Wednesday, January 28, 2009

Global crisis ‘could cost 50m jobs’

Projections by the International Labour Organization, a UN agency, on global employment trends predict that on a worst-case scenario, recorded unemployment could rise by more than 50m from baseline 2007 levels to 230m or 7.1 per cent of the world’s labour force by the end of 2009.

In the same scenario the number of people in “working poverty”, earning less than $2 a day, could rise to 1.4bn or 45 per cent of all workers, from 1.2bn in 2007.

This would leave as many people below the poverty line as there were in 1997, wiping out all the gains over the past decade and marking “a return to a situation in which more than half of the global labour force would be unemployed or counted as working poor.”

Juan Somavia, ILO director-general, said its message was “realistic, not alarmist”. “We are now facing a global jobs crisis…Progress in poverty reduction is unravelling and middle classes worldwide are weakening. The political and security implications are daunting.”

Saturday, January 24, 2009

The Renminbi controversy

The US and China have embarked on a public row over foreign exchange policy only three days after Barack Obama’s inauguration, with China denying on Friday night it was “manipulating” its currency and saying the allegation would only fan protectionist sentiment in the US.

The Chinese government was responding to claims by Tim Geithner, President Obama’s choice for Treasury secretary, who told a Senate nomination hearing on Thursday that China was “manipulating” the renmnbi.

In a statement on Friday night, China’s commerce ministry said Beijing “has never used so-called currency manipulation to gain benefits in its international trade”, AFP, the news agency, reported. “Directing unsubstantiated criticism at China on the exchange-rate issue will only help US protectionism and will not help towards a real solution to the issue.”

China’s currency has appreciated 19 per cent since Beijing abandoned a dollar peg in 2005, but record trade surpluses over the past three months give ammunition to those who argue the renminbi is still undervalued.

White House Philosophy Stoked Mortgage Bonfire


“We can put light where there’s darkness, and hope where there’s despondency in this country. And part of it is working together as a nation to encourage folks to own their own home.” — President Bush, Oct. 15, 2002

Seven most horrible things about Bush presidency
7. Bush politicized parts of the government that should be nonpartisan.
6. Bush squandered the budget surplus.
5. Bush comforted the comfortable and afflicted the afflicted.
4. Bush rewarded incompetence. Because politics and personal loyalty were all that counted.
3. Bush lied us into war.
2. Bush has exposed himself to war crime charges.
1. Bush weakened our democracy. Bush has embraced a theory of dictatorship.

The Rise and Fall of RBS

On Seeking Alpha
On Monday, RBS announced the biggest loss in British corporate history. It comprised £7 to £8 billion from trading ($10-$12 billion) plus a further £20 billion ($30 billion) write-down in goodwill following the acquisition of ABN AMRO. Total loss, therefore: $40 billion, and possibly more. Full results will be announced in February.

It is a dramatic comedown for an institution with a long and respectable history. Originally a very conservative Scottish bank, established in 1727, RBS pottered along for a few centuries without raising its head too far above the parapets. Then Fred Goodwin arrived in 1998 from National Australia Bank, where he had gained a reputation for being “Fred the Shred” for his singular and significant cost cutting focus during the bank’s acquisition of Clydesdale Bank.

By 2004, RBS commanded a global market value of $70 billion, more than JPMorgan Chase, Deutsche Bank, Barclays, and UBS. Just to put this in context, in 1999, the top 25 banks in the world based upon market capitalisation included ABN AMRO in 15th place and NatWest in 22nd, while RBS didn’t even make the Top 40. By 2004, RBS had moved up to become the 8th largest bank in the world.

The acquisitions and growth trail did not stop there, though, as Sir Fred’s ambitions continued unabated. First, there was a $1.6 billion investment in Bank of China in 2005 and then, in the most audacious move of all, a bidding war against Barclays, with Fortis and Banco Santander as RBS’s partners, to win ABN AMRO in a $101 billion all-cash offering in November 2007--right at the peak of the market. This was the biggest bank takeover in history and, at three times book value, very richly priced.

