Is it just me or did Secretary Geithner just talk out of other side of his mouth? Today he wrote an Op-Ed in the Wall Street Journal with two Asian leaders to mark a big meeting of APEC (Asian Pacific Economic Cooperation) in Singapore.

The WSJ article started out with a bunch of diplomatic niceties about how everyone was working together and must continue to do so, so that all may prosper.

We have just lived through the greatest challenge to the world economy in generations. In acting together, policy makers have shown that they understand the most important lesson of this crisis: Our economies are inexorably linked. We must now work together to ensure strong, stable and balanced growth in the future…

We also must keep our sights on maximizing the potential of global markets. Both exports and imports remain critical stimulate the flow of knowledge and innovation that is enabling emerging economies to catch up with developed-world living standards.

Then it went on to re-affirm the utility of APEC, which people like Andy Xie are calling useless.

APEC will play an indispensable role in establishing strong, sustainable and balanced growth. Our 21 members—which include nine members of the G-20—account for 40% of the world’s population, over half of global GDP and nearly half of world trade. Our ranks include the world’s largest and fastest-growing economies.

But, you kind of got the feeling, this was leading to something else. Wait…wait… hold it… there it is – halfway through paragraph six:

Depending on individual economies’ circumstances, a combination of macroeconomic policy adjustments and structural reforms will be needed. Market-oriented exchange rates in line with economic fundamentals will be essential in assuring the resource and sectoral shifts to match and foster the new patterns of demand.

Everyone knows they are talking about the Renminbi. Remember, Secretary Geithner is the same fellow who accused the Chinese of manipulating their currency during his confirmation hearings. And most people think a freer floating Renminbi would be revalued not devalued.

Yesterday, I posted “Geithner impersonates Nicholson – America, you can’t handle the truth” in which Secretary Geithner was saying he supports a strong U.S. currency, but today he is talking about “market-oriented exchange rates.”

C’mon. We’re not that stupid.

Related posts:

• US angling to get Chinese to revalue renminbi
• China “serious about the plan to internationalise” Yuan
• The dollar is rising against floating currencies
• Japanese defend dollar’s status while China tears it down
• Geithner and Summers consolidate power

I tend to think so. Yesterday, Ben Bernanke made what some media outlets are calling hawkish statements.  This, combined with heavy currency intervention by Asian central banks, helped to strengthen the U.S. dollar. However one must ask if there is anything fundamental about these moves.

Just a few days ago, we got a sensational article via the British Daily the Independent in which a well-respected journalist suggested that a move was afoot to move away from the greenback as the globe’s main reserve currency.  This sent the dollar into freefall against a host of major free-floating currencies and gold to an all-time high. I wrote a skeptical post about the report at the time (see my post here). And I think the currency intervention demonstrates why.

Many of the Asian currencies are pegged to the U.S. dollar.  So when the greenback declines in value, they are forced to intervene in currency markets to maintain their pegs.  if they do not and allow their currencies to appreciate, this hurts export growth in Asia.  So clearly, the central banks in Asia do want to upset the apple cart by permitting a freefall in the value of the dollar.  Asia is too dependent on export to the U.S. for this to be a preferred policy at this juncture.

Meanwhile, the U.S. does not want a freefall either. Certainly, they want inflation (via a currency depreciation if necessary) but they do not want higher interest rates which is what a freefall would mean. So the Fed is jawboning the market.  First, we saw Kohn and Fisher out making hawkish statements. now it’s Bernanke’s turn. 

What Bernanke actually said is that the federal reserve was prepared to withdraw liquidity in a number of ways, the most interesting of which was the so-called reverse repo by which the Fed finances its own portfolio via the banks instead of the of the way around (see story here). Bernanke also mentioned paying interest on reserve deposits, a topic he has broached before.  But, the bottom line is this:

My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period.

This is what Bernanke said in his presentation.

Translation: We are keeping rates at zero percent for the indefinite future, something Bill Dudley at the New York Fed has said as well. The bottom line is that despite what hawks like Hoenig or Fisher might say, we are going to be on easy street for some time to come.

Related posts:

• Asian inflation in the pipeline
• The dollar is rising against floating currencies
• Big Mac Index: Europe overvalued, Asia undervalued
• Currencies pegged to the dollar under pressure to drop peg
• Federal Reserve’s Fisher says tightening will be aggressive

Earlier today we learned that the Singapore PMI was much weaker than expected for September 2009, coming in at 50.6 versus 54.4 for August. While this demonstrates that the manufacturing sector there is still rising, it is doing so just barely.  This was the lowest reading since April and should be seen as a clear indication that export-led growth in Asia is stalling.

When I searched the Internet for further word on this development and what other analysts were saying, I came up empty-handed. I am relatively bullish about the prospects of a multi-year recovery given my negative longer-term outlook.  A double-sip recession is not my baseline view, but it is certainly a strong possibility. We should watch the data flow from Asia as a canary in the coal mine suggesting a less robust near-term outlook.

Related posts:

• Rosenberg: ’Asia Revival May Be For Real’
• Consumer confidence sinking
• Stephen Roach is still bearish, no recovery until 2010
• Will Goldman’s Jim O’Neill change his bullish outlook?
• Industrial production implodes

The data being reported out of Asia is in marked contrast to what we are seeing in Europe and North America.  Last week, I noted that Singapore had put up big numbers.  China is also expanding robustly. Compare that with the data coming out of Europe like the UK growth numbers released today and you can see that Asia is de-coupling.  Now comes South Korea.  The BBC reports.

South Korea’s economy expanded in the second quarter by its fastest rate in five-and-a-half years.

Gross domestic product rose 2.3% from the previous three months. It fell 2.5% from the same quarter a year earlier, a smaller-than-expected fall.

Increased government spending, help for car buyers and record low interest rates helped boost the economy, the country’s central bank said…

The growth in the April-to-June period.. compares with 0.1% growth from January to March and a 5.1% drop in the October-to-December period.

Its exports rose 14.7% in the second quarter compared with the previous three months, helped by a weak won.

“The domestic demand growth was aided by tax benefits for car purchasers and fiscal spending. It’s hard to say the economy is set for self-driven recovery, given the dim jobs market outlook,” Kim Myung-kee at the Bank of Korea.

While economists welcomed the data, they voiced some caution.

South Korea’s growth was “driven a good mix of strong fiscal stimulus, a weak won and monetary easing”. But it is unclear if, as fiscal stimulus wanes and credit expansion slows, this growth will continue, Mr Kim added…

The fly in the ointment here is the fact that much of the increase in Asia is due to government stimulus and a comparison to already low numbers.  If you recall, Asia was crushed by the slowdown in the West, with export volumes falling 30-50% across the board. It’s kind of easy to show huge growth when you are doing so from a low base.  Going from 100 to 90 to 93 is not as indicative of a true recovery as going from 100 to 97 and back to 100.

So caution is certainly warranted here.  As I mentioned on Wednesday, Stephen Roach, a well-known economist based in Asia, says he doesn’t see good underlying demand fundamentals anywhere – and that presumably includes Asia (At about 4 minutes into the video linked above, he says: “The ultimate question here: where is the demand? And as I go around the world, especially in Asia, you know, I don’t see any follow through on the demand front”).

My conclusion: these are very good numbers and they do point to a faster rebound in Asia than elsewhere.  However, it is not entirely clear that the underlying demand without government stimulus is indeed robust.  Once fiscal policy is normalized in places like China and South Korea the true fundamentals will be clear.

Related posts:

• Is South Korea de-coupling?
• Japan does not demonstrate the failure of stimulus
• Denmark out of recession
• Does Japan’s economic implosion mean anything?
• Will Asia’s downturn be worse than America’s?

Back in April, I mentioned a story about BTA, a bank in Kazakhstan that had been nationalized by the state in February.  The interesting bit about the story was that interested parties from abroad (including Morgan Stanley) had significant Credit Default Swap contracts (CDS) written against losses in the banks bonds.  In essence, foreign investors would be better off if BTA failed than if it had not been seized by the State.  And this interest in the bank’s failure created a self-fulfilling prophecy. See my post “CDS contracts and the implosion of several Eastern European economies” for more details.

Fast forward to today and now we learn of a gargantuan $7.9 billion loss at BTA.  DealBook reports:

BTA, the largest Kazakhstani bank, confirmed losses and write-downs for 2008 of $7.9 billion in a financial statement issued Monday, even as it pursues the restructuring of its debt.

According to the bank’s financial statement, actions by previous management led its portfolio to deteriorate for the year, resulting in the loss of 1.188 trillion tenge, the Kazakh currency.

Explaining the causes of the loss, the bank said:

Certain loan documentation, including collateral and associated additional agreements, primarily relating to financing of projects outside Kazakhstan, is no longer available. In addition, many loans were transferred to new borrowers that do not have adequate sources of repayment. Moreover, no collateral was provided by these new borrowers. Consequently all transferred loans are unsecured. A number of significant borrowers, primarily registered outside Kazakhstan, have ceased servicing their loans, have not allowed the Bank to monitor collateral or failed to provide information about their financial performance.

BTA spokespersons were not immediately available for comment.

Fraud is an issue and the bank is now being sued by shareholders.  But, I do want to concentrate on the CDS issue and its role in forcing the bank’s hand. In my view, CDS contracts should be seen as a major change in how parties to a bankruptcies react. They distort incentives for interested parties, and create a whole new group of ‘stakeholders’ through naked CDS (i.e. where the holders of the CDS have no underlying interest in the bonds).

In situations of systemic stress as we have just witnessed, CDS have the potential of increasing the number of bankruptcies and volatility in the financial system.  In my view, that is why they must be regulated – and not just in the United States, but globally, as this case in Kazakhstan attests. If CDS contracts could help drive a major foreign company into bankruptcy and an American finance firm could suffer massive losses as a result (not the case for Morgan Stanley here), I imagine this is something that U.S. regulators would want to know and prepare for.

