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HomeBen Bernanke’s “Hail Mary”
Posted by Larry Doyle on August 29th, 2010 11:12 AM |
Hail Mary passes are typically thrown late in a game in an attempt to clutch victory from the jaws of defeat. Ben Bernanke’s statement at the Fed’s Jackson Hole conference this past week is an indication that he is getting ready to throw his “Hail Mary.” The problem that I see, though, is that our ‘game’ is only somewhere in the second quarter.
Have you ever witnessed a football game where one team literally has to scrap its game plan because it finds itself in such a huge hole in the first quarter? That, my friends, is analogous to the state of the U.S. economy going into 2008. While we could debate whether the calls made by our coaching staff in Washington have helped or hurt our recovery, the fact is Ben and his fellow coaches have thrown everything and the kitchen sink at the economy and the results are anything but robust.
For a review of the game to date and the uncertain prognosis going forward, The New York Times’ Peter Goodman provides a wealth of ’sense on cents’ in his fabulous and comprehensive commentary, (more…)
Laurence Kotlikoff: “The U.S. Is Bankrupt”
Posted by Larry Doyle on August 12th, 2010 1:20 PM |
Nobody likes being told they are broke. While the truth may hurt, when you’re broke, you’re broke. Are we as a nation broke? Laurence Kotlikoff believes we are and expresses as much today in a Bloomberg commentary, U.S. Is Bankrupt and We Don’t Even Know It,
Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.
What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.
Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”
But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. (more…)
The Time Bomb of Global Government Debt and Deficits Is Ticking Louder
Posted by Larry Doyle on June 23rd, 2010 12:35 PM |
Living beyond one’s means is a path to long term pain. That path is not in front of us, but rather is upon our nation and many others around the world.
The cost of funding the global government debt and deficits will continue to serve as a drag on our economic future. While financial wizards may believe the debts can be postponed, the simple fact is in the midst of a sluggish economy, global governments will not generate sufficient tax revenues to fund spending programs and the deficits. What does this mean? Lessened spending, increased taxes, and assorted other measures of fiscal austerity.
The Financial Times provides a fabulous review on this topic today in writing, Public Finances: Daunted by Deficits: >>> (more…)
Rogoff: EU Bailout Will Not Stop Defaults
Posted by Larry Doyle on May 19th, 2010 8:57 AM |
Kenneth Rogoff
Shock and awe? The trillion dollar bailout of the debt-ridden nations within the EU was supposed to backstop the Euro and put investors at ease. As of this juncture, the politicians and central bankers are likely the only individuals left shocked and awed.
Rather than writing checks and overpaying for debt, perhaps these politicos and their central banker friends should call on those who have studied global economic and financial crises. Like who? Harvard’s Kenneth Rogoff, who pointedly details that the very structure of the EU-bailout will be insufficient in forestalling defaults within the EU. (more…)
May 15, 2010: Market Week in Review
Posted by Larry Doyle on May 15th, 2010 6:12 AM |
The European Union, the European Central Bank, and the International Monetary Fund (and the Fed, as well, although they don’t want to truly highlight it) provide $960 billion in backstops for the Euro-zone and what happens? The Euro ends the week lower by 3%!! Ladies and gentlemen, that is nothing more than a major “F&%@ Y#&“ on behalf of global investors to the aforementioned central banks and government entities.
Think there is tension in Euroland, and specifically between France and Germany? As The UK-based Telegraph reports, President Nicolas Sarkozy ‘Threatened to Pull France Out of Euro’:
President Nicolas Sarkozy slammed his fist on the table and threatened to pull France out of the euro at a meeting of European leaders deciding Greece’s aid package last Friday, according to Spain’s El Pais newspaper.
The last time there was this kind of tension between these countries, guess who was coming ashore at Normandy? (more…)
Revisiting the Weakest Link
Posted by Larry Doyle on October 7th, 2009 12:44 PM |
Are all regions of the world improving? Will Asia lead the globe to greener pastures and brighter days? Well, if so, the trek through the fields will not be easy and we will encounter many storms along the way.
While Australia’s raising rates yesterday is an indication of an improving economy in that country, as one moves out of Asia into eastern Europe we encounter a decidedly different dynamic. Let’s revisit the ‘weakest link,’ that being Eastern Europe in general and the Baltic nation of Latvia specifically.
I initially addressed the economic weakness in this part of the world last February in writing, “The Weakest Link.” Today, we learn that Latvian Currency Scare Rattles Markets:
The Swedish krona and a range of eastern European currencies have tumbled as Latvia appears to edge closer to devaluing its currency.
In a re-run of the last major devaluation scare, Latvia failed to attract any bids for one of its treasury bill auctions earlier Wednesday. The country’s treasury received no bids for its offer to sell eight million lats ($16.7 million) of paper maturing in April 2010.
The poor auction results are the latest sign of economic stress in the Baltic nation, where the government is struggling to meet budget cuts required by the International Monetary Fund, the European Union and other bilateral lenders in return for aid.
The Swedish krona, linked to Latvia through Sweden’s large banking exposure to the country, tumbled as news of the failed auction emerged. The euro extended earlier gains to reach a peak at SEK10.3670 against the krona.
Meanwhile, Europe’s emerging market currencies, which often suffer from nerves over risk when Latvia’s problems intensify, also fell.
The euro soared to over HUF269 against the highly risk-sensitive Hungarian forint, from under HUF267 at the start of the day. The euro also swept to over PLN4.24 against the Polish zloty, from a low of PLN4.18.