A new leadership is now in place to sort out the mess, with Stephen Hester at the helm. Mr. Hester came from Abbey, where he started his tenure with the bad news and some major mark-downs on the bank's position. He did the same Monday at RBS, with the news that a trading loss of over $40 billion is likely for 2008.

This, on the same day that the UK government announced a $300 billion secondary bank bailout plan, much of which is going to RBS as the government’s 57.8% preference share stake in the bank is converted to a 70% ordinary shares stake. This is being done in order to reduce the interest payments by around $1 billion a year, as the preference shares warrant a 12% payback versus 5% on the ordinary shares.

John Thain, Then and Now

On DealJournal
Update: Obama on Thain - “the reports that we’ve seen over the last couple of days about companies that have received taxpayer assistance, then going out and renovating bathrooms or offices or in other ways not managing those dollars appropriately”.

January 2008: Thain slashes costs at Merrill, ridding the firm of the helicopter frequented by predecessor Stan O’Neal and replacing $20,000 worth of cut fresh flowers with silk ones.
January 2009: Revelations emerge that, at the same time Thain was cutting costs, he also spent $1.2 million decorating his own office, including an $87,000 rug and $35,000 “commode with legs.”

February 2008: “I don’t think it’s an accident that the firms that seem to have avoided these problems the best have CEOs who get very actively involved in the business,” Thain told Bloomberg. “You look at Goldman and you look at Lehman.”
January 20, 2009: “Senior executives at Bank of America sensed that Mr. Thain didn’t appear to be fully engaged in issues surrounding the deal just when the scope of Merrill’s losses was becoming apparent. In mid-December, Mr. Thain left on a vacation to Vail, Colo., and was pretty much out of touch after that, says this person,” the Journal wrote.

January 17, 2008: Thain: “We were very comfortable with our liquidity position, both at the end of the year and going forward.” — Fourth quarter 2007 earnings call interview with France’s Le Figaro newspaper
March 16, 2008: Thain said, “We have more capital than we need, so we can say to the market that we don’t need more injections. We can confirm that we have tackled the problem.” –to Spain’s El Pais newspaper

February 2008: “When you’re the smartest guy in the room, which [Thain] typically is, you come at things from a different altitude,” CFO Nelson Chai told Bloomberg.
January 22, 2009: The Journal wrote, “When Mr. Lewis asked Mr. Thain what happened, the Bank of America CEO didn’t get a ‘good explanation for what was happening and why,’ this person said. Not only did Mr. Thain not appear concerned about the losses, but he ‘didn’t really have a good grasp of what was going on,’ this person added.

Thursday, January 22, 2009

Know this America, they will be met

"The problems are serious and they are many. They will not be met easily or in a short span of time. But know this, America — they will be met.”

Saturday, January 10, 2009

2008 US Job Loss Worst Since 1945

The worsening U.S. economy hit the nation's work force hard in December, as the unemployment rate climbed to 7.2% and brought the total number of jobs lost last year to just over 2.5 million -- the most since 1945. Of those, 1.9 million vanished in just the final four months of the year.

'Atlas Shrugged': From Fiction to Fact in 52 Years


If only "Atlas" were required reading for every member of Congress and political appointee in the Obama administration. I'm confident that we'd get out of the current financial mess a lot faster.

For the uninitiated, the moral of the story is simply this
Politicians invariably respond to crises -- that in most cases they themselves created -- by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.

One memorable moment in "Atlas" occurs near the very end, when the economy has been rendered comatose by all the great economic minds in Washington. Finally, and out of desperation, the politicians come to the heroic businessman John Galt (who has resisted their assault on capitalism) and beg him to help them get the economy back on track. The discussion sounds much like what would happen today:
Galt: "You want me to be Economic Dictator?"
Mr. Thompson:
"And you'll obey any order I give?"
start by
abolishing all income taxes."
"Oh no!" screamed Mr. Thompson,
leaping to his
feet. "We couldn't do that . . . How would we pay government
"Fire your government employees."
"Oh, no!"