Source

Kazakh Bank Confirms $7.9 Billion in Losses – DealBook

Related posts:

• Georgia bank fails with $1.1 billion in assets
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• Seven more bank failures brings total to 64
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• $467 billion in writedowns and counting

The Economist released its remarkably telling Big Mac Index this past weekend.  The index looks at the relative cost of Big Mac in various countries to gauge how over- or undervalued the currencies in those locales are.  Judging from this Index, there are some monster distortions in the currency markets right now.

The numbers marked in red are the areas I would like to highlight. They are representative of massive currency overvaluation in Europe (+72% in Norway, +55% in Denmark, +29% in the Eurozone) and absurd levels of undervaluation in Asia (-49% in China, –52% in Hong Kong, –47% in Malaysia and –42% in the Philippines).  One might argue the European overvaluation represents a repudiation of the U.S. dollar.  Sterling is only +3% versus the Dollar in the index, so that suggests a repudiation of the Pound as well.

On the other hand, Asian currencies are generally not floating but rather fixed via dirty float to the U.S. dollar. For example, the Malaysian ringgit and the Chinese renminbi are two currencies with a managed float. So, the undervaluation of Asian currencies is a political decision of mercantilist economic policy in the region. This has been a major cause of the fabled Asian savings glut and large current account surpluses in Asia.  In my view, this as also been a major source of instability in the global financial system. 

Clearly, Bretton Woods II has outlived its usefulness.

Source

The Big Mac index: Cheesed off – The Economist

Related posts:

• The Big Mac Index
• The dollar is rising against floating currencies
• Is the Fed just jawboning?
• The weak dollar trade regains momentum
• U.S. Dollar: Cliff Diving Again

Talk about V-shaped recoveries.  Here’s one that’s actually for real.  It’s in Singapore and it’s huge.

Singapore appears to be emerging from its worst recession on record after the economy expanded at an annualised rate of 20.4% between April and June.

The rapid expansion compares with a revised contraction of 12.7% in the first quarter from January to March.

It was the first quarterly expansion in a year, lifted by increased drug sales and construction activity, said the Ministry of Trade and Industry.

However, the government still expects the economy to contract for the year.

Now, to be fair, the economy in Singapore is still down 3.7% year-on-year – and this is after a 20.4% surge in Q2. So we are talking about an economy that had been absolutely crushed by the global downturn – and it is a lot easier to grow from a lower base.  But, as I said in May, Asia is de-coupling and this is evidence supporting that de-coupling.  I don’t expect a similarly marked upturn in the U.S. or Europe.

Video below.

Source

Singapore’s economy bounces back – BBC News

Related posts:

• South Korea going gangbusters in contrast to UK
• Rosenberg: ’Asia Revival May Be For Real’
• Is South Korea de-coupling?
• Bernanke expects recovery later this year
• Asia is de-coupling

The fundamentals in Asia are much stronger than they are in the U.S. or in Europe. This bodes well for a recovery in the region.  Nevertheless, there is reason to worry because here is a video warning about an Asian-wide bubble in the making. I have warned about the Chinese bubble.  Frederic Neumann talks about that in this video, but says that an incipient bubble already evident in China and Hong Kong could go Asian-wide.

Related posts:

• China issues bonds to “promote the RMB in neighbouring countries”
• Big Mac Index: Europe overvalued, Asia undervalued
• Hong Kong: “America is doing exactly what Japan did last time”
• Industrial & Commercial Bank of China
• Asia is de-coupling

David Rosenberg is out today with a bullish Asia commentary.  In today’s “Breakfast with Dave” comments, he says:

Asia Revival May Be For Real: Unless the data are lying, we are seeing spreading strength across the continent. This is bullish for the commodity complex, which is now breaking out. Gold, copper and oil have all broken above their 200-day moving averages just as the U.S. dollar has broken below its trendline. The U.S.A. is still the largest economy in the world by far, but it is losing its dominance each year and the fact of the matter is that it is a mature service-driven economy. Emerging Asia in general, and China in particular, are still the marginal buyer of basic materials, and their economic success is more critical to the outlook or commodities.

This is a reading of the data that I fully support. In the past, I have mentioned the fact that Asia is looking to de-couple from the western currencies (see my post “Asia is De-coupling” ).  However, they are also likely to recover before Europe given recent economic trends, one reason their equity markets have rallied significantly, well ahead of U.S. or European markets.

Rosenberg is still very bearish on the U.S. economy, as he sees D-cycle dynamics (deflation, depression and deleveraging – what I call the three D’s) as holding sway for the foreseeable future.  You should notice that the Personal Spending numbers that came out today support that view as they showed Americans saving at the highest rate in 14 years, with a savings rate now well above 5%.

Is America likely to experience a depressionary balance sheet recession?  In my view, this is a likely outcome of the bubble bursting in the U.S. and I will have more to say about this theme in later posts.

Related posts:

• Stephen Roach: Downturn in Asia less severe, but recovery later
• David Rosenberg: This is the Great Depression II
• One on One with David Rosenberg, Chief North American Economist at Merrill Lynch
• Rosenberg: Still a bear market rally
• David Rosenberg and Richard Bernstein to leave BOA

Marc Faber participated in a roundtable discussion on CNBC this morning about the dreadful figures coming out of Europe (see articles here and here).
At one point, the German CNBC correspondent made a very good comment about Eastern Europe getting killed by a falloff in internal demand due to a severe banking crisis and this being compounded by a falloff in external demand as Germans and others increase their savings. She asked whether over-indebtedness and excess consumption was what caused the problem. Why should that now be the solution?

Faber used this as an occasion to promote his thesis that much of the geopolitical tension and economic turmoil is associated with a passing of the baton of economic leadership from the west to Emerging economies. Whether you agree with his sentiments, it makes for a lively discussion. The video is below and runs about 7 minutes. Take a look.

There is also an associated blurb from CNBC Europe’s anchor Geoff Cutmore about the discussion that reads:

Prepare for War, the Death of capitalism and Bankruptcy of the US Government (not necessarily in that order)

A vintage performance from the author of “The Gloom, Boom & Doom Report”. This morning – living up to his reputation for bearishness – Marc Faber forecast a litany of unpleasant events ahead.

His key message is: buy real assets. He thinks it will take years for the global economy to recover, but when it does the effect of governments’ printing money will ultimately reignite inflation.

“If you’re in any field, you should own a farm because one day you will be grateful that you are able to grow your own agricultural produce.”

Recovery will be slow because government meddling in the markets will postpone it. He argues that the final low for markets and for growth will only come when the debt and losses have been cleaned out of the system.

Unless the system is cleaned out of losses, “the way communism collapsed, capitalism will collapse.”

“The best way to deal with any economic problem is to let the market work it through.”

The Fed is destabilizing, it’s creating “enormous volatility”.

Marc thinks the yields in government bonds bottomed out in December 2008 – rather than lend money to the US government he suggests buying a portfolio of large, quality blue chip stocks. They will grow and survive – and reposition to take advantage of the rising importance of the emerging economies.

“I think we are living through a major transition in the world… the economic bloc of emerging countries will be more meaningful than before.”

“I think that in Asia we have lots of sectors that are quite attractive. The banks, they don’t have the toxic assets that we have in the rest of the world.”

While not an optimist on the Chinese economy near term – Marc likes Asian currencies, and banks ex-Japan. He also thinks the real estate markets are improving. Both Russia and Turkey get a positive mention.

Cutmore follows this up with a summation of Faber’s market calls related to this view. See the link at the bottom for those calls.

Source
Cutmore: Marc Faber on Armageddon – CNBC

Related posts:

• Marc Faber: Dr. Doom goes bullish
• Marc Faber Raw
• Marc Faber on CNBC: bearish on oil and India
• Marc Faber: “I am 100% sure that the U.S. will go into hyperinflation”
• Marc Faber: I advise every American to hold his gold outside of the United States

On Monday, I mentioned that the Asian Development Bank Fund was a clear sign that Asia was cutting loose from the west and looking to take care of things domestically.  WIlliam Pesek of Bloomberg News put out a piece this morning echoing those sentiments, but also adding a lot more background regarding the events leading up to the Asian Crisis in the late 1990s, which I think is relevant.  Below, are some relevant excerpts from the Pesek post with a link in the sources at the footer.  Afterwards, I will follow that with a 2005 piece from Marshall Auerback that runs on similar lines.

Pesek starts off:

The International Monetary Fund’s 1997 meeting has a special place in the hearts of many journalists.

There we were in Hong Kong, Asia’s economies crashing around us, watching George Soros duke it out with Malaysia’s prime minister. The billionaire described Mahathir Mohamad as a “menace to his own economy.” Mahathir labeled Soros, one of the speculators blamed for attacking Malaysia, a “moron.”

That brawl comes to mind as another big story out of the event comes full-circle. It involves an Asia-only bailout fund, Lawrence Summers and Timothy Geithner. Its implications will travel far and wide in the fastest-growing economic region.

The “Asian Monetary Fund,” so passionately derided by Summers and Geithner at the time, is back. There is little a crisis-plagued U.S. can do to stop Asia’s $120 billion foreign- exchange reserve pool. Its creation is the clearest sign yet that Asia is getting serious about combating the global crisis. Done right, it will bode well for the region’s outlook.

There is still a role for Soros and Mahathir in this story more than a decade later, and I’ll get back to them shortly.

In September 1997, Summers was deputy U.S. Treasury secretary and Geithner was just being sworn in as assistant secretary for international affairs. Today, they are director of the White House National Economic Council and Treasury secretary, respectively. Back then, Summers, Geithner and their boss, Robert Rubin, objected to Asia having a bailout fund.

Eclipsing the IMF

Their concern was that it would eclipse the IMF in the region and, by extension, the U.S.’s say in how Asia retooled economies. They feared doling out billions of dollars in aid with few policy-change strings attached would prove dangerous. And they got their way. That changed this week.

