Saturday, February 27, 2010

Setting goals and paying the price

"First, you decide what you want specifically; and second, you decide if you're willing to pay the price to make it happen, and then pay that price." - Nelson Bunker Hunt, Texas Oil Billionaire

from the Kirk Report

This is a clear comment on risk reward in the labor market. You want to reach a goal and you have to pay a price. Or, there is limited time and resources available for personal development so you have to make allocation decisions.

Wednesday, February 24, 2010

Capital controls as a policy solution back in vogue

The Washington consensus espoused by the US and IMF focused on free trade and open capital markets as the keys to a successful global economy. There was no doubt about what countries should do. The use of capital controls to limited short-term movements was viewed as a step backwards. This doe snot mean that some countries did not use capital controls effectively, but the overall objective was for countries to reach a better financial state and that included markets free of capital controls.

The IMF staff position note Capital Inflows: the Role of Controls SPN 10/04 now takes a difference view that capital controls are justified as part of a policy toolkit. The objective of controlling exchange rates and eliminating savings imbalances may dominate the role of open financial markets.
The premise for the work is that countries that have capital controls were less susceptible to changes in GDP than those that had open capital markets. It may seem obvious that if you limit flows there will be less reaction. The point is that the limited flows would have reduced overall growth before the crisis. (Of course, there is the point that governments should try and minimize crises, then capital controls would not be necessary.)

We have learned that an economy can become fragile when there is a poor mix of external liabilities. The authors also argue that external liabilities get longer when there are capital controls. Again, this should be expected. If you cannot take your money out in the short-run, you will not lend in the short-run. Similarly, if there is a lower stock of debt, less leverage, there will be less of an impact of any GDP shock.

The normal adjustment in an open market would be to allow the exchange rate to appreciate when capital flows start to become excessive. This may lead to overshooting which is viewed as potentially being worse than the choice of capital controls. It is hard to believe that a good policy would be to control capital because a rabid herd of speculators cannot be controlled.

The authors clearly state that capital controls should only be used in special situation bu this part of the paper will probably be missed. The authors admit that the jury is still out whether capital controls have worked in practice. Their view is that capitla controls may be choice no different than exchange rate appreciation or reserve accumultion.

The impact of change in IMF policy is far-reaching. Not in the short-run, but longer-term, capital controls will place more frictions or sand in the engine of commerce which will reduce global financial diversification. A short-term fix as an alternative to solving deeper problems like credible monetary policy seems short-sighted. Delinking capital flows as a global solution for a lack of policy coordination will not be an effective solution to any imbalance problems.

Tuesday, February 23, 2010

Germany - the other current account surplus country

The talk has always been about the China being the big current account surplus, but Germany the number two exporter is also running a large current account surplus. This has been the stealth current account deficit because much of it is with other countries in Europe. The PIGS are running current account deficits with Germany, so we are having a microcosm of the US and China savings problem.

The PIGS are running excess investment over savings through their government deficits which mean that the difference has to be financed from savings outside the country. This is equivalent to saying that imports or consumption exceeds income generated from exports. The funds are coming form surplus countries and their export engine. Germany.

Similar to the China - US issue, the rate of exchange between Germany and Greece is fixed. This is what happens when there is optimal currency area like the euro. While there is a discussion about appreciation of the yuan to "solve" the problem in Chimerica, there is no such option available to the EU.

Similar to China, Germany does not want to be pushed into a change and they resent the "financing" of Greek debt, or even the believe that they are responsible for the problem. The trade engine has been a substitute for domestic growth similar to China. The trade surplus was 5% of GDP last year for Germany. The savings or trade imbalance across the EU is the dirty secret of international finance.

Since the EUR is a construct for all of the EU, Germany has the advantage of a cheap currency. Yes, the EUR was overvalued last year, but the DM would have been higher given the economics of Germany.

The choices for the EMU are limited. One option is that real wages in Greece fall along with a cut in government spending to restore the trade - savings imbalance. The other alternative is to have Germany share the burden. A bail-out and write-off of debt would be a simple but not very palatable choice. Someone has to take the pain. Someone has to pick their poison. As stated by Peterson Institute's Posen, "We're past the point where constructive ambiguity is constructive."

