly favourable" and the balance sheets of households, businesses and big banks were soundly creditworthy, said the ECB.
and
Central banks step in over credit crisis
By FT Reporters
Published: December 12 2007 14:25 | Last updated: December 13 2007 00:46
European and North American central banks on Wednesday unleashed a co-ordinated attempt to end the credit squeeze in global financial markets, setting off a wild day of trading as investors tried to make sense of a barrage of measures to increase market liquidity.
The Federal Reserve, European Central Bank, Bank of England, Bank of Canada and the Swiss National Bank all announced steps to make cash more readily available to banks. The Bank of Japan and Reserve Bank of Australia voiced support.
The actions – described by the Bank of England as an attempt to “demonstrate that central banks are working together to try to forestall any prospective sharp tightening of credit conditions” – helped ease pressure in money markets, a vital area of concern for policymakers. One-month Libor – the rate at which banks borrow from each other – was expected to set at 4.99 per cent on Thursday, down from 5.10 per cent on Wednesday.
However, conditions in the money markets remained strained by normal standards. Stocks also gave back most of their gains after surging earlier in response to the announcements.
The Fed said it was forming a new credit auction facility – first revealed by the Financial Times – that will offer cash to banks in return for a wide range of collateral, including housing-related securities. The Fed said it would hold two auctions of $20bn each in one-month loans this month.
The ECB and the Swiss National Bank said they had entered into so-called swap arrangements with the Fed to auction $24bn in dollar funds to banks in Europe. The two initiatives effectively form a new onshore and a new offshore dollar liquidity facility, and the Fed is willing to consider increasing both if required.
However, this is not all net new money, as the Fed is likely to pare back the amount of liquidity it would have provided through open market operations.
The Bank of England and the Bank of Canada, meanwhile, announced sweeping changes to their collateral rules to allow banks to pledge a much wider range of securities in exchange for funds.
Lucas Papademos, vice-president of the ECB, said the actions were “aimed at easing pressures and containing pressures in the term money market”.
Analysts hailed the announcements as evidence of the world’s top central bankers working together, but some traders were angry at the Fed for failing to signal the decision after its Tuesday policy meeting.
A senior Fed official said: “This was a global effort...We could not have announced yesterday as Europe was closed.” He said the announcements had “nothing to do” with the negative reaction to the Tuesday rate cut.
The S&P 500 opened more than 2 per cent higher, but dipped into negative territory as oil prices surged and ended up 0.6 per cent. Yields on two-year Treasuries rose 21 basis points to 3.13 per cent. However, interest rates for shorter-dated Treasuries barely moved – a sign of continued risk aversion.
and the guardian:
Central banks get a grip of Libor...finally
By Jamie McGeever
Finally, the world's leading central banks may be gaining traction in their battle to free up liquidity in credit markets, restore confidence in the global banking system and prevent slowing economic growth from, in some cases, spilling over into recession.
But the surprise package of measures announced by major central banks on Wednesday may not be enough on its own to completely fully thaw the credit market freeze and further policy easing -- not to mention patience -- may be required.
For example, it will take time for banks to confidently lend to counterparties still thought to be saddled with debt-related losses, months of tight credit still has to work its way through the economy and prolonged financial market stress simply won't be waved away with a magic wand overnight.
Still, the measures which include the creation of a short-term lending facility from the Federal Reserve and a $24 billion currency swap facility between the Fed, European Central Bank and Swiss National Bank, should help ease year-end funding tensions. "This will certainly help alleviate the liquidity squeeze but the main problem is still persuading banks to make liquidity go around, not just sit on it," said Marco Annunziata, chief economist and global head of fixed income research at UniCredit Markets & Investment Banking.
"For this we also need more transparency on the write-offs and losses, which i think we will get in the next few months. So I do think this is a very important and positive step, but you will also need more clarity to see liquidity conditions normalize in asset markets," he said.
Banks around the world have racked up losses and debt-related writedowns stemming form the collapse of the U.S. subprime mortgage market of more than $60 billion in recent months.
Immediately after the package was unveiled, indicated money market rates for dollar, euro and sterling deposits across the one-three month spectrum fell, suggesting Thursday's daily London interbank offered rates (Libor) will be fixed lower.
SHORT-TERM GAIN
Late Wednesday, indicated market rates were all below their respective Libor rates at the British Banking Association's daily fixing, which came before the central banks' announcement.
One-month sterling deposits were indicated at 6.35 percent, almost 40 basis points below the three-month Libor rate of 6.74625 percent.
And three-month euro deposit rates were trading at 4.85 percent, around 10 basis points below the 4.95250 percent Libor fix.
Tensions have been high in money markets since August as the credit crisis nearly shut key funding channels for banks, namely the asset-backed commercial paper market.
Laurent Fransolet at Barclays Capital said Libor rates could be fixed lower in the days ahead by as much as 20 basis points.
The biggest impact will likely be seen in sterling rates, where higher fixings have had "the strongest, most direct" effect, and the most limited in the euro zone.
But it will take time for the recent market carnage to heal.
"While this would still be way above pre-crisis levels, we suspect it will be difficult for the market to fully recover in the near term. After all, the ABCP market in the U.S. is about 30 percent smaller than at its peak and that of the euro area has almost halved, making the combined shrinkage more than $500 billion over the past five months," he wrote in a note.
If Libor rates do fall Thursday, it will be the first downward move in three-month euro Libor for over a month.
Before the measures were unveiled on Wednesday, three-month euro Libor rates rose to 4.95250 percent from 4.92688 percent, the biggest gain this month and the 21st straight increase.
One-month euro Libor rates rose to 4.94500 percent from 4.92250 percent, their highest since December 2000.
The premium of three-month Euribor rates over three-month euro overnight index average (EONIA) rates (a weighted average of all overnight unsecured interbank lending) widened to 90 basis points on Wednesday.
That's the widest in several years, wider than the initial peak after the credit crisis blew up in August, and around 40 basis points wider in the past month alone.
Like others, Lena Komileva, Group G7 economist at Tullett Prebon, also took a cautiously optimistic view.
"We expect that today's measure together with the drop-out of year-end effects from the market's pricing will help bring some temporary relief for funding markets and overt serious systemic risks at the turn of the year," she said.
"Nevertheless we expect that risk premia will be maintained above the levels seen in recent years into 2008 as the credit crunch enters a more mature stage." (Editing by Ron Askew)
ECB warns of danger of a wider liquidity squeeze
By Gerrit Wiesmann and Ivar Simensen in Frankfurt
Published: December 13 2007 02:00 | Last updated: December 13 2007 02:00
The eurozone's 21 largest banks hold €244bn (£175bn, $359bn) in off-balance sheet assets that may have to be brought back on to their balance sheets and could trigger a credit squeeze in the wider economy, the European Central Bank warned yesterday.
Fears that banks could be forced to take these assets on to their books have fuelled the liquidity squeeze.
Liquidity in the inter-bank money markets has dried up as banks have shored up funds as a precaution to taking these assets on their books, the ECB said in its biannual report on financial stability in the eurozone.
The ECB said the top 21 banking groups in the eurozone faced additional funding requirements of €244bn if they had to take their total exposure to asset-backed commercial paper and leverage loans - asset classes that have been the hardest hit by the credit crunch - back on their books.
With an average exposure of €11.1bn or 6 per cent of loans, the ECB said all banks would remain adequately solvent even if all assets were downgraded from their current mostly high ratings of AAA and AA to below investment grade and transferred to balance sheets. But it warned that could raise the banks' own funding costs, forcing them to cut payouts to shareholders and seek new capital. It could also erode banks' ability to lend, which could foster "a credit crunch in the wider economy".
Lucas Papademos, vice-president of the ECB, said yesterday the added liquidity provisions were needed in order to "mitigate the spill-over effect from the money markets into other markets, particularly the credit market". Problems stemming from the US subprime mortgage market rippling into the global credit markets have left the eurozone more exposed to shocks in its own private and commercial loan markets, the ECB warned. It said banks and investors could face a "challenging" adjustment process that could leave the system "more vulnerable than before to the crystallisation of other risks".
It said risks to financial stability had "materially increased" since its previous assessment mid-year, which was all the more startling given that the report was concluded at the start of November, when market distortions appeared to be easing. Mr Papademos said the pressure on market conditions had "elevated" in the month since the report was concluded.
The central bank for the 13-member currency area said a "substantial increase" in household debt coupled with signs of declining house prices in some markets added to the credit risk facing banks "in the short to medium term".
The economic outlook of the eurozone remained "broadly favourable" and the balance sheets of households, businesses and big banks were soundly creditworthy, said the ECB.
and
Central banks step in over credit crisis
By FT Reporters
Published: December 12 2007 14:25 | Last updated: December 13 2007 00:46
European and North American central banks on Wednesday unleashed a co-ordinated attempt to end the credit squeeze in global financial markets, setting off a wild day of trading as investors tried to make sense of a barrage of measures to increase market liquidity.
The Federal Reserve, European Central Bank, Bank of England, Bank of Canada and the Swiss National Bank all announced steps to make cash more readily available to banks. The Bank of Japan and Reserve Bank of Australia voiced support.
The actions – described by the Bank of England as an attempt to “demonstrate that central banks are working together to try to forestall any prospective sharp tightening of credit conditions” – helped ease pressure in money markets, a vital area of concern for policymakers. One-month Libor – the rate at which banks borrow from each other – was expected to set at 4.99 per cent on Thursday, down from 5.10 per cent on Wednesday.
However, conditions in the money markets remained strained by normal standards. Stocks also gave back most of their gains after surging earlier in response to the announcements.
The Fed said it was forming a new credit auction facility – first revealed by the Financial Times – that will offer cash to banks in return for a wide range of collateral, including housing-related securities. The Fed said it would hold two auctions of $20bn each in one-month loans this month.
The ECB and the Swiss National Bank said they had entered into so-called swap arrangements with the Fed to auction $24bn in dollar funds to banks in Europe. The two initiatives effectively form a new onshore and a new offshore dollar liquidity facility, and the Fed is willing to consider increasing both if required.
However, this is not all net new money, as the Fed is likely to pare back the amount of liquidity it would have provided through open market operations.
The Bank of England and the Bank of Canada, meanwhile, announced sweeping changes to their collateral rules to allow banks to pledge a much wider range of securities in exchange for funds.
Lucas Papademos, vice-president of the ECB, said the actions were “aimed at easing pressures and containing pressures in the term money market”.
Analysts hailed the announcements as evidence of the world’s top central bankers working together, but some traders were angry at the Fed for failing to signal the decision after its Tuesday policy meeting.
A senior Fed official said: “This was a global effort...We could not have announced yesterday as Europe was closed.” He said the announcements had “nothing to do” with the negative reaction to the Tuesday rate cut.
The S&P 500 opened more than 2 per cent higher, but dipped into negative territory as oil prices surged and ended up 0.6 per cent. Yields on two-year Treasuries rose 21 basis points to 3.13 per cent. However, interest rates for shorter-dated Treasuries barely moved – a sign of continued risk aversion.
and the guardian:
Central banks get a grip of Libor...finally
By Jamie McGeever
Finally, the world's leading central banks may be gaining traction in their battle to free up liquidity in credit markets, restore confidence in the global banking system and prevent slowing economic growth from, in some cases, spilling over into recession.
But the surprise package of measures announced by major central banks on Wednesday may not be enough on its own to completely fully thaw the credit market freeze and further policy easing -- not to mention patience -- may be required.
For example, it will take time for banks to confidently lend to counterparties still thought to be saddled with debt-related losses, months of tight credit still has to work its way through the economy and prolonged financial market stress simply won't be waved away with a magic wand overnight.
Still, the measures which include the creation of a short-term lending facility from the Federal Reserve and a $24 billion currency swap facility between the Fed, European Central Bank and Swiss National Bank, should help ease year-end funding tensions. "This will certainly help alleviate the liquidity squeeze but the main problem is still persuading banks to make liquidity go around, not just sit on it," said Marco Annunziata, chief economist and global head of fixed income research at UniCredit Markets & Investment Banking.
"For this we also need more transparency on the write-offs and losses, which i think we will get in the next few months. So I do think this is a very important and positive step, but you will also need more clarity to see liquidity conditions normalize in asset markets," he said.
Banks around the world have racked up losses and debt-related writedowns stemming form the collapse of the U.S. subprime mortgage market of more than $60 billion in recent months.
Immediately after the package was unveiled, indicated money market rates for dollar, euro and sterling deposits across the one-three month spectrum fell, suggesting Thursday's daily London interbank offered rates (Libor) will be fixed lower.
SHORT-TERM GAIN
Late Wednesday, indicated market rates were all below their respective Libor rates at the British Banking Association's daily fixing, which came before the central banks' announcement.
One-month sterling deposits were indicated at 6.35 percent, almost 40 basis points below the three-month Libor rate of 6.74625 percent.
And three-month euro deposit rates were trading at 4.85 percent, around 10 basis points below the 4.95250 percent Libor fix.
Tensions have been high in money markets since August as the credit crisis nearly shut key funding channels for banks, namely the asset-backed commercial paper market.
Laurent Fransolet at Barclays Capital said Libor rates could be fixed lower in the days ahead by as much as 20 basis points.
The biggest impact will likely be seen in sterling rates, where higher fixings have had "the strongest, most direct" effect, and the most limited in the euro zone.
But it will take time for the recent market carnage to heal.
"While this would still be way above pre-crisis levels, we suspect it will be difficult for the market to fully recover in the near term. After all, the ABCP market in the U.S. is about 30 percent smaller than at its peak and that of the euro area has almost halved, making the combined shrinkage more than $500 billion over the past five months," he wrote in a note.
If Libor rates do fall Thursday, it will be the first downward move in three-month euro Libor for over a month.
Before the measures were unveiled on Wednesday, three-month euro Libor rates rose to 4.95250 percent from 4.92688 percent, the biggest gain this month and the 21st straight increase.
One-month euro Libor rates rose to 4.94500 percent from 4.92250 percent, their highest since December 2000.
The premium of three-month Euribor rates over three-month euro overnight index average (EONIA) rates (a weighted average of all overnight unsecured interbank lending) widened to 90 basis points on Wednesday.
That's the widest in several years, wider than the initial peak after the credit crisis blew up in August, and around 40 basis points wider in the past month alone.
Like others, Lena Komileva, Group G7 economist at Tullett Prebon, also took a cautiously optimistic view.
"We expect that today's measure together with the drop-out of year-end effects from the market's pricing will help bring some temporary relief for funding markets and overt serious systemic risks at the turn of the year," she said.
"Nevertheless we expect that risk premia will be maintained above the levels seen in recent years into 2008 as the credit crunch enters a more mature stage." (Editing by Ron Askew)
Sunday, December 9, 2007
Stagfaltion on the Way?
Wolfgang Munchau in the FT this morning. I don't really agree with the way in which Wolfgang is framing this, but it is where the argument is at now, and needs to be taken seriously. This is here really so I can find it easily at some point in the future.
No single tactic will beat the subprime crisis
By Wolfgang Munchau
Published: December 9 2007 19:46 | Last updated: December 9 2007 19:46
The subprime crisis is a massive macroeconomic shock in need of a determined policy response. But what kind? It will probably not require a symmetrical response across countries and policy instruments but a more targeted strategy.
The US and the UK, for example, should respond harder than the eurozone and Asia, where the recession probability is much lower. While I never believed in decoupling – the theory spun by exuberant investment bankers that the rest of the world could happily grow when the US was in recession – this is an asymmetric crisis nevertheless.
If you live in a credit-addicted, English-speaking country with a large financial centre, you are more likely to be in trouble.
Nor should central banks, regulators and fiscal authorities open all the policy valves at the same time. The correct response is to use fiscal and regulatory policy aggressively – and monetary policy judiciously. In fact, there was some evidence last week that we are moving in that direction.
The European Central Bank was right in signalling a possible rise in interest rates next year, given prevailing inflationary pressures there. The US Treasury was also right when it came up with a scheme to bail out distressed subprime borrowers by freezing interest payments.
The only fault I could find with the US scheme is that it may not be sufficient – that the US government needs to do more to help mitigate the spillover from housing to the real economy.
The scheme, as it stands now, will not do anything to prevent a sharp economic downturn – but it might just help prevent a downturn becoming a depression. But even in the US, where there is a risk of an outright recession, a monetary over-reaction would be a serious mistake.
One reason is that monetary policy may not be as effective as regulatory and fiscal policy. For monetary policy to be able to bail out distressed borrowers would take cuts in interest rates of the order of some 200 to 300 basis points. And that would only work for those borrowers that can refinance immediately.
It is far better to bail out the distressed mortgage holders directly, if necessary through subsidies. The US has led the way, and Germany and Italy are also discussing relief plans.
Another important reason is the rise in global inflation. This is why Japan’s descent into deflation in the early 1990s offers fewer lessons than some people may think.
While it is true that in the past central banks often made the mistake of under-reacting, rather than over-reacting, this is not a generic lesson of financial crises. The early 1990s was a period of global disinflation. The Japanese asset price crash resulted in deflation and policymakers were in denial at the time.
That is surely not the case now. Global inflation is rising. Globalisation has entered a phase where it no longer just supplies us with cheap goods, but in addition creates large and rising demand for resources with supply constraints, such as oil, food and logistics. Another reason is that the period of wage deflation in western economies may also be coming to an end.
If we are unlucky, we might even end up with stagflation. If, as some commentators have urged, we use monetary policy too aggressively, we risk turning a credit squeeze into a wider financial crisis.