From 1997 to 1998, the IMF arranged about $100 billion of loans to Indonesia, South Korea and Thailand as currencies collapsed. In return, governments had to cut spending, raise interest rates and sell state-owned companies. The IMF’s policies needlessly deepened the turmoil.

During this global crisis, nations sought help from neighbors instead of borrowing from the IMF. Indonesia, for example, raised $5.5 billion of standby loans from the Asian Development Bank, World Bank, Australia and Japan, and increased the size of its currency-swap arrangements with China and Japan to bolster access to foreign exchange.

A quick re-cap then?  In 1997, Asia blew up.  The IMF got involved.  At the time, Tim Geithner and Larry Summers had prominent roles in making sure it was the IMF and not the ADB which was central to the process.  Now, in 2009, it is the U.S. which has blown up spectacularly and the U.S., with Geithner and Summers again in positions of authority, is in no position to dictate terms.  Hence the ADB monies.  The U.S. may have forgotten the Asian Crisis, but the Asians have not.  Marshall Auerback wrote a post 4 years ago reminding us that an Asian Monetary Fund was in development. Here is what he had to say with my highlighting for emphasis:

Even prior to the Asian financial crisis of 1997, the Japanese had begun to sell the idea of creating an Asian monetary fund to provide regional liquidity. Almost as soon as the trial balloon was launched, Washington shot it down with great force, sending Lawrence Summers, then Deputy Secretary of the Treasury to the region to make sure the message was not misunderstood. In spite of the subsequent travails experienced by the region, the idea apparently died a quick death.

Or did it? When Haruhiko Kuroda, former Japanese Deputy Minister of Finance for International Affairs, took over the helm of the ADB on February 1st of this year, he quietly began to promote the idea again. Kuroda has long been a strong advocate of an Asian Monetary Fund, an idea whose time may have come, given the increasingly low esteem with which the International Monetary Fund is held, particularly in emerging Asia, which has long been the world’s major savings repository.

It’s worthwhile looking again at the history of this venture: in the spring of 1997, before the onset of the Asian financial crisis, Japan and Taiwan had offered to put up $100 billion to help their fellow Asians cope with any potential fallout which might arise in the event of a precipitous withdrawal of short-term portfolio capital from their respective economies. The idea was killed by then-Treasury Secretary Robert Rubin and Deputy Secretary Summers, both of whom saw the idea as a threat to the monopoly of the IMF over international financial crises. The US Treasury in particular did not want Japan taking the lead in this area because Japan would not have imposed the IMF’s conditions on the Asian recipients, and as a policy objective for Washington, this almost superseded the importance of restoring the region to full economic health.

We all know what happened subsequently. Instead of forestalling global economic instability, the Treasury/IMF proposals helped make further instability inevitable. Ironically, the emerging markets’ crisis that ensued led to American policymakers developing a proposal very similar to that suggested by the Japanese in the first place. By November 1998, the Brazilian economy was so destabilised by volatile capital flows, that Secretary Rubin put together a $42 billion “precautionary package” to shore up Brazil, which had been the ostensible rationale underlying the initial Japanese proposal for the AMF.

Which does lead one to question the motives underlying Washington’s opposition to the original Japanese proposal. By killing off the idea of a competing Asian Monetary Fund, Rubin/Summers enabled the IMF to continue in its guise as an ostensibly “neutral” agency, thereby facilitating the implementation of the Treasury’s agenda whenever a financial crisis which required the IMF’s intervention arose. Of course, the “medicine” the IMF proffered had the ultimate effect of weakening pre-existing financial structures by imposing Western measures of financial restructuring, thereby giving Wall Street a huge stake in the subsequent “reform” agenda introduced: Basle capital adequacy ratios were to be applied. Highly indebted banks and firms were to be closed. Labour laws were to be changed to make it easier to fire workers, facilitating the closures. Regulations on foreign ownership were to be lifted in order to allow foreign banks and firms to buy domestic banks and firms, injecting needed capital and skills. All of which required lots of western style restructuring and “reform”, and who better to offer this than America’s finest investment bankers?

Somewhat similar measures were applied in a much narrower setting to solve the American savings and loan crisis in the late 1980s and early 1990s, and they worked. But it is one thing to undertake such reforms where real interest rates are very low and indebtedness not high (as in the United States in the late 1980s), and another to undertake them where both real interest rates and indebtedness are high. In these conditions such restructuring leads to closures and layoffs, with deflationary knock-on effects and more investor pullout. In short, the Fund’s initial insistence on fiscal contraction, cuts in aggregate demand, and large-scale institutional reform accelerated debt deflation.

This is why the IMF’s strategy for Asia ultimately failed in spite of widespread attempts revisionist attempts to take credit for the region’s subsequent economic recovery. In fact, in spite of the introduction of refinancing to the tune of US$110 billion, almost three times Mexico’s US$40 billion package of 1994–95 (the biggest in the imf’s history to that date), the crisis continued unabated: Asia’s currencies went into freefall by early 1998, leading to the Fund to call for even more interest rate hikes to arrest this process. Yet by May the deepening economic contraction, the rising unemployment and the fear of social unrest combined to produce a second wave of capital outflows and renewed falls in currencies and stock markets.

The Japanese themselves had long expressed disquiet with the IMF/Treasury measures forced on the afflicted economies in return for a financial bailout, fearing – rightly, as it transpired – that an overly conservative approach would push them into a full-blown recession. The financial mandarins in Tokyo wanted fiscal pumping and low interest rates so Asian exporters could trade their way out of the quagmire – and protect billions of dollars worth of Japanese investments in the region. Unfortunately, given the state of their own economy, Tokyo’s mandarins had comparatively little leverage and credibility to push their proposals more forcefully. It was the resumption of the collapse in May 1998 which finally forced Asian governments to begin to turn away from the initial imf strategy. They began to follow Japan’s remedies: bringing down interest rates and turning fiscal restriction into fiscal expansion.

In retrospect, it is clear that the Fund’s most serious error in policy was its failure to see the danger of calling for high real interest rates for Asian economies with high levels of private indebtedness. Unlike the Japanese, mandarins at the Fund failed to understand that high real interest rates, which are fairly well tolerated in Latin American countries where debt has historically been kept low by the 1970s legacy of hyperinflation, would be disastrously deflationary in Asian economies, characterised by a high savings/high debt structure.

Seen within this historic context, therefore, Mr Kuroda’s appointment as head of the Asian Development Bank is very significant, since he, along with his predecessor at the Japanese Ministry of Finance, Eisuke Sakakibara, was one of the major architects devising the original Asian Monetary Fund proposal, which was largely predicated on these Japanese policy prescriptions. Additionally, Kuroda is on record as expressing the Asian countries’ frustration that they lacked the proper voting power on the IMF to reflect their economic development over the past two decades. When he succeeded Sakakibara at the MOF, he noted: “The voting share and board representation of the Asian countries have been extremely limited. On the other hand, 37 per cent of the voting power in the IMF belongs to executive directors from Europe.” His comments largely reflected Asian frustration over the IMF as a “white man’s club” whose interests were increasingly at variance with those of the Far East. That the Japanese nevertheless openly put forward Sakakibara as a potential IMF President after Michel Camdessus’s retirement, knowing full well that his chances for acceptance were virtually nil, suggests that the country had an ulterior diplomatic motive: to demonstrate to the rest of Asia that it was best to disengage themselves from institutions which paid scant heed to the interests of the world’s largest savings bloc and thereby smooth the obstacles for the reintroduction of a regional lending facility like an Asian Monetary Fund.

Whilst the AMF proposal itself has ostensibly failed to gain any further traction in spite of the many manifest failures of the IMF since the Asian Financial crisis, the Asia Times has recently noted that in substance, if not in form, a less direct route toward the same objective has steadily been gain steam over the past several years:

“The AMF was generally greeted with scepticism and just as quickly vanished. But its legacy was felt in other ways. Despite US resistance, the 10 members of the Association of Southeast Asian Nations (ASEAN) linked their international reserves with Japan, China and South Korea in May 2000 as part of a currency swap framework that became known as the Chiang Mai Initiative. An Asian Clearing Union (ACU) has been functioning since 1975 to settle intraregional trade transactions in local currencies, and ASEAN has had a currency swaps arrangement since 1977 to deal with temporary international liquidity problems.

At a surveillance level, the Executives’ Meeting of East Asia and Pacific Central Banks (EMEAP) was set up in 1991 to monitor financial market developments and exchange information on perceived threats. More recently, Thailand has instigated an Asian Bond Fund as a part of the Asian Cooperation Dialogue, with the objective of developing domestic capital markets and reducing reliance upon speculative inflows from abroad…"

In the meantime, Japan has been polishing up the AMF formula and, reverting to its traditionally more pragmatic approach, has shifted the battleground to the diplomatic front. Two years ago, the ADB launched a scathing attack on the IMF’s role in the global financial architecture by floating the idea of ‘credible emergency financing from official sources, with less strings’. In language that clearly was aimed at Asia’s central bankers and monetary chiefs, the institute’s Japanese dean, Masaru Yoshitomi, called for ‘collective measures to restore systemic currency stability, including joint interventions’.

Simultaneously, Kuroda’s predecessor at the ADB, Tadao Chino, began to challenge the World Bank’s function as the final arbiter of global development policy by setting the agency on a more independent footing. ASEAN countries have given warm, if qualified, support for monetary union, even awarding the ADB Institute a contract several years ago to conduct regular surveillance of the members’ economies, in a pointed intrusion into the IMF’s turf.”- (“Asia’s Answer to the IMF”, Alan Boyd, Asia Times, Feb. 19, 2005)

It is understandable why Washington would continue to resist the notion of an Asian Monetary Fund. As things stand right now, in spite of the significant contraction in bond yields since the late 1990s, western investors continue to extract huge risk premiums from the entire emerging markets universe as a quid pro quo for the provision of their capital. This is manifestly perverse, especially when one considers that the ultimate source of much of that liquidity is Asia. All of the nations of Asia continue to run large current account surpluses, the proceeds of which are funnelled back into the US Treasury market, where the savers obtain a yield of less than 5 per cent, in a country which is now the world’s largest debtor nation, suffering the twin diseases of a declining currency and higher inflation (both of which are eroding the real value of the Asian creditors’ respective investments).