Chinese real estate fears do not seem to matter

The Shanghai index is down about 8.99% compared with the SPX down around 184 bps, Nikkei down 184 bps and the Euro Stoxx down 791 bps YTD. The major business news magazines have all starting picking up the story of a Chinese real estate being "1,000 Dubai's", yet the impact on the overall Chinese financial market still seems muted. The market is focused on Greece yet this bubble may be much larger.

Can investors hold two crisis scenarios in their mind at the same time?

IMF's Blanchard and higher inflation

Olivier Blanchard is a leading MIT macroeconomics economist who is now the chief economist for the IMF. In a recent policy position piece for the IMF, Rethinking Macroeconomic Policy SPN 10/03, Blanchard reviewed the current state of macroeconomics discussing the pros and cons of monetary, fiscal and regulatory policy on the objective of reaching full employment. While much of what he stated is well accepted as conventional wisdom. There is one area that causes a raised eyebrow.

He suggested that banks should raise their inflation targets from 2 to 4% as one idea to get the global economy going again both for today and over the longer-run. By raising the inflation targets, the chance of a zero interest rate problem is reduced. This was suggested as one of the main problems with the global monetary environment.

This simple policy will force inflation expectations higher through more aggressive monetary policy. Raising inflationary expectations will force money out of cash accounts and into the lending markets at higher rates. The end of deflation and liquidity traps will lead to more current activity and reduce the pressure on lenders. Of course, creditors would be hurt. Government debt would be educed in nominal terms which offsets some of the deficit problem. Good idea?

Central banks have spent 20 years trying to control the inflation excesses of the the later 70's and early 80's. They were successful by increasing their creditability through forcing targets upon themselves. This has been good for many economies and have reduced the cost of inflation even at low levels.

The objective of inflation targets is not to eliminate inflation or allow for deflation but to have a controlled low volatility environment. A new policy target would change the equilibrium between central bank policy and inflation expectations to a higher rate.

Unfortunately, there would be costs with change the equilibrium inflation target. Risk premiums would increase and it is not clear that inflation could be contained at 4%. There is the underlying assumption that we can handle an extra 2% of inflation. The cost of 4% inflation is low, or from the policy perspective the cost of inflation is low relative to the cost of being constrained by an zero nominal rate. Ask that to those who are bond holders or on fixed pensions. I agree this will solve constraints on policy-makers, but I am having a hard time finding where the brilliance is in the provocative idea from an investors point of view.

Saturday, February 20, 2010

Rich as an Argentine - what about the US?

"Rich as an Argentine" That was a common epithat in Europe before WWI, a time when Agentina was viewed by the public, and by investors as a land of opportunity. Quote in Paul Krugman's Depression Economics.

Phrasing like that always scare me. It tells us that no economy is predestined for success. Failure is an option. You can get it wrong. You can go into a policy spiral that will lead to failure. I sound like a dismal economist; however, it is necessary to think in extreme scenarios in order to take these issues seriously.

The conflict between Mellon and Keynesian economics -

"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate .. purge the rotttenness out of the system" Andrew Mellon

The conflict in Keynesian economics is how much failure should be allowed in the market system. Most Keynesian are asking for more stimulus and deficit financing. The government should be used to provide a strong macroeconomic safety net. This will provide the downside protection that will allow for a take-off in the economy. If the economy is not performing well this year, the government needs to provide more help to solve the problem.

The alternative argument is the one articulated by Mellon in the Hoover administration during the Great Depression. Excesses have to be purged to allow for liquidation that will cleanse the financial and economic system. Do not use government to stop this process. Balance the budget or cut the government excesses because we are prolonging the process.

Neither side is right. There as to be a compromise that allows for failure but provides temporary support during the transition. Unfortunately, there is little talk of funding a compromise.

Friday, February 19, 2010

Discount rate change - not a big deal?

