Back and in deep freeze mode

Yeah, I am back to blogging after a 100+ day hiatus. No reason. Just found nothing exciting to blog.

A few minutes back, I read a nice piece by Greg Pytel titled “A US way out” and I almost froze. Here’s the excerpt from that chiller of a post –

“Washington Times compares the US model to Franklin D Roosvelt’s New Deal. However the current financial crisis does not resemble the 1930’s depression in its root cause. The current crisis is a result of a giant global financial pyramid collapse that left a quadrillions of dollars liquidity hole. Therefore President Obama’s actions may not be modelled on the New Deal, but on some other premise…

Considering the current US debt and its rate of increase, the US borrow and spend solution reminds an insolvent person who keeps on borrowing money, as long as there is anybody “silly” enough prepared to lend him. He knows that at the end of this process he will not pay anything back but simply declare bankruptcy, write off the entire debt and start its financial life anew.

The US, as the country, is economically and militarily powerful enough to declare that it no longer honours its debt and its currency. Effectively the dollar could be written off as a currency. As around two thirds of world reserves are held in dollar they will be written off. The US will have no debt.”

And then I read “History of Collapsed Dollar” in Commodityonline.com and Pytel’s hypothesis didn’t seem like a fictional conjecture at all. It could get catastrophically real.

“As with any fiat currency, the Continental dollar [USD version 1] later collapsed due to inflation. With politicians unwilling to fix the deficit and instead choosing to inflate the currency, the currency was left in ruins. The Continental dollar was eventually recalled by Congress and redeemed at 1/40th its face value. In a very few localities, it remained in existence for many more years, where it eventually plummeted to 1/1000th of its issuing value.

The factors that led to the demise of the first currency of the United States are the same that are leading the assault on the current US dollar. History shows us that when fiat currencies fail, precious metals remain as a standard of wealth and an accepted medium of exchange.”

And I now turn to a new asset class that I had shunned so far. Paper Gold. Gold ETF, I mean. Googled up and landed here. I will watch the price of Gold for next 4-5 months and might end up investing in this by August, 2010.

Just wish Barack Obama allows me time till then. Amen.
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Predictions of a recovery – V, U, W and now " L " !

Fuck.... They're soon going to run out of letters in the alphabet.

All this talk of shape of the (economic) recovery befuddles me. Can we assume the first step in any recovery is for output is to stop shrinking? But the more interesting question is what shape it will take. The debate centers around three scenarios: “V”, “U” and “W”. A V-shaped recovery would be vigorous, as pent-up demand is unleashed. A U-shaped one would be feebler and flatter. And in a W-shape, growth would return for a few quarters, only to peter out once more.
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America is apparently doomed no matter what. Years of debt driven consumption by consumers is now replaced by debt driven consumption by the government. If it inflates away the debt, the government will be able to pay off its debt but its citizen will all be poorer due to value erosion, leading to a crash in consumption and even higher unemployment. If US doesn't inflate away its debt, then its children and grandchildren will work to pay off interests on that debt for generations, leading to extended depressed consumption and high unemployment. Different path to the same result. So, some predict an `L' shape recovery for America.
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Why is inflation bad? Inflation is a tax on savings while a subsidy to borrowers. If you saved $100,000 today, it won't feel so great when high inflation eats all of it away tomorrow. If you're a borrower, $100,000 is a huge burden on you today, but something you can probably write a check for tomorrow and forget about.

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America's balance sheet recession is different. In this case, the saver is not fellow Americans. They're foreigners (China and other Asian nations). So for Americans, inflation is a remedy that won't make its rulers lose that many votes (so long as inflation does not get out of control). After the Asian financial crisis, East Asia was using export-oriented growth, through undervalued exchange rates, to power growth. The other side of their trade figure is a huge deficit in America which can only exist with an overvalued dollar...which itself can only exist with foreign money from Asia coming in to prop up the dollar. So, high export earnings from Asia were replowed into America, which cannot produce anything of its own because of an overvalued currency but was awash with cheap money...well, banks had to do something with that money, like lend. If they didn't lend, their competitors will. Asia giving so much money to a rich country where they money won't go as far is really unusual.

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This is unusual for two reasons: a) developing countries are in no position to lend (b) US T-bills offer a silly 4-5% return. Asia should therefore invest all of it internally for better healthcare, education and infrastructure in rural areas. Then perhaps they can beat the piffling return they get from US-T bills as they do now, which is again eroded by depreciation of the dollar as they repatriate back home on maturity. This is a great misallocation of resources!

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Still people are fixated at likely shape of recovery, than how best to make it happen.

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The Goldman heyday

What are we to make of Goldman’s Q1 results…? Making $3 b in as many months is indeed recession defying but how much of it is its own making in contrast to the near absence of competition – Citigroup, UBS, Lehmann and its ilk? The Economist says - To the survivor the spoils - and I can’t agree more.

Monday, after market close, Goldman Sachs Group, Inc. reported 1Q09 earnings of $1.66 billion or $3.39 a share, up from $1.51 billion, or $3.23 a share a year earlier. The results were way ahead of consensus estimates of a profit of $1.64 per share.