By contrast, even leading Asian conglomerates (whose products are readily gobbled up by the American consumer) are forced to pay several hundred basis points above the yield of Treasuries. The Western investor or banker is extracting a wholly unmerited premium, whilst the US continues to trade on its reserve currency and safe haven status to subsidise its over-consumption and perpetuate the country’s growing financial imbalances.

It’s a great deal for Washington and readily explains the Treasury’s violent opposition to an Asian Monetary Fund (or anything else that would disrupt the existing status quo, such as restrictions on capital account mobility). But must the world’s largest creditor bloc continue to act from such a position of weakness, which is more apparent than real? The aggregate net creditor position of Asia dwarfs its indebtedness. The domestic markets are rapidly maturing and will soon be in a position to replace the American consumer (who must surely retrench if the US is ultimately to come to grips with its own debt disease).

The actions by Asia’s leading policy makers suggest an implicit (albeit belated) recognition that they have been getting a raw deal from the existing global financial architecture and are taking incremental steps to redress the current imbalance. To be sure, historic rivalries, notably between China and Japan (manifesting themselves most recently over Taiwan) may slow the development of an AMF. It is also probable that the Bush administration will likely go out of its way to exacerbate this rivalry and thereby frustrate the development of competing multilateral agencies, which would invariably weaken Washington’s influence in the region.

But in spite of these periodic setbacks, the trend appears clear. The day is moving closer where an Asian Monetary Fund will become a reality. It is particularly noteworthy that the idea continues to be pushed by Japan, America’s staunchest ally in the region. Tokyo’s embrace of Washington only goes so far. Ironically, if (as we suggested last week) America ultimately repudiates existing obligations to its (largely) Asian foreign creditors, it will simply catalyse this process and likely ensure the AMF’s swift arrival, in spite of ongoing efforts to render this idea stillborn since 1997. The world is full of such rich ironies: In Iraq, America has long expressed opposition to the formation of Shiite-dominated theocracy, yet the recent elections suggest that this is about to become an impending reality. So too, the inexorable logic of current economic policy making may yet introduce outcomes – such as the introduction of an Asian Monetary Fund – completely at variance with Washington’s oft-expressed preferences to the contrary. In any event, time is definitely not on the side of the existing status quo.

My view here is this: the Great Unravelling has been a blow to every nation in the global economy.  The U.S., Europe, Africa, Asia, Latin America, Canada, they have all suffered.  But, Asia is de-coupling.  Mind you, I am not saying they are literally about to separate from the West and embark on their own growth path.  No, the ties are too strong.  Nevertheless, the West is weak, particularly the United States.  No one from the IMF is dictating terms in Asia today. Nor will they for the foreseeable future.  The die is cast.  The United States badly overplayed its hand in the 1990s.  Asia senses it is weak, overburdened with debt and depression.  This is therefore their opportunity to break free and I believe Asia will use it.

(Also see related posts: China warns that the west’s quantitative easing is inflationary and Breaking news: China has been secretly stocking up on gold)

Source

Summers, Geithner Are Silent as IMF Loses Grip: William Pesek – Bloomberg

Related posts:

• Asia is de-coupling
• New Zealand in recession: who’s next in Asia?
• Stephen Roach: Downturn in Asia less severe, but recovery later
• Jim Jubak joins the inflation made in Asia crowd
• Big Mac Index: Europe overvalued, Asia undervalued

A post from Reuters in overnight trading in Asia caught my eye.  It proclaimed “Asia faces up to challenges of global crisis." What I found particularly interesting about the post was the fact that the Asians had set up a $120 billion fund through the Asian Development Bank which excluded the International Monetary Fund (IMF) as the go-to organization in a crisis.  Reuters says the following:

Asia has been hard hit by the collapse in global demand largely because of the region’s heavy reliance on exports. Singapore, Hong Kong, Taiwan and Japan are in recession and growth elsewhere is the weakest in years.

"Poverty is worsening in many countries. Businesses are struggling. The extremely urgent climate change agenda could be affected," Indonesian President Susilo Bambang Yudhoyono said at the annual meeting of the Asian Development Bank.

"If all this goes unchecked, down the road we could see social and political unrest in many countries," he told representatives of the ADB’s 67-member countries, including finance ministers and central bank governors.

To counter the downturn, the ADB said it will raise lending by half and Asian governments agreed at the weekend to launch a $120 billion fund countries can tap to avert a balance of payments crisis.

You will recall that the Asians were forced to go cap in hand to the IMF for bailout funds after the Asian Crisis in the late 1990s.  This experience was very humiliating for some and caused extreme hardship as the IMF programs were rather severe and deflationary.  Resentment toward the IMF remains as a result. I see this development as an explicit measure to exclude the IMF in Asia.  I am not the only one who noticed this.  Marc Chandler the Chief Global Currency Strategist at Brown Brothers Harriman sent out a missive today titled "The Beginnings of an Asian IMF?" saying:

Back in the 1997-1998 Japan proposed an Asian-based IMF, the US objected and the issue seemed to be closed. However, during this crisis, a modified version appears to be in the works and without the international objections.

ASEAN+3 (Japan, China and South Korea) confirmed over the weekend that a $120 bln fx reserve pool will be established by year-end as the Chiang Mai Initiative is expanded. Participating countries can borrow up to 20% of their quote (agreed upon swap ). The other 80% can be accessed only after an IMF-like agreement. At first multilateral agencies, like the IMF and ADB, will be tapped for their expertise, but the intent to be independent is clear. Over time, their own surveillance unit will identify risks and provide oversight.

Separately, Japan offered a $60 yen-swap facility and to guarantee yen-denominated bonds (samurai) issued by developing countries. This is in addition to contributing $38.4 bln to the reserve pool (the same as China–including HK). South Korea will provide $19.2 bln. The four largest economies in ASEAN–Thailand, Indonesia, Malaysia, and Singapore–will each contribute $4.77 bln each, and the Philippines will pony up $3.68 bln.

Now, you should note that the CLSA China Manufacturing Index for April also came out overnight (see Econompic Data’s charts), with the index registering expansion in China for the first time in nine months. The reading was 50.1 in April versus 44.8 March.  This indicates that the stimulus efforts of the Chinese government are indeed having the wanted effect on demand as I suggested last week.  Therefore, I am officially abandoning my downbeat forecast for Chinese growth (see my predictions for 2009).

Asia looks poised to break away from the West, dare I say de-couple.  I am loathe to use that word because the inter-connectedness of the global economy has meant that negative demand-side shocks in the West will be felt in Asia as well.  Nevertheless, Asia looks to be developing an Asia-only dynamic and re-focusing on internal trade and politics.  This is good for Asia, but, for the West, not so much.

Source

Asia faces up to challenges of global crisis – Reuters.

Related posts:

• Pesek: Asia is de-coupling
• Stephen Roach: Downturn in Asia less severe, but recovery later
• China warns that the west’s quantitative easing is inflationary
• Jim Jubak joins the inflation made in Asia crowd
• Big Mac Index: Europe overvalued, Asia undervalued

China is holding its own in regards to economic growth because the government is pumping massive amounts of government money into the economy in order to make up for the loss in trade.  What does this mean for China, Chinese shares and the global economy?

The Bloomberg video below makes the bullish case for China and Asia more generally.  (Disclosure: I have previously said China’s growth rate would trough at 2%, but this is looking relatively pessimistic at this point – Standard Chartered is calling for 6%.  I am sticking to my view for the time being. But, the bullish case for China is looking better every day.)

Related posts:

• G-20: China is clearly looking for a new world order
• China: Growth on track but at what cost?
• Does the US need a second stimulus package?
• Treasurys are getting killed again
• China slams U.S. profligacy

This past week, I caught an article in Wirschaftswoche (WiWo), the German Business Week, which suggested that the South Koreans were very confident about their economy and had learned from the Asian Crisis.

Just today, the South Koreans released GDP numbers that many would find amazing, showing that the economy grew 0.1% in the first quarter compared to Q1 2008 Q4 2008.  Q4 2008 was a 5.1% fall, so that’s a pretty prodigious uptick which comes largely from household and private consumption.  It certainly begs the question as to whether the Asians are ‘de-coupling,’ a term I never though I would use in a positive sense.

What is clear from the reports at a minimum is that intra-Asian trade is increasing and keeping countries like Korea from feeling the full impact of the slow down in the West. (A 30% currency devaluation helps too.)

Below is a Bloomberg video on the Korean economy:

Also, here is what WiWo had to say (my translation):

South Korea wants to present itself at the just opened Hanover Fair as a country with a promising future – and as an unbroken dynamic export nation. The worst is behind the country. But, the Koreans find one development unpleasant.

Like a ballerina, the young lady dances around in front of the black sedan of Mr. Yoo. She leads the heavy but graceful Hyundai into the car park at the Seoul Lotte warehouse and bows so deeply that her little pink hat almost touches the ground. She chirps, that she is sorry for the precious time that had to be wasted by the important Client in the queue. Yoo Jae-Wook, head of consultancy Nemo Partners, sees the ‘parking show,’ as a good sign: “Every day the same large crowd. Officially, we have crisis, but they are all go shopping! ”

South Korea, this year the official partner country at the Hanover Fair, wants to present itself to the world as a haven of stability amid the present global crisis. This is not only outdoor advertising, but is quite the mood in the country itself. The fourth largest economy in Asia has come through the global shock calm. Quite unlike the Asian crisis of 1997/98, when some Koreans even donated their gold to support the economy. “In Seoul, they are not making cuts to their quality of life,” says Kim Nan-Do from the National University in Seoul. The Koreans, according to the local Siemens boss Josef Meilinger, understand the global crisis as an opportunity: “You look at which share of the world pie you can grab now.”

