Collection of Interesting, Worth Reading NEWS, ANALYSIS & ARTICLES

The global trade is declining. WTO estimates that the global trade will decline 9% this year against a 2% increase in 2008. It was even at a 6% increase 15 months ago. Is it because of protectionism that made the 1930s recession a great depression or is it because of falling demand. Thankfully it is because of falling demand.

UK's Story (March 25th 2009):
In a reminder of how bad things are across the globe, the U.K. failed to find enough buyers for $2.55 billion (1.75 billion pounds) in gilt-edge bonds, Bloomberg is reporting. This is debt that the U.K. is attempting to sell to raise money to help the country out of its recession. The snub marks the third time in the past 10 years Britain has been unable to complete a debt auction. This is bad news on its face, but it could be worse news going forward: Prime Minister Gordon Brown hopes to sell $214 billion worth of debt this year and an additional $215 billion next year. The Treasury was able to sell $2.4 billion worth of the 40-year securities, leaving some $100 million worth of debt unsold. The failed auction could be a bad sign for a number of nations that hope to sell debt to raise money to dig out of the recession. The United States plans to triple its debt sales this year to a record $2.5 trillion. Germany, by comparison, plans a far more modest $470 billion debt offering this year.

Ireland's Story (March 25th 2009):
Ireland's successful sale of €1bn in bonds, in its first auction since 2005, showed investor concern about the risk of default is overblown and the securities offer value, investment bank ING said yesterday. The National Treasury Management Agency (NTMA) sold the bonds to raise cash as the economic slump hoovers up tax revenue. Irish 10-year bonds rose after the auction, reducing the spread between the securities and German benchmark notes to the narrowest in three weeks. The cost of insuring against a government default also declined, credit-default swap prices showed. "This is an opportunity to buy," said Padhraic Garvey, head of investment-grade bond strategy at ING in Amsterdam. "Ireland's bond spread overshot and talk about the country potentially defaulting on its debt was just ridiculous and far-fetched." The three-year €300m bond was 3.8 times oversubscribed while the 10-year €700m was 2.7 times over, the NTMA said. "The healthy demand is really good news," said Rossa White, chief economist at Davy Stockbrokers. Moreover, spreads on the 2020 note have tightened by 30 basis points in the secondary market already, he added. Analysts added that the CDS went too far in February when worries about Ireland were at their highest, and it has now converged with the cash market. The spread between Irish and German 10-year debt narrowed 24 basis points yesterday to 249. The average spread during the past 10 years between Irish and German 10-year debt was 18 basis points, according to Bloomberg analysis. However, market watchers added that the key event in the Irish economic calender is the April 7 Budget. "If hard decisions are made on current Government spending, we could see a significant further tightening of Irish spreads vis-a-vis Germany," Mr White said. Although this was the first auction in some time, Ireland has already had several fund raisings via syndication whereby governments use banks to find buyers for the securities rather than offer the debt through auction. In January and February the NTMA raised €10bn in two bond sales via syndication. Other commentators were also cheered by the latest news. "Ireland chose a fantastic time to put their toes back in the water," said Peter Chatwell, a fixed-income strategist in London at Calyon, the investment-banking unit of Credit Agricole SA. "Risk appetite has improved and the spread is pulling in, suggesting the auction inspired a lot of confidence."

Analysis:
Clearly amidst the doom and gloom this is excellent news, without wanting to understate the serious challenges that lie ahead - they obviously see something we don't! But the markets seem to be suggesting that either Brown is complete nuts if the UK cannot raise 1.75bn at a gilt auction and he is hoping for 150bn of borrowing or Ireland is taking the pain quick and fast for their liking. Me thinks the latter is of utmost importance. Ireland is x4 over subscribed on it's debt raising! This is extremely good news. The markets are willing to lend to trusty Ireland in vast amounts. The borrowing plans of the UK look shaky and ridiculous now and the risk of default has suddenly shifted from Ireland onto UK. Mervin King, the head of the Bank of England, before this auction warned that not only where the public finances out of control but that a second stimulus plan was unaffordable. This means the UK, having failed to raise debt, is having to print that money right now...that means inflation is becoming a risk in a declining economy which in turn raises the horrid specter of hyper inflation should the BOE go too far. It is all a big game of chess. The UK has to take action should a second gilt raising exercise fail and dramatically cut down on spending like Ireland has done. Brown won't be able to keep his stimulus in full after this fiasco. Unlike Ireland which has received a huge boost - this was a pretty big warning shot for the UK. "Don't take the markets for granted".

