24 Sep 08
While Nomura’s corporate culture is closer to that of Lehman than those in other East-West matches, the ultimate question is whether Nomura and MUFG can learn from Sony’s experience with MGM: supervise risk and learn but do not operate. When Sumitomo Bank acquired a 12.5% stake in Goldman in 1986, it was frustrated with the results, even though it made a nice financial return – it had expected much more. The so-called technology transfer it had hoped for never happened. So why should either of these firms expect better than market pricing from their newly captive partners? The logic that makes sense is the access to deals from the Japanese network that Morgan Stanley or Lehman would not get, plus their superior distribution to a pliant investor base, combined with the Wall Street firms’ ability to achieve a better NPV on their deals, at any discount rate. So long as these firms move back to traditional Corporate Finance & Principal Broking, rather than operating as closet hedge funds, they will lift the earnings of their investors.
10 Apr 08
The IMF continues to be closer to the mark, as Strauss-Kahn remains less of a political lap dog than his Treasury Department counterparts at the leading member countries. Indeed, it will be unlikely that US GDP growth breaks 1% until 2010 or later. At 0.5% for this year, the IMF’s estimate is 1/3 of the various US agencies’ estimates. It was political hubris that delayed appropriate action by regulators in the US and elsewhere for so long, allowing the asset bubble and system leverage to build up so high. It is that same hubris again that is directing the finger-pointing and the storming about to lynch someone and do anything to avoid a recession. The IIF’s stated intention to devise new financial industry standards for management and control systems way behind time, but it will be better than the imposed “solutions” contemplated by the politicians looking for scapegoats rather than remedies.
27 Mar 08
Continental Europe is holding up better than the UK and US, a sign of better confidence in their regulators. The property gains on the continent over 2000 by early 2007 were almost as high as those in London and far worse than in the coastal US. So, there is huge asset-price vulnerability there if confidence does begin sliding. Lost confidence is the core of the crisis in the US now. Falling machine orders and other durables buying is natural when the market shifts back to saving after 15 years of almost uninterrupted spending. A dangerously large percentage of UK subjects are shifting toward saving too, so one should expect the further slowing of economic growth and higher unemployment. The fuse has almost burned through to the bomb, but there is some remote hope in the US that the FED’s now-all-encompassing embrace may cheer bankers enough to make them start lending, even if at higher rates.
20 Mar 08
When ¼ of the smart money starts saving more, it is already too late to turn the ship around. The top of the waterfall is imminent. Closer to a 1/3 of the general public in the UK also feel that way, while the rest seem to feel some last-ditch effort by Messrs. Bernanke and King will succeed in turning the supertanker from doom. At least they have begun cooperating; if they begin trying to turn the wheel in the same direction, there may be a change in the economy’s general direction – toward a slightly shallower end of the waterfall. But the big drop is still imminent.
18 Mar 08
Well, at least someone thinks the FED has finished shorting the Dollar. The economics team at Bear Stearns probably realize that this is not so and that there is still more straw in the broom – more mistakes to be swept under the carpet. This should be seen as the “retail interest” that figures out last that Japan will join the circle of currency debasers. Unfortunately for them, the FED is way ahead of the competition and while Japan and the UK – maybe even Mr. Trichet & co – start to open their taps wider, the Dollar will continue falling against the Yen. Lower exports could soften the Dollar’s fall, but continued fear of foreign calamity will bring a lot more Yen back home before the combined yield and risk benefit of foreign shores lures them back. That will be a few years away yet.
18 Feb 08
It is not as if there has been no warning of this. Western economists keep dithering about exclusion of fuel and food, but they have become linked because of George Bush’s boundless stupidity (or closeness to Archer Daniels – a version of the same thing, perhaps). Thus, fuel and food costs are not going to revert suddenly to level familiar two years ago but are headed toward a new long-term higher trend. The People’s Bank has gotten over this bit of silly bit of dogma. It knows that the government will get hosed at the upcoming National People’s Congress, the annual airing of opinion in China. While the investors may hope for more cheap money and the Communist Party for stable growth and reasonable prices (Chinese version of GARP), it is generally understood in the leadership that they have painted themselves into a corner and that someone is about to be pushed onto wet paint. Foreign investors have already figured this out and are now well under quota in the authorized QFII vehicles. Once Mr. Jiao and Madam Lee figure this out, the long-expected “hiccup” in the great Chinese growth story will be in full swing. The post-Olympic slump may begin a little early this time.