Crisis? What Crisis?

What crisis überhaupt? The Koreans come to Hanover full of self-confidence: “Our economy is overcoming the global crisis faster than other countries,” said Cho Hwan-Eik, president of the trade promotion company Kotra,. “We have high-performance products, sophisticated marketing strategies, and government and businesses have relatively low debt-burdens. Indeed, South Korea with government debt of 38.5 percent of annual gross domestic product is much better than Japan, for example, with almost 185 percent. The country has dealt with the recession from just over a decade ago and it is partially immunized against new problems – at least in many Koreans opinion. “The Asian crisis has made us seem well trained. We have learned to survive,” says business consultant Yoo.

In the areas of information technology, electronics, shipbuilding and auto industries, South Korean firms are forcing their way into the world class tier, but also lately in green technologies. In addition: The banking system is reasonably stable. “In comparison to the great Asian crisis a decade ago, our banking and financial system today is less vulnerable,” says Jong-Goo Yi of the state financial oversight of FSC. At that time, many indebted Korean conglomerates like the car manufacturer Daewoo and KIA, the Hanbo steel producer as well as several banks were forced into bankruptcy or had to give up their independence. Today, however, the liquidity of the 44 major Korean corporations is “so high that these companies have even more months to survive crisis,” says Yi.

Cautious optimism in the boardrooms

It is also reassuring, according to Yi, that the Korean banks, on average, have less than one percent of their loan portfolio in “toxic” assets – they have little invested in complicated derivatives. Accordingly, the financial structure is much healthier than in Europe or the USA.

In the boardrooms of the export-dependent companies, the typical sound is somewhat subdued optimism. In 2008, the export share of the economy was about 55 percent. Now, in the face of the crisis of world trade, sensitive setbacks are threatening. “Until now we have had the rapid depreciation of the won to hold us above water,” said Ko-Yung Sang of Standard Chartered Bank in Seoul. Against the dollar, the exchange rate of the Korean currency fell by almost 30 percent in the past twelve months. So Korea’s largest car manufacturer Hyundai / KIA lost in the U.S. less than one tenth of its turnover, although the total there saw a 40 per cent fall. The worst for Korea could already be behind them. The most difficult month was January, when the Korean exports crashed 34.2 percent. Afterward, the figures have improved. In March, the trade surplus was even at a record high of 4.6 billion U.S. dollars. For 2009, the economy ministry expects an increase of approximately 20 billion U.S. dollars, significantly more than previous estimates.

Even in crisis, South Koreans can rely on their main trading partner China, which at last count bought 23 percent of all Korean exports – 14 percent went to the European Union, and nearly ten to the U.S.. Above all, the shipbuilders were successful: Korean shipbuilders recorded a sales increase of 61 percent in March.

Such export power could ensure that South Korea’s recession in 2009 is relatively mild with a fall of minus two percent, the government previously estimated. Some prognosticators still hold a crash of up to six percent possible. The FKI Industries notes, however, that the mood among business people has improved significantly. “The downturn will lose significant momentum,” said JP Morgan economist Lim Ji-Won Lim. He holds a recovery already this summer for possible.

Need for social consensus is growing

Koreans feel uncomfortable, however, with the development of its labor market – despite the fact that other industrialized countries might be jealous at the figures. The unemployment rate has gone since February 2008 from 3.5 to 3.9 percent. Especially small and medium-sized enterprises should cut some 200,000 further jobs, which would bring the rate upward a further percentage point.

Therefore, the need for social consensus is rising. Entrepreneurs, workers and government have agreed on a program “to share the social pain.” In many companies the employees take up to 30 percent wage cuts. Managers voluntarily reduce their salaries, officials waive ten percent of their salaries and donate the money for the needy. Several unions, in fact notorious for militant strikes, want to work, fighting to forgo wage increases – in exchange for guaranteed jobs and recruitment.

In addition, the government is on a major stimulus program: 25 billion euros – about 2.5 percent of gross domestic product – to keep the economy on track: “The main objective is the preservation of jobs,” President Lee Myung-Bak announced.

The same applies for the job of dancing white car park in the Lotte department store. Strikingly, many customers pay with cash coupons, which the State distributed as part of the economic program to 2.6 million poorer citizens.

Watch developments in Korea. If we do see de-coupling oin the way up, it is going to be in countries like Korea where the upswing will happen first.

Source
Südkorea gibt sich auf der Hannover-Messe krisenresistent – WiWo.de

Related posts:

• South Korea going gangbusters in contrast to UK
• Asia is de-coupling
• Trade flows in flux: is this re-balancing?
• Pesek: Asia is de-coupling
• China warns that the west’s quantitative easing is inflationary

If you have noticed, Pakistan is in a real state of crisis right now.  Given the fact that this country is both unstable and possesses nuclear weapons courtesy of A. Q. Khan, it stands to reason that everyone should be interested.  The fact that it has a border with Afghanistan only makes things that much more urgent.

In this video on Charlie Rose, Steve Coll of the “New Yorker” discusses Pakistan with Joe Klein, Hasain Haqqani, Director of the Center for International Relations and Professor at Boston University, and Imtiaz Ali.

Related posts:

• An hour with Mikhail Gorbachev and George Shultz on Charlie Rose
• Downward oil price momentum and the news cycle
• A conversation with Brent Scowcroft on Charlie Rose
• A conversation with Peter Orszag on Charlie Rose
• Kill All The Storytellers

Sovereign Wealth Funds (SWFs) are losing money hand over fist, which should leave one wondering whether their appetite for Western assets will continue to bolster those markets. Funds in Asia and the Middle East have been hit by a double-whammy of losses on existing foreign asset portfolios and weak domestic markets due to the fall in oil prices in the Mideast and an absence of de-coupling in Asia.

Originally, it was the SWFs’ investment in western banks during 2008, which helped to forestall a poor outcome in the United States, Britain and elsewhere. However, the Lehman collapse in September ended further widespread investments by SWFs in American and European banks, resulting in an unpleasant outcome which I predicted in June of last year.

Nevertheless, demand for assets in the West has held up strongly.

International demand for long-term U.S. financial assets rose more than economists forecast in December as foreign investors bought the most corporate debt since June.

Total net purchases of long-term equities, notes and bonds increased to $34.8 billion, compared with net selling of a revised $25.6 billion in November, the Treasury Department said today in Washington. Including short-term securities such as stock swaps, foreigners bought a net $74 billion, compared with net buying of $61.3 billion the previous month.

Stock prices rose and the dollar declined in the final month of 2008, when the Federal Reserve cut its benchmark lending rate. Investors abroad flocked to debt issued by American companies.

But, will all of that change going forward? My answer is yes for two reasons. First, economic conditions in the home market where the largest SWFs are domiciled are truly awful. Governments cannot be seen allowing domestically-controlled funds to be diverted to foreign assets in such circumstances, the risk being social unrest. Witness Dubai, one of the seven emirates of UAE, which has seen an enormous property bubble implode. Even the ritzy Atlantis Hotel is laying off workers. You should note that Dubai has no oil wealth to speak of.

Investors and home buyers in the United Arab Emirates may default on payments for properties that have yet to be completed, creating a liability for developers of as much as $25 billion over the next two years, UBS AG said.

“We believe delinquencies on payment terms will be a growing concern over the next few years,” Dubai-based UBS real estate and construction analyst Saud Masud said in an interview. “In our view investors are and will continue to default as per individual risk profile.”

Dubai property prices have dropped 25 percent from their September peak as banks reduced lending and speculators left the market because of the global financial crisis, Morgan Stanley said. Dubai opened its property market to foreign investors in 2002, and Abu Dhabi followed three years later, fueling a boom that was boosted by low interest rates.

“Our assessment of leverage in Dubai’s residential property market is based on the cost to developers to finish properties should investors default on the upcoming supply of 140,000 units,” Masud said in a Feb. 15 interview. “We estimate this liability to be roughly $20-$25 billion over the next two years.”

Based on conservative estimates, 30 percent of Dubai’s residential properties may be vacant by the end of next year as the population falls and the risk of oversupply increases, Masud said. The strengthening of the dollar against the pound, euro, ruble and the Indian and Pakistani rupee will make property less attractive to buyers using those currencies, Masud said.

Emaar Loss

Emaar Properties PJSC, the largest real-estate developer in the U.A.E., on Feb. 12 reported an unexpected loss for the fourth quarter because of writedowns at its U.S. unit and falling prices at home. The net loss was 1.77 billion dirhams ($481 million) compared with a profit of 1.74 billion dirhams a year earlier. Emaar’s results missed UBS estimates by 20 percent, Saud said.

Moody’s Investors Service said Feb. 12 it may downgrade banks and government-owned companies in Dubai, the second-largest sheikhdom in the United Arab Emirates, if oil-rich Abu Dhabi limits support to its own institutions. The emirate may have to refinance $15 billion in debt due this year from its total debt obligations of $70 billion, according to Moody’s.

But, more than that, SWFs are still losing a lot of money in the investments they already made. The latest such revelation comes from Singapore.

Government of Singapore Investment Corp., one of two sovereign wealth funds owned by the island, lost as much as S$50 billion ($33 billion) in 2008, the Wall Street Journal said, citing two people familiar with the matter.

The fund doesn’t plan to get rid of its investments including in Citigroup Inc. and UBS AG even as asset values plummet, the newspaper said. GIC expects the two banks to provide substantial long-term returns, according to the report.

Sovereign wealth funds in Asia and the Middle East have pumped money into global financial institutions to help replenish capital eroded by writedowns and losses that have topped $1 trillion globally. GIC, overseeing more than $100 billion of reserves, has invested about $18 billion in UBS and Citigroup since December 2007.

