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Fund Managers can become farmers: Jim Rogers Interview Economic Times of India

At one stage we were inundated with gloomy forecasts, which were further reinforced by the IMF and World Bank. And then suddenly stocks surged — something most were not prepared for. How risky is the market today?

Central banks all over the world have printed huge amounts of money, and the real economy is not strong enough for all this money to be absorbed… so, it’s going into stocks and real assets such as commodities. It’s a mistake what they are doing. It’s giving short-term pleasure, but there’s long-term pain as we are going to have much higher inflation, much higher interest rates and a worse economy down the road.

The American bond market is already beginning to go down dramatically as people realise that the American government has to sell huge amount of bonds, and secondly, there is going to be inflation, serious inflation, as it was always in the past when you had governments printing huge amounts of money.

Stocks are rising even as fiscal deficit is widening. Somewhere it has to snap…

It’s going to snap. Later this year, next year, we are going to have currency problems, maybe even a currency crisis. I don’t know with which currency — maybe with the pound sterling, maybe with the US dollar, who knows. It maybe with something none of us have at the moment. When you have a currency crisis, stocks will be affected, many things will be affected. It is not sound, what’s happening out there in the world.

In the 1930s, we had a huge stock market bubble which popped. And then politicians started making many mistakes. They became protectionist. They made solvent banks take over insolvent banks and then both banks failed in the end.

They are doing many of the same mistakes now. What’s different this time is that we are printing huge amounts of money which they did not print at that time. So, we are going to have inflation this time.

What do you do? No politically-elected government can afford so much pain, unemployment and hardships…

America could have. America just had an election. The guy was elected in November and he could have come in the beginning of a four-year term and said the guys before me were hopeless idiots. They ruined things. We have to solve this problem. We have to take some pains now. But don’t worry, we will get through this pain, and in two to three years or four years, things would be fine. And he could have been re-elected.

If the pain comes in 2010, 2011 or 2012, there will be nobody he can blame. Especially, if things go bad later, the opposition will say, wait a minute, 2009 looked good. The next guy is going to say you did it… But you are right. It’s very difficult for an elected government. You have a newly-elected government in India. Whenever you have a new government they can take some of the pain.

You recently said that you would invest in China and Sri Lanka but not in India. Aren’t you betting on the new government in India?

I was trying to make a point that if anyone wants to invest in this particular part of the world, the best place would be Sri Lanka. Because it looks like the 30-year war is coming to an end.

Throughout history, if you go to a place after the war ends you usually find everything as very cheap, everyone is demoralised, people are just depressed and there are enormous opportunities if you have energy.

In my view, investing in Sri Lanka in May 2009 is probably a better bet than Pakistan, Bangladesh, India or some of the other countries nearby. Let’s hope the new Indian government does something. I have heard wonderful things from Indian politicians for 40 years.

And rarely do they produce. It’s not the first time that the Congress party has been in the power. If they mean it, India’s going to be one of the greatest development stories in the next 20 years. But I don’t know if they mean it.

What kind of reforms?

Why isn’t the currency convertible, why isn’t foreign capital encouraged, why isn’t foreign expertise encouraged, why is it so protectionist? Why are farmers only allowed to own five hectares? India should be the greatest farming nation in the world. You have the soil, the weather, you have everything and yet an Indian farmer can own only five hectares.

How can an Indian farmer compete with a guy in Ireland who can own 1,000 hectares or a guy in Brazil who can own 5,000 hectares? Smart people don’t become farmers. Because what’s the future? Whenever prices start going up, Indian politicians ban futures trading, as if futures trading makes prices go up. It’s the craziest and the most absurd thing in the whole world. Prices go up because there is a reason for prices to go up.

Last year you were buying only Chinese stocks. Why?

The market collapsed in October-November. That’s when I bought more Chinese shares. I have not bought any Chinese shares since then. I have not bought shares anywhere in the world since then. My way of participating in what’s going on now is to buy commodities.

In my view, commodities are the only place where fundamentals are improving. Farmers can’t get loans for fertilisers now, even though inventories of food are the lowest in decades. Nobody can get a loan to open a mine. So, you will have supplies of everything continuing to decline.

What else are you looking at while investing?

There are some industries in India that would do exceedingly well in the next few years, one of which is water. You have a horrible water problem. China also has a horrible water problem. So, I bought water companies in China. There are some great opportunities if America falls off the face of the earth. China is spending hundreds of billions of dollars to solve the agricultural problem.

So, I am buying agricultural stocks and water stocks in China. There are other industries in India which have a great future. I am very bullish on Indian tourism. Wherever I go for speeches around the world I tell people, if you have to go to one country in your lifetime, you should go to India.

Your government is going to re-build the military, they say. So, there’s going to be great opportunities here. Also, they may build the infrastructure. So, I see many opportunities in India.

The possibility of a sovereign default in the developed world could further depress sentiments. You think it’s possible?

In 1918, the UK was the richest and the most powerful country in the world. Within one generation it was in shambles, within two-and-a-half generations it defaulted. The UK defaulted in 1970s and had to be bailed out by the IMF. Many of the countries in the developed world are in serious trouble right now.

Iceland has already defaulted. I think there could be a currency crisis because of sovereign debt problems later this year, next year or 2011. Developed nations have defaulted before. Remember the Asian crisis. It was a default of one kind or the other. It has happened before and it will happen again.

Are you worried about any particular market or region?

I am glad that I have no investments in the UK. Neither long, nor short. I am convinced that it’s in trouble. I am worried about the US. I have sold nearly all of my US dollars. I always had some as I am an American citizen. But I see serious problems developing there. Those two of the big developed countries are the ones that I see with the most likely problems.

But the problem is that it never works that way. Everybody is sitting here watching the UK and US and it may happen in say Portugal or some place we haven’t thought of and it will come suddenly to surprise us all.

If US unemployment touches the 10%-mark, it would further impact retail sales. How bad could this be for Asia?

Let’s pick on China for a minute. If you sell to Wal-Mart in the US and if you are a Chinese supplier you know there is a problem. And you are going to be suffering. Any company that deals with the West is going to have problems. On the other hand, companies that are in the water-treatment business in Asia will care less if the West disappears. They are too busy making money, too busy going to work everyday.

What kind of commodities will smart money chase? Can money be made in crude?

I own gold but think silver is better right now. Natural gas is cheaper than oil right now, but I own them all. If you want to buy crude, you should probably buy cotton. Because all farmers in the US are planting corn to turn into energy. That means they are not going to plant any cotton. The best way to play crude oil is to buy cotton.

Right now, there are huge subsidies around the world for farmers to plant corn, maize, for instance, so that they can be converted into energy. If energy prices go higher, there will be even more of that.

If everybody plants his fields with soya, corn or palm oil to turn it into oil or energy then no one is going to plant cotton.

And you can make a lot more money in cotton than oil. Between oil and gold, buy cotton. Between oil and gold buy silver. The other way to invest in oil is to buy sugar as everybody is converting a lot of sugar into energy.
Silver is so much cheaper on a historic basis. And gold is near its all-time high. Silver is 75% below its all-time high. So, I would suspect that silver and cotton are going to do better than gold and oil.

Global population is close to its peak and genetically-modified crops will increase productivity. What makes you so bullish on agriculture?

It doesn’t matter. The world has been consuming more than it produced. Food inventories are at a multi-decade low. And we haven’t had any bad weather. We had isolated cases of droughts and things. That may never happen again. But if it does, the prices of food would go through the roof.

If there is climate change taking place, the best way to participate is through agriculture or through agriculture products. There are many positive things happening. Right now, there is a shortage of everything in agriculture — seeds, fertilisers, tractors, tractor tyres. We have a shortage of farmers because farming has been a horrible business for the past 30 years.

What kind of a market are you witnessing now?

Jim Rogers

It’s a bear market rally. I was going to say I don’t think S&P 500 will see new highs. But I have to quickly temper that by saying against the dollar because the S&P 500 could triple from here if they print enough money and the value of the US dollar collapses, then S&P could go to 50,000, Dow Jones can go to 1,00,000.

Which is one reason why I am not shorting stocks right now. Because there is a possibility of this sort of a thing. There is a possibility that stocks could go through unheard of levels, but would be in worthless currency.

That naturally brings us to the debate on a new international reserve currency

Several countries have raised the issue once again. The US dollar is terribly flawed right now. Something has to be done to the US dollar and something will be done just as something was done about the pound sterling. After World War II, people stopped using the pound sterling and converted to the dollar for many reasons. Something’s going to be done about the dollar.

We are much closer to be doing something about it or will be forced to do something about it. India was forced to change in 1991 and the world will be forced to change the currency situation in the foreseeable future.

There is already an underlying fear that this mountain of cash will chase assets and eventually force central banks to mop up liquidity. How do you think this would play out?

I know they all say, ‘Don’t worry, we will reverse gears and take the excess liquidity out in time.’ I don’t believe them for a minute. No one has ever done it that way. When central bankers started trying to, it caused so much pain that they quickly reversed or have got rid of that central banker and put somebody else in.

