Monday, March 31, 2008

The Dollar and Credit Crunch

McKinnon explained on wsj that the negative yields (inflation-adjusted) on Treasurys can not be due to "flight to quality" alone. The falling dollar and foreign central banks' intervention also played a big role. To prevent appreciation of their own currency, foreign central banks are buying more Treasurys thus reducing supply of Treasurys available for the U.S. financial institutions. Both drive up price on Treasurys.

(click to enlarge, source: wsj)

Sunday, March 30, 2008

Regulation overhaul by Paulson Jr.

According to NY Times, the Bush administration is proposing the broadest overhaul of Wall Street regulation since the Great Depression.

The plan hands vast new authority to the Federal Reserve...The proposals would, for the first time, create a set of federal regulators with authority over all players in the financial system, be they banks, insurance companies or other entities like hedge funds and private equity funds, which now operate virtually without regulation. But that authority would be limited...

Saturday, March 29, 2008

Yuan Exchagne Rate: Appreciation or Depreciation?

(click to enlarge, author's own calculation)

Europe is China's No. 1 trading partner. It seems that they did not get the deal the US is getting. Are we going to see more appreciation pressure of CNY/Euro in the future? Or Europe, a union of rough a dozen countries, is fundamentally weaker than the U.S. when it comes to negotiation power?

China's stock market is cliff-diving

courtesy of

Saturday, March 22, 2008

Blackjack and investing

Edward Thorp and Bill Gross talk about their investing philosophy, and its relationship to blackjack.  Mr. Thorp ran two hedge funds, Princeton-Newport Partners and Ridgeline Partners, which went nearly 30 years without a down year, and averaged 19%-20% annual returns.
[Thorp and Goss]
(source: wsj)
"....(the) basic thrust concerns the idea of gambler's ruin, where you lose everything by over-betting. In the context of blackjack, you can never bet more than 2% of your stake without the possibility of eventually losing your entire pot".
Bill Gross, "Here at Pimco, it doesn't matter how much you have, whether it's $200 or $1 trillion. You'll see it throughout our portfolio. We don't have more than 2% in any one credit. Professional blackjack is being played in this trading room from the standpoint of risk management, and that's a big part of our success."

Friday, March 21, 2008

Slump Moves From Wall St. to Main St.

NY Times reports main street consumers start to feel the pinch.

More bank regulation coming

Are we soon to see more regulations on banks, especially on investment banks? Paul Krugman thinks no regulation on "shandow banking system" is the reason why we got here today.  He compared today's financial crisis with the Great Depression in 1930s. But aren't those regulated banks also in trouble?  Can regulation solve the problem?

Thursday, March 20, 2008

Paul Volcker on Charlie Rose

Paul Volcker interview (03/18/08) on Charlie Rose.
(what happened to Charlie's eye?)

(click above picture to play, about 30 mins)

Wednesday, March 19, 2008

Flight to Quality: 3m T-bill Reached 50-year Low

Treasuries rose and three-month bill rates plunged to the lowest level in almost 50 years on speculation credit market losses will widen, prompting investors to seek the relative safety of government debt. The rate on the three-month bill, viewed by investors as a haven in times of trouble, dropped 32 basis points, or 0.32 percentage point, to 0.56 percent. It's the lowest level since May 1958.

(click to enlarge)

Monday, March 17, 2008

The Fed's Dilemma

It's really a difficult decision for the Fed to make: financial meltdown or moral hazard.

Vicious Cycle: Bear & Lehman

When you are in trouble, people shun away from you, bad words spread. More people refuse to deal with you (themsevles in panic). Then you are in deeper and deeper trouble. This is called "vicious cycle". It brought down Bear Stearns. I wish Lehman Brothers could survive this.

Sunday, March 16, 2008

Summers on seriousness of current economic problem

Larry Summers spoke at a policy research conference at Standford University. A very grim assessment and good summary of three vicious cycles in the current economy.

(click to play the video)

Saturday, March 15, 2008

China inflation update

China's inflation rose 8.7% over a year ago in February. Very worrisome. According to Morgan Stanley,
The jump was larger than our expectation (+7.8%), as food prices surged 23.3%, steeper than our projection of 20.5% and contributing 90% of the month's inflation. Following the snowstorms, fresh vegetable prices jumped 46% YoY in February (+13.7% in January and +8.9% in 2007), while the supply of meat and poultry (+45.3% in February versus +41.2% in January and +31.5% in 2007) remained tight, especially that for pork (+63.4% in February versus +58.8% in January and +48.3% in 2007).
In the non-food categories, there was a noticeable increase in utilities (+6.5% in February versus +5.5% in January and +3% in 2007), but other items showed stable trends. The Lunar New Year effect eased on items such as intercity transport (+4.2% in February versus +6% in January) and travel (+1.8% versus +5.1%) services, bringing overall service inflation to 2%, down from 2.6% in January.