Abolishing the income tax. Now that really would be a genuine economic stimulus. But Mr. Obama and the Democrats in Washington want to do the opposite: to raise the income tax "for purposes of fairness" as Barack Obama puts it.

Friday, January 09, 2009

Sensex now vs Nikkei in 1990s

The two charts look scarily similar. (Source: Bloomberg)

C&H on bailout subsidies

Thursday, January 08, 2009

Doomsayers who got it right

Often mocked for predictions that seemed outlandish at the time -- big banks will fail, Fannie Mae will go bankrupt -- a few of these outliers, including money manager Jeremy Grantham, mutual-fund manager Bob Rodriguez and brokerage-house owner Peter Schiff, were among the first to describe key parts of the U.S. financial meltdown.

Still, they say the worst may be ahead.

Jeremy Grantham
As early as 2000, Mr. Grantham, co-founder of Boston money-management shop GMO LLC, was warning his shareholders that "a sensational bust" was coming. That made him more than a half-decade premature.

Bob Rodriguez
Mr. Rodriguez manages the FPA New Income fund, which was up more than 4% in 2008 due to some notable shifts in the investment strategy in recent years. He saw storm clouds gathering in 2005 when newly minted pools of supposedly high-quality "Alt-A" mortgages began acting oddly: Delinquencies and foreclosures were surging on mortgages just nine months old. (Alt-A mortgages, sometimes called "liar loans," were widely used by borrowers with high credit scores but undocumented income.)

Peter Schiff
Since at least 2004, as president and chief global strategist at EuroPacific Capital, a broker/dealer in Darien, Conn., Mr. Schiff has routinely peddled warnings that the housing market was a house of cards and that stock values were artificially inflated by Federal Reserve and White House policies that, he says, "were working against market forces."

Full WSJ article

Sunday, January 04, 2009

S&P 500 Never Turned Positive During 2008’s Rout

The Standard & Poor’s 500 Index ended every day of the past year below its closing level of 2007, the first time since 1977 that the gauge never produced a profit, according to Bespoke Investment Group LLC. (Source: Bloomberg - link)

2009 Could Be Better Than You Think

Lets welcome 2009 on an optimistic note.

Alan Murray on WSJ gives us five reasons to be optimistic about 2009:

1 This will be a good year to invest in stocks.
No one can tell you exactly when or where the market will bottom. But most business-cycle experts agree that the bottom will be found sometime this year, and that it probably won't be too far below where the market is today.
Even in the Great Depression, the market bottomed out in 1932, with the Dow Jones Industrial Average at 41, down from a peak of 381 in 1929. By 1937, it had climbed back to a respectable 194. That didn't make investors whole. But for those who stayed in, it certainly soothed the wounds.

2 It will be a good year to invest in real estate.
This one's a bit trickier, since real-estate prices are "sticky" on the downside. Homeowners don't like to admit that the value of their pride and joy has fallen by 30%. So they'll put their house on the market at an inflated price and hope some fool will bite.

3 Americans will learn to live within their means.
Around our house, the crisis is already having a salutary effect. Our teenagers suddenly seem to understand that unlimited dinners out with friends aren't a birthright, and that blue jeans don't have to carry triple-digit price tags.

4 President Obama will have a historic opportunity to reshape public policy.
Speaking at the Wall Street Journal's CEO conference in November, Mr. Obama's chief-of-staff-designate, Rahm Emanuel, said the words that have become his team's rallying cry for 2009: "You never want a serious crisis to go to waste. This crisis provides the opportunity for us to do things that you could not do before."

5 Your (federal) taxes won't rise.
Never mind those campaign calls for higher taxes on the wealthiest Americans. Truth is, no politician is going to push for general tax increases in the midst of a severe recession.

This, too, is unsustainable. A reckoning will come. But that's a problem for 2010 and beyond.