I just don’t think they could do it. That’s why I am worried about the bond market and the inflation. If all central banks do it together, that’s going to lead to higher unemployment, riots in the streets, civil unrests.

Your track record as an investor has been more than impressive. But in todays market can you replicate your performance of the past 20 years?

One can. I probably cannot as I am not spending enough time at it. But it can be done. There are going to be people who we will read about in 20 years having made legendary fortunes starting now. In the 1930s, there were people who built huge fortunes and laid the foundations like Templeton.

He started in the 1930s. He saw opportunities and took advantage. These are people who saw great advantages and opportunities in the 1930s, acted and became fantastic successes. There may be somebody out there now. I don’t know who she is. Maybe she is in Brazil, China or India.

What will you tell a confused fund manager who seeks your advice?

Become a farmer. The world has tens of thousands of hotshot fund managers right now. If I am correct, the financial community is not going to be a great place to be in for the next 30 years. We have many periods in history when financial people were in charge, we had many periods when people who produced real goods were in charge — miners, farmers, etc.

The world, in my view, is changing and is shifting away from the financial types to producers of real goods, and this is going to last for several decades as it always has. This may sound strange but it always happens this way. Ten years from now, it may be farmers who will drive the Lamborghinis and the stock brokers will drive tractors or taxis at best.

Source: Economic Times, 04.06.2009

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Filed under: Asia, Banking, Brazil, China, Energy & Environment, Exchanges, India, Latin America, News, Risk Management, , , , , , , , , , , , , ,

Ten principles for a Black Swan-proof world

By Nassim Nicholas Taleb

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.

6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

In other words, a place more resistant to black swans.

The writer is a veteran trader, a distinguished professor at New York University’s Polytechnic Institute and the author of The Black Swan: The Impact of the Highly Improbable

Source: FT Financial Times, 07.04.2009

Filed under: Banking, News, Risk Management, , , , ,

Asia aims to find its own economic solutions

Plans for a regional free-trade zone, existing currency-swap arrangements and moves towards closer economic cooperation indicate that East Asia is already building a new world structure.

Although the meeting of Asian leaders at Pattaya this past weekend turned into a farce and had to be aborted, it is impossible to ignore either its intentions or the portents.

The richest and fastest growing countries in Asia seem to have looked at the turmoil afflicting the rest of the world and decided that it’s not for them. Instead, they perhaps see this as an opportunity to shift the axis of the world, or rather confirm the centre of the global map to where China has always believed it to be.

A central part of the East Asia Summit, to be held in the Thai resort town of Pattaya at the weekend, was to be the development of plans to set up an East Asia free-trade zone. Leaders of the 10-member Association of Southeast Asian Nations (Asean), plus China, Japan and South Korea, were planning to further “explore ways and means to increase regional trade”, according to a draft statement released on Friday to AgenceFrance-Presse. They were to be joined by the prime ministers of Australia, India and New Zealand on Sunday.

Of course, the meeting was postponed after supporters of former Thai prime minister Thaksin Shinawatra invaded the conference venue in the latest stage of what some refer to as a simmering Thai civil war.

Nevertheless, the intention to establish a pan-Asia free-trade area, which would encompass nearly half of the world’s population, is intact, and a final report of the “second phase feasibility study” is due to be submitted by economic ministers at their next summit in October, said the leaked document. The region-wide zone would build on bilateral arrangements already forged within Asean.

Asia looks to be turning US and European criticisms for building up vast foreign exchange surpluses and maintaining large domestic savings on its head. At the Davos Summit in January, the no longer so great and good tried to shift blame for the West’s spending binge on the cheap money resulting from cash-rich Asian central banks purchasing US Treasury securities, which depressed interest rates and made it too easy for households (as well as investment banks, hedge funds and private equity firms) to borrow cash to buy Asian exports. The temptation was too great, it seems, but it is a tad desperate, even childish, for a spendthrift to blame a prudent saver for supplying the means for his profligacy.

But although most commentators agree that Asian savers need to pick up the slack of reduced US consumer demand, the unintended consequence (from a Western standpoint) might be an Asian block that chooses to go-it-alone. The region’s main concern, after all, is to find and consolidate markets for its exports.

An International Monetary Fund report in February 2008, said that the “importance of exports to the (Asian) region has reached an unprecedented level. While the share of exports in GDP was already high for emerging Asia in 1990, it increased further over the past decade, reaching almost 50% in 2006”. The IMF concluded that “this trend is key to understanding economic developments in the region”.

Asia’s growing share of world trade has resulted largely from increased regional trade integration. While trade flows in the rest of the world roughly tripled between 1990 and 2006, inter-regional trade involving emerging Asia rose by five times, and intra-regional trade within emerging Asia increased by eight-and-a-half times. As a result, trade between the economies in emerging Asia has risen steadily from about 30% of total exports by the region in 1990 to more than 40% in 2006, according to the report.

But the IMF warned that developed economies outside the region remain the main destination of final goods exported by emerging Asia. “Indeed, the exposure of Asian economies to inter-regional exports has actually increased over the past 15 years”, because trade within Asia largely reflects a chain of “vertical specialisation”.

And Michael Buchanan, Asia chief economist at Goldman Sachs, points out that the big drop in Chinese imports from other Asian countries in January this year shows that Chinese consumers have not replaced their US and European counterparts. Instead, he says, a lot of intra-Asian trade still “smells a lot of just supply-chain dynamics” feeding exports to other regions.

But although Asia’s most open countries — Japan, Korea, Taiwan, Hong Kong and Singapore — are set to see their economies contract this year, the rest of the world must look a bit of a mess to Asian eyes.

Eastern Europe is close to bankruptcy; Russia’s post-communist advance appears to have been nothing more than an oil-fuelled boom, and its leadership’s macho posturing has consequently been humbled; Western Europe is ridden alternately with conflict and paralysis as it wonders how best to tackle the recession and how to regulate the new financial order; Latin America is veering towards a recidivist socialism — even Peru’s Maoist Sendora Luminosa guerrillas reappeared last weekend; Africa still looks unstable and poor, but useful as a source of raw materials; while the US’s Armageddon-like crisis of confidence, as much as its financial and economic woes, has undermined its ideological credibility and its leadership credentials.

Amid the chaos, it’s tough to view China’s Delphic suggestions to replace the US dollar with an alternative reserve currency, as anything but mischief-making. The renminbi is hardly a viable replacement: it’s not yet fully convertible and isn’t even legal tender in Hong Kong SAR. Pointing to the IMF’s special drawing rights (SDRs) is surely disingenuous: SDRs are not a real currency, but an IMF accounting unit allocated to countries in proportion to their IMF quotas.

Even China’s insistence on a bigger voice in IMF decisions as a reward for greater financial contributions seems designed to irritate the West and ensure that China won’t have to contribute more cash to the fund. Besides, it’s doubtful whether Asia (at least its wealthier countries) either needs or wants the IMF. More than anything else, the 1997-98 crisis taught Asian countries an important and long-lasting lesson, namely to build up a war chest of foreign exchange reserves to prevent a repeat of the run on their currencies. It was the currency collapse that forced them to turn to the IMF, which then imposed its ruinous dogma of fiscal and monetary austerity, and enforced bank closures and corporate fire-sales to US predators.

Indeed, there is an evolving view in Asia that there are other sources of funding to draw from, given the region’s holding of around $3.5 trillion in foreign reserves. In response to rapidly weakening foreign exchange rates, Asian finance officials agreed in March to enlarge a foreign currency pool to $120 billion from $80 billion proposed last year, to help defend their currencies. The 10 members of Asean plus Japan, China and South Korea had previously pledged to pool bilateral currency swap arrangements under the so-called Chiang Mai Initiative within a multi-lateral fund that could be tapped in emergencies.

Increasingly, Asia is looking like a region set to find its own solutions — not just to the current crisis, but to the inherent structural weaknesses in its economic models. Of course, its success is by no means certain: it is a vast heterogeneous area made up of diverse interests, conflicting world-views and the traditional rivalry between China and Japan. But a free-trade zone, multi-lateral currency agreements and closer cooperation over investment decisions will make the region an even more formidable force than it is already. And it will be a power that doesn’t need to lobby for influence in established multi-lateral global forums or institutions, such as the IMF. Instead, it will acquire de facto dominance, while the rest of the world postures, and huffs-and-puffs like so many President Sarkozys.

Source: FinanceAsia.com, 14.04.2009

Filed under: Asia, Banking, China, Hong Kong, India, Japan, Korea, Latin America, Malaysia, News, Singapore, , , , , , , , , , , , , , ,

Stocks Will Drop; Banks Will Go Belly Up – Roubini says

 The stock market will drop as major banks go belly up says Nouriel Roubini, the NYU economist that successfully predicted the current economic collapse. Below is the text from an interview Mr. Roubini gave today on Bloomberg TV.