GIC’s losses are similar to those at Temasek Holdings Pte, the city-state’s other sovereign wealth fund, according to the Journal. “GIC does not comment on speculative reports,” Singapore-based spokeswoman Jennifer Lewis said today by phone.

The value of Temasek’s portfolio shrank 31 percent in the eight months to Nov. 30 as the global stock-market slump eroded the value of companies from Barclays Plc to Merrill Lynch & Co., Lim Hwee Hua, senior minister of state at Singapore’s finance ministry, said on Feb. 10.

Temasek’s assets were valued at S$127 billion, down from S$185 billion at the end of March 2008, Lim said then. The MSCI World Index declined 38 percent over the same period in U.S. dollar terms. The benchmark tumbled a record 42 percent in 2008.

GIC, along with Temasek, reduced equity holdings amid the global downturn last year “early in the crisis,” helping the funds to post smaller losses than the MSCI World Index, Finance Minister Tharman Shanmugaratnam said on Jan. 19.

I see the weak domestic market and the heavy losses as a one-two punch for Sovereign Wealth Funds. While these funds may have continued to invest heavily in Europe and North America through 2008, I cannot foresee a similar asset allocation going forward. This lack of demand is a downside for markets n those countries.

Sources
Foreign Demand for U.S. Long-Term Assets Gained in December – Bloomberg.com
U.A.E. Real-Estate Defaults May Cost $25 Billion, UBS Says – Bloomberg.com
Singapore’s GIC Loses $33 Billion as Assets Tumble, WSJ Says – Bloomberg.com
Dubai resort The Atlantis stages most expensive launch party ever – Telegraph
Atlantis The Palm Dubai website
Atlantis lays off 70 staff – National

Related posts:

• Abu Dhabi sovereign wealth fund loses $125 billion
• China sovereign wealth fund diversifies into a massive loss
• Dubai bailed out by Abu Dhabi after property bust
• John Paulson: Distressed assets best opportunity in a lifetime
• Foreign investors dump Danske Bank

Overnight, the Japanese government released figures for Q4 2008 GDP that pointed to a depression-like fall in the Japanese economy.  GDP contracted 3.3% from Q3, or 12.7% using the U.S. convention of annualizing those numbers.  This is the largest such quarterly contraction in Japan since 1974.  While a very poor number was expected, this number was even worse than forecast.

Ken Worsley of the Japan Economy & News website has a good summary of the situation:

While PR fallout has yet to land concerning Finance Minister Shoichi Nakagawa’s seemingly drunken appearance at the G7 meetings in Rome this past weekend, data released today by the Cabinet Office shows Japan’s GDP as having fallen 3.3% in the October quarter, annualized at a 12.7% decline. This is the largest fall since since an annualized 13.1% decline in the January-March quarter of 1974.

For comparison, while Japan’s October-December GDP declined 3.3% against the third quarter, the US saw a 1% fall while the EU experienced a 1.5% contraction.

Where were the declines seen? Here’s a breakdown of performance by major categories, compared against the third quarter:

Domestic Demand: -0.3%

Private Demand: -0.6%

• Private Consumption: -0.4%
• Household Consumption: -0.4%
• Household Consumption (excluding rent): -0.6%
• Private residential investment: +5.7%
• Private non-residential investment: -5.3%

Pubic Demand: +0.6%

• Government consumption: +1.2%
• Public investment: -0.6%

Capital Spending: -2.9%

Exports of goods and services: -13.9%
Imports of goods and services: +2.9%

The largest drag on GDP figures is clearly in the export category, which fell at an annualized 45.0% in the fourth quarter. Is there any end in sight for this? With bankruptcy figures still climbing and machinery orders still falling, the head of research at the Bank of Japan, told reporters last week that there is a possibility that the first quarter of 2009 might see worse numbers than what was reported today.

Japan’s GDP number is important for a number of reasons.  First, despite massive stimulus – economic and fiscal, Japan has never fully rebounded from the  stock and property market crashes that began nearly two decades ago.  While one cannot rule out demgraphic shifts as a major reason for the economy’s continued sluggishness, the Japanese experience reinforces the notion that stimulus is inadequate without a robust  financial sector policy response.

In addition, just as in the U.S. Q4 numbers, there was a significant inventory build in the figures which artificially goosed the final figure.  The GDP number would have been even worse were it not for the inventory build.  Given the massive layoff announcements in Japan and elsewhere, it is evident that companies are looking to reduce inventories drastically in Q1 2009, that is going to depress GDP figures.  I expect a serious downside surprise in Japan and the United States at a minimum.  Such a nasty surprise could have an important psychological impact for markets and consumers.

Further, the Japanese figures demonstrate the huge falloff in global trade as exports collapsed in Japan.  Similarly large falloffs have been witnessed across Asia including in Taiwan, Singapore, and South Korea.  Therefore, the figures in Japan bolster the notion that China’s economy is suffering mightily due to its export orientation.  This would also suggest that Sovereign Wealth Funds domiciled in China and elsewhere in Asia will have much less appetite for overseas investments, which could be a meaningful loss of investment demand should Western markets come under pressure.

As they plot their future investment strategies, SWFs are trying to gauge how deep the recession will be, how long it will last and what shape a recovery will take.

Some funds are facing pressure to invest more at home instead of abroad. The French government announced in November that it would establish a 20 billion euro SWF not just to help local companies cope with the effects of the credit freeze but also to prevent the takeover of strategic French firms by “foreign predators.”

Other SWFs in Asia and the Middle East, burned by investing early in the current crisis, are wary of going back into the market until they are more confident an upturn is in sight and the financial system has stabilized.

Lou Jiwei, chairman of the $200 billion China Investment Corp., said in December that “we don’t have the courage to invest in financial institutions anymore, because we don’t know what problems we’ll have.” Like the Singapore SWFs and some Gulf Arab funds, CIC invested early in the crisis in Western financial services companies and has lost billions of dollars on paper.

Analysts say China’s other SWF, the $312 billion SAFE Investment Company, is also sitting on book losses on some of its foreign investments, although they appear to be smaller than those of CIC.

Before buying abroad on a significant scale again, SWFs will have to make an assessment about the future strength of the global economy, and where its most vibrant growth centers and sectors will be. This recession is the worst since World War II, and possibly since the Great Depression in the 1930s. Unlike previous downturns, it has hit all major markets, both developed and developing. Demand for exports is down everywhere.

 
Finally, recent news from Japan overnight suggests that the economy is still headed down. One should see this as a harbinger of global economic trends.

Japan’s government may cut its economic assessment for a fifth month, Nikkei English News said, without citing anyone.

The Cabinet Office report, to be released on Feb. 19, is likely to downgrade it description of the economy from “worsening rapidly,” the Nikkei said.

The report may also cut its assessments for employment and personal consumption, the news wire said.

In sum, I see the Japanese numbers as big news. It has meaning far beyond the Japanese economy. This was a downbeat number which suggests that the global economy is indeed getting worse.

Sources
Japan’s GDP contracts 3.3% in fourth quarter, 12.7% annualized – Japan Economy & News Blog
Former saviors racking up losses – Japan Times
Japan to Cut Economic Assessment for Fifth Month, Nikkei Says – Bloomberg.com

Related posts:

• Depression in Japan
• Japan: stimulus without reform leads to a policy cul de sac
• Is Japan next on the road to quantitative easing?
• China is now on the same bubble path as Japan post-1987 crash
• Japan’s easy money policy was the trigger for the tech wreck

Morgan Stanley Asia head Stephen Roach believes that Asia will weather the economic storm with a less severe downturn than the West. However, as the economies are predominantly export-led, he also believes that the countries are followers, not leaders. Translation: Asia will recover more slowly.

Asia will have a less acute impact from the global financial and economic crisis but their recovery will also be slower than Western countries, said Morgan Stanley (Asia) chairman Dr Stephen Roach.

He said Asia’s economies, which were largely export-led, would only recover after their main export markets, the US and Europe, recovered.

“Export-led regions are followers, not leaders,” he said. “The only possibility (to recover earlier) is China, as it has large infrastructure spending in place that could provide support for economic growth.”

Roach has predicted that China will recover by the second half of this year.

He said Asia would grow below market projections this year, forecasting Asian growth at less than 2.5% and the rest of the world at between -1% and 1.5%.

Asked if China could turn its high savings into consumption, he said unless China extended its safety net for employment and social security, consumption in China would remain deficient.

Edward here. One should also note Roach’s views on stimulus and monetary policy which dovetail with what I have said — in a nutshell: fiscal stimulus good, monetary stimulus bad.

Roach also said he doubted that the use of monetary policy to boost the economy could be as effective as before.

“One of the consequences of lowering interest rates is high inflation. But my utmost concern is what the exit strategy for this aggressive easing is? How do you wind down without tipping to deflation,” he said, citing the example of Japan, where the economy had not been stimulated even with near zero interest rates.

Roach said he preferred fiscal policies, especially those which focused more on investments rather than private consumption, as he felt businesses were better credit managers than individuals.

On the US financial crisis, Roach said he blamed it on the reckless consumption, politicians and the central bank.

He said the US was only 20% through its deleveraging cycle and that the adjustments being made would take a number of years to complete.

On the US dollar, Roach said the greenback would continue as the world currency for a lot longer than many people thought, probably for a further 20 to 30 years.

You will have noticed that Roach thinks the deleveraging is only 20% complete. That means 2009 is a complete writeoff. However, when we do resume growth, excessive monetary stimulus may lead to inflation. First the deleveraging and the deflation, then the inflation. But, that’s a story for 2010-2011.

Source
Morgan Stanley chief: Asia will be less affected by crisis – The Star Online

Related posts:

• Stephen Roach sees a W-shaped recovery for China
• Stephen Roach: Asia is source of stagflation
• Stephen Roach is talking double dip again
• Stephen Roach is still bearish, no recovery until 2010
• Stephen Roach has a bone to pick with Congress

There seems to be a blame game making the rounds in policy circles these days in which Asia is at fault for the credit crisis and economic downturn. The meme goes like this:  Everything was fine until the Asians started manipulating their currencies and creating excess savings to export to the West.  This mercantalist policy of low domestic demand, high savings, and an export-oriented economy set up huge macro imbalances that created the debt bubble and recession we see today.  Asians need to save less and buy more — and stop manipulating their currency.  Do you buy this line of argument?  I don’t.

