Archive for the ‘World Economy’ Category
Most salient economic trends of the decade
What are the most important trends in the last decade? Which ones will continue and which ones will turn? I have taken 7 major trends – gold, US stocks, emerging markets, debt, interest rates, housing and tech.
1. Spectacular rise of Gold.
From early 80s till the end of 90s, gold was a laggard. As inflation fears receded (thanks to China’s low cost exports) and growth fears subdued (due to “unreal” 90s – when growth skyrocketed due to open markets worldwide), gold’s role was really questioned. Most mainstream commentators thought gold bulls were dinosaurs and gold investing was anachronistic.
However, gold would prove its detractors wrong.
Japan is no longer a saver – it is now emulating USA
Japan is joining the United States club. I guess it got tired of keep saving to just see its strength get eroded. Heck, now US is saving more than Japan J.
http://www.economist.com/finance/displayStory.cfm?story_id=13240636&source=hptextfeature
In the six months to January, it had an annualised trade deficit of ¥4 trillion ($39 billion), compared with a surplus of almost ¥11 trillion a year earlier.
total current-account surplus plunged to only ¥125 billion in December, 92% less than a year ago.
the saving rate of households has fallen from 18% of income in 1980 to an estimated 1% last year
The fall in saving is exactly what the “life-cycle hypothesis” would predict. People like to smooth consumption over their lifetimes, so during their working years they spend less than they earn and accumulate wealth, which they then draw down once they retire.
These companies benefitted from AIG bailout
Wall Street Journal identifies the beneficiaries of the AIG bailout for the first time.
Field report – Future of India and commodities
In January, I was visiting a few villages in India partly to understand how global markets are affecting them. After spending a week in Europe and a few weeks Indian cities, the villages marked a refreshing contrast. As I walked in the fields, I saw that the villagers were happy, gave me free juicy sugarcanes and they were more upbeat about economy that anybody else. As we will see, if India were to consume as much oil per-capita as a relatively poorer Eastern European nation like Slovenia, it alone needs 30 million barrels/day (mbpd) more (40% of world consumption) apart from another 35 mbpd from China. If they both want to consume as much as US, India needs about 60 million addition barrels apart from 70 mbpd for China (current world production of the order of 85 mbpd).
These villages might never get to the economic level of an average American or European countryside, their per-capita income might never get closer to that of an average American, but the changes going on in these nameless places will have a profound impact on world’s commodity, tech and consumer markets. And this could change the wage-commodity price relationship substantially.
‘Slumdog Millionaire’ – A Stimulus package for India?
India started out deriding slumdog millionaire “poverty tourism”, but now has completely embraced. While 8 oscars is surely a big boost, it is the 2 Oscars given to A.R. Rahman that holds very special for most Indians. While it maybe just a movie, it might actually set off an interesting chain reaction.
It could help spread globalization and bring India more to the global markets. And it can open up newer products and newer markets to be created, and that could partly help economic revival. The story of 300 million middle class and 500 million other aspirants for middle class, all of whom barely tapped by global corporations, is not going to be lost even if S&P cuts Indian bonds to Junk tomorrow. Indian growth story is for there to stay, even if going with lesser hype and more reality. Slumdog is really the symbol of it. It shows India’s realities, but still manages to capitvate the global audience. Indians have no real reason to be embarrassed with the realities – it just happens for any growing country.
Special Report – Recession impact on various sections of the society
Executive Summary
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82% are job loss are among men. Women are going to pass men in workforce for the first time
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West is hit the most compared to North east and MidWest
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Young, blacks and Hispanics are hit more in the recession
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Artists face a far worse time than other professions though their unemployment rate is not different from average population
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Uneducated lost more jobs than educated workforces, unlike the previous 2 recessions.
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With various government policies and market movement, misery could be spread to everyone, including rich
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Portland and St. Louis rank among the unhappiest cities in the US
Emerging market indices that have grown in the past 3 months
MarketWatch has a good report on the progress in emerging market indices the past 3 months. While some of the indices have gone up, I would really be careful of some of those countries. While countries like China and to some extent India and Brazil seems a relatively safe long term bet, given their size and demographics, it is not clear how other countries will fare in the crisis of a lifetime. Chile and Israel are stable democracies and good rule of law, but given their smaller size it is not clear if they can face a sizable change in global trade patterns. Argentina and South Korea might get into deeper trouble, based on their fragile financial systems as seen in the recent history.