U.S. stocks will fall and the government will nationalize more banks as the economy contracts through the end of 2009, said Nouriel Roubini, the New York University professor who predicted last year’s economic crisis.

“The stock market is a bit ahead of the real macroeconomic and financial news,” Roubini, a professor at NYU’s Stern School of Business and the chairman of consulting firm Roubini Global Economics, said in an interview with Bloomberg Television in London today. “We’ll have some major banks going belly up that will need to be taken over.”

The global equity rebound in March that sent the Standard & Poor’s 500 Index to its best monthly advance in 17 years is a “bear-market rally” and U.S. Treasury yields will “remain relatively low” as investors flock to the safest assets, Roubini said. Treasury Secretary Timothy Geithner’s new plan to remove toxic debt from financial companies won’t be enough for insolvent banks, he said.

Roubini’s outlook contrasts with predictions this week from Templeton Asset Management Ltd.’s Mark Mobius and Traxis Partners LLC’s Barton Biggs, who said that equities are poised to rally as government efforts to revive the economy and banking system begin to work. Investors are “way too optimistic” about the prospects for a recovery in the economy and earnings, Roubini said.

For full article click here

Source: Infomation Clearing House, 27.03.2009

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The Mexican Evolution

AMERICA’S distorted views can have costly consequences, especially for us in Latin America. Secretary of State Hillary Clinton’s trip to Mexico this week is a good time to examine the misconception that Mexico is, or is on the point of becoming, a “failed state.”

This notion appears to be increasingly widespread. The Joint Forces Command recently issued a study saying that Mexico — along with Pakistan — could be in danger of a rapid and sudden collapse. President Obama is considering sending National Guard troops to the Mexican border to stop the flow of drugs and violence into the United States. The opinion that Mexico is breaking down seems to be shared by much of the American news media, not to mention the Americans I meet by chance and who, at the first opportunity, ask me whether Mexico will “fall apart.”

It most assuredly will not. First, let’s take a quick inventory of the problems that we don’t have. Mexico is a tolerant and secular state, without the religious tensions of Pakistan or Iraq. It is an inclusive society, without the racial hatreds of the Balkans. It has no serious prospects of regional secession or disputed territories, unlike the Middle East. Guerrilla movements have never been a real threat to the state, in stark contrast to Colombia.

Most important, Mexico is a young democracy that eliminated an essentially one-party political system, controlled by the Institutional Revolutionary Party, that lasted more than 70 years. And with all its defects, the domination of the party, known as the P.R.I., never even approached the same level of virtually absolute dictatorship as that of Robert Mugabe in Zimbabwe, or even of Venezuela’s Hugo Chávez.

Mexico has demonstrated an institutional continuity unique in Latin America. To be sure, it can be argued that the P.R.I. created a collective monarchy with the electoral forms of a republic. But since 2000, when the opposition National Action Party won the presidency, power has been decentralized. There is much greater independence in the executive, legislative and judicial branches of government. An autonomous Federal Electoral Institute oversees elections and a transparency law has been passed to combat corruption. We have freedom of expression, and electoral struggles between parties of the right, center and left.

Our national institutions function. The army is (and long has been) subject to the civilian control of the president; the church continues to be a cohesive force; a powerful business class shows no desire to move to Miami. We have strong labor unions, good universities, important public enterprises and social programs that provide reasonable results.

Thanks to all this, Mexico has demonstrated an impressive capacity to overcome crises, of which we’ve had our fair share. They include the government’s repression of the student movement of 1968; a currency devaluation in 1976; an economic crisis in 1982; the threefold disaster of 1994 with the Zapatista rebel uprising, the murder of the P.R.I. candidate for president and a devastating collapse of the peso; and the serious post-election conflicts of 2006.

We have overcome these challenges and drawn meaningful lessons from them. We learned to diversify the economy and reduce the state’s financial monopolies, paving the way for the eventual Nafta agreements. Election controversies and the threat of political violence have led to a national acceptance of a peaceful and orderly transition to democracy.

Now once again, we face enormous problems. The worldwide financial crisis is intensifying our ancient dramas of poverty and inequality. But the most acute problems are the increased power and viciousness of organized crime — drug trafficking, kidnappings and extortion — and an upsurge in ordinary street crime.

This may be the most serious crisis we have faced since the 1910 Mexican Revolution and its immediate aftermath. More than 7,000 people, most of them connected to the drug trade or law enforcement, have died since January 2008. The war against criminality (and especially the drug cartels) is no conventional war. It weighs upon the whole country. It is a war without ideology, rules or a shred of nobility.

Is it a war that Mexico can win? Not through the tactics of any conventional war. But there can be progress by restricting the range of the enemy. Since taking power in 2006, President Felipe Calderón has sent more than 40,000 army troops to various Mexican states to combat drug gangs, and has had some victories in drug-related seizures and arrests. Even though Mr. Calderón enjoys a relatively high approval rating, the government has not managed to reassure the general population. Large sectors of Mexican society seem to endure these events as if they were part of a nightmare from which some morning we will awake. But it will not just disappear, and Mexicans must help fight the war by mobilizing public opinion, supplying information to the authorities and vigilantly supervising both elected and appointed officials. This kind of civic participation has already begun to yield some successes in Mexico City.

The government, for its part, must continue the huge task of cleaning up the dark corners of its police forces, establishing an efficient intelligence network in order to keep ahead of the cartels. Mexico also needs a secure prison system that will not serve as a sanctuary where sentenced drug bosses can continue conducting their business and recruiting new criminals. It is also vital to speed up the purification of a judicial system that is slow and inefficient in its handling of serious crimes. We could use more political cooperation as well: Mr. Calderón (and his National Action Party) are now fighting this battle without significant support from the opposition parties, the P.R.I. and the Party of the Democratic Revolution.

The Mexican print media has not been entirely helpful either. Of course, freedom of press is essential for democracy. But our print media has gone beyond the necessary and legitimate communication of information by continually publishing photographs of the most atrocious aspects of the drug war, a practice that some feel verges on a pornography of violence. Press photos of horrors like decapitated heads provide free publicity for the drug cartels. This also helps advance their cause by making ordinary Mexicans feel that they are indeed part of a “failed state.”

While we bear responsibility for our problems, the caricature of Mexico being propagated in the United States only increases the despair on both sides of the Rio Grande. It is also profoundly hypocritical. America is the world’s largest market for illegal narcotics. The United States is the source for the majority of the guns used in Mexico’s drug cartel war, according to law enforcement officials on both sides of the border.

Washington should support Mexico’s war against the drug lords — first and foremost by recognizing its complexity. The Obama administration should recognize the considerable American responsibility for Mexico’s problems. Then, in keeping with equality and symmetry, the United States must reduce its drug consumption and its weapons trade to Mexico. It will be no easy task, but the United States has at least one advantage: No one thinks of it as a failed state.
Nor, for that matter, did anyone ever see Al Capone and the criminal gangs of Chicago as representative of the entire country. For Mexico as well, let’s leave caricatures where they belong, in the hands of cartoonists.

Enrique Krauze is the editor of the magazine Letras Libres and the author of “Mexico: Biography of Power.” This article was translated by Hank Heifetz from the Spanish.

Source: NY Times, By ENRIQUE KRAUZE, 23.03.2009

Filed under: Mexico, News, , , , , , , , ,

Stiglitz anticipates New World Order

Professor Joseph Stiglitz opens the Credit Suisse conference by warning that the world can no longer rely on the US consumer, cautioning against weak policy responses and signalling a decline of the US dollar.

Policymakers are focusing too much on the costs of fiscal stimulus packages, rather than their benefits, said Joseph Stiglitz, Nobel laureate and former chief economist at the World Bank, on the opening morning of the Credit Suisse Asian Investment Conference in Hong Kong yesterday.

Consequently, these spending programmes may be too tepid, especially when, as in the United States, they contain too great an emphasis on tax cuts, and are neutralised by a contraction in expenditure by revenue-starved local authorities that are compelled to balance their budgets.

Stiglitz was also sceptical about US Treasury secretary Timothy Geithner’s plan for a public-private partnership to buy “toxic assets” from banks because it might turn a “zero sum” game into a “negative-sum” game, by leaving taxpayers with losses while providing opportunities for profits for gamblers and fraudsters in the private sector.

In response to concerns about governments and central banks laying the seeds for future inflation through their massive spending programmes and ultra-loose monetary policies, Stiglitz argued that deflation would be far worse. It creates a deleterious chain of damage, as fixed debt obligations become more expensive, leading to individual payment defaults, worsening bank balance sheets and a further contraction in credit. The subprime calamity is already morphing into a wider crisis as it spreads to prime mortgages, car loans and credit cards.

But Stiglitz did warn that inflation can happen suddenly and unexpectedly, and that the US Federal Reserve was courting danger by artificially reducing long-term interest rates by buying commercial assets, such as corporate bonds, rather than just Treasury bills.