Th Fed raised the discount rate by 25 bps to 75 bps. Some are saying that this signifies a change in policy. The exit has started. The signal is clear. Still this action has to be placed in context. The discount rate borrowings have been dropping and now only represent $87 billion. This was after the borrowings hit $400 billion in October 2008. This is a normalization of monetary policy but will not have a strong effect on the overall Fed balance sheet or the monetary base. The monetary base is at $2 trillion so even if all discount borrowings disappeared the impact would only be 4%. There are more than enough excess reserves that banks should be able to access funds from other banks at a cheaper price. The discount rate is now a penalty rate which is usually what normal Fed behavior has been.

The increase in 25 bps will mean an increase cost to those borrowing money of about $217 million per year. One will expect that the borrowings will decline even more in the coming weeks. What is an issue is the composition of the borrowers for the $87 billion. This is not clear whether these borrowers have access to other funds.

Overall, this action has a strong announcement effect that the Fed is serious about normalizing monetary policy. However, the key move is what will happen with the mortgage purchase program which ends this quarter.

Tuesday, February 16, 2010

Shadow banking and shrinking credit

The credit channels in the loan market have changed over the last decade. Prior to the crisis the ascent of the shadow banks system reduced the importance of traditional lending lines. The ABS commercial paper market was used to securitize loans that were usually held by commercial banks. This market fueled the CBO and sub-prime mortgage growth but it also served as a way to bundle traditional loans. The supply of credit was not coming from bank depositors but through money market funds and other non-banking sources. Bank regulators had less control over the credit system. However, since 2007, there has been a significant shrinking of this system. It may never come back.

Where did the money go? It went back to banks as deposits. It also went to the Treasury bill market. Private credit has been replaced with government credit demand. This demand has still been met by the market through a shifting of portfolios to Treasuries. Now since the crisis the amount in money funds has actually dropped but it has not moved to private credit but toward Treasury bonds with longer term maturities. The reach for yield has fueled the Treasury market and has kept the government deficit under control.

The non-financial and bank commercial paper markets have stabilized but only back to levels similar to 2004. This suggests that the demand for credit is still weak.

Monday, February 15, 2010

TIPS market not signaling inflation

If real yields are up, do you want to own TIPS? This has been a difficult time to determine what should be done in the TIPS market. The story for TIPS was that the QE would push up expected inflation which would make these bonds attractive relative to nominal bonds. The implied inflation rate in TIPS versus nominal bonds is still very low, but there has been a movement up in real rates which makes these bonds less attractive. The short-term story for holding TIPS is negative when there are large output gaps but why are real rates starting to inch up. This could be normalization of credit markets or a funding problem. Hard to say there is strong value in this market.

A steep yield cuve - now what?

Yield curves are very steep given the very loose monetary policy. The market has actually seen bear steepeners because it is the back-end that has risen especially in 2009. The reason has been a combination of higher expected inflation and move to positive real rates. Note that real rates on the front-end of the curve have been negative since we have not had the strong deflation that was expected. On the back-end of the curve, there real rates have been positive with low but positive inflation. The real rate have moved positive under the expectation that funding costs will be positive.

What could be next is the bear flattener which usually happens two quarters before actual Fed tightening activity. Longer-term money market rates will start to move higher while long rates are anchored. This will cause the curve to flatten. Under this scenario, the expectation for the timing of a Fed policy change is the main driver for curve changes. This is fairly normal but the amount of uncertainty concerning the "when" is greater than usual. Most put the change in late 2010. The Fed itself is saying the same thing. This means that the curve may actually get steeper if funding problems increase.

Contrarians and equity investing

Generally contrarians do well at turning points in the macro economy. That is, buying losers or selling winners from some past period. The contrarian approach did well when the internet bubble burst, the bear market ended in 2003, and the bear market ended in 2009. All other times it is better to follow momentum in stocks. As the economy grows stocks will perform better. We will not discuss the reason for turning points but the relevant take-away is that contrarian strategies have to be focused on a change in the status quo.

So what does it mean to be a contrarian in 2010? The financial sector did well and stocks in general did well. Should you avoid banks and equities in general? That would assume that growth prospects for the US economy are actually going to be lower than the most recent numbers. In the face of strong government stimulus, it is not clear that being a contrarian is a sure bet.