Here is the the report.
Of the 23 country benchmarks that comprise the widely watched MSCI Emerging Market Index, 14 have outperformed the S&P 500.
Driving this outperformance, investors have bet that economies which rely heavily on exports and commodities are poised to benefit first when the global economy starts to recover.
MSCI EM index, which as of last week had rallied 8% since the S&P 500′s Nov. 21 low, now shows only a 1.5% advance.
The gains since November didn’t come easy, arriving on the heels of steep yearly losses for the markets as the credit crisis tightened its grip and consumer and investor sentiment slid. The Bovespa ended 2008 down 53%, ending five years of consecutive gains. The Shanghai Composite fell 65%, Taiwan’s Taiex dropped 46% and the Merval tumbled 54%.
World’s best companies – Fortune list
The House of Cards – CNBC
A good CNBC series on the mortgage crisis.
US Budget highlights
Who is John Galt? – Atlas Shrugged’s relevance today
Economist reports that there is a big spike in the sales of Atlas Shrugged – the monumental philosophical tome of Ayn Rand – since the start of the credit crisis. They even plotted the book sales against the economic events, and seems every time the government brings some major policy attempting to “solve” the crisis, the sale of the book goes up. Nothing incites as much love and hate as this book. And the book’s tagline – Who is John Galt is forever etched in the popular culture.
I have read the book atleast 5 times and consider it to be one among the greatest literary works ever written and thought I will share some opinion on this. From where I grew up, Atlas shrugged is not a political manifesto, but a kind of rite of passage from teenager into an adult. Almost every major college in India has fan clubs for this book, and since the reading of it was so normal (you don’t need to be a libertarian or atheist or anarchist anything) and so I didn’t go through the stereotyping process that goes on in America.
S&P gets its earnings wrong
Today’s Op-ed makes an interesting case for changing how S&P computes “E” in P/E for the S&P 500 index.
http://online.wsj.com/article/SB123552586347065675.html
Standard & Poor’s recently shocked investors with an announcement that reported earnings for its S&P 500 Index for the fourth quarter of 2008 are forecast to be negative for the first time since such data were calculated in 1936.
… Suppose on a given day the only price changes in the S&P 500 are that the largest stock, Exxon-Mobil, rose 10% in price and the smallest stock, Jones Apparel Group, fell 10%. Would S&P report that the S&P 500 was unchanged that day? Of course not. Exxon-Mobil has a market weight of over 5% in the S&P 500, while the weight of Jones Apparel is less than .04%, so that the return on Exxon-Mobil is weighted 1,381 times the return on Jones Apparel. In fact, a 10% rise in Exxon-Mobil’s price would boost the S&P 500 by 4.64 index points, while the same fall in Jones Apparel would have no impact since the change is far less than the one-hundredth of one point to which the index is routinely rounded.
Yet when S&P calculates earnings, these market weights are ignored. If, for example, Exxon-Mobil earned $10 billion while Jones Apparel lost $10 billion, S&P would simply add these earnings together to compute the aggregate earnings of its index, ignoring the vast discrepancy in the relative weights on these firms. Although the average investor holds 1,381 times as much stock in Exxon-Mobil as in Jones Apparel, S&P would say that that portfolio has no earnings and hence an “infinite” P/E ratio. These incorrect calculations are producing an extraordinarily low reported level of earnings, high P/E ratios, and the reported fourth-quarter “loss.”
Frequent errors in Japanese investment banks don’t inspire enough confidence
http://www.cnbc.com/id/29381730
UBS said its computer systems mistakenly placed a $31 billion order for convertible bonds (CB) of videogame maker Capcom… UBS Securities Japan said that it had intended to place a 30 million yen order to simultaneously buy and sell the bonds in a so-called cross-trade but that its computer system placed a 3 trillion yen ($31 billion) order instead.
Wow. They thought millions to be trillions and put $31b in line. If you thought this is a one-off error, you are wrong. It now seems pretty routine for the Japanese banks.
