Don’t Fight the Last War: Lessons from the Battlefields of Risk Management

Our brains are not calibrated to deal with the unexpected. Most of us believe we are good risk managers but in reality we are not. Most of us trust that risk can always be quantified and expressed through some fancy modelling whereas, often, it cannot. The world is not normal, yet universities continue to teach our young students the wisdom of Markowitz and Sharpe which brought us modern portfolio theory and, more specifically, the capital asset pricing model. Garbage In, Garbage Out, as they say. One of the fundamental assumptions behind modern portfolio theory is that asset returns are normally distributed random variables. The return profile of US equities fairly closely matches that of a normal distribution with the exception of large negative returns. They have come about more frequently than one would or should expect

[Premium] Daily commentary: On the Manufacturing PMI divergence

A slew of manufacturing data was released today in Asia and Europe to go along with the Manufacturing data we saw yesterday in the United States. The data show a divergence of economic fortunes that demonstrates the severity of Europe’s austerity-induced economic recession. However, the strength of the US data has to be questioned as all of the regional indices came in below the prior month’s data and forecasts except the Richmond Fed Index

OPEC: near record production, spare capacity a concern

In addition to the hole left by the Iran sanctions, the Saudis are pressured to pump more in order to meet their own rising domestic demand. This is putting strains on OPEC’s spare capacity

Monetary Relief from Asia

The ECB and BOE have shown their intent with their recent aggressive balance sheet expansions and the Fed is trying hard to keep the door open for more QE even as the data in the US continues to defy the general global slowdown.

In Asia however sticky inflation in India, a desire to nail property developers to the wall in China and a belief in a post earthquake in Japan have kept the big Asian central banks from providing additional easing. Even in Australia where the economy has been teetering on the brink of a recession for 6 months, the central bank has refrained from any decisive moves

Global Manufacturing Steadies as She Goes, or Does She?

The year got off on a much better foot than might have been expected, at least as far as global manufacturing is concerned. So the fall in global manufacturing has flattened out, even though the bounce back has more of a dead cat look about it than anything else. As usual in recent months the report was very much a mixed bag

[Premium] Growth momentum shift to Emerging Markets continues

Two weeks ago I highlighted the fact that Indonesia has re-attained an investment grade rating, continuing the upward path it has been on since the Asian crisis derailed the Asian growth story 15 years ago. Indeed, we should expect emerging markets, and Asian emerging markets in particular to outperform developed economies

The Swiss Franc is the most overvalued currency in the world, and the Indian Rupee most undervalued

That’s what the Economist’s Big Mac Index tell us. According to this index, the Swiss Franc and the Norwegian Krone are both more than 60 percent overvalued compared to the US dollar. Much further down are Sweden with over 40% overvaluation and Brazil which shows more than 30%.

The flip side comes with the Indian Rupee, which had been hitting record lows last year. Here, we’re talking about a 60% undervaluation

Roubini: Moving From the Post-Bubble, Post-Bust Economy to Growth

Here are the important extracts from a recent paper in terms of the causes of the crisis. I have also embedded the full pdf version, which has suggested policy prescriptions as well

EFSF Enhancement Hinges on Slovakia

Equity markets paring back recent gains after one-week recovery ahead of Slovakia EFSF vote. Slovakia is the last country to vote on EFSF enhancement; “Yes” vote is not a done deal. News reports indicate China’s SWF is buying bank shares; Indonesia unexpectedly cuts rate

Faber: Market May Fall Below 1,100

Marc Faber told CNBC yesterday that he thinks the S&P500 could fall to as low as 1010 by the end of the ongoing sell-off. Faber also believes gold could fall. However, he believes both markets are oversold and is more keen to buy gold on a rebound than equities

Asian central bank preview: on hold for now

In the Asian EM space, central banks from Malaysia, the Philippines, Indonesia, and South Korea all meet this Thursday. We don’t see any change from these four central banks and in general we believe EM central banks have moved into dovish wait-and-see mode for now, with the obvious exception of Brazil and Turkey, who have both cut. At some point, more EM central banks are likely to cut if the global outlook worsens, but we think it is prudent, and likely, that most remain on hold for now. Markets are, however, punishing countries that have cut rates with an eye towards a weaker currency, Brazil and Turkey

Asian Manufacturing PMIs suggest slowing economic growth

My take: economic growth is moderating in Asia and that has caused central banks to become more dovish. Markets no longer expect the tightening cycle there to continue at the same pace. The 50 basis point cut in Brazil could be seen as a harbinger of more dovish emerging market interest rate policy everywhere – not that the CBs would go so far and cut as Brazil has done. The real question is China. They have been tightening. Will they continue to do so in the face of obvious weakening domestically and in Europe and North America