One reason for being a contrarian is based on the relationship between operating leverage, the business cycle and profits which are all closely tied. When the economy turns down and there is a fall in top line growth, there will be a squeeze in profit margins. This is especially true if there is a shock to top line revenues such as a the create crisis. Sales will fall faster than expected and there will be inventory build. Margins fall because the operating leverage does not change with decline in sales.

Now in this case many companies reacted quickly to the decline in sales with lay-offs. The objective was to cut operating expenses as quickly as possible given the size of sales decline. the expected severity of the recession caused a quick reaction. The cost structure was able to adjust quickly in 2009 which lead to better than expected profits. Analysts did not expect that companies would be able to control costs as quickly as they did. Now the question is whether companies will be able to maintain margins if there is a turn up in the business cycle. If there is a strong recovery, margins will increase quickly.

The success for 2010 in equities may have more to do with how companies control operating margins as opposed to overall sales growth. The contrarian story may be based on the company cost control and not sales growth estimates.

Interesting stats on inflation - but where is it going?

Hat tip to Rebecca Wilder of RGE for providing some interesting facts on inflation:

In 1982 there were 27 countries with inflation above 20%
In 2008, there were18 countries with inflation above 20%
In 2011, the IMF estimates there will be only one country Venezuela with 20+% inflation.

This shows the great progress we made in inflation in the last thirty years, but the issue is always where are we going not where have we been. If Greece had its own currency, would we be looking at a high inflation QE policy with possible devaluation?

What is the point of all of the liquidity? Central banks want to get inflation higher. Certainly not 20% but the objective is o bed the inflation curve upward. Once that is done, can they stop the process? I think not.

US state problem as bad as Greece or worse?

You Can’t Put Lipstick on These PIGS:

California Budget gap (as a % of the total budget): 22% Gap: $22.2 billion

New York Budget gap (as a % of the total budget): 9.8% Gap: $5.5 billion

Florida Budget gap (as a % of the total budget): 19.9% Gap: $5.1 billion

New Jersey Budget gap (as a % of the total budget): 7.7% Gap: $2.5 billion

Arizona Budget gap (as a % of the total budget): 19.9% Gap: $2 billion

Nevada Budget gap (as a % of the total budget): 16% Gap: $1.2 billion

All data for fiscal year 2008 Source Businessweek

These gaps are large and will have to be solved in the next year. Does this involve a bail-out? This is the same problem as the EU dealing with Greece. Of course, the Federal government can reverse flows and reduce regulation to help with some of the problem; however, the real problem is that the states will place a drag on fiscal stimulus. There is counter-cyclical fiscal policy at the state level.

Friday, February 12, 2010

Themes for the week

China risk on/off trade - Why focus on China?

China is the epicenter for risk-on/off trading. The reserve requirements are increased and slowdown is expected. Inflation is announced and there is relive that prices are not rising too fast. There is the expectation that China, the world's third largest economy, is taking the place of the US as a global growth catalyst. China now has become the world's largest exporter ahead of Germany and is poised to become the second largest economy replacing Japan this year.

We know that China has been a great exporter. They have been able to grow by selling the rest of the world goods. This makes China dependent on growth elsewhere in the globe, but imports are also growing fast which is good for global growth. The trade balance this month actually declined because imports, YOY, were up 85% while exports only increased 21%. This is the third straight month of import increases. Some of this is an artifact of the Lunar New Year. Nevertheless, the jump in Japanese machine tool exports is suggestive of the gains in trade from higher China growth.

Focus on Chinese economic numbers is essential in the coming quarters.

Greece - Can it get their house in order?

So where is the plan? Sounds like the plan is to wait and see how much budget cutting is done and whether the debt can be financed later this Spring. The EU filled the void with the announcement of support, but the uncertainty doe snot end the problem. Hard to see say how low the EUR will go. The negative sentiment toward the dollar has now switched to the EUR.

The real issue is whether we are going to have another EU banking crisis. Large EU members do not care about Greece, bu they do care about the quality of their banks. A bank problem will change the focus of the ECB which will put further pressure on the EUR.