Higher inflation would, of course, help ease the immediate credit crisis as it shifts wealth from lenders to creditors. But it would bring on another, probably much bigger, crisis as investors would then start to desert the US bond market.
The last thing the world economy needs right now is a global bond market crash and an ensuing rise in real interest rates.
Central banks are therefore best advised to focus narrowly on price stability. Of course, a central bank also has responsibility to ensure financial stability, but this should not be confused with bailing out insolvent banks. In fact, it would probably be very healthy for the global financial system if some of those reckless mortgage lenders were allowed to go bankrupt.
A central bank’s role should be confined to providing ample liquidity to the markets through its regular money market operations. This is not at all in conflict with its price stability objective. Why should a central bank not be able to raise interest rates and increase its liquidity provisions at the same time? These two instruments serve different purposes.
Nor is an inflation-targeting approach at a time like this necessarily bad for economic growth.
A pure price stability strategy, if applied persistently and symmetrically, surely offers insurance against deflation and depression, just as it offers insurance against inflation and overheating. If inflationary expectations were to fall below the target, the central bank would still have plenty of time to act vigorously to bring expectations back in line with the target.
It is difficult to make the case at this point that the Federal Reserve is in any danger of undershooting its inflation target.
So if the Fed were to cut interest rates this week, it would be sending out the message that it is ready to let inflationary expectations rise. Even if the Fed goes down that road, the Europeans should walk the other way. I am now more optimistic than before that they will.
No single tactic will beat the subprime crisis
By Wolfgang Munchau
Published: December 9 2007 19:46 | Last updated: December 9 2007 19:46
The subprime crisis is a massive macroeconomic shock in need of a determined policy response. But what kind? It will probably not require a symmetrical response across countries and policy instruments but a more targeted strategy.
The US and the UK, for example, should respond harder than the eurozone and Asia, where the recession probability is much lower. While I never believed in decoupling – the theory spun by exuberant investment bankers that the rest of the world could happily grow when the US was in recession – this is an asymmetric crisis nevertheless.
If you live in a credit-addicted, English-speaking country with a large financial centre, you are more likely to be in trouble.
Nor should central banks, regulators and fiscal authorities open all the policy valves at the same time. The correct response is to use fiscal and regulatory policy aggressively – and monetary policy judiciously. In fact, there was some evidence last week that we are moving in that direction.
The European Central Bank was right in signalling a possible rise in interest rates next year, given prevailing inflationary pressures there. The US Treasury was also right when it came up with a scheme to bail out distressed subprime borrowers by freezing interest payments.
The only fault I could find with the US scheme is that it may not be sufficient – that the US government needs to do more to help mitigate the spillover from housing to the real economy.
The scheme, as it stands now, will not do anything to prevent a sharp economic downturn – but it might just help prevent a downturn becoming a depression. But even in the US, where there is a risk of an outright recession, a monetary over-reaction would be a serious mistake.
One reason is that monetary policy may not be as effective as regulatory and fiscal policy. For monetary policy to be able to bail out distressed borrowers would take cuts in interest rates of the order of some 200 to 300 basis points. And that would only work for those borrowers that can refinance immediately.
It is far better to bail out the distressed mortgage holders directly, if necessary through subsidies. The US has led the way, and Germany and Italy are also discussing relief plans.
Another important reason is the rise in global inflation. This is why Japan’s descent into deflation in the early 1990s offers fewer lessons than some people may think.
While it is true that in the past central banks often made the mistake of under-reacting, rather than over-reacting, this is not a generic lesson of financial crises. The early 1990s was a period of global disinflation. The Japanese asset price crash resulted in deflation and policymakers were in denial at the time.
That is surely not the case now. Global inflation is rising. Globalisation has entered a phase where it no longer just supplies us with cheap goods, but in addition creates large and rising demand for resources with supply constraints, such as oil, food and logistics. Another reason is that the period of wage deflation in western economies may also be coming to an end.
If we are unlucky, we might even end up with stagflation. If, as some commentators have urged, we use monetary policy too aggressively, we risk turning a credit squeeze into a wider financial crisis.
Higher inflation would, of course, help ease the immediate credit crisis as it shifts wealth from lenders to creditors. But it would bring on another, probably much bigger, crisis as investors would then start to desert the US bond market.
The last thing the world economy needs right now is a global bond market crash and an ensuing rise in real interest rates.
Central banks are therefore best advised to focus narrowly on price stability. Of course, a central bank also has responsibility to ensure financial stability, but this should not be confused with bailing out insolvent banks. In fact, it would probably be very healthy for the global financial system if some of those reckless mortgage lenders were allowed to go bankrupt.
A central bank’s role should be confined to providing ample liquidity to the markets through its regular money market operations. This is not at all in conflict with its price stability objective. Why should a central bank not be able to raise interest rates and increase its liquidity provisions at the same time? These two instruments serve different purposes.
Nor is an inflation-targeting approach at a time like this necessarily bad for economic growth.
A pure price stability strategy, if applied persistently and symmetrically, surely offers insurance against deflation and depression, just as it offers insurance against inflation and overheating. If inflationary expectations were to fall below the target, the central bank would still have plenty of time to act vigorously to bring expectations back in line with the target.
It is difficult to make the case at this point that the Federal Reserve is in any danger of undershooting its inflation target.
So if the Fed were to cut interest rates this week, it would be sending out the message that it is ready to let inflationary expectations rise. Even if the Fed goes down that road, the Europeans should walk the other way. I am now more optimistic than before that they will.
The US Mega Conduit
From the NYT today:
When he announced a new plan to try to stanch the foreclosure crisis, Treasury Secretary Henry Paulson Jr. said that the officials, lenders and investors involved had been working toward it since August. That start date is a useful benchmark for measuring the plan’s inadequacy.
Only an estimated 250,000 borrowers, at best, are likely to benefit from the plan’s main relief measure — a five-year freeze on certain adjustable loans’ introductory rates. Yet, from mid-2007 to now, some 800,000 homeowners have entered foreclosure. From 2008 through mid-2010, when the last of the potentially eligible loans would otherwise reset to sharply higher payments, there will be an estimated 3.5 million loan defaults.
The plan is too little, too late and too voluntary. Mr. Paulson and his boss, President Bush, have left it to the private sector — the mortgage industry — to protect the public interest, without any negative consequences if it does not. That is not the way the private sector works. And it is not how government is supposed to work at a time when Americans are facing mass foreclosures that threaten entire communities, financial markets and the wider economy.
Many mortgage servicers — lenders and private companies that collect mortgage payments on behalf of investors — have been reluctant to modify at-risk loans, even though the alternative is to foreclose on thousands of homeowners. That is because they fear being sued by mortgage investors. For some investors, letting a troubled borrower default would actually be better business, for others not. It all depends on how their particular security is set to pay out.
The new plan establishes guidelines that lenders can use to determine which troubled borrowers might qualify for a rate freeze. But even lenders that stick to the government-brokered guidelines have no guarantee that they cannot be sued.
The criteria for who gets relief and who does not are also a problem. Some are reasonable: borrowers must live in their homes and have a good repayment record on their mortgage loan. Others are far too restrictive: borrowers can be disqualified if they have improved their credit score during the loan’s introductory period, a move that is intended to weed out anyone with even the smallest probability of being able to afford a payment that is set to explode, but which could subject homeowners who need help to delays and denials.
Investors may simply be too self-interested to pull off the aggressive, broad-based loan fixes that Mr. Paulson has said he wants — and that the nation needs. Rather than standing up to Wall Street, Mr. Paulson is hoping that the interests of investors — to make money — will magically align with the interests of homeowners, to keep a roof over their heads.
Mr. Paulson should be prepared to choose sides. If the voluntary efforts are not much more successful than expected — and soon — he should support the tougher approaches being called for on Capitol Hill. One bill would help shield lenders who modify loans from being sued by investors. Another would allow troubled borrowers to restructure their mortgages under bankruptcy court protection. Both would give the industry a strong motivation to ramp up loan modifications — or watch the courts take over. If the industry drags its feet, that is exactly what should happen.
When he announced a new plan to try to stanch the foreclosure crisis, Treasury Secretary Henry Paulson Jr. said that the officials, lenders and investors involved had been working toward it since August. That start date is a useful benchmark for measuring the plan’s inadequacy.
Only an estimated 250,000 borrowers, at best, are likely to benefit from the plan’s main relief measure — a five-year freeze on certain adjustable loans’ introductory rates. Yet, from mid-2007 to now, some 800,000 homeowners have entered foreclosure. From 2008 through mid-2010, when the last of the potentially eligible loans would otherwise reset to sharply higher payments, there will be an estimated 3.5 million loan defaults.
The plan is too little, too late and too voluntary. Mr. Paulson and his boss, President Bush, have left it to the private sector — the mortgage industry — to protect the public interest, without any negative consequences if it does not. That is not the way the private sector works. And it is not how government is supposed to work at a time when Americans are facing mass foreclosures that threaten entire communities, financial markets and the wider economy.
Many mortgage servicers — lenders and private companies that collect mortgage payments on behalf of investors — have been reluctant to modify at-risk loans, even though the alternative is to foreclose on thousands of homeowners. That is because they fear being sued by mortgage investors. For some investors, letting a troubled borrower default would actually be better business, for others not. It all depends on how their particular security is set to pay out.
The new plan establishes guidelines that lenders can use to determine which troubled borrowers might qualify for a rate freeze. But even lenders that stick to the government-brokered guidelines have no guarantee that they cannot be sued.
The criteria for who gets relief and who does not are also a problem. Some are reasonable: borrowers must live in their homes and have a good repayment record on their mortgage loan. Others are far too restrictive: borrowers can be disqualified if they have improved their credit score during the loan’s introductory period, a move that is intended to weed out anyone with even the smallest probability of being able to afford a payment that is set to explode, but which could subject homeowners who need help to delays and denials.
Investors may simply be too self-interested to pull off the aggressive, broad-based loan fixes that Mr. Paulson has said he wants — and that the nation needs. Rather than standing up to Wall Street, Mr. Paulson is hoping that the interests of investors — to make money — will magically align with the interests of homeowners, to keep a roof over their heads.
Mr. Paulson should be prepared to choose sides. If the voluntary efforts are not much more successful than expected — and soon — he should support the tougher approaches being called for on Capitol Hill. One bill would help shield lenders who modify loans from being sued by investors. Another would allow troubled borrowers to restructure their mortgages under bankruptcy court protection. Both would give the industry a strong motivation to ramp up loan modifications — or watch the courts take over. If the industry drags its feet, that is exactly what should happen.
Tuesday, December 4, 2007
Yamal Peninsula
The Yamal Peninsula (Russian: полуо́стров Яма́л), located in Yamal-Nenets autonomous district of northwest Siberia, Russia, extends roughly 700 km (435 mi) and is bordered principally by the Kara Sea, Baydaratskaya Bay on the west, and by the Gulf of Ob on the east. In the language of its indigenous inhabitants, the Nenets, "Yamal" means "End of the World".
The peninsula consists mostly of permafrost ground and is geologically a very young place—less than 10,000 years old.
In the Russian Federation, the Yamal peninsula is the place where traditional large-scale nomadic reindeer husbandry is best preserved. On the peninsula, several thousand Nenets and Khanty reindeer herders hold about 500,000 domestic reindeer. At the same time, Yamal is inhabited by a multitude of migratory bird species.
At the same time, Yamal holds Russia's biggest natural gas reserves. The Bovanenkovskoye deposit is planned to be developed by the Russian gas monopolist Gazprom by 2011-2012, a fact which put the future of nomadic reindeer herding at considerable risk.
On the peninsula in the Summer of 2007 the well preserved remains of a 10,000 year old mammoth calf were found by reindeer herder. The animal was female and approximately six months old at the time of death.
Demographics
Population (2002): 507,006.
Ethnic groups: As oil workers from across Russia far outnumber indigenous people in the region it should come as no surprise that the Nenets only make up 5.2% of the population, preceded by Tatars (5.4%), Ukrainians (13%) and ethnic Russians (58.8%). Other prominent ethnic groups include Belarusians (8,989 or 1.8%), Khants (1.7%), Azerbaijanis (8,353 or 1.65%), Bashkirs (7,932 or 1.56%), Komi (1.22%), Moldovans (5,400 or 1.06%) and so on. (all figures as per the 2002 census)
Nenets (autonym: ненэця" вада) is a language spoken by the Nenets people in northern Russia. It belongs to the Samoyedic languages which form the Uralic language family with the Finno-Ugric languages. There are two major dialects—Tundra Nenets and Forest Nenets—with low mutual intelligibility between the two. Tundra Nenets has the larger group of speakers.
Contents
The name Samoyed entered the Russian language as a corruption of the self-reference Saamod, Saamid (the Fennic suffix "-d" denotes plurality: Saami -> "Saamid"). Another version derives the name from the expression "same edne" , i.e., the land of sami. In Russian ethnographic literature of 19th century they were also called "Самоядь", "Самодь", (samoyad', samod', samodijtsy, samodijskie narody) which was often transliterated into English as Samodi.
The literal morphs samo and yed in Russian convey the meaning "self-eater", which appears as derogatory. Therefore the name Samoyed quickly went out of usage in the 20th century, and the people bear the name of Nenets, which means "man".
When reading old Russian documents it is necessary to keep in mind that the term samoyed' was often applied indiscriminately to different peoples of Northern Siberia who speak different Uralic languages: Nenets, Nganasans, Enets, Selkups (speakers of Samoyedic languages). Currently, the term "Samoyedic peoples" applies to the whole group of different peoples. It is the general term which includes Nenets, Enets people, Selkup people and Nganasan people.
Nenets are just a part of the Samoyedic peoples. Sometimes their name is spelled as Nenet, probably because of the erroneous assumption that the terminal 's' is for the plural number.
There are two distinct groups based on their economy: the Tundra Nenets (living far to the north) and the Khandeyar or Forest Nenets. The third group Kominized Nenets (Yaran people) has emerged as a result of intermarriages between Nenets and the Izhma tribe of the Komi peoples.
Some[Who?] believe that they split apart from the Finno-Ugric speaking groups around 3000 BCE and migrated east where they mixed with Turkic and Altaic speaking peoples around 200 BCE. Those who remained in Europe came under Russian control around 1200 CE but those who lived further east did not come in contact until 14th century. In the early 17th century, all Nenets were under Russian control. The Samoyedic languages form a minor branch of the Uralic language family, the major branch being the Finno-Ugric languages. It is of major importance for the basic comparison between the Uralic and Finno-Ugric languages. Another consideration is that they moved (probably from farther south in Siberia) to the northernmost part of what later became Russia before the 12th century.
Nenets family in their tent.
Nenets family in their tent.
They ended up between the Kanin and Taymyr peninsulas, around the Ob and Yenisey rivers, with some of them settling into small communities and taking up farming, while others continued hunting and reindeer herding, travelling great distances over the Kanin peninsula. They bred the Samoyed dog to help herd their reindeer and pull their sleds, and European explorers later used those dogs for polar expeditions, because they have adapted so well to the arctic conditions. Fish was also a major component of their diet.
They had a shamanistic and animistic belief system which stressed respect for the land and its resources. They had a clan-based social structure. The Nenets shaman is called a Tadibya.
After the Russian Revolution, their culture suffered due to Soviet collectivisation policy. The government of the Soviet Union tried to force the nomad Samoyeds to settle down, and most of them became assimilated. They were forced to settle on permanent farms and their children were educated in state boarding schools, which resulted in erosion of their cultural identity. On the other hand, a wide range of new professions and activities were made available to the Nenets; Konstantin Pankov, for instance, became a well-known painter. Environmental damage due to the industrialisation of their land and overgrazing of the tundra migration routes in some regions (Yamal Peninsula) have further endangered their way of life.
The Kara Sea (Russian: Ка́рское мо́ре) is part of the Arctic Ocean north of Siberia. It is separated from the Barents Sea to the west by the Kara Strait and Novaya Zemlya, and the Laptev Sea to the east by the Severnaya Zemlya.
It is roughly 1,450 kilometres long and 970 kilometres wide with an area of around 880,000 km² and a mean depth of 110 m.
Compared to the Barents Sea, which receives relatively warm currents from the Atlantic, the Kara Sea is much colder, remaining frozen for over nine months a year.
The Kara receives a large amount of fresh water from the Ob, Yenisei, Pyasina, and Taimyra rivers, so its salinity is very variable.
Its main ports are Novy Port and Dikson and it is important as a fishing ground although the sea is ice-bound for all but two months of the year. Significant discoveries of petroleum and natural gas, an extension of the West Siberian Oil Basin, have been made but have not yet been developed.
The peninsula consists mostly of permafrost ground and is geologically a very young place—less than 10,000 years old.
In the Russian Federation, the Yamal peninsula is the place where traditional large-scale nomadic reindeer husbandry is best preserved. On the peninsula, several thousand Nenets and Khanty reindeer herders hold about 500,000 domestic reindeer. At the same time, Yamal is inhabited by a multitude of migratory bird species.
At the same time, Yamal holds Russia's biggest natural gas reserves. The Bovanenkovskoye deposit is planned to be developed by the Russian gas monopolist Gazprom by 2011-2012, a fact which put the future of nomadic reindeer herding at considerable risk.
On the peninsula in the Summer of 2007 the well preserved remains of a 10,000 year old mammoth calf were found by reindeer herder. The animal was female and approximately six months old at the time of death.
