Europe’s Yudhistra

My weekly piece for MINT today was that Germany would be dragged into Europe. The original title was ‘Germany to merge into Europe’. They changed it to a safer ‘End-game in Europe’. I still believe that Germany would not want to be seen as having fractured Europe one more time. I am reminded of an episode in Mahabharat.

Sage Vyas meets with Yudhistra and warns him that there would be a big war on account of his actions and millions would die. Yudhistra is devastated. But, he made up his mind. He concluded that war would happen only if he refused others. So, he decided that he would agree to whatever others asked him to do. That is why when he was invited to a game of dice with Sakuni (although the invitation came from Duryodhan) with Sakuni’s own dice (and not a neutral one), Yudhistra agreed. He did not protest. He could not avert war still.

Germany is going to be Europe’s Yudhistra. That is what I had tried to say in today’s MINT column, notwithstanding this excellent, thoughtful article in NYT.

If JPM marked its assets to market…

Spain has now committed 23.5 billion euros of public funds to rescue its third-largest bank, Bankia, amid last week’s revelation of fresh deterioration in real estate loans and other assets (which again makes us wonder what the losses would look like on the $100 billion-plus of European mortgage debt that JP Morgan has amassed, if JPM was actually required to mark these securities to market).

Worse, Spain is providing these funds not as part of any restructuring, but by purchasing newly issued stock of the unrestructured, insolvent bank. While this will give Spain nearly 90% ownership of Bankia, the bailout effectively gives the people of Spain nearly worthless stock in an insolvent entity, putting them behind Bankia’s bondholders. In the likely event that Bankia fails, is nationalized, and is then restructured, the 23.5 billion euros of public funds will vanish as worthless stock, and in the process of restructuring, the bondholders of Bankia will recover 23.5 billion euros more than they otherwise would have.

In short, by putting off the receivership and restructuring of Bankia, Spain is simply enriching the bank’s bondholders at the expense of its citizens, who are already being squeezed by budget austerity. [Link]

Source: Weekly Market Comment, John Hussman (May 28, 2012)

p.s: He is going on record that the next U.S. recession will eventually be dated May/June 2012. I am very much inclined to agree with him. David Rosenberg wrote recently that, but for weather-related sectors, the US 1Q GDP contracted. Orders for non-defense capital goods excluding aircraft have contracted in three out of four months in 2012. The Philadelphia Fed Manufacturing index is now in negative territory. The Citi US Economic Surprise index is -24.5. In plain English, consensus forecasts in recent days have consistently overestimated US economic data. Reality has disappointed. These are not sentiments on the US economy. These are facts.

Extraordinary times…

… call for extraordinary and pragmatic measures. Even Capital controls are not off the table for Switzerland if Eurozone collapses. Personally, I commend them for not treating any economic policy measure as taboo. That is how policy-making should be. The context determines the response. Not theory and not ideology. Something for Singapore to think about.


(1) Listened to this interview of Dick Bove and Barry Ritholtz in Business News Network (ht: Ritholtz). Dick Bove sets up far too many strawmen to knock them down. He even invokes xenophobic nationalist  sentiments to defend the American banking industry. That is something. At least, the man hides nothing  as to where his loyalties lie.

(2) Was at a ‘good-bye’ lunch hosted by a good friend, moving back to India, yesterday. At my table, there was a discussion on schools, under-graduate programmes in the US, job prospects, etc. One friend recounted a tale of another friend’s son who went to a decent school in the US and managed to land up with offers from a consumer product company and that of a financial services multi-national. He chose the latter.

The logic was that, even if the financial sector compensation had peaked, it would retain an advantage over non-financial sector, on compensation. Two fallacies:

(i) It ignores history. Once the tide turned in the wake of the 1929-32 depression, it took five decades for the process of the financial sector to bottom out, in many respects. Compensation was one of them. Relative compensation advantage could well turn into a disadvantage.

(ii) Second, it ignores our own behavioural response to a diminishing relative advantage. Even if the gap remains, if it keeps shrinking, those of us in the financial services industry would not help feeling miserable and feeling more of it and more often.

The starting point will cease to matter as it becomes distant memory. It is the change at the margin that would loom large. That change won’t be in favour of the financial services industry.