Treasury auction - Have investors had enough?

A new focus on auction numbers is essential in the coming months. The link between debt and interest rates has never been well founded, but we have never had the absolute level of government deficits before. The cover ratios and price ranges at auction have not been too bad, but every auction has created more anxiety given the competition for funds is so acute.

What is saving the US is the demand for safe risk-free assets. Treasuries are still viewed as a safe asset so there is strong demand from foreign sources. The domestic demand is also strong given the weak private credit demand, but both these sources seem to be sensitive to changes in the news environment.

The Fed - Following an exit strategy?

Can an exit strategy be followed in the mortgage market? Unlikely. There is no private demand at these spread levels. Can the CMBS ABS market be successful without Fed support. Again, unlikely. Can the balance sheet be reduced? The plans are being put in place but any near-term action does not seem likely without some better economic numbers. Watch the Fed action on mortgages in the next 30 days as a key clue.

What evidence do you need of a Chinese real estate bubble?

If there is not a bubble in Chinese real estate, where is there a better example? We have all of the conditions necessary for a bubble. Excessive credit. Lax regulation and lending standards for banks and the real estate market. (Yes, you can have lax regulation in a command economy.) Strong price increases which can lead to a positive feedback loop. Real estate collateral used to back further loans.

The Chinese government sees it, the market sees it, but the issue is how can this bubble be stopped. Cutting credit is one solution. We are seeing reserve requirements go up, but credit restrictions are blunt instrument for sector bubbles. Also, if the bubble is pricked too quickly, the feedback loop will work in reverse which will led to a collapse in the economy. Allowing for more flexible exchange rates may seem like a solution to cut the monetary link with the US, but this will affect the export growth engine. If the adjustment is not large enough, there will be further fuel for speculation in China from foreign sources.

This is a problem that will end badly. We have seen this real estate problem before, the US, Ireland, the Scandis, UK, Spain, and Japan to name a few.

Can Greece do it? Unlikely - muddle continues

Greece is about to embark on an economic path that few others have taken, an attempt at reducing its deficit by 4ppts per annum for 3 years with a starting output gap bigger than -7%. The last time Greece tried anything like this was 1990 when the output gap was positive, and it took 9 years to get the deficit back to 3%. -- Kevin Gaynor RBS

The Greek government plans to reduce the deficits fro m 12.7% to 8.7% of GDP this year. Greek economic minister, George Papaconstantinou, called his nation "a terrible mess".

There have been strikes by government employees since the planned for budget cuts has been announced. This will continue. It will be hard to make these cuts in the face of citizen upheaval.

Now we have problems with derivatives swaps that have not been clearly included in the budget. Eurostat didn't receive the information, wasn't aware of the swaps, and does not have confidence in the budget numbers. They were used to make deb limits looks lower. This will turn people against banks. The song that "banks and derivatives are the evil" will start which will further ignite problems. We are also hearing that the spreads on Greek debt are too high and an overreaction from bond vigilantes.

So what is the EU plan for Greece? It is unclear. There is communication of support but no concrete plan.

Wednesday, February 10, 2010

Greece problem does not have easy solutions

The politics are very difficult. Even if this problem is solved there are major political problems in the ability o the EU to respond to crisis.

Consider the European solution to the lack of an executive. Now it has three presidents: Van Rompuy, the president of the European Council (who is talking about "an economic government and greater control of national budgets), Zapatero, Spain's Premier who is also the rotating president of the EU and Barroso the President of the European Commission.

- Marc Chandler BBH

The most important point on why the EU will provide some help. They need to save the banks.

The real driver here is not that the private debt problem is becoming a sovereign debt problem, but the opposite--the sovereign debt problem is threatening to renew the private sector banking crisis. Consider the BIS data that is cited in press reports today: German bank exposure to Greece is 43 bln euros, to Protugal 47 bln euros, to Ireland 193 bln euros and to Spain 240 bln euros.

Greece needs to raise around €53 billion this year, a quarter of which (€13 billion) is simply to service the debt, i.e. interest payments.

