Tuesday, May 26, 2009

The leverage of capitalism….

“The essence of capitalism is capitalizing—bringing forward the future value of cash to the present so that society can grow more quickly taking risks. It goes back to the Dutchmen in the 16th century, sitting in their coffeehouses in Amsterdam and Leiden, loaning each other money for a guaranteed return. Someone said, “I’ll give you a little higher return if you give me a piece of the action” – and equity was invented. That had the effect of bringing forward, into real cash today, the net present value of future earnings. That levered society and allowed it to grow at a much higher rate that it would otherwise have.”

Richard Foster, “Creative destruction and financial crisis: An interview with Richard Foster (co-author of Creative Destruction), December 2008, McKinsey Quarterly

Thanks David Haarmeyer

Monday, May 25, 2009

Delicious irony as Fiji deregulates lawyers

It would seem utterly unobjectionable that a regulatory reform should:

- stop a local law society being the body which licenses lawyers and instead reserves that role to the government,

- stop the prohibition of non members of the local law club being able to practice the law, and,

- stop the practice whereby the local law club was the body which heard complaints against its own members replacing that process with a government appointed commission.

Many countries would dearly love to be able to clean out lawyers’ trade unions and bolster competition through introducing this minimum of level playing fields. But when Fiji does it, the outcry from the lawyers (obviously to be expected just as taxi drivers railed against deregulation) is joined by others claiming a lack of “democracy”.

One hesitates of course to endorse the Fijian method but it is a good deal more awkward to object to the goal. It perhaps says plenty about such closed shops as law societies that matters have to get to the Fijian extreme in order to remove the privilege enjoyed by this group when looking after its own.

Sunday, May 24, 2009

Great news from Bruce Yandle (Bootleggers and Baptists fame – Clemson Univ

The mid‐year economy shows multiple signs of reaching the bottom of the Great Recession. Saying that a bottom is found does not say that recovery is underway. All indicators surveyed in this report suggest that the start of recovery is several months out, perhaps as far away as early 2010.

The impact of the various policy actions taken in the name of stabilizing financial markets and stimulating the economy are targeting large firms, those called too big to fail, state and county government activities, and the healthcare sector.

Along with bundles of assistance come additional constraints. Those sectors receiving the most assistance will become less agile. While members of the palace guard, they will form a new economic sector, one that has stiff joints, hardening of the arteries, and less ability to respond quickly to opportunity. Those unblessed firms and organizations that are small enough to fail will gain. They will be relatively more active and competitive.
In short, the American Recovery and Reinvestment Act provides immense opportunity for entrepreneurs to move forward.

Tuesday, May 19, 2009

Why is this so tough for so many to see?????

You cannot help the poor by destroying the rich. 
You cannot strengthen the weak by weakening the strong. 
You cannot bring about prosperity by discouraging thrift. 
You cannot lift the wage earner up by pulling the wage payer down. 
You cannot further the brotherhood of man by inciting class hatred. 
You cannot build character and courage by taking away people's initiative and independence. 
You cannot help people permanently by doing for them, what they could and should do for themselves. 
.....Abraham Lincoln

Monday, May 11, 2009

Yes Mandy

Some fund managers are critical of bank aggression in setting pricing.

Craig Tyson, investment manager at ING, says banks are effectively gouging to restore their own margins.

The OCR has dropped from above 8% to 2.5% while credit spreads have ballooned from 50 basis points to as high as 350, he says.

Could it be that the spread represents a closer to true reflection of risk while the OCR represents political aspirations?

Saturday, May 9, 2009

The high cost of sunk costs….

These numbers are numbing… the more so as people seem determined to tear up good money after bad in a continued refusal to accept that what is good for GM is not (and never has been) good for America…. [excerpt below from NZ Herald]

General Motors lost US$6 billion ($10.1 billion) in the first quarter and its revenue fell by nearly half as car buyers worldwide steered clear of showrooms out of fear that the wounded giant may go bankrupt and stop honouring its warranties.

The Detroit-based company also said it spent US$10.2 billion more cash than it took in from January through March, mainly because revenue dropped by a staggering US$20 billion, or 47 per cent.

Chief financial officer Ray Young said GM expects to need another US$2.6 billion in government loans this month and US$9 billion during the rest of the year.

The largest US-based carmaker is living on US$15.4 billion in federal loans and faces a June 1 Government deadline to finish a restructuring plan or enter Chapter 11 bankruptcy protection.

Young said talk of bankruptcy is scaring some consumers away from buying GM vehicles. Chrysler filed for bankruptcy protection last week.

Tuesday, May 5, 2009

A dull little misunderstanding

Today scrapping about the apparently rapacious Australian banks NZ offshoots (most of the NZ banking sector) charging more for home loans than their Aus counterparts in spite of the Australian OCR being higher than ours….. i.e. how to miss completely the ideas that:

  • risk in Australia is different to risk in N.Z
  • much lending is done through wholesale markets lending into the respective countries (same point in the end, and,
  • the mix of fixed versus floating creates quite different reinvestment and funding risks

Instead commentators who should know better pushed along by a media bouncing off the walls through  swine flu driven highs grounded in the “law of micro calamity” figure its cross Tasman greed.

Typically our failure to recognise risk as a fundamental life force continues.

Monday, May 4, 2009

Terribly relevant right now…..

I have pointed out before that a key issue in the current Cassandra Disease Syndrome that much of the economic impact of  the phenomena (equally applicable to Y2K,  various flues etc) arises from media and politician driven obsessive attention seeking rubbish and resulting reactions – not the disease or threat itself…. the following is a good illustration  developed during the SARS  polemic.