However, he was also scathing about the past behaviour of Federal Reserve officials and commercial bankers who, he argued, have a myopic concentration on price stability, while missing the far bigger threat of inflated asset values supported by inadequate financial structures. The housing market was the most egregious manifestation of that short-sightedness.

Stiglitz, who is currently a professor at Colombia University, pointed out that the past economic model — US consumption supporting world trade — is unlikely to be resurrected, as the US savings rate increases in tandem with the uncertainty of a higher unemployment rate. So, we should not anticipate a return to the conditions similar to the beginning of the boom in 2002. Most importantly, US exports and investments must show signs of picking up, while the engine of domestic demand must shift to other parts of the world.

Stiglitz is “very optimistic” about China, although he is conscious that as an outsider he might be viewing the country with rose-tinted glasses. He praised the recent fiscal stimulus programme, with its emphasis on developing a social safety-net by devoting spending to education, health services, insurance and pensions. The population should feel more secure, he said, which would lead to a pick-up in domestic consumption and moving the economy away from its reliance on exports. However, he noted that the Chinese savings rate is not abnormally high; it’s just that household income as a proportion of GDP is low, while corporate profits are correspondingly high. Hence, wages need to increase, which might be facilitated by an expansion of the small-and medium-sized enterprise sector. However, he is worried that too much consolidation in key industries might reduce China’s efficiency, and that the government may be reluctant later on to cut what are effectively subsidies for natural resources that will artificially boost corporate profits.

Commenting on Asia in general, Stiglitz said that it is understandable that the “class of ’97”, the Asian countries whose sovereignty was effectively taken away by the International Monetary Fund and US Treasury policies during the crisis a decade ago, has focused on building up foreign exchange reserves above all else since then. However, as a result they have become victims of the “paradox of thrift”, ever dependent on a profligate US consumer to support positive trade balances.

But, he was encouraged by developments such as the expanded Chiang Mai Initiative currency swap arrangement, which he sees as a potential nascent regional currency reserve system that, if combined with similar support agreements in Latin America, for instance, might evolve into a viable global reserve system, replacing the increasingly discredited US dollar. The dollar, he said, is no longer a good “store of value”: It is volatile and diminished by the printing press, and the confidence on which it should be predicated has been lost due to political and economic instability.

One day, Stiglitz believes, the world will have a genuine “super currency” as Keynes originally desired back in 1944 at the Bretton Woods meeting, which did so much to shape the post-war financial landscape.

Source: FinanceAsia.com, Rupert Walker 25.03.2009

Filed under: Banking, China, Latin America, News, , , , , , , , ,

Mexico’s Finance Minister says U.S. Gov. Citigroup stake temporary

March 20 (Bloomberg) — Mexican Finance Minister Agustin Carstens said U.S. Treasury Secretary Timothy Geithner told him the government’s stake in Citigroup Inc. is temporary, a position that will help avoid conflicts with Mexican law.

Carstens said the U.S. bailout of Citigroup has helped strengthen its Mexican unit, Grupo Financiero Banamex SA, and that he thinks the U.S. will relinquish its stake in Citigroup by 2012. That forecast was seconded by Manuel Medina-Mora, the chief executive officer for Citigroup’s Latin American division.

President Felipe Calderon’s government had come under pressure from local lawmakers to force Citigroup to dispose of its Banamex unit after the U.S. Treasury agreed to take a 36 percent stake in the New York-based lender. The finance ministry yesterday said that “foreign government aid programs don’t violate Mexican law.”

“We are living through an exceptional, transitory, temporary period,” Carstens said. “The assistance of the U.S. to Citigroup is helping Banamex.”

Calderon will send a bill to Congress that seeks to maintain a restriction on foreign governments holding stakes in Mexican banks while more clearly stating the permissible exceptions during times of crisis, the finance ministry said in a statement yesterday.

Third Rescue

The U.S. government agreed on Feb. 27 to a third rescue of Citigroup, prompting Mexico’s National Banking and Securities commission to say it would study legal implications of the U.S. government’s stake. Citigroup bought Banamex, Mexico’s second- largest bank, for $12.5 billion in 2001.

The new proposed legislation “would establish with total clarity the exceptions strictly necessary to face crises such as those that present themselves today,” the ministry said.

The proposal would specify that banks, after three years of operating under the exemption to allow foreign government stakes, would have to sell 25 percent of their Mexican unit’s shares on the local market. That requirement would rise to 50 percent of shares after six years.

Carstens also said he wants to see the peso strengthen beyond a 14 peso per dollar exchange rate. The Mexican currency rose 0.8 percent to 14.1318 pesos per dollar at 11:30 a.m. New York time.

Source: Bloomberg, 20.03.2009  Bill Faries  wfaries@bloomberg.net; Valerie Rota  vrota1@bloomberg.net in Acapulco, Mexico

Filed under: Banking, Mexico, News, , , , , , , ,

FiNETIK and the latest on ITAU / Banamex / Citi

Via the Finetik blog linked here, your info-hungry Otto finds out that Banco Itau (ITU) sent an official communication to the Brazilian regulators last night stating that Itau “..is not negotiating any stake in Banamex’s capital..”.

Now that doesn’t mean there’s no interest, of course. The ITU honchos have already said they’d be interested purchasers if and when Banamex went up for sale. It does mean, however, that ITU isn’t doing anything proactive right now. This fits with the official Citigroup (C) line that Banamex is not up for sale, of course. This won’t quell the rumours, but it will put a dampener on short-term speculation for sure. However it should be clearly pointed out that none of this addresses the core issue here: As explained previously if the US gov’t takes its 36% interest in Citigroup as planned, C will be breaking the Mexican law and cannot hold onto Banamex as things stand. That’s as plain as day.

Finally, a word of kudos for the people at Finetik; I’ve only recently discovered the blog (which is part of a wider capital markets company that specializes in Latin America as well as Asia) and put it on my RSS, but I’ve been very impressed with the quality of information passed over there. I can thoroughly recommend it and say it would be a good addition to your own RSS feed (or regular bookmarked visit). Here’s the link to the blog’s main page.

Disclosure: I have no affiliation whatsoever with Finetik and have never even spoken to the people in my time. I just think it’s a good blog that covers LatAm finance well.

Source: Inca Kola, 05.03.2009

Filed under: Banking, Mexico, News, , , , , , , , , , ,

Rumor: ITAU to buy Banamex from Citigroup

Marcia Peltier Column at Jornal do Commercio (Rio de Janeiro) says that Itau-Unibanco will announce next week the purchase of Banamex. It also says that executives from brazilian bank are already in Mexico City.

Itau-Unibanco opportunities in US crisis

There are two immediate analyses that Itaú has to do. The first is the sale of Citibank’s’ stake in the credit card processor Redecard. The stake is worth R$ 2.9 bn, at market value. Itáu declared that it is only interested in buying 24 mn shares, which will allow it to be the largest shareholder, with a 26.7% stake. At market value, Itaú will have to pay R$ 573 mn. As Redecard trades at 24x BV, it will mean that, net of tax, Itaú will pay less than R$ 400 mn. Itaú also stated that it would like to find a strategic partner for the rest of the stake. The only bank Itau would feel  fit the bill is HSBC, but we are uncertain if it desires to hold such a stake.

The second immediate opportunity that arises, also due to Citibank’s financial problems, is the sale of Citi’s Mexican bank. According to Mexican law, no foreign government can own a bank in that country. As Citi will have as a major shareholder the government of the United States, the situation forces them to sell their Mexican stake. This would be a very attractive asset for Itaú, as it would assure the bank’s international expansion. However, we expect it to let it pass due to the current process of digesting the merger with Unibanco.

Itau Unibanco are in merging process

Itaú and Unibanco have effectively begun the merger of the two banks. There are no expectations of major lay-offs, as
management expects natural turnover and retirements to decrease the total number of employees. There have been
some reductions in specific areas, but nothing significant enough to affect personnel expenses. By 1H10 the merger
should nearly be over, with only some back office mergers in 2011. According to management, there will be no
significant reduction in the number of branches.

IXE Casa de Bolsa conference call: ITAU

Source: IXE Casa de bolsa, 27.02.2009, 03.03.2009

Filed under: Banking, Mexico, News, , , , , , , , , , , , ,

Citigroup-Banamex: Failed US Banks vs. Soild Mexican Institutions

Does the US government’s 36 per cent stake in Citi violate Mexican ownership laws? Have we got our countries confused? No. Citi owns Banamex, a Mexican bank with circa 1,200 branches and 2.6m checking accounts. And Latin American finance blog Inca Kola sees a fight brewing over the Southern subsidiary:

The nub of the issue revolves around Mexican law, which states in crystalline manner that foreign governments cannot own more than 10% of any bank that operates inside Mexico. It’s as clear as a bell and on the statute. So as Banamex is a wholly owned subsidiary of Citigroup (C paid $12.1Bn or so back in 2001 for the bank) if the US Gov’t takes its 36% stake in Citigroup then it will be a larger-than-10% shareholder of Banamex, something against Mexican law. Won’t it?