- Marc Chandler BBH

The Stability and Growth Pact, which requires members to limit budget deficits to 3% of GDP and 60% debt to GDP, barring extenuating circumstances. The EU have been reluctant to enforce the agreement and now we are seeing the impact.

Fed change in policy? Raising discount rate

Bernanke --- "Before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate. These changes, like the closure of a number of lending facilities earlier this month, should be viewed as further normalization of the Federal Reserve's lending facilities, in light of the improving conditions in financial markets; they are not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy..."

This will normalize monetary policy. The question is whether it will be meaningful and of course, when will it happen. The symbolism will be strong. The actual effect will be small.

The discount rate is usually higher than the Fed funds rate and has been used as a rate or place for last resort bank borrowing. During the crisis there was some stigma with using the discount rate window. It was viewed that discount borrowing meant that you could not get the money in the Fed funds market. This may not be true, but it was the perception. Raising the rate will not change the fact that we are awash in excess reserves that can be borrowed at close to zero. Raising the discount rate will force more borrowing into the Fed funds market which would be more normal.

There is no reason why the discount rate should not be raised. It could happen soon which means within the next two quarters.


From Chris Foti at BNY ---- great Bloomberg article by David Reilly yesterday talking about the possibility US losing its AAA rating. He is trying to coin a new acronym that I like… DOLTS…. Dangerously Over Levered Triple AAA Superpowers… Only one the good old US of A…

I have been reading some work form Barclays Bank which suggests that the impact of the crisis on the deficit is small relative to demographics. The aging of the G3 will have a greater impact on debt financing problems.

Tuesday, February 9, 2010

More on Greece - still unknown

ECB president Trichet leaves for Europe from the RBA 50th anniversary celebration and the market is abuzz that a Greek bail-out is in the works. Olli Rehm the new European economic affairs commissioner offer "support in the broad sense of the word". Looks like we may have a bail-out package. Many are also bailing on the long dollar trade. While volatile, it could be a little early given we do not know what the form of any support will be for Greece.

Good news from Japan and EU

Machine tool orders explode on the upside, 192% YOY. Of course this is after a horrible beginning in 2009. Hitachi construction quarterly shows more modest increases of 1% QOQ but large changes in the Mideast and China, respectively 66.2% and 90.1% Komatsu showed increases of 132% for China yoy and 13.3% QOQ. German exports were up 3% for January.

2009 trade decline of 13% was a first contraction since 1982 and the greatest contraction in global trade since WWII. It was a bad year for trade but there are signs of a rebound; however, all numbers are coming off of low bases. The trade bottom was hit in the second quarter and has shown a V-shaped recovery although the end of year trade numbers were still below fourth quarter in 2008.

One measure of contagion - more groupings of risky countries

The oft amusing Jim Bianco suggests that instead of using the phrases PIIGS, we give these acronyms a try:

* DEBT – Dubai EU Brazil Turkey
* SICK – Spain Iceland Columbia Kazakhstan
* DUMP – Dubai Ukraine Mexico Portugal
* PUKE – Portugal UK EU
* STUPID – Spain Turkey UK Portugal Italy Dubai

It is an amazing collection of names of countries with debt problems.Contagion is likely because there are so many countries that are on the brink. The question is what will be the safe assets in this environment.

PIIGS current account problem

We have been focusing on the deficit problem and have argued that this sovereign crisis is different because there is not an independent currency. There cannot be a devaluation like we usually see, although we are seeing capital flight out of the euro. Nevertheless, a look a the current account for each of the PIIGS shows significant deficits.

The message is clear investments is outstripping savings. There will have to be a cutback in the domestic spending to return to an equilibrium level that is sustainable. The terms of trade cannot change on a country specific basis in the EU except if there is a change in productivity. A significant portion of these current account deficits is with other EU countries which means that the debt problem is intertwined with the rest of the EU. Unfortunately, the prescription for solving the problem follows the classic austerity programs usually recommended by the IMF during a credit crisis.

Monday, February 8, 2010

Never lose AAA-rating on Treasury debt? Strong words from Treasury

Treasury Secretary Timothy F. Geithner said the U.S. is in no danger of losing its Aaa debt rating even though the Obama administration has predicted a $1.6 trillion budget deficit in 2010.