Dan Ariely would be pleased to hear of this story. We are predictably irrational.

China loans

While you may like to reflect on the solid factual content of this news-article in Bloomberg such as

New bank loans last month dropped 33 percent from March to 681.8 billion yuan, missing the 780 billion yuan median forecast of economists surveyed by Bloomberg News. A third of April’s new credit was also so-called discounted bills, or short-term loans often used by banks to pad the total figure.

This month may be worse. The four biggest banks — which account for about 40 percent of lending — had advanced only 34 billion yuan as of May 20, Liu Yuhui, a director at the government-backed Chinese Academy of Social Sciences, said in an interview this week, without saying where he got the data. The lenders may rush to boost credit in the last few days, mainly through short-term notes, he said.

You need to scroll down to the bottom of the article for comic relief such as

Still, Morgan Stanley this week joined banks including Goldman Sachs Group Inc. in lowering its estimate for China’s economic growth for the year. The annual GDP forecast was cut to 8.5 percent, from an earlier 9 percent goal, to “reflect the worse-than-expected slowdown” in the first four months, chief economist Helen Qiao said in a note to clients on May 21.

Yes, hard-landing with 8.5% GDP growth.

It is not news that they lack any sense of credibility but it is news that we still hang on to their words.

Xie makes a lot of sense

Central banks are pushing on a string. If they insist on more monetary stimulus, the world could head toward an inflation crisis with similarities to what happened in the 1970s. Thus, central bankers may be making fools of themselves while trying to restore growth to everyone’s satisfaction. But globalization is making demand manipulation less effective than in the past, as multinational corporations have made production completely movable. Hence, no government can count on a localized, the kind of virtuous cycle that balances supply and demand and is necessary for demand stimulus to work.

The rise of the true multinational corporation has been the most important economic development since 1990. These are independent forces, and many are stronger than most countries. Any policymaker or economist who doesn’t understand the work of today’s multinationals is not qualified for the job. …………………….

………………… That is the best scenario for Europe without structural reforms. Now, it appears Europeans don’t want reform and won’t accept a lower standard of living. They have politicians who want to spend their way out of problems, backed by famous American economists. We will see the consequences soon.

The above are verbatim quotes from Andy Xie’s piece for the Caixin magazine published on 7th May. It is well worth a read.

Hunkering down, accepting lower growth and lower standard of living (for a while) while working to remove the (natural and energy) resource constraints on growth that have become more and more binding in recent years, limiting govenrment support to the very needy, etc., are the possible ways to deal with the mountain of debt and living beyond means that have characterised the last three decades.

We have basically stolen growth from the future. We need to pay back, at least for a while. Failure to acknowledge that will bring us greater grief. We are on our way there.

Quick links

NY Times writes a piece that reads a lot like one would read in Bloomberg. It walks over familiar ground. It is a collection of news developments. There is no story. What Mario Monti said and what Merkel is doing in Germany are significant. One of those rare occasions, when I agree with what Jeremy Siegel says. I have more to say on the likely developments in Eurozone in my forthcoming piece in MINT on Tuesday. Will post it here after it is published.

In the meantime, pay attention to what Dr. Brahma Chellaney has written on the ‘irresistible rise’ of Asia. It is very sobering for the triumphalist camp in Asia.

Mohit Chandra’s brilliant open letter to India’s graduating classes. Spot on.

Business as usual with PKO

Could not help feeling that Price-Keeping Operations have commenced in American stock markets with 3:00 PM and 3:30 PM rallies in US stocks over the last two days on rather flimsy rumours relating to Europe. They eclipsed very lousy macro data from both the US and Europe, not to mention China’s loan growth prospects in 2012, the setback for HSBC PMI in China, etc.

Of course, of course, some would point to positioning, technicals, oversold conditions, etc. Been there and seen that.

Chinese buyers defer and default

Reuters does a pretty good job of putting together this story on how a Chinese city saved a small state-owned firm from going bankrupt by bailing out the holders of its commercial paper in full. Bank loans remain uncertain!

FT reported on its website on 20th May that some Chinese buyers of thermal coal and iron ore are deferring purchases and defaulting on contracts. That squares well with this short blog post.