Demographics
Population (2002): 507,006.
Ethnic groups: As oil workers from across Russia far outnumber indigenous people in the region it should come as no surprise that the Nenets only make up 5.2% of the population, preceded by Tatars (5.4%), Ukrainians (13%) and ethnic Russians (58.8%). Other prominent ethnic groups include Belarusians (8,989 or 1.8%), Khants (1.7%), Azerbaijanis (8,353 or 1.65%), Bashkirs (7,932 or 1.56%), Komi (1.22%), Moldovans (5,400 or 1.06%) and so on. (all figures as per the 2002 census)
Nenets (autonym: ненэця" вада) is a language spoken by the Nenets people in northern Russia. It belongs to the Samoyedic languages which form the Uralic language family with the Finno-Ugric languages. There are two major dialects—Tundra Nenets and Forest Nenets—with low mutual intelligibility between the two. Tundra Nenets has the larger group of speakers.
Contents
The name Samoyed entered the Russian language as a corruption of the self-reference Saamod, Saamid (the Fennic suffix "-d" denotes plurality: Saami -> "Saamid"). Another version derives the name from the expression "same edne" , i.e., the land of sami. In Russian ethnographic literature of 19th century they were also called "Самоядь", "Самодь", (samoyad', samod', samodijtsy, samodijskie narody) which was often transliterated into English as Samodi.
The literal morphs samo and yed in Russian convey the meaning "self-eater", which appears as derogatory. Therefore the name Samoyed quickly went out of usage in the 20th century, and the people bear the name of Nenets, which means "man".
When reading old Russian documents it is necessary to keep in mind that the term samoyed' was often applied indiscriminately to different peoples of Northern Siberia who speak different Uralic languages: Nenets, Nganasans, Enets, Selkups (speakers of Samoyedic languages). Currently, the term "Samoyedic peoples" applies to the whole group of different peoples. It is the general term which includes Nenets, Enets people, Selkup people and Nganasan people.
Nenets are just a part of the Samoyedic peoples. Sometimes their name is spelled as Nenet, probably because of the erroneous assumption that the terminal 's' is for the plural number.
There are two distinct groups based on their economy: the Tundra Nenets (living far to the north) and the Khandeyar or Forest Nenets. The third group Kominized Nenets (Yaran people) has emerged as a result of intermarriages between Nenets and the Izhma tribe of the Komi peoples.
Some[Who?] believe that they split apart from the Finno-Ugric speaking groups around 3000 BCE and migrated east where they mixed with Turkic and Altaic speaking peoples around 200 BCE. Those who remained in Europe came under Russian control around 1200 CE but those who lived further east did not come in contact until 14th century. In the early 17th century, all Nenets were under Russian control. The Samoyedic languages form a minor branch of the Uralic language family, the major branch being the Finno-Ugric languages. It is of major importance for the basic comparison between the Uralic and Finno-Ugric languages. Another consideration is that they moved (probably from farther south in Siberia) to the northernmost part of what later became Russia before the 12th century.
Nenets family in their tent.
Nenets family in their tent.
They ended up between the Kanin and Taymyr peninsulas, around the Ob and Yenisey rivers, with some of them settling into small communities and taking up farming, while others continued hunting and reindeer herding, travelling great distances over the Kanin peninsula. They bred the Samoyed dog to help herd their reindeer and pull their sleds, and European explorers later used those dogs for polar expeditions, because they have adapted so well to the arctic conditions. Fish was also a major component of their diet.
They had a shamanistic and animistic belief system which stressed respect for the land and its resources. They had a clan-based social structure. The Nenets shaman is called a Tadibya.
After the Russian Revolution, their culture suffered due to Soviet collectivisation policy. The government of the Soviet Union tried to force the nomad Samoyeds to settle down, and most of them became assimilated. They were forced to settle on permanent farms and their children were educated in state boarding schools, which resulted in erosion of their cultural identity. On the other hand, a wide range of new professions and activities were made available to the Nenets; Konstantin Pankov, for instance, became a well-known painter. Environmental damage due to the industrialisation of their land and overgrazing of the tundra migration routes in some regions (Yamal Peninsula) have further endangered their way of life.
The Kara Sea (Russian: Ка́рское мо́ре) is part of the Arctic Ocean north of Siberia. It is separated from the Barents Sea to the west by the Kara Strait and Novaya Zemlya, and the Laptev Sea to the east by the Severnaya Zemlya.
It is roughly 1,450 kilometres long and 970 kilometres wide with an area of around 880,000 km² and a mean depth of 110 m.
Compared to the Barents Sea, which receives relatively warm currents from the Atlantic, the Kara Sea is much colder, remaining frozen for over nine months a year.
The Kara receives a large amount of fresh water from the Ob, Yenisei, Pyasina, and Taimyra rivers, so its salinity is very variable.
Its main ports are Novy Port and Dikson and it is important as a fishing ground although the sea is ice-bound for all but two months of the year. Significant discoveries of petroleum and natural gas, an extension of the West Siberian Oil Basin, have been made but have not yet been developed.
U.S. Share of Global Stocks Falls to 17-Year Low
From Bloomberg this morning:
The U.S. share of global stock-market capitalization fell to a 17-year low as faster-growing overseas exchanges lured more companies, a group of executives and academics backed by Treasury Secretary Henry Paulson said.
U.S. exchanges held 35 percent of worldwide equities by value as of September, down from 52 percent in 2001, the Committee on Capital Markets Regulation said in a report today. The group is led by former White House Economic Adviser Glenn Hubbard and ex-Goldman Sachs Group Inc. President John Thornton.
``On a scale of one to 10, with 10 where we need to be, I think we're at two right now,'' said committee director Hal Scott, a professor at Harvard Law School. If rules aren't changed, ``things are going to get worse.''
The appeal of U.S. stock markets has deteriorated significantly in recent years by ``any meaningful measure,'' the group said. Overall competitiveness declined from historical averages in 12 of 13 measures it used.
In a November 2006 report, the 24-member group recommended that policy makers overhaul securities regulation, including the Sarbanes-Oxley law passed after the collapse of Enron Corp. and WorldCom Inc. Lawmakers should limit liability for accountants, and the U.S. Justice Department should pursue indictments against companies only as a last resort, the group said.
Companies Leaving
The number of U.S.-based companies conducting initial public offerings only on overseas exchanges rose to 15 through September of this year, the group said. As recently as 2001, no U.S. company sold shares exclusively outside the country.
A growing number of international companies are leaving U.S. stock markets, the group said. A record 56 firms, or 12.4 percent of all foreign companies listed on U.S. exchanges, had left as of October, the report said. That compares with 30 delistings, or 6.6 percent of all foreign companies, in 2006.
The increase was likely related to the relaxation of rules by the U.S. Securities and Exchange Commission that previously made delisting more difficult, the group said.
``Some say this spike reflects a pent-up demand to leave and now will level off,'' the report said. ``That may be, but such a pent-up demand is itself a negative judgment on the value of using'' U.S. stock markets.
Not everyone agrees with the group's premise that regulation has been the main culprit. Nothing has damaged U.S. stock markets this year more than the failure by regulators to take measures to prevent the subprime-mortgage crisis, said Barbara Roper, director of investor protection at the Consumer Federation of America.
``It has been too little and too ineffective regulation that has hurt our markets,'' Roper said.
Paulson endorsed the independent panel's plan to study the competitiveness of U.S. capital markets when the committee was formed last year.
U.S. stock markets were valued at $17.8 trillion as of Dec. 2, or 29 percent of the global total, according to data compiled by Bloomberg. The value of Chinese equities tripled to $3.9 trillion from $1.3 trillion at the start of the year.
The U.S. share of global stock-market capitalization fell to a 17-year low as faster-growing overseas exchanges lured more companies, a group of executives and academics backed by Treasury Secretary Henry Paulson said.
U.S. exchanges held 35 percent of worldwide equities by value as of September, down from 52 percent in 2001, the Committee on Capital Markets Regulation said in a report today. The group is led by former White House Economic Adviser Glenn Hubbard and ex-Goldman Sachs Group Inc. President John Thornton.
``On a scale of one to 10, with 10 where we need to be, I think we're at two right now,'' said committee director Hal Scott, a professor at Harvard Law School. If rules aren't changed, ``things are going to get worse.''
The appeal of U.S. stock markets has deteriorated significantly in recent years by ``any meaningful measure,'' the group said. Overall competitiveness declined from historical averages in 12 of 13 measures it used.
In a November 2006 report, the 24-member group recommended that policy makers overhaul securities regulation, including the Sarbanes-Oxley law passed after the collapse of Enron Corp. and WorldCom Inc. Lawmakers should limit liability for accountants, and the U.S. Justice Department should pursue indictments against companies only as a last resort, the group said.
Companies Leaving
The number of U.S.-based companies conducting initial public offerings only on overseas exchanges rose to 15 through September of this year, the group said. As recently as 2001, no U.S. company sold shares exclusively outside the country.
A growing number of international companies are leaving U.S. stock markets, the group said. A record 56 firms, or 12.4 percent of all foreign companies listed on U.S. exchanges, had left as of October, the report said. That compares with 30 delistings, or 6.6 percent of all foreign companies, in 2006.
The increase was likely related to the relaxation of rules by the U.S. Securities and Exchange Commission that previously made delisting more difficult, the group said.
``Some say this spike reflects a pent-up demand to leave and now will level off,'' the report said. ``That may be, but such a pent-up demand is itself a negative judgment on the value of using'' U.S. stock markets.
Not everyone agrees with the group's premise that regulation has been the main culprit. Nothing has damaged U.S. stock markets this year more than the failure by regulators to take measures to prevent the subprime-mortgage crisis, said Barbara Roper, director of investor protection at the Consumer Federation of America.
``It has been too little and too ineffective regulation that has hurt our markets,'' Roper said.
Paulson endorsed the independent panel's plan to study the competitiveness of U.S. capital markets when the committee was formed last year.
U.S. stock markets were valued at $17.8 trillion as of Dec. 2, or 29 percent of the global total, according to data compiled by Bloomberg. The value of Chinese equities tripled to $3.9 trillion from $1.3 trillion at the start of the year.
Monday, December 3, 2007
Brazil, China IPOs Thrive as Global Stocks Decline
From Bloomberg this morning:
In the midst of the biggest drop in global equities in five years, investors are profiting from initial public offerings from Brazil to India. Those opportunities will keep appearing in the months ahead.
Bovespa Holding SA, owner of Brazil's biggest stock exchange, has risen 43 percent since trading started Oct. 26 versus a 1.4 percent gain in the nation's benchmark index. India's Mundra Port & Special Economic Zone Ltd. has surged 121 percent since its IPO last week; the Sensitive Index rose 1.9 percent. Athletic clothing company China Dongxiang (Group) Co. advanced 26 percent since its Oct. 9 debut, while the Hang Seng Index in Hong Kong, where the stock trades, is up 1.5 percent.
More than half the record $255 billion raised this year through IPOs globally came from emerging markets, where economic growth is more than triple the rate of developed nations. Consumer, industrial and financial companies that went public since Sept. 30 posted an average 11.5 percent gain compared with the MSCI World Index's 1.4 percent slump through last week, data compiled by Bloomberg show. IPOs planned by XTEP (China) Co., a sneaker maker, and Bolsa Mexicana de Valores SA, owner of Mexico's bourse, may attract similar interest.
``People are uncertain about the growth outlook in developed markets, but they can certainly see plenty of growth potential in emerging markets,'' said Alex Tedder, who purchased Bovespa during the IPO and helps manage $7 billion in global stocks at American Century Investments in New York. ``These things are in great demand.''
Global Declines
The end of the buyout boom and the first decline in U.S. profits in five years sent the Standard & Poor's 500 Index down 10 percent for the first time since 2003 last month and erased more than $4 trillion from equity markets globally.
The S&P 500 fell 0.6 percent to 1,472.42 today, while the MSCI World lost 0.4 percent.
Investors snapped up new shares of Sao Paulo-based Bolsa de Mercadorias & Futuros-BM&F SA, Latin America's biggest derivatives market, in its IPO last week, offering to buy 14 times more stock than the company sold, according to a person familiar with the sale. The stock jumped 20 percent on its first day of trading.
China Railway
China Railway Group Ltd., the world's third-biggest construction company, surged 69 percent in its Shanghai trading debut today on optimism the nation's growing transport demand will spur earnings. The company raised 22.4 billion yuan in the Shanghai offering and another HK$19.2 billion in a Hong Kong IPO, people with direct knowledge of the sales said last month.
China, India, Brazil and other emerging-market nations will expand 7.4 percent next year, compared with a rate of 2.2 percent in industrialized regions including the U.S., Japan and Europe, according to International Monetary Fund projections.
In the U.S., where subprime mortgage losses have caused the worst housing recession in 16 years, the economy may expand 1.9 percent in 2008, according to the IMF.
``The emerging markets are a few steps removed,'' said Henrik Strabo, chief investment officer at Clay Finlay Inc. in New York, which manages more than $5 billion. ``Even if things get a little rusty here, the emerging markets will still be OK.''
Financial, consumer and industrial companies sold about $48 billion in shares through IPOs this quarter, or 72 percent of all offerings globally. A total 131 companies in developing nations have raised $35.4 billion through IPOs in the same period, versus $32.7 billion raised by 117 companies in developed countries. Emerging-market IPOs also outpaced those from developed nations in the first nine months of the year, with $98.4 billion raised compared with $89.2 billion.
`In Heaven'
Investors bought $3.7 billion of Sao Paulo-based Bovespa's shares on expectations Latin America's fastest-growing bourse will keep expanding after trading jumped sixfold since 2000. BM&F tapped into that demand when it raised $3.4 billion last week.
The performance of exchanges has ``nothing whatsoever to do with the level or direction of stock prices,'' said Lawrence Goldstein, general partner at Santa Monica Partners LP in Larchmont, New York, who manages about $200 million and holds shares of NYSE Euronext, owner of the New York Stock Exchange. ``As long as stocks or derivatives trade, you're in heaven.''
Bolsa Mexicana, Mexico's biggest stock exchange, will pique investor interest when it sells shares in early 2008 because bourses tend to be profitable, said Gerardo Copca, equity analyst at financial consulting firm Metanalisis in Mexico City.
XTEP (China) hired New York-based JPMorgan Chase & Co. and Zurich-based UBS AG in August to help arrange a $300 million IPO, making it one of about 100 companies located in Brazil, Russia, India and China that have pending offerings, data compiled by Bloomberg show.
China Growth
China Dongxiang, located in Beijing, rose since its debut on speculation increased employment will boost the buying power of the nation's consumers. China's retail sales in October rose at the fastest pace in eight years as consumers in the world's fastest-growing major economy got richer and inflation accelerated, according to government data.
Expectations for gains in the newest emerging-market stocks may be too sanguine. BM&F sold shares for 36 times estimated 2009 earnings, while Bovespa's price-to-earnings ratio is 30, according to London-based Victoire Finance Capital. That compares with the S&P 500's P/E of 18.
`Pretty Expensive'
``They look pretty expensive to me,'' said David Semple, whose $185 million Van Eck Emerging Markets Fund outperformed 93 percent of its peers last year. ``There's unprecedented levels of activity in emerging markets. They're very much at risk if activity tails off.''
Billionaire investor Kenneth Fisher of Fisher Investments Inc. said the price justifies the risk, and IPOs provide fund managers a way to profit when earnings growth slows.
``What people want right now are good things, not bad things,'' said Fisher, who oversees more than $45 billion from Woodside, California. ``They want things that in their mind don't have a lot of fleas in them. Invariably with IPOs people tend to think they're pretty good.''
In the midst of the biggest drop in global equities in five years, investors are profiting from initial public offerings from Brazil to India. Those opportunities will keep appearing in the months ahead.
Bovespa Holding SA, owner of Brazil's biggest stock exchange, has risen 43 percent since trading started Oct. 26 versus a 1.4 percent gain in the nation's benchmark index. India's Mundra Port & Special Economic Zone Ltd. has surged 121 percent since its IPO last week; the Sensitive Index rose 1.9 percent. Athletic clothing company China Dongxiang (Group) Co. advanced 26 percent since its Oct. 9 debut, while the Hang Seng Index in Hong Kong, where the stock trades, is up 1.5 percent.
More than half the record $255 billion raised this year through IPOs globally came from emerging markets, where economic growth is more than triple the rate of developed nations. Consumer, industrial and financial companies that went public since Sept. 30 posted an average 11.5 percent gain compared with the MSCI World Index's 1.4 percent slump through last week, data compiled by Bloomberg show. IPOs planned by XTEP (China) Co., a sneaker maker, and Bolsa Mexicana de Valores SA, owner of Mexico's bourse, may attract similar interest.
``People are uncertain about the growth outlook in developed markets, but they can certainly see plenty of growth potential in emerging markets,'' said Alex Tedder, who purchased Bovespa during the IPO and helps manage $7 billion in global stocks at American Century Investments in New York. ``These things are in great demand.''
Global Declines
The end of the buyout boom and the first decline in U.S. profits in five years sent the Standard & Poor's 500 Index down 10 percent for the first time since 2003 last month and erased more than $4 trillion from equity markets globally.
The S&P 500 fell 0.6 percent to 1,472.42 today, while the MSCI World lost 0.4 percent.
