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The first and second quarter of 2010 could be seen as having generated a mixed response, however, if we put it in perspective with last year's performance, I think 2010 could have performed much worse.
We are now below the S&P500 value on January 4th, but not too far below. The market started well, but now we see a clear tendency to move sideways.
If we now take into account the fact that begin of this year we still had loads of good news and a bucket of hope in the economic recovery, I expect that the second half of the year will be a much worse performance.
Consumers are not buying much, the US unemployment figures stagnate, companies had some good results so far but much of it should be accounted for as being inventory purchases. Since consumption is not increasing, we will quickly fall back to a cruise speed mode of productions, as we have seen with Intel decreasing drastically its sales forecast.
Finally, traders will slowly start to prepare for next year. They will bet and make money on small trends, up or down, but this year should finish down to be able to have some bull run early next year. This is not a conspiracy theory, it is just based on the 'wisdom of the crowds' looking at booking a nice profit this year by shorting and preparing a good year 2011 :-)
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Hernando de Soto famously pointed out that a key difference between developed countries and developing countries was the possibility to pledge land title or real estate as a collateral to gain access to credit.
Financing, as we know, is the blood of the economy. If the economy is powered by the muscle of manufacturing, services and capital creation (read "real estate"), financing and loans are the blood to provide it with oxygen. That is also the reason why banking and shadow banking providing credit should be treated differently from traditional industry. The finance sector has to be controlled and its growth should be monitored closely. The veins carrying the blood are useless if they grow and outsize the muscles, they consume too much of the oxygen on their own, defeating their purpose.
Regulations are on the way, but not enough is being done to impose stringent rules if you ask me. Although credit has been recognized as an important factor for growth, what we have seen in the US was a huge excess, the muscle has been flooded, like an engine on Nitrox.
Pledging collateral for financing gives consumers and businesses access to much needed hard cash that can e.g. be used to build up inventory. A good example in developing countries is the possibility to set up a small shop and increase trade, one of the most important factors for growth. But too much financing acts as a choke, and when refinancing is being used carelessly for an ever increasing consumption, trouble is never far.
The US credit crisis has been covered thoroughly, with many books detailing the excesses and ruthlessness of mortgage brokers and banks. However, these are just the symptoms of the illness. These were short-term excesses that were pretty short-lived if we compare it on a scale going back to the industrial revolution. If we look at growth in developed and developing countries, George Soros clearly identified the growth over the last 30 years as being a growth fueled by a super-bubble of credit. And that is also where the theories of Soros and Hernando de Soto meet: credit.
If in developed countries credit has reached an all-time high and deleveraging is under way, there is still much to do in developing countries. Banking is not accessible to many consumers in China, India and Indonesia to name a few countries, but these countries account for 1.7 billion people!
Banking has therefore a future, the future will be in developing countries. Banking will have to go back to its roots of taking deposits and lending it to good causes with proper risk management. I don't see CDOs being created in Indonesia anytime soon. Banks still have to be seen as trustworthy, a long way from synthetic and toxic products. The question however is where will the growth in developed countries come from?
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China is to finally resume its currency appreciation compared to the US dollar. Big news indeed, it's been a while since we expected this to happen. The pressure from foreign governments was building up, but in the end it probably makes most sense for the Chinese economy.
Internal inflation is at an all time high, with wage increases being forced out of management by striking. Wage increases of 66% have been unheard of, but it is possible in China. This is going to put a huge pressure on prices. One of the (small) factors that can help contain the inflation pressure is the appreciation of the renminbi.
Let's hope it works for the Chinese government.
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Companies listed on the S&P 500 have a record pile of cash on hand, and everybody wonders what they will do with it.
Looking at the unemployment rate figures in the US, it does not look like the companies spend the cash on creating jobs. Instead, those companies are looking at two possibilities: First, acquiring companies or assets in Europe to benefit from the low Euro-Dollar exchange rate. The second possibility they are looking at is to buy back their own shares.
Companies engaging in share buy-back strategies usually outperform the market, because they believe the shares are at a discount to their intrinsic value. And now that the level of companies applying for the right to buy back their own shares reaches a record level not seen since 2007, it is probably time to go long on those shares.
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Greece with its empty coffers, Hungary with its threat of having to restructure its debt, and the US with its ever lasting Great Recession are all candidates for being the culprit of rocking the boat.
