Home » 2010
Yearly Archives: 2010
Value investing conference hosted at Darden Business School of UVA.
Some nice big-picture views of the current economy. Pay attention to the interesting analysis on housing market – among the 56 million US residential mortgages, it’s estimated that 20% of them, or 11 million, will eventually default. Housing price is set to decline by another 5% at least; if without government support, probably by 10%.
So far, ECB has been using the wrong tools to fix a very urgent crisis. Bailout and debt monetization won’t solve the problem. Either way, it puts too much pressure on Euro.
(click on the graph to play the video; Source: FT)
John Cochrane at U. of Chicago thinks the right approach is to have a bailout with precondition of debt restruction.
If European governments want to bail out their banks, let them do so directly and openly—not via the subterfuge of country bailouts. Then they should face the music: How is it that two years after the great financial crisis, European banks make so-called systemically dangerous sovereign bets, earn nice yields, and then get bailed out again and again?
European bank regulators should announce that sovereign debt is not risk-free, and that their banks need capital against sovereign loans, or they need to buy insurance (credit default swaps) against sovereign exposure. Will taking this step hurt bank profits? Well, yes. Sorry. That game, at taxpayer expense, is over.
The big culprit in all of this is short-term debt. There would be no crises if governments had issued long-term debt to match long-term plans to repay that debt. If investors become gloomy about long-term debt, bond prices go down temporarily—but that’s it. A crisis happens when there is bad news and governments need to borrow new money to pay off old debts. Only in this way do guesses about a government’s solvency many years in the future translate to a crisis today.
There are two lessons from this insight. First, given that the Europeans will not let governments default, they must insist on long-term financing of government debt. Debt and deficit limits will not be enough. Second, the way to handle a refinancing crisis is with a big forced swap of maturing short-term debt for long-term debt. This is what “default” or “restructuring” really means, and it is not the end of the world.
Interview of Andy Xie, former Morgan Stanley Chief China economist.
Pay attention to his view that raising interest rate will have limited effect on containing inflation because it may prick the housing bubble. This is especially true when considering local governments’ huge stake in keeping housing and land prices high.
I expect Chinese government will resort more to raising bank reserves and administrative measures to contain inflation.
Three other things are also likely to happen:
1) Chinese government may distort official inflation numbers, i.e., more human smoothing.
2) Accelerate Yuan’s appreciation, which I think is most likely. In fact, Qing Wang of Morgan Stanley expects the RMB to appreciate from currently 6.64 to 6.2 by Dec. 2011. Marty Feldstein, in my earlier post, echoed the similar view.
3) tighter capital control to prevent inflow of hot money.
More broader picture is that the super easy monetary policy by the Fed is propping asset bubbles everywhere in the world, especially in the fast growing emerging economies (carry trade factor). Besides China, Brazil also faces grim inflation outlook, and Brazilian interest rate is already above 10% and expected to rise further.
Commodity prices are already high and fast rising. But given the debasement of paper currency across board, and the grim inflation outlook in emerging markets, it’s reasonable to believe commodities are set to rise further.
Higher volatility is ahead of us; expect to see more booms and busts; and China is facing another real challenge.
Interview of Jim Chanos, who is one of the biggest short sellers on China’s real estate developers.
WSJ has a nice short piece questioning Fed's chairman's overconfidence.
Three things listed as the main limits for the Fed to raise interest rate when needed:
1) higher interest rate will hurt housing sector's recovery;
2) higher interest rate will make banking sector more vulnerable, as banks hold $2.4 trillion residential mortgage and $1 trillion mortgage backed securities;
3) slow recovery in labor market
Ben Bernanke would like to add something, beyond death and taxes, to life's short list of certainties: the ability of the Federal Reserve to quash inflation.
Speaking on "60 Minutes" on Sunday, the Fed's chairman declared he was "100%" confident the central bank could control an inflationary surge: "We could raise interest rates in 15 minutes if we have to. So there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time."
If only it were that easy. While the Fed has managed over the past few decades to keep inflation in check, in the future, its ability to choke off inflation through interest-rate rises could be constrained by fear of destabilizing still-weak property and banking sectors.
Any swift rise in interest rates, for example, could hit home prices again, in turn pressuring banks, which held about $2.4 trillion in residential mortgage debt at the end of the third quarter and more than $1 trillion in mortgage-backed securities. Also, stubbornly high unemployment could reduce the Fed's appetite to squeeze the economy.