Mexico’s National Banking ans Securities Commission is therefore investigating, while Banamex is saying that the North American Free Trade Agreement will (somehow) protect it.

Selling Banamex would effectively mean an even worse deal for the US government. The unit’s been described by Citi as one of its “crown jewels”, managing to post an $896m net profit for 2008, making it one of the least toxic parts of the banking group. Banamex is accordingly part of Citicorp — the retail (read: non-toxic) part of the Citi empire. Full Article click here.

Source: FT Alphaville 02.03.2009, Inca Kola News 01.03.2009

Mexico Gov. Studying Effect on Banamex of U.S. Aid to Citi,

(Bloomberg) Mexico’s National Banking and Securities commission said it’s studying the legal impact of the U.S. government’s stake in Citigroup Inc., which owns Grupo Financiero Banamex SA.

The U.S. government announced today it plans to convert as much as $25 billion of preferred shares of Citigroup into common stock. The conversion would give the U.S. a 36 percent stake in the New York-based company. Mexico’s banking law prohibits foreign governments from owning or having a stake in banks that operate in Mexico, like Banamex. Citigroup purchased Banamex for $12.5 billion in 2001.

The commission has asked all banks operating in Mexico that have received help from governments to provide information on the aid, the statement said. The banking commission and other financial authorities will “soon” release information on the study, the body said in a statement.

“The Mexican financial authorities are analyzing the legal implications of the aid that foreign governments have granted foreign financial entities that have subsidiaries in Mexico,” the agency said.

Speculation has mounted in recent weeks that Citigroup may sell Banamex to raise cash and shore up capital amid the global financial crisis. Chief Executive Officer Vikram Pandit flew to Mexico Feb. 19 for two days of meetings with clients, Banamex officials and government officials, including Finance Minister Agustin Carstens and central bank Governor Guillermo Ortiz.

Citigroup fell 96 cents, or 39 percent, to $1.50 at 4 p.m. in New York Stock Exchange composite trading as a record 1.87 billion shares changed hands. The stock has plummeted 94 percent in the past year.

Source: Bloomberg 27.02.2009 Andres R. Martinez in Mexico City at amartinez28@bloomberg.net

Mexican Bank Asset Value

(IXE) According to local newspaper EL UNIVERSAL columnist Alberto Aguilar, ITAU is one of the government’s favorite candidates to acquire Citigroup’s BANAMEX if they have a minority stake in a group led by Mexican investors.Other candidates that have expressed interest are JP Morgan Chase and HSBC.

IXE understands that if Citibank sells Banamex, it will likely sell its BZ.Bradesco branch as well. Due to the fact that Banamex ranks in second in Mexico (assets) and first (equity), along with an important corporate loans book, while the BZ subsidiary present loans book smaller than the ones presented by mid-size banks, and with a lower ROE, which could be higher considering its BZ peers. Furthermore, Citibank BZ does not present important market share in any particular segment in Brazil.

Banamex instead, possess a significant Mexican banking market (see file attached). This would be a very important operation for Itau if it materializes. We believe foreign players could be potential acquirers of Banamex (including Itau) because local players could end up having problems to find funding to finance the operation in the future. If Itau buys Banamex, it will be coherent with Itau’s Roberto Setubal past speeches.

The following is a table of the size of Mexican Banks (Tot. Assets 2Q08 in billion US$)

US$ 53.4 bn BBVA Bancomer
US$ 38.9 bn Banamex
US$ 31.5 bn Santander
US$ 26.8 bn HSBC
US$ 21.0 bn Bannorte
US$ 12.7 bn Inbursa
US$ 10.0 bn Scotia

Source: IXE Casa de Bolsa, 28.01.2009

Filed under: Banking, Mexico, News, Risk Management, , , , , , , , , , , , , , , ,

Industry Fears Proposal in Congress Would Destroy High-Frequency Trading and Liquidity

Trading industry experts said the passage of a new bill to tax each buy and sell transaction by up to 25 basis points would devastate liquidity in the equities market.
The proposed House of Representatives’ bill-H.R. 1068: Let Wall Street Pay for Wall Street’s Bailout Act of 2009-would, they say, dramatically increase trading costs, widen bid-ask spreads, kill off high-frequency market making firms, slash volumes and move trading to overseas markets.

“It would have a really major impact for the high-frequency players,” said Jeff Bell, with Wedbush Morgan Securities’ clearing and technology group. “It would end that whole business.”

Since equities began trading in penny increments in 2001, the trading industry has undergone a massive overhaul, moving to an electronic trading world. Today, roughly 65 percent of all volume is executed by high-frequency traders, who have replaced specialists and market makers who fled the inside market due to narrower bid-ask spreads that raised their risk profile.

The concern within the trading industry is that if high-frequency traders were taxed, they would exit the business, because their current razor-thin margins would turn to losses. The result? Liquidity would disappear for all market participants.

Wedbush clears the trades for many of the industry’s largest high-frequency firms. Bell calculated, for example, that Wedbush’s fee for the tax would have been more than an estimated $50 million on Monday alone for having done more than $20 billion worth of securities transactions that day.

“That’s a huge tax; 25 basis points is enormous,” said Dan Mathisson, the head of Credit Suisse’s Advanced Execution Services.

The proposed bill would add 5 cents per share to the cost of trading an average stock, at around $20 a share, Mathisson added. By comparison, electronic trading commissions for services cost a penny-or just under a penny.

“You’re talking about raising the trading costs more than five times,” he said. “That would bring liquidity presumably down to levels from 10 years ago, which is the last time transaction costs were that high. I assume you would see volumes drop from about 10 billion shares a day to one billion shares a day.”

Details for the bill have yet to be worked out. As written, the bill would amend the Internal Revenue Code of 1986 to impose a tax on certain securities transactions enough to recoup the net cost of the Troubled Asset Relief Program. Rep. Peter DeFazio, D-Ore., authored the bill.

DeFazio introduced the bill on Feb. 13. It has since been referred to the House Committee on Ways and Means, according to the House of Representatives’ Web site.

The bill’s findings argue that because the $700 billion TARP fund and the new Federal Reserve lending facilities were created to protect Wall Street investors, the same Wall Street investors should pay for the infusion of taxpayer money.

“The easiest method to raise the money from Wall Street is a securities transfer tax, a tax that has a negligible impact on the average investor,” the bill states. “This transfer tax would be on the sale and purchase of financial instruments such as stock, options and futures. A quarter percent (0.25 percent) tax on financial transactions could raise approximately $150 billion a year.”

The offices of Representatives DeFazio and Michael Capuano, D-Mass.-the only one of seven additional sponsors of the bill who is on the House’s Financial Services Committee-did not return calls for comment.

There is precedent for such a tax. The United States imposed a transfer tax of 0.2 percent on stock trades between 1914 and 1966. In addition, investors now pay the federal government $9.30 per million dollars of face value to fund the Securities and Exchange Commission-under Section 31 of the Securities Exchange Act of 1934.

With such a steep climb in transaction costs, high-frequency market makers operating on razor-thin margins would be the first to fall, several in the industry said. By some accounts, they comprise an estimated two-thirds of average daily volume.

And with less liquidity, by definition, spreads would widen, said Eric Hess, general counsel for Direct Edge ECN. They could widen by a factor as great as three or four, according to some estimates.

“It would have a cascading effect over time,” Hess said. “In the same way that liquidity begets liquidity, draining liquidity has the tendency to drain even more liquidity.”

The extra cost would most likely get passed on to investors. Because of tight margins, broker-dealers wouldn’t assume the cost themselves, unless they were for their own proprietary accounts, Hess added.

The Security Traders Association circulated a letter to its members earlier this week that described the tax’s potential impact. In it, the letter laid out the bill’s impact on high-frequency market makers and overall liquidity in the equities, options and futures markets.

“The deeper and more liquid the market, the better the price discovery and related information provided,” the STA letter said. “Impairment of liquidity lessens the value of the information and the functioning of a market-based economy.”

And with less liquidity, firms would be encouraged to trade overseas, where costs are cheaper, Hess said. Consequently, more companies could be encouraged to list overseas.

As many stocks can be listed overseas, the tax would create an immediate market for them. Market venues such as the Toronto Stock Exchange and or Chi-X, in Europe, could likely start listing U.S. equities, some industry pros said.

Mathisson laid out one scenario

“How long does it take for off-shore entities, such as the Chi-Xs of the world, or the London Stock Exchanges of the world, to cross-list a significant number of U.S. companies and get everybody to start to trade there?” he asked. “And then volume in the U.S. would drop even more, or maybe just stop. Maybe the U.S. equities are traded at exchanges overseas. And then the [transaction] tax generates a negligible amount of revenue because it shuts down the U.S. exchange industry.”

The bill won’t generate the anticipated revenues if trading behavior changes and volumes plummet, Hess added.

“You’re talking about imposing a tax on behavior that can change overnight and over time,” he said. “Algorithms will be changed. Trading patterns will be changed. People will seek to minimize the impact of this tax on them and that will result in less revenues, not to mention the additional costs it will impose on an already fragile system.”

