• Looking at China’s Savings
    Posted by on August 26th, 2008 at 9:45 am

    John Hempton at Bronte Capital has a novel explanation for China’s stratospheric savings rate. He says it’s due to their one-child policy. In any pre-Industrial economy, you’re retirement savings plan was very simple, you had children. Now you can’t so to compensate, you save, save, save. Hempton’s reckons “that the average Chinese person is saving maybe 46 percent of their income”.
    This is an issue for us in the West because, as the theory goes, all that savings needs to be invested somewhere. And there’s simply too much money lying around, sooner or later it will go into dumb areas. Today, we’re at the later part. Hempton writes:

    My thesis – which will be expanded in future posts is that the brokers have become the intermediaries between this endless demand for products to save in (China, Petrodollars etc) and the endless willingness of the profligate in the West to spend. What they do is – through their trading, their securitisation and through other things they turn the complex financial instruments of the West (mostly but not entirely debt) into vanilla instruments that the Chinese and petrodollars want to buy.

    In the Telegraph, Ambrose Evans-Pritchard notes a study by HSBC which claims that China is forcing its banks to buy dollars. In effect, the Chinese Fed is using its banking sector as a way to intervene in the currency markets.

    Beijing has raised the reserve requirement for banks five times since March, quickening the pace with two half-point rises in late June.
    This is having major spill-over effects into the currency markets because banks in China have been required over the last year to hold extra reserves in dollars rather than yuan. The latest moves have lifted the mandatory deposit from 15pc to 17.5pc of total lending since March.
    “China has used the pretext of reserve requirement hikes to help slow yuan appreciation. We estimate that the PBOC [central bank] intervened by about $49.6bn in June,” said Daniel Hui, the bank’s Asia strategist.
    Beijing has also slashed the amount of foreign debt banks operating in China can hold. The effect is to oblige the banks to become net buyers of dollars, halting the flow of foreign “hot money”.

  • How Investment Banks Can Cut Costs
    Posted by on August 26th, 2008 at 9:13 am

    From Andrew Ross Sorkin:

    When Wall Street seeks to save money — “every dollar saved is a dollar made,” is the current catchphrase — it often turns to management consultants to help figure out which divisions should stay and which should go.
    So McKinsey & Company published a helpful report last week on how investment banks can cut up to $2 billion in noncompensation costs. (We wouldn’t want to cut compensation, would we?)
    “Initiatives to curb expenditures need not be extremely demoralizing to frontline employees,” McKinsey says, trying to find ways to save money without affecting the worker bees. So what does it recommend? Getting rid of the consultants. Yep, you read that correctly.

    Interesting. When Google went public, it tried to cut cost by eliminating the investment banks.

  • Tyler Cowen on the Economy
    Posted by on August 25th, 2008 at 10:02 am

    From Saturday’s NYT:

    Emerging from the current slowdown isn’t just a matter of political will or smart central banking. If the recipe for success requires smooth adjustment into new growth sectors, more savings from disposable income, cleaning up the housing mess, well-functioning energy markets, and more effective financial intermediation — all in the right combinations and in the right sequences — neither the government nor the Federal Reserve can control this process. The Fed can add regulatory and monetary clarity, but there isn’t any magic bullet. Beware of anyone who tells you there is.
    The Japanese failed to break out of their recession quickly because they didn’t promptly close down or clean up their problem banks. So far, the Fed and other regulators show no signs of making this mistake; they have been vigilant in resolving crises as they occur. But that’s not enough to guarantee a successful transition. The American economy will be tested for its deftness — and the test will be difficult precisely because there isn’t a single enemy on which to focus.
    HAVE you ever tried to undo a bunch of tangled wires or cords? If you don’t pull on the right wires in the right order, the mess becomes worse. If you pull too hard, the whole thing can break. But if your first pulls are good ones, the untangling becomes easier with each move.
    That’s like our economy’s situation today. If we expect too much too quickly, we’ll make matters worse. But there is a way out of the mess, and it lies in our hands.
    Be careful, and start pulling.

  • Ben Stein Watch
    Posted by on August 25th, 2008 at 9:50 am

    Felix Salmon regularly skewers Ben Stein’s incoherence in each week’s New York Times. (For the record, Stein’s the one who appears in the NYT, Felix writes on his blog). This week, Felix finds this sentence:

    They walk in rows of three, each on a cellphone, not even talking to the people next to her.

    You truly do not want to know the context. What caught Felix’s eye is that, up until that point, no female had been referenced. The “next to her” just appeared out of nowhere, which leads Felix to conclude that no one at the Times bothers to read his columns.
    My take is that there was a previous sentence that had been edited out which had referred to the female, and the following sentence hadn’t been fixed. I have to think that the reason for the deletion and the female reference are related, but I could be wrong.

  • Best Line of the Day
    Posted by on August 25th, 2008 at 9:46 am

    Paul Kedrosky finds this gem from a French banker in 1907:

    The U.S. is a great financial nuisance.

    The Panic of 1907 was pretty ugly for investors. Here’s what I wrote last year on its 100th anniversary.

  • The Weekend Is Here
    Posted by on August 22nd, 2008 at 5:27 pm

  • Gas Prices Around the World
    Posted by on August 22nd, 2008 at 1:46 pm

    Here’s a cool map looking at gasoline prices around the world. I’m glad I don’t live in Turkey ($11.17/gallon). On the other hand, I’m not about to move to Venezuela ($0.12 a gallon) either.

  • Defending Shorts
    Posted by on August 22nd, 2008 at 11:42 am

    Doug Kass has an excellent article in the FT defending shorts:

    Yet short-sellers have served as financial watchdogs, as many of their warnings have been spot on. The delusional dotcom boom in the late 1990s brought Cassandra-like utterings from the short-selling cabal that proved insightful but were largely ignored. After the subsequent 75 per cent collapse of the Nasdaq, a bull market in corporate fraud emerged and short-sellers such as David Rocker, founder of Rocker Partners, highlighted accounting problems at companies such as Sunbeam, Tyco and Lernout & Hauspie. Kynikos’ Jim Chanos played a role in uncovering the largest fraud in history when his contrary-minded analysis warned of Enron’s accounting shenanigans – which were emulated (but ignored by investors) in the banks’ recent dalliance with structured investment vehicles.

    Short sellers have done the work that governments won’t and can’t. It’s absurd for governments to limit their opportunities. .

  • Investors Pulling Out of Russia
    Posted by on August 22nd, 2008 at 10:10 am

    In January 1980, the gold market peaked just a few days after the Soviets invaded Afghanistan. Now it looks like the commodities market has again peaked with a Russian incursion, this time into Georgia. In the short-term, it was a strategic victory for Putin, but the long-term might not be so kind. The BBC reports that investors are pulling out of Russia.

    Russia has seen foreign reserves decline, a sign that the market is more nervous about investing in the region since the recent conflict in Georgia.
    Central Bank figures show reserves were sharply down in the week ending 15 August, marking a fall of $16.4bn (£8.8bn) from $597.5bn a week earlier.
    Tensions with the west have also been strained by Russia’s objection to the US placing a missile defence in Poland. Georgia has urged the west to invest in the region as it seeks to rebuild.
    According to the Financial Times, the latest drop in capital reserves is the largest “since comparable figures began” in 1998, though similar funds were taken out during the currency crisis.

  • Quote of the Day
    Posted by on August 22nd, 2008 at 9:48 am

    From Mr. Buffett:

    “You always find out who’s been swimming naked when the tide goes out. We found out that Wall Street has been kind of a nudist beach,” said Buffett, who was called the world’s richest person by Forbes magazine.