How to proceed with Citi nationalization
Till this point government stuck to preferred stocks instead of common stocks (that we trade in the market). Preferred stocks are not exactly ownership, because there are no voting rights, and this arrangement between government and the banks is deliberate. Preferreds are more closer to debt than to equity. With today’s announcement, that might change with the government trying to convert its preferred holdings into common stocks. When it holds a majority of common stocks, it would then be defacto nationalization.
http://www.federalreserve.gov/newsevents/press/bcreg/20090223a.htm
Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory. Previous capital injections under the Troubled Asset Relief Program will also be eligible to be exchanged for the mandatory convertible preferred shares.
Where do US Universities spend their money?
Have you ever wondered where do the money from your tuition go? How do the universities spend their money? Why does the cost of tuition grow 2X more than the inflation rate? Why are the US universities extremely inefficient and uneconomical? I didn’t find any other study and workable stats on university spending in the net, so I just made a small exploratory study on how universities spend money.
Organization of this essay:
Part 1 concerns endowments, Part 2 contains analysis on a private University (Harvard) and Part 3 contains analysis on a public university (UW) and Part 4 is the initial conclusion. If there is enough audience interest, I will go deeper into this problem in further posts.
I started from this chart from my earlier post and started digging where the universities spend their money in.
My 2020 Wishlist
1. Economical solar power (less than $0.05/kWh)
2. Economical water desalination (less than $0.001/gallon)
3. 100% global literacy
4. Democracy and Law & Order returning to Sub-saharan Africa
5. Poorest countries of developing world getting within a factor of ½ or more of developed world’s per-capita income (around $40K/yr)
6. Significant protection of coral reserves & tropical forests and help rebuild the damage to nature
7. Reversal of global warming using the cheap energy from #1
8. Eradication of most preventable, communicable diseases (including Polio, Malaria, Cholera, Tuberculosis and Typhoid)
9. Programmable homes, enabled by Nanomechanics, to enable changing in color, structure and other physical properties on demand, and making homes extremely cheap, mass producible and still satisfy consumer choices
10. Foldable, collapsible cars that can completely compact on demand (you can park the car in the closet) and give options to hold from 1 to 10 passengers, with adjustable sizes, and passing all the crash tests.
Header Image from: http://www.flickr.com/photos/66164549@N00/2455160742/
21st Century debate: Contribution of Computers and Internet to Economic growth after almost a decade into the new century
How come we see the computer revolution everywhere except in the [aggregate] productivity statistics?
- Robert M. Solow, Winner, 1987 Nobel Prize for Economics (Sveriges Riksbank Prize)
Computers, Internet and mobile phones have fundamentally changed our life the last 2 decades. We could do more efficient shopping, connect to a lot more people and be more productive at work. As an engineer who have been a part in developing an Operating system, a search engine and a social networking tool – the three main products of this revolution, I feel they are great things to both build and to use. They make individuals much more productive looking at the micro level. However, looking from an economic point of view and see the Macro picture I’m bogged down with “Show me the money”. Economists of the 1980s and 90s have debated a lot about this and suggested that they may not have caused a lot of economic growth. As this review shows, the economists of late 80s successfully argued that this paradox is due to “mismeasurement, lags, redistribution and mismanagement”.
However, over a long period of time you should see the effect in economic growth, as the indirect effect of the productivity increases reflect in the macro economy. And things have changed since the original “productivity paradox” came, as PCs came into the living room and internet connected the ordinary people to do their mundane stuff in networks originally designed to survive nuclear attacks.So in this decade, have the powerful PCs, Smartphones, Search engines, Facebook led an explosive economic growth? In reopening the debate and looking at the recent data, there still seems to be dismal evidence for the productivity growth from the modern revolution. It is possible that the economy might have reached a saturation as a $10 trillion economy cannot continue to be sprinting like a $1 trillion economy, but still 1.7% annual growth in per-capita income since WWW came seems less. There might be other small causes too. The article concludes with what might be a possible cause for this.
H1b and Innovation
Here is an interesting paper on H1b and the contribution to innovation.
http://www.hbs.edu/research/pdf/09-005.pdf
It’s a pretty long paper and some parts of it are too technical. So, I have reorganized into two main themes and summarized the contents below.