The Turkish lira and, to a lesser degree, the Czech koruna, also weakened. The failed bond auction was “not good news,” said Nigel Rendell, a European emerging markets strategist at RBC Capital Markets in London.
“It has all the makings of the final chapter in the Latvian story,” he added. In credit markets, the cost of insuring Latvian sovereign debt against default continued to climb from recent levels, in a sign that investors are increasingly uncomfortable with the outlook for the country. Regional peers Lithuania and Estonia, which also peg their currencies to the euro, saw their swaps spreads widen.
Still, the debt and currency markets shouldn’t be overly troubled by Latvian devaluation risk, as the threat has been building for some time, and the global financial markets are now much more robust than they were several months ago.
“If they did devalue, there would be a selloff [in eastern European assets], but the impact would not be as severe as it would have been six to nine months ago,” said Mr. Rendell at RBC. “If we had big currency moves, I think people would buy them back,” he added.
Devaluation is also unlikely to catch the Swedish banks off guard. To brace for the potential onslaught of defaulting customers, both Swedbank AB and Skandinaviska Enskilda Banken AB have set up Baltic units to deal with problem loans and seized collateral.
While officials may care to discount the impact of a full blown devaluation of the Latvian currency, the interconnectedness of the global markets has proven to be more of a risk propellant rather than a risk mitigant. How so? The use of derivatives across currency and credit markets has been shown to be as much speculative in nature as pure hedging. In fact, there certainly are market participants who will benefit by a Latvian devaluation.
Can that devaluation, if it does occur, be well contained?
I’ll be watching.
LD
Related Sense on Cents Commentary
Let’s Cross the Pond and Revist the Weakest Link (May 23, 2009)
GDP Projections from IMF, CBO, OMB
Posted by Larry Doyle on July 8th, 2009 12:05 PM |
For those not familiar with the acronyms of the organizations referenced in the title of this post:
IMF: International Monetary Fund
CBO: Congressional Budget Office
OMB: Office of Management and Budget, which operates within the White House
This morning the IMF released their updated Global Economic Prospects.
I will share with you the projected growth rates for the United States against those provided by the CBO and OMB. I will then provide some comparative analysis.
United States
IMF -2.6% (2009) .8% (2010)
CBO -3.0% (2009) 2.9% (2010)
OMB -1.2% (2009) 3.2% (2010)
The figures provided by CBO and OMB were projections from the 1st quarter 2009. As you can see, the White House projections forecasted by the OMB are wildly optimistic both for this year and next relative to the IMF and CBO.
Those projections play directly into projected tax revenues and then, in turn, to the level of the federal deficit. If the IMF’s current projections are anywhere close to being accurate, our deficit will be significantly worse than previously forecast. What does that mean?
HIGHER TAXES ACROSS THE BOARD!!! What happens then?
SLOWER GROWTH GOING FORWARD!!!
In regard to the rest of the globe, the IMF’s projected numbers speak volumes:
China 7.5% (2009) 8.5% (2010)
Euro Area -4.8% (2009) -.3% (2010)
Japan -6.0% (2009) 1.7% (2010)
India 5.4% (2009) 6.5% (2010)
Emerging/Developing 1.5% (2009) 4.7% (2010)
Economies
Advanced Economies -3.8% (2009) .6% (2010)
Global -1.4% (2009) 2.5% (2010)
Bloomberg provides a review of the IMF report, IMF Sees Stronger Global Rebound From ‘09 Recession. I would question the accuracy of Bloomberg’s title. I see a wide divergence between growth prospects in the BRIC nations and emerging markets from those of the advanced economies, especially with Europe and the United States. Bloomberg reports:
Still, risks to the outlook, which have “diminished noticeably,” are still “tilted to the downside,” the fund said, citing a possible downward pressure on asset prices resulting from rising unemployment, pressure on bond yields from concerns on public debt, and emerging economies’ vulnerability to financial stress.
A larger-than-expected drop in risk aversion and stronger demand in emerging economies could offer “some upside risk” that boosts growth, according to the fund.
In a separate report today on the state of the global financial system, the IMF said that while financial markets and confidence in an economic recovery have improved since April, risks remain and policy makers must remain vigilant until a sustained recovery is under way. Credit risks are high, bank lending to the private sector is slowing and the recovery so far has been dependent primarily on public funds, the fund said in an update to its Global Financial Stability Report.
Can the emerging economies of the world pull the developed countries out of the ditch? Will the global economies decouple? Is there any surprise why countries are pursuing protectionist measures?
In regard to the United States, President Obama may want to have the members of his economic team, including Secretary Geithner, Larry Summers, and Peter Orszag, call John Lipsky at the IMF and ask him what he sees.
Risks remain extraordinarily high.
LD
“IMF Puts Financial Losses at $4.1 Trillion”
Posted by Larry Doyle on April 21st, 2009 9:57 AM |
The FT provides in depth analysis as IMF Puts Financial Losses at $4.1 Trillion. The IMF had forecast these losses earlier this month. The actual report is no better than the initial warning. The simple fact is the world is awash in excessive debt. This debt can be restructured, defaulted, and/or devalued. Each of these respective approaches will take time and money. While the IMF has a checkered reputation, I had the good fortune of working at JP Morgan with John Lipsky, current First Deputy Managing Director at the IMF, and hold him in very high regard. Lipsky is often the public face to the markets for the IMF given his reputation.
The FT report is fairly comprehensive, although I still question the relative amount of losses outside of the U.S., Europe, and Japan. Is there anyplace in the world to truly hide in the face of these losses? Can China single-handedly be the economic engine for the global economy? The FT does a great service in shedding light on this report. (more…)
