Two good FT columns today

Tim Price of ‘The Price of Everything’ blog fame has written a good column in FT. Sample these two paragraphs:

And an analysis of the Altman Z Score, which assesses the likelihood of corporate insolvency by comparing various balance sheet measures, shows that the frankly flakiest companies have seen their shares hugely outperform the rest of the market even as their capital strength deteriorates. In short, this has been a rally driven by junk.

But then what should we expect, when governments and their nominally independent central bank associates have conspired to manipulate prices throughout the capital asset structure, primarily to bail out banks that are conspicuously unfit for purpose? We are now trapped within a global parody of free markets. [More here]

Similarly, on a somewhat related topic, John Kay talks of the application of the Peter’s principle to the financial industry. He finds financial industry is apt for the application of Peter’s principle:

The financial services industry is particularly vulnerable to hubris because sections of it are not very competitive, and randomness plays a large role in the outcome of speculative transactions. It is therefore particularly easy for those who work in financial institutions to make the mistake of believing that their success is the result of exceptional skill rather than good fortune. What more natural to believe than that extraordinary talent will find pots of gold under other rainbows? Until vanity is vanquished, I anticipate that diversification to the level of incompetence will continue to be a powerful element in business behaviour. [More here]

I would add  ‘acquisition’ to the comment about ‘diversification to the level of incompetence’.

The re-appointment of Bernanke

President Obama has ended the suspense on the re-appointment of Bernanke. Subject to Congressional hearings and approval, Bernanke looks set for a second term as the chairman of the Federal Reserve. The President cited his temperament as one of his strengths. Perhaps, there is something to that. But, as for his judgement, reading Stephen Roach’s column in FT today is the best place to go to. Roach provides a clear, well-argued and yet scathing indictment of Bernanke’s errors of judgement. 

On a different note, it will be up to his cheerleaders to deny that the current mood of well-being and optimism has a lot to do with the rose-tinted glasses with which Bernanke’s monetary reflation efforts are viewed.

That is what Stephen Roach hints at here and correctly so:

Notwithstanding these mistakes, Mr Obama may be premature in giving Mr Bernanke credit for the great cure. No one knows for certain as to whether the Fed’s strategy will ultimately be successful. The worst of the US recession appears to have been arrested for now – a fairly typical, but temporary, outgrowth of the time-honoured inventory cycle. But the sustainability of any post-bubble recovery is always dubious. Just ask Japan 20 years after the bursting of its bubbles. [More here]

Comments by John Hussman in his weekly ‘Market Comment’ were good and homed in on its target with good precision:

“Our forecast is for moderate but positive growth going into next year. We think that by the spring, early next year, that as these credit problems resolve and, as we hope, the housing market begins to find a bottom, that the broader resiliency of the economy, which we are seeing in other areas outside of housing, will take control and will help the economy recover to a more reasonable growth pace.”

Ben Bernanke, Federal Reserve Chairman

On Friday, investors took great cheer in an optimistic statement by Ben Bernanke suggesting good prospects for economic growth ahead. We might be inclined to place a sliver of credibility in Chairman Bernanke’s assessment – if not for the fact that the quote above wasn’t from last week at all, but rather, hails back to November 8, 2007, just before the recent recession began. You might recall that the S&P 500 was pushing 1500 at the time. The implosion of the global credit markets was still just a slight rumble. [More here]

In the final analysis, it is a good thing that he has been reappointed for he should be around long enough to witness and reap the windfall of his acts of omission and commission.

[Update: Ambrose Evans-Pritchard writes an even-handed comment on the re-appointment of Ben Bernanke]

Jackson Hole triumphalism

To fully understand, interpret and even judge Mr. Bernanke’s tone of ‘quiet satisfaction’ with obligatory reference to ‘pending challenges’, you should read this very well-written and crisp piece by Prof. Barry Eichengreen. Nice parting shot:

Too bad that there was not a better way of learning sympathy for Japan than by emulating its example. [More here].

Talking of Bernanke’s speech, it should be mentioned that this was his inaugural remarks at the Federal Reserve Bank of Kansas City’s Annual Jackson Hole Symposium this year.