On the surface, China is the big winner with a strong growth. Its neighbours enjoy economic growth thanks to China's demand for goods, but, that is just at the surface. In a previous blog post in february, I highlighted the early signs of inflationary pressure building up in China. The minimal wage in Jiangsu province was increased by 13%, which is large in absolute terms, but it is nothing compared to the 30% and 70% salary increase Foxconn is giving its Shenzen workers.
This will put some serious pressure on the wages in China, which will then be reflected worldwide. If on top of it the Renminbi is let to appreciate, you can imagine the impact for the rest of the world.
Be prepared for inflation
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The financial regulation that is due to be signed by President Obama has not gone unnoticed in the markets. The markets roiled with the S&P down by 9% compared to the begin of May. Greece is indeed part to blame, but the Greek worries are not new, we know about the Greek tragedy for a while now. Germany's new rule to ban short sellers on Sovereign bonds, well yeah, I'd say it is a mistake, but what the heck does it have to do with the S&P? It is well known that naked shorts create distortions in the market, and betting on the demise of states can only aggravate things. Naked short selling introduces perverse incentives as explained in this blog post, but confusing short selling and naked short selling shows that the regulators do not seem to understand their job. It definitely did not help the markets, but I believe there is a much more important factor out there: the new banking regulations.
Banks told members of Congress that proposals like the one on spinning off swaps desks [from the banks] contributed to this week’s market turmoil. What the heck did they just say? Did the markets [read investors] not appreciate the new rules, or did the banks themselves rock the boat?
They have guts to say something like this in Congress, they just held Congress for ransom.
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"Obama turns BP anger on regulators" is the latest news from the White House, really ?
I am flabbergasted to see that the Oil & Gas regulator who schmoozed for decades with the Oil & Gas industry and its lobbyists (read 'drinking champagne') is being hammered now that an oil spill, which had to happen someday if you think in terms of probabilities due to the lack of control, threatens the US coast.
You will tell me that it is normal that the regulators get hammered when the security measures in place were not even reviewed or audited, especially when so much is at stake. The price of the barrel is above 75 USD, oil is a valuable commodity, and I do not even talk about all the fishermen losing their income.
But it is not normal that one regulator failing gets the hammer, while another regulator failing gets the sweets. You know what I am getting at. The SEC, the Fed and the Treasury were supposed to monitor, review, audit and secure the financial industry that has been freewheeling without bounds, and they miserably failed. What did they get? A huge bailout package, Geithner was promoted to Treasury Secretary and Bernanke was re-appointed. What a joke.
Bankers have a job that is different from other jobs. Bankers are there to provide a means to an end, i.e. credit and other sorts of financial necessities for the industrial, commercial, and consumer world to function, grow and build prosperity.
If the industry is the muscle, finance is the blood, and bankers are the veins. In order to have enough blood to be delivered to the muscle, the loss of blood to feed the veins has to remain very small.
Unfortunately, the veins have outgrown the size of the muscles and the blood needs to feed the veins asphyxiate the muscle. Banking is not a means to an end anymore, it has unfortunately become an end in itself.
If you are part of the muscle tissue, you have been underfed for years, and don't expect it to change
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Beijing Home Prices Plunge 31.4% Not too long ago, we experienced a serious decline in real estate prices, and the world suffered. Unfortunately, it looks like the contagion is spreading to China after all. Real estate prices in Beijing decreased by 31% over the last month, an abyssal drop, even for Chinese standards.
Compounding to that the fact that many loans are non-performing loans, a financial storm might blow over China soon. Remember that a drop in real estate and non-performing loans put a serious strain on the balance sheets of banks. Banks will therefore stop lending, which will hinder growth, fueling a further decrease in real estate prices, and so on. The vicious circle has been entered, without government assistance a steep decline can be expected.
On a regional scale, it is bad news for Asia in general, but more specifically so for Korea and Japan. Japan is already in a bad situation, if China goes south, Japan is beyond south...
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Swiss negotiation technique consists of hitting hard on some points, and then soothing the counterparty's feelings by giving in on some items you can let go.
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On average, financial crises occur every 10 years. I am sure you did not take that into account in your financial plan. Neither did I actually, until I read about this horrifying fact.
Before 2008, there was the Asian crisis in 1997 and the Russian default in 1998.And before that we had the US Savings & Loans crisis in 1989. But before that .... ?