Investors snapped up new shares of Sao Paulo-based Bolsa de Mercadorias & Futuros-BM&F SA, Latin America's biggest derivatives market, in its IPO last week, offering to buy 14 times more stock than the company sold, according to a person familiar with the sale. The stock jumped 20 percent on its first day of trading.
China Railway
China Railway Group Ltd., the world's third-biggest construction company, surged 69 percent in its Shanghai trading debut today on optimism the nation's growing transport demand will spur earnings. The company raised 22.4 billion yuan in the Shanghai offering and another HK$19.2 billion in a Hong Kong IPO, people with direct knowledge of the sales said last month.
China, India, Brazil and other emerging-market nations will expand 7.4 percent next year, compared with a rate of 2.2 percent in industrialized regions including the U.S., Japan and Europe, according to International Monetary Fund projections.
In the U.S., where subprime mortgage losses have caused the worst housing recession in 16 years, the economy may expand 1.9 percent in 2008, according to the IMF.
``The emerging markets are a few steps removed,'' said Henrik Strabo, chief investment officer at Clay Finlay Inc. in New York, which manages more than $5 billion. ``Even if things get a little rusty here, the emerging markets will still be OK.''
Financial, consumer and industrial companies sold about $48 billion in shares through IPOs this quarter, or 72 percent of all offerings globally. A total 131 companies in developing nations have raised $35.4 billion through IPOs in the same period, versus $32.7 billion raised by 117 companies in developed countries. Emerging-market IPOs also outpaced those from developed nations in the first nine months of the year, with $98.4 billion raised compared with $89.2 billion.
`In Heaven'
Investors bought $3.7 billion of Sao Paulo-based Bovespa's shares on expectations Latin America's fastest-growing bourse will keep expanding after trading jumped sixfold since 2000. BM&F tapped into that demand when it raised $3.4 billion last week.
The performance of exchanges has ``nothing whatsoever to do with the level or direction of stock prices,'' said Lawrence Goldstein, general partner at Santa Monica Partners LP in Larchmont, New York, who manages about $200 million and holds shares of NYSE Euronext, owner of the New York Stock Exchange. ``As long as stocks or derivatives trade, you're in heaven.''
Bolsa Mexicana, Mexico's biggest stock exchange, will pique investor interest when it sells shares in early 2008 because bourses tend to be profitable, said Gerardo Copca, equity analyst at financial consulting firm Metanalisis in Mexico City.
XTEP (China) hired New York-based JPMorgan Chase & Co. and Zurich-based UBS AG in August to help arrange a $300 million IPO, making it one of about 100 companies located in Brazil, Russia, India and China that have pending offerings, data compiled by Bloomberg show.
China Growth
China Dongxiang, located in Beijing, rose since its debut on speculation increased employment will boost the buying power of the nation's consumers. China's retail sales in October rose at the fastest pace in eight years as consumers in the world's fastest-growing major economy got richer and inflation accelerated, according to government data.
Expectations for gains in the newest emerging-market stocks may be too sanguine. BM&F sold shares for 36 times estimated 2009 earnings, while Bovespa's price-to-earnings ratio is 30, according to London-based Victoire Finance Capital. That compares with the S&P 500's P/E of 18.
`Pretty Expensive'
``They look pretty expensive to me,'' said David Semple, whose $185 million Van Eck Emerging Markets Fund outperformed 93 percent of its peers last year. ``There's unprecedented levels of activity in emerging markets. They're very much at risk if activity tails off.''
Billionaire investor Kenneth Fisher of Fisher Investments Inc. said the price justifies the risk, and IPOs provide fund managers a way to profit when earnings growth slows.
``What people want right now are good things, not bad things,'' said Fisher, who oversees more than $45 billion from Woodside, California. ``They want things that in their mind don't have a lot of fleas in them. Invariably with IPOs people tend to think they're pretty good.''
Bond market illiquidity hits eurozone
From the FT this morning:
A severe bout of illiquidity has hit eurozone government bonds, threatening to impair the ability of some governments and other borrowers to meet their funding needs in coming months, according to market specialists.
The development is striking because it underlines the degree to which problems in the US subprime mortgage market is spilling over into seemingly unrelated sectors, including traditionally safe government bond markets in the single currency region.
In recent weeks, risk premiums on eurozone government bonds, except those of Germany – which is the largest and most liquid market in the region – have been rising.
“European government bond markets are facing challenges they haven’t done for decades,” said Steven Major, head of fixed-income strategy at HSBC. “We are seeing a repricing of risk and a level of illiquidity we haven’t seen for a long time.”
Tensions in the secondary markets are also being fuelled by the “turn of the year” effect, which make banks increasingly reluctant to lend to each other in maturities extending beyond the end of any given year.
But analysts say the year-end effect should have dissipated by now if markets were behaving more normally. “People have generally been complacent because they thought that risk aversion might have gone away by now but risk premiums are only getting higher and so is risk aversion,” said Mr Major.
The situation could become problematic for governments in the eurozone, as well as a swathe of other issuers from the region, including supra-national and quasi-government agencies, which have traditionally tended to issue a large proportion of their debt at the start of the calendar year – unlike in the US and the UK.
“There is a massive surge in funding in January and if things do not get back to a reasonable sense of normality by then, there could be some difficulties raising funds,” said Ciaran O’Hagan, strategist at Société Générale. He estimates that eurozone governments alone could issue a gross €570bn ($885bn, £405bn) next year, with more than €70bn likely to come in January.
One European sovereign debt management official said: “It will be very difficult in the new year to conduct all the new issue activities, especially for corporates but for some sovereigns as well. There are so many standing in line and waiting.”
Some analysts say the huge proportion of the year’s redemptions, which also come early in the year, will help absorb new supply.
“I doubt that governments will have trouble raising money,” said Marc Ostwald, strategist at Insinger de Beaufort. “But they may be fretting about a potential sharp upward adjustment in the yields they need to pay to sell their debt.”
Indeed, even in the US Treasury market, the spread between buy and sell prices for securities issued by the Treasury before the current quarter has become a lot wider than normal. “Traders and banks are in risk-reduction mode,” said Tom di Galoma, head of Treasury trading at Jefferies.
A severe bout of illiquidity has hit eurozone government bonds, threatening to impair the ability of some governments and other borrowers to meet their funding needs in coming months, according to market specialists.
The development is striking because it underlines the degree to which problems in the US subprime mortgage market is spilling over into seemingly unrelated sectors, including traditionally safe government bond markets in the single currency region.
In recent weeks, risk premiums on eurozone government bonds, except those of Germany – which is the largest and most liquid market in the region – have been rising.
“European government bond markets are facing challenges they haven’t done for decades,” said Steven Major, head of fixed-income strategy at HSBC. “We are seeing a repricing of risk and a level of illiquidity we haven’t seen for a long time.”
Tensions in the secondary markets are also being fuelled by the “turn of the year” effect, which make banks increasingly reluctant to lend to each other in maturities extending beyond the end of any given year.
But analysts say the year-end effect should have dissipated by now if markets were behaving more normally. “People have generally been complacent because they thought that risk aversion might have gone away by now but risk premiums are only getting higher and so is risk aversion,” said Mr Major.
The situation could become problematic for governments in the eurozone, as well as a swathe of other issuers from the region, including supra-national and quasi-government agencies, which have traditionally tended to issue a large proportion of their debt at the start of the calendar year – unlike in the US and the UK.
“There is a massive surge in funding in January and if things do not get back to a reasonable sense of normality by then, there could be some difficulties raising funds,” said Ciaran O’Hagan, strategist at Société Générale. He estimates that eurozone governments alone could issue a gross €570bn ($885bn, £405bn) next year, with more than €70bn likely to come in January.
One European sovereign debt management official said: “It will be very difficult in the new year to conduct all the new issue activities, especially for corporates but for some sovereigns as well. There are so many standing in line and waiting.”
Some analysts say the huge proportion of the year’s redemptions, which also come early in the year, will help absorb new supply.
“I doubt that governments will have trouble raising money,” said Marc Ostwald, strategist at Insinger de Beaufort. “But they may be fretting about a potential sharp upward adjustment in the yields they need to pay to sell their debt.”
Indeed, even in the US Treasury market, the spread between buy and sell prices for securities issued by the Treasury before the current quarter has become a lot wider than normal. “Traders and banks are in risk-reduction mode,” said Tom di Galoma, head of Treasury trading at Jefferies.
Wednesday, November 28, 2007
Credit Squeeze and Bank Lending in the Eurozone
From the FT this morning:
Credit squeeze fails to dent eurozone borrowing
By Ralph Atkins in Berlin
Published: November 28 2007 15:03 | Last updated: November 28 2007 15:03
The global credit squeeze has had little or no impact on business and consumer borrowing in the eurozone, European Central Bank data suggested on Wednesday, with the effects of the recent financial turmoil yet to feed through into the 13-country economy.
Loans to non-financial businesses grew at an annual rate of 13.9 per cent in October, unchanged from the previous month, and one of the fastest rates since the launch of the euro in 1999, according to the ECB’s credit and money supply figures. Lending to consumers had started to slow before the credit crunch hit in August but in October still grew at an annual rate of 6.8 per cent – also unchanged from the previous month.
That appeared at odds with recent the latest ECB survey on bank lending conditions, released last month, which had reported a significant toughening of credit standards applied by banks.
The conflicting evidence highlighted the quandary facing the European Central Bank. Inflation is rising sharply – November’s figure published on Friday is expected to be far above its target of an annual rate “below but close” to 2 per cent – which would otherwise have strengthened the case for higher interest rates.
But the ECB is still fighting to calm tensions in money markets, where three-month interest rates remain stubbornly high. The large appetite for funds was highlighted in the ECB’s latest regular auction for three-month money yesterday, where banks submitted €132.4bn of bids for the €50bn allotted.
Meanwhile, the extent of the macro-economic impact of the global credit squeeze and the euro’s record strength remain unclear. Robert Barrie, economist at Credit Suisse, argued that October might have been too early to see effects on lending data. But higher market interest rates, and a sharper-than-expected US slowdown added to the threats. “It is very easy to draw up quite a list of downside risks to growth. If they all materialised, growth would slow a lot,” he said.
As a result of the conflicting pressures, the ECB is expected to hold its main interest rate unchanged next week at 4 per cent – and financial markets expect it to remain on hold for much of 2008
The latest data showed annual growth in M3, the broad money supply measure, accelerating to a record 12.3 per cent in October. M3 is watched closely by the ECB as an inflation early warning signal. But its growth might have been exaggerated by a flight to liquid assets as a result of recent financial market turmoil.
The figures on lending to business might also have been distorted by recent events with growth rates exaggerated if loans had built up on banks’ books because they had failed to securitise deals as in past. Nevertheless, Julian Callow, economist at Barclays Capital, argued that the ECB was likely to see the data “as suggesting no discernible impact of the credit tightening on the pace of non-financial private sector credit growth up until the end of October.”
Credit squeeze fails to dent eurozone borrowing
By Ralph Atkins in Berlin
Published: November 28 2007 15:03 | Last updated: November 28 2007 15:03
The global credit squeeze has had little or no impact on business and consumer borrowing in the eurozone, European Central Bank data suggested on Wednesday, with the effects of the recent financial turmoil yet to feed through into the 13-country economy.
Loans to non-financial businesses grew at an annual rate of 13.9 per cent in October, unchanged from the previous month, and one of the fastest rates since the launch of the euro in 1999, according to the ECB’s credit and money supply figures. Lending to consumers had started to slow before the credit crunch hit in August but in October still grew at an annual rate of 6.8 per cent – also unchanged from the previous month.
That appeared at odds with recent the latest ECB survey on bank lending conditions, released last month, which had reported a significant toughening of credit standards applied by banks.
The conflicting evidence highlighted the quandary facing the European Central Bank. Inflation is rising sharply – November’s figure published on Friday is expected to be far above its target of an annual rate “below but close” to 2 per cent – which would otherwise have strengthened the case for higher interest rates.
But the ECB is still fighting to calm tensions in money markets, where three-month interest rates remain stubbornly high. The large appetite for funds was highlighted in the ECB’s latest regular auction for three-month money yesterday, where banks submitted €132.4bn of bids for the €50bn allotted.
Meanwhile, the extent of the macro-economic impact of the global credit squeeze and the euro’s record strength remain unclear. Robert Barrie, economist at Credit Suisse, argued that October might have been too early to see effects on lending data. But higher market interest rates, and a sharper-than-expected US slowdown added to the threats. “It is very easy to draw up quite a list of downside risks to growth. If they all materialised, growth would slow a lot,” he said.
As a result of the conflicting pressures, the ECB is expected to hold its main interest rate unchanged next week at 4 per cent – and financial markets expect it to remain on hold for much of 2008
The latest data showed annual growth in M3, the broad money supply measure, accelerating to a record 12.3 per cent in October. M3 is watched closely by the ECB as an inflation early warning signal. But its growth might have been exaggerated by a flight to liquid assets as a result of recent financial market turmoil.
The figures on lending to business might also have been distorted by recent events with growth rates exaggerated if loans had built up on banks’ books because they had failed to securitise deals as in past. Nevertheless, Julian Callow, economist at Barclays Capital, argued that the ECB was likely to see the data “as suggesting no discernible impact of the credit tightening on the pace of non-financial private sector credit growth up until the end of October.”
Volatility and the Japanese Yen
From the FT this morning:
BoJ warns of ‘disease’ in world markets
By David Pilling in Tokyo
Published: November 27 2007 20:01 | Last updated: November 27 2007 20:01
The yen hit a two-and-a-half year high against the dollar on Tuesday as Toshihiko Fukui, governor of the Bank of Japan, expressed strong concern about the turbulence in world markets, comparing it with “a serious disease”.
The yen briefly rose to Y107.17 against the dollar, although it fell back to Y108 in Tokyo trading. Before July, when investors began to reverse some so-called yen carry-trade positions amid a retreat from risk, the currency had been trading at above Y120 to the dollar.
Tuesday’s sharp oscillations sent Japanese equity markets gyrating, with the Nikkei index falling 300 points in the morning amid concern about the effects of a strong currency on exporters, before it rallied to close up 87.64 points as the yen drifted down again. Mr Fukui said the volatile movements in financial markets since July suggested global markets were paying the price for “euphoria and excessive risk-taking”. It was the central bank’s job, he said, “to help markets adjust themselves in an orderly manner as far as possible, while keeping markets functioning at all times.”
The BoJ has reacted to the US mortgage crisis by putting an expected interest rate rise on hold, keeping overnight rates at 0.5 per cent. Although the bank has fractionally pared back its growth and inflation predictions for this year, it has stuck to its central thesis that Japan’s economy remains in a virtuous cycle.
Masaaki Kanno, chief economist at JPMorgan in Tokyo, said a strengthening yen clouded the picture. If the yen broke through Y100 or Y90 to the dollar, he said, it could “be a big blow to the economy” and once more raise the spectre of deflation.
“In the past we didn’t worry so much about yen strength as we believed the global economy would grow steadily,” he said. “But if the strong yen is caused by the slowing of the global eco- nomy together with the spread of risk aversion, then probably we should be a bit more worried than before.”
Other economists said concern about the yen comes on top of worries about the domestic economy, partly brought on by a sharp fall in housing starts.
Jonathan Allum, strategist at KBC Financial Products, said the yen was still relatively weak against the euro, a fact that had helped underpin strong exports to European countries.
On Tuesday, the yen, which peaked at Y168 to the euro in early July, had strengthened to about Y160, compared with previous levels of about Y130.
If the yen appreciated further against the euro it could damage exports to Europe, Mr Allum said. But the “knee-jerk reaction that a strong yen is bad and a weak yen is good [for Japan] is probably a bit out of date.”
Japanese politicians have said that a strong yen is not bad for Japan in the long run, but they have warned about the dangers of sharp movements.
From Bloomberg this morning:
The yen climbed against all of the world's 16 most-active currencies as losses at U.S. banks prompted investors to reduce purchases of higher-yielding currencies funded by loans from Japan.
The yen rose against the dollar, rebounding from its biggest decline in three months, after Asian stocks fell and Wells Fargo & Co. announced a $1.4 billion of loan losses. The euro fell after Germany's consumer confidence weakened more than expected by economists in December.
``The subprime crisis isn't over yet by any means,'' said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank, Germany's second-largest bank. ``Investors are risk averse, so the bias is to buy the yen.''
Japan's currency climbed to 108.65 against the dollar at 6:50 a.m. in London from 108.97 late yesterday, when it fell more than 1.4 percent. The yen may rise to 108.10 today, Muramatsu forecast.
The euro declined to 160.52 yen from 161.62 yen and fell to a one-week low of $1.4773 from $1.4829, after Gfk AG's index of German consumer confidence fell to 4.3 in December, the lowest since January 2006.
The 13-nation currency also declined after the Economic Times of India today cited European Central Bank President Jean- Claude Trichet as saying he's averse to ``brutal'' shifts in exchange rates.
Growth Outlook
``European officials are worried the euro's gains may be excessive, hurting economic growth,'' said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co., Japan's sixth-largest brokerage by sales. ``It looks like they don't want a rapid rise in the currency,'' which may fall to $1.4785 and 160.45 yen today, he said.
Losses in the euro accelerated after it dropped below $1.4775, where traders have orders to sell, said Shigetake Nakayama, a manager of proprietary trading desk in London at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's largest publicly traded lender by assets.
Traders sometimes place automatic instructions to limit losses in case their bets go the wrong way. The euro may fall to $1.46 against the dollar today, Nakayama said.
