The quantitative easing done by the Federal Reserve to assist on the recovery of the US economy only fuels the increasing speculative bubbles in other areas like, commodities, gold, silver, other metals and other non-US related investment instruments. The US economy still seems to be taking its time to recover, creating a U-shapred recovery rather than V-shaped recovery that many hoped.
Why is this so?
Everyone knows that the US economy has been mainly a consumption based economy as consumption takes up 79% of GDP in 2009 (PWT 7.0; Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 7.0, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, May 2011.) If the absolute level of consumption does not rise, the US economy will not recover much, no matter how much fiscal spending is done by the government. Anyway, the US government does not have many fiscal bullets left judging by the budget deficit crisis occurring.
After the Great Recession, US companies would not be ready to hire back US-based staff as they would surely review their internal procedures to find the most cheap but efficient locations in the world to service their operations. As such there could be a shift of operations from US to elsewhere in the world. This prevents US unemployment rate from dropping to the natural rate of unemployment. With US jobs on the line, and US consumers yet to recover from the housing bubble that burst, which saw many losing the value of their properties, the average US consumer just would not have the financial capability to continue consumption to boost GDP and get the recovery moving.
US-based only companies that bucked the trend of globalisation will now suffer as they will see their corporate profits dip due to the reduction in spending by US consumers while Global US companies still being affected by the drop in revenue in the US, will have other regions of the world contributing to their bottom lines. US consumers will see a further pull-back in stocks of US-based only companies, whcih in turn will again affect the purchasing power of US consumers.
What can be done to assist in the US recovery?
An extreme case will be to stop US companies from increasing overseas manpower and pull back all possible operations back to the United States. This will be increasing employment and provide the necessary jobs that people need. However, doing this might be non-profitable to US companies as they would be the ones to bear the burden of higher operational costs.
A possible solution is for the US government to provide incentives for overseas companies to setup businesses in the US, compete with US companies for the US domestic market. This might seem illogical given the fact that US consumers will not have the ability to consume. Let's think about this for a second. The reason why overseas companies will want to setup businesses in US is the belief that they can offer cheaper or more value-added products or services against US companies. US consumers will still need to consume albeit at a reduced amount than previous. Lower cost products will create more savings for US consumers which can be used elsewhere, like paying off bank loans.
There will be a need for a group, either US consumers, US corporates or US government to face further economic burden before things get better. At the present moment, US consumers are still taking the blunt of the problems, but they are the ones that can stabilise the US economy. Before consumer expectations of a recovering economy gets turn back to a recessionary expectation, which consumers will further reduce consumption, assistance need to be provided to the US consumers and they need it now.
Friday, June 10, 2011
Thursday, October 21, 2010
Currency Bubble
Reading through the article ("As Dollar's Value Falls, Currency Conflicts Rise" by Graham Bowley, The New York Times, 20 October 2010), this shows that even on the world stage, countries are still govern by the the fundamental principal of Adam Smith, it being self-interest.
United States and Europe, each still facing recessionary issues could only have weaker currencies in the near term. However, their currencies are unable to depreciate due to the intervention of central banks from export-reliant nations. These central banks would buy the Dollar and Euro to weaken their own respective nations' exchange rate.
Exchange rate intervention has always been a debatable issue. Countries who use exchange rate intervention to smooth out huge fluctuations, preventing sudden appreciation/depreciation of the currency but still enabling market forces to decide on the long term exchange rate is considered good. For others who use exchange rate intervention to decide upon their own preferred rate is frowned upon as the long term rate is not determined by market forces.
With the current exchange rate intervention done by central banks of export-reliant countries, they are making their own currencies to be weaker than the Dollar and Euro. This may seem like an excellent short term idea, so that their own exports are cheaper and they would be able to foster a export-growth GDP. However, when there is huge influx of capital flows moving from United States and Europe to these export-reliant nations, exchange rate intervention is going to create negative repercussions for the long term.
Grahman talks about the points on asset bubbles in the stocks and property markets in the article, these I would not mention again. I would just make a simple example of what I want to bring forth.
"Hot money" always seek the highest return if not higher return. Since the interest rate in United States is near or is zero, there is little incentive to place money in Dollar denominated deposits. "Hot money" would flow to export-reliant nations who have higher interest rates. Of course, the "hot money" would be converted to the local export-reliant nation's currency. This is now a great bargain since the export-reliant nation has a weaker exchange rate. These flows would continue till it is deemed that the risks of placing in the export-reliant nation is greater than the interest rate return.
If all of a sudden, there is a reverse flow of "hot money" from export-reliant nation to United States due to improved changes in the economic fundamentals of the United States, the export-reliant nation will need to keep selling Dollars and buy back its own currency. Now, if the "hot money" received earlier is greater than the export-reliant nation's currency reserve, there would be grave consequences. The export-reliant nation could go bust and have an exchange rate so low that prices of imports will skyrocket, causing economic hardship for its citizens. This in turn may result in social and political unrest.
Central bankers need to discuss and arrive at a decision on how best to resolve this current unprecedented challenge ever since the Gold Standard was abolished.
United States and Europe, each still facing recessionary issues could only have weaker currencies in the near term. However, their currencies are unable to depreciate due to the intervention of central banks from export-reliant nations. These central banks would buy the Dollar and Euro to weaken their own respective nations' exchange rate.
Exchange rate intervention has always been a debatable issue. Countries who use exchange rate intervention to smooth out huge fluctuations, preventing sudden appreciation/depreciation of the currency but still enabling market forces to decide on the long term exchange rate is considered good. For others who use exchange rate intervention to decide upon their own preferred rate is frowned upon as the long term rate is not determined by market forces.
With the current exchange rate intervention done by central banks of export-reliant countries, they are making their own currencies to be weaker than the Dollar and Euro. This may seem like an excellent short term idea, so that their own exports are cheaper and they would be able to foster a export-growth GDP. However, when there is huge influx of capital flows moving from United States and Europe to these export-reliant nations, exchange rate intervention is going to create negative repercussions for the long term.
Grahman talks about the points on asset bubbles in the stocks and property markets in the article, these I would not mention again. I would just make a simple example of what I want to bring forth.
"Hot money" always seek the highest return if not higher return. Since the interest rate in United States is near or is zero, there is little incentive to place money in Dollar denominated deposits. "Hot money" would flow to export-reliant nations who have higher interest rates. Of course, the "hot money" would be converted to the local export-reliant nation's currency. This is now a great bargain since the export-reliant nation has a weaker exchange rate. These flows would continue till it is deemed that the risks of placing in the export-reliant nation is greater than the interest rate return.
If all of a sudden, there is a reverse flow of "hot money" from export-reliant nation to United States due to improved changes in the economic fundamentals of the United States, the export-reliant nation will need to keep selling Dollars and buy back its own currency. Now, if the "hot money" received earlier is greater than the export-reliant nation's currency reserve, there would be grave consequences. The export-reliant nation could go bust and have an exchange rate so low that prices of imports will skyrocket, causing economic hardship for its citizens. This in turn may result in social and political unrest.
Central bankers need to discuss and arrive at a decision on how best to resolve this current unprecedented challenge ever since the Gold Standard was abolished.
Monday, February 23, 2009
Back to basic production
In the recent article, "The collapse of manufacturing" by The Economist 21 Feb 2009 Pg. 13, industrial production has fallen all over the world, this is especially so in countries that are dependent on manufacturing exports to the developed countries. This has only enlarged the economic problems for export-oriented countries as they can no longer export their countries out from poverty.
These export-oriented countries have huge labour supply and vast land mass with the exception of the city-nation Singapore. China, Japan, South Korea, and other Asia Pacific nations should consider a return to agricultural production if they have the comparative advantage in doing so at this point in time, without the assistance of government subsidy of course.
