Wednesday, 26 May 2010

Roubini's views

Some excerpts from RGE Monitor:

After bottoming in Q2 2009, world trade volumes have grown steadily since H2 2009, with momentum continuing into early 2010. Emerging markets (EMs) are driving the trade recovery with their imports approaching the 2008 peak. In early 2010, emerging Asia’s exports and imports crossed their 2008 peaks as regional domestic demand, inventory restocking in Asia and abroad, and Chinese commodity demand boosted intra-Asia trade.
Domestic demand has fueled a sharp rise in LatAm imports while its exports approached the 2008 peak, helped by strong commodity exports and reviving U.S. demand. The Middle East and Africa’s trade has also revived decisively, whereas deleveraging and fiscal austerity are weighing on Central and Eastern Europe’s trade. While Asian demand has supported Japan’s exports, U.S. and eurozone exports and imports are still over 10% shy of their 2008 peak due to a slow recovery in domestic consumption.
After plunging in 2009, investment is recovering due to strong government investment and improving capex in EMs and advanced economies. Replacement of capital and fiscal incentives for capex and automobile purchases are boosting global trade in capital goods, automobiles and auto parts and components. But trade volumes were still 7.0% below their 2008 peak as of early 2010
And now, debt crisis and fiscal austerity in the eurozone and potential trade and financial contagion to the rest of the world threaten to stifle the global trade recovery in 2010 and increase protectionism and trade finance costs. Aggressive fiscal cutbacks in periphery eurozone countries have arrived earlier than expected, which—along with a weak euro—are likely to reduce the EU’s import demand starting in 2010. This will affect global trade in consumer and capital goods since the EU accounts for nearly 40% of global imports and is a key export destination for the world’s major economies. The euro weakness will boost EU exports, especially those of competitive countries like Germany and the Netherlands.
The current crisis would also force core eurozone countries and those with vulnerable fiscal outlooks to undertake fiscal austerity as soon as 2011, weighing on private demand and imports. Developed economies’ imports are expected to recover sluggishly amid slow recovery in consumption and capacity utilization. Imports of EMs with large domestic demand and any expansion of global fiscal stimulus will fail to offset weaker import demand from the eurozone and other economies. Due to these factors, global trade momentum will ease over the course of 2010 and grow at a slower pace in 2011. RGE forecasts world trade volume to grow 7.5% in 2010, with downside risks, following a contraction of 12.2% in 2009.

PIIGS markets all in bear territory European Stocks to Watch - MarketWatch

PIIGS markets all in bear territory European Stocks to Watch - MarketWatch

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Missing the point

Eric Rasmussen of writes about the typical behavioral mistakes retirees make at retirement:

The period right after retirement, when people have just stopped working, can be the most critical period for investors, say experts, and yet it’s also a time when people make decisions with their guts that they ought to be making with their heads. People are often unwilling to take risks during this period—say, by keeping investments in the stock market. Yet at the same time they’re ignoring the risk of longevity, or what might happen with their money if they live another 30 years and have to deal with the inflated costs of food, shelter and (even more sobering) health care. Imagine trying to spend 1986 dollars on health care today.
So it goes that behavioral finance has become the topic du jour, and insurance company Allianz has gone out and plumbed the thinking of 10 experts in the area, creating a report called Behavioral Finance and the Post-Retirement Crisis. The report discusses why investors make certain decisions about products like annuities, then digs into why that behavior might not always be in their best interests. It also considers how such behavior might be changed.
One observation of the report is that retiree aversion risk is often greatly amplified. Professor Eric Johnson of Columbia University recently worked with the AARP and the American Council of Life Insurers to look at risk-taking behavior. Where normally a gambler in Atlantic City would risk a $3 loss to make a $6 gain, retirees are in the woodshed by that time.“Nearly half of the retirees said that they would refuse a gamble with a 50% chance of winning $100 and a 50% chance of losing as little as $10, which suggests they weighted losses about 10 times more heavily than gains,” says the report.
And that kind of aversion can have a dramatic effect on what they do with money after they retire—say, when they are faced with the choice of taking a lump sum distribution of money or annuitizing. Johnson says that handing over the money to an insurance company can seem like “losing” the money, and because the psychological effect is double, handing over $250,000 can seem like handing over half a million, he says.Investors might also not realize that they’re thinking in terms of nominal dollars not real dollars. Professor Jeffrey Brown of the University of Illinois found that an investment spurned by retirees when framed one way might be embraced when it is framed another way. He took a $100,000 savings account with 4% interest and put that in front of 1,300 people older than 50, asking them if they preferred that to a life annuity paying $650 a month. The two choices were actually designed to have the same actuarial value. But only 21% liked it when it was positioned as an investment, whereas 70% preferred it when it was positioned as a monthly income stream, not an investment. The investment moniker had more risk associated with it. Such behavior has come under greater scrutiny as investors continue to reel from the financial crisis. People tend to take a rear-view mirror view to the choices they make, says the report. “I find a very strong negative relationship between a bad stock market return and annuitization,” said Alessandro Previtero, a fellow at the Anderson School of Management at UCLA, at the press meeting. “After a negative trend in the stock market, individuals are more likely to take an annuity. After a positive time, they are more likely to take the lump sum.” “People make long-term binding financial decisions based on the last six months of the stock market,” echoed Shlomo Benartzi, a professor and co-chair of the behavioral decision-making group at UCLA. Benartzi said that the behavioral finance element of an advisor’s work will become more important as investors become more responsible for their own decision-making in the defined contribution era.

Wednesday, 19 May 2010

The Second Stage of the Financial Crisis....

Not even the U.S. is safe any more from bond investors who may realise government debt is unsustainable says Nouriel Roubini as reported by Businessweek:

“Bond market vigilantes have already woken up in Greece, in Spain, in Portugal, in Ireland, in Iceland, and soon enough they could wake up in the U.K., in Japan, in the United States, if we keep on running very large fiscal deficits,” Roubini said at an event at the London School of Economics yesterday. “The chances are, they are going to wake up in the United States in the next three years and say, ‘this is unsustainable.”
The euro slid to the lowest level in more than four years against the dollar today as a German ban on some speculative trading fueled concern the European debt crisis will worsen. Roubini suggested the public debt burden incurred after the 2008 bank panic may now cause the financial crisis to metamorphose.
“There is now a massive re-leveraging of the public sector, with budget deficits on the order of 10 percent” of gross domestic product “in a number of countries,” Roubini said. “History would suggest that maybe this crisis is not really over. We just finished the first stage and there’s a risk of ending up in the second stage of this financial crisis.”
Roubini, who predicted in 2006 that a financial crisis was imminent, said that the record U.S. budget deficit may persist amid a stalemate in Congress between Republicans blocking tax increases and Democrats who oppose cuts in spending.
“In many advanced economies, the political will to do the right thing is constrained,” he said.
The U.S. posted its largest April budget deficit on record as the excess of spending over revenue rose to $82.7 billion. The federal debt is currently projected to reach 90 percent of the economy by 2020.
Roubini, speaking in a lecture hall packed with students who then queued to meet him at a book-signing, reiterated that the euro region faces the threat of a breakup after the Greek budget crisis. The European Union said yesterday it transferred the first installment of emergency loans to Greece, one day before 8.5 billion euros ($10.4 billion) of bonds come due.
“Even today there is a risk of a breakup of the monetary union, the euro zone as well,” Roubini said. “A double dip recession in the euro zone” is “something that’s not unlikely, given what’s happening.”

Friday, 7 May 2010

The Return of Fear Across The Globe...

Financial Times reports on the latest market developments about the European Debt Crisis:

Worries about European sovereign debt turned suddenly into one of the market’s sharpest corrections since the crisis began.