The euro has gained 2.7 percent versus the dollar in the past month, eroding the competitiveness of European exports. The European Commission this month cut its forecast for euro-area growth next year to 2.2 percent from 2.5 percent. The British pound weakened 0.3 percent versus the dollar to $2.0629, and the Swiss franc declined 0.3 percent to 1.1091.
The yen rose the most versus Norway's krone, a favorite of the carry trade because Norway's key rate of 5 percent is above Japan's 0.5 percent. The krone slipped 0.9 percent to 19.7886 yen. The MSCI Asia-Pacific Index of regional shares fell 0.4 percent.
Carry Trades
``Exporters are taking advantage of the yen's weakness, especially when the outlook of subprime problems is unclear,'' said Akihiro Tanaka, a senior currency dealer in Tokyo at Resona Bank Ltd., Japan's fourth-largest publicly traded lender.
Japan's currency may move between 107.80 and 108.80 per dollar today, Tanaka forecast.
In carry trades, speculators get funds in a country with low borrowing costs and invest in another with higher returns, earning the spread between the two. The risk is that currency fluctuations erase profits between the two rates.
Wells Fargo, the second-largest U.S. mortgage lender, said yesterday it will take a $1.4 billion pretax charge tied to increased losses on loans backed by homes.
The euro may fall to 153 yen after its chart formed a so- called ``double top,'' said analysts at Citigroup Global Markets Inc. Europe's single currency advanced to 167.65 yen on Nov. 7, with the previous peak a 12-week high of 167.74 on Oct. 15. The pattern indicates a currency may decline, triggering a slide in the euro to 153 yen, Citigroup's technical analysts said.
Japanese Exporters
Japanese exporters sold dollars before the end of the month on speculation the Federal Reserve's so-called Beige Book, a compendium of regional reports that will frame policy makers discussions when they meet in December, will today show mortgage defaults are slowing U.S. economic growth.
``The dollar has a downside risk with the Beige Book,'' said Masaki Fukui, senior economist in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest publicly traded lender by assets. ``There are some possibilities the Fed may indicate the correction in housing markets and financial instability will adversely affect the real economy.''
The U.S. currency may decline to 103 yen by the end of March, Fukui said.
There's a 98 percent chance the Fed will cut its key interest rate by a quarter-percentage point next month from the current level of 4.5 percent, according to interest-rate futures traded on the Chicago Board of Trade. Investors saw an 82 percent chance a month ago.
and from Reuters
JGBs rise as quick remedy on credit crunch doubted
Japanese government bonds rose on Wednesday as investors remained doubtful of a quick resolution to global credit problems, with many financial institutions still struggling with losses from the slumping U.S. housing sector.
The housing market slump kept intact concerns about a deterioration in the U.S. economy, which could also weigh on Japan's economy and make the Bank of Japan delay raising interest rates further.
Traders said investors were buying back bonds, particularly in the medium-term sector, as they saw as overdone the previous session's sharp selling on expectations that money may flow into risk assets again from the safety of government debt.
JGBs and U.S. Treasuries fell sharply on Tuesday on news that Abu Dhabi Investment Authority, the world's biggest sovereign wealth fund, will inject $7.5 billion into Citigroup Inc (C.N: Quote, Profile , Research), which has been one of the hardest hit by subprime mortgage sector problems and the consequent credit crunch.
"The move is not sufficient to resolve the subprime loan problem, which has a much wider impact not only on the health of financial institutions but also on the U.S. economy, so selling of JGBs on the news was overdone," said a senior dealer at a big Japanese bank.
The move "soothed excessive pessimism, while few think uncertainties over the subprime mortgage problems have completely diminished," said Tatsuo Ichikawa, a fixed-income strategist at ABN AMRO Securities.
Wells Fargo & Co (WFC.N: Quote, Profile , Research), the second-largest U.S. mortgage lender, said on Tuesday it would take a $1.4 billion fourth-quarter charge largely related to losses on home equity loans as the U.S. housing market deteriorates.
December 10-year futures <2JGBv1> ended the day session up 0.21 point at 137.10, edging towards a 22-month high of 137.53 hit last week.
JGB futures have risen to their highest since January 2006, as turmoil in global financial markets has fuelled investor doubts over whether the BOJ will lift interest rates to 0.75 percent from the current 0.5 percent before the end of Japan's fiscal year in March.
The 10-year yield fell 1 basis point to 1.480 percent, staying well above a 26-month low of 1.395 percent reached last week.
The five-year yield fell 2 basis points to 1.025 percent. The yield slid to 0.995 percent on Tuesday, a 21-month low.
The two-year yield edged down 0.5 basis point to 0.755 percent. The short-term yield struck a nine-month low of 0.715 percent earlier in the month.
Traders expect the Ministry of Finance's offer of around 1.7 trillion yen ($15.67 billion) in two-year JGBs on Thursday to go smoothly, although demand is not expected to be very strong. Traders said the coupon could be set at 0.8 percent.
Weaker Tokyo shares also made investors careful about selling JGBs too aggressively, traders said. The Nikkei share average <.N225> ended down 0.5 percent at 15,153.78.
Japanese retail sales rose a more-than-expected 0.8 percent in October from a year earlier, pointing to firmness in consumer spending, but the data did little to alter the prevailing market view that the BOJ will not raise rates until well into next year. ($1=108.45 Yen) (Additional reporting by Rika Otsuka, Editing by Michael Watson)
BoJ warns of ‘disease’ in world markets
By David Pilling in Tokyo
Published: November 27 2007 20:01 | Last updated: November 27 2007 20:01
The yen hit a two-and-a-half year high against the dollar on Tuesday as Toshihiko Fukui, governor of the Bank of Japan, expressed strong concern about the turbulence in world markets, comparing it with “a serious disease”.
The yen briefly rose to Y107.17 against the dollar, although it fell back to Y108 in Tokyo trading. Before July, when investors began to reverse some so-called yen carry-trade positions amid a retreat from risk, the currency had been trading at above Y120 to the dollar.
Tuesday’s sharp oscillations sent Japanese equity markets gyrating, with the Nikkei index falling 300 points in the morning amid concern about the effects of a strong currency on exporters, before it rallied to close up 87.64 points as the yen drifted down again. Mr Fukui said the volatile movements in financial markets since July suggested global markets were paying the price for “euphoria and excessive risk-taking”. It was the central bank’s job, he said, “to help markets adjust themselves in an orderly manner as far as possible, while keeping markets functioning at all times.”
The BoJ has reacted to the US mortgage crisis by putting an expected interest rate rise on hold, keeping overnight rates at 0.5 per cent. Although the bank has fractionally pared back its growth and inflation predictions for this year, it has stuck to its central thesis that Japan’s economy remains in a virtuous cycle.
Masaaki Kanno, chief economist at JPMorgan in Tokyo, said a strengthening yen clouded the picture. If the yen broke through Y100 or Y90 to the dollar, he said, it could “be a big blow to the economy” and once more raise the spectre of deflation.
“In the past we didn’t worry so much about yen strength as we believed the global economy would grow steadily,” he said. “But if the strong yen is caused by the slowing of the global eco- nomy together with the spread of risk aversion, then probably we should be a bit more worried than before.”
Other economists said concern about the yen comes on top of worries about the domestic economy, partly brought on by a sharp fall in housing starts.
Jonathan Allum, strategist at KBC Financial Products, said the yen was still relatively weak against the euro, a fact that had helped underpin strong exports to European countries.
On Tuesday, the yen, which peaked at Y168 to the euro in early July, had strengthened to about Y160, compared with previous levels of about Y130.
If the yen appreciated further against the euro it could damage exports to Europe, Mr Allum said. But the “knee-jerk reaction that a strong yen is bad and a weak yen is good [for Japan] is probably a bit out of date.”
Japanese politicians have said that a strong yen is not bad for Japan in the long run, but they have warned about the dangers of sharp movements.
From Bloomberg this morning:
The yen climbed against all of the world's 16 most-active currencies as losses at U.S. banks prompted investors to reduce purchases of higher-yielding currencies funded by loans from Japan.
The yen rose against the dollar, rebounding from its biggest decline in three months, after Asian stocks fell and Wells Fargo & Co. announced a $1.4 billion of loan losses. The euro fell after Germany's consumer confidence weakened more than expected by economists in December.
``The subprime crisis isn't over yet by any means,'' said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank, Germany's second-largest bank. ``Investors are risk averse, so the bias is to buy the yen.''
Japan's currency climbed to 108.65 against the dollar at 6:50 a.m. in London from 108.97 late yesterday, when it fell more than 1.4 percent. The yen may rise to 108.10 today, Muramatsu forecast.
The euro declined to 160.52 yen from 161.62 yen and fell to a one-week low of $1.4773 from $1.4829, after Gfk AG's index of German consumer confidence fell to 4.3 in December, the lowest since January 2006.
The 13-nation currency also declined after the Economic Times of India today cited European Central Bank President Jean- Claude Trichet as saying he's averse to ``brutal'' shifts in exchange rates.
Growth Outlook
``European officials are worried the euro's gains may be excessive, hurting economic growth,'' said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co., Japan's sixth-largest brokerage by sales. ``It looks like they don't want a rapid rise in the currency,'' which may fall to $1.4785 and 160.45 yen today, he said.
Losses in the euro accelerated after it dropped below $1.4775, where traders have orders to sell, said Shigetake Nakayama, a manager of proprietary trading desk in London at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's largest publicly traded lender by assets.
Traders sometimes place automatic instructions to limit losses in case their bets go the wrong way. The euro may fall to $1.46 against the dollar today, Nakayama said.
The euro has gained 2.7 percent versus the dollar in the past month, eroding the competitiveness of European exports. The European Commission this month cut its forecast for euro-area growth next year to 2.2 percent from 2.5 percent. The British pound weakened 0.3 percent versus the dollar to $2.0629, and the Swiss franc declined 0.3 percent to 1.1091.
The yen rose the most versus Norway's krone, a favorite of the carry trade because Norway's key rate of 5 percent is above Japan's 0.5 percent. The krone slipped 0.9 percent to 19.7886 yen. The MSCI Asia-Pacific Index of regional shares fell 0.4 percent.
Carry Trades
``Exporters are taking advantage of the yen's weakness, especially when the outlook of subprime problems is unclear,'' said Akihiro Tanaka, a senior currency dealer in Tokyo at Resona Bank Ltd., Japan's fourth-largest publicly traded lender.
Japan's currency may move between 107.80 and 108.80 per dollar today, Tanaka forecast.
In carry trades, speculators get funds in a country with low borrowing costs and invest in another with higher returns, earning the spread between the two. The risk is that currency fluctuations erase profits between the two rates.
Wells Fargo, the second-largest U.S. mortgage lender, said yesterday it will take a $1.4 billion pretax charge tied to increased losses on loans backed by homes.
The euro may fall to 153 yen after its chart formed a so- called ``double top,'' said analysts at Citigroup Global Markets Inc. Europe's single currency advanced to 167.65 yen on Nov. 7, with the previous peak a 12-week high of 167.74 on Oct. 15. The pattern indicates a currency may decline, triggering a slide in the euro to 153 yen, Citigroup's technical analysts said.
Japanese Exporters
Japanese exporters sold dollars before the end of the month on speculation the Federal Reserve's so-called Beige Book, a compendium of regional reports that will frame policy makers discussions when they meet in December, will today show mortgage defaults are slowing U.S. economic growth.
``The dollar has a downside risk with the Beige Book,'' said Masaki Fukui, senior economist in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest publicly traded lender by assets. ``There are some possibilities the Fed may indicate the correction in housing markets and financial instability will adversely affect the real economy.''
The U.S. currency may decline to 103 yen by the end of March, Fukui said.
There's a 98 percent chance the Fed will cut its key interest rate by a quarter-percentage point next month from the current level of 4.5 percent, according to interest-rate futures traded on the Chicago Board of Trade. Investors saw an 82 percent chance a month ago.
and from Reuters
JGBs rise as quick remedy on credit crunch doubted
Japanese government bonds rose on Wednesday as investors remained doubtful of a quick resolution to global credit problems, with many financial institutions still struggling with losses from the slumping U.S. housing sector.
The housing market slump kept intact concerns about a deterioration in the U.S. economy, which could also weigh on Japan's economy and make the Bank of Japan delay raising interest rates further.
Traders said investors were buying back bonds, particularly in the medium-term sector, as they saw as overdone the previous session's sharp selling on expectations that money may flow into risk assets again from the safety of government debt.
JGBs and U.S. Treasuries fell sharply on Tuesday on news that Abu Dhabi Investment Authority, the world's biggest sovereign wealth fund, will inject $7.5 billion into Citigroup Inc (C.N: Quote, Profile , Research), which has been one of the hardest hit by subprime mortgage sector problems and the consequent credit crunch.
"The move is not sufficient to resolve the subprime loan problem, which has a much wider impact not only on the health of financial institutions but also on the U.S. economy, so selling of JGBs on the news was overdone," said a senior dealer at a big Japanese bank.
The move "soothed excessive pessimism, while few think uncertainties over the subprime mortgage problems have completely diminished," said Tatsuo Ichikawa, a fixed-income strategist at ABN AMRO Securities.
Wells Fargo & Co (WFC.N: Quote, Profile , Research), the second-largest U.S. mortgage lender, said on Tuesday it would take a $1.4 billion fourth-quarter charge largely related to losses on home equity loans as the U.S. housing market deteriorates.
December 10-year futures <2JGBv1> ended the day session up 0.21 point at 137.10, edging towards a 22-month high of 137.53 hit last week.
JGB futures have risen to their highest since January 2006, as turmoil in global financial markets has fuelled investor doubts over whether the BOJ will lift interest rates to 0.75 percent from the current 0.5 percent before the end of Japan's fiscal year in March.
The 10-year yield
The five-year yield
The two-year yield
Traders expect the Ministry of Finance's offer of around 1.7 trillion yen ($15.67 billion) in two-year JGBs on Thursday to go smoothly, although demand is not expected to be very strong. Traders said the coupon could be set at 0.8 percent.
Weaker Tokyo shares also made investors careful about selling JGBs too aggressively, traders said. The Nikkei share average <.N225> ended down 0.5 percent at 15,153.78.
Japanese retail sales rose a more-than-expected 0.8 percent in October from a year earlier, pointing to firmness in consumer spending, but the data did little to alter the prevailing market view that the BOJ will not raise rates until well into next year. ($1=108.45 Yen) (Additional reporting by Rika Otsuka, Editing by Michael Watson)
Sunday, November 25, 2007
Japanese Investors Quitting the US?
The New York Times reports on a growing trend in Japan among individual investors of reallocating funds invested in the U.S. to faster growing emerging markets. Japanese investors have reduced holdings of domestic mutual funds investing in the U.S. in 16 of the past 17 months. Meanwhile, investment inflows in overseas-oriented funds have consistently grown at a higher clip than the outflow from U.S. funds. An estimated half of Japan's $14 trillion in personal savings is believed to be invested overseas in search of higher returns, especially in terms of yield, given Japan's extraordinarily low returns on deposits and bonds. At the same time, Japanese investors are gradually beginning to diversify their holdings, after having only embraced mutual fund investing about a decade ago. According to data from Daiwa Fund Consulting, Japanese investors have invested the dollar equivalent of $17.5B into emerging market funds over the past year, while reducing holdings of North American funds by $4B. Fund management companies have taken notice, resulting in a 36% increase in the number of emerging market mutual funds to 183 in total (vs. 137 U.S.-focused funds).
TOKYO, Nov. 22 — Many in Japan are starting to speak of “quitting America,” but they are not talking about a rise in anti-American political fervor. Rather, they mean a move away from American investments that is altering global capital flows and helping to weaken the dollar.
The move is seen in decisions of individual investors like Daijo Okudaira, a 66-year-old clerk at a Tokyo consulting company. Like many Japanese, Mr. Okudaira had long limited his overseas investments to the relative safety of securities from developed countries, particularly the United States.
Starting late last year, however, Mr. Okudaira made drastic changes to his portfolio, putting $50,000 into mutual funds focusing on stocks in China and other emerging economies. He said he had been drawn to these countries because they seemed to hold much brighter growth prospects than the United States.
“People say the engine of the global economy is shifting from the United States to emerging countries,” Mr. Okudaira said. “Emerging countries have growth and energy that America and Europe lack. They remind me of Japan 40 years ago.”
Japan’s legions of individual investors like Mr. Okudaira have emerged as a global financial force to be reckoned with, directing almost half a trillion dollars of their nation’s $14 trillion in personal savings overseas in search of higher returns. Until recently, much of this huge outflow of cash, known as the yen-carry trade, had gone into United States stocks, bonds or currency, propping up the dollar’s value.
Now, however, Japanese individuals are diverting more and more of that money away from the United States and the dollar and into higher-yielding global investments, ranging from high-interest Australian government bonds to shares in fast-growing Indian construction companies. Partly this “quitting America” — called beikoku banare in Japanese — reflects an increasing sophistication of Japan’s investors, who embraced mutual funds only a decade ago and are still learning to diversify. But it also offers one more sign that the world does not depend as much on the American economy as it once did.
Recent figures on mutual fund purchases suggest this trend has accelerated since August, when subprime problems shook Wall Street — and along with it, faith in the United States economy. Since early August, the dollar has fallen almost 8 percent against the yen, a decline many analysts here say offers another indication of Japan’s waning appetite for dollar-denominated investments.