Between 1945 and the 1980 Latin America debt crisis, not much happened. And guess what, the bankers pay was in line with equivalent jobs in the industry
Over the last four hundred years, we've seen on average a financial crisis every ten years, except between 1945 and roughly 1980. One of the main factors of why there was not much of trouble in the financial world is because after the Great Depression, lawmakers imposed regulations on the financial industry. Once deregulation started under Reagan and Thatcher, well, financial crises re-appeared, together with inflated payment packages, probably to compensate for the moral burden of screwing the man in the street.
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. A basic and populist inference would be to decrease the bankers' pay to make it more in line with the salary on Main Street, but is it that a foolish thought? | Comment | 0 |
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The best oxymoron I could think of...
Country default probabilities going up: Greece is in a bad shape, like Ireland, Spain, Portugal and Italy (PIGS)
City default probabilities going up: Milan, Birmingham (Alabama) are suing banks on the derivative trades they contracted in the past, which will be followed by loads of other cities if they win the case.
And last but not least, many companies that have been acquired by Private Equity funds: the big CLO default wave ...
Sit tight in your seats, and market timing using straddles will generate a wealth of profits, because volatility might be decreasing right now, but once the defaults will start, the VIX will hit the roof
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It has been year since the S&P touched the bottom on March 9, 2009. Since then, an explosive growth of 75% annualized return has shown the path to confidence.
However, nothing is to be taken for granted now. The run was led by cheap money given to banks to start lending again, but they slashed the money into financial markets instead. Trade volumes were at record levels in the last two years, nd now coming back to more normal levels. The VIX index, a good indicator for market uncertainty, is dropping. Although markets were spooked by the specter of a Greek default, things seem to be back to normal now. But ....
Although markets showed some kind of rally in the last few weeks, real economic growth has been driven by emerging markets. And unfortunately, the growth, funded by government stimulus plans, is bringing inflation along. The forward curves in government bonds in Brazil, Mexico and India show sky-high interest rates. China keeps on boosting domestic demand, fueling inflation. This in turn will increase prices for goods exported to the rest of the world. And with the US printing money night and day, the inflationary pressure is building up.
This will, in turn, put a lot of pressure on the central banks globally to increase interest rates, delivering a fatal blow to the recovering economies in the developed markets.With unemployment at record levels in the US, that does not look good for the worldwide consumption. The recovery will be slow and long. Long term investments are not the answer in such markets, the money is not put to work. It is rather recommended to invest in structured products offering a pay-off on markets moving sideways. But since the Lehman Brothers Minibonds scandal, the perception of structured products in the markets is pretty bad. We better overcome our perceptions with good research, and put that money to work harder, because the 75% market rally is over.
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The financial times are once again set for a high level of uncertainty.
The euro-zone is entering a critical phase with European governments practically helpless in front of the growing Greek social unrest. The Southern countries are suffering while trying to reassure markets that everything will be fine, but they are trapped between the vulture funds mounting the pressure on sovereign bonds and syndicates fighting back on budget cuts. The bets are on, will the euro-zone survive?
Financial markets are showing greater uncertainty, with a flight to the dollar, still the currency of the world. Although in the short term a stronger dollar will fight off inflationary pressures in the US, inflation seems to be a growing problem. Inflation is not a problem yet in the US, but it starts to be a problem in the East.
China is tightening the monetary supply to fight inflation, and the latest move by the government of the Jiangsu province to increase the minimal wage by 13% shows that inflation is indeed back in China.It is not good news for the rest of the world, since consumption is still driven by the US, a temporary rising dollar with increased prices in China will make a deadly cocktail for the US once the dollar depreciates again.
Indeed, the US will face a triple inflationary pressure: national inflationary pressure, increased prices on imports due to a weaker dollar and an additional increase in prices due to more expensive labor in China.
Where is the reason to be found? First of all, since China fueled economic growth by stimulating local consumption together with monetary supply, inflation increased naturally compared to when Chinese products were shipped overseas. So now the Chinese government will have to manage growth while suppressing inflation. The only way will be to lower local consumption and to start exports again. However, since the rest of the world is still suffering heavily from the crisis, this might not happen before 2011. So China will be facing a dilemma: growth or inflation.
One last way to manage inflation in China is to reduce the burden of imports, by letting the Renminbi appreciate. But this would also mean higher costs for Chinese products for the rest of the world.
In the end, the Chinese government will choose whatever is best for their economy, and that means inflation for the rest of the world....
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Not a good period for shorting I am afraid. The short squeeze surprised me. Markets are going up, at a rapid pace, unfortunately I am at the wrong side of the market...
Earnings are good compared to what was expected, however, in absolute terms they are still bad. It does not make too much sense, unless bankers are driving up the prices as long as the Volcker regulation is not in effect ....
