Jan
16
Stiglitz worries
Filed Under General | 226 Comments
A $200 dress? Or a relatively minor bump for your 401(k)? A years worth of Starbucks? Or £1,000 in your savings account? That is the question… There’s a bit of a debate brewing about the structure of Obama’s planned $825bn stimulus. Nobel-prize winning and ex-World Bank economist Joseph Stiglitz argues in today’s FT for instance that he is not a fan of the plan’s proposed tax cuts:
What is clear is that tax cuts will not help much. When Barack Obama, president-elect, last week proposed to use nearly 40 per cent of the stimulus for tax cuts, he was rightly told this would be less effective than, say, spending on infrastructure. It has been surprising, then, to see President George W. Bush’s former economic advisers, including Greg Mankiw, argue that tax cuts are the way forward. Mr Mankiw cites a recent study by Christina Romer and David Romer, economists at the University of California, Berkeley, who found that each dollar of tax cuts raises GDP by about $3 (€2.30). Such studies, based on past data, may have little to say about the situation the world now faces. Americans confronted with debt, shrinking retirement accounts, houses worth less than mortgages and a tough credit environment will save more of their money than in the past…
This, however, seems intuitively uncomfortable. If much of the current credit crisis was caused by over-leveraged consumers, then is spending really the right way out of it? The US savings rate was hovering around zero in recent years — even managing to go negative after Hurricane Katrina wrecked havoc in 2005. Stiglitz is clearly leaning towards a short-term economic boost — but he’s not unaware of America’s structural problems. From the transcript of his FT.com Video interview:
In the long run, we will have to address the problem of debt. In the short run, we have to get our economy going. If we don’t, the deficit will rise because tax revenues are going to fall. We are, to use that expression, between a rock and a hard place. We don’t spend the money, we have a big deficit. If we do spend the money, we have a big deficit. But if we do spend the money and it works and we spend it well, at least then there will be jobs and people will not face the hardship that they will face if we don’t spend the money.…… it will be many months before we see the light at the end of the tunnel. Almost surely at the end of 2009 GDP will be lower than it is now. Unemployment will be higher than it is now. So things may have turned around, but they will not have recovered. What worries me and what worries an increasing number of economists is, what happens in 2011? Do we emerge into a Japanese style malaise, or do we have a robust recovery? There’s every reason to believe that unless we don’t address some of the more fundamental problems facing the global economy and the American economy, it will be a Japanese style malaise. Because remember, what has sustained the American economy for the last five years? It’s been a consumption bubble sustained by a housing bubble. What we’re talking now is solving the problem of the credit crunch, but even after we solve that, we have the question, what will replace the housing bubble? Maybe another bubble, like we have the tech bubble, but that’s not a good answer.
Jan
8
Black Swan sightings
Filed Under General | 34 Comments
Steve Sailer spots one of the first Black Swans of the year:
Jill Claman of Fox News interviews investment guru David Swensen, who has guided Yale’s endowment ($20 billion last summer) to (until recently) consistently (and, to my mind, suspiciously) gigantic returns (17.8% per year for ten years):
Claman: Isn’t it fair to say right now we face what some call a Black Swan event? This term “Black Swan” indicates that something we rarely ever see. Has it taken you by surprise?
Swensen: You’re absolutely right to characterize it as the Black Swan event. By the nature, the events have to take people by surprise.
Don’t blame me, it was a Black Swan!
Jan
2
A Chinese New Year?
Filed Under General | 160 Comments
Here is an interesting report from the BBC. Prepare for 2009 being the year of the Chinese crash.
China’s graduates will find it tougher than ever to get jobs in the coming year, as China’s economy slows down and unemployment rises. Experts say a chronic over-supply of graduates and a shortage of “high end” jobs had already been causing difficulties, but the mass lay-offs and business closures in recent months has made the situation even worse.
