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Daryl Montgomery
April 16, 2010
on the money
whopping 32.1%. While a huge growth rate like this would be OK for an emerging
economy. China, which is behind Singapore on the development curve, saw a
GDP expansion of 11.9% in the beginning of this year and inflation is already
starting to show up there.
While countries are always trying to increase their GDP growth rates, this is one of
those areas where the proverbial 'too much of a good thing' can lead to trouble.
There is a desirable band of GDP growth for every economy. Too little is not
enough to keep the population employed and happy, too much creates more
demand for resources than available supply and this causes inflation. The
desirable level of economic growth for the U.S. is generally believed to be around
3% a year. It can be much higher for an emerging market.
Singapore is a trading economy and its current huge growth is an indication of
how much Asian trade is picking up. It's first quarter GDP was a record increase.
The central bank just began raising interest rates to tighten credit. Singapore also
boosted its inflation forecast to the 2.5% to 3.5% level as a result of its GDP
numbers. It will indeed be lucky if it can keep its inflation rate that low.
China's consumer prices were up 2.5% in March. China's economy grew by 8.7% in
2009, while the U.S. and EU economies stagnated. China is now arguably the
second largest economy in the world and if it hasn't already moved ahead of
Japan, it will do so very soon. Almost half a trillion dollars in stimulus in a $4.9 trillion
economy can be credited for maintaining China's spectacular growth rate.
Stimulus creates inflation as well as growth though. The growth numbers were all
very high for the first quarter. Retail sales were up 19.6%. Fixed asset investment
was up 25.6%. Exports were up 29%. China, like most Asian economies has based
its economic expansion model on export growth.
Not everyone in the world can be a net exporter however. Someone has to be
buying those exported goods and that someone is the United States. The U.S.
trade deficit widened by 7.4% in February (this subtracts from U.S. GDP and
requires borrowing from foreign sources in order to fund it) and the deficit with
China widened. The U.S. trade deficit is going up again because imports are rising
faster than exports. The media reported that Wall Street economists were
surprised. Apparently having a PhD in economics doesn't mean you can grasp the
concept that increased exports from one country lead to increased imports in
another. Many of these same economists also say there will be no inflation in the
U.S. even though the government is engaged in substantial money printing.
Daryl Montgomery
economy. China, which is behind Singapore on the development curve, saw a
GDP expansion of 11.9% in the beginning of this year and inflation is already
starting to show up there.
While countries are always trying to increase their GDP growth rates, this is one of
those areas where the proverbial 'too much of a good thing' can lead to trouble.
There is a desirable band of GDP growth for every economy. Too little is not
enough to keep the population employed and happy, too much creates more
demand for resources than available supply and this causes inflation. The
desirable level of economic growth for the U.S. is generally believed to be around
3% a year. It can be much higher for an emerging market.
Singapore is a trading economy and its current huge growth is an indication of
how much Asian trade is picking up. It's first quarter GDP was a record increase.
The central bank just began raising interest rates to tighten credit. Singapore also
boosted its inflation forecast to the 2.5% to 3.5% level as a result of its GDP
numbers. It will indeed be lucky if it can keep its inflation rate that low.
China's consumer prices were up 2.5% in March. China's economy grew by 8.7% in
2009, while the U.S. and EU economies stagnated. China is now arguably the
second largest economy in the world and if it hasn't already moved ahead of
Japan, it will do so very soon. Almost half a trillion dollars in stimulus in a $4.9 trillion
economy can be credited for maintaining China's spectacular growth rate.
Stimulus creates inflation as well as growth though. The growth numbers were all
very high for the first quarter. Retail sales were up 19.6%. Fixed asset investment
was up 25.6%. Exports were up 29%. China, like most Asian economies has based
its economic expansion model on export growth.
Not everyone in the world can be a net exporter however. Someone has to be
buying those exported goods and that someone is the United States. The U.S.
trade deficit widened by 7.4% in February (this subtracts from U.S. GDP and
requires borrowing from foreign sources in order to fund it) and the deficit with
China widened. The U.S. trade deficit is going up again because imports are rising
faster than exports. The media reported that Wall Street economists were
surprised. Apparently having a PhD in economics doesn't mean you can grasp the
concept that increased exports from one country lead to increased imports in
another. Many of these same economists also say there will be no inflation in the
U.S. even though the government is engaged in substantial money printing.
