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/

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

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. 

Further readings and must-watch item 

Bloomberg 

http://www.bloomberg.com/news/2011-10-31/mf-global-exposes-prop-trading-risk-that-volcker-wants-to-curb.html

http://www.bloomberg.com/news/2011-11-01/mf-global-probe-said-to-involve-hundreds-of-millions-in-funds.html

New Release by MF Global Holdings 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTEzMTY2fENoaWxkSUQ9LTF8VHlwZT0z&t=1

Video of MF Global files for bankruptcy- http://www.youtube.com/watch?v=yVcvh2O1ykU

Is the post dollar era coming ?

First edition of ‘The Currency War’ have primarily criticized the system of Dollar and claimed it to be unstable to be used as reserve currency. In addition, second edition illustrates and elaborate the mechanism of the currency (dollar) and analyzed the causes of financial crisis 2008-9 in structural manner and anticipated how this crisis would end under the influence of conspiracy theory based point of view. Author, Soon Hong Bin- he is one of prominent economists in China; His main argument was made on whether dollar would be still stable reserve currency and also outlined pessimistic outlook on global economy. He also has somewhat forecasted that this global economic recession will take place by emphasizing the fundamental problems of volatile derivative market whether it has been used to hedge the level of risk or intentionally taken the position to make speculative profits.  

Author’s view on dollar as global currency; dollar is not functioning properly with right intention and dollar is increasingly being manipulated by invisible powers. He urges the global economy will soon need an alternative key and also expressed his sincere concern if dollar loses control completely. On contrary, many economists collectively do not agree Yuan as the next global currency as this is one of the wish list for China, not really in favor of global economy. There are so many unstable variables embedded in Yuan if this currency is considered to be key global currency. Author also brings the spotlight to Yuan being the key currency for global trade (goods/services) and looks at the possibilities. 

Having seen recent global economic recession and European Sovereign debt crisis, I personally think that it would be the case for the global economy to seek for an alternative ‘post-dollar currency’. This review of ‘The Currency War’ highlighted some key events such as this current economic recession would persist until 2024 which author find this current economic meltdown will have almost similar impact as The Great Depression 1930. He gave an assumption that new post dollar currency will be based on gold and certified emission reduction and he strongly encouraged Chinese nationals to have a great understanding on how the Western countries have been developing during last three decades instead of being ignorant. Roosevelt once said ‘There is no such coincidence’ on every event that take place. It is meticulously planned and executed’.

There are too much information everywhere that due diligence is sometimes required to identify the quality of the information. Our impulsive and unethical behaviors in generating profit and use the policies to make the life easy and favorable for 1% caused this crisis rather than blaming on people who could payback their loans. Also, perspective of The Currency Book is pessimistic on the US economy. Yet, this alternative key currency in post-dollar era; that must be something we should all be keen to study about although I have no doubt that dollar would still remain strong as the global currency.

Further Reading
http://competitiveintelligencejournal.blogspot.com/2008/08/currency-wars.html

I-L-L-U-S-I-O-N

(Source: Top foreign stock, 2011)

About ten years ago, it is not too long ago that IMF has been very spiteful on Asian financial crisis in July 1997. In 2011, IMF is so affable that majority of Asian slightly start forgetting about Asian financial crisis. Yet, Asian countries do not really welcome this friendly gesture taking their painful lesion from financial crisis (1997) into account. When you generally talk about China, what is the first thing that comes to your mind? Is it the largest population, cheap labor or the next leader of global economy? If we look at closely at ‘Export growth by trade partner in 2010’, this graph illustrates an important view that economic growth of majority of Asian countries are based on the exports, mainly to China, except Philippine and it was also interesting to see exports to the United States was less than China in comparison amongst trade partners as shown below.

We often read the articles with the title such as China: stunning growth? ‘Is China in recession ‘ Large part of Chinese economic growth was obtained by the export activity, in which this different level of exports can be monitored by the index, called ‘Baltic Exchange Dry Index (BDI, in short). This index tracks worldwide international shipping prices of various dry bulk cargoes and provide an assessment of the price of moving the major raw materials by sea. When this index goes up, this would mean that there is high demand of moving raw materials from one country to another. In opposite, this show the falling demand of raw materials (or commodity) the line graph above, please refer to blue line. Second half of Year 2008, the rate dropped from $11380/day down to almost $ 330/day (approx.) shown below.

(Source: Investmenttool.com, 2010)

In my own perspective, Asian countries might be exposed to ‘knock-on effect’ risk if China reaches the point where economy can’t grow further growing then. Then, what could be the driving force of stunning Asian economic growth that we have been hearing and seen so far?  It is certain that Asian economies will grow in certain size. Sustainability of the growth still is questionable. So, the illusion of China – is it still there? I think not. BDI has temporarily been raising right after the financial crisis 2007. This was because China had a substantial impact on rising demand of moving raw materials, most commonly iron ore from other countries to China (inbound transport) There was also a huge of wave of constructing new apartments, real estate buildings in China which even pushed demand even higher. This means that China has been importing raw materials rather than getting this within their country. 