Take a look at the Oil refining companies
The oil prices are going down and it should be bad for all petroleum related companies, right? Well, have you guys looked at the pump prices for gasoline the last 2 months? I took a month vacation in December and when I returned I was shocked to see the price in my gas station rocketed from 1.58 to 2.18 (a shocking 60% up), while the world oil prices are still going down. And in fact, the trend is seen nationally. The gasoline prices have gone up more than 25% since Christmas. So, who is benefitting from this? The answer is – refiners. Their gross margins have gone up from about 10% in December to as high as 50% in January.
Brutal carnage in Mumbai: Where do we go from here?
The carnage in Mumbai is still going, 48 hours after the crisis started on a Black Wednesday. Terrorists have been mostly neutralized except for the Taj Mahal hotel, where one suspected terrorist seems to be holing out still. In size and daringness this is comparable to only September 11 – when a group of hijackers synchronized their attack to destabilize the commercial capital of the US. 9 different locations where attacked killing Jews, Europeans and scores of Indians. Once, the crisis ends we have big questions ahead of us. Read the rest of this entry »
Major terror attack in Mumbai
Terrorists have yet again struck Mumbai, the financial center of India. The attack around 10:30 pm Indian standard Time, was one of the most daring things in the recent times.
India has been plagued by insurgents for the last couple of decades and is related to the global terror attacks emanating from Islamic insurgency in Afghanistan and Pakistan. The attacks seems to have been highly coordinated and aims to scare away away the tourists and other foreign visitors from the Indian financial capital. The information available currently is pretty sketchy and a detailed report will be made in this blog soon. One only hopes that International community will collaborate stronger with India in rooting out this global terror mania.
Image source: Guardian
A Series on Depression – Tulip Mania of 16th Century Holland
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Though it is not exactly a Depression, it is one of the major economic bubbles in the modern history. It had all the elements of a bubble – frenzied people buying an asset in the hope that some other person will pay them higher than what they paid. At one point around 1637 it went so crazy that one Tulip bulb cost more than 12 acres of land and 20 years of a worker’s salary.
This crisis is interesting in that it hyper-inflated a very silly object (a flower) and well analyzed over the centuries and it has a special place in economic history given some of the innovations it brought like the futures contracts. As we will see later in the article, a lot of information about this crisis in the traditional media is more hype than truth and many modern researchers debunk the folklore comparing this crisis to major depressions. This crisis was confined mostly to a small duration around January-February 1637, and didn’t have a lot of serious effects on Dutch economy, contrary to what a lot of traders believe.
Taking a look at investing in the airlines
If you have taken a flight these days, you will not be surprised with the amount of fees they add to your ticket. Most airlines even charge for the first bag you check-in. Here is the list of all charges in various airlines. Now, the positive is that many airlines are returning to profitability. Today’s WSJ writes:
But those who check multiple bags, ski equipment or oversized or overweight luggage are paying much, much more — allowing airlines to make a tidy profit. In those instances, baggage fees may yield more profit for the airline than what the carrier is making on the basic passenger ticket.
… Customers were paying the fee at other airlines without a backlash. Delta said it wasn’t getting any benefit from not charging the fee. So why not charge it?
A Series on Depression – Introduction
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What do you normally expect in a recession? A “Grapes of Wrath” style dust bowls and people in rusted wagons shuttling all across the highways? People waiting in the soup lines and families going out of heat in the winter? People near the end of the world? Well, those are not the only pictures we will see.
Look at 1930s movies – how often do you find signs of depressions in it? In fact, some of the best and grandest of movies came during that period in every genre ranging from slapstick comedy to horror movies, romantic comedies, epics and serious social movies. By 1935, 50% of Americans owned automobile, the first of freeways came in (1939 – Pennsylvania turnpike) and concept of motels exploded 3 fold in a few years, as more Americans began to take vacation inspite of depression. They had fun by inventing so many past-times like Monopoly, miniature golf, swing dance, and reinvented activities like Jigsaw puzzle etc. Society held together and people won their crisis with hope. How did that happen?
A Series on Depression – Prologue
We might be getting close to a depression or atleast a deep recession. But, do we know what a depression means and how bad it is? In the next few months my plan is to take you through historical depressions worldwide, their causes and effects. I’m not going to wear a pink glass and say everything that is happening is going for good. I want to be realist and give you both sides of the coin – something that the traditional media lacks. There are both positives and negatives, and we keep an objective mind we can overcome any crisis is what history teaches us.
What is the series going to contain?
