Tuesday, August 25, 2009

This really scares me

Just one year out from a major financial disaster, some of the most leveraged banks that recently lost billions of shareholder value are now looking to expand their trading operations again. What did we learn from the deleveraging debacle? Nothing.

Apparently even more banks than Goldman Sachs and Morgan Stanley want to get into commodities speculation. Soc Gen and Bank of America hardly seem like the type, but the opportunity to squeeze retail investors out of their nickels may be too great. In case, traders know that the place to make big money is where the volatility is. So I guess if you are down tens of billions of dollars you will be tempted to enter a market a lot of zig and zag.

Aug 31 Update: It looks like Citigroup does not want to be left out and is diving in head first too.

Friday, August 14, 2009

Stimulus Watch: Has China closed the spigot already???

As I have mentioned before, the massive stimulus program in China is driving much of the revival of exports in across the global, particularly in regional partners like Japan and South Korea and commodity producers like Brazil.

But has the Chinese government started to close the spigot of easy money already???

"The benchmark Shanghai Composite Index fell to 3112.72, as data showing a 77% decline in bank lending in July from June raised fears that banks may make fewer loans following record disbursals during the first half. The Shenzhen Composite Index fell 4.4% to 1052.51.

"Even though the Chinese government insists it'll keep a loose monetary policy, the reality may be that some credit tightening measures have already been implemented," said Ben Kwong, chief operating officer at KGI Asia. "The market is worried that a significant slowdown in lending means less liquidity and investors are taking profits."(1)

The evidence of the change might be represented by the recent turn in the Baltic Dry Bulk Index. The index is largely driven by the movement of raw commodities in international trade, and the recent surging demand from China provided a major boost to the index from January's historic lows.

There is still too little data to substantiate a change in the economic climate. But many estimates made by Brazil and even use manufacturers like Alcoa hinge on the sustained growth in China to offset economic stagnation elsewhere. It will be interesting to observe over the next few months if China will be able to maintain it's momentum with or without easy money policies.

(1) "Drop in Bank Lending Spooks Investors; a Fall Back Below 3000?", WSJ, August 14, 2009 by V. Phani Kumar

Sunday, August 2, 2009

The whole world is on Viagra

Last night I heard a story about a friend who looks after his 91 year old grandfather. My friend has a dilemma that even though his grandfather's health is failing because his advanced years, he continues to live the lifestyle of someone younger and more spry. In fact on more than one occasion he has found his dear old grandpa passed out in various areas of the house from overdoses of Viagra.

The global economy is experiencing a similar circumstance.

With US port traffic down...

Retail sales down...

imports and exports are down...

There is little sign of virility to the economic situation. Yet the global markets stay excited over the prospects of a turnaround in the face of this information. Why?

Artificial stimulation from bailouts and stimulus plans, of course.

Only $230B of the $787B US stimulus package has been spent to date. But US is far along ($700B) with the housing market stimulus executed with the 1.25T allocation to purchase agency debt. The US is also stimulating the housing market with $500B in purchases of securitized mortgage debt in the open market at exaggerated prices. Without this support, mortgage rates would rise and provide an additional disincentive for the anemic rate of home sales.

There are auto purchasing incentive programs in the US, South Korea, China, and Brazil. The U.S. , the last to adopt an auto purchase incentive program, "Cars for Clunkers" program has been expended from $1B to $3B in funding. The government rebate will be used in an estimated 500,000 car transactions this year in the US. It has been shown before that such stimulus only pulls forward future purchases. Maybe this time will be different...

In the U.K. the government continues to use quantitative easing to support the yield curve and keep mortgage rates down. The U.K. recently extended their quantitive easing program by authorizing another $50B in funds to attempt artificially depress interest rates.

China also is in the process of executing a $586B spending package to maintain economic growth. But this pales in comparison to the loose monetary policy underwritten by the Chinese government. In the first half of 2009, over a $1T in loans has been made, a 1000% increase over the previous year.

The overall stimulus in China has been massive. “They opted for a very quick fix,” said Stephen Roach, an economist and chairman of Morgan Stanley Asia. “Surging investment, fueled by the most rapid bank lending in history, accounted for nearly 90 percent of China’s G.D.P. growth in the first half of this year. And that is worrisome.”

Overall, with Japan, France, Germany, China and soon the US reporting Q3 growth and no top line growth across the whole bunch, it looks like ailing economy is dependent on special pills to stay in the game. Let's hope we don't over exert ourselves in the process.