Yes, manufacturing demand is elastic and there is a lack of demand at this point in time. Consumers are worried over their jobs that they are spending less, demanding less manufacturing goods like computers, mobiles, et cetera. However, there is one aspect of production that consumers will demand. Such demand is inelastic. It is the demand for food.
Export-oriented nations should take this opportunity to encourage industries in farming, food production using labour and not technology. This may seem to be inefficient. But in export-oriented nations, if the cost of labour is less than the cost of technology, this would be productive. Not only would this create temporary employment for the unemployed masses, it would also increase the food supply of the world.
Although the sudden increase in food supply would cause food prices to fall, individuals' purchasing power would increase for other goods as they would be spending less on food. In turn, this could stimulate the demand of manufacturing goods and spur the cycle of economic growth.
Sunday, February 22, 2009
Time to stop the spread of negativism
It has been a while since the last update was done. I stopped blogging, not due to the lack of time or the lack of interest. It is quite the opposite. I stopped to prevent the spread of negative news which was being reported each day. I stopped to prevent a vicious cycle of pessimism and negativism from occurring which would negate the positive effects of any stimulus package that were being done by the governments of the world.
"Can Talk of a Depression Lead to One?", by Robert J. Shiller, The New York Times, 21 Feb 2009 sums it best with and I quote, "EARLY in the Great Depression, people were concerned that, as one observer put it in 1931, we may “pass through a long period of mediocre business activity like that of the 1890s.”"
I definately would not want the Great Depression from happening ever again. It was painful for those living through that period. It was also painful on how the world came out from it, through a World War. ("Who’ll Stop the Pain?", by Paul Krugman, The New York Times, 19 Feb 2009)
The world needs positive news, now more than ever before. Hence, before anyone goes further with the constant bombardment of negative news, think of its effects. Of course, there is still a need for factual reporting of Gross Domestic Product (GDP), Purchasing Managers Index (PMI), retail sales revenue, companies' profits/loss announcements, et cetera. But once negative news is out, just let it pass. Do not keep spreading it. Do not let negativism feed negativism.
"Can Talk of a Depression Lead to One?", by Robert J. Shiller, The New York Times, 21 Feb 2009 sums it best with and I quote, "EARLY in the Great Depression, people were concerned that, as one observer put it in 1931, we may “pass through a long period of mediocre business activity like that of the 1890s.”"
I definately would not want the Great Depression from happening ever again. It was painful for those living through that period. It was also painful on how the world came out from it, through a World War. ("Who’ll Stop the Pain?", by Paul Krugman, The New York Times, 19 Feb 2009)
The world needs positive news, now more than ever before. Hence, before anyone goes further with the constant bombardment of negative news, think of its effects. Of course, there is still a need for factual reporting of Gross Domestic Product (GDP), Purchasing Managers Index (PMI), retail sales revenue, companies' profits/loss announcements, et cetera. But once negative news is out, just let it pass. Do not keep spreading it. Do not let negativism feed negativism.
Wednesday, October 8, 2008
Bolder solutions needed
Even with the passing of the USD700 billion bailout package ("Bailout Plan Wins Approval; Democrats Vow Tighter Rules" by David M. Herszenhorn, The New York Times, 03 October 2008), the financial crisis is not being contained in the United States. It has in fact been spreading across the globe, causing Central Banks around the world to coordinate in cutting their interest rates. (Central Banks Coordinate Cut in Rates, by David Jolly and Keith Bradsher, The New York Times, 08 October 2008)
I agree with the points mentioned by Paul Krugman in his article "Thinking the bailout through" published in The New York Times on 21 September 2008. The USD700 billion is only going to clear some of the troubled mortgage backed securities and not all of the problematic assets. In addition, the selection by the US Government and the Federal Reserve to choose who to save and who not to save has resulted in banks worrying which financial institution would be next to go. These actions have resulted in not just a minor crisis of failing mortgage-backed securities but a liquidity crunch.
Banks are fearful of lending out their money to borrowers. Depositors are fearful of banks who are involved in this crisis to be failing. What is happening, seems to be a total lack of confidence in the banking industry. Depositors could be fleeing to financial institutions who are not involved in this crisis, as a means to safeguard their assets. If this is the case, there could be massive flow of funds from the ailing financial institutions to the healthier ones, which could cause the former to fail. If more financial institutions fail, the effects would spread even to the healthier ones and contagion would just occur with a never-ending cycle.
What can be done to stem this once and for all?
1) Establish all deposits to be safe. Be it from the rich, poor, retail or corporate. This is to give confidence to depositors and preventing a liquidity crush for the ailing banks. (This has to be mainly by the Federal Reserve as it is the US financial institutions which are in trouble and pulled the rest of the banking world onboard.)
2) Establish rules permitting that bank to bank loans would be honoured by the Federal Reserve should the borrower bank fail. This is to provide confidence to other financial institutions and immediately reduce the default risk of loans by banks.
3) Establish strong regulations during this period of time that financial institutions have to rein in the unsecurred credit facilities provided to clients (with the exception of banks). For secured credit facilities, there should be a limit as to the loan amount that can be provided, say around 50% of the market value.
However, the above suggestions can be very difficult to implement. With the total guarantee on deposits and bank to bank loans, the Federal Reserve would be putting more taxpayers money on the table. Moral hazard would be dealt with when the regulations on credit facilities are implemented, but the time frame of over-hauling regulations is long and tedious.
The market may react to the news in a unexpected positive manner even though it may not be implemented yet. We'll only know, if these are truly implemented.
In the meantime, let's prepare ourselves for a long drawn financial crisis.
I agree with the points mentioned by Paul Krugman in his article "Thinking the bailout through" published in The New York Times on 21 September 2008. The USD700 billion is only going to clear some of the troubled mortgage backed securities and not all of the problematic assets. In addition, the selection by the US Government and the Federal Reserve to choose who to save and who not to save has resulted in banks worrying which financial institution would be next to go. These actions have resulted in not just a minor crisis of failing mortgage-backed securities but a liquidity crunch.
Banks are fearful of lending out their money to borrowers. Depositors are fearful of banks who are involved in this crisis to be failing. What is happening, seems to be a total lack of confidence in the banking industry. Depositors could be fleeing to financial institutions who are not involved in this crisis, as a means to safeguard their assets. If this is the case, there could be massive flow of funds from the ailing financial institutions to the healthier ones, which could cause the former to fail. If more financial institutions fail, the effects would spread even to the healthier ones and contagion would just occur with a never-ending cycle.
What can be done to stem this once and for all?
1) Establish all deposits to be safe. Be it from the rich, poor, retail or corporate. This is to give confidence to depositors and preventing a liquidity crush for the ailing banks. (This has to be mainly by the Federal Reserve as it is the US financial institutions which are in trouble and pulled the rest of the banking world onboard.)
2) Establish rules permitting that bank to bank loans would be honoured by the Federal Reserve should the borrower bank fail. This is to provide confidence to other financial institutions and immediately reduce the default risk of loans by banks.
3) Establish strong regulations during this period of time that financial institutions have to rein in the unsecurred credit facilities provided to clients (with the exception of banks). For secured credit facilities, there should be a limit as to the loan amount that can be provided, say around 50% of the market value.
However, the above suggestions can be very difficult to implement. With the total guarantee on deposits and bank to bank loans, the Federal Reserve would be putting more taxpayers money on the table. Moral hazard would be dealt with when the regulations on credit facilities are implemented, but the time frame of over-hauling regulations is long and tedious.
The market may react to the news in a unexpected positive manner even though it may not be implemented yet. We'll only know, if these are truly implemented.
In the meantime, let's prepare ourselves for a long drawn financial crisis.
Wednesday, September 17, 2008
The weakness of OTC
On 16 Sep 2008, AIG had to borrow US$85billion worth of loans from the Federal Reserve as its attempts to obtain loans from other financial institutions and raising cash through stock sales failed.