But judging from recent statements by policy makers in the U.S. and the U.K., there are any that do.  Witness this article from the Times of London last week, which was reporting on quantitative easing aka printing money.  The U.K. has resorted to printing money as the only way out of an economic pickle.  But not without some measure of recrimination.  Note the blame given to Asia, which I have highlighted in bold:

Mr King emphasised the need for international cooperation to fight a global downturn. Limiting banks’ cutbacks on lending meant cross-border action was essential. “Almost every aspect of the present crisis has an international dimension.”

He blamed the crisis on a binge of lax lending by banks, and on a wall of cheap money from Asia as a result of “global imbalances”. Urgent action was needed to tackle these problems and prevent future turmoil, including new weapons for central banks and governments to prevent excessive future build-ups of debt, were needed. Governments of big economies also needed to work together to overhaul the global monetary system.

I flagged this article when I saw it last week, but my concern about the Blame Asia Meme has only increased with time. The focus here, of course, is China. Tim Geithner, the new U.S. Treasury Secretary, has said, “Treasury has to be and Treasury will be a source of bold initiative.” What does that mean? Judging from Geithner’s other statements, it might mean protectionism. The video below sums up the protectionist sentiment both in Europe and in the United States.

The most pointed exchange has been as a result of Tim Geithner’s comments during his confirmation hearings when he accused china of “manipulating” its currency. Here’s what Willem Buiter says about all of this:

Timothy Geithner, the nominee for US Treasury Secretary, has risked damaging the global economy even before his confirmation by the full Senate. In a written answer to questions from US senators, Geithner said: “President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency”. In the US, the words “currency manipulation” are fighting words. If the US administration were to formally name China as a currency manipulator, a range of trade sanctions could be imposed by the US government.

The threat to world trade comes from the Omnibus Trade and Competitiveness Act of 1988. The section dealing with the exchange rate, bilateral current account balances and the overall current account balance is a monument to economic illiteracy.

Under the Omnibus Trade and Competitiveness Act of 1988, “The Secretary of the Treasury shall analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.”

“If the Secretary considers that such manipulation is occurring with respect to countries that (1) have material global current account surpluses; and (2) have significant bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair advantage.”

I have mentioned in the past that Barack Obama does not have a consistent record on promoting free trade and many are worried, including Free Trade guru Jagdish Bhagwati, that we are about to see protectionism hit with full force. So, while the White House backpedaled from the protectionist sentiment, Geithner’s comments cannot be taken lightly.

This concept that Asia is to blame for the downturn and the massive losses at European and American banks must be rebutted before it gathers steam and creates a trade row that nobody wants.

Update 11 Mar 2009: The most recent chapter in the Blame Asia meme was written by Sir Alan Greenspan, who had a Wall Street Journal article out today defending his tenure at the Federal Reserve. The overall point was that the Federal Reserve was not responsible for the low interest rates which stoked the housing bubble. Rather, it was excess savings from Asia. Here is the important passage below.

The Federal Reserve became acutely aware of the disconnect between monetary policy and mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004. Moreover, the data show that home mortgage rates had become gradually decoupled from monetary policy even earlier — in the wake of the emergence, beginning around the turn of this century, of a well arbitraged global market for long-term debt instruments.

U.S. mortgage rates’ linkage to short-term U.S. rates had been close for decades. Between 1971 and 2002, the fed-funds rate and the mortgage rate moved in lockstep. The correlation between them was a tight 0.85. Between 2002 and 2005, however, the correlation diminished to insignificance.

As I noted on this page in December 2007, the presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005.

So, there you have it – Asia was responsible for the bubble, not the West. And the blame game continues. See below for my original January article – Alan Greenspan is not alone here.

Sources
Mervyn King paves way to start Bank print presses – Times Online
Obama Deems China ‘Manipulating’ Yuan, Geithner Says – Bloomberg.com
When all else fails, blame China – Willem Buiter’s Mavercon
China comments not a “determination”: White House – Reuters
Währungsstreit: IWF-Chef fordert Kurswechsel von Peking – Financial Times Deutschland
Broader point about Geithner, Obama, China, and “manipulation” – James Fallows, Atlantic

Related posts:

• Stephen Roach: Downturn in Asia less severe, but recovery later
• China slams U.S. profligacy
• The U.S. is exporting unemployment with ‘Buy America’
• Asia is de-coupling
• Ahead of G-20, China blames west and west blames China for meltdown

Ambrose Evans-Pritchard has picked up on the decline in trade flows that many have highlighted in recent months. This time, he looks at European-Asian trade flows and sees some major problems.

“They have already hit zero,” said Charles de Trenck, a broker at Transport Trackers in Hong Kong. “We have seen trade activity fall off a cliff. Asia-Europe is an unmit­igated disaster.”

Shipping journal Lloyd’s List said brokers in Singapore are now waiving fees for containers travelling from South China, charging only for the minimal “bunker” costs. Container fees from North Asia have dropped $200, taking them below operating cost.

Industry sources said they have never seen rates fall so low. “This is a whole new ball game,” said one trader.

The Baltic Dry Index (BDI) which measures freight rates for bulk commodities such as iron ore and grains crashed several months ago, falling 96pc. The BDI – though a useful early-warning index – is highly volatile and exaggerates apparent ups and downs in trade. However, the latest phase of the shipping crisis is different. It has spread to core trade of finished industrial goods, the lifeblood of the world economy.

Trade data from Asia’s export tigers has been disastrous over recent weeks, reflecting the collapse in US, UK and European markets.

Korea’s exports fell 30pc in January compared to a year earlier. Exports have slumped 42pc in Taiwan and 27pc in Japan, according to the most recent monthly data. Even China has now started to see an outright contraction in shipments, led by steel, electronics and textiles.

I should note that U.S.-Asian trade and intra-Asia trade have also seen remarkable declines as well. This story is in marked contrast ti the recent news that China revised its 2008 GDP growth up to 13% from 11.9% for all of 2008. The Financial Times noticed this as well.

Markets down, jobs down, growth down – everywhere, it seems, except China. On Wednesday came the revelation that the country’s economy grew 13 per cent in 2007, versus an original estimate of 11.9. As a result, China became the world’s third largest economy. Statistical bodies often tweak published data. But 110 basis points, equivalent to $114bn, is quite an adjustment. And when the nation doing the revising is China, eyebrows invariably rise.

Whether the statistics tell the real story remains to be seen because it is 2009 when the declines in China’s growth rate will begin. While I am skeptical about China’s near-term prospects (I see 2% growth for 2009), the growing commentary about the decline in growth there has reached a feverish, almost hysterical level. The contrarian in me is starting to wonder if the China-goes-bust stor is starting to become oversold.

Sources
Shipping rates hit zero as trade sinks – Ambrose Evans-Pritchard, Telegraph
China’s growth figures – FT Lex

Related posts:

• Trade flows in flux: is this re-balancing?
• Free trade is dead: victim of a poor economy
• New Zealand in recession: who’s next in Asia?
• Asian inflation in the pipeline
• Rosenberg: ’Asia Revival May Be For Real’

The Chief Economist of Goldman Sachs, Jim O’Neill, sat down with the FT’s David Oakley and had a go on a number of topics from the financial crisis, investments in Emerging Markets, the future of the Bric (Brazil, Russia, India and China) economies, to the global economy.

Below are links to the three-part video series on the FT website. While he is more optimistic than I, I do think the videos are well worth watching.

Enjoy.

This first video is on the global economy. (Click on image below)

Click here for the second video on the Bric economies.

And click here for his view on investment in emerging markets.

Related posts:

• The bullish argument for the global economy
• Three views of the global economy
• Marc Faber: Investment strategies for June 2008
• Where is the global economy headed?
• Jamie Dimon on the economy

The question on everyone’s mind in the emerging markets is who will blow up next. Arnab Das of Dresdner Kleinwort Benson takes a stab at answering that question. He targets the Baltics as the problem children and sees current account surplus nations in Asia as lest vulnerable. He also discusses his views on Russia.

Below is the video with him on CNBC giving forth his view.

Related posts:

• How Iceland collapsed
• Is Ireland the next Iceland?
• Violence erupts in Iceland
• Iceland fast tracked for EU membership
• Iceland: a cautionary tale for small nations

Despite the plethora of data that has come out recently, one thing that has occasioned very little comment is the outlook for U.S. exports. Exports are generally not a big factor in the subset of companies involved in the ISM survey, but the plunge in export orders to 34.5 suggests that U.S. exports, hitherto a support in an otherwise collapsing economy, could be in big trouble as well.

U.S. November ISM Non-Manufacturing Index: Summary

	Nov.	Oct.	Sept.	Aug.	July	June	May	April	March	6-mo Avg
	2008	2008	2008	2008	2008	2008	2008	2008	2008
Composite Index	37.3	44.4	50.2	50.6	49.5	48.2	51.7	52	49.6	46.7
Export Orders*	34.5	50	50.5	44.5	47.5	52	54	48.5	55	46.5
Import Orders*	40	52	47.5	46	49	50.5	48	50	54.5	47.5

U.S. November ISM Non-Manufacturing Index: Summary, December 3, 2008, Bloomberg

Note that the export order index is falling faster than the import order index. The recent strength of the dollar is clearly having an impact. The combination of these two sub indices of the manufacturing ISM shows the substantial positive differential of exports over imports has disappeared. The same sub indices for the non-manufacturing ISM may be telling us once again that the whole trade improvement that was such a positive for the U.S. economy in recent quarters is about to disappear and may even reverse. This ominously echoes what happened in the wake of the Asian Financial Crisis in 1997/98, where a flight into the dollar from the Asian currencies triggered a huge deterioration in the U.S. current account and a further hollowing out of the country’s manufacturing base. With Detroit already on the verge of collapse, the decline of the Korean won from 900 to 1400 massively improves Korea’s competitiveness in the U.S. auto market. If dollar strength persists, then no bailout or no bailout, GM, Ford and Chrysler are toast.