Mention of Jackson Hole should remind readers of the treatment Raghuram Rajan got there some years ago (2005, to be precise). It simply shows that sycophancy is not just the defining feature of developing countries’ power structure. That finds mention here and here. The second one is the post by Krugman. You have to click on the link that takes you to the comments by Donald Kohn in reaction to Raghuram Rajan’s remarks. It is incredible stuff.

The crucial point – one that is being missed in all the talk of Bernanke’s re-appointment as the Fed chairman – is that he was an unflinching intellectual companion to Mr. Greenspan. While defending Bernanke against criticism and charges levelled by Anna Schwartz (intellectual companion of Milton Friedman, Paul Kasriel of Northern Trust packs his own punch in the end. Read it all here.

[Update: This is the link to Mr. Kohn’s comments and that of others on Raghuram Rajan’s paper. The reference to the obsequious comment by Kohn towards Greenspan can be found here. Of course, it is in the last page of the comments by Kohn to which I have provided the link above. The original WSJ story on Raghuram Rajan’s critique is here]

Capitalism and Indian capitalists

T.N. Ninan reminded us of the dangers of Indian capitalism being derailed by Indian capitalists  in his weekend column yesterday. The immediate trigger is the collapse of the portion of roof in the new Delhi Domestic Airport Terminal, close on the heels of the problem in the Delhi Metro project. The implications of what Mr. Ninan writes are clear. How and on what basis are contracts for public works awarded to private contractors?

This ties in with the recent debate on governments, private interests and oligarchies in the wake of the dispute between the Ambani brothers on the supply of natural gas from one to the other and on the supply of gas by Reliance Industries to a public sector undertaking in which it appears that the Petroleum Minister is not a disinterested party in more ways than one. See Latha Jishnu’s column here. The speech by Raghuram Rajan that she refers to, can be accessed here in full. It was made in September 2008 in India.

If you read Prof. Rajan’s speech, you can understand that a lot is riding on the Unique ID project that Mr. Nandan Nilekani is spearheading. I wish and pray for unqualified and overwhelming success for his efforts.

Going after growth

Ever since I heard that Indian PM had said that restoring 9% growth was going to be the greatest challenge in his Independence Day speech, I wanted to go back and read his full speech. I did that. This is where he said that:

As you know, our economy grew at a rate of about 9% from the year 2004-05 to the year 2007-08. This growth rate came down to 6.7% in 2008-09 due to the global economic crisis. It is only a result of our policies that the global crisis has affected us to a lesser extent than many other countries. Restoring our growth rate to 9% is the greatest challenge we face. We will make every necessary effort to meet this challenge — whether it is for increasing capital flows into the country, or for encouraging exports or for increasing public investment and expenditure. [More here].

Growth has to be the natural consequence of a government doing the right things by the country, by its people. It should be an incidental outcome. It can be a loose guide but it cannot be elevated to that of an obsessive goal. There are many arguments as to how India managed to achieve 9% growth rate for 3-4 financial years. It was not just because India managed to find the right formula but only for four years. To be sure, there was a tipping point for the better in many domestic factors but international growth and easy money played no small role.

More importantly, we all know that countries can keep growth up for quite some time while its harmful effects silently build up. Economics works with lags. The negative impact might be felt in the near future or later or might be felt over a number of years quietly.

Good friend Niranjan has written a column on the subject of 9% growth. You can read it here. He says that we should not take 9% growth for granted. I would have preferred a more provocative conclusion. I would have said, ‘let us not even bother about 9% or any other growth target’. It is false precision.

In his list of 13 countries that have achieved high growth sustainably over a quarter century, not many are democracies or, were democracies when they achieved those rates of growth. No, it does not mean that non-democracies attain high growth rates more easily than democratic nations. To me, it means that non-democracies go after high growth as a means of conferring legitimacy on themselves. Thus, it carries immediate political costs and later economic costs.

We – columnists – write history as it is being made. We do not go back and check the eventual fate of the stories that we hail as ‘successful’ at a given point in time. Countries rarely figure out their sustainable growth rate and thus ‘grow within their means’ nor do they work to expand the potential in a manner that high growth would not entail unacceptable costs now or later. 