Gold crossed $1000 mark

A busy week for me, trying to do some catchup in the weekend.

Gold price (April future) reached historical high this Thursday and briefly crossed $1000 per ounce. This is extraordinary. With inflation adjusted, gold price is still below the record of $2,239 reached in 1980. The graph below gives you a nice historical perspective (click to enlarge).

Wednesday, March 12, 2008

Are we asking too much of monetary policy?

Jim Hamilton asks the question, "Are we asking too much of monetary policy?"
But I would nevertheless caution that we need to be open to the possibility that no matter how low the Fed brings its target rate, it may not arrest the unfolding financial disaster. Unless the intention is to go all the way with enough inflation to avert the defaults, that means we need an exit strategy-- some point at which we all admit that further monetary stimulus is doing nothing more than generating inflation, and at which point we acknowledge that the goal for monetary policy is no longer the heroic objective of making bad loans become good, but instead the more modest but also more attainable objective of making sure that fluctuations in the purchasing power of a dollar are not themselves a separate destabilizing influence.

Oh Boy, This Fed Is Innovative

A digest of yesterday's Fed's move.

Sunday, March 09, 2008

Something about CALPERS

An interesting inside look at how Calpers operates (source: wsj)

California's Soeveign Wealth Fund

Deputy Treasury Secretary Robert Kimmitt recently spelled out a few policy principles for sovereign wealth funds (SWFs), the most important of which was this: "Invest commercially, not politically." Mr. Kimmitt's concern is that "governments could conceivably employ large pools of capital in noncommercially driven ways that are politically sensitive."

Anyone interested in evidence of such behavior needn't look beyond America's borders. If California were a national economy, it would be the eighth largest in the world. And its Public Employees' Retirement System, Calpers, with $259 billion in assets, would rank fifth among the world's SWFs. Combine it with the $169 billion California State Teachers' Retirement System (Calstrs), and California runs the second largest SWF in the world, just behind the United Arab Emirates.

Calpers is a political entity in every sense of the word. Its board is comprised of four members of the state political hierarchy, two appointees of the governor, one appointee of the legislature and six elected members -- all six of whom have long ties to organized labor, including the board president, Rob Feckner, who is also executive vice president of the California Labor Federation. Calpers's investment policies are politically driven, often dictated by the legislature, and even involve foreign policy goals.

Gov. Arnold Schwarzenegger tried to tame the behemoth in 2005 by forcing public employees to join a defined-contribution pension plan. But he was driven into retreat by strong union opposition, and last October he joined the effort to politicize investments by signing legislation to force Calpers and Calstrs to divest about $3.4 billion in stock of companies that do business in Iran.

A Calpers spokesman estimated the likely divestment transaction costs to fundholders to be about $17.8 million. In total, investment politics have cost fundholders vastly more in recent years. Restrictions on the investments Calpers can make in developing countries have cost the fund approximately $410 million, according to a staff memo issued last year. That's equal to 2.6 percentage points in returns. The staff has long bristled at political interference, but their concerns are perhaps better viewed as economic interference with the state's foreign policy agenda.

Developing-country investment restrictions based on political factors and labor practices began in earnest in 2002 under the direction of then-state treasurer and Calpers board member Phil Angelides. These quickly put 14 of 27 such countries examined by Calpers off limits. When the Philippines was proposed for exclusion in 2004, its stock market and currency plunged. Spurred into action by the Philippine ambassador and heeding a call from Sacramento priests, six busloads of Filipino-Americans besieged a Calpers investment meeting, forcing officials into an embarrassing volte face. Mr. Angelides nonetheless called for Calpers to increase "positive pressure" on foreign governments. "It would be a mistake to walk away from an activist policy," he said.

When looking for the results of "positive pressure" exerted by Calpers's board, it is best to look close to home. In 2006, the Los Angeles Times revealed that individuals associated with three U.S. venture-capital firms donated money to the Democratic gubernatorial campaign of Steve Westly, who as state controller and Calpers board member had helped the firms land multi-million-dollar investments from the fund. A 2002 New York Times piece raised similar concerns about Calpers investment beneficiaries who donated tens of thousands of dollars to the election campaigns of Mr. Angelides and former Gov. Gray Davis.

The fund touts "good corporate governance." But the actual investments it trumpets typically relate to labor and environmental practices, not shareholder concerns.

In February, Calpers's chief investment officer, Russell Read, highlighted the California Initiative Program, which directs capital to "companies that employ workers who live in disadvantaged areas," and a new $2.5 billion investment program for environmentally friendly forest projects. Mr. Read justified the program by stating that "investing in forests is an important move to guard against inflation." At least someone is holding the Federal Reserve to account.