It is probably time to unwind the short position, January was a good month for shorting. My guess is that the shorts will come back once the Volcker regulations will be imposed.
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My short strategy seems to be rewarding, let's see for how long, but for now it works.
Markets are still going down. I do not expect it to last for long, but in the short term I see it going down. Since picking stocks to short seems a little tough for the moment, I just go shot on the indexes.
My favourite index is S&P 500. It is not as volatile as Shanghai, with some leverage the returns can be nice. My current leverage is 6, it is therefore imperative to watch the markets closely not to get stuck in a market rebound.
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2009 was a great year. Stock markets rising faster than the tide at Mt Saint Michel, something I did not see in my (young) life, but what is it going to be in 2010?
It looks like, in the short term, it is going to go down. Analysts will talk of correction, but what are the underlying factors? Liquidity is being taken out of the markets (where did TARP go?), annual results are not so great (except for Apple), the US is in deep shit with ever rising unemployment, China is holding back on lending, Greece is going down the drain, Japan's debt is being downgraded and ... the last fat bank bonuses are being handed out.
This last statement is important, because that is primarily what drove the markets so high. Traders had access to cheap money from the Fed and, more generally, governments from all over the world. 2009 was party time. Of course they knew it would not last. Regulations were coming to clamp down on the banking excesses that led to the financial crisis. Everybody knows that regulation changes take time, so our trader friends had a last big party before the punch bowl were to be taken away. This party in turn led to sarcasm from Main Street urging to clamp on banks, and so it keeps on going, an infinite circle re-inforcing itself due to the feedback loop that was put in place.
Therefore, do you think that the traders will save mom & pop's pension funds? Of course not, they will take the money and run away. Prop desks are being banned, what will all those poor traders do? I wonder, probably try to open some kind of hedge fund to keep on playing with your money: heads I win, tail you lose
Welcome to 2010, just make sure you short the market for the time being
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The incentives of this century seem to be completely misplaced and pervert. Banks are now handing out huge bonuses while still writing off the bad debts they made. The conclusion: we screwed up, but we don't care, we pay ourselves fat bonuses. Simply fantastic, I wonder where else this could be true. Not only are they robbing the shareholders, but on top of it they do it on the back of the taxpayers. I simply love it, gotta rob a bank.
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Into real estate of course !
So, our banker friends were paid huge salaries and bonuses to sell subprime mortgages that triggered the crisis, then they received huge liquidity packages and cash injections which they could invest in the stock market and create a nice rally which will end up in fat bonuses, and while the real estate prices drop, they will have all that money right on time to buy the real estate at depressed prices.
How beautiful is this.
And there is more!
today I am surprised to read the following on the FT: This summer a London-based banker revealed to me that he was trying to purchase flats in Singapore and Zurich. That was not, he insisted, because he personally expected to relocate.
Anyway, I guess the houses will have to be smaller than what they expected, a 50% tax on the bonus will probably mean a 50% smaller house...
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Life insurance policies are amongst the most popular policies issued to people today. Be it for life insurance solely or as a along term investment vehicle. Term policies basically cover a fixed span of time such as twenty or thirty years. Whole life policies on the other hand, cover not only the term of the policy which is your entire life but also any interest that has accumulated on top of it.
Is it a good investment? No! Where it seems that saving more money in the investment portion of the term insurance is good for the long term, it really isn’t. The rate of return offered by most policies is small, in the range of 2% to 3% per year. This return is will barely keep up with inflation over time. Inflation will erode the value of your savings over time, you will therefore most probably end up with just the face value of your investment in real dollar terms.
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Markets are booming, but is it a new bubble fueled by the tax-payers' money pumped into the system or is it a genuine recovery propelling us back to the Good Ol' Times? Many wonder, don't let yourself be sidelined by the (mis)behaviour of markets. Invest some time in educating yourself on financial matters, it pays off! And in more ways than you think, you can win an iPod Shuffle.
We are happy to share with our community that Schroders recently launched an interactive micro-site which provides a punchy and refreshing overview of investment basics, as well as a retirement planning calculator and a nifty widget that demonstrates the impact of inflation on savings. But rather than simply pushing information on one direction, Schroders have also implemented an online quiz with random questions that allows would-be investors to test their understanding of the learning points provided. Answer everything correctly, and you will stand a chance to win one of the iPod Shuffles. Follow the link to take the quiz challenge: www.schroders.com.sg/smartmoney
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