Many of the half dozen in the industry pros interviewed for the story said the bill was too obviously flawed to pass. But each added that in an environment where the entire financial world is blamed for banks’ ills, and many are desperate to close budget gaps, no one is sure how seriously the bill will be taken.

“It’s better to be proactive on a poorly designed investor tax than it is to sit and wait for it to pop up on the mainstream radar,” said Peter Driscoll, current STA chairman, and senior equity trader at The Northern Trust Co.

Source: Traders Magazin by James Ramage 25.02.2009

Filed under: Exchanges, Trading Technology, , , , , , , , , , , ,

The Economic Outlook: 2012 and beyond

To see into the future of our economies, with some small degree of certainty, we have to pay attention to what is happening around us and what we do.  American Cronical 22.02.2009 full article

But to get an idea of how the future will be, one has to have a real picture of the present. This is important since a false picture will present us with false alternatives, on which we act which in turn will result in unexpected outcomes (i.e., future that we are not prepared for).

It is not always easy to see through all the false pictures and data that we are constantly presented with. For example, in Norway on February 18th, the real-estate association came out with the statement that the housing crisis was almost over and the bottom was reached. This was plastered all over the place. Next day on February 19 th, the Norwegian Centre for Statistics came out with its own forecast; stating that house prices will continue to fall for the next year and that situation will deteriorate further.

It was clear to some of us that the real-estate association was putting out false information to drum-up business for its members. But if banks, industrialists, and even politicians also send out false and misleading information, then the average person will make decisions that may be contrary to his or her best interests.

Most of us do not have the time, energy, or even the necessary knowledge to gather and sift through large amount of data. We rely on news media, and the experts to make most of our decisions. Until last year, very few people were talking about the tremendous crisis that was well under way; even though as early as 2006, there were clear signs that the economy was under tremendous pressure.

In this article I will try to provide you with a picture of the present situation and then try to extrapolate based on the current policies adopted by various governments, what the near future will look like.

The current economic situation

Let me tell you in no uncertain terms that we are facing a synchronised global economic depression and I am not the only one that is saying this. In early February, the International Monetary Fund’s chief Dominique Strauss-Kahn said the world’s advanced economies — the U.S., Western Europe and Japan — are “already in depression”. Gordon Brown, the UK’s Prime Minister also used the word “depression” to describe the global economy, although his aides quickly said it was a slip of the tongue.

The politicians and others of course avoid using the term “depression” for fear of creating a panic; instead they use terms such as “severe recession” or “one of the most serious financial crises since the great depression”, etc. But they all are saying the same thing, we are in a depression and all the available data support this. An important fact to remember is that this depression is synchronised and this synchronicity has been made possible by the globalization and accompanying deregulation; the very things that were making workers poorer and the rich, richer.

Now the chickens have come home to roost. All economies are now suffering. Such promising economies as Iceland’s saw its GDP shrink by 10%, while the success show case of Europe, Ireland, had its GDP shrink by 6%. Germany, the euro zone’s biggest economy shrank by 2.1% in the three months to December, seconded by Italy, which suffered a 1.8% drop in GDP. The French economy also contracted by 1.2% while IMF put Spain on its vulnerable list. UK ‘s GDP has also suffered and is forecasted to contract by 3.5% in 2009.

The misery list includes most of the Eastern European countries as well with some such as Ukraine set to experience severe contraction. According to IMF Ukraine’s GDP will shrink by 8 to 10% in 2009. The Russian economic growth is also set to fall. According to the Russian Deputy Economic Development Minister Andrei Klepach the forecast for the Russian economy has worsened to a 2.2-percent contraction in GDP.

Japan’s economy, the second largest in the world, contracted by 12.7 per cent on a seasonally adjusted annualised basis in the fourth quarter and is set to contract by. According to the Taiwanese government, Taiwan’s GDP will shrink by 3% in 2009. Another big economy in Asia is Korea. According to S&P sovereign ratings, Asia’s fourth-largest economy will contract by about 3.5 percent this year. All other South East Asian economies are reporting severe slow down or outright contraction except China.

According to National Bureau of Statistics of China, by comparing the fourth quarter 2007 to that of the fourth quarter 2008, China had achieved a 6.8 percent growth in 2008. However, many believe that this figure is misleading and that the Chinese are hiding the extent of the economic contraction of its economy. They point out that energy consumption in China has substantially been reduced. This could not have happened without a marked slowing down of the economy.

According to the article published in The Epoch Times (17 Feb 09) “Economists at the Standard Chartered Bank estimate China’s growth rate to be around 1 percent. Morgan Stanley analysts estimate it to be at 1.5 percent. This is much lower than the CCP reported 15 percent for the first quarter of 2007. According to economists at Merrill Lynch, the sequential growth rate of fourth quarter of 2008 was zero percent.”

Middle Eastern countries have also been severely affected by the financial crisis. The revenue from their major source of income, oil, has fallen at an incredible rate. Oil prices that were around 120 to 140 dollars last year have come down to around 30 to 40 dollars this year. Every country has slashed its expenditure with the accompanying slowing growth. For example recently UAE was forced to halt construction projects worth $582 billion or fully 45% of all projects. A recent report in New York Times (11th Feb. 09) paints a grim picture of the situation in Dubai. The report states that ” with Dubai’s economy in free fall, newspapers have reported that more than 3,000 cars sit abandoned in the parking lot at the Dubai Airport, left by fleeing, debt-ridden foreigners (who could in fact be imprisoned if they failed to pay their bills)”. Iranians, Saudis, Iraqis, Kuwaitis and others have also been forced to slow down or freeze many projects. One must not forget that many of these countries’ petro-dollars are re-circulated back into the US and European economies. Those funds are drying-up fast.

Turkey sitting between the Europe and Middle East is also suffering. Turkey has the largest GDP in the Islamic world. Turkey’s GDP was 750 billion in 2008, the GDP of Saudi Arabia was 600 billion dollar for the same period. A once dynamic economy is now negotiating with IMF for help.

Having surveyed most of the economic landscape of Europe and Asia, we can now look at the world largest economy, the US. The US economy is in a terrible shape, with all sectors going through severe depression. Housing market has completely collapsed. The auto industry is going bankrupt. The banking sector is alive only by the grace of the government handouts. The entertainment industry (TV and film industry excluded) is facing severe problems and unemployment is increasing rapidly. The Federal Reserves’ forecast for 2009 shows a contraction of 0.5 to 1.3 percent of the GDP with official unemployment rising to 8.5 or 8.8 percent. Here one should note that this official unemployment rate does not present a true picture, since all those who give-up registering with the unemployment office or are barely working (part-time workers, etc) are not counted as unemployed.

The missing engine of growth

Before we look at the future development we have to remember that there are four factors that power an economy: consumers, investors, government, and a favourable trade balance. Some economies such as China rely on favourable trade balance and Foreign Direct Investment (FDI) for their growth. For example according to the Chinese Ministry of Commerce, from 1990 to 2007, China received $748.4 billion in FDI. At the same time, since its economic liberalization, China has recorded consistent trade surpluses with the world. For example China has registered trade surpluses of $102 billion for 2005, $177.47 billion for 2006, $262.2 billion for 2007, and $295.47 billion for 2008. China currently has accumulated nearly two trillion dollars in foreign exchange reserves.

In contrast to the China, the United States has relied on consumers and the government for its growth. According to Peter G. Gosselin citing Roach of Morgan Stanley Asia, U.S. consumers constitute only about 4.5% of the global population, yet they bought more than $10 trillion worth of goods and services last year. In contrast the Chinese and Indian consumers combined which account for 40% of the global population bought only $3 trillion worth. He goes on to point out that according to government statistics, from 2001 to 2007, U.S. consumer spending shot up from a little over 73% of the economy to nearly 77%.

If we just look at the differences in consumption levels between US and China-India, we’ll see that these countries are not in a position or have the financial resources to pick-up the slack left by the US consumers. Anyway, China’s growth is based on its exports and the FDI and not its consumers. When the international market shrinks, the Chinese will see (as they do now) a sharp drop in their actual growth. If they try hard they may be able to keep their people’s standard of living at its current level (highly unlikely); but they will be unable to increase consumption. Anyway, according to the Bloomberg (19 January 09), the Chinese unemployment rate has jumped to its 30 year high and will most likely increase further.

How about Japan? Japan also started its economic miracle by export-led growth. Japan saved hard, and worked hard to become one of the largest economies in the world. However, the bursting of the housing bubble of 1990-91 started a deflationary period that Japan never really recovered from.

If we look at the Consumer Price Indexes (CPI) for Japan, the U.S., and the Euro Area from 1999 to 2006, with 1999 being the base (100), we’ll see that by 2006, the CPI index for US was 122.8, 118.5 for EU and 97.7 for Japan. This shows that until 2006 Japan was still in the grip of deflation.