14 Feb 08
Most of the surprise comes because Japanese corporations plan a few quarters further ahead than most analysts and all journalists think. The first quarter will show lower growth from both final consumption and capital expenditure-driven consumption, but it will be weaker than the baseline trend because of an inventory run-down that is already in full swing. Just-in-time logistics is fine for the chain stores and big manufacturers, but most of the economy still carries more inventory than it needs during a pick-up in the economy and dumps it with a delay in a slow-down. Most Japan-based analysts will call a market bottom late in 2Q08, but we are likely to bounce around that low for more than a year – and not just in Japan.
13 Feb 08
The economics of investing make an obvious case for diversifying a substantial portion of FX reserves away from the most liquid foreign asset available. Greater income (yield) and reduced risk could both be gained with even a third of total assets put into strategic investments at home and abroad. But the real constraint is not discussed in this or other public fora. The first purpose of FX reserves is to help suppress the home currency against that of its major export markets, while holding it in a liquid form. In other words the reserve is a mechanism to work against the market’s forces in the service of domestic growth through savings. The second purpose is to reduce the will of these major trading partners to allow their own currency to depreciate, as it naturally would under the pressure of a sustained current account deficit. The US, China and Europe (in roughly that order) will continue to be the major destinations of Japanese investment, for both ROI and return on political capital. Using the FX reserve funds for that purpose is mostly a matter of domestic politics, not all the things it purports to be.
11 Feb 08
An increasing amount of this sector is export to China or supports such exports and a similar amount goes to the rest of Asia. Since we are coming off the top of an unusually long global business cycle, it would be normal for such orders to move into a long trough. The fact that they have not done so yet attests to the power of JBIC and other financiers of capital exports. Even they can not hold the sky up forever. The market is already discounting further declines. Just do not let sudden bursts of optimism distract you. Most of this sector has a bit cheaper to get, yet.
30 Jan 08
This is an excellent example of why China remains an equally large risk to the global economy as the US is. Price controls, especially those at only the bottom of the supply chain, cause disruptions that are worse than inflation. They are hidden until they force a breakdown because there is no variable or progressive, visible effect - as there is in priced behavior. So, in a command economy or any where political goals interfere with the allocation of resources in detail, the risk is pressures from many fronts can build up, undetected by the outsider or global investor until they explode. This house-of-cards risk is why playing the greater-fool game in China is not worth the risk.
28 Jan 08
Mr. Summers has a reputation for speaking his mind, especially if it makes others uncomfortable. That has worked well for him in politics but no so well in politically-correct academic institutions. There seems to be a clear schism between the FED and other US government leaders, who are trying to boost confidence and talk down fears of the end of the good times, on the one side. On the other side are those who realize that the US only has so much dry powder and hope a concerted multinational action will create a cheaper “solution” all around. But none of them seem to be talking about the excess level of demand, driven by excess levels of debt, that the rich world (plus China) face. Further stimulus does not solve this problem, unless they cynically just plan to inflate the debt away. For more inflation is surely what we shall harvest from enough stimulus to turn US GDP growth back above 2% this year. Better to bite the bullet and get the painful part over with quickly. The cost of correction will go into the national public debt anyway. The only questions are how much and which channel. Stop all this fooling around!
21 Jan 08
The whole world has gotten pulled up into the passion play between Wall Street and the US primaries, both appealing to raw emotion, rather than reason. So, when disappointment at even the risk of candy denied pushes the Dow Industrials to a point 14% below its July high point, Asia's most liquid indices fall even more. The Nikkei has reached a point 27% below its July peak. Hong Kong has returned to its July high, after falling 25% from its ridiculous late October peak. Even the closed and liquidity-surplus markets of India, China and Indonesia have fallen 12% to 16% from recent peaks and invincible Australia has fallen 17% in 11 days from its October peak. This is raw emotion but the likely effect of a US recession on other economies will be significant. Some in Japan are predicting a new recession there - a hasty judgement, we think. Volatility will continue. Japan may have reached its long-term bottom, even though plunges below 13,000 are likely in this tearful environment, but the rest of Asia will see worse levels before the year is out. 30% declines in Asia may soon not be rare, regardless of what US politicians do.