The plan announced this week by the US Treasury secretary Tim Geithner is designed to clear away a large load of so-called “toxic assets” clogging up America’s financial system. But what are these assets? And how will the plan work?

Financial Times provides a very good video explanation that even the beginners can understand.

McKinsey mapped the decline and recovery of many sectors in past 4 recessions. According to the analysis, McKinsey says

Particularly in hard times, it’s crucial to make the right assumptions in strategic planning. Despite claims that the current recession is “unprecedented,” it seems to be following many of the same patterns the four previous ones did—patterns that may offer insights into the performance of sectors in the coming months and years. All four recessions, like the current one, began with falling sales and EBITA in the consumer discretionary sector and three with similar declines in IT. Consumer staples didn’t suffer significantly in the last three or health care in the last two. The energy sector was among the latest to be hit in three of the recessions, though it was among the latest to recover in all four of them. The exhibit shows the sequence of decline and recovery in these and other sectors.

Hans Rosling provides a eye opening presentation regarding the development of the world in past few decades and how this presentation changes our pre-conceived notions. The video is superior not only the by content but also by the way of presentation: a mix of wisdom and sense of humor. A great watch.

About Hans Rosling: As a doctor and researcher, Hans Rosling identified a new paralytic disease induced by hunger in rural Africa. Now the global health professor is looking at the bigger picture, increasing our understanding of social and economic development with the remarkable trend-revealing software he created.

To read more about him CLICK HERE

TUMBLING exchange rates, gaping current-account deficits, fearsome foreign-currency borrowings and nasty recessions: these sound like the ingredients of a distant third-world-debt crisis from the 1980s and 1990s. Yet in Europe the mess has been cooked up closer to home, in east European countries, many of them now members of the European Union. One consequence is that older EU countries will find themselves footing the bill for clearing it up.

Many west Europeans, faced with severe recession at home, will see this as outrageously unfair. The east Europeans have been on a binge fuelled by foreign investment, the desire for western living standards and the hope that most would soon be able to adopt Europe’s single currency, the euro. Critics argue, with some justice, that some east European countries were ill-prepared for EU membership; that they have botched or sidestepped reforms; and that they have wasted their borrowed billions on construction and consumption booms. Surely they should pay the price for their own folly?

Yet if a country such as Hungary or one of the Baltic three went under, west Europeans would be among the first to suffer (see article). Banks from Austria, Italy and Sweden, which have invested and lent heavily in eastern Europe, would see catastrophic losses if the value of their assets shriveled. The strain of default, combined with atavistic protectionist instincts coming to the fore all over Europe, could easily unravel the EU’s proudest achievement, its single market.

Indeed, collapse in the east would quickly raise questions about the future of the EU itself. It would destabilize the euro—for some euro members, such as Ireland and Greece, are not in much better shape than eastern Europe. And it would spell doom for any chance of further enlarging the EU, raising new doubts about the future prospects of the western Balkans, Turkey and several countries from the former Soviet Union.

Read the full article HERE

Before reading further just make a guess after glancing at the headline of this post.

According to the Bank for International Settlements, the notional value of over-the-counter derivatives worldwide reached a mind-boggling $684 trillion last summer. That's more than six times the scale they had reached by 2002 when Warren Buffett dubbed derivatives "financial weapons of mass destruction".

Perhaps the trillions pledged can plug the leaks from subprime mortgages and failed auto loans, but can we reasonably expect to keep a derivatives market afloat that is at least eight times the size of a contracting global economy? I don't know, but I sure hope Bernanke and Geithner do.

The following table provides as precise an accounting of the crisis as the public record presently permits. After calculations, the combined total of existing, announced, and potential outlays from the Federal Reserve and U.S. government agencies that are directly attributable to the financial crisis will breach $13 trillion! Now match this figure with the guess you made at the start of this post. Did it match? I am sure it did not; at least mine didn't.

The adopted strategy of spending to bring United States out of this mess by propping up the system with loans and guarantees has now been etched into stone ... there is no turning back. To the contrary, experts fear the only path ahead implies still further commitments of public funds and woeful undermining of the U.S. dollar. Lets keep our fingers crossed and hope this plan doesn't go underwater otherwise not only US but whole world will sink along with this titanic ship called United States.