How could AIG face such liquidity crunch? The answer, is mainly the credit-default swaps that AIG is liable to make payouts for. ("Fed Agrees to Lend A.I.G. $85 Billion to Head Off Crisis", by Edmund L. Andrews, The New York Times, 17 Sep 2008)
What could have been done to avoid such liabilities concerning these Over-The-Counter derivatives? These OTC should not be OTC in the first place. They should be traded in an exchange where the buyers and sellers are the market makers. There should not be brokers in the market acting as the market-makers. Yes it might reduce the potential trading liquidity for these OTC swaps, but there will be reduced risk as brokers do not have to take an extended position for 1 side of the OTC swaps.
Brokers if they are market-makers of OTC swaps, could be in AIG shoes, taking on too much of 1 position that would cause huge liabilities to themselves. These liabilities would become too much to bear that a crisis would occur.
The present scenario would be for the Securities Exchange Commission to take an immediate stance and create an exchange for derivative instruments that have been trading as OTC. This would reduce counterparty risk for buyers and sellers as they would be dealing with themselves. Should they deal with just 1 financial institution, they would face the default risk of the financial institution, aka AIG in this case.
How could AIG face such liquidity crunch? The answer, is mainly the credit-default swaps that AIG is liable to make payouts for. ("Fed Agrees to Lend A.I.G. $85 Billion to Head Off Crisis", by Edmund L. Andrews, The New York Times, 17 Sep 2008)
What could have been done to avoid such liabilities concerning these Over-The-Counter derivatives? These OTC should not be OTC in the first place. They should be traded in an exchange where the buyers and sellers are the market makers. There should not be brokers in the market acting as the market-makers. Yes it might reduce the potential trading liquidity for these OTC swaps, but there will be reduced risk as brokers do not have to take an extended position for 1 side of the OTC swaps.
Brokers if they are market-makers of OTC swaps, could be in AIG shoes, taking on too much of 1 position that would cause huge liabilities to themselves. These liabilities would become too much to bear that a crisis would occur.
The present scenario would be for the Securities Exchange Commission to take an immediate stance and create an exchange for derivative instruments that have been trading as OTC. This would reduce counterparty risk for buyers and sellers as they would be dealing with themselves. Should they deal with just 1 financial institution, they would face the default risk of the financial institution, aka AIG in this case.
More challenges ahead
During these last few days, the US financial market was in turmoil again.
15th Sep 2008, Monday, saw fall of 2 world-reknown financial institutions. The 101 year old Merrill Lynch announced it was being bought over by Bank of America and the 164 year old Lehman Brothers Holdings Inc formally filed Chapter 11, declaration of bankruptcy. ("Lehman Files for Bankruptcy; Merrill Is Sold" by Andrew Ross Sorkin, The New York Times, 14 Sep 2008)
16 Sep 2008, Tuesday, AIG announced it was receiving US$85 billion worth of loans from the Federal Reserve as it could not raise the amount in the capital markets. It was facing rating downgrades from Moodys and Standard & Poor due to its falling stock price. With its stock price losing 94% of its value, it could not raise the cash needed through a sale of stock. ("Fed in an $85 Billion Rescue of an Insurer Near Failure" by Edmund L. Andrews, The New York Times, 17 Sep 2008)
What does this show about the financial situation in the US now, petaining to the subprime crisis incident. As I had mentioned previously in my previous post, "Possible Spillover of Sub-prime Mortgage Crisis" on 2 Sep 2007, it seems that situation 2 is being acted out in the financial market:
15th Sep 2008, Monday, saw fall of 2 world-reknown financial institutions. The 101 year old Merrill Lynch announced it was being bought over by Bank of America and the 164 year old Lehman Brothers Holdings Inc formally filed Chapter 11, declaration of bankruptcy. ("Lehman Files for Bankruptcy; Merrill Is Sold" by Andrew Ross Sorkin, The New York Times, 14 Sep 2008)
16 Sep 2008, Tuesday, AIG announced it was receiving US$85 billion worth of loans from the Federal Reserve as it could not raise the amount in the capital markets. It was facing rating downgrades from Moodys and Standard & Poor due to its falling stock price. With its stock price losing 94% of its value, it could not raise the cash needed through a sale of stock. ("Fed in an $85 Billion Rescue of an Insurer Near Failure" by Edmund L. Andrews, The New York Times, 17 Sep 2008)
What does this show about the financial situation in the US now, petaining to the subprime crisis incident. As I had mentioned previously in my previous post, "Possible Spillover of Sub-prime Mortgage Crisis" on 2 Sep 2007, it seems that situation 2 is being acted out in the financial market:
"2) Subprime Crisis > Mortgage borrowers fail to pay up > CDOs worthless > Balance sheets of financial institutions get impacted (depending on impact, some may close, others face a huge profit write off) > Markets may get shocked > Investors seek liquidity > Pull of from markets > Markets fall, herd behaviour occurs > Market falls further > Investors lose confidence > Govts step in > Stability may occur slow or fast depending on the speed and actions taken by govts."
The Federal Reserve and the US Treasury have been quick to enter the financial market and make the critical decision on which companies to help and which companies should not be. It will be years of discussion on whether the actions of the 2 have been proper and just. But at the present moment in time, the fire has not been put out.
The financial market is still in turmoil. With the folding of Merrill Lynch and Lehman Brothers; the falling share prices of AIG and various other companies, financial institutions and other companies which are holding these stocks in their portfolio will be facing unrealized revaluation losses. Being the month of Sep, companies are reporting their earnings for the earlier quarter. However, as the failures of Lehman Brothers, Merrill Lynch and AIG are occurring in the month of Sep, the financial results being reported for the quarter should be considered as over-valuing the company at this point in time.
It means that the financial reports are too historical, even though they are being mark-to-market. Companies should provide interim financial results that indicate the impact of Merrill Lynch, Lehman Brothers and AIG. At least investors would be well informed as to the contagion effect and this should prevent another shock to the market when another quarterly reporting occurs.
Thursday, September 11, 2008
Shareholders' Woes
The infamous phase of the year if not for years or decades, "If you’ve got a bazooka and people know you’ve got it, you may not have to take it out.” ("As Crisis Grew, a Few Options Shrank to One" by Charles Duhigg, Stephen Labaton and Andrew Ross Sorkin, 07 Sep 2008, New York Times) In the end, he still had to use it. Who is he? Treasury Secretary Henry M. Paulson Jr. is him.
At the time of implementation of the bazooka, which is simply to give officials the power to inject billions of dollars into the Freddie Mac and Fannie Mae through investments and loans("Scramble Led to Rescue Plan on Mortgages", Stephen Labaton, 15 Jul 2008, New York Times), Treasury Secretary Paulson only wanted an instrument to calm the market. He was able to calm the markets with the bazooka. But it was only for a short duration.
The market became even more jittery after that, which can be seen from the stock prices of Fannie Mae and Freddie Mac. With each passing day, the market was worried. Should the bazooka be used, who would be the ones affected? Would it be the shareholders, bondholders or both? What would be the repercussion for any of them?
Shareholders would lose the worth of the shares. Bondholders would lose not only their interest paydowns but their principals as well. But who is the group that the Treasury Department is willing to bear the losses? The shareholders or the bondholders? Note that most bondholders are foreign central banks, financial institutions and others ("In Rescue to Stabilize Lending, U.S. Takes Over Mortgage Finance Titans", Stephen Labaton and Edmund L. Andrews, 7 Sep 2008, New York Times) and if the bonds are defaulted, it would mean that the US has defaulted payments. No country would want this, not especially the United States of America. As such, the only logical group to bear the cost would be the shareholders.