Daryl Montgomery
| Jameslist James Spotting |
The 'Helicopter Economics
Investing Guide' is meant to
help educate people on how
to make profitable investing
choices in the current
economic environment. We
have coined this term to
describe the current
monetary and fiscal policies
of the U.S. government,
which involve
unprecedented money
printing. This is the official
blog of the New York
Investing meetup.
Investing Guide' is meant to
help educate people on how
to make profitable investing
choices in the current
economic environment. We
have coined this term to
describe the current
monetary and fiscal policies
of the U.S. government,
which involve
unprecedented money
printing. This is the official
blog of the New York
Investing meetup.
© 2010 realefinancemedia.corp - all rights reserved
Financial Crises
Compared:
Eurozone 2010, Asia
Daryl Montgomery
05/05/2010
Compared:
Eurozone 2010, Asia
Daryl Montgomery
05/05/2010
Current market action has all the earmarks of a global financial crisis. Stocks and
2008 and also during the Asian contagion in 1997.
As we all know by now, the problems started in Greece, a small economy that
represents only 2% of the eurozone GDP. Greece had been lying about its budget
deficit and true financial position for many years (and is certainly not the only
country doing so). Even though it submitted obviously ridiculous financial numbers
to the EU central HQ in Brussels, they were not officially questioned. Greece itself,
like Bernie Madoff, finally confessed to the scam because it was falling apart. The
EU, which has had more than six months to deal with the situation, consistently
failed to take action. What was at first a minor problem has festered and grown
into a problem gnawing away at the world financial system. The simple and
obvious solution of using dollarization - letting Greece continue to use the euro,
but removing it from the currency union (which it should never have been
allowed to join in the first place) - was not even considered by EU authorities.
Instead they have gone the bailout route and because they have dragged their
feet, the cost of the bailout has tripled in the last few weeks alone.
A small country with a currency problem causing major problems in the global
financial system has a recent precedent in Asia in 1997. The Thai baht, which was
pegged to the U.S. dollar, came under speculative attack in May of that year
and the government was forced to drop the dollar peg and float the currency on
July 2nd. The problems in Thailand, a relatively small economy, then spread
throughout East and South Asia. They eventually washed up on the shore of the
U.S., with an October 27th mini-crash in the stock market that dropped the Dow
Jones Industrial Average 7% in one day. The selling may have been worse, but
stock trading was halted early that day.
The euro has been seriously weakened in the last several months, falling from over
1.50 to the U.S dollar in December to under 1.28 this morning (key support is
around 1.25). Problems in Greece are spreading to other parts of Europe, just as
problems in Thailand spread to other parts of Asia. Indonesia and South Korea
were seriously affected first and then Hong Kong, Malaysia and the Philippines
suffered damage. Problems even spread to China, India, Taiwan, Singapore and
Viet Nam. Portugal, Spain and Ireland are the next dominoes to fall in the
eurozone. Italy also has troubled finances, but its economy is too big to be bailed
out. Bailing out Spain might also be problematic. There is a one key difference
between Asia in 1997 and the eurozone today. The Asian economies were strong
and had been so for many years before the crisis hit, while the eurozone
economies have been relatively weak for many years and have been mired in
recession for the past two.
Major stock indices in Europe and North America were down around 2% to 3%
yesterday. In the U.S. the Dow dropped 2.1%, the S&P 500 2.4%, Nasdaq 3.1% and
the small cap Russell 2000 3.4%. Smaller markets in Europe were down 4% to 7%.
Gold was down only slightly on the day, but oil was down over 6% at one point.
The VIX, the volatility index, was up 27% during the day's trading and the TED
spread, a measure of stability in the financial system, rose almost 9% (the higher
the number, the less stability). U.S. treasuries rallied and the U.S. trade-weighted
dollar not only rallied, but also had a significant breakout above the 82 range. If
this all sounds familiar, it is because this is how the market frequently traded during
the fall of 2008 during the height of the Credit Crisis.