This is awesome. It costs only $350 even in the lab made with off the shelf components. Your hand, wall, any surface is a screen. It’s a digital prototype called “sixth sense” that is currently being evaluated by major companies like Microsoft, Google, Hewlett-Packard and Samsung. The brain behind this device is the 28-year-old Indian-born Pranav Mistry, a researcher at the Media Lab, Massachusetts Institute of Technology (MIT).

The “Sixth Sense” device (patented by MIT) comprises a pocket projector, mirror and web camera bundled in a wearable pendant-like mobile. The projector can turn anything into a touch screen. The web cam (and color-coded finger-gloves worn on the index finger and thumb) can recognize the movements of a user's hands, which enables gesture-commands.

Watch this youtube video below. Believe me, this is jaw dropping and worth watching:

As delegates gather for the G20 summit in London on 2 April, it is worth looking to the last time London hosted a world economic summit. In June 1933, delegates from 66 countries gathered in London to try and agree plans to revive the world economy in the midst of the Great Depression. The author of this report from BBC argues that though the crisis this time is different but need of political will and the global nature of both recessions are same. If correct lessons are not drawn from the 1993 conference failure then it may happen again. The author also aomments that being the largest economy, US has to be have the political will to solve the world's problem rather than having a double agenda just like that of FDR. April 2nd is not far. Lets see what happens.

Read the full BBC article HERE

Did you know (At least I didn't know) that another not so well known financial crisis happened a century ago? In early 1906, the US banker Jacob Schiff told a group of colleagues that if the United States did not modernize its banking and currency systems, its economy would, in effect, fall off a cliff — that the country would “have such a panic ... as will make all previous panics look like child’s play.”

Yet the United Sates failed to reform its financial institutions, and conditions deteriorated steadily over the next 20 months. There was a worldwide credit shortage. The American stock market crashed twice. The young Dow Jones industrial average lost half of its value.

In October 1907, when a panic started among trust companies in New York and terrified depositors lined up to get their money out, Schiff’s dire prediction seemed about to come true. The United States had no Federal Reserve, the Treasury secretary did not have much political authority, and the president, Theodore Roosevelt, was off shooting game in Louisiana.

J. Pierpont Morgan, a 70-year-old private banker, quietly took charge of the situation.

Sounds interesting? Read the full story HERE

OK it took me a long time to compile and to properly present this data. The data shows all the countries holding the US treasury securities as of Jan 2009. Showing the data not in a meaningful way would have defeated the purpose. So I am showing on three parameters.

1. By dollar value
2. By % change from Jan 2008
3. By % of nominal GDP(2008)

The conclusions that I would draw from these three charts are

CHART1: The countries having largest foreign exchange reserves are buying the US treasury securities are the largest holders
CHART2: Countries whose economies are relatively smaller in GDP terms and are doing relatively OK in the current market don't mind holding more US treasury holders. China is an exception here.
CHART3: Countries that need more money at home are selling the US treasury securities and hence reduced their holdings since Jan 2008

Please do share what you conclude from the data and these charts.

Though I also looked at various government sources of many countries individually but this data has been complied primarily from www.ustreas.gov, wikipedia.org, www.cia.gov (the world factbook) and www.imf.org

This interview is a good watch (If not excellent). Tarun Khanna, professor at Harvard Business School, speaks on four points:

1. Identifying salient features
2. Complementary entrepreneurship
3. Familiarity and trust
4. Reshaping the contours of business

You may watch this video HERE. After clicking on this link click on the link "Launch Interactive" below the picture of Tarun Khanna at the bottom.

Here is the mother of all rescue plans!!! As we all know (If you don't know please READ HERE) that among all the issues, issue of toxic assets in at the center of all the banks. This issue in turn is affecting the ability of banks to extend more loans and hence making things worse. As NY Times states, it is believed that there are around $2 trillion of troubled assets that are ruining the balance sheets of banks. In his effort to bring the market back to normal Mr. Obama is planning three pronged approach.

1. To facilitate the selling of banks' troubled assets, FDIC will set up special purpose investment partnerships and lend nearly 85% of money that the above said partnerships will be needing.
2. US treasury will hire few investment management firms and will match the private money on dollar-for-dollar basis.
3. US Treasury, in collaboration with US Federal Reserve, is planning to expand lending through Term-Asset Backed Security Loan Facility (TABSLF). This is more targetted towards the individuals and small businesses. To read more about TABSLF click here OR here.