Finally the bazooka was fired. Mainly due to Freddic Mac being unable to rise the USD5.5billion which was needed. Fannie Mae was considered as being too close with Freddie Mac and since Freddie needed help, Fannie should be helped too. ("As Crisis Grew, a Few Options Shrank to One" by Charles Duhigg, Stephen Labaton and Andrew Ross Sorkin, 07 Sep 2008, New York Times)
However, with shareholders bearing the blunt of this explosion. One will begin to wonder who are the shareholders of these GSEs? Are they the financial institutions who are facing the sub-prime crisis, like Citigroup, Lehman Brothers, Morgan Stanleyand UBS just to name a few. If the closing stock price of Fannie and Freddie being USD 0.99 and USD 0.8834 respectively as of 09 Sep 2008, what would this mean to the books of these financial institutions who are holders of these 2 GSEs? Surely, there is a need to mark-to-market. Further losses from financial institutions can be expected due to this conservatorship done by the Treasury Department.
There is one consolation prize from all of this. The market seems to be reacting well to the usage of the bazooka with the Dow Jones and Nasdaq rising. However, only time will tell if this is just a short term bullrun based on feel good sentiment from the bazooka.
At the time of implementation of the bazooka, which is simply to give officials the power to inject billions of dollars into the Freddie Mac and Fannie Mae through investments and loans("Scramble Led to Rescue Plan on Mortgages", Stephen Labaton, 15 Jul 2008, New York Times), Treasury Secretary Paulson only wanted an instrument to calm the market. He was able to calm the markets with the bazooka. But it was only for a short duration.
The market became even more jittery after that, which can be seen from the stock prices of Fannie Mae and Freddie Mac. With each passing day, the market was worried. Should the bazooka be used, who would be the ones affected? Would it be the shareholders, bondholders or both? What would be the repercussion for any of them?
Shareholders would lose the worth of the shares. Bondholders would lose not only their interest paydowns but their principals as well. But who is the group that the Treasury Department is willing to bear the losses? The shareholders or the bondholders? Note that most bondholders are foreign central banks, financial institutions and others ("In Rescue to Stabilize Lending, U.S. Takes Over Mortgage Finance Titans", Stephen Labaton and Edmund L. Andrews, 7 Sep 2008, New York Times) and if the bonds are defaulted, it would mean that the US has defaulted payments. No country would want this, not especially the United States of America. As such, the only logical group to bear the cost would be the shareholders.
Finally the bazooka was fired. Mainly due to Freddic Mac being unable to rise the USD5.5billion which was needed. Fannie Mae was considered as being too close with Freddie Mac and since Freddie needed help, Fannie should be helped too. ("As Crisis Grew, a Few Options Shrank to One" by Charles Duhigg, Stephen Labaton and Andrew Ross Sorkin, 07 Sep 2008, New York Times)
However, with shareholders bearing the blunt of this explosion. One will begin to wonder who are the shareholders of these GSEs? Are they the financial institutions who are facing the sub-prime crisis, like Citigroup, Lehman Brothers, Morgan Stanleyand UBS just to name a few. If the closing stock price of Fannie and Freddie being USD 0.99 and USD 0.8834 respectively as of 09 Sep 2008, what would this mean to the books of these financial institutions who are holders of these 2 GSEs? Surely, there is a need to mark-to-market. Further losses from financial institutions can be expected due to this conservatorship done by the Treasury Department.
There is one consolation prize from all of this. The market seems to be reacting well to the usage of the bazooka with the Dow Jones and Nasdaq rising. However, only time will tell if this is just a short term bullrun based on feel good sentiment from the bazooka.
Tuesday, August 12, 2008
Write-downs upon write-downs
With the further write-downs of JP Morgan Chase, ("JPMorgan Loses $1.5 Billion Since July" by Reuters, 12 Aug 2008, New York Times) on its mortgage and credit loans, will there be further write downs? Have we reached the end?
JP Morgan Chase's write-downs were partially due to the sale of Merill Lynch's $30.6 billion in risky debt to Lone Star funds for just $6.7 billion. If JP Morgan Chase was pressured to further write-down their investments, other financial institutions would be also pressured, not only by Merill Lynch actions but by JP Morgan Chase's as well. There could be another major round of write-downs which may cause a never-ending cycle of write-downs to occur.
What the financial institutions could do at this point in time, is to take the most conservative valuation and write-down their mortgage investments once and for all. Clear up everything in the balance sheet, get the necessary cash and move on.
They should not write-down slowly which places their stock prices at risk. It only adds jitters to the market and creates lots of uncertainty whenever there is negative news about the mortgage sector.
Uncertainty is something that financial institutions cannot afford at this point in time.
JP Morgan Chase's write-downs were partially due to the sale of Merill Lynch's $30.6 billion in risky debt to Lone Star funds for just $6.7 billion. If JP Morgan Chase was pressured to further write-down their investments, other financial institutions would be also pressured, not only by Merill Lynch actions but by JP Morgan Chase's as well. There could be another major round of write-downs which may cause a never-ending cycle of write-downs to occur.
What the financial institutions could do at this point in time, is to take the most conservative valuation and write-down their mortgage investments once and for all. Clear up everything in the balance sheet, get the necessary cash and move on.
They should not write-down slowly which places their stock prices at risk. It only adds jitters to the market and creates lots of uncertainty whenever there is negative news about the mortgage sector.
Uncertainty is something that financial institutions cannot afford at this point in time.
Sunday, August 10, 2008
Finding a rallying reason
I was mentioning to a friend last night (08 Aug 2008, 10.20pm Singapore time) that the US market would have a bloodbath throughout the trading session due to the announcement of Fannie Mae's ("Mortgage Giants to Buy Fewer Risky Home Loans" by Charles Duhigg, 08 Aug 2008, New York Times) worse than expected results; something similar to Freddic Mac's annoucement on Wednesday's US trading session ("Freddie Mac’s Big Loss Dims Hopes of Turnaround" by Charles Duhigg, 09 Aug 2008, New York Times) and AIG's announcement on Thursday's trading session ("A.I.G. Posts a Large Loss as Housing Troubles Persist" by Mary Williams Walsh, 06 Aug 2008, New York Times).
However, this was not the case on that eventful Friday trading session in the US market. Oil and commodities prices fell due to lower expected growth from Europe and China which strengthen the dollar as investors poured funds into US stocks, causing the market to rise tremendously. ("Shares Rally as Oil Continues to Fall" by Vikas Bajaj, 08 Aug 2008, New York Times).
Would this mean that US stocks will continue to rally and the lowest point has been reached due to the weakening of the oil and commodity sectors? I doubt it.
The market now has become very sensitive to news and it has come to a point when even the slightest positive news will bring a huge rally without the fundamentals as support. Take the instance of Friday's dramatic rally. Even if growth in Europe and China slows down, does it mean that the US economy will out-grow either of them?
The economic problems in the US are not yet over. The 2 Government Sponsored Enterprises "GSEs", Fannie and Freddie, are in dire straits. Problem in the mortgage lending sector is having a huge spillover effect like in AIG's case. Many financial institutions would be forced to revalue a loss on their existing investments if the mortgage sector fails to pick up.
Other parts of the US market will be affected as well, as falling property and financial stock prices make individuals poorer on paper resulting them in cutting down on their expenditure. The broader economic outlook is still gloomy with lots of uncertainity.
However, this was not the case on that eventful Friday trading session in the US market. Oil and commodities prices fell due to lower expected growth from Europe and China which strengthen the dollar as investors poured funds into US stocks, causing the market to rise tremendously. ("Shares Rally as Oil Continues to Fall" by Vikas Bajaj, 08 Aug 2008, New York Times).
Would this mean that US stocks will continue to rally and the lowest point has been reached due to the weakening of the oil and commodity sectors? I doubt it.
The market now has become very sensitive to news and it has come to a point when even the slightest positive news will bring a huge rally without the fundamentals as support. Take the instance of Friday's dramatic rally. Even if growth in Europe and China slows down, does it mean that the US economy will out-grow either of them?