Add to this the recent financial crisis and you’ll see that Japan is once again entering another deflationary period. In deflationary periods, consumers spend less and try to save more. The fear of losing one’s job, the psychology of ever decreasing prices, and general feeling of doom act against free spending by the consumers. One should also understand that Japanese consumers are reluctant to spend like their American counterparts. According to the available figures (2005), the Japanese consumption was only 55% of the GDP. Compare this to the American consumption of 77%. So the Japanese consumers cannot help either.

What about the EU? Euro zone consumers have a slightly better consumption rate than the Japanese. The consumption rate for Euro zone (2005) was 57% of the GDP. In addition the Euro zone is facing severe financial problems with many countries such as Spain, Ireland, Italy and others facing mounting debt and shrinking export market. Consumers already hit by the housing crisis, financial crisis and now the imminent unemployment crisis cannot be expected to start spending wildly.

So who is going to take the position left vacant by the US and act as the world’s economic locomotive and pull the world out of the depression? The answer is no-one and everyone. US is clearly not able to do that much. As a matter of fact the US consumers have to get used to lower spending levels for at least a decade, if not for good.

According to Howard Davidowitz, chairman of Davidowitz & Associates, as quoted by Aaron Task in Yahoo Finance, American’s standard of living is undergoing a “permanent change” – and not for the better as a result of:

  • An $8 trillion negative wealth effect from declining home values
  • A $10 trillion negative wealth effect from weakened capital markets.
  • A $14 trillion consumer debt load amid “exploding unemployment”, leading to “exploding bankruptcies.”

“The average American used to be able to borrow to buy a home, send their kids to a good school [and] buy a car,” Davidowitz says. “A lot of that is gone.

The diminishing wealth
Last year when the depth of financial crisis became apparent the US Feds started to aggressively cut interest rates, in the hope of reducing the severity of the crisis. Other countries specially the Europeans soon followed the Americans in cutting their interest rates. As the crisis spread to Asia and the Middle East, they also began to cut their interest rates. But soon it became apparent that this crisis was not like any they had seen since the great depression and simply cutting interest rates was not going to solve the problem.

To start with the housing market had collapsed completely leaving many banks holding worthless pieces of paper. In addition, these papers were (partly) insured by many insurance and financial institutions that weren’t banks, but because of financial deregulations, had acted as banks. They were also hit by the bad mortgage problems. In short, all the financial institutions, banks, insurance companies and others were suddenly in trouble.

This hit the stock markets, with the shares of these institutions taking a nose dive. These institutions are extremely important for the economy. They provide the logistics for financial transactions. Any problem here affects all parts of the economy. So it was not a surprise to see that all normal financial transactions suddenly came to a halt, hitting other sectors of the economy. Share prices of all the affected sectors began to go down and with it the fortune of the share holders. To see the extent of the damage done one just has to look at how much various stock markets have fallen.

The following stock markets data was published by The Economist (21 Feb. 2009) which shows the extent of the fall since Dec 31st 2007:

US (NAScomp) – 44.7%, US (DJIA) -43%, US (S&P 500), Japan (Nikkei 225) -41.3%, China (SSEA) -55.1%, Hong Kong (Hang Seng) -52.9%, Canada (S&P TSX) -53%, Australia (All Ord.) -61%, Britain (FTSE 100) -55.8%, Euro area (FTSE 100) – 59.5%, Euro area (DJ STQxx 50) – 58.7%, France (CAC 40) -56.1%, Germany (DAX) -55.3%, Greece (Athex comp) -73.7%, Italy (S&P/MIB) -63.1%, Netherlands (AEX) -60.4%, Norway (OSEAX) -64%, Denmark (OMXCB) -55.2%, Sweden (Aff.Gen) -57.7%, Russia (RTS, $ terms) -77.1%, Turkey (ISE) -70.3%, India (BSE) -64.9%, South Korea (KOSPI) -62.6%, Taiwan (TWI) -50.5%, Brazil (BVSP) -53%, Argentina (MERV) -56%, Mexico (IPC) -52.9%, Venezuela (IBC) – 55.6%, Saudi Arabia (Tadawul) -56.8%, South Africa (JSE AS) – 54.1%…. WORLD all (MSCI) -51.2%.

For people in general, shares act both as saving and investment. The average person buys share in hope of getting better return than the banks. It is also easy to get in and out of the market. The advancements in information and communication technologies, the costs of buying and selling have fallen steadily in the last decade. So now anyone with a computer can buy and sell shares. This ease of entry enticed an ever increasing number of ordinary people to enter the stock markets.

Now the people have been hit by three disasters. First they lost a lot of money in the housing market. This was both real and illusory. First they were hit with the housing crisis. Many have lost their homes or have seen the value of their homes depreciate heavily. Then they were hit with the collapse of the stock markets. Trillions of Dollars, Yens, Euros and Yuans have been wiped-out in a relatively a short time. Then many have lost their jobs and many are uncertain about the future job security. All these have had a tremendous impact on the consumers, forcing many to heavily reduce their consumption, which in turn have begun to affect businesses which in-turn are shedding workers to compensate for the loss of sales and revenues. This is a classical deflationary circle that feed on itself.

The governments’ response to this threat has been to stimulate the economy by pumping large sums of money into the economy. A decade ago, a hundred billion dollar was an astronomical sum. Today we don’t even bother to look at it twice. Today we talk of Trillions. A few hundred billions here and a few hundred billions there soon add up to a few nice trillions; especially the trillions that we don’t have.

Now we face a classical problem: the increasing budget deficits. Exactly when the economy is contracting and tax receipts are falling, the government expenditure is rising rapidly. In addition, the governments are buying bad debts (US, UK, etc) and trying to spend more on whatever they can in order to arrest the increasing unemployment and stimulate the economy. These large sums have to come from somewhere. They can be borrowed or money can simply be printed. The problem is that some governments are opting for both.

The most important economy is of course the US economy. The US government under Bush spent close to one trillion dollars, and now the Obama administration is promising to spend trillions in the years to come to stimulate the economy. With official US debt now close to 11 trillion dollars and climbing fast, the situation is becoming untenable. According to treasurydirect.gov, last year (2008) US government paid $451 billion dollars interest on its debt. Add to this the Medicare and social security obligations and suddenly things look a lot worse than they appear.

So how can the US continue its deficit spending? By issuing treasury bonds and other security certificates of course. Both public and foreign governments buy these securities which are guaranteed by the US government. According to Reuters (February 18th 2009), foreign central banks alone held $1.76 trillion dollars in US treasuries. According to the same report “The combined holdings of Treasuries and agency securities by foreign central banks at the Fed totalled $2.573 trillion, up $11.223 billion”.

The coming inflation

So far the foreign governments and businesses have been willing to buy US debt, but with the current economic downturn things are beginning to change. According to New York Times, in the last 5 years China has spent as much as one-seventh of its entire economic output buying mostly American debt. However, with the sharp slowdown in its economy, China is finding it difficult to keep buying. China has also come-up with its own $600 billion stimulus plan. This along with the falling trade surplus and the falling tax receipt will make it exceedingly unlikely that China can keep financing part of the US government’s deficit spending. The same applies to other countries as well.

So as the economic downturn continues we can see two things: the interest on US treasuries increase substantially to make it attractive and or printing money. Printing money is not so farfetched as many would like to believe. Already countries that cannot find willing lenders are resorting to this. A good example of this is UK. With the current plans to nationalise a few more banks (Lloyds and Royal Bank of Scotland), the UK national debt is set to surpass the £2.2 trillion pound mark. This is 150% of UK’s GDP. It is not then surprising to see that the Bank of England voted unanimously earlier this month to seek consent from the government to start the process of quantitative easing by buying gilts and other securities. Quantitative easing means printing money. With interest rates at 1%, printing money is likely to increase inflation.

Already many governments find it difficult to cover their deficits. It is only a matter of time before they also begin to print money. It is especially appealing for the US government to do this since inflation means a real value reduction in debts. With mounting trade and budget deficit and decreasing tax receipts and the shrinking of the number of willing lenders, US government may not have any choice but to print money.

So far, all governments are reducing their interest rates to historic lows and at the same time spending a lot of money that they don’t have. It will take at least two more years for the economy to stabilise. Here we should note that by stabilise I mean an arrest in decline rather than outright growth. Once that point is reached we will begin to see the effects of the loose monetary policy: a tremendous rise in inflation which can be accompanied by low economic growth or in other words stagflation.

The fear of stagflation arises from the fact that from all indication, growth will not strengthen anytime soon. It is quite clear now that the US and to a large extent the European consumers have been hit hard by the current crisis. There is also the possibility that another banking crisis may still ensue such as the commercial real-estate mortgage defaults and above all the repetition of currency crisis (1997 Asian Financial Crisis). Already we see that China Japan, Korea and others are setting-up $120 billion currency defence fund to protect Asian currencies against speculative attacks.