21 Jan 08
The hysterical tone of this article is laughable. Chinese former bureaucrats' ambition to roll out investment funds to join the sovereign wealth fund rescue queue may find it is getting harder to raise money than they thought, without official backing. The massive amounts of money in private-equity funds will indeed have a hay day and some may try to stretch their mandates by picking up listed shares at bargain prices such as Citigroup's. But there is no advantage that Ping An has over an insurance group such as Allianz or AIG, except, perhaps for a lack of previous ideas and an excess of ambition.
16 Jan 08
It would be hard to conclude that Japan is headed into a recession; although, it is clear that the US and UK are doing so. This is partly because the volatility of Japan's real GDP growth has been so low for so long. That it has remained at or above 2%, much less the 3% achieved in some recent quarters is rather remarkable, given the slow rate of consumer improvement. A nation of pessimists seems to create its own prediction, at times, in spite of its work ethic. This is the nub of the problem today: the restructuring of Japan's economy is only partial. The companies are not yet midway through the transformation from employment machines to vehicles for consumer and shareholder pleasure. These latter two have clearly been secondary goals in the past, but continue gaining importance - in some cases, primacy. Employees are a little further ahead in the shift and increasingly unhappy with this slow struggle, hence their diffident trend in consumption. Exports and a weak Yen will continue to be the tipping factor for a number of years to come.
11 Jan 08
If big Ben really walks his talk, then the Dollar will drop another 5-10% against the Euro. Worse, the "Yen-carry trade" (actually, Japanese households investing abroad and in the "uridashi" market in Japan) will finally unwind with the kind of scary jump in the Yen last seen in 1993-94. This kind of shift would clear most of the foreign-reserve fund imbalances, but it will create yet a new bubble and prevent the US consumption and housing bubbles from clearing properly. Procrastination will only increase the final, cumulative pain. The FED is telling us that it fears a collapse of the Dollar less than a collapse in consumer confidence. The latter can not be avoided - only delayed - while the former could be avoided, since the current-account deficit is already shrinking nicely - without triggering the trade war Bernanke risks starting. Sell the S&P. Now.
10 Jan 08
The arrival of a disruptive idea always scares the pants off the defenders of the "status quo" and of the weak. Tata's wholesale revision of The Car is doing just that. Whether as a motorcycle for 5 people or as a locust to flood the cities with traffic and the air with carbon and sulfur, the new "Nano" and its imitators will force change on phlegmatic industry. It will also force change on city and road managers, an even more phlegmatic and uncompetitive group. And it will force change on environmental activists and the politicians who exploit them. The implication is that automobile production in low- and middle-income countries will grow by more than 10 million a year within a few years - maybe twice that in five years - or cities and governments will finally get serious about mass-transportation and taxing individual use the way Singapore does.
24 Dec 07
Long overdue changes that will hurt a few of the local service-sector incumbents but will increase the activity level of a) those meddlesome foreigners and b) those slippery and uncooperative small start-up firms. Alas, there are many more trip-wires with which to slow the process. But the local inefficiencies, which make the stock market such a persistent arbitrage opportunity, will persist. Now the foreign mood-swing effect will just be amplified.
17 Dec 07
The BoJ's "tankan" took the steam out of the market and one can expect another month or two of declines in the main stock indices, as both foreign and domestics institutional investors reduce exposure. Even though the diffusion index for the next year fell to a near-term low, the coincident index rose. Consistent with this earnings growth for the FYE Mar08 is still well over 20% - a lot better than one can say for the US now. So, what does this mean for investment opportunity in Japan? A stock picker's market - even more than it was a year ago. Index volatility is likely to decline further as the consensus shifts to more gloom till March.
11 Dec 07
The markets still predict what they want rather than what would be rational. The interference of politicians in the process makes this bad habit all the harder to break. The last two decades of FED myth-building have led many to believe central banks can fine-tune the economy. Not only did that attitude help get us into the current mess, but it sets the market up for continual disappointment - interrupted by shorts bursts of exaggerated euphoria. This, of course, is what is driving volatility levels back up. That effect is masked somewhat by the credit squeeze and the near-random rescue efforts of the central bankers lately. The direction trade is still south, but volatility is also soon to be too expensive.