The economic problems in the US are not yet over. The 2 Government Sponsored Enterprises "GSEs", Fannie and Freddie, are in dire straits. Problem in the mortgage lending sector is having a huge spillover effect like in AIG's case. Many financial institutions would be forced to revalue a loss on their existing investments if the mortgage sector fails to pick up.
Other parts of the US market will be affected as well, as falling property and financial stock prices make individuals poorer on paper resulting them in cutting down on their expenditure. The broader economic outlook is still gloomy with lots of uncertainity.
Tuesday, April 15, 2008
The Cracks Are Showing
From the signals of a weak labour market to American retailers filing for bankruptcy protections, the start of a possible major economic downturn in the US economy has begun.
The weak labour market can be seen from the claims of job unemployment benefits by the unemployed. The number of US workers remaining on job unemployment benefits rose to 2.94million in the week ending 29 March 2008, the highest since July 2004. ("US jobless claims drop 53,000 in latest week" by Singapore Business Times, 10 April 2008.) This could be due to companies putting hiring on hold and/or laying off staff in anticipation of a slowdown in demand for their products.
As for American retailers, 8 mostly middle size retail chains have filed for bankruptcy protections while others have started to downsize their operations in anticipation of an economic downturn. ("Retailing Chains Caught in a Wave of Bankruptcies" by Michael Barbaro, The New York Times, 15 April 2008.) Retailers are faced with 2 main problems, consumers spending less and the inability to obtain loans easily from banks.
Consumers are spending more on necessities like food and oil(petrol) which are income inelastic. This results in consumers having less disposable income for other luxury goods which are income elastic. The final effect, retailers having less revenue to cover their fixed costs which for some, are not even able to cover their variable costs such that they are forced to close down. In this case here, they seek bankruptcy protection.
The collateral debt obligations (CDOs) crisis has created a credit crunch among banks as they are cautious in lending towards one other. This has made the Federal Reserve to reduce interest rates to spur lending. However, it seems that the Feds' efforts have been futile as banks are unwilling to lend and/or extend credit facilities to the retail chains. This has created cash flow problems for the retail chains in making payments to their suppliers which only push the retail chains into bankruptcies.
The falling US dollar does not help the economy at all. The weaker dollar creates import-inflation as mentioned in my previous article, "Greater Possibility or Has It Arrived?" 21 February 2008. If the US economy is the final consumer of imported products, with US demand being inelastic, consumers will face increasing price rises such that they would have little to spend. For March 2008, US Producers' prices rose by 6.9% on a year to year basis.("U.S. Producer Prices Up 1.1% in March", by Reuters, The New York Times, 15 April 2008).
The Fed has used monetary policy to try to advert a possible downturn. But to no avail it seems judging by the result of the decline in consumer confidence. ("US consumer confidence takes a beating", Singapore Business Times, 12 April 2008.)
Should monetary policy be ineffective, there is another method. Examine the equation of the Gross Domestic Product:
GDP = Consumption + Investment + Government + (Exports - Imports)
With consumption and investment possibly dropping and imports increasing, the way out for the US Government is to use fiscal policy or have the US economy export its way out from recession. With the US Government providing tax rebates cheques to households, it is hopeful that this would spur the increase in consumption. If not, it is going to be a long recovery from the downturn.
The weak labour market can be seen from the claims of job unemployment benefits by the unemployed. The number of US workers remaining on job unemployment benefits rose to 2.94million in the week ending 29 March 2008, the highest since July 2004. ("US jobless claims drop 53,000 in latest week" by Singapore Business Times, 10 April 2008.) This could be due to companies putting hiring on hold and/or laying off staff in anticipation of a slowdown in demand for their products.
As for American retailers, 8 mostly middle size retail chains have filed for bankruptcy protections while others have started to downsize their operations in anticipation of an economic downturn. ("Retailing Chains Caught in a Wave of Bankruptcies" by Michael Barbaro, The New York Times, 15 April 2008.) Retailers are faced with 2 main problems, consumers spending less and the inability to obtain loans easily from banks.
Consumers are spending more on necessities like food and oil(petrol) which are income inelastic. This results in consumers having less disposable income for other luxury goods which are income elastic. The final effect, retailers having less revenue to cover their fixed costs which for some, are not even able to cover their variable costs such that they are forced to close down. In this case here, they seek bankruptcy protection.
The collateral debt obligations (CDOs) crisis has created a credit crunch among banks as they are cautious in lending towards one other. This has made the Federal Reserve to reduce interest rates to spur lending. However, it seems that the Feds' efforts have been futile as banks are unwilling to lend and/or extend credit facilities to the retail chains. This has created cash flow problems for the retail chains in making payments to their suppliers which only push the retail chains into bankruptcies.
The falling US dollar does not help the economy at all. The weaker dollar creates import-inflation as mentioned in my previous article, "Greater Possibility or Has It Arrived?" 21 February 2008. If the US economy is the final consumer of imported products, with US demand being inelastic, consumers will face increasing price rises such that they would have little to spend. For March 2008, US Producers' prices rose by 6.9% on a year to year basis.("U.S. Producer Prices Up 1.1% in March", by Reuters, The New York Times, 15 April 2008).
The Fed has used monetary policy to try to advert a possible downturn. But to no avail it seems judging by the result of the decline in consumer confidence. ("US consumer confidence takes a beating", Singapore Business Times, 12 April 2008.)
Should monetary policy be ineffective, there is another method. Examine the equation of the Gross Domestic Product:
GDP = Consumption + Investment + Government + (Exports - Imports)
With consumption and investment possibly dropping and imports increasing, the way out for the US Government is to use fiscal policy or have the US economy export its way out from recession. With the US Government providing tax rebates cheques to households, it is hopeful that this would spur the increase in consumption. If not, it is going to be a long recovery from the downturn.
Thursday, February 21, 2008
Greater Possibility or Has It Arrived?
Three months ago, I mentioned that the United States was being in the risk of stagflation. This worried fear is now being echoed by the Federal Reserve found in NYT's 21 Feb 2008, "That ’70s Look: Stagflation" by Graham Bowley and NYT's 21 Feb 2008, "Rising Inflation Limits the Fed as Growth Lags " by Edmund L. Andrews and Michael M. Grynbaum.
Even with the current interest rate cuts, the financial market in the United States is not improving. The current paralysis is affecting not only the macroeconomics of the United States but the entire world as well. The lowering of interest rates has made the value of USD to be even less than before. Using Pacific FX Database (http://fx.sauder.ubc.ca/), the monthly value of Gold Ounces against USD is at it's lowest point in Jan 2008 (not able to use Feb 2008 as the full month as yet to pass), since inception of the database of Nov 1991.
With the value of the USD being at its lowest, it will only cause the trade deficit of USD 711.6 billion for Year 2007 ( http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf) to be more costly if its repayment terms are in the foreign countries' currencies. Luckily for the United States, this has yet to happen as USD is the major currency of trade at the moment. Should it be another country like Thailand or Indonesia which had a huge trade deficit, the financial sectors would have collapse overnight as seen in the Asian Financial Crisis.
As imports become more expensive due to a weaker dollar, corporates and consumers should reduce consumption of foreign goods which would help to reduce the current trade deficit (in USD terms). This would be possible if the income elasticity of corporates and consumers are elastic, such that the decline in the USD value against other currencies will enable corporates and consumers to switch to local products. Should elasticity be inelastic, the weaker USD will only cause a bigger trade deficit which will further burden the US economy in the long run.
The trade deficit is still being financed by Asian countries as they have hordes of USD reserves. This financing will still continue as trade is still being done in USD. But with the falling USD value, these countries may reconsider their reserve currencies portfolio's USD weightage. The falling USD is making these reserves less in value. By re-aligning the USD weightage, the Asian countries would be able to save their reserves from FX losses. However the re-alignment has to be done in a small batches. A huge sudden re-alignment may cause the USD to fall further which may result in a melt-down of the world's financial markets.