Higher-than-expected profit was mainly due to strong trading revenue. Of the first quarter net revenues of $9.4 billion, $6.6 billion (34% higher than its previous record) was the contribution from the company’s fixed-income, currency and commodities (FICC) group. High volatility (benefiting the Treasury markets and the Dollar), wide spreads in fixed income and reduced competition in the markets were the main reasons for strong earnings.

However, the areas outside fixed income and currency businesses showed weakness during the quarter. Investment banking revenues were down 30% year-over-year, due to the low activity in the capital markets. Asset management revenues also declined 28% to $949 million.

Again as the Economist says this windfall will likely dwindle soon. The firm may be scooping up market share at quite a clip. But the bigger picture is still far from pretty. Goldman and other survivors will benefit from the coming wave of debt issuance by federal, state and local governments. But dealer spreads are sure to shrink as markets normalise and those that have retreated return to the fray. This is likely to be offset only partially by a pick-up in businesses tied more closely to economic growth, such as advising on mergers and acquisitions.

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"Long term? You must be kidding !"

Yesterday, when the Sensex closed slightly above 10,800 mark (Nifty at 3342) I squealed with delight. After a long time, pretty long time that is – I made some money. In the normal course I, a not so sophisticated investor – would have lingered on. But not yesterday, especially since it’s been way too long since I’ve booked some profits.

All kinds of news flows abound. There are the general elections, the March quarter earnings and the good ol’ talk of markets bottoming out. The weather beaten ones like me would not buy any of it, they’d rather be happy if the portfolio doesn’t crack any further. Neither would they invest any fresh funds towards equities. Nobody is in any tearing hurry to abandon caution and get back into equities that have cut and carved them up right down their middle.

But then what’s fueling this rally? Nifty closed at 3033 at the beginning of this year, now stands at 3343 – a surge of 310 points or 10.22%. What has changed in just three months? Have we picked up on some signals that tell us our worst fears of a recession are misplaced? Have the foreign investors – that made and marred our markets – returned? In their own backyard, Wells Fargo sent the stock market on a dizzying rally on Thursday when it revealed that its mortgage applications surged to $190 billion in the first quarter, a sharp increase that would lead it to a record $3 billion profit for the period. Like other big banks, Wells appears to have benefited from a surge in mortgage refinancing because of ultra low borrowing rates engineered by the government and an exodus of competitors. Bank of America, JPMorgan Chase, PNC Financial and others have had similarly strong performances and are expected to post improved profitability when earnings reports are issued next week. Or so, they’d make us believe for now, until another wave of disclosures would tell the world they’d gone horribly wrong again.

As I admitted earlier, I am not so sophisticated to make any sense out of this. I hear a lot of bull crap - investors, mostly foreign institutions, are initiating trading strategies through equity options to bet on the likely rise in volatility blah, blah – but I am in no mood to buy none of that. When I see my stocks rise, I go out and book profits. To hell, with long term. Who knows how long is long term?

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"Outrageous"

Sometimes you get to read funny combination of headline news. Today I had one such - on Wall Street bonuses and another on PE firms unlikely to invest now.

Even as the whole world reels under recession triggered by Wall Street excesses, they have no qualms in collectively showering upon themselves billion $ bonuses as usual. Barack Obama felt it’s “outrageous”. Indeed.

Another is not so retchy, yet funny. Now that valuations are at their near lowest, PE firms are unlikely to invest. May be they are waiting for hyper valuations to return so that they can stir in right earnest burning bigger holes in their investors’ pockets!

What they teach only at B-schools ?

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Tax cuts or higher public spending - which is better recession remedy?

This is often a confounding question that baffles governments and right thinking citizen alike. Arguments fly back and forth – tax cuts generate higher disposable income that goes to buy stuff and keeps demand buoyant. The opponents figure saved tax money just stays locked in. It doesn’t create jobs because businesses have put on hold large capex spends.

But then economic stimulus has its own detractors as well. Increased public spending on infrastructure, healthcare and education have long gestation periods. Committing the tax payer’s money to long term projects especially in recessionary times is not exactly sensible because there is no guarantee that businesses will continue to make profits in future years on which the government can expect to collect more taxes and keep those jobs in tact.

Here’s how to think about this argument: it implies that we should shut down the air traffic control system. After all, that system is paid for with fees on air tickets — and surely it would be better to let the flying public keep its money rather than hand it over to government bureaucrats. If that would mean lots of midair collisions, hey, stuff happens.

The common knowledge is that tax cuts are not always better than public spending. Tax cuts work when a particular industry is marred by business cycle or has been subjected to excessive levies or if it contributes to larger public good, like say clean tech. In general otherwise, public spending provides much more bang for the buck than tax cuts — and therefore costs less per job created — because a large fraction of any tax cut will simply be saved.

This suggests that public spending rather than tax cuts should be the core of any stimulus plan. But rather than accept that implication, conservatives take refuge in a nonsensical argument against public spending in general.

But I would rather weigh it on case to case, time to time than offer a sweeping solution.

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