“One lesson of August was the failure of American markets to recover,” said Akiyoshi Hirose, head of research at Daiwa Fund Consulting, a research company based in Tokyo specializing in mutual funds. “On the other hand, Asia’s emerging countries did recover quickly. So money is flowing out of the United States and Europe and into these newer markets.”
In October alone, Japanese individuals pulled 33.9 billion yen, or about $300 million, out of mutual funds that invested solely in North American stocks and bonds, according to Daiwa Fund. In the same month, it said, Japanese individuals put 175.2 billion yen, or $1.6 billion, into funds investing in stocks and bonds in emerging countries.
In the last 12 months, Japanese individuals invested 1.97 trillion yen, or $17.5 billion, into emerging market mutual funds, according to Daiwa Fund, and during the same period, they removed 447 billion yen, or $4 billion, from North America-only mutual funds.
Demand for emerging market funds has gone up so sharply that asset management companies added 48 such funds in the past year, bringing the total number to 183, the company said. Meanwhile, it said, the number of United States-focused funds rose by just 3, to 137.
To be sure, some analysts caution that the popularity of emerging markets may prove to be a fad, especially if stock markets in China or India start falling as quickly as they rose. Analysts also say the dollar’s greater familiarity gives it an enduring appeal among many Japanese, who may return once the United States mortgage problems subside.
Some analysts predicted the eventual revival of short-term currency trading between the dollar and the yen, which had been an important support for the dollar’s value before August’s market turmoil.
“A lot of dollar-buyers are just sidelined now,” said Tohru Sasaki, chief exchange strategist in the Tokyo office of JPMorgan Chase Bank. “They’ll be back once currency markets settle down.”
PCA Asset Management, a Japanese arm of a British firm, said that until last year, its most popular product was a United States bond fund. Now, the company says, 80 percent to 90 percent of the investment money it receives flows into its emerging-market funds, all focused on Asia. To meet demand, the company has added five new Asia-focused mutual funds since January 2006. The most popular, a fund investing in stocks of infrastructure-related companies in India, has grown to $1.4 billion in assets in just one year.
Takashi Ishida, head of investment at PCA Asset, said the emerging-market funds have proved particularly popular with investors in their 50s and 60s, an age group that remembers Japan’s period of high growth four decades ago. He said these Japanese now believe they recognize the same sort of heady growth in developing Asian countries like China, India and Vietnam.
“Asian emerging markets appear safe to invest in because they seem familiar to many Japanese,” Mr. Ishida said.
Many individual investors agree, citing vague impressions of cultural affinity in explaining their optimism in Asian emerging markets. Okiko Ebata, one of a half-dozen individuals gathered on a recent afternoon for an investing seminar in Tokyo, said she had invested in overseas stocks for the first time late last year, choosing a mutual fund that focused on Vietnam. She acknowledged it was a riskier choice than United States or European stocks, but said she felt comfortable.
“I’ve heard people in Vietnam resemble Japanese,” said Ms. Ebata, 59, as the rest of the group nodded in agreement. Two others also said they had invested in the last year in mutual funds focused on India or Southeast Asia.
In a separate interview, Mr. Okudaira, the clerk, said his China fund had doubled in value in less than a year. But even if Chinese investments cannot keep up such rates of return, he said, he and other Japanese will continue to diversify where they put their savings.
“I now have money invested in America, Europe, as well as in Asia,” Mr. Okudaira said. “Japanese are learning how to reduce risk.”
TOKYO, Nov. 22 — Many in Japan are starting to speak of “quitting America,” but they are not talking about a rise in anti-American political fervor. Rather, they mean a move away from American investments that is altering global capital flows and helping to weaken the dollar.
The move is seen in decisions of individual investors like Daijo Okudaira, a 66-year-old clerk at a Tokyo consulting company. Like many Japanese, Mr. Okudaira had long limited his overseas investments to the relative safety of securities from developed countries, particularly the United States.
Starting late last year, however, Mr. Okudaira made drastic changes to his portfolio, putting $50,000 into mutual funds focusing on stocks in China and other emerging economies. He said he had been drawn to these countries because they seemed to hold much brighter growth prospects than the United States.
“People say the engine of the global economy is shifting from the United States to emerging countries,” Mr. Okudaira said. “Emerging countries have growth and energy that America and Europe lack. They remind me of Japan 40 years ago.”
Japan’s legions of individual investors like Mr. Okudaira have emerged as a global financial force to be reckoned with, directing almost half a trillion dollars of their nation’s $14 trillion in personal savings overseas in search of higher returns. Until recently, much of this huge outflow of cash, known as the yen-carry trade, had gone into United States stocks, bonds or currency, propping up the dollar’s value.
Now, however, Japanese individuals are diverting more and more of that money away from the United States and the dollar and into higher-yielding global investments, ranging from high-interest Australian government bonds to shares in fast-growing Indian construction companies. Partly this “quitting America” — called beikoku banare in Japanese — reflects an increasing sophistication of Japan’s investors, who embraced mutual funds only a decade ago and are still learning to diversify. But it also offers one more sign that the world does not depend as much on the American economy as it once did.
Recent figures on mutual fund purchases suggest this trend has accelerated since August, when subprime problems shook Wall Street — and along with it, faith in the United States economy. Since early August, the dollar has fallen almost 8 percent against the yen, a decline many analysts here say offers another indication of Japan’s waning appetite for dollar-denominated investments.
“One lesson of August was the failure of American markets to recover,” said Akiyoshi Hirose, head of research at Daiwa Fund Consulting, a research company based in Tokyo specializing in mutual funds. “On the other hand, Asia’s emerging countries did recover quickly. So money is flowing out of the United States and Europe and into these newer markets.”
In October alone, Japanese individuals pulled 33.9 billion yen, or about $300 million, out of mutual funds that invested solely in North American stocks and bonds, according to Daiwa Fund. In the same month, it said, Japanese individuals put 175.2 billion yen, or $1.6 billion, into funds investing in stocks and bonds in emerging countries.
In the last 12 months, Japanese individuals invested 1.97 trillion yen, or $17.5 billion, into emerging market mutual funds, according to Daiwa Fund, and during the same period, they removed 447 billion yen, or $4 billion, from North America-only mutual funds.
Demand for emerging market funds has gone up so sharply that asset management companies added 48 such funds in the past year, bringing the total number to 183, the company said. Meanwhile, it said, the number of United States-focused funds rose by just 3, to 137.
To be sure, some analysts caution that the popularity of emerging markets may prove to be a fad, especially if stock markets in China or India start falling as quickly as they rose. Analysts also say the dollar’s greater familiarity gives it an enduring appeal among many Japanese, who may return once the United States mortgage problems subside.
Some analysts predicted the eventual revival of short-term currency trading between the dollar and the yen, which had been an important support for the dollar’s value before August’s market turmoil.
“A lot of dollar-buyers are just sidelined now,” said Tohru Sasaki, chief exchange strategist in the Tokyo office of JPMorgan Chase Bank. “They’ll be back once currency markets settle down.”
PCA Asset Management, a Japanese arm of a British firm, said that until last year, its most popular product was a United States bond fund. Now, the company says, 80 percent to 90 percent of the investment money it receives flows into its emerging-market funds, all focused on Asia. To meet demand, the company has added five new Asia-focused mutual funds since January 2006. The most popular, a fund investing in stocks of infrastructure-related companies in India, has grown to $1.4 billion in assets in just one year.
Takashi Ishida, head of investment at PCA Asset, said the emerging-market funds have proved particularly popular with investors in their 50s and 60s, an age group that remembers Japan’s period of high growth four decades ago. He said these Japanese now believe they recognize the same sort of heady growth in developing Asian countries like China, India and Vietnam.
“Asian emerging markets appear safe to invest in because they seem familiar to many Japanese,” Mr. Ishida said.
Many individual investors agree, citing vague impressions of cultural affinity in explaining their optimism in Asian emerging markets. Okiko Ebata, one of a half-dozen individuals gathered on a recent afternoon for an investing seminar in Tokyo, said she had invested in overseas stocks for the first time late last year, choosing a mutual fund that focused on Vietnam. She acknowledged it was a riskier choice than United States or European stocks, but said she felt comfortable.
“I’ve heard people in Vietnam resemble Japanese,” said Ms. Ebata, 59, as the rest of the group nodded in agreement. Two others also said they had invested in the last year in mutual funds focused on India or Southeast Asia.
In a separate interview, Mr. Okudaira, the clerk, said his China fund had doubled in value in less than a year. But even if Chinese investments cannot keep up such rates of return, he said, he and other Japanese will continue to diversify where they put their savings.
“I now have money invested in America, Europe, as well as in Asia,” Mr. Okudaira said. “Japanese are learning how to reduce risk.”
Saturday, November 24, 2007
Decoupling and Global Markets
The piece below comes from the FT this morning, if you want to know my take on all this go over here.
Markets unsure if they will decouple from US
Global markets are reflecting unease that a deteriorating US economy, which comprises about 25 per cent of total world activity, could torpedo the notion that Asia and other countries can "decouple" from a sickly North America.
China's Shanghai index fell below 5,000 this week, the first time since August, and is now more than 17 per cent lower since setting a record high in mid-October.
The big fear is that the US consumer, battered by record high energy prices, a collapsing housing market and a growing credit squeeze from banks will have no choice but to rein in spending.
The consumer is responsible for about 70 per cent of US economic activity. Any pullback, argue some analysts, will lower global growth, particularly for those countries that rely heavily on exporting goods to the US.
"As to whether a US recession would spill over to the rest of the world, opinions are split,'' says Marco Annunziata, chief economist at UniCredit Markets. "Some strongly believe in decoupling and look forward to watching the giant collapse, while the rest of the world powers on, while others believe we would all be hurt.''
At this juncture, the outlook for the US economy is for an extended period of much slower growth starting in the present quarter, but not a recession. Lehman Brothers forecast a 30 per cent probability of a recession starting before the end of next year.
The key factor to watch is the labour market, argue economists. So long as unemployment does not rise sharply from its level of 4.7 per cent, the consumer should weather the storm.
Markets unsure if they will decouple from US
Global markets are reflecting unease that a deteriorating US economy, which comprises about 25 per cent of total world activity, could torpedo the notion that Asia and other countries can "decouple" from a sickly North America.
China's Shanghai index fell below 5,000 this week, the first time since August, and is now more than 17 per cent lower since setting a record high in mid-October.
The big fear is that the US consumer, battered by record high energy prices, a collapsing housing market and a growing credit squeeze from banks will have no choice but to rein in spending.
The consumer is responsible for about 70 per cent of US economic activity. Any pullback, argue some analysts, will lower global growth, particularly for those countries that rely heavily on exporting goods to the US.
"As to whether a US recession would spill over to the rest of the world, opinions are split,'' says Marco Annunziata, chief economist at UniCredit Markets. "Some strongly believe in decoupling and look forward to watching the giant collapse, while the rest of the world powers on, while others believe we would all be hurt.''
At this juncture, the outlook for the US economy is for an extended period of much slower growth starting in the present quarter, but not a recession. Lehman Brothers forecast a 30 per cent probability of a recession starting before the end of next year.
The key factor to watch is the labour market, argue economists. So long as unemployment does not rise sharply from its level of 4.7 per cent, the consumer should weather the storm.
Wednesday, November 21, 2007
Dubai Money Going To India?
This one in Bloomberg this morning is interesting:
Damac Properties, a closely held developer based in Dubai, plans to invest as much as $5 billion in India over the next three years as a booming economy spurs demand for real estate.
The developer will construct houses, offices and shops in the Indian cities of Mumbai, New Delhi, Hyderabad and Bangalore, Chairman Hussain Sajwani said in a telephone interview from Mumbai. The first project will be started in 12 months, he said.
Soaring office rents and a shortage of apartments is luring developers including Donald Trump Jr. and Emaar Properties PJSC to India. Damac has built waterfront luxury projects in the United Arab Emirates and is investing in Saudi Arabia and Egypt as it expands outside its home base of Dubai.
``There is a latent demand for high-end and luxury properties as the economy booms and income levels rise,'' said Malvika Chandra, head of India research at Knight Frank in Mumbai. ``The right products are getting lapped up.''
India's 1.1 billion population faces a shortage of 25 million housing units, according to government data. The government is seeking to encourage the purchase of homes by giving tax breaks and ensuring easy availability of bank loans.
``We plan to meet the funding requirement from our internal resources,'' Sajwani said.
Growing Wealth
Demand for property is soaring in the world's fastest-growing major economy after China. India is poised for 9 percent growth in the year to March 31, following an average 8.6 percent average rise in the past four years.
Economic growth and the rising value of stocks and real estate are increasing the number of affluent in India.
The number of Indians with the financial wealth of $1 million or more rose by a fifth, the second fastest in Asia after Singapore, to about 100,000 last year, according to Merrill Lynch & Co. and Cap Gemini SA.
Rising demand is pushing up property prices with houses in south Mumbai doubling in the past two years, according to estimates by Cushman & Wakefield.
``We are on the luxury segment of the market so rising prices in India is not a concern,'' Sajwani said.
Mumbai also has the second-priciest offices in the world after London, according to CB Richard Ellis Group Inc.'s semi- annual Global Market Rents survey.
The city is the headquarters to India's main stock exchanges, companies and the main trading center for gold, diamond and commodities.
Rising Supply
Developers including Emaar MGF Land Pvt., Lodha Developers and Oberoi Constructions Pvt. are seeking to benefit from rising demand from Mumbai, New Delhi, and Bangalore and Hyderabad, the main hub for the telecommunications, software and pharmaceutical industries.
Still, a rise in the supply of high-end houses could hurt their future growth, according to DTZ Research. The number of high-end houses in Gurgaon, adjacent to New Delhi, could triple to 10,500 by 2010, DTZ said.
Most of these are being constructed by DLF Ltd., India's biggest developer, Emaar MGF Land, Unitech Ltd. and Parsvnath Developers Ltd., it said.
``Most of the prudent demand comes from the mid-income segments, and that's where we also see most of the supply also coming,'' said Chandra of Knight Frank.
Venture capital firm Indiareit Fund Advisors yesterday said it plans to invest 1.5 billion rupees ($38 million) in Samira Habitats, a company that's developing luxury villas and apartments in Alibag, on the mainland across from Mumbai, made up of a series of islands.
Houses in the 400-acre Samira Habitats project will cost between 5 million rupees and 100 million rupees when they go on sale at the end of next year, Managing Director Ramesh Jogani said.
Emaar MGF Land, the Indian unit of Emaar Properties PJSC, plans to sell 117 million shares. The Middle East's biggest real- estate developer by market value may raise as much as 60 billion rupees in an initial share sale, the Business Standard reported in September.
Damac Properties, a closely held developer based in Dubai, plans to invest as much as $5 billion in India over the next three years as a booming economy spurs demand for real estate.
The developer will construct houses, offices and shops in the Indian cities of Mumbai, New Delhi, Hyderabad and Bangalore, Chairman Hussain Sajwani said in a telephone interview from Mumbai. The first project will be started in 12 months, he said.
Soaring office rents and a shortage of apartments is luring developers including Donald Trump Jr. and Emaar Properties PJSC to India. Damac has built waterfront luxury projects in the United Arab Emirates and is investing in Saudi Arabia and Egypt as it expands outside its home base of Dubai.
``There is a latent demand for high-end and luxury properties as the economy booms and income levels rise,'' said Malvika Chandra, head of India research at Knight Frank in Mumbai. ``The right products are getting lapped up.''
India's 1.1 billion population faces a shortage of 25 million housing units, according to government data. The government is seeking to encourage the purchase of homes by giving tax breaks and ensuring easy availability of bank loans.
``We plan to meet the funding requirement from our internal resources,'' Sajwani said.
Growing Wealth
Demand for property is soaring in the world's fastest-growing major economy after China. India is poised for 9 percent growth in the year to March 31, following an average 8.6 percent average rise in the past four years.
Economic growth and the rising value of stocks and real estate are increasing the number of affluent in India.
The number of Indians with the financial wealth of $1 million or more rose by a fifth, the second fastest in Asia after Singapore, to about 100,000 last year, according to Merrill Lynch & Co. and Cap Gemini SA.
Rising demand is pushing up property prices with houses in south Mumbai doubling in the past two years, according to estimates by Cushman & Wakefield.
``We are on the luxury segment of the market so rising prices in India is not a concern,'' Sajwani said.
Mumbai also has the second-priciest offices in the world after London, according to CB Richard Ellis Group Inc.'s semi- annual Global Market Rents survey.
The city is the headquarters to India's main stock exchanges, companies and the main trading center for gold, diamond and commodities.
Rising Supply
Developers including Emaar MGF Land Pvt., Lodha Developers and Oberoi Constructions Pvt. are seeking to benefit from rising demand from Mumbai, New Delhi, and Bangalore and Hyderabad, the main hub for the telecommunications, software and pharmaceutical industries.
Still, a rise in the supply of high-end houses could hurt their future growth, according to DTZ Research. The number of high-end houses in Gurgaon, adjacent to New Delhi, could triple to 10,500 by 2010, DTZ said.
Most of these are being constructed by DLF Ltd., India's biggest developer, Emaar MGF Land, Unitech Ltd. and Parsvnath Developers Ltd., it said.
``Most of the prudent demand comes from the mid-income segments, and that's where we also see most of the supply also coming,'' said Chandra of Knight Frank.