“Absolutely not,” Geithner said, when asked in an ABC News interview broadcast yesterday whether a downgrade is a concern. “That will never happen to this country.”

With the International Monetary Fund (IMF) calculating debt in the Group of 20 economies will reach 118 per cent of GDP in 2014, up from about 80 per cent before the crisis, some G7 nations are attracting the ire of investors and credit rating companies.

Ire is a nice word. The ire is with the fact hat these statements have limited creditability. The Us has a higher deficit to GDP than many lower rated countries. The debt to GDP is also higher than many countries rated Aa2 from Moody's.

For example, the US has a deficit to GDP of 13% and a debt to GDP of 94% India has a deficit to GDP of 9% and debt/GDP of 82%. It is rated Ba2. Now if the Us gets downgraded the same action should be taken for many other countries.

Countries with deficits to GDP in excess of 10% for 2009 include: US, Japan, UK, Spain, Greece, Ireland, Iceland and India. This represents 43% of global GDP. The US, EU, Japan and UK will need to issue $5 trillion of debt in 2010.

AAA countries should not make pronouncements about their ratings at this time.

Putting Greece in perspective - a comparsion with other bankrupcies

Total economy -

16th largest in Europe at $357 billion. A little larger than Argentina and the same size as Taiwan.

Stock market cap $53 billion compared with $7.65 trillion for the Bloomberg European 500.

This is all about contagion.

This was a banner decade for big bankruptcy. Of the 20 largest corporate bankruptcy filings in history, all but three of them occurred in the last decade.The 2000s featured three businesses with more than $100 billion in assets. All the companies in the list here held more than $30 billion in assets.Combined size of the biggest bankruptcies this decade: $1.5 trillion. That would make them the 10th richest country in the world with a greater GDP than Canada, India, Mexico, Australia and most of Europe.

The Biggest Business Bankruptcies of Decade
  • Pacific Gas and Electric: $36.1 billion April 2001
  • Enron: $65.5 billion December 2001
  • WorldCom: $107 billion July 2002
  • Conseco: $61.4 billion December 2002
  • Lehman Brothers: $691 billion September 2008
  • Washington Mutual: $327.0 billion September 2008
  • Chrysler: $39.3 billion April 2009
  • Thornburg Mortgage: $36.56 billion May 2009
  • General Motors Corporation: $91 billion June 2009
  • CIT Group: $71 billion November 2009

G7 meeting - What can this organization do?

The G7 cannot do much. Many of the member of the G20 are larger and the concentration of the G7 in Europe which is n the grips of the Greece problem creates a distraction.

The key statements from the week-end meeting was that Greece should be able to solve its problems. This was not what the markets wanted to hear. The G7 also stated that banks should pay for their rescue. Sounds like more taxes on banks which will not help growth.

Speaking after a meeting of finance ministers and central bankers from the G7 in Iqaluit, Canada yesterday, Canadian finance minister Jim Flaherty said the countries would “continue to deliver the stimulus to which we are mutually committed and begin looking at exit strategies to move to a more sustainable fiscal track”.

Acknowledging the risks, a document drawn up by Canadian officials for discussion said G7 members should set “clear, credible and consistent” plans to strengthen their budgets. Delay in doing so would lead markets to “begin to question our commitment to sound medium-term policy frameworks, with the result that interest rates would rise,” said the report.


Let's not forget the EU has requirements that budget deficits cannot get beyond 3% of GDP. Somehow Greece got to 12.7%. So who in Europe was minding the tore. Granted a recession should allow for greater short-term deficits but off by factor of 4X?

The fact that there was not much news suggests that the G7 should be disbanded and eliminate the policy noise.

An economist's forecasting skill - latest joke

A physicist, a priest, and an economist go duck hunting.

The physicist shoots and just misses. “I guess the wind blew the bullet off course,” he says.

The priest shoots and barely misses. “I guess God wanted that duck to live one more day,” he says.

The economist shoots and misses by a mile. “Nailed it!” he says.

from Marty Fridson