Chinese Prime Minister Wen Jiabao has told students that the problem of graduate employment is “at the top of the government’s agenda”. Six and a half million graduates in China will be looking for a job over the next year. The government says it is going to try to create nine million jobs for them and for those from previous years who are still unemployed. That will not be easy though. Economic growth in China is expected by some to fall below the figure of 8%, cited by many as the minimum needed to continue to create enough jobs.
There are three problems for the new graduates to cope with.
- Firstly the economic slowdown here means there are fewer jobs available.
- Secondly widespread redundancies mean there are more experienced people than there might have been in previous years, trying to secure the same jobs as them.
- Thirdly there are many graduates from previous years who are still jobless.
Some students from the very top universities will of course still be able to get well paid jobs, but for the majority of students the best they can hope for is any job at all. China’s successfully expanded higher education in recent years. Too successfully perhaps. About 6% of the workforce has been to university, far fewer than in many developed countries, but there are still not yet enough high-end jobs for graduates to do here.
Students are taking jobs that previous years’ intakes would not have been willing to accept. Graduates face fierce competition for jobs in the economic slowdown
But that does not always pay the bills, and most importantly the student debts. The government says finding work for graduates like her and finding jobs for the migrant workers who have been forced to return to their villages after factories have closed are its twin priorities.The reason is obvious. It is worried about social unrest. Large numbers of highly educated, jobless graduates in huge debt from student loans could cause trouble. The government wants to avoid that at any cost.
Happy New Year!
Dec
24
Busy bankers?
Filed Under General | 115 Comments
This is an awesome quote and probably explains a few things:
As Walter Bagehot, the great nineteenth-century editor of the Economist who reveled in the quaint paradoxes of English life, described them, members of the Court [they governed the Bank of England] were generally “quiet serious men…(who) have a good deal of leisure.” Indeed, he felt it an ominous sign for a private banker to be fully employed. “If such a man is very busy, it is a sign of something wrong. Either he is working at detail, which subordinates would do better and which he had better leave alone or he is engaged in too many speculations…and so may be ruined.”
That is from Liaquat Ahamed’s Lords of Finance: The Bankers Who Broke the World, with a hat tip to Marginal Revolution.
Dec
18
Latest in fakes from China
Filed Under General | 84 Comments
The 2008 China International Petroleum Equipment and Technology Exhibition concluded last Friday in the eastern city of Dongying. 3000 guests from over 40 countries attended and everything appeared to run smoothly. Yet the majority of the foreign delegates were hired just to make the event look “international”. Among the 200 fake delegates was Jez Webb, The Peking Order’s energy correspondent.
Most guests had responded to an ad on theBeijinger.com with the curious title: “Free trip to Shandong, 200 foreign visitors invited (Be paid)”. We would, depending on our age, receive between 600 and 700 RMB (£60-70) for two days “work” – two 6 hour bus journeys to and from the city, full board in a luxury hotel and a couple of hours walking round an exhibition, pretending that we were involved in the petroleum industry.
Dec
16
Man of the Year: Harry Markopolos
Filed Under General | 28 Comments
In Madoff News: Harry Markopolos, who has been a complete pain-in-the-ass for the last nine years as he tried to alert a world that totally didn’t want to hear about it that Bernie Madoff’s money management business was actually a $50 billion pyramid scam. The WSJ reports:
Harry Markopolos, who years ago worked for a rival firm, researched Mr. Madoff’s stock-options strategy and was convinced the results likely weren’t real. “Madoff Securities is the world’s largest Ponzi Scheme,” Mr. Markopolos, wrote in a letter to the U.S. Securities and Exchange Commission in 1999. Mr. Markopolos pursued his accusations over the past nine years, dealing with both the New York and Boston bureaus of the SEC, according to documents he sent to the SEC reviewed by The Wall Street Journal.