Venture capital firm Indiareit Fund Advisors yesterday said it plans to invest 1.5 billion rupees ($38 million) in Samira Habitats, a company that's developing luxury villas and apartments in Alibag, on the mainland across from Mumbai, made up of a series of islands.
Houses in the 400-acre Samira Habitats project will cost between 5 million rupees and 100 million rupees when they go on sale at the end of next year, Managing Director Ramesh Jogani said.
Emaar MGF Land, the Indian unit of Emaar Properties PJSC, plans to sell 117 million shares. The Middle East's biggest real- estate developer by market value may raise as much as 60 billion rupees in an initial share sale, the Business Standard reported in September.
Monday, November 19, 2007
Europe's property sector hit hardest
From the FT this morning:
Europe's financial services industry, and especially the property sector, has been hardest hit by the global credit squeeze, a closely watched survey has shown.
Growth in European Union financial services went into reverse in October, with the sector reporting its first monthly contraction since the terrorist attacks of September 11 2001, according to details of purchasing managers' indices published on Monday by NTC Economics.
Within the financial services sector, property-related service companies saw the steepest rate of decline.
The latest data reinforce other evidence suggesting that the global credit squeeze has started to have a significant macroeconomic impact across Europe - although its extent and likely duration remain unclear.
The overall all-sector index for the EU suggested that economic output grew in October at the slowest rate since September 2005. The detailed breakdown of the results suggests that much of that slowdown was concentrated in those industries most obviously affected by the financial market turmoil, such as banking. Financial services had already seen a marked weakening in growth since July.
However, out of eight broad industries surveyed by NTC Economics, only telecommunications and consumer services reported growth in October at rates above that seen a year ago - suggesting that the effects of the financial market turmoil over the past few months had become more widespread. The technology sector saw the weakest growth for more than four years.
"Whether that is contagion from the credit turmoil or whether it is a broadening of the slowdown that had taken place before the summer, is a difficult one to answer ... There might be a little bit of both," said Jacques Cailloux, economist at the Royal Bank of Scotland.
Given London's importance as a financial sector, the UK might have been expected to be particularly affected, but service sector activity has also been hit in the eurozone.
Economic activity across Europe is likely to have been hit by the higher financing costs resulting from the credit squeeze. At the same time, a significantly stronger euro and the delayed effects of higher European Central Bank interest rates since the end of 2005 are also likely to have acted as a brake on growth. More recently, a pick-up in inflation would have eroded consumer spending power.
Europe's financial services industry, and especially the property sector, has been hardest hit by the global credit squeeze, a closely watched survey has shown.
Growth in European Union financial services went into reverse in October, with the sector reporting its first monthly contraction since the terrorist attacks of September 11 2001, according to details of purchasing managers' indices published on Monday by NTC Economics.
Within the financial services sector, property-related service companies saw the steepest rate of decline.
The latest data reinforce other evidence suggesting that the global credit squeeze has started to have a significant macroeconomic impact across Europe - although its extent and likely duration remain unclear.
The overall all-sector index for the EU suggested that economic output grew in October at the slowest rate since September 2005. The detailed breakdown of the results suggests that much of that slowdown was concentrated in those industries most obviously affected by the financial market turmoil, such as banking. Financial services had already seen a marked weakening in growth since July.
However, out of eight broad industries surveyed by NTC Economics, only telecommunications and consumer services reported growth in October at rates above that seen a year ago - suggesting that the effects of the financial market turmoil over the past few months had become more widespread. The technology sector saw the weakest growth for more than four years.
"Whether that is contagion from the credit turmoil or whether it is a broadening of the slowdown that had taken place before the summer, is a difficult one to answer ... There might be a little bit of both," said Jacques Cailloux, economist at the Royal Bank of Scotland.
Given London's importance as a financial sector, the UK might have been expected to be particularly affected, but service sector activity has also been hit in the eurozone.
Economic activity across Europe is likely to have been hit by the higher financing costs resulting from the credit squeeze. At the same time, a significantly stronger euro and the delayed effects of higher European Central Bank interest rates since the end of 2005 are also likely to have acted as a brake on growth. More recently, a pick-up in inflation would have eroded consumer spending power.
Dizzy in Boomtoom
From the Economist last week:
Dizzy in Boomtown
Nov 15th 2007 | HONG KONG
From The Economist print edition
The boom in emerging economies and their stockmarkets is not over yet. But some are likely to run out of breath sooner than others.
THE world is experiencing one of the biggest revolutions in history, as economic power shifts from the developed world to China and other emerging giants. Thanks to market reforms, emerging economies are growing much faster than developed ones. There is a widening gap between their growth rate and that of the sluggish developed world (see chart 1). According to the IMF, this year they are growing almost four times as fast.
Emerging economies account for 30% of world GDP at market exchange rates (and over half using purchasing-power parity to take account of price differences). At market exchange rates they already account for half of global GDP growth. And by a wide range of measures, their weight is looming larger. Their exports are 45% of the world total; they consume over half of the world's energy and have accounted for four-fifths of the growth in oil demand in the past five years (explaining why oil prices are so high); and they are sitting on 75% of global foreign-exchange reserves.
The increasing strength of emerging economies has been reflected in their stockmarkets, which have climbed steeply in recent years. Share prices in many emerging economies are showing signs of altitude sickness, with recent sharp falls in China and other markets. Even so, since 2003 Morgan Stanley Capital International's emerging-market index has jumped more than fourfold in dollar terms, compared with an increase of only 70% in America's S&P 500. Top of the mountain has been Brazil, with an incredible gain of 900% (see chart 2). Over the same period, emerging economies' output has grown by 35%; the developed world's by only 10%. More than ever before, emerging economies are being relied upon to help lift the world economy. But can they keep up the effort?
Sounder footings
They may be able to. On many measures emerging economies look sounder than some developed ones. As a group they are no longer financially dependent on foreigners: together they run a current-account surplus, and thanks to large reserves and reduced debts, are now net foreign creditors. They have smaller budget deficits, on average, than rich countries, and inflation rates remain historically low. Unlike so often in the past, most currencies do not appear to be notably overvalued and hence prone to collapse; if anything, many are undervalued.
What is most striking is that this year, for the fourth year running, all of the 32 emerging economies tracked by The Economist show positive growth. This is a remarkable turnabout: in every previous year since the 1970s at least one suffered a recession, if not a severe financial crisis.
But it is dangerous to treat emerging economies as homogenous. This brings back alarming memories of the early 1990s, when investors poured money into any fund with an “emerging market” tag. On April 1st 1994, when buying fever was at its peak, a Hong Kong stockbroker advised clients to buy shares in Bhutan Dry Docks. He immediately received several large orders even though Bhutan is a landlocked Himalayan kingdom which then did not even have a stockmarket.
Investors need to discriminate carefully between countries. Although emerging economies have never before looked so healthy, aggregate numbers conceal some horrors. Table 3 shows The Economist's ranking of 15 of the biggest economies according to potential economic risk. It is based on the size of current-account balances, budget deficits, credit growth and inflation. A country's overall score is arrived at from the sum of the rankings of each indicator. It is obviously only a crude gauge, but it reflects the economic factors that have caused trouble in the past. A similar ranking would have flashed red for Thailand in early 1997 just before the Asian financial crisis.
The riskiest economies, all with current-account deficits and relatively high consumer-price inflation, are India, Turkey and Hungary. Those with current-account deficits are vulnerable to a sudden outflow of capital if global investors become more risk averse. Economies where inflation and credit growth are already high and budget deficits large, such as India, have less room to ease monetary or fiscal policy if the economy weakens.
Being irrational
The nature of capital inflows also matters. Foreign direct investment is much safer than speculative capital. But according to Chetan Ahya, an economist at Morgan Stanley, 85% of India's capital inflows this year have been in the form of debt or portfolio investment, much of which has gone into the stockmarket. India shows dangerous signs of irrational exuberance. It was swept by euphoria last month as the Sensex, India's benchmarket index, hit 20,000 for the first time. India's Economic Times declared, “The first 10,000 took over 20 years. The next came in just 20 months...Superpower 2020?” Instead, India's poor risk-rating should ring alarm bells.
China's economy looks less risky thanks to a small official budget deficit (many reckon that it really has a surplus) and its vast current-account surplus and reserves. The other two members of the so-called BRIC group, Brazil and Russia, also have a better risk-rating than India. Russia's credit boom is frightening, with lending up by 55% in the past year, but the economy is sheltered by large external and budget surpluses, thanks to high oil prices. After running a current-account deficit for most of the previous three decades, Brazil has had a surplus for five years—also thanks to robust commodity prices.
Emerging Europe, however, is flashing red, with widening current-account deficits, rising inflation, soaring bank lending and property bubbles. Indeed, Hungary and Turkey appear prudent compared with the Baltic states. Latvia has a current-account deficit of 24% of GDP, inflation of 13% and property prices rising at an annual 60%. The economy is seriously overheating, but its currency is pegged to the euro, which means it cannot raise interest rates. Estonia, Lithuania, Bulgaria and Romania also have current-account deficits of more than 12% of GDP. If these smaller economies were included in the table they would all rank at the bottom, below India.
A large chunk of bank lending in the Baltics and other parts of emerging Europe has been denominated in, or indexed to, foreign currency. The combination of large external financing needs and private-sector currency mismatches looks suspiciously like Thailand in 1997. These economies are highly vulnerable to a change in investor sentiment: if a rapid outflow of capital caused currencies to collapse, debts would soar in local-currency terms.
At the other extreme, Thailand, Malaysia, Taiwan and South Korea have not only the lowest risk ratings, but also share prices that look less overvalued than elsewhere. In Thailand, Malaysia and Taiwan price/earnings (p/e) ratios are still below their 20-year average.
Emerging stockmarkets now have a higher average p/e ratio than developed markets for the first time since the early 1990s. Stocks used to trade at a discount because these markets were seen as riskier. Now their economies are less wobbly and profits grow faster than in the rich world. This might justify a higher valuation. But the size of some p/e ratios causes concern that a bubble is in the making.
There was a stumble in emerging markets this summer when America's subprime crisis began to unfold. But after the Federal Reserve cut its discount rate in August investors eagerly returned, pushing prices up by an average of 40% in dollar terms by the end of October. Markets that looked cheap in August started to look dear, so it is hardly surprising that some investors have recently needed a breather.
In any case, the average p/e ratio in emerging markets may be distorted upwards because of a different industrial mix. Some types of businesses have consistently higher ratios, and emerging-countries tend to have more of them. When comparing like with like, the average p/e is still lower in emerging economies than in the developed world, according to UBS.
International comparisons can also be blurred by different accounting conventions. It is better to compare a country's p/e ratio with its own track record. Emerging markets' average p/e of 14.7 (based on forecast 2008 profits) is now above its 20-year average of 14, but it is nevertheless still well below previous peaks (see chart 4).
China A shares have been the frothiest this year, up by 104%. Thanks to frenzied buying at its stockmarket debut, PetroChina is now by some measures the world's most valuable company—three of the world's five largest companies are Chinese. A forward p/e ratio for A shares of 40 (again, based on forecast profits) certainly looks bubbly, but it too is much lower than in previous bubbles. The p/e reached 80 in Japan in the late 1980s, while on America's NASDAQ it hit 90 in 2000.
The p/e for Chinese shares that foreigners can buy is a more modest 22, well below the 40 reached in 2000. In contrast, Indian shares, also with a p/e of 22, have never been so overvalued. And while p/e ratios of 11-12 in Russia and Brazil seem like a screaming buy, relative to their historical averages of 7-8 they look generous.
Rolling along
Emerging stockmarkets experienced a similar boom in the early 1990s, until ended by a series of painful crises: Mexico at the end of 1994, East Asia in 1997, Russia in 1998, Brazil in 1999, Turkey in 2000, Argentina in 2001 and Venezuela in 2002. By 2002 the Morgan Stanley emerging-market index had lost almost 60% of its 1994 dollar value. So why should the current boom be any more sustainable?
A common feature of bubbles, such as America's dotcom mania and more recently its housing boom, is that most people refuse to believe they are bubbles until they burst. In sharp contrast, plenty of people have denounced China's stockmarket as a bubble, most notably Alan Greenspan, the former chairman of the Fed. The recent dive in prices makes such warnings seem prescient.
Yet a report by Goldman Sachs argues that many of the common symptoms seen when bubbles are about to burst are missing in today's emerging markets. Not only are p/e ratios much lower than in previous bubbles, but economic and financial imbalances created by rising asset prices, such as widening external deficits, are also absent from many economies. Likewise, before bubbles burst, notably America in the late 1990s and Asia in 1997, profits started to shrink. They are still growing strongly in China and the rest of Asia.
There is also ample global liquidity to fuel further gains. Just as previous interest-rate cuts by the Fed helped to pump up both the dotcom bubble and America's housing bubble, further easing over the next year could inflate emerging markets even more. These economies' domestic monetary conditions are also loose. Over the past year their broad money supply has increased by an average of almost 20%, accounting for a staggering three-fifths of the total expansion in the world's money. The surplus of money growth over and above the growth in nominal GDP (a crude measure of the money available to be invested in financial assets) has been growing at its fastest pace for years.
Several analysts therefore predict that after taking a short breather, emerging-market mania will resume. Bubbles will get bigger before they burst. Chris Wood, a strategist at CLSA, predicts that emerging Asia's forward p/e ratio will peak at twice America's. The premium now is only 5%.
Foreign money seems likely to continue to pour into emerging-country stockmarkets, if only because they lag so far behind the rest of the world. While emerging countries account for 30% of world GDP, they account for only 11% of world stock-market capitalisation.
Over the coming years, faster growth in profits and hence share prices, along with new share issues by companies, will almost certainly boost the value of these markets. According to a recent report by Ernst & Young, China, India, Russia and Brazil accounted for nearly half of all money raised worldwide in initial public offerings in the third quarter of this year.
One risk is that such prospects will attract too much interest from abroad. The surge in emerging-market shares has been a boon for international investors, but large inflows of foreign capital may be less welcome to governments and central banks. According to the IMF, net inflows of private capital to emerging economies have surged to almost 4% of their GDP on average this year, surpassing the peak of the previous wave in the first half of the 1990s. Net inflows to Brazil and Argentina have been running at 5-6% of GDP; and emerging Europe even more.
Vast capital inflows can harm economies in several ways. Not only can they inflate asset bubbles and spur excessive borrowing, but they can also cause a steep rise in the exchange rate, damaging the competitiveness of export sectors. If a country already has a current-account deficit this will make it even more vulnerable to a quick reversal of capital. On the other hand, if central banks intervene to hold down their currencies, the build-up of reserves can lead to excessively loose monetary conditions and rising inflation. This is exactly what is happening in much of emerging Europe.
Many other emerging economies have allowed their exchange rates to rise against the dollar. The Brazilian real has jumped by 23% this year, and by a total of 100% since 2003. In response to rising inflation, the Reserve Bank of India has allowed the rupee to rise by 12% since April. It has been greeted with howls of protest from business, yet the rupee has risen by no more than the Chinese yuan since mid-2005 and by much less than many other Asian currencies, such as the Thai baht.
Could a sudden crash in emerging stockmarkets derail the boom? Most stockmarkets are much smaller in relation to GDP than in developed economies, so the wealth effects of a crash would be modest. The East Asian economic slump in the 1990s was not caused by stockmarkets crashing, but by over-borrowing and the severe currency mismatches which caused the local currency value of debt to explode when currencies fell. This is a serious risk in the Baltics, but elsewhere most economies do not display the same sort of financial imbalances.
A more imminent threat is the impact of an American recession. Economists argue fiercely about whether emerging economies can decouple from the United States, yet by some measures they seem to have done so already. Emerging economies' exports to America slowed markedly this year, but their GDP growth has been supported by robust domestic demand and strong exports elsewhere.
If exports to America weaken further, many governments can support demand by boosting public spending, thanks to more prudent budgeting than in the past. Anyway, America is less important as an importer than it used to be. The share of China's exports going to America (including re-exports through Hong Kong) has fallen from 34% in 1999 to 24% now. China exports more to other emerging economies, which as a group now send more to China than to America. This partly explains why as American imports have slowed this year, the emerging world has continued to boom. So long as China's economy remains robust, it will help to pull other emerging economies along.
Indeed, this year for the first time emerging economies are likely to have bought slightly over half of America's exports, helping to prop up the economy of the United States. Some years into the future, economists may instead ask: “Can America decouple from China?”
Dizzy in Boomtown
Nov 15th 2007 | HONG KONG
From The Economist print edition
The boom in emerging economies and their stockmarkets is not over yet. But some are likely to run out of breath sooner than others.
THE world is experiencing one of the biggest revolutions in history, as economic power shifts from the developed world to China and other emerging giants. Thanks to market reforms, emerging economies are growing much faster than developed ones. There is a widening gap between their growth rate and that of the sluggish developed world (see chart 1). According to the IMF, this year they are growing almost four times as fast.
Emerging economies account for 30% of world GDP at market exchange rates (and over half using purchasing-power parity to take account of price differences). At market exchange rates they already account for half of global GDP growth. And by a wide range of measures, their weight is looming larger. Their exports are 45% of the world total; they consume over half of the world's energy and have accounted for four-fifths of the growth in oil demand in the past five years (explaining why oil prices are so high); and they are sitting on 75% of global foreign-exchange reserves.