The current economic crises have left many countries’ local banks with foreign currency loans that they find difficult to repay in that currency. This and the possibility of defaults have made these countries a good target for speculators. If such an attack starts, many countries will automatically have to devalue their currencies (even more than they already have) or try to defend their currencies. In either case this may trigger yet another crisis that may actually destroy a good portion of many economies around the world.

Even if we assume that no more nasty surprises will appear in the next two years and the economies stabilise, we are left with the reduced levels of consumption around the world, especially in major economies. As I have mentioned above, it is very clear that at least in US, the consumers are not going to recover anytime soon. I have also shown that the Chinese and Indian consumers cannot replace the US and European consumers. So there will be a dearth of market for the goods and services produced by others. In absence of US, the question will be: which country or countries are able to increase demand to such a degree as to trigger a recovery; a recovery that most likely will be accompanied with high inflation.

In 2006 in the article “the coming financial crisis”, I stated the following:

“At the end of the WWII, 45 nations gathered at a United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire, to address the problems of reconstruction, monetary stability and exchange rates.

The delegates agreed to establish an international monetary system of convertible currencies, fixed exchange rates and free trade. To facilitate these objectives the delegates agreed to create two international institutes: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank). An initial loan of $250 million to France in 1947 was the World Bank’s first act.

Since then there has already been considerable criticism of the roles of IMF and the World Bank. The above mentioned problems and the ongoing trade imbalance in the world have to be addressed by a similar gathering. Sooner or later, both the United States and the rest of the world have to address the existing problems. These problems are not the United States’ alone. We cannot ignore the largest economy on earth. It is said that if United States sneezes, the world catches cold. We have to either make sure that the United States doesn’t catch cold or vaccinate ourselves against it.”

Once again I restate my earlier arguments: we need a new “Bretten Woods” agreement where we can address the existing problems and restructure the world’s economic system. If we don’t do this, and soon, we will face protectionism, low economic growth, and even trade wars. We have ignored this problem for a long time and are now paying the price. What would the price be if we continue to ignore the existing systemic problems?

Dr. Abbas Bakhtiar lives in Norway. He is a management consultant and a contributing writer for many online journals. He’s a former associate professor of Nordland University, Norway. He can be contacted at : Bakhtiarspace-articles@yahoo.no

Source: American Cronicle, 22.02.2009

Filed under: Asia, Australia, Banking, Brazil, China, Energy & Environment, Japan, Korea, Latin America, Malaysia, Mexico, News, Singapore, Venezuela, , , , , , , , , , , , , , , ,

Challenging Year for Thomson Reuters, Bloomberg and Financial Information/analysis Market

Burton-Taylor International Consulting LLC, a leading financial news and market data research, strategy and business consulting organization, today released research showing the market shares of industry leaders Thomson Reuters (TRI) and Bloomberg to have increased slightly in 2008 to 34% and 24% respectively. The overall spend on financial information and analysis globally was flat year-on-year, as the industry exited 2008 at US$23.01 billion versus US$22.99 billion in 2007.

Although distant in terms of revenue, the fastest growing major data providers in the industry were FactSet, Interactive Data Corporation (IDC) and SIX Telekurs which now enjoy 2.5%, 3.3% and 1.2% global share respectively. The fact that the third, fourth and fifth biggest players hold less than 4% market share each only serves to underscore the duopolistic nature of the current market data industry.

Asia led all regions in 2008 with a 20.3% increase in spend, while Europe, Middle East and Africa (EMEA) grew at just under 7% and the Americas contracted by almost 10%. Thomson Reuters is the market share leader, with Bloomberg second, in each of the three regions. Quick sits third in Asia while SIX Telekurs is third in EMEA and IDC third in the Americas.

Burton-Taylor data shows that exiting 2008 the largest segment, in terms of total information and analysis spend worldwide, is Fixed Income/FX Sales & Trading. Investment Management is second largest, followed by Equity Sales & Trading, Corporate, Wealth Management, Commodities & Energy and a dramatically smaller Investment Banking segment.

A challenging year in 2009 is projected by Burton-Taylor, with negative 1-3% growth seen for the industry. The Americas will continue to contract. EMEA will remain flat but be supported by growth in the Middle East and Eastern Europe. Asia’s growth rate will be significantly less than recent years but still reach the low to mid-single digits, fueled by external investment from Japan and internal investment in China.

“Thomson Reuters and Bloomberg will face differing challenges and changing business focuses in 2009,” says Douglas B. Taylor, Managing Partner of Burton-Taylor. “At TRI, feeding the appetites of the growing ‘low latency’ and risk management monsters, as well as continuing to establish a foothold against strong competitor Dow Jones in the machine readable news market, are key priorities. At the same time, launching a new financial video service and rebuilding equity news to leverage their desktop dominance in the North American Wealth Management space will test the Company’s ability to both invest and seek overall margin improvement.”

“At Bloomberg the attention is directed at finding new revenue outside the core terminal business,” Taylor says. “Commitments to high margin datafeed sales, and to improved news coverage in China, are seen as significant opportunities, but successfully capitalizing on the strategies without cannibalizing existing revenue will require creative commercial models and deft execution in areas that are relatively new to the company.”

According to Taylor, “Both TRI and Bloomberg are facing these challenges at a time when the revenue insulation provided by their dwindling two and three year client contracts is rapidly eroding. Additionally, IDC’s continued aggressive approach to pricing and SIX Telekurs’ continued strong organic and acquisition-based growth may begin to dent the market shares of the ‘Big 2’. Maintaining revenue by Thomson Reuters and Bloomberg over the next 12-24 months will be strictly on the merit of their strategic planning and execution. Both companies are leaning heavily upon their proprietary news capabilities to help drive growth, which is one reason that Burton-Taylor in the coming weeks intend to publish the first ever, detailed comparative study of Bloomberg News versus Reuters News.”

“Because market participants are finding it increasingly difficult to differentiate services, we believe that our study ‘Bloomberg vs Reuters News – Analysis of International Services 2009’; a quantitative and qualitative analysis of Bloomberg News and Reuters News including regional and international content, daily and hourly volume, 3rd party redistribution, coverage breadth, coverage depth and commentary comparison, will provide a transparency and illumination that improves competition between industry participants and profitability of industry clients,” say Taylor.

Source: Burton-Taylor Internationalm 17.02.2009

Filed under: Corporate Action, Data Management, Data Vendor, Market Data, News, Reference Data, Trading Technology, , , , , , , , , , , , , , , , , , , , ,

Latin Stocks May Rise 40% in 2009, Citigroup Says

Latin American stocks may gain 40 percent in 2009, rebounding from their worst annual decline in two decades, on the prospect the U.S. recession ends by the middle of the year, said Citigroup Inc.

Latin America may grow 1.3 percent this year even as the global economy shrinks 0.7 percent, strategist Geoffrey Dennis wrote in a note. Risk aversion has started to ease and stock valuations are “very attractive,” he wrote.

“We expect the regional trading range to hold for 2-3 more months as further poor macro news is digested, before a major upside breakout occurs, generating dollar returns of 40 percent by end-2009,” Dennis wrote. “Our view is based, above all, on the U.S. recession ending in mid-year.”

The MSCI Latin America Index tumbled 53 percent last year, the steepest since Bloomberg records began in 1988, while the Standard & Poor’s 500 Index lost 38 percent. The Latin measure has recovered about a quarter of its value since last year’s low, spurred by rallies for Brazilian and Chilean stocks last month.

Citigroup recommends an “overweight” equity position in Chile and Brazil, predicting the latter’s economy will grow 2.2 percent this year.

Brazil’s Bovespa index has gained 3 percent this year, while Chile’s Ipsa has surged 7.4 percent. Central banks in both nations cut interest rates by a full percentage point last month to boost their economies. The U.S., which entered recession at the end of 2007, is Brazil’s biggest trading partner and a major buyer of its commodities.

Latin America equity funds posted inflows for a fourth straight week in late January, EPFR Global said. Brazil was the “driver” behind flows into Latin America funds, the funds tracker said.

The MSCI Latin America Index has dropped 0.5 percent this year, compared with an 8.4 percent decline for the MSCI Emerging Markets benchmark and an 8.6 percent drop for the S&P 500 Index.

Source: Bloomberg, 03.02.2009,  by James Attwood in Santiago at jattwood3@bloomberg.net

Filed under: Banking, Exchanges, Latin America, News, , , , , , , , , , , , , , ,

Global Megatrends 2009: Ernest & Young Analysis

Download report Global Megatrends 2009 EY

Each year, the EY Global Strategy Team conducts an analysis of external trends to inform the Global Executive’s discussion about priorities and initiatives for the coming year.

The report provides a good overview of important external influences affecting all organizations.

While the EY megatrends document was previously for limited distribution, this year the report is shared more broadly since the issues it addresses are no doubt also on the top of mind for many.

Source: Ernest & Young, 29.01.2009

Filed under: Asia, Banking, Energy & Environment, Islamic Finance, Latin America, Library, News, Wealth Management, , , , , , , , , , , , , , , , , , , , , , , , , , ,