Mind Game: November 2011

Monday, 21 November 2011

True Booming Economy versus Multi Bubble Economy ?

As we all know, the global economy confronts one of the toughest crises in history.

From my point of view, this is not an ordinary recession. There are a lot of beliefs that we can all cycle out of recession. Is that really possible though? I have underlined US Dollar would still remain as the key reserve currency for next decades. I am convinced that there is right way to look at current crises in sequence of bubbles. David (2010) outlines how different natures of bubbles have advanced and today’s post will provide you insightful analysis of how each bubble developed for the worst ever in the history.

American economy in particular, the house price rose on inflation-adjusted basis until 1980s and then exploded in 2001. Moreover, Stock market bubble continued after the real estate bubble with the notion that Dow had risen 300 % from 1928 to 1982 for 54 years whereas Dow between 1983 and 1992 has increased substantially by 1200 %, growing four time faster than before without having an actual economic growth. (i.e. GDP or company earnings)

Private debt bubble was not significant as the real estate and stock market bubble after the economy itself had self control on their respective responsibilities within the society with belief in continuous growth in asset values and a prosperous and healthy economy that no one did not even make any chances on. The Housing price in the US has dramatically fell in 2006 as the result of the real estate, stock market and private debt bubble where there was default on numbers on loans from individuals who made the wrong assumption on the American economy. There was somewhat a little influence on the discretionary spending bubble. Yet, this came turning point of changing in the pattern of behaviors such as consumer’s irrationalized spending due to growth in housing price and stock market growing at such fast pace where various credit facilities were largely available.

Also, our necessities includes discretionary components where consumers easily give up on the purchases if good alternative. Yet, the real estate, stock market, and private debt bubbles to certain extent have brought negative impact on consumer confidence when the bubble pops. Due to multi bubble economy (i.e. the United States), there was currency bubble, namely, the dollar bubble had a significant impact on falling value on dollars, despite government’s earnest effort. The next government debt bubble, is the worst kind of all where book value of the debt exceeded $12 trillion though it was 8.5% trillion in 2006 in the United States. Bad debts in Europe have not been fully written down by other EU member states. Despite constant effort to stretch the debt ceiling, the government debt bubble found to be the worst, threatening bubble of all relative to other bubbles in the US economy.

So, What's next ?

Peter Thiel, founder of PayPal cogitates ‘Higher education’ as the next bubble after the government debt bubble. He decisively defines the bubble as “when something is overvalued and intensely believed, sort of economic version with short-lived passion.” - The education perfectly fits the definition. Higher education tuition is already too high and surprisingly; feel increase every year not in proportion to the improvement in education quality. Thus, students’ debt loads are unreasonable.

Yet, students make the investments by getting loan from financial institutions and private lenders, as education for them is equivalent of a form of insurance against the future. Higher education is already overvalued that what it can actually yield. In United States, President George W. Bush made it clear that education loans cannot be canceled by a personal bankruptcy. Also, if an individual with education loan fails , they will stuck with the debt and become a heavy burdensome for nearly all students on the planet whose his or her parents are wealthy enough to support higher education.

Is the global economy genuinely booming now? or is it another creation of bubble by human beings ? My answer to today's post is just sad reality. The economy is not booming because I believe that economy is evolving. I think one way to prevent the bubble happening frequently is to continuously learn the mistakes and make changes accordingly rather than strongly believing in "Greed is good". Oh, well - let's be careful with "The Great Recession"

Further Reading 1
http://thestoppedclock.blogspot.com/2011/07/building-economy-of-bubbles.html

Further Reading 2
http://www.forbes.com/sites/peterjreilly/2011/11/02/when-will-the-education-bubble-explode/

Further Reading 3
http://www.cogwriter.com/news/prophecy/great-recession-of-2011-2012/

Sunday, 13 November 2011

Should we all have laugh about Chinese's GDP ? [PART2]

Firstly, there is a problem associated with measuring GDP in China. The figure needs fair correction after official statistic being reported. This happens because regional governments in China deliberately misreport the figures and tends to happen every year. In my opinion, the regions put better words on regional performance and make competitive figures in investment, government expenditure, net export and consumptions so that best figures can be report to People’s Bank of China. Better regional government official report the number, better chance to get promotion for the officials. Thus, political factor heavily plays critical role in constructing economic indicators by manipulating figures unrealistically for better individual gains. Subsequently, it is important to press China to report real statistical figures other than falsified ones.

When the country reports their GDP, they announce target growth rate and real growth rate. Nevertheless, People’s Bank of China solely reports target growth rate and has never been really announced real growth rate. The reason I emphasize of this fundamental problem is real growth is a better indicator of how much of the wealth of the economy has been created and distributed, which would eventually have a great impact on correcting and deciding economic policies. Some economists associate GDP with currency appreciation/revaluation or with Consumer Price Index (CPI) to have a comprehensive picture of what Chinese’s GDP is really about. I think that it’s necessary to respect ‘the Chinese’s way’ – This is because we do not have full picture of domestic political, economic, social and technological aspect of Chinese economy. Global economy depends on China, not vice versa.