The increasing strength of emerging economies has been reflected in their stockmarkets, which have climbed steeply in recent years. Share prices in many emerging economies are showing signs of altitude sickness, with recent sharp falls in China and other markets. Even so, since 2003 Morgan Stanley Capital International's emerging-market index has jumped more than fourfold in dollar terms, compared with an increase of only 70% in America's S&P 500. Top of the mountain has been Brazil, with an incredible gain of 900% (see chart 2). Over the same period, emerging economies' output has grown by 35%; the developed world's by only 10%. More than ever before, emerging economies are being relied upon to help lift the world economy. But can they keep up the effort?
Sounder footings
They may be able to. On many measures emerging economies look sounder than some developed ones. As a group they are no longer financially dependent on foreigners: together they run a current-account surplus, and thanks to large reserves and reduced debts, are now net foreign creditors. They have smaller budget deficits, on average, than rich countries, and inflation rates remain historically low. Unlike so often in the past, most currencies do not appear to be notably overvalued and hence prone to collapse; if anything, many are undervalued.
What is most striking is that this year, for the fourth year running, all of the 32 emerging economies tracked by The Economist show positive growth. This is a remarkable turnabout: in every previous year since the 1970s at least one suffered a recession, if not a severe financial crisis.
But it is dangerous to treat emerging economies as homogenous. This brings back alarming memories of the early 1990s, when investors poured money into any fund with an “emerging market” tag. On April 1st 1994, when buying fever was at its peak, a Hong Kong stockbroker advised clients to buy shares in Bhutan Dry Docks. He immediately received several large orders even though Bhutan is a landlocked Himalayan kingdom which then did not even have a stockmarket.
Investors need to discriminate carefully between countries. Although emerging economies have never before looked so healthy, aggregate numbers conceal some horrors. Table 3 shows The Economist's ranking of 15 of the biggest economies according to potential economic risk. It is based on the size of current-account balances, budget deficits, credit growth and inflation. A country's overall score is arrived at from the sum of the rankings of each indicator. It is obviously only a crude gauge, but it reflects the economic factors that have caused trouble in the past. A similar ranking would have flashed red for Thailand in early 1997 just before the Asian financial crisis.
The riskiest economies, all with current-account deficits and relatively high consumer-price inflation, are India, Turkey and Hungary. Those with current-account deficits are vulnerable to a sudden outflow of capital if global investors become more risk averse. Economies where inflation and credit growth are already high and budget deficits large, such as India, have less room to ease monetary or fiscal policy if the economy weakens.
Being irrational
The nature of capital inflows also matters. Foreign direct investment is much safer than speculative capital. But according to Chetan Ahya, an economist at Morgan Stanley, 85% of India's capital inflows this year have been in the form of debt or portfolio investment, much of which has gone into the stockmarket. India shows dangerous signs of irrational exuberance. It was swept by euphoria last month as the Sensex, India's benchmarket index, hit 20,000 for the first time. India's Economic Times declared, “The first 10,000 took over 20 years. The next came in just 20 months...Superpower 2020?” Instead, India's poor risk-rating should ring alarm bells.
China's economy looks less risky thanks to a small official budget deficit (many reckon that it really has a surplus) and its vast current-account surplus and reserves. The other two members of the so-called BRIC group, Brazil and Russia, also have a better risk-rating than India. Russia's credit boom is frightening, with lending up by 55% in the past year, but the economy is sheltered by large external and budget surpluses, thanks to high oil prices. After running a current-account deficit for most of the previous three decades, Brazil has had a surplus for five years—also thanks to robust commodity prices.
Emerging Europe, however, is flashing red, with widening current-account deficits, rising inflation, soaring bank lending and property bubbles. Indeed, Hungary and Turkey appear prudent compared with the Baltic states. Latvia has a current-account deficit of 24% of GDP, inflation of 13% and property prices rising at an annual 60%. The economy is seriously overheating, but its currency is pegged to the euro, which means it cannot raise interest rates. Estonia, Lithuania, Bulgaria and Romania also have current-account deficits of more than 12% of GDP. If these smaller economies were included in the table they would all rank at the bottom, below India.
A large chunk of bank lending in the Baltics and other parts of emerging Europe has been denominated in, or indexed to, foreign currency. The combination of large external financing needs and private-sector currency mismatches looks suspiciously like Thailand in 1997. These economies are highly vulnerable to a change in investor sentiment: if a rapid outflow of capital caused currencies to collapse, debts would soar in local-currency terms.
At the other extreme, Thailand, Malaysia, Taiwan and South Korea have not only the lowest risk ratings, but also share prices that look less overvalued than elsewhere. In Thailand, Malaysia and Taiwan price/earnings (p/e) ratios are still below their 20-year average.
Emerging stockmarkets now have a higher average p/e ratio than developed markets for the first time since the early 1990s. Stocks used to trade at a discount because these markets were seen as riskier. Now their economies are less wobbly and profits grow faster than in the rich world. This might justify a higher valuation. But the size of some p/e ratios causes concern that a bubble is in the making.
There was a stumble in emerging markets this summer when America's subprime crisis began to unfold. But after the Federal Reserve cut its discount rate in August investors eagerly returned, pushing prices up by an average of 40% in dollar terms by the end of October. Markets that looked cheap in August started to look dear, so it is hardly surprising that some investors have recently needed a breather.
In any case, the average p/e ratio in emerging markets may be distorted upwards because of a different industrial mix. Some types of businesses have consistently higher ratios, and emerging-countries tend to have more of them. When comparing like with like, the average p/e is still lower in emerging economies than in the developed world, according to UBS.
International comparisons can also be blurred by different accounting conventions. It is better to compare a country's p/e ratio with its own track record. Emerging markets' average p/e of 14.7 (based on forecast 2008 profits) is now above its 20-year average of 14, but it is nevertheless still well below previous peaks (see chart 4).
China A shares have been the frothiest this year, up by 104%. Thanks to frenzied buying at its stockmarket debut, PetroChina is now by some measures the world's most valuable company—three of the world's five largest companies are Chinese. A forward p/e ratio for A shares of 40 (again, based on forecast profits) certainly looks bubbly, but it too is much lower than in previous bubbles. The p/e reached 80 in Japan in the late 1980s, while on America's NASDAQ it hit 90 in 2000.
The p/e for Chinese shares that foreigners can buy is a more modest 22, well below the 40 reached in 2000. In contrast, Indian shares, also with a p/e of 22, have never been so overvalued. And while p/e ratios of 11-12 in Russia and Brazil seem like a screaming buy, relative to their historical averages of 7-8 they look generous.
Rolling along
Emerging stockmarkets experienced a similar boom in the early 1990s, until ended by a series of painful crises: Mexico at the end of 1994, East Asia in 1997, Russia in 1998, Brazil in 1999, Turkey in 2000, Argentina in 2001 and Venezuela in 2002. By 2002 the Morgan Stanley emerging-market index had lost almost 60% of its 1994 dollar value. So why should the current boom be any more sustainable?
A common feature of bubbles, such as America's dotcom mania and more recently its housing boom, is that most people refuse to believe they are bubbles until they burst. In sharp contrast, plenty of people have denounced China's stockmarket as a bubble, most notably Alan Greenspan, the former chairman of the Fed. The recent dive in prices makes such warnings seem prescient.
Yet a report by Goldman Sachs argues that many of the common symptoms seen when bubbles are about to burst are missing in today's emerging markets. Not only are p/e ratios much lower than in previous bubbles, but economic and financial imbalances created by rising asset prices, such as widening external deficits, are also absent from many economies. Likewise, before bubbles burst, notably America in the late 1990s and Asia in 1997, profits started to shrink. They are still growing strongly in China and the rest of Asia.
There is also ample global liquidity to fuel further gains. Just as previous interest-rate cuts by the Fed helped to pump up both the dotcom bubble and America's housing bubble, further easing over the next year could inflate emerging markets even more. These economies' domestic monetary conditions are also loose. Over the past year their broad money supply has increased by an average of almost 20%, accounting for a staggering three-fifths of the total expansion in the world's money. The surplus of money growth over and above the growth in nominal GDP (a crude measure of the money available to be invested in financial assets) has been growing at its fastest pace for years.
Several analysts therefore predict that after taking a short breather, emerging-market mania will resume. Bubbles will get bigger before they burst. Chris Wood, a strategist at CLSA, predicts that emerging Asia's forward p/e ratio will peak at twice America's. The premium now is only 5%.
Foreign money seems likely to continue to pour into emerging-country stockmarkets, if only because they lag so far behind the rest of the world. While emerging countries account for 30% of world GDP, they account for only 11% of world stock-market capitalisation.
Over the coming years, faster growth in profits and hence share prices, along with new share issues by companies, will almost certainly boost the value of these markets. According to a recent report by Ernst & Young, China, India, Russia and Brazil accounted for nearly half of all money raised worldwide in initial public offerings in the third quarter of this year.
One risk is that such prospects will attract too much interest from abroad. The surge in emerging-market shares has been a boon for international investors, but large inflows of foreign capital may be less welcome to governments and central banks. According to the IMF, net inflows of private capital to emerging economies have surged to almost 4% of their GDP on average this year, surpassing the peak of the previous wave in the first half of the 1990s. Net inflows to Brazil and Argentina have been running at 5-6% of GDP; and emerging Europe even more.
Vast capital inflows can harm economies in several ways. Not only can they inflate asset bubbles and spur excessive borrowing, but they can also cause a steep rise in the exchange rate, damaging the competitiveness of export sectors. If a country already has a current-account deficit this will make it even more vulnerable to a quick reversal of capital. On the other hand, if central banks intervene to hold down their currencies, the build-up of reserves can lead to excessively loose monetary conditions and rising inflation. This is exactly what is happening in much of emerging Europe.
Many other emerging economies have allowed their exchange rates to rise against the dollar. The Brazilian real has jumped by 23% this year, and by a total of 100% since 2003. In response to rising inflation, the Reserve Bank of India has allowed the rupee to rise by 12% since April. It has been greeted with howls of protest from business, yet the rupee has risen by no more than the Chinese yuan since mid-2005 and by much less than many other Asian currencies, such as the Thai baht.
Could a sudden crash in emerging stockmarkets derail the boom? Most stockmarkets are much smaller in relation to GDP than in developed economies, so the wealth effects of a crash would be modest. The East Asian economic slump in the 1990s was not caused by stockmarkets crashing, but by over-borrowing and the severe currency mismatches which caused the local currency value of debt to explode when currencies fell. This is a serious risk in the Baltics, but elsewhere most economies do not display the same sort of financial imbalances.
A more imminent threat is the impact of an American recession. Economists argue fiercely about whether emerging economies can decouple from the United States, yet by some measures they seem to have done so already. Emerging economies' exports to America slowed markedly this year, but their GDP growth has been supported by robust domestic demand and strong exports elsewhere.
If exports to America weaken further, many governments can support demand by boosting public spending, thanks to more prudent budgeting than in the past. Anyway, America is less important as an importer than it used to be. The share of China's exports going to America (including re-exports through Hong Kong) has fallen from 34% in 1999 to 24% now. China exports more to other emerging economies, which as a group now send more to China than to America. This partly explains why as American imports have slowed this year, the emerging world has continued to boom. So long as China's economy remains robust, it will help to pull other emerging economies along.
Indeed, this year for the first time emerging economies are likely to have bought slightly over half of America's exports, helping to prop up the economy of the United States. Some years into the future, economists may instead ask: “Can America decouple from China?”
Friday, November 16, 2007
Russian Inflation
Inflation in Russia in 2007 could exceed 11%, the director of the Economic Development and Trade Ministry’s macroeconomic forecasting department said Thursday.
Andrei Klepach told journalists that originally, inflation in 2007 was expected to reach 8% attributing the rise to structural factors like price hikes in staple foods, as well as monetary factors. Klepach said inflation in 2008 could exceed the 6-7% forecast. “We are currently specifying the inflation forecast for 2008. It looks like we won’t be within 6-7%,” he said. The ministry official also said the Russian government could restrict grain exports in 2008 to curb inflation. “We may impose a direct ban or introduce an export duty,” Klepach said adding that measures will depend on the market situation. He said grain exports were 3 million metric tons in October and if this trend continues, the government will consider additional measures to restrict exports. According to the economics ministry forecast, GDP growth in 2007 will reach 7.3-7.4%.
Russian consumer prices rose more than expected in October as sunflower oil, dairy products and other foods became more expensive.
Prices rose a monthly 1.6 percent, the most since January, compared with 0.8 percent in September, the Moscow-based Federal Statistics Service said in an e-mailed statement today. The median forecast of 18 economists surveyed by Bloomberg was for a 1.4 percent increase.
Russia, the world's biggest energy exporter, has struggled to curb accelerating inflation as petrodollars flood the country and global food prices increase. The inflation rate may rise to 11 percent this year, surpassing the previous year's rate for the first time since 1998, according to the Economy Ministry.
``The rising costs of basic commodities can no longer be offset by resilient labor costs and soft commodities,'' UralSib Financial Corp. said in an e-mailed research note before the figures were released.
President Vladimir Putin and several ministers said last month the government will be unable to meet their goal of lowering the inflation rate to 8 percent this year from last year's 9 percent.
Food prices increased a monthly 3.3 percent in October, led by sunflower oil which increased 26 percent in the month, the service said. Dairy produce rose a monthly 9.6 percent.
Food Effect
``The Russian government has recently taken a number of measures to control prices on foodstuffs, given that they account for more than a third of Russian CPI index,'' UralSib said.
The government approved a lower import duty on dairy and vegetable oil, sold some grain from the state reserves and instituted an export duty on grain to keep the commodity in Russia to curb consumer-price growth.
Companies including OAO Wimm-Bill-Dann, Russia's biggest dairy producer, and X5 Retail Group NV agreed last month to freeze prices on some milk, vegetable oil, egg and bread products until Jan. 31.
The anti-inflationary measures slowed price growth in the last week of October, probably keeping inflation from spiking until next year, said Yaroslav Lissovolik, the chief economist at Deutsche Bank AG's Moscow office.
Ruble Strength
The central bank may allow the ruble to strengthen at the end of this year or in the first quarter of 2008 to slow price growth, he said.
``The increase in government spending, which will improve the situation with liquidity, will place the central bank in a better position'' to use the ruble as an anti-inflationary tool, Lissovolik said.
Most Russians spend more than half their household income on food, according to the state-run Center for the Study of Public Opinion. Another 29 percent spend at least a quarter of their income on food, according to a survey released on Oct. 31.
Consumer prices increased 9.3 percent in January through October, compared with 7.5 percent in the first 10 months of last year, according to the statistics office.
Andrei Klepach told journalists that originally, inflation in 2007 was expected to reach 8% attributing the rise to structural factors like price hikes in staple foods, as well as monetary factors. Klepach said inflation in 2008 could exceed the 6-7% forecast. “We are currently specifying the inflation forecast for 2008. It looks like we won’t be within 6-7%,” he said. The ministry official also said the Russian government could restrict grain exports in 2008 to curb inflation. “We may impose a direct ban or introduce an export duty,” Klepach said adding that measures will depend on the market situation. He said grain exports were 3 million metric tons in October and if this trend continues, the government will consider additional measures to restrict exports. According to the economics ministry forecast, GDP growth in 2007 will reach 7.3-7.4%.
Russian consumer prices rose more than expected in October as sunflower oil, dairy products and other foods became more expensive.
Prices rose a monthly 1.6 percent, the most since January, compared with 0.8 percent in September, the Moscow-based Federal Statistics Service said in an e-mailed statement today. The median forecast of 18 economists surveyed by Bloomberg was for a 1.4 percent increase.
Russia, the world's biggest energy exporter, has struggled to curb accelerating inflation as petrodollars flood the country and global food prices increase. The inflation rate may rise to 11 percent this year, surpassing the previous year's rate for the first time since 1998, according to the Economy Ministry.
``The rising costs of basic commodities can no longer be offset by resilient labor costs and soft commodities,'' UralSib Financial Corp. said in an e-mailed research note before the figures were released.
President Vladimir Putin and several ministers said last month the government will be unable to meet their goal of lowering the inflation rate to 8 percent this year from last year's 9 percent.
Food prices increased a monthly 3.3 percent in October, led by sunflower oil which increased 26 percent in the month, the service said. Dairy produce rose a monthly 9.6 percent.
Food Effect
``The Russian government has recently taken a number of measures to control prices on foodstuffs, given that they account for more than a third of Russian CPI index,'' UralSib said.
The government approved a lower import duty on dairy and vegetable oil, sold some grain from the state reserves and instituted an export duty on grain to keep the commodity in Russia to curb consumer-price growth.
Companies including OAO Wimm-Bill-Dann, Russia's biggest dairy producer, and X5 Retail Group NV agreed last month to freeze prices on some milk, vegetable oil, egg and bread products until Jan. 31.
The anti-inflationary measures slowed price growth in the last week of October, probably keeping inflation from spiking until next year, said Yaroslav Lissovolik, the chief economist at Deutsche Bank AG's Moscow office.
Ruble Strength
The central bank may allow the ruble to strengthen at the end of this year or in the first quarter of 2008 to slow price growth, he said.
``The increase in government spending, which will improve the situation with liquidity, will place the central bank in a better position'' to use the ruble as an anti-inflationary tool, Lissovolik said.
Most Russians spend more than half their household income on food, according to the state-run Center for the Study of Public Opinion. Another 29 percent spend at least a quarter of their income on food, according to a survey released on Oct. 31.
Consumer prices increased 9.3 percent in January through October, compared with 7.5 percent in the first 10 months of last year, according to the statistics office.
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