A four per cent drop in Chinese stocks started the downbeat mood, but Wall Street added an exclamation point. Later in the afternoon, the S&P 500 index took its biggest plunge since December 2008, erasing its 2010 gains in a matter of moments. It was down at one point 8.6 per cent, to 1,065.93.

The VIX index of market volatility spiked nearly 40 per cent to 40.71, to highest level in a year – and its sharpest one-day jump since February 2007.
“It’s really shocking,” said Jeff Palma, global equity strategist at UBS. “Stocks fell to minus nine on the year within seconds, that was a pretty shocking move. This is not your normal every day pull back, this is a pretty full-on collapse in risk appetite.”
Images of Greek protesters taking to the streets in opposition to austerity measures matched an accelerating decline in the euro. Meanwhile, the European Central Bank said it would keep its interest rate at 1 per cent, and would not begin buying sovereign debts.
Markets have been rocked over the past few days as the danger to the global economy of unsustainable budget deficits has hit home hard. Riots in Athens have illustrated how the severe austerity measures designed to tackle such deficits have implications not just for economic growth but also for social cohesion.
The dollar and highly-rated government bonds have been pushed sharply higher on haven flows, and commodities corrected to year lows, notably oil trading near $75 a barrel.

In spite of fear emanating from sovereign risk, the beneficiary of the anxiety was the world’s deepest haven market, the 10-year US Treasury. The benchmark fell 15 basis point to 3.38 per cent, having earlier tumbled 28bp. 30-year Treasuries at one point tumbled 30bp lower, to 4.06 per cent, their lowest level since March 2009.

Wednesday, 5 May 2010

Nouriel Roubinis' RGE Monitor reports on the latest developments in Europe dealing with the debt crisis in Greece and perhaps other countries.

Even as the IMF and the eurozone have virtually finalized an unprecedented three-year financing package of €110 billion for Greece, financial markets remain unimpressed. The common currency continued to plunge this week and long-term government bond yields in Greece and in the periphery countries, including Italy, spiked upward again after a short relief rally before the agreement. The market’s lukewarm reaction to the financing package confirms RGE’s view that a traditional financing package extended at unsustainable interest rates, will not allay solvency fears but rather will lead to a disorderly outcome and contagion.
Plan A includes the following core elements: €80 billion in bilateral loans will be provided by the eurozone at annual interest rates of about 5%, according to a previously negotiated formula, and €30 billion (i.e. 32 times quota) by the IMF through a standard stand-by arrangement. Although some eurozone member states—including Germany, which is facing regional elections on May 9—still have to ratify the unpopular disbursement, a new consensus has emerged among authorities and opposition that the main issue is not Greece per se but the gathering contagion to the rest of the eurozone. Unanimous approval by eurozone heads of state is due on May 7 at a special summit, following fresh reports that the Slovak government is holding up the disbursement for domestic election purposes.
The additional measures agreed by the Greek authorities will result in a front-loaded fiscal retrenchment of about 11 percentage points of GDP over three years with the aim to reducing the deficit below 3% of GDP by 2014. About half of the deficit reduction will come from expenditure cuts, the other half from tax increases and a broadening of the tax base, including from previously undocumented income. Greek authorities have accordingly revised down their growth forecast to -4.0% in 2010 and -2.6% in 2011 for a cumulative GDP volume retrenchment of 8.6% starting 2009. The debt ratio is expected to continue increasing, peaking at almost 150% of GDP by 2013 before starting to decline in 2014.
The major banks have already been downgraded to junk status by S&P, and other rating agencies might follow suit. Importantly, against previous assurances that the ECB would not ease the rules for one country alone, in an unprecedented U-turn the ECB has decided to suspend the minimum rating threshold for any Greek collateral with the ultimate aim to encourage investors to hold on to their investment. Indeed, as of the end of 2009, European banks hold claims of US$193 billion on Greece and more than US$1 trillion of further claims on Portugal, Ireland and Spain.
It cannot be ruled out that the ECB will eventually have to resort to more aggressive measures such as buying government bonds in the secondary market in order to stop the contagion.