During the second half of 2009, the apparently endless and prolonged slide of the once mighty greenback against most of the other major currencies was primarily attributed to the Federal Reserve’s near-zero interest rate policy. The relatively cheap dollar funding has led to an escalation of the carry trade, where investors were borrowing USD and investing in commodities or higher yielding currencies. We all remember that China, the world’s largest holder of FX reserves, and Russia have both called for a new global currency to replace the US dollar as the global currency reserve. On top of that, Bill Gross – PIMCO manager, claimed that the dollar would continue to weaken as long as the US was pumping massive amounts of money into the economy. According to an Italian money manager, “the diversification out of the dollar will accelerate, and people are buying the EUR not because they want that currency, but because they want to get rid of the dollar.” At the beginning of this year, the median estimate of more than 40 economists and strategists was for the dollar to end the year at $1.47 per EUR. Continue reading ‘EUR:USD – The Sultan Of Swing’
Monthly Archive for March, 2010
When Greece joined the EMU in January 2001, ECB President Wim Duisenberg was warning that Greece had to adopt a tough austerity program aimed at making deep cuts in public spending. Back then, many investors did not agree with the EU-11 enlargement fearing that the decision would send out the wrong signal to financial markets, suggesting that in future other weaker economies might be allowed in without complying fully with membership conditions. Over the last decade, the Greek government has got involved in manipulating accounting rules and derivatives markets to run up unsustainable debts. By using the swap contracts and not having to record these transactions as debt, Greece managed to scrape in under the Maastricht criteria for EMU membership. This financial engineering helped the Mediterranean country accumulate more debt that would otherwise have been possible, pushing the country deeper into a sovereign debt crisis. Continue reading ‘Greece: Leave The Euro!’
Bear Stearns, at one point, the fifth-largest US investment bank, has survived the September 11th attacks, just as it had survived safe and sound other events since its founding in 1923, among them: the Great Depression, World War II and the Black Monday. In the summer of 2007, the maverick firm had to pledge more than $3 billion to bail out two of its hedge funds that had bet heavily on subprime mortgages. On Mar 10 2008, Alan Greenberg – the former Bear Stearns CEO, responding to the liquidity rumors which caused shares to drop 10% in early trading, told CNBC that the liquidity rumors were totally ridiculous. One week later, the 383 Madison Avenue investment bank was offered to JP Morgan for an initial fire sale price of $2. Continue reading ‘CEO Wall Of Shame (I)’
If history taught us something is that during the economic booms, the expansion of the private debt leads to credit-fuelled bubbles. When the economic growth is replaced by financial crises, more borrowers default on their loans and consequently banks report mounting credit losses. At that point, governments intervene by bailing out the banking system and as a result the public debt surges while the private debt collapses. These days, many European countries are facing high public debt levels and large external deficits. It is well known that PIIGS countries should urgently address the public debt issue and most importantly repair their image amongst investors. Under the current Maastricht treaty, it is clear that EU could not provide public financial support to one of its members. Nevertheless, few European politicians are proposing the creation of an IMF carbon-copy European Monetary Fund (EMF) aimed at fixing the current and future sovereign debt crises. Continue reading ‘EMF – EU’s Piggy Bank’
China took the entire world by surprise in the pre-crisis world economy, recording gigantic exports, consistently gigantic capital inflows, and imbalances in both stocks and real assets that could prove to be extremely harmful to the international economic stability in the short term and devastating to China in the long term. Some voices that called for restructuring were never heard in Beijing, simply because of the apparent success of high growth and low inflation economic dichotomy. However, China might have a very difficult time keeping inflation at its 2010 target of about 3 percent, after banks flooded the Chinese financial system with money in 2009. According to the median forecast of 14 economists, inflation may reach 4.4 percent this year. China’s GDP growth quickened to 10.7 percent in the fourth quarter, the fastest pace since 2007. The Chinese authorities affirmed a target of 8 percent growth for 2010, the same goal that the government has set and surpassed in each of the past five years. Nouriel Roubini said “this strong economic recovery implies that the super-loose monetary, fiscal and credit policy followed by China has to reverse itself or otherwise there is a risk of overheating and inflation”. Continue reading ‘China – The Wonderland’
In an effort to end a deadlock in the Congress over the bill aimed at overhauling the medical system, President Barack Obama is to give Democratic lawmakers a new set of directions. The Washington administration is proposing a comprehensive plan that will ultimately bring the first real changes to the nation’s health system since the 1965 creation of Medicare and Medicaid. After the health care bill failed to become law in 2009, the Democrats are willing to concede some key Republicans’ demands: to limit medical malpractice lawsuits and to uncover the massive fraud within the Medicare program. Given the fact that Democrats control 59 of the 100 Senate seats, in order to pass this bill, Democrats are calling for a parliamentary maneuver called reconciliation – which requires a simple majority vote. Continue reading ‘Health Care Bill – Do Or Die’
Banks’ Free Lunch
Goldman Sachs, JP Morgan, Bank of America, Morgan Stanley and Citigroup are largely gaining from a slowing in the write-down volume and a Federal Reserve-induced steep yield curve. Investors who bought US bank bonds are also benefiting from banks’ successful raising capital attempts and the repayment of TARP money. For instance, Citigroup put $20 billion back into the Treasury, Bank of America paid back $45 billion, JP Morgan $25 billion, Goldman Sachs $10 billion and Morgan Stanley returned $10 billion. Apparently, there is such thing as a free lunch, as long as a bank could borrow short-term money via the discount window, currently at 75 basis points, and it could lend long-term money at lucrative rates. According to Fed’s data, the net interest margin at larger US banks have increased to 3.38% in 2009, from a record low 2.94% in 2008. Last March, JP Morgan [JPM] was trading at $15, Goldman Sachs [GS] at $47, Citigroup [C] at $1, Bank of America [BAC] at $2.5 and Morgan Stanley [MS] at $15. These financial stocks reached their 52-week highs at astonishing levels: JPM at $47, GS at $192, C at $5, BAC at $19 and MS at $36. Continue reading ‘Banks’ Free Lunch’