A friend shared this story from China local press with me. The statistics on the PBoC enterprises’ confidence index is significant:

Along with decreases in lending, enterprises in China are clearly losing confidence inthe country’s economy. According to a survey of 5,000 companies by the PBC, anindex tracking enterprises’ confidence in the country’s economy sank to 39.2 percent inthe first quarter of this year, the third consecutive quarter of decrease, far below the 50percent mark which separates optimism from pessimism. As China’s business climate gets frostier and its entrepreneurs become less ambitious, it’s inevitable that importswill suffer in the process.

To the best of my knowledge, this PBoC survey of 5000 companies is not actively tracked in Bloomberg.

Yet, talk of economic stimulus in China excites investors. Scepticism, people, scepticism! Where is it? Why have investors lost it? Why have they stopped demanding risk premium? Why are they giving away their hard earned money so easily?

I am not able to make sense of this story – as to its deeper significance.

Amidst all the hand-wringing and hand-waving on Greece, Spain, Europe, the Indian rupee and what else, this piece of news on the Pentagon annual report on Chinese military went unnoticed:

“Chinese actors are the world’s most active and persistent perpetrators of economic espionage,” the report said.

That is par for the course for an aspiring superpower. That is how they compete.

The overexpansion and invasion of politics in the higher education system has made China’s universities yet another victim of political corruption. [Link to full article]

There are something that are still common between the rising Asian giants!

US notes

Returned to Singapore in the early hours of Tuesday after about a week in North America – first time back there in eighteen years. Left Boston in March 1994 after Ph.D at UMASS, Amherst. Did not get a chance or reason to go back. Spoke at CFA  Montreal Emerging market conference on May 15th on SE Asia and India. Slightly more positive on the former than the latter. Surprise, surprise! See the ‘India Today’ cover story. May be, subscription is required for full access.

Spent 3+ days in D.C area. Gave a talk at the GW University co-hosted by the US-India  Business Council (USIBC). Spoke on India. Had to do a balancing act. I think it went well. Decent crowd. 20+ but great participation.

Could not get a sense of the health of the economy. Not that I was looking for it. Did not see the 60% overweight in the small sample that I ran into. No road rage. Only my anxious friend, not to miss a turn, skipped a red light!

Top news during my stay was Facebook IPO pricing. My 10-year old son wondered what the fuss was about and why Zuckerberg was a billionnaire when he had nothing to sell. One friend clarified that we, the people, are the product.

The other story was, of course, JP Morgan. This WSJ story, as usual, was great on the human interest dimensions. But, for me, the key take-aways are:


The debacle has raised broad questions on Wall Street and in Washington about whether any executive can properly oversee such a large financial institution, whether new regulatory rules will do anything to prevent another financial crisis and whether tougher regulation is needed to further rein in risky bank trading, particularly at financial behemoths that are viewed as too big to fail.


Indeed, hubris wants and feeds itself on becoming bigger. Coffee mugs in America are a testimony to their obsession with size. The simple answer to the question posed in the first highlighted sentence above is that no executive (human being) can properly oversee such large financial institutions. Period. It needs not a whole lot of humility to accept that. Just some humility would do.

Last year, Mr. Macris dropped risk-control caps that had required traders to exit positions when their losses exceeded $20 million.

Why would some one do that unless they were overconfident? Again, the importance of two words in English that start with ‘H’: Hubris and Humility.

Mr. Dimon had recalled that he was aware of the group’s strategy to take a bearish position on the economy, an official says. And he also recalled that early this year he approved a reduction in that position amid signs of economic recovery, though the official says Mr. Dimon had never vetted the “particular means to execute” the strategy.

This is a very important disclosure. This is an example of how banks behave with their clients. Their economist for the US is a perma-bull. He has never had anything negative to say on the US economy. If he sounds cautiously optimistic, that is the worst negative sentiment you can get out of him and as an investor, it would be time to head for the exit doors. Yet, the bank’s proprietary trading unit – CIO office is a politically correct label for the old prop. trading desk.

At the same time, the appointment of a Venezuelan immigrant as MIT President showcased the best of what America has to offer. Mr. Reif’s remarks at the press conference after his  selection is a  great read. Lovely touch at the beginning of his remarks.

P.S: Will be curious to know the United Airlines’ policy on the recruitment of pilots and cabin crew.