The Federal Reserve has to make the important decision, and now! The apparent decisions to cut interest rates is not improving the economy. Either the Fed cuts interest rates up to the point where the current credit crunch is gone and confidence is restored or the Fed increases interest rates to strengthen the dollar to combat import-inflation. However, the latter does have its repercussion.
The increase in interest rates would increase the cost of borrowing for the United States. If there is not enough reserves, which the United States does not have, it will only increase its debt to the world. The United States has a budget deficit of USD 5,035.3 billion as of 2007 (http://www.cbo.gov/budget/historical.shtml).
There could be another possibility, but the US public may not be willing to accept. The Fed could personally insure all US banks and make good all borrowings between banks at this point in time to reduce the credit crunch. However, there could be a public outcry due to the usage of public funds bailing out private companies.
Even if there is no public outcry, this is also not a fool-proof plan due to moral hazard of banks coming into play. Banks, knowing that the Fed would 'sign the blank cheque', enter into risker deals which results in more problems later on. Regulatory controls could be enforced onto the banks to prevent such deals from ever taking place. Would the US financial market, deemed as a free market, ever allow regulatory controls to be implemented?
The world has become more uncertain with inapt decisions by the Fed and intertwined financial markets.
Even with the current interest rate cuts, the financial market in the United States is not improving. The current paralysis is affecting not only the macroeconomics of the United States but the entire world as well. The lowering of interest rates has made the value of USD to be even less than before. Using Pacific FX Database (http://fx.sauder.ubc.ca/), the monthly value of Gold Ounces against USD is at it's lowest point in Jan 2008 (not able to use Feb 2008 as the full month as yet to pass), since inception of the database of Nov 1991.
With the value of the USD being at its lowest, it will only cause the trade deficit of USD 711.6 billion for Year 2007 ( http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf) to be more costly if its repayment terms are in the foreign countries' currencies. Luckily for the United States, this has yet to happen as USD is the major currency of trade at the moment. Should it be another country like Thailand or Indonesia which had a huge trade deficit, the financial sectors would have collapse overnight as seen in the Asian Financial Crisis.
As imports become more expensive due to a weaker dollar, corporates and consumers should reduce consumption of foreign goods which would help to reduce the current trade deficit (in USD terms). This would be possible if the income elasticity of corporates and consumers are elastic, such that the decline in the USD value against other currencies will enable corporates and consumers to switch to local products. Should elasticity be inelastic, the weaker USD will only cause a bigger trade deficit which will further burden the US economy in the long run.
The trade deficit is still being financed by Asian countries as they have hordes of USD reserves. This financing will still continue as trade is still being done in USD. But with the falling USD value, these countries may reconsider their reserve currencies portfolio's USD weightage. The falling USD is making these reserves less in value. By re-aligning the USD weightage, the Asian countries would be able to save their reserves from FX losses. However the re-alignment has to be done in a small batches. A huge sudden re-alignment may cause the USD to fall further which may result in a melt-down of the world's financial markets.
The Federal Reserve has to make the important decision, and now! The apparent decisions to cut interest rates is not improving the economy. Either the Fed cuts interest rates up to the point where the current credit crunch is gone and confidence is restored or the Fed increases interest rates to strengthen the dollar to combat import-inflation. However, the latter does have its repercussion.
The increase in interest rates would increase the cost of borrowing for the United States. If there is not enough reserves, which the United States does not have, it will only increase its debt to the world. The United States has a budget deficit of USD 5,035.3 billion as of 2007 (http://www.cbo.gov/budget/historical.shtml).
There could be another possibility, but the US public may not be willing to accept. The Fed could personally insure all US banks and make good all borrowings between banks at this point in time to reduce the credit crunch. However, there could be a public outcry due to the usage of public funds bailing out private companies.
Even if there is no public outcry, this is also not a fool-proof plan due to moral hazard of banks coming into play. Banks, knowing that the Fed would 'sign the blank cheque', enter into risker deals which results in more problems later on. Regulatory controls could be enforced onto the banks to prevent such deals from ever taking place. Would the US financial market, deemed as a free market, ever allow regulatory controls to be implemented?
The world has become more uncertain with inapt decisions by the Fed and intertwined financial markets.
Monday, November 19, 2007
Uncertainty, uncertainty, uncertainty
Ever wonder why articles containing good news are always emphasized more and not so good news are given less emphasis?
I believe it's just how we, homosapians are created. We tend to think about things alot and if good news are more, we think that things are good. If bad things happen, we tend to think, "oh no" bad times are here. In which case, either good or bad thoughts will create self-fulfilling prophecy of the respective event to happen.
We don't wish to have bad events happening now, do we? An example is like rumors of a stock market crash, and when investors hear about it, they will want to sell their holdings to protect their capital. A sell-down is ensured and a crash will be imminent.
I never thought it will happen, crude oil nearly reaching USD100. I thought the book "The Coming Economic Collapse: How You can Thrive When Oil Costs $200 a Barrel", was just that, a book. Instead it is a possibility in sight in the next decade if not a few years.
What is worrisome is that, the world is still stuck to oil and it's by-products of petro-chemicals. We are like a cat that needs milk. without this milk, we can't survive.
On top of rising crude oil, we are faced with a US housing bubble in the midst of collapse. And this collapse seems to be taking dragging into the grave, not only the homeowners, but the banks as well, forcing the FED to pump liquidity into the financial system.
So what are we going to face? Growing inflation, possible recession. Oh.. it's going to be a stagflation. The worst that can ever happen to a country. Hopefully it's only a country and not the entire world. Just imagine the economic and political nightmare should such a scenario happen.
What do you choose to solve, inflation or recession? Solving one will cause the other to worsen. Unless you have the political chips and patience of the people, the solution will not come with ease.
I believe it's just how we, homosapians are created. We tend to think about things alot and if good news are more, we think that things are good. If bad things happen, we tend to think, "oh no" bad times are here. In which case, either good or bad thoughts will create self-fulfilling prophecy of the respective event to happen.
We don't wish to have bad events happening now, do we? An example is like rumors of a stock market crash, and when investors hear about it, they will want to sell their holdings to protect their capital. A sell-down is ensured and a crash will be imminent.
I never thought it will happen, crude oil nearly reaching USD100. I thought the book "The Coming Economic Collapse: How You can Thrive When Oil Costs $200 a Barrel", was just that, a book. Instead it is a possibility in sight in the next decade if not a few years.
What is worrisome is that, the world is still stuck to oil and it's by-products of petro-chemicals. We are like a cat that needs milk. without this milk, we can't survive.
On top of rising crude oil, we are faced with a US housing bubble in the midst of collapse. And this collapse seems to be taking dragging into the grave, not only the homeowners, but the banks as well, forcing the FED to pump liquidity into the financial system.
So what are we going to face? Growing inflation, possible recession. Oh.. it's going to be a stagflation. The worst that can ever happen to a country. Hopefully it's only a country and not the entire world. Just imagine the economic and political nightmare should such a scenario happen.
What do you choose to solve, inflation or recession? Solving one will cause the other to worsen. Unless you have the political chips and patience of the people, the solution will not come with ease.
Friday, October 5, 2007
Tired of it all
When you reached a time in your life and realise that life is just what it is, there's nothing more interesting left...
It's just a dull color with all its negative vibes.
Sad is it not?
Just tired of it all and wish for it to end soon...
It's just a dull color with all its negative vibes.
Sad is it not?
Just tired of it all and wish for it to end soon...
Saturday, September 15, 2007
Subprime Crisis
Even before my previous entry, the credit crunch and the pumping of funds into the financial institutions by central banks were already in the midst.
Now it seems, that a variation of Possibility 6 happened.