Also, for better measurement of Chinese GDP, CPI and M2 should be taken into account in generating final conclusive figure of GDP. When, these two factors are taken into account, surprisingly, China had generated negative economic wealth during 2006 and 2011. How so? GDP growth in Q1 2011 was measured at 9.6 %. Here, we subtract 5.4% of CPI and real growth comes at 4.2 %. If we take into account of money supply (M2), money supply is increased to 15.9% and was 6.3% higher than GDP. In market, it takes time for M2 to have a direct impact on CPI. In other world, labor participation in the economy has distributed the equal wealth rather than creating positive economic wealth so that overall wealth of individuals in population would benefit from this astonishing economic growth of China.

At last, Chinese’s economy should feel proud of their economic development. Yet, I strongly urge China to maintain high level of integrity and be more cooperative with global leaders. There is nothing wrong about being honest and it doesn’t harm anybody!

Should we all have laugh about Chinese's GDP ? [PART1]

China – the world’s is the fastest growing economy with the largest population in the world; we have seen magnificent rate of growth of Gross Domestic Product (GDP) where United States, United Kingdom and Greece have sharply been shanked– But what does this Chinese GDP mean to us and to Chinese nationals?

Having seen China still well above 9-10% of GDP growth, there is evidently widening gap between the rich and the poor due wealth is hardly distributed to output that generated in the economy. My critical view on this that GDP growth does not categorically mean anything to Chinese nationals. In some extent, increase in wage one way helps regional states to urbanize and people can better afford their needs. Yet, currency policy is in the middle of firing squad. In general, GDP is perceived as a macroeconomic measurement. From my point of view, Chinese nationals only look at microeconomic economic perspectives, not macroeconomic measurement, as they do not see consistent improvements in their wealth and standard of living. What is so important about Chinese’s economy? What is the real improvement that nationals recognize in China? Standard of living in Chia is not very far off from living standard in Africa. Can we still say that China would surpass the largest economy, the United States by meeting every economic needs and objectives? Guess what? China already surpassed the Japan. Where are the problems of China? But, they need to develop their economy in more structured manner.

Source: http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&idim=country:CHN&dl=en&hl=en&q=chinese+gdp#ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_mktp_kd_zg&scale_y=log&ind_y=false&rdim=country&idim=country:CHN:GRC:GBR:USA&ifdim=country&hl=en&dl=en

Tuesday, 1 November 2011

Is lesson taught thoroughly ?

MF Global, leading broker-dealer firms providing customized trading and hedging solutions in commodities, listed options and futures, equities, fixed income securities and foreign exchange. The company announced a filing under Chapter 11 of the U.S Bankruptcy Code with the United States Bankruptcy Court for the Southern District on 31 October 2011. The board of directors approved this Chapter 11 petition in order to protect their assets. By fact, this is the biggest US casualty of Europe’s debt crisis and the seventh largest bankruptcy by assets in US history. In particular, the company strived to revive by hiring restructuring and merger advisers for a bid from potential buyer ‘Interactive Brokers’ under the court supervised auctions.

So, what went wrong? The company has initially been suffering from low interest and bets it made on European sovereign debt. MF Global basically went for what would be a very profitable trade with European sovereign debt that obviously has blown up in their face and brought the company down. Interestingly, impulsive risk-appetite of MF Global Chief Executive Officer with the company’s own money has shown the similar risk behavior that we have seen before Financial Crisis 2008-9 in proprietary trading from major investment houses such as Goldman Sachs, JP Morgan, Citi Group and Morgan Stanley, this has subsequently slashed the company value by -67.39% (graph shown below) and with credit rating cut to junk by Fitch Rating from BBB to BB + and Moody from Baa2 to Baa3, one level above the junk status. Bloomberg reports that Jon Corzine, CEO of MF Global Holding had been placing additionally increasing position in the debt of Italy, Spain, Belgium, Portugal and Ireland from a year ago according to company’s presentation.

Due to uncertainty over Wall Street’s exposure in sovereign debt in Europe, US regulators demanded to disclose the bets on debt issued by countries including Portugal, Ireland, Italy and Greece. MF Global particularly failed to comply with the US Commodity Future Trading Commission (CFTC) n in providing required data and records. Chief Operation Officer of MG Global Holding wrote in the filing that “Regulators had expressed ‘grave concerns’ about the viability of MF Global, which filed the bankruptcy after – no viable alternatives was available in the limited time leading up to the regulator’s deadline.” It is interesting to see MF Global COO fingers at regulators in the part of the statement in the filing that the bankruptcy process was quicken with the pressure from CFTC. It is evident that aggressive behavior in taking position of troubled economies has not been favoring the return on the position is being taken from the investment.

I am wondering whether the lesson from Lehman Brother’s collapse was taught MF Global Holdings. Traders, brokers in financial market envisioned two hundred years of MF Global Holdings as Mini Goldman Sachs as MF Global CEO worked at Goldman for four years. MF Global is generally known for highly leveraged and trying to do what he did at Goldman Sachs. But, the market went against him. Also, there are rumors that the senior management figures are expected to receive severance bonus. So, I say once again that there is price for everything, and in finance; there is no such free lunch. The potential loss is now in hand of local and international investors such as private equity firms where they hold the substantial number of shares of MF Global. However, I do not hope that global financial markets would not see Lehman Brothers type bankruptcy and stricter regulations should be considered to fill in the loophole and ethically serves the clients with clear and transparent objectives whereas MF Global Holdings was not particularly good at.