Of course, Mr. Bernanke may speak with such conviction because he is certain any looming inflation won't be the sort the Fed cares about. While the Fed's $600 billion bond-buying program is spurring price rises in agricultural commodities, metals and energy, these aren't generally counted in the Fed's measure of "core" inflation. Core inflation would take time to emerge. And it should come from a strengthening economy, which would in theory be able to absorb higher rates.
It depends on your definition of inflation. But Mr. Bernanke, who infamously declared in a May 2007 speech that problems in the housing market would be "limited" to the subprime sector, should know better than to give blanket assurances.
Ben Bernanke’s second interview ever.
He declares, “we are not printing money”, because money supply is not moving. (I laugh…)
Mr. Bernanke called the inflation fears “way overstated” and said he had 100% confidence he could act quickly enough to keep prices in check. “We’ve been very, very clear that we will not allow inflation to rise above 2% or less,” he said. “We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time.”
I am troubled by his 100% over-confidence. Yes , the Fed could raise interest rate in 15 minutes, but will the Fed raise interest rate when the inflation passed 2% yet unemployment rate remained very high still?
This video interview will become an evidence of the Fed’s overconfidence in a few years time.
Interview of Goldman Sachs’ chief economist. His view is that inflation is less of a worry, and the Fed won’t raise rates in 2011, not even in 2012.
In another effort to diffuse housing bubble, China has set an aggressive 2011 construction target of 10 million subsidized, affordable housing units for local governments, 72 percent higher than this year's 5.8 million units, with an emphasis on public rentals for lower income families.
(graph courtesy of US Global Investors)
Gold's record rally has been attributed to everything from worries about inflation, the dollar and the emergence of exchange-traded funds. One big factor many may have missed: huge buying from China.
Data cited Thursday by China's state-run Xinhua news agency showed that China imported 209.7 metric tons of gold in the first 10 months of the year, a fivefold increase compared with the same period last year.
That surpassed purchases made by ETFs and surprised analysts, who until now had no clear insight into the size of China's buying.
"Everybody in the gold market knew there was a surge in investment demand, but they didn't know it was China," said Jeff Christian, managing director at CPM Group.
China's import growth is a reminder of the country's huge but nascent purchasing power.
It comes as the government loosens its restrictions on gold purchases by financial institutions and individual investors. In August, the country began allowing more banks to import and export gold, opening up the gold market to the institutions and their clients.
Then this week, the Chinese securities regulator approved the country's first gold fund designed to invest in overseas-listed gold ETFs, a move analysts interpreted as another bullish sign for gold.
"The big picture is that China is continuing to relax the rules governing the domestic gold market," said Martin Murenbeeld, chief economist of DundeeWealth Inc., which oversees $69.9 billion in assets. "What we are seeing is the latent demand that has been there all the time and now can be exercised in the market because now the market is freed."
The World Gold Council estimates that China's gold demand could double in 10 years as more investors there embrace precious metals.
Until several years ago, China's gold market was strictly controlled by the central bank, which bought all the gold mined domestically. It then sold the metal to jewelry makers. The country, which is now the largest gold producer, remained largely self-sufficient in gold, with imports at a meager 31 metric tons in 2009, according to GFMS Ltd.
This year, fears of inflation have driven many Chinese investors to include gold in their portfolios as a store of value. At the Shanghai Gold Exchange, trading volume increased 43%, to 5,014.5 tons, in the first 10 months of 2010, exchange Chairman Shen Xiangrong said, according to Xinhua.
At a speech at the China Gold and Precious Metals Summit in Shanghai Thursday, Mr. Shen detailed the size of China's imports this year, Xinhua said. Those purchases were big enough to absorb all the gold that the International Monetary Fund had shed during that time period, which stood at 148.6 tons. It also dwarfed the SPDR Gold Shares, the world's largest gold-backed ETF, which added 159.48 tons of gold into its holdings in the same period.
China also is home to a booming gold-mining industry that keeps it as the world's largest gold producer. Wednesday, China's Ministry of Industry and Information Technology said the nation's gold production reached 277.017 metric tons in the January-to-October period, up 8.8% from the same period last year.
China's 2010 gold production is expected at about 350 metric tons, according to Standard Bank head of commodity strategy Walter de Wet.
So far this year, Chinese RMB has appreciated 3.1% against the US dollar. But it has depreciated against majority of other currencies (especially the currencies of the emerging market) on trade-weighted basis.
Marty Feldstein forecast that with domestic inflation rising, China is likely to accelerate the pace of its currency appreciation so to achieve at least two goals: 1) contain domestic inflation through lower import prices of commodities; 2) increase real income of domestic consumers again through lower prices of foreign imported goods.
Link to the full text of Marty's piece.