Banks pay extreme caution in lending, and they are not even lending to their counterparts! As reported in Singapore's The Business Times on 15 September 2007, "Britain urges 'international action' after banking bailout", the Bank of England had to provide emergency funds to a major British mortgage lender called Northern Rock after other banks became wary of lending to it, squeezing the mortgage lender's financing.
As long as holders of CDOs related to the subprime crisis have no idea how material the financial impact will be, uncertainty will be formed in the market. As such, banks will take caution towards lending even if they are lending to others in their industry.
Let's all hope the subprime crisis will not be material to cause a banking meltdown.
Now it seems, that a variation of Possibility 6 happened.
Banks pay extreme caution in lending, and they are not even lending to their counterparts! As reported in Singapore's The Business Times on 15 September 2007, "Britain urges 'international action' after banking bailout", the Bank of England had to provide emergency funds to a major British mortgage lender called Northern Rock after other banks became wary of lending to it, squeezing the mortgage lender's financing.
As long as holders of CDOs related to the subprime crisis have no idea how material the financial impact will be, uncertainty will be formed in the market. As such, banks will take caution towards lending even if they are lending to others in their industry.
Let's all hope the subprime crisis will not be material to cause a banking meltdown.
Monday, September 3, 2007
Possible Spillover of Sub-prime Mortgage Crisis
1) Subprime Crisis > Banks tighten lending > Credit Crunch > Investment funds pull out from markets > Currencies fall > Net Import Nations face crisis of higher priced goods (import inflation)
2) Subprime Crisis > Mortgage borrowers fail to pay up > CDOs worthless > Balance sheets of financial institutions get impacted (depending on impact, some may close, others face a huge profit write off) > Markets may get shocked > Investors seek liquidity > Pull of from markets > Markets fall, herd behaviour occurs > Market falls further > Investors lose confidence > Govts step in > Stability may occur slow or fast depending on the speed and actions taken by govts.
3) Subprime Crisis > Mortgage borrowers fail to pay up > Foreclosure of homes > Supply of home sales in market outstrip demand > Property prices fall > USA home owners feel less rich > Consumption decreases > USA demand for global goods decreases > Negative impact on export-oriented countries like China, Taiwan and Singapore > Economic slowdown possible on a global scale.
4) Subprime Crisis > Mortgage borrowers fail to pay up > Foreclosure of homes > Supply of home sales in market outstrip demand > Property prices fall > USA home owners feel less rich > Consumption decreases > FED lowers interest rate, get banks to lend out more > Banks change lending patterns from property to other forms > Consumption increases > Solve economic slowdown.
5) Subprime Crisis > Mortgage borrowers fail to pay up > Foreclosure of homes > Supply of home sales in market outstrip demand > Property prices fall > USA home owners feel less rich > Consumption decreases > FED lowers interest rate, get banks to lend out more > Banks change lending patterns from property to other forms > Consumption increases > Subprime Crisis gets worse, impacts entire economy > Possible stagflation.
6) Subprime Crisis > Banks tighten lending > Credit Crunch > Central Banks reduce interest rates > Banks pay extreme caution in lending > Not many borrowers > Interest rates remain low > Subprime Crisis gets bigger than expected > Economic fallout > Recession on a global scale > Possible depression like 10-year long Japan.
Many more other possibilities, as the future is uncertain.
2) Subprime Crisis > Mortgage borrowers fail to pay up > CDOs worthless > Balance sheets of financial institutions get impacted (depending on impact, some may close, others face a huge profit write off) > Markets may get shocked > Investors seek liquidity > Pull of from markets > Markets fall, herd behaviour occurs > Market falls further > Investors lose confidence > Govts step in > Stability may occur slow or fast depending on the speed and actions taken by govts.
3) Subprime Crisis > Mortgage borrowers fail to pay up > Foreclosure of homes > Supply of home sales in market outstrip demand > Property prices fall > USA home owners feel less rich > Consumption decreases > USA demand for global goods decreases > Negative impact on export-oriented countries like China, Taiwan and Singapore > Economic slowdown possible on a global scale.
4) Subprime Crisis > Mortgage borrowers fail to pay up > Foreclosure of homes > Supply of home sales in market outstrip demand > Property prices fall > USA home owners feel less rich > Consumption decreases > FED lowers interest rate, get banks to lend out more > Banks change lending patterns from property to other forms > Consumption increases > Solve economic slowdown.
5) Subprime Crisis > Mortgage borrowers fail to pay up > Foreclosure of homes > Supply of home sales in market outstrip demand > Property prices fall > USA home owners feel less rich > Consumption decreases > FED lowers interest rate, get banks to lend out more > Banks change lending patterns from property to other forms > Consumption increases > Subprime Crisis gets worse, impacts entire economy > Possible stagflation.
6) Subprime Crisis > Banks tighten lending > Credit Crunch > Central Banks reduce interest rates > Banks pay extreme caution in lending > Not many borrowers > Interest rates remain low > Subprime Crisis gets bigger than expected > Economic fallout > Recession on a global scale > Possible depression like 10-year long Japan.
Many more other possibilities, as the future is uncertain.
Monday, August 13, 2007
Facing Life With A Sprain Ankle
Inspiration, youth and time. That's what all of us think we have. However, it always takes an incident/accident to make us realise our own mortality.
Never before I stopped to see the world from this different angle. But it has brought before me the realisation of what I take for granted on a daily basis.
The ability for us to control our bodily fuctions is a gift. The abilities to crawl, walk, run and jump are common to those who are fortunate, and they are many fortunate people around.
When you can't walk properly, you'll find that the traffic light changes rapidly. And you start to think how the elderly are able to cross without the fear of their lives.
When you can't walk properly, you'll find that stares from people are common. And you start to think what those people's thoughts are.
When you can't walk properly, you'll find that tasks once every so simple is so difficult to do. And you start to think if you can actually complete those tasks.
Being able to control one's bodily functions, gives one's self-confidence and esteem. Losing any and you'll start to lose both.
Everyday is a challenge, even if it is just to get out from bed. Need to challenge self and increase own's self-confident and esteem is left only through own motivational thoughts.
Appreciate life, appreciate the finer things in life.
Never before I stopped to see the world from this different angle. But it has brought before me the realisation of what I take for granted on a daily basis.
The ability for us to control our bodily fuctions is a gift. The abilities to crawl, walk, run and jump are common to those who are fortunate, and they are many fortunate people around.
When you can't walk properly, you'll find that the traffic light changes rapidly. And you start to think how the elderly are able to cross without the fear of their lives.
When you can't walk properly, you'll find that stares from people are common. And you start to think what those people's thoughts are.
When you can't walk properly, you'll find that tasks once every so simple is so difficult to do. And you start to think if you can actually complete those tasks.
Being able to control one's bodily functions, gives one's self-confidence and esteem. Losing any and you'll start to lose both.
Everyday is a challenge, even if it is just to get out from bed. Need to challenge self and increase own's self-confident and esteem is left only through own motivational thoughts.
Appreciate life, appreciate the finer things in life.
Thursday, June 28, 2007
Does the Past Haunt Us?
Is it possible within a short time span to do something wonderful?
Is it possible that we would value history more than the present and hope through the past obtain a better future?
Is it possible for us to improve our lives without wasting our time?
Interesting is it not?
Just by pondering on these few questions, will our entire existence of how we live haunt us?
A crucial event has happened, and the selected few of us are wondering are we able to do it?
Let's just struggle through our lives and hope for the best outcome even if it may not be Pareto efficient.
Is it possible that we would value history more than the present and hope through the past obtain a better future?
Is it possible for us to improve our lives without wasting our time?
Interesting is it not?
Just by pondering on these few questions, will our entire existence of how we live haunt us?
A crucial event has happened, and the selected few of us are wondering are we able to do it?
Let's just struggle through our lives and hope for the best outcome even if it may not be Pareto efficient.
Wednesday, May 30, 2007
Deal or No Deal
It's a wonderful game show ever to be created on national television.
