Archive for October, 2009|Monthly archive page

US Economy Grows 3.5% in Q3: Can They Sustain?

In Financials, Politics on October 29, 2009 at 14:51

Wal MartThe US economy has statistically exited from recession. Its Q3 GDP growth on an annual basis beat analysts estimates and reached 3.5%. Growth had been missing for more than a year. The big issue here is whether this trend can be sustained.

Large part of this expansion was propelled by Washington’s stimulus packages that boosted consumer spending, which accounts for more than 70% of US economy, and home building. What happens when the government’s stimulus runs out of steam? Will the private sector pick up from there?

What’s worrying is that without the government’s “cash-for-clunkers” program which re-fuelled car sales, GDP growth would have been 1.9%. Same holds for residential investment which contributed to GDP for first time since 2005. This freshly released figure doesn’t allow for safe conclusions.

Lagging indicators like unemployment rates and consumer credit haven’t caught up yet with GDP rise. Unemployment will take at least 18 months to reverse its trend to pre-crisis levels. Let’s not get too excited as the road to recovery is still long and upward. For the rates to be sustained transition from government-driven to private-driven growth has to be smooth. And let’s not forget of the China force…

by the Self-Seeker

Dollar-Driven Carry Trade Threatens Asset Prices

In Financials on October 26, 2009 at 13:17

carry tradeThe Federal Reserve has made its intentions clear keeping the key rates at near-zero rates for as long as it’s needed, as opposed to the ECB where officials are prepared for an exit strategy as soon as inflationary expectations ’emerge’.

Carry trade is when investors borrow money at a low-rate denominated currency like the dollar, and invest in a higher-rate denominated currency like the New Zealand dollar or the Turkish Lira. Ever since Bernanke dropped rates to the historically low levels of 0%-.25%, carry trade has been compressing the dollar value. Today, the dollar fell as low as $1.5063 per euro, its weakest rate since August 2008.

As economist Nouriel Roubini, aka Dr. Doom, pointed out, asset prices have been globally inflated by the cheap dollar, so when the ‘greenback’ reverses its course, a major crash may hit asset markets as investors will bail their funds out for the dollar.

Although low rates may be essential for the ‘reseting’ of the US and the global economy, we don’t want to fuel another bubble on the doorstep of recovery. It’s urgent for the dollar to be stabilised for the global markets to seek for sustainability.

by the Self-Seeker

“To Bonus or Not to Bonus?”

In Financials, Politics on October 23, 2009 at 13:22

bank bonusBank bonuses have been on the front-page ever since the financial crisis started unfolding and the US government bailed-out major institutions. As I’ve written in previous posts, the problem of lack accountability in these groups supported by moral hazard, has been the “trademark” of excessive risk-taking. The risks those companies take work something like this; heads they win big-time, tails the taxpayer comes to clean up the mess. Does this sound like a fair game to you? Certainly not, but things are much more complex than you think.

In 2007, US executives were paid 275 times more than the average compensation of the workers at their companies. This number used to be 24 back in 1965. Who said the capitalist structure is the fairest of all? This is one of the prices the society pays for growth and prosperity.

It is difficult for government officials to restrict bonuses as it may cause these institutions to fly out to Switzerland, Asia or even the Far East for more favourable payment schemes. But what has the punishment for banks been so far? I reckon nothing..!

The Obama administration  and the Federal Reserve have moved forward in examining banks bonuses and compensations for 6,000 institutions. Treasury official, Kenneth Feinberg, said that cash salaries of the top executives of the seven highest TARP-aided institutions will be capped at $500,000. The rulings will apply for November and December and will be the cornerstone for next years amendments. Several banks have already overhauled their payment schemes shifting more resources to salaries than bonuses.

The proposals were a result of an escalating adverse public mood against bonuses, with Goldman Sachs, setting aside $11.4 billion on bonuses for the first half of this year, being its climax. Governments need to provide a realistic payment framework that will tie payments to stock prices and profit sustainability instead of revenues and turnover that would just fuel further excessive risk-taking. So the answer to our question is, to Bonus but in a smart and sustainable way.

by the Self-Seeker

Bus Drama Caught on Camera

In Misc on October 20, 2009 at 13:42

Have you ever seen death from a very close distance? .. Me neither, but this guy did! The following event occurred in Russia, city of Perm, on Monday, where a bus runaway was caught on CCTV. Just watch..

Button Claims the F1 Drivers’ World Title

In Sports on October 19, 2009 at 21:02

Button titleIn what was an exciting race, Jenson Button steered clear of trouble to win his first World Championship, securing the Constructors title along with Rubens Barichello for Brawn Mercedes by finishing in fifth place. The start of the race provided many incidents, with Trulli, Sutil and Alonso being involved in an accident which took all three out of the race, prompting the release of the safety car. In another incident on the same lap, Raikonnen was forced to pit for a damaged front wing. At that time, Kovalainen who also pitted, was released with the fuel hose still attached to the car, spilling fuel a into Raikonnen’s path and causing a short inferno which thankfully caused no damage. These incidents compromised Raikonnen’s good start, the Finnish driver finally finishing in sixth place.