Related posts:

• Dollar strength is an illusion
• Japanese defend dollar’s status while China tears it down
• U.S. Dollar: Cliff Diving
• The U.S. dollar plunges due to quantitative easing
• Why I am bearish on the U.S. Dollar

So, I am back in the saddle after a great weekend in Palm Beach. And three days almost entirely away from Newspapers, Televisions, Telephones, and Computers is a very good thing to clear the head. (Although I did happen to catch Sarah Palin on “Saturday Night Live” and I thought it was well done.)

Let me start off this week with some thoughts that come out of conversations with friends in the financial industry that I spoke to at the weekend. I sincerely believe the panic that we experienced over the past few weeks is over. In time, risk premia like the TED Spread and LIBOR-OIS spread will damp down somewhat and they have already begun to do so.

However, much of the underlying problem: leverage, excessive debt and inflated asset prices remains. Moreover, we are now about to experience the pain of recession, which is an entirely different beast than what we have experienced to date. And all of this will take time to work through.

However, my focus will be on Asia because Asia is next. Let me explain why?

This crisis and downturn is a manifestation of how markets respond to a realization that an unsustainable mania has weakened the entire banking system. In Manias, Pancs and Crashes, Charles Kindleberger outlines the stages of a financial mania and crisis.

The events begin as a result of legitimate speculation in a promising asset class: metallic coins in the Holy Roman Empire in 1618-23, British Government Debt in Amsterdam in 1763, Railroads in the U.S. in the 1870s, Technology and Telecom stocks in 1995. However, easy money steps in and monetary expansion fans the flames of the speculation turning legitimate speculation into a bubble.

As the bubble takes form and money is to be made, swindlers enter the scene. Time and again, this has bee the case and in the present case things were no different. However, at some point the unsustainability of things becomes evident. Warning signs appear, leading to changing expectations, and, eventually, financial distress. Then comes the crash and panic. This is what we have seen to date in the present crisis.

However, Kindleberger also mentions the infection of asset classes due to the speculative mania in Chapters Seven and Eight. The speculation and bubble events do not happen in a vacuum. Easy money and large profits spill out into other asset classes domestically and are also propagated internationally.

Now, I would argue we have seen the spill over events in terms of residential real estate infecting leveraged loans, high yield debt, Collateralized Debt Obligations and so on. Moreover, we have seen that a number of countries have experienced housing manias that are in unwinding right now. However, I would argue that, in a globalized economy, no one is going to “de-couple” — no nation can insulate itself from the global effects of this largest speculative mania in history, That is why Asia is next.

In August, I penned a blog post “Europe is next,” in which I said:

As you could probably tell — from all the stories I have been writing about the Baltics, Denmark, Sweden, you name it — I believe that Europe is the next leg down in the global housing bubble. As such, it will pay to focus as much attention on events outside the US, where the housing bubble began as it will to focus on the continuing U.S. problem.

Make no bones about it, with distress in Alt-A, Prime, Option Arm, and Negative Amortization mortgage products still rising, the U.S. has many more writedowns to come and some bankruptcies. Yet, it is Europe where the next leg down will be interesting.
-Europe is Next

I went on to elaborate on how I saw distress in Europe and that Europe was going to suffer along with the U.S. in this downturn. And the script has largely unfolded as expected. Now, it is Asia which should move center stage. The signs of weakness are readily apparent. Three major economies are in recession: Japan, New Zealand and Singapore. Others will follow.

Moreover, the financial distress that we saw first in the U.S. and then in Europe is also apparent as well. Look at the Bloomberg headlines from Asia today:

India Lowers Key Rate for the First Time Since 2004
Citic Pacific May Lose $2 Billion From Currency Bets
Kazakhstan to Use Oil Reserves to Avert Bank Failure
Asian Stocks Rise as Government Policies Provide Market Support
Dollar Hoarding Fuels Won, Rupee, Real Drop on Losses
Pakistan May Seek IMF Bailout to Avoid Debt Default
China’s Economy Grows 9%, Slowest Pace in Five Years

All of this suggests that the ill effects of the global economic crisis have finally made their way to Asia and emerging market countries in Latin America and elsewhere. For me the South Korean banking mess is the canary in the coalmine here:

South Korea sought to rescue its financial system by guaranteeing $100 billion of lenders’ foreign-currency debts and providing $30 billion in U.S. dollars to banks.

The won rose and the Kospi was little changed after the government said it will also give tax benefits for long-term investors, and the central bank will provide “adequate” currency liquidity to the markets. The plan, unveiled yesterday, aims to help lenders overcome overseas funding difficulties.

South Korea, struggling with Asia’s worst-performing currency and a stock market that has lost 38 percent this year, joins Europe, Australia and Hong Kong in providing banks with state backing amid a global lending drought. The measures should boost confidence in the banking system and return attention to “Korea’s solid macroeconomic fundamentals,” the International Monetary Fund said.

The guarantee is “essential,” said Kim Hag Ju, head of research at Samsung Securities Co. in Seoul. “Rather than give banks the money they need, it’s much cheaper and effective to back their debts so they can borrow it. With the credit freeze, it’s extremely difficult for a bank or company to be able to borrow money without a sovereign guarantee.”

The Kospi slipped 0.3 percent to 1,177.11 at 9:29 a.m. in Seoul after initially rising as much as 1.3 percent. The index fell 9.4 percent on Oct. 16, the biggest drop since September 2001, and is heading for its first annual decline since 2002.

Currency Rises

The won gained 4.1 percent to 1,280.80 against the U.S. dollar today. The currency fell last week by the most since an IMF bailout of South Korea in 1997 after Standard & Poor’s said it may cut the credit ratings of the nation’s largest lenders.

South Korea’s government said it has no immediate plan to recapitalize lenders or increase deposit guarantees.

-Bloomberg News

If you recall, these were measures initially undertaken in the U.S. and across Europe. Eventually, greater support in the form of bank recapitalization and explicit deposit guarantees were necessary. Why would it be any different in South Korea or elsewhere in Asia?

My last though on this issue is about China. China has had a massive property and stock bubble. The stock bubble has burst and the monetary authorities are doing all that they can to keep the property bubble from collapsing in a disorderly, panic-filled way. However, it seems to me that China will suffer a hard landing as the magnitude of these bubbles become evident.

What’s my point? Asia is in a much better situation than either North America or Europe. Yet, it will not completely de-couple. The speculative mania certainly spilled out into Asia in terms of excess capacity across Asia, stock market and property bubbles in China in particular, and inflation and easy money across the entirety of Asian economies. Therefore, while Asian macro data is better than it is elsewhere, I believe we are about to witness the next leg down in the global credit crisis and it will be in Asia where the action takes us.

Asia is next.

Sources
Manias, Panics and Crashes – Charles Kindelberger

Related posts:

• Jim Jubak joins the inflation made in Asia crowd
• Asia is de-coupling
• South Korea going gangbusters in contrast to UK
• Hungary cut to a notch above junk by S&P
• Is China avoiding using US dollars?

Last night, on Bloomberg TV I heard that New Zealand had become the first Asian economy to officially slip into recession. Today, I have seen the stats confirming this.

Jim O’Neill, Chief Economist at Goldman Sachs, says the chance of global recession is only 10%. I don’t see how he can believe this with economies weakening globally. New Zealand joins the UK, Ireland, Germany, France, and Japan at a minimum which have had negative GDP quarters. As I see it, this downturn is global and it is going to mean a global recession.

O’Neill is a smart cookie. So, if anyone has evidence to the contrary, I’d love to see it.

Below is the FT’s commentary on New Zealand’s recession and the inter-connectedness of Asian economies. Very interesting read.

New Zealand – the first country to see the light of day each morning – has, fittingly, become the first country in the Asia-Pacific region to stumble into recession. Second-quarter GDP data showed a decline in private consumption and exports, offset by only a small increase in government spending. Meanwhile, Japan, on technical definitions, is half way there. Does grim economic data from other Asian economies suggest there will be more casualties in the once robust region?

Strong trade links meant Asia was always going to suffer: if U.S. homeowners are giving back the keys to their homes, they are less likely to be buying Korean TVs or Chinese fridges. That hurts since Asia has become more, rather than less, export-intensive over the years. In 1980, exports represented less than one-quarter of output in Asia ex Japan, China and Taiwan, according to Royal Bank of Scotland; now they make up more than half. Chinese exports comprised one-fifth of GDP in 2001 and 37 per cent in 2007. This downturn has been exacerbated by spiralling food and energy prices, which ties the hands of central bankers.

Policymakers, banking on sustained lower inflation, are now seeking to pump up growth. China, for example, this month reversed years of monetary tightening to cut lending rates and reserve requirements for smaller banks. Taiwan, in milder fashion, followed suit. But not everyone can count on softer price rises – the weakening won, for example, could propel inflation higher in Korea. Besides, even reducing borrowing costs and making more funds available is only half the trick; consumers wary of losing their jobs will usually opt for saving over spending.

Fiscal packages doled out so far are unlikely to change the dynamics much, although China has the firepower to go further. Ultimately, though, the saving grace of Asia is that growth rates are starting to tail off from a high base. Japan apart, recession looks about as remote as – well, New Zealand.

Source
Asia’s first economy in recession – FT

Related posts:

• Recession nears in New Zealand
• Stephen Roach: Downturn in Asia less severe, but recovery later
• Asia is de-coupling
• Nouriel Roubini: we are in recession
• Will Asia’s downturn be worse than America’s?