Why would it be so?
The game show enables viewers to understand human behaviour and internalise their own personality better. The show applies 3 most fundamental concepts of life. Statistics, risk taking and greed.
As the participant chooses his case to keep, statistics plays its part. He would have a 1 out of 26 chances in choosing the top amount. After that, he would need to eliminate the other cases in an excitment driven show, at times heart-wrenching to the participant. I'll not mentioned the process here as there're many websites that explain it clearly.
What the participant hopes for is to have many of the huge money cases left after the rounds of elimination to ensure that the banker offers the participant a good price for the case he kept.
If the banker offers a low price, the participant enacts the concept of risk taking and opens a few more cases to get that offer to a higher level. Just so often, the risk taking concept changes to greed as the participant gets drawn too deep in thoughts of winning the biggest money amount. The participant takes too much risk for too little return on the belief that he is being lucky which eventually causes him to obtain a lower offer from the banker.
Of course there are rational participants who play the game to the best of their statistical minds and walk away with the most money obtainable, even though that money is not the highest case amount but just the offer from the banker.
So what can be used in all of this in life? Plenty!
First, no matter which type of industry you are working in, statistics plays its part. And for those self-employed, do not think statistics have no part to play. Statistics is being acted upon daily, even with the insurance you bought.
Second, risk taking is part of life. We take risk everyday, from crossing the road to taking the train. But what is most applicable on risk taking is this. Parents take the risk of putting their children into reputable schools with the hope they would turn out good. Pupils take the risk of studying subjects with the hope they would obtain the best grades. Teenagers taking the risk of knowing more friends with the hope they would like best friends but may mixed up with the wrong company.
Well, I believe you get to see the picture. No matter what is done in life, there are risks. It is a matter of how much risk you are taking and whether does the return of the risk (measured in terms of utils and not money) is beneficial to you. Some risks are worth taking, and others not.
Lastly, you must always know why you are there. There, in the sense of where you are, the situation you are in, the event you placed yourself. Know what you objective is. Do not follow greed and forget the reason you are there. Greed has many forms, and many of us know its first, which is money. But greed can also be in terms of utils. With many utils gained, many do forget their first objective, their reason of being there and continue to gain those utils as their greed sets in.
As such, know who you are, what your objective is, and do your statistics to obtain the best risk taking possible. Do not let greed rear its ugly head over you.
Why would it be so?
The game show enables viewers to understand human behaviour and internalise their own personality better. The show applies 3 most fundamental concepts of life. Statistics, risk taking and greed.
As the participant chooses his case to keep, statistics plays its part. He would have a 1 out of 26 chances in choosing the top amount. After that, he would need to eliminate the other cases in an excitment driven show, at times heart-wrenching to the participant. I'll not mentioned the process here as there're many websites that explain it clearly.
What the participant hopes for is to have many of the huge money cases left after the rounds of elimination to ensure that the banker offers the participant a good price for the case he kept.
If the banker offers a low price, the participant enacts the concept of risk taking and opens a few more cases to get that offer to a higher level. Just so often, the risk taking concept changes to greed as the participant gets drawn too deep in thoughts of winning the biggest money amount. The participant takes too much risk for too little return on the belief that he is being lucky which eventually causes him to obtain a lower offer from the banker.
Of course there are rational participants who play the game to the best of their statistical minds and walk away with the most money obtainable, even though that money is not the highest case amount but just the offer from the banker.
So what can be used in all of this in life? Plenty!
First, no matter which type of industry you are working in, statistics plays its part. And for those self-employed, do not think statistics have no part to play. Statistics is being acted upon daily, even with the insurance you bought.
Second, risk taking is part of life. We take risk everyday, from crossing the road to taking the train. But what is most applicable on risk taking is this. Parents take the risk of putting their children into reputable schools with the hope they would turn out good. Pupils take the risk of studying subjects with the hope they would obtain the best grades. Teenagers taking the risk of knowing more friends with the hope they would like best friends but may mixed up with the wrong company.
Well, I believe you get to see the picture. No matter what is done in life, there are risks. It is a matter of how much risk you are taking and whether does the return of the risk (measured in terms of utils and not money) is beneficial to you. Some risks are worth taking, and others not.
Lastly, you must always know why you are there. There, in the sense of where you are, the situation you are in, the event you placed yourself. Know what you objective is. Do not follow greed and forget the reason you are there. Greed has many forms, and many of us know its first, which is money. But greed can also be in terms of utils. With many utils gained, many do forget their first objective, their reason of being there and continue to gain those utils as their greed sets in.
As such, know who you are, what your objective is, and do your statistics to obtain the best risk taking possible. Do not let greed rear its ugly head over you.
Tuesday, March 6, 2007
Marginal Utility of jobs
How life changes when an individual starts working. Before starting work, a person would think about getting the dream job, or whatever possible jobs that he/she would not mind working.
It's only when upon getting the job, the person would look back feel it is not really the job that matters. It is the risk and return of the job that is important to him at the end of the day.
So what can be the return of a job? Well, it must be the salary, medical and health benefits and other monetary incentives that the person would get in the job. It must also be the future benefits of the job, like yearly bonuses and salary increments.
And what about the risks? Surely a person working inside an office does not face the risk of having an accident on the road more than a lorry driver. But an office worker does face the risk of stress, hypertension, stroke, heart disease and many more if the office worker does not take care of his health. In this day of age, with all the fuss on flexible working arrangements surely working cannot be bad. There is little truth in this statement for the over-worked lot which is mainly the middle class society.
Then there is the risk that the office worker will lose his job in 5-10 years time due to the mobility of jobs due to labour wage competition from the entire globe, mainly India and China. So does the risk and return commensurate with each other?
Of course they should be, that's what HR is for. Ensuring that workers obtain the best benefits that the company can offer. That's what companies would view. Workers would have a differing opinion on this subject matter.
Workers would tend to measure if their own personal marginal utility is met. If the return and risks of the jobs enable the workers to reach their highest marginal utility, workers would be satisfied with the job.
The problem arises when workers have different marginal utility. What may be one's person food is another person's posion. Thus it is difficult to gauge whether a job is suitable for a person without that person taking the leap and trying the job out.
So end of day, you do need to remember that opinions differ as to whether a job is good or not. Only you will know what you like to do, and what jobs are suitable for you to meet your own personal marginal utility.
It's only when upon getting the job, the person would look back feel it is not really the job that matters. It is the risk and return of the job that is important to him at the end of the day.
So what can be the return of a job? Well, it must be the salary, medical and health benefits and other monetary incentives that the person would get in the job. It must also be the future benefits of the job, like yearly bonuses and salary increments.
And what about the risks? Surely a person working inside an office does not face the risk of having an accident on the road more than a lorry driver. But an office worker does face the risk of stress, hypertension, stroke, heart disease and many more if the office worker does not take care of his health. In this day of age, with all the fuss on flexible working arrangements surely working cannot be bad. There is little truth in this statement for the over-worked lot which is mainly the middle class society.
Then there is the risk that the office worker will lose his job in 5-10 years time due to the mobility of jobs due to labour wage competition from the entire globe, mainly India and China. So does the risk and return commensurate with each other?
Of course they should be, that's what HR is for. Ensuring that workers obtain the best benefits that the company can offer. That's what companies would view. Workers would have a differing opinion on this subject matter.
Workers would tend to measure if their own personal marginal utility is met. If the return and risks of the jobs enable the workers to reach their highest marginal utility, workers would be satisfied with the job.
The problem arises when workers have different marginal utility. What may be one's person food is another person's posion. Thus it is difficult to gauge whether a job is suitable for a person without that person taking the leap and trying the job out.
So end of day, you do need to remember that opinions differ as to whether a job is good or not. Only you will know what you like to do, and what jobs are suitable for you to meet your own personal marginal utility.
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