California's newest political target is, interestingly, sovereign wealth funds. A bill pending in the state assembly would restrict Calpers and Calstrs from investing in private-equity firms, or in any funds managed by such firms, if they are owned in whole or in part by SWFs. The assembly is clearly concerned that other governments will use their investments to pursue political agendas. Now, where could they have gotten that idea?

Feldstein's plan: no government bailout

Martin Feldstein outlined his rescure plan on the housing sector. Unlike recent cryout for government bailout or forced alteration of mortagage contract, he proposed, in my view, the first potentially workable more market-based solution. The idea is to offer incentives to homeowners not to walk away and raise the opportunity cost of mortgage default.

Here's one way that such a program might work: The federal government would lend each participant 20% of that individual's current mortgage, with a 15-year payback period and an adjustable interest rate based on what the government pays on two-year Treasury debt (now just 1.6%). The loan proceeds would immediately reduce the borrower's primary mortgage, cutting interest and principal payments by 20%. Participation in the program would be voluntary and participants could prepay the government loan at any time.

Friday, March 07, 2008

Decoupling, something new

Economist magazine takes another look at international trade and decoupling.
"The four biggest emerging economies, which accounted for two-fifths of global GDP growth last year, are the least dependent on the United States: exports to America account for just 8% of China's GDP, 4% of India's, 3% of Brazil's and 1% of Russia's. Over 95% of China's growth of 11.2% in the year to the fourth quarter came from domestic demand'.

Fisher on market turmoil and monetary policy

A nice interivew of President of Dallas Fed, Richard Fisher. Unlike others, the reporter asked some really good and sensible questions.

Recession is done deal

Feb. unemployment data further confirms that we are in a recession.

From the BLS: Employment Situation Summary

Nonfarm payroll employment edged down in February (-63,000), and the unemployment rate was essentially unchanged at 4.8 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment fell in manufacturing, construction, and retail trade. Job growth continued in health care and in food services.

(click to enlarge, courtesy CR)

Thursday, March 06, 2008

Leveraging in our financial system

This table shows you the leverage ratios of various financial institutions.

Estimated balance sheet loss assuming 5% decline of leverage ratio and 50% capital loss recoupment.

What matters most for US Dollar?

Here are three graphs I plot from St. Louis Fed on relationship between Dollar (trade weighted against major currencies) and Fed funds rate, budget deficit and current account deficit. Red is dollar exchange rate. Click to enlarge.

1. Dollar and interest rate

2. Dollar and government budget deficit

3. Dollar and current account deficit

Wednesday, March 05, 2008

Roach: what have we learnt from Japan?

Stephen Roach, Asia Chairman of Morgan Stanley compares current housing-led crisis with Japan's in 1990s.
He sees many similarities between the two. His thinks Fed's aggressive interest rate cuts and Congress' stimulus package won't solve the problem, "Like their counterparts in Japan in the 1990s, American authorities may be deluding themselves into believing they can forestall the endgame of post-bubble adjustments".
His solution, "A more effective strategy would be to try to tilt the economy away from consumption and toward exports and long-needed investments in infrastructure". 
He also argues, "Washington should help the innocent victims of the bubble's aftermath — especially lower- and middle-income families. But the emphasis should be on providing income support for those who have been blindsided by this credit crisis rather than on rekindling excess spending by overextended consumers".

Buffett's common-sense recession call

Warren Buffett said in an exclusive CNBC interview that "by any common sense, we are already in a recession". Watch it below.


Tuesday, March 04, 2008

Free Falling, No Easy Way Out?

El-Arian of PIMCO thinks to prevent a housing price collapse, either overnment must intervene or the mortgage contracts have to be altered. "There is no better alternative", he said in a CNBC interview (watch below). Boy, that's frightening! But I was more frightened by how a capitalist at such high level ditches market-based solutions so easily.

The next shoe to drop: commercial real estate

According to Wall Street Journal, Goldman analyst expects 1st quarter write-downs of investment banks in their exposure to commercial real estate would reach $7.2 billion. They hold a total of $141 billion at the end of last year. The write-downs will be much bigger if incoming data confirms a deep recession.
spread is rising sharply...

Monday, March 03, 2008

Crude Tops Inflation-Adjusted All-time High

Crude-oil futures surged above their inflation-adjusted high Monday, climbing $2.08 to $103.92 a barrel in New York Mercantile Exchange trading, amid a weakening dollar and indications that OPEC is leaning against an increase in output. The previous high of $103.76, in January dollars, was set in April 1980.

Sunday, March 02, 2008

How a Bubble Stayed Under the Radar

Bob Shiller on NY Times asks the question: why even most experts didn't recognize the bubble as it was forming.

courtesy of NY Times