04 Dec 07
This equates to a 25% to 82% increase in the size of the problem for the market. If one assumes the low figure of $600bn (recent subprime mortgages, i.e. those most at risk), that is $120bn of damage to the market. The ABCP (asset-backed commercial paper) market has already shrunk over $350bn from its peak size in early Aug07 and is still falling. So, perhaps one should consider a wider range of weak assets in the securitization back-lot. That brings in older subprime loans, credit-card receivables, alt-A mortgages, home-equity loans and trophy-asset loans (“MacMansions” & pleasure craft, etc). That raises the pool to several trillion dollars. HSBC’s decision to bring its 2 card-and-subprime refinancing SIVs onto its balance sheet last week (who was giving thanks that day?) is indicative of the real problem this will cause. Like the dwindling ABCP market, this is forcing unplanned lending on the banks, absorbing huge amounts of credit capacity that should be going to business finance and normal consumer lending. This is the kind of crowding out that economists fear most and is one reason why short-term rates have remained so high, pressing the stock indices lower. Current efforts to relieve the credit pipeline (creating new “rescue SIVs” is Secretary Paulson’s current idea and what HSBC is planning) may help, but massive waivers of the kind California is instituting are the kind of special forebearance that will be really required. Political pressure is leading that way. SO, although the problem looks grim, political largess may come to the rescue. It’s not too late to sell those bank shares!
13 Nov 07
Brave talk from regional brokers is of lots of money running around and just looking for a place to park. Even though Tuesday’s markets paused from Monday’s retreat – a continuation from last week – the driver is still the same: central bank concerns about excess demand in China and private-investor fears of more write-downs in the West. No matter how one rearranges the letters, this spells de-leveraging in the global financial markets. The reckless pursuit of any yield over 5%, both by Asian households and Western one’s, drove both earnings and their pricing multiples above long-term averages without the commensurate increase in productivity. A correction of the larger markets was over due and has begun again. When the Chinese share markets will begin trending back toward pragmatic valuations is anyone’s guess. Plenty of black money looking for a place to hide there. Unfortunately, it really is just parking. As soon as the incredible liquidity momentum looks seriously like stopping Chinese investors will put it elsewhere – whether or not the “through train” is running – and the departure of the “imperialist running-dog lackeys” will probably be the trigger.
07 Nov 07
All the major securities houses and most of the biggest banks have significant exposure to sub-prime mortgage securities, either directly or through CDOs containing them. With about US$100 billion in either announced losses in the 3rd quarter or expected losses in 4th quarter 2007, this reckoning with higher rates and leverage has obsessed the press. But the media are focusing on the symptom, not the cause, and the result is that of counting small pox blisters rather than addressing the virus – entertainment, not enlightenment. The global markets are starting to pay the price of living on cheap credit for too long. The central banks of exporting countries who focused their FX reserves on too few instruments for years, as well as borrowers who went beyond their basic means were two sides of the same coin. The weak link in the credit system was always deals priced too tightly. Sub-prime mortgages - $700bn of them in 2006 and 2007 alone – have been the most visible weak link, but credit cards and some LBOs are in the same bucket and will experience higher default rates now than in the past decade. This is using up all the spare balance sheet capacity of major banks and the result will be below-normal or even ZERO credit growth in some countries. That is what will cause the recession, not bank losses – no matter how entertaining they may be on network television.
04 Nov 07
When the People’s Bank of China announced the plan to channel domestic investors’ money through the new Binhai special economic zone into Hong Kong’s stock market, it sounded like a bad idea on many levels. Hong Kong investors thought otherwise, but they are inveterate speculators. Not only would this special preference for Binhai-based banks make party officials with foresight richer but it would end the balanced restrictions across the capital account that allowed Shanghai and Hong Kong to price shares independently of each other, according to the mania of each respective market. After a few months it became obvious that this window on the world had, in fact, pierced the veil that kept global valuations from ruining China’s carefully choreographed financial PR exercise. The risk of disappointments in Hong Kong’s share prices tunneling back into Shanghai suddenly looked real and the misnamed “through-train” was shelved in order to avoid the otherwise inevitable train wreck. So, after a 50% run in 70 days, we are likely to see the Hang Seng index return through 22,000 in even less time, as global investors risk aversion spreads and Chinese markets no longer look so “de-coupled” as local strategists proposed.