Again, if they stop importing, where will the rest of demand come from? Is it sufficient enough to grasp well-balanced global trade? Does China need continuously have their economic growth with bubble in their economy to maintain current positivism? Huge cheering from trade partners, IMF, World Bank – who are they in favor of?  I personally don’t think that cheering gesture of IMF towards Asian countries is sometimes in favor of 99% of global economy. I suppose it is mostly for 1 % for advanced economies without truly knowing what these countries are after and perhaps they still conduct such impulsive behavior after being saved from this crisis. All economies (countries) should really have the mindset of fostering their economy, not heavily relying on a particular country (e.g. China). Independence; that is something that we all have been lacked for some time.

Image 1 – US Economic Crisis Climate

Source: http://topforeignstocks.com/2011/09/06/u-s-economic-crises-since-1990/

Image 2 – Baltic Dry Index

Source: http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm

The West vs The East

Sorry, folks – Global economy is still in recession

It is not surprise that global economy is still in recession. There have been two major stages of the most serious crisis since the Great Depression. BNP Paribas firstly made an announcement that they were ceasing activity in three hedge funds that specialized in US Mortgage debt. The banks did not how big the losses were. On 15 September 2008, this was the time that the US government allowed the investment bank ‘Lehman Brothers’ to go bankrupt. There was also an interesting mindset among the major investment bank houses saying – they are ‘too big to fail’ and expected the government bailout.  This held no longer true that the threat of a domino effect through global financial system was forthcoming.

Furthermore, On 5 August 2011, there was whooping new that S&P downgraded triple rating (AAA) of the United States during the weekend and was no longer classed as top-notch and the American bond yield will unlikely rocket in coming times. It came to my mind that it would be seen as opportunity for rapid growing economies such as China and India mainly. These economies will bounce back from a part of global recession with substantial economic growth and constant developments.  This assumption is based on conditionality of “Any country with mountains of foreign reserve and the possibly lowest budget deficit will position themselves.” (Naroo Kim, 2011)  The Economist published an interesting article on September issue what $ 3 trillion Chinese foreign reserve could do. (The Economists, 2011)

Threatening the West ?

If you ask me whether these growing economies are dangerous. My cynical answer is ‘Yes’ – watch out. Why? Look at the list of shopping list for China with their foreign reserve? Buying off all Portugal, Ireland, Italy and Spain debt? Or Buy this year’s projected oil output and drive the oil market as they wish? This raises very important points for Europe and the United States. The economy need to bring their intervention with an acute eye to re-shape the economy to prevent European Credit Crunch, which I believe that is imminent. Hence, rapid growing economies will have somewhat a huge impact on rebalancing the global economy outlook of global economy and may lead the economic growth. For Europe and the US, it is a real time without further postponement to restore their confidence and work hard beyond their expectation to fix what has gone wrong for a long time. 

Oh, My God! - It’s really happening

Danny Quah, a professor at London School of Economics and also a member of the World Economic Forum on Economic Imbalances. One of his studies grasped my attention with a headline of ‘The Great Shift East’. His study argues that there is clearly more economic activity in Asia and also mapped out the evolution of world’s economic centre of gravity from 1980 through 2049. According to Professor Danny Quah;

                                                                                                                                      (source: Danny Quah, 2011) 

Economic centre of gravity is defined as the spot within the globe, which represents the “average location” of global GDP. For example, if there were only two locations anywhere in the world producing any GDP, New York and Beijing, and they produced the same amount of GDP in each city, then the centre of gravity would lie within the surfaces of the globe exactly halfway between New York and Beijing. The first dot on the left is where the centre of gravity in 1980s, somewhere between Europe and US. The black dot on the far right is where it was located in 2008. And the red dot shows where is projected to be in 2050. It has moved a long way east already, will move a lot further east in future decades. (Danny Quah, 2010)

                                                                

But, Western economists (e.g. William Easterly and Greg Mankiw) says, “ West should not be worried” based on their thought that the west and the East are not competing for a fixed amount of Global GDP, and free trade between them will mean that both can become richer than they would be without the free trade. Also, rapidly growing economies are growing at breathtaking scale and is happening so quickly as it is shown on the graph below.

                                                                                                                                           (Source: FT, IMF, 2010)  


I do not totally believe in the collapse of financial sector in 2008 did cause widening gaps in GDP growth between emerging countries and developed countries. There was an obvious tipping point from beginning of 2001. I do not say with confidence of course. But, if these two lines show interconnections, the global order and economy will see many issues that has not ever discovered, yet with an same objective of all – A great era with more growth as one economy within all countries on globe rather than classifying the global economy as the west and the east as if they are competitors for a death. 

Source 1- FT

http://ftalphaville.ft.com/blog/2011/03/23/523231/the-worlds-economic-centre-of-gravity/

Source 2- Danny Quah, LSE

http://econ.lse.ac.uk/~dquah/p/GE_Shifting_CG-DQ.pdf