Following Jean-Claude Trichet’s - President of European Central Bank - underlying the importance of large insurance companies and pension funds as important ingredients of systemic risk last month, a second announcement came out yesterday, which sounds like an indirect declaration of exit from expansionary monetary policy.
Federal Reserve has been cautiously testing the right time of the exit from quantitative easing since mid-October through reverse repos, which is basically pulling out the liquidity from the system through selling assets such as treasury bills. $1trillion additional liquidity was injected into the economy since the beginning of the crisis in 2007
2010 seems to be the year.
Friday, 11 December 2009
Wednesday, 9 December 2009
JAPAN & DEFLATION
Japan’s deflation problem since early 1990s have been ranked lower in priority during the recession following the globally imposed problems such as fall in exports, huge budget deficits caused by attempts to increase domestic demand through government spending, dealing with Debt to GDP ratio of over 180%.
Now deflation is back in an economy, which is trying to recover from recession. People don’t spend as they expect the prices to fall more. With consumption item of GDP low, the burden is on investment and government spending. And without consumption, investment will be low too. Government issued ¥10,800billion ($110billion) bonds last fiscal year and announced a stimulus spending announcement of ¥7,200billion recently.
Now deflation is back in an economy, which is trying to recover from recession. People don’t spend as they expect the prices to fall more. With consumption item of GDP low, the burden is on investment and government spending. And without consumption, investment will be low too. Government issued ¥10,800billion ($110billion) bonds last fiscal year and announced a stimulus spending announcement of ¥7,200billion recently.
Tuesday, 8 December 2009
NEW COMPETITION TREND: REPAY TARP FUND – II
After Bank of America’s attempt last week, Citigroup is demanding to repay bail-out money received through TARP funds as well, which are $45billion and $20billion respectively.
In April, when Goldman Sachs and JP Morgan Chase had requested to repay $10billion and $25billion respectively, US government was much more cautious before deciding whether to accept it or not. But now the government officials are discussing one step ahead: “how shall we use these funds: more government spending and job creation or closing the budget deficit?”
This time markets are more cautious with initial response of a decline in Citigroup’s share price today.
In April, when Goldman Sachs and JP Morgan Chase had requested to repay $10billion and $25billion respectively, US government was much more cautious before deciding whether to accept it or not. But now the government officials are discussing one step ahead: “how shall we use these funds: more government spending and job creation or closing the budget deficit?”
This time markets are more cautious with initial response of a decline in Citigroup’s share price today.
Sunday, 6 December 2009
OPTIMISM IS IN THE AIR
According to Financial Times, increase in US unemployment is 11thousand in November. An incredible improvement from six digits to five digits in one single month.
When we look at the monthly trend during 2009 with the chart as below, November can be the end of the increase from 7.5million in December 2007 to 15million today.
US is leading the world out of this recession. 11thousand is almost 0 when considering the October figure of 195thousand. Numbers speak louder than words.
When we look at the monthly trend during 2009 with the chart as below, November can be the end of the increase from 7.5million in December 2007 to 15million today.
US is leading the world out of this recession. 11thousand is almost 0 when considering the October figure of 195thousand. Numbers speak louder than words.
Thursday, 3 December 2009
CREDIT RATING AGENCIES
Should credit rating agencies function as informative organizations after things happen or as a forewarning mechanism?
When S&P downgraded five state-backed companies in Dubai after $59billion of delayed payments, presumably it is targeting to help for avoidance of future casualties.
They have been one of the most criticized bodies during this recession and any potential default risk just brings them back under the scrutiny of the public.
S&P’s, Moody’s, Fitch will be under more pressure to meet the dynamic nature of the current economy and update their ratings more often.
S&P’s responded to that pressure by downgrading 20 European companies yesterday, highlighting the default risk until 2011.
When S&P downgraded five state-backed companies in Dubai after $59billion of delayed payments, presumably it is targeting to help for avoidance of future casualties.
They have been one of the most criticized bodies during this recession and any potential default risk just brings them back under the scrutiny of the public.
S&P’s, Moody’s, Fitch will be under more pressure to meet the dynamic nature of the current economy and update their ratings more often.
S&P’s responded to that pressure by downgrading 20 European companies yesterday, highlighting the default risk until 2011.
Friday, 27 November 2009
GROWTH ANNOUNCEMENT
UK made a growth announcement for Q4 yesterday after giving the signals of exiting the expansionary monetary, fiscal policies and low interest rates on 10th November.
US had initiated the early growth announcement in Q3 and ended up with an annualised 2.8% actual expansion. The difference between the two announcements is the time where US’s was two weeks early but UK’s is five.
Just the day before, the holding company of Dubai World, which has broad real estate investments in US & UK, asked for a six month extension – until 10th May 2010 - from its creditors, on repaying its $59bn of debt. The announcement is timely to give the markets the confidence that the global world is strong enough to deal with this.