01 Oct 07
While some banks may be nervous about the deployment of Japan Post Bank’s (JPB’s) $1.65 trillion worth of deposits through 234 full-fledged branches, this will be a big step forward in the commercial pricing of risk for this heretofore-protected dinosaur. JPB’s previously subsidized access to deposits made it impossible for risk pricing of deposits to enter the banking market and improve bank manager discipline. That day is now approaching.
13 Sep 07
When the Sage begins to sell, one is well advised to take that as more than a leading indicator. But when the cost of funds within China will bite and chase domestic investors from unrealistic multiples is hard to guess. For Hong Kong-listed H-shares, however, one would expect a bit more sensitivity to the global USD cost of funds. So, a 3.3 multiple over book value looks hard to sustain – much less improve upon – in the face of a continued global slow-down., Of course, 10.6% of a company is a big position to sell and Berkshire Hathaway still holds 90% of its full position. Chances are, though, that BH will be substantially out of that position by Mar08.
11 Sep 07
Well, is the sun rising or setting? Amidst political turmoil and worrying signals from its 2nd biggest export market (the US), with dark hints about consumption in its largest export market (China), a ray of sunshine lifts the TSE above its present funk. After last month’s dramatic swan-dive-and-rebound act, a return to sideways drift may be welcome. Has the BoJ really lost its urge to purge inflation – if only it can find some – or will it return to block the sun in the 4Q07?
11 Sep 07
When put beside an article on China’s new (yet again…) conviction on price stability, the message is clear: China can not afford to let the horses run wild any longer. The risk to small investors and speculating companies alike is now large. If the PBC acts assertively to cut inflation below 6.5%, the mob will begin to flee the stock market. China has seen a rout in its markets several times before; each time after a wild run of the sort we have seen this year. Better to get it out of the way before the year of the Glorious Olympic spectacle!
08 Sep 07
Time for the other shoe to drop. Once again, the law of gravity (unique in its form within each country, of course) begins to assert itself – at least if still through the prism of political reality. Hong Kong will be the first goose cooked.
04 Sep 07
Laws like this are too vague in their basic form. It is the implementing regulations and guidelines that are all important. The battle will continue to be fought within the CSRC and State Council. Whether it is used from time to time as a revenge tool or as another hurdle to certain foreign investors is not material. Politicians in every country use local laws to protect their constituents occasionally. The question is whether it stimulates competition of any kind.
03 Sep 07
A lot of opacity within CDO structures (and reporting) weakened the market’s ability to price credit risk consistently. Not innovation but conflict of interest and herd instinct caused the mispricing that is now beginning to be corrected.
03 Sep 07
At 1.635% the 10-year yield still reflects abnormal, temporary demand. Risk aversion will find alternative havens (back to boring banks?); the real problem will arise if net bank asset growth slows much more or goes negative again – then will begin the next round of bargain hunting, for both debt and equity investors.
03 Sep 07
The 4.9% 2Q07 pull-back is the result of normal tax-incentive harvesting before the Japanese FYE (31 Mar), after a robust +13.6% surge in 1Q07; watch the currency level for signals; the resulting average 8.03% investment growth for 1H07 is slower than for the last three fiscal years, but within normal bands for Japan.
29 Aug 07
The real news beneath the headlines is that China’s solution to uncontrollable liquidity and political corruption is: move a step closer to Hong Kong. By allowing corporations to issue bonds without bank guarantees, allowing the CSRC – rather than the Party’s NDRC – to manage access to the capital markets, and promoting a variety of rating firms, China is moving toward the revolution that the US witnessed with the arrival of “junk bonds” 25 years ago. Most credit in China today is high-yield and if priced as such will do much to improve corporate governance and to allocate capital efficiently. Valid price signals are what today’s semi-capitalist China still lacks.
27 Aug 07
Systematic risk can not be entirely avoided, whether as benchmark or liquidity, but most troubled funds shared a common trait: use of significant leverage to boost mediocre base returns. Synthetic assets are powerful risk-management tools, but are leverage boosters if used as more than overlay tools.
Latest EAAL outlook
04 Oct 09 Asian Value Risks15 Jan 09 The Axis of Ambition29 Nov 08 Santa Outsources Christmas to Scrooge24 Oct 08 Return of the Optimist20 Sep 08 The Price of Relying on Daddy08 Feb 08 The FED can not prevent recession this time22 Jan 08 How to catch a falling....22 Oct 07 Too late to apologize06 Sep 07 Too Good to Be True01 Jul 07 Be Careful What You Wish
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