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.
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