US had initiated the early growth announcement in Q3 and ended up with an annualised 2.8% actual expansion. The difference between the two announcements is the time where US’s was two weeks early but UK’s is five.
Just the day before, the holding company of Dubai World, which has broad real estate investments in US & UK, asked for a six month extension – until 10th May 2010 - from its creditors, on repaying its $59bn of debt. The announcement is timely to give the markets the confidence that the global world is strong enough to deal with this.
Tuesday, 10 November 2009
EXIT FROM QUANTITATIVE EASING
UK contracted by 0.4% in Q3 and gave signals of gradually starting to exit quantitative easing by the relatively smaller £25bn further injection into economy, which is believed to be the last portion of a £200bn sum.
Lower interest rate is also expected to change the movement in upwards direction from mid 2010 onwards and a figure of 2% at the end of 2010 from the current level of 0.5%.
Is UK about to close a chapter of:
Expansionary monetary policy
+Expansionary fiscal policy
+Interest rates near zero?
2010 will be an interesting year to find out.
Lower interest rate is also expected to change the movement in upwards direction from mid 2010 onwards and a figure of 2% at the end of 2010 from the current level of 0.5%.
Is UK about to close a chapter of:
Expansionary monetary policy
+Expansionary fiscal policy
+Interest rates near zero?
2010 will be an interesting year to find out.
Monday, 19 October 2009
THE BIG ANNOUNCEMENT - II
Figures are drawing the actual picture of the US economy. Increase in unemployment in September is 263k. This is reversing the downward momentum between April and August with a slight increase from August figure. US cumulative unemployment is standing at 9.8% after September. Investors who are ready to get a swine flu from a sneeze in those days reacted quickly by bringing down FTSE 100 index at the first days of last quarter of the year.
Housing market is ringing the bells too. Reuters informs repossession of a house for every 13 seconds, bringing worries that 6million houses are likely to be repossessed for the next three years. Inevitable and painful lagging effects of unemployment…
Despite these facts; change in the moods between early-April and now is incredibly huge! A change from depression expectations to growth cheers! It is understandable when considering the catastrophic nature of the first quarter of 2009 where we saw falls of 45.7% in Japan’s exports, 47% in German engineering companies’ export orders. And only in one single month! Nobody wants to even imagine what would happen if this percentage falls continued.
Bernanke is now “carefully optimistic” with slight emphasis of the previous announcement by saying “Recession is very likely over” this time he has a “but”, which is “It is still going to feel like a very weak economy for some time”.
The announcement is turning from big into realistic. This is parallel to the fact that no rational person will believe in pink clouds, not after US households saw their wealth shrinking by $14trillion!
Housing market is ringing the bells too. Reuters informs repossession of a house for every 13 seconds, bringing worries that 6million houses are likely to be repossessed for the next three years. Inevitable and painful lagging effects of unemployment…
Despite these facts; change in the moods between early-April and now is incredibly huge! A change from depression expectations to growth cheers! It is understandable when considering the catastrophic nature of the first quarter of 2009 where we saw falls of 45.7% in Japan’s exports, 47% in German engineering companies’ export orders. And only in one single month! Nobody wants to even imagine what would happen if this percentage falls continued.
Bernanke is now “carefully optimistic” with slight emphasis of the previous announcement by saying “Recession is very likely over” this time he has a “but”, which is “It is still going to feel like a very weak economy for some time”.
The announcement is turning from big into realistic. This is parallel to the fact that no rational person will believe in pink clouds, not after US households saw their wealth shrinking by $14trillion!
Tuesday, 22 September 2009
THE BIG ANNOUNCEMENT - I
FED’s Chairman Ben Bernanke made the long awaited announcement on the 16th of September that recession is over for USA.
I have been waiting to hear this for a long time, more impatiently after Germany, France and Japan declared growth for quarter two - 0.3%, 0.3%, and 0.6% respectively. - The fact that Bernanke made the announcement before quarter-three ended is signalling that I am not the only one. The main reasoning is the expectation that USA should lead the world out of this Great Recession earlier than anyone else as it led into it the first. Basically FIFO – First in First Out - principle of inventory management was my presumption but we had LIFO – Last in First Out – this time.
Quarter-three & four figures in growth are needed before making the judgement that it is really heading to be over. Forecasts have been quite movable with daily-weekly-monthly changing announcements during the first half of 2009.
On the positive side US monthly unemployment figures have fallen from an approximate average of 700k per month in first quarter to 539k in April, 345k in May, and finally 216k in August. Downward slope is a good sign. Also improving consumer confidence reflected through increased sales is supportive.