The cost of SARS
What a health panic can do to the global economy.

by Daniel Ben-Ami

Experts have predicted huge economic losses resulting from SARS - the World Bank, for example, forecast $15billion (£9.4billion) in Asia alone.

But while there may be billions of pounds of economic costs associated with SARS, the greatest part of these losses will be the result of an irrational panic rather than the disease itself.

The public health costs of dealing with SARS are probably minimal. As Michael Fitzpatrick has previously argued on spiked, the medical impact of SARS is being hugely exaggerated (see Apocalypse from now on). The losses caused by the public panic, which have already led to a decrease in tourism and could hit production, are a different matter.

Perhaps the clearest example of irrational panic is the widespread avoidance of Chinese restaurants and Chinatowns in the USA. According to the latest figures from the World Health Organisation (WHO), there have so far been 65 cases of SARS in America, and no deaths (1). David Baltimore, a Nobel prize-winning virologist and the president of the California Institute of Technology, argues that: 'The de facto boycott of Chinese restaurants across America is the most alarming overreaction, since there's absolutely no reason to think that SARS can be transmitted through food, or by people who happen to be Chinese.' (2)

Worldwide, industries such as airlines and hotels are already suffering from a fear of travel - and this is particularly the case in America. Less tangible but probably more important is the added edge the SARS panic gives to the mood of caution in business. Business commitments and investment decisions, which businesses have avoided in recent years, are likely to be postponed yet again as a result of worry about SARS.

But it is Asia - the only area of the world economy that is enjoying reasonably strong economic growth - that is suffering the most serious losses from the SARS panic.

Much of the discussion about the impact of SARS in Asia has focused on Hong Kong, which accounts for many SARS casualties, and other tourist destinations such as Thailand, Malaysia and Singapore. Commentators have noted the impact on these countries' entertainment, tourism and retail sectors - as people are travelling less in the region, restaurants are often empty and many consumers are avoiding shops.

The cancellation of trade fairs has hit Chinese manufacturers

But potentially the most significant economic damage could be done within mainland China. It is particularly unfortunate that the SARS virus started in Guangdong - the southern province of China that is next to Hong Kong and at the heart of the Chinese manufacturing miracle of the past two decades.

While the world economy has grown slowly in recent years the Chinese economy has surged. As a result, China now produces, among other things, over half of the world's cameras, 30 percent of air conditioners and televisions, 25 percent of washing machines and nearly 20 percent of fridges (3). This surge in production enabled China to overtake Britain in 2002 as the world's sixth largest trading nation (4).

This growth is not only providing the world with a huge amount of cheap manufactured goods; it is also enabling China to develop. A nation of about 1.3billion people has the possibility of being lifted out of poverty by concerted economic growth. China's growth is also helping to bolster the East Asian region, with other countries either exporting to China or investing in the mainland.

The externally oriented character of China's growth surge makes it particularly vulnerable to an over-anxious reaction by its overseas business partners. A combination of strong investment from abroad and exports of cheap manufactured goods to the rest of the world has created an economic boom. China has taken over from America as the largest recipient of foreign direct investment, with over $50billion in inflows in 2002. And the investment bank Morgan Stanley estimates that over three-quarters of China's GDP growth in 2002 was the result of exports (5).

The SARS panic threatens to undermine this growth. Foreign investors are nervous about visiting China to invest more money. And the postponement or cancellation of trade fairs has hit Chinese manufacturers, particularly medium and smaller sized exporters, which depend on fairs to sell their goods. Direct sales visits, which are also important to Chinese exporters, have suffered too. If the panic gets worse there is a danger of factory shutdowns and worker absenteeism.

As a result of SARS, the economic growth which could potentially lift many hundreds of millions of people out of poverty is under threat. But it is the SARS panic, much more than the disease, that threatens to blight so many lives of the poor in Asia.

Friday, May 1, 2009

Niall Ferguson: Economists In A State Of Massive Denial

Joe Weisenthal|Mar. 3, 2009, 8:09 AM|

Niall Ferguson, an expert in economic history, has a devastating piece in The Australian. Mainstream economists, who have so far failed in understanding or appreciating every aspect of this crisis, deserve every ounce of the scorn he heaps upon them:

IT began as a sub-prime surprise, then became a credit crunch and is now a global financial crisis. At last month's World Economic Forum at Davos there was much finger-pointing - Russia and China blamed the US, everyone blamed the bankers, the bankers blamed everyone - but little in the way of forward-looking ideas. From where I was sitting, most attendees were still stuck in the Great Repression: deeply anxious, but fundamentally in denial about the nature and magnitude of the problem.

There were the people calling the bottom of the recession by the middle of this year. There were the people claiming India and China would be the engines of recovery. There were the people more worried about inflation than deflation. And, above all, there were the people trusting John Maynard Keynes would save us. I heard almost no criticism of the $US800 billion ($1.2trillion) stimulus package then making its way through Congress (and mutating as it went into something more like a pork barrel). The general assumption seemed to be that practically any kind of government expenditure would be beneficial, provided it was financed by a big deficit.

There is something desperate about the way people on both sides of the Atlantic are clinging to their dog-eared copies of Keynes's General Theory. Uneasily aware that their discipline almost entirely failed to anticipate the crisis, economists seem to be regressing to macro-economic childhood, clutching the multiplier like an old teddy bear. Read the whole thing

He goes onto argue the same thing we've been saying: That the problem is too much leverage and too much public debt and that it hardly makes sense to think that the solution requires more leverage and more debt. Everything that Obama has done -- and that guys like Krugman love so much -- assumes the problem is that we're not spending enough, and if that's what they judge the problem to be, it's hard to imagine the solutions are going to work out. Really, read the whole thing.