Rather than just the government doing it alone, it want to encourage private investors (Such as Hedhe Funds, PE firms) whose sentiments are at the lowest and who have put their money under the mattress. To do that FDIC will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets. The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

This sounds like a good plan but this plan alone (apart from other rescue packages) gonna cost US a whopping $1 Trillion and there are so many treacherous complexities that haven't been resolved since the bush government was in power.

A new study has been conducted at the Harvard Business School. The Harvard team looked at thousand so of venture-backed companies for their performance. The professors found that, on average, there is no new learning from the failures for a first time entrepreneurs. Here are some key results of the study:

1. First-time entrepreneurs who received venture capital funding had a 22 percent chance of success
2. Success rate of already-successful entrepreneurs for later venture-backed companies was 34 percent.
3. Entrepreneurs whose companies had been liquidated or gone bankrupt had almost the same follow-on success rate as the first-timers: 23 percent.

Professor Gompers even says “for the average entrepreneur who failed, no learning happened.” I have read Mr. Gompers books during my MBA at Oxford University. He is great. But my belief is that the learning is not a quantifiable thing that can be measured by a statistical tool. The circumstances are different for each and every entrepreneurs even if they are in the same industry or sector. So there must be some learning. From the methodology it seems that they assumed that things that caused first failure may not have caused the second failure. Generally entrepreneurs don't make the same mistake again. If they do then you can say that there was no learning from the first failure.

What do you think? Please comment...

Anyway you can read the NY Times article HERE

Just now read an article in the Portfolio Magzine that the scientists (Physicists, statisticians, earthquake specialists and others) are trying to predict the economic downturns and other economic messes related to finance, utilities, real estate, derivatives, hedge funds etc. The scientists cited in the article argue that these problems are very complex and economists are not even capable of solving those problems. They add that the fundamental assumptions of the economics that "people, firms and other economic agents act rationally" is flawed and is no longer valid because of added complexity of these large "systems". The article provides some real examples such as Illinois' power market and the state of Illinois avoided the Enron-like manipulation. The scientists believe that the technology exists to build the massive computer programs to map our entire economies and predict what will happen if things go awry. Very Impressive!!! If this can happen then I wonder what these nobel prize winner economist will do for a living. :-) :-)

The full article can be read HERE

Recently I stumbled upon an article on fixing the toxic asset problems of the US banks by Lowell Bryan and Toos Daruvala (Directors of the NY McKinsey Office). The article is well argued but as suggested it is just a conversation starter. They are arguing that mark-to-market (also called fair value accounting) is not good in times of high volatility and they are suggesting that mark-to-model approach is the best suited in these times. But they somehow overlooking the fact that mark-to-model has its own flaws because everybody will be having their own model and there will be no standards. On top of that investors are not fools who will believe the models of these financial institutions and they will still be more inclined towards the mark-to market model since value of a asset is its price in the market not in some formulae.

The original article can be read below:

The chart below shows the military spending of top 15 spenders. US spending is larger than the combined spending of next 14 countries. WOW!!! Recently Russia announced that it will spend more because despite its promise of not to include former USSR countries in NATO, US is doing so. China also announced a 14.9% increase in its military spending. DON'T KNOW WHERE IT WILL END?

I am starting my first entry with the some basics of the current state of the economy of the world. May of you would be wondering how this mess was created at the first place. Yes, the mess was created... it did not happen all by itself. You may say the cause to be greed, loose regulations or any other but something caused it. So read the following in the order they are written:

Financial Crisis for Beginners - There are lot of other articles on this page. If those interest you then do read them to get a full picture.

What is National Debt

Interest Rates for Beginners

Federal Reserve for Beginners

Bank Failures

Bank Runs

Above articles are basics. If you have some more energy to read then go through these articles as well. These are little more than beginner ones...

Primary Surpluses and Sustainable Debt Levels in Emerging Market Countries

Keynes Economics Theory

Keynes Theory being tested by Obama first time since it is written

The Recession Paradox: Spend Or Save?

Reviving The Economy: What Really Works?

And some other related ones that I thought will interest you are here...

How Hedge Funds and other investors are making money on toxic assets of banks

Wall Street on the Tundra (Iceland's Fall)