On the negative side though, there is still a nervously waiting banking sector, focused on saving its own life – through increasing high quality Tier-1 capital- and can barely help anyone else. The sector is still in intensive care except few big names on Investment Banking side such as Goldman Sachs and JP Morgan Chase. Those names were accepted as successful based on the basic fact that they could pay back the Troubled Asset Relief Funds borrowed from the US government.
Will see what comes up with the figures…
I have been waiting to hear this for a long time, more impatiently after Germany, France and Japan declared growth for quarter two - 0.3%, 0.3%, and 0.6% respectively. - The fact that Bernanke made the announcement before quarter-three ended is signalling that I am not the only one. The main reasoning is the expectation that USA should lead the world out of this Great Recession earlier than anyone else as it led into it the first. Basically FIFO – First in First Out - principle of inventory management was my presumption but we had LIFO – Last in First Out – this time.
Quarter-three & four figures in growth are needed before making the judgement that it is really heading to be over. Forecasts have been quite movable with daily-weekly-monthly changing announcements during the first half of 2009.
On the positive side US monthly unemployment figures have fallen from an approximate average of 700k per month in first quarter to 539k in April, 345k in May, and finally 216k in August. Downward slope is a good sign. Also improving consumer confidence reflected through increased sales is supportive.
On the negative side though, there is still a nervously waiting banking sector, focused on saving its own life – through increasing high quality Tier-1 capital- and can barely help anyone else. The sector is still in intensive care except few big names on Investment Banking side such as Goldman Sachs and JP Morgan Chase. Those names were accepted as successful based on the basic fact that they could pay back the Troubled Asset Relief Funds borrowed from the US government.
Will see what comes up with the figures…
Saturday, 27 June 2009
BOE AND FSA
Recent discussions between Conservatives and the Chancellor of the Exchequer on moving powers between Financial Services Authority (FSA) & Bank of England (BOE) have been dominating the agenda.
Conservatives insist on moving regulatory power from FSA to Bank of England whereas the Chancellor is planning a new Banking Act to strengthen the role of FSA.
FSA and Bank of England - two very prestigious organizations - are blamed for the crisis in the banking sector. A few points should be born in mind before targeting those two institutions as scapegoats:
1) Banking crisis is GLOBAL,
2) Every country and industry was hit,
3) FSA has set up the rules very clearly for a well functioning banking system. The problem lies with its application, which is not easy to control,
4) Bank of England is the model on which most modern, large central banks have been based.
Main functions of Bank of England as for all other Central Banks in the world are to provide monetary and financial stability.
Monetary stability's two main criteria are stable prices and confidence in the currency, which are controlled through inflation target and adjustments in base interest rate.
Financial stability is the crucial function, which these discussions are based on. It involves protecting against threats to the whole financial system and Bank's acting as "lender of last resort" in exceptional circumstances.
The Bank works with several organisations to serve these functions including HM Treasury, FSA, other central banks and international organisations.
Bank of England did a good job in managing the crisis so far. The base rate was lowered very successfully from 5% to 0.5% since March 2008; confidence was managed well by intervening the troubled banks such as Northern Rock and Royal Bank of Scotland on time.
FSA is an independent body that regulates the financial services industry. It is kind of a branch of Bank of England, which has already made significant changes in regulations, and managing risks.
In a nutshell, these discussions are not bringing any benefit. Focusing on finding constructive solutions would be ideal in these exceptional days, in which CONFIDENCE is the most important variable to manage.
Conservatives insist on moving regulatory power from FSA to Bank of England whereas the Chancellor is planning a new Banking Act to strengthen the role of FSA.
FSA and Bank of England - two very prestigious organizations - are blamed for the crisis in the banking sector. A few points should be born in mind before targeting those two institutions as scapegoats:
1) Banking crisis is GLOBAL,
2) Every country and industry was hit,
3) FSA has set up the rules very clearly for a well functioning banking system. The problem lies with its application, which is not easy to control,
4) Bank of England is the model on which most modern, large central banks have been based.
Main functions of Bank of England as for all other Central Banks in the world are to provide monetary and financial stability.
Monetary stability's two main criteria are stable prices and confidence in the currency, which are controlled through inflation target and adjustments in base interest rate.
Financial stability is the crucial function, which these discussions are based on. It involves protecting against threats to the whole financial system and Bank's acting as "lender of last resort" in exceptional circumstances.
The Bank works with several organisations to serve these functions including HM Treasury, FSA, other central banks and international organisations.
Bank of England did a good job in managing the crisis so far. The base rate was lowered very successfully from 5% to 0.5% since March 2008; confidence was managed well by intervening the troubled banks such as Northern Rock and Royal Bank of Scotland on time.
FSA is an independent body that regulates the financial services industry. It is kind of a branch of Bank of England, which has already made significant changes in regulations, and managing risks.
In a nutshell, these discussions are not bringing any benefit. Focusing on finding constructive solutions would be ideal in these exceptional days, in which CONFIDENCE is the most important variable to manage.
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