We should just end the fixation with 9% growth rate. The recent crisis is largely a culmination of the belief that gained currency among many intellectuals that global growth speed limits have been broken permanently.

Article IV dialogue with China

The transcript of the IMF conference call on the conclusion of the Article IV consultation with China is a gem, more for what it does not say explicitly than for what it does. Readers should note that the IMF did not conduct Article IV (under the Articles of Agreement each country signs with IMF on becoming a member, an annual consultation is held) dialogue with China in 2007 and in 2008.  Second, unlike in the case of other countries, IMF does not publish a report at the end of its Annual Article IV consultation with China.

Credit tea-leaves

On August 6th, the Bank of England raised the amount of debt securities it intended to purchase, from GBP125 billion to GBP175 billions. On August 12tth, the Federal Reserve quietly extended the end-date for its quantitative easing programme to October from September. On August 17th, it extended the deadline for its Term Asset Backed Loan Facility (TALF) by 3 to 6 months from its end of the year deadline. Central bankers are in no hurry to exit quantitative easing. They know why. Do investors understand why?

Fed Senior Loan Officers’ Survey (July 2009): key findings

Lesser number of American banks may be tightening lending standards than before. But, on net, tighter rather than easier lending conditions are dominant. Second, demand for Commercial Real Estate loans, Commercial & Industrial Loans or residential mortgages from prime borrowers and consumer loans remains weak or weakened in some cases. Third, lending standards are expected to remain tighter than average until mid-2010 and for ‘low credit quality’ borrowers (households or commercial) would remain tighter, for the foreseeable future.

IEA and the IMF

If you were looking for a good reason to turn negative on the crude oil price outlook, you might have found one here: 

IEA Raises 2009, 2010 Oil Demand Forecasts on Chinese Growth

Aug. 12 (Bloomberg) — The International Energy Agency raised its global oil demand forecasts for this year and next, citing accelerating industrial activity in China, the world’s fastest-growing consumer of crude.

The world will need an average of 85.25 million barrels of oil a day next year, 70,000 barrels a day more than previously estimated, the adviser to 28 nations said in its monthly report today. Demand growth next year at 1.6 percent will be lower than earlier forecasts after the outlook for 2009 was also increased. The agency boosted predictions for supply from outside OPEC.

“There are some signs of life, certainly in the Chinese economy,” David Fyfe, head of the IEA’s oil industry and markets division, said by telephone from Paris. “But you’ve got to offset that with what’s happening” in developed economies, where industrial activity remains “very sluggish,” he said.

This reminds me exactly of the July 2007 global growth upgrade made by the IMF for 2008. It is still there in the IMF website. It makes for interesting reading:

The strong global expansion is continuing, and projections for global growth in both 2007 and 2008 have been revised up to 5.2 percent from 4.9 percent at the time of the April 2007 World Economic Outlook. Risks to this favorable outlook remain modestly tilted to the downside.

A number of other risks, however, look more balanced. In particular, while the correction in the housing sector is continuing, overall downside risks related to U.S. domestic demand have diminished somewhat. Upside risks to growth in the euro area and emerging market countries discussed in the April 2007 World Economic Outlook have partially materialized and have been built into the baseline projections. Further, some progress has been made toward reducing risks of a disorderly unwinding of global imbalances, although protectionist pressures are a continuing concern.

To their credit, the IMF had not removed it from their website.

No comments required

Massive liquidity due to easy credit has encouraged industry-wide speculative buying of steel products as evidenced by non-steel industry players hoarding steel products in anticipation of higher prices in 4Q09, while large amount of steel products are traded among steel traders, not consumed by end-users.

Source: Global Commodities Daily dated 10th August 2009, of a leading global investment bank.

Indian monsoon and cities

It has been a fascinating exercise watching /reading analysts/economists treating the Indian monsoon showers (or the lack of them) coyly, never once bothering to identify it as a potentially serious risk to the rural demand story. You can see remnants of that attitude here but not here and not here either.

Good friend Sanjeev Sanyal has written this very interesting and thoughtful piece on Indian urban planning over at India Banao! I blog there too on India related matters.