In a statement late Friday, the SEC said “staff from the Division of Enforcement in New York completed an investigation in 2007, and did not refer the matter to the Commission for enforcement action.” The SEC said it reopened the investigation Thursday. It’s not clear what the focus of the 2007 investigation was, or why it was closed. A person familiar with the matter said it related to issues raised by Mr. Markopolos.
Dec
16
More bad news for China?
Filed Under General | 55 Comments
According to China’s Minister of Industry Li Yizhon speaking of the drop in car sales
“This is a serious problem, industrial growth is sharply declining and we have not seen a turning point yet. We feel a lot of pressure.”
The minister called on the government to support the country’s industrial sector with subsidised loans. Loan guarantees by the government to restore confidence would be key, he added.
Despite the poor economic data, Chinese government officials said they were confident that the country would hit its target of an 8% economic growth rate in 2008. They believe that the economy must achieve this rate of growth to provide enough jobs for the country’s rapidly expanding workforce.
Dec
11
Is the worst over?
Filed Under General | 87 Comments
The market is frustrating. Just a few weeks ago it looked like the financial markets were about to reach lows we haven’t seen since the early 90’s. The commodity bubble was bursting, hedge funds were imploding, and it seemed like the selling would never stop. To add fuel to the fire, unemployment was getting worse, consumers started saving again (seemingly all at the same time, which isn’t very helpful), and practically every week another bank failed.
It was disastrous. The government was handing out cash to banks and guaranteeing private companies’ commercial paper while putting trillions of dollars it doesn’t have at risk. It seemed like a depression wasn’t out of the question, but all of that’s starting to change. Consider what’s happened over the past few weeks. Citigroup (NYSE:C) practically failed. It has become painfully obvious that despite a multi-billion dollar bailout, one of Detroit’s Big Three is going to go away, either through merger or through bankruptcy. Retailers reported the sharpest holiday shopping season declines in decades, and the unemployment rate is climbing faster and faster.
There’s almost no good news, but the market is still up. Sometimes it just doesn’t make any sense. However, it could be telling us something - the recent rally could be a giant signal the worst is behind us.
It’s not
Dec
10
Shorting London real estate
Filed Under General, Stock analysis | 246 Comments
I executed a few short contracts on the IG Index Halifax House Price Index yesterday. I will fill my position up to about £500k notional equivalent over the next few days. This should give me a net short position of about £150k (at todays prices) on London UK real estate.
The index calculation methodology is as follows:
The Halifax House Price Index
The Halifax House Price Index is the UK’s longest running monthly house price series with data covering the whole country going back to January 1983. The Index is based on the largest monthly sample of mortgage data, typically covering around 15,000 house purchases per month, and covers the whole calendar month. From this data, a “standardised” house price is calculated and property price movements on a like-for-like basis (including seasonal adjustments) are analysed over time. Properties over £1 million are included (since December 2002) and the index is seasonally adjusted with the seasonal factors updated monthly. The indices are based on the detailed records of the prices, physical characteristics and the regional location of all the houses on which the organisation has made a mortgage offer in each time period.
Available Data
The database used to construct the current indices offers a large number of house-purchase transactions that have been financed by the Halifax. As a consequence, the analytical procedures used in developing the Index are both reliable and robust. Not all house purchases financed by the Halifax are included in the database. There are some properties that are excluded from the subsequent analyses. For example, the vast majority of council house sales which may have been sold at below market price. After editing, the database covers around 13,500 house purchase transactions per month.
It should be noted that the data refer to mortgage transactions at the time they were approved rather than completed. This has the disadvantage of covering some cases that never proceed to completion. However, it has the advantage that the price information is more up-to-date as an indicator of price movements and is
on a more consistent time-base than completions data given the variable time lags between approval and completion.
Dec
9
London real estate
Filed Under General | 143 Comments
I just got short of London real estate through IG Markets. It is not quite a net short as I still have an apartment in London but give me a few days and I will be net short to quite a large extent! I think London real estate has a long way down to go and the Halifax index, which is what the contract is based on, underestimates the drop.
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