Polesitter Barichello, who stayed out of trouble and led the race initially could not equal the overall pace of race winner Mark Webber and second placed Robert Kubica, a late puncture further adding to his misery in his run to eighth place, too far behind to maintain his title challenge to Button. Vettel, who also had a mathematical chance of the World Championship, could not fight for victory or the championship after starting the race from fifteenth place. He finished in fourth. Lewis Hamilton produced a great run to the final podium position after starting in seventeenth place. His team McLaren were adamant that, had he started higher in the grid, he would have fought for the victory.

In a season with many new regulations, Brawn Mercedes, by being more prepared than all the other teams and starting the season so well have won both the Drivers and the Constructors championship with a race to spare. By the time teams such as Red Bull and Mclaren (with Ferrari giving up their 2009 challenge at an early stage to focus on 2010) had caught up in terms of pace, they were simply too far behind. While the final race of the season in Abu Dhabi will be a free for all as drivers look to end the season on a high, the similar regulations next year will allow all teams to be better prepared as teams now focus for the 2010 Formula One World Championship.

by Sketch

Where is Capitalism Going?

In Financials, Misc, Politics on October 19, 2009 at 11:18

capitalismDo models fail cause they are flawed, or are we actually incompetent to use them the right way and make the best out of them? Do we understand the real dynamics of a model we adopt, or are we just gambling and hope for the best? Was capitalism chosen through a trial-and-error process? Is capitalism what’s best for human prosperity? How should I know..!

What I do know though, is history as it happened. Communism failed because it was unable to compete against capitalism for obvious reasons. But what about capitalism? Has it failed? Are advanced economies suffering an identity crisis? The answer to the latter question is yes, but capitalism per se has not failed. It is and will continue to be the core of market mechanisms around the world. Unless humans and firms stop being utility and profit maximizers respectively, capitalism will be the ruling system due to the economic freedom it bolsters. But, capitalism’s biggest virtue, its freedom, is also it’s biggest flaw. In general terms, this translates into market fragility, especially when an increasing number of countries are embracing this model.

Incentive is the driving force behind production, growth and as a result prosperity. When incentives are mis-percieved, this is where the economy moves to the wrong direction. In the case of large financial institutions, there was lack of accountability and misinformation to the market participants. The state was absent and Central Banks were “adding booze to the party”. This was not capitalism. This was the rule of jungle..

The current crisis hasn’t been a sign of failure, but an indicator that’s time for major correction to the system. Capitalism needs to be modified. The state doesn’t have to get more involved as bad as it needs to address the issues of accountability and misinformation, issues of paramount importance for the incentive drivers.

Markets do fail, but in a sensitive and complex world like ours, when they fail they fail big time. So, until a fitter economic model shows up, which doesn’t seem likely anytime soon, capitalism will prevail.

by the Self-Seeker

Harvard Suffers $500 million to Escape Losses on Swaps

In Financials on October 18, 2009 at 11:27

Harvard logoAlthough its popularity and academic credibility may be at the top, its finances aren’t. Harvard was forced to pay $497.6 million on investment banks to exit from interest rate swap positions worth of $1.1 billion. Harvard intended to use these swaps as a hedge against variable-rate debt for capital projects. What is more, the university has agreed to pay $425 million over the next 30-40 years to cover an additional $764 million in swaps.

Interest rate swaps are a type of financial derivatives where the two parties of the deal exchange interest-based cashflows. Typically, one party receives fixed rate for a variable rate payments. Harvard’s position started losing value when Central Banks slashed benchmark interest rates to historically low levels.

Harvard has sold $2.5 billion in bonds to finance the swap pull-out along with some infrastructure spendings. Many of swap positions were taken in 2004 when Lawrence Summers, Obama’s close economic advisor, was the university’s president.

Universities should not be widely exposed on such complex financial instruments, difficult enough to monitor and interpret. Risk-taking should not be on the vocabulary of a university’s finances, but on the other hand, who could have seen the financial  mayhem coming..

by the Self-Seeker

Obama “Clinches” Healthcare Reform

In Politics on October 17, 2009 at 12:05

obama 1On Tuesday, Obama’s plan for healthcare reform overcame a major hurdle as his proposal was accepted from the Senate Finance Committee after the support it had from an influential Republican, Olympia Snowe, who warned however, she may be objecting future amendments.

Obama’s healthcare plan is set to offer insurance to the 47 million uninsured Americans. The public option healthcare plan that Obama proposes is also expected to cut healthcare expenditures,boost competition further and improve the quality of medical coverage across the country. Except some small and medium enterprises, health insurance will be mandatory or penalty will be charged.

Obama has been facing strict oppositions both from Republicans and some Democrats considering a potential upsurge in public spending and deterioration of budget deficit. What is more, insurance companies are increasingly feeling the plan is getting closer into becoming a reality, and have already engaged in policies to mobilise the public against it arguing the reform would lead to much higher premiums for the insurer.

The healthcare reform is indeed moving forward, but Obama has to hold tight. No one said this would be easy, especially if one considers the sensitivity of the healthcare sector and the size of the reform we are discussing. When history calls, history calls..

by the Self-Seeker