While events in 1997 had their biggest impact in East and South Asia, echoes of
the problem wound up impacting U.S. and other stock markets into 1998. The
collapse of hedge fund Long-Term Capital caused a severe bear market, with the
Nasdaq dropping around 30% in August of that year. Regional financial crisis do
not tend to get resolved quickly, and their impact can easily last for at least a
couple of years and be felt half way around the world. Events in the spring can
cause market sell offs in the fall. The current situation is much worse in 2010 though
than it was in 1997. Bailouts and pumping liquidity into the global financial system
(which lead to the tech bubble blow off in 1999 and early 2000) were used to
deal with the problems in 1997. Governments and central banks have already
used these tools to a massive extent for the last two years. If we are having
another crisis, clearly they aren't working.
Disclosure: Long VXX.
Disclosure: Long oil.
Daryl Montgomery
2008 and also during the Asian contagion in 1997.
As we all know by now, the problems started in Greece, a small economy that
represents only 2% of the eurozone GDP. Greece had been lying about its budget
deficit and true financial position for many years (and is certainly not the only
country doing so). Even though it submitted obviously ridiculous financial numbers
to the EU central HQ in Brussels, they were not officially questioned. Greece itself,
like Bernie Madoff, finally confessed to the scam because it was falling apart. The
EU, which has had more than six months to deal with the situation, consistently
failed to take action. What was at first a minor problem has festered and grown
into a problem gnawing away at the world financial system. The simple and
obvious solution of using dollarization - letting Greece continue to use the euro,
but removing it from the currency union (which it should never have been
allowed to join in the first place) - was not even considered by EU authorities.
Instead they have gone the bailout route and because they have dragged their
feet, the cost of the bailout has tripled in the last few weeks alone.
A small country with a currency problem causing major problems in the global
financial system has a recent precedent in Asia in 1997. The Thai baht, which was
pegged to the U.S. dollar, came under speculative attack in May of that year
and the government was forced to drop the dollar peg and float the currency on
July 2nd. The problems in Thailand, a relatively small economy, then spread
throughout East and South Asia. They eventually washed up on the shore of the
U.S., with an October 27th mini-crash in the stock market that dropped the Dow
Jones Industrial Average 7% in one day. The selling may have been worse, but
stock trading was halted early that day.
The euro has been seriously weakened in the last several months, falling from over
1.50 to the U.S dollar in December to under 1.28 this morning (key support is
around 1.25). Problems in Greece are spreading to other parts of Europe, just as
problems in Thailand spread to other parts of Asia. Indonesia and South Korea
were seriously affected first and then Hong Kong, Malaysia and the Philippines
suffered damage. Problems even spread to China, India, Taiwan, Singapore and
Viet Nam. Portugal, Spain and Ireland are the next dominoes to fall in the
eurozone. Italy also has troubled finances, but its economy is too big to be bailed
out. Bailing out Spain might also be problematic. There is a one key difference
between Asia in 1997 and the eurozone today. The Asian economies were strong
and had been so for many years before the crisis hit, while the eurozone
economies have been relatively weak for many years and have been mired in
recession for the past two.
Major stock indices in Europe and North America were down around 2% to 3%
yesterday. In the U.S. the Dow dropped 2.1%, the S&P 500 2.4%, Nasdaq 3.1% and
the small cap Russell 2000 3.4%. Smaller markets in Europe were down 4% to 7%.
Gold was down only slightly on the day, but oil was down over 6% at one point.
The VIX, the volatility index, was up 27% during the day's trading and the TED
spread, a measure of stability in the financial system, rose almost 9% (the higher
the number, the less stability). U.S. treasuries rallied and the U.S. trade-weighted
dollar not only rallied, but also had a significant breakout above the 82 range. If
this all sounds familiar, it is because this is how the market frequently traded during
the fall of 2008 during the height of the Credit Crisis.
While events in 1997 had their biggest impact in East and South Asia, echoes of
the problem wound up impacting U.S. and other stock markets into 1998. The
collapse of hedge fund Long-Term Capital caused a severe bear market, with the
Nasdaq dropping around 30% in August of that year. Regional financial crisis do
not tend to get resolved quickly, and their impact can easily last for at least a
couple of years and be felt half way around the world. Events in the spring can
cause market sell offs in the fall. The current situation is much worse in 2010 though
than it was in 1997. Bailouts and pumping liquidity into the global financial system
(which lead to the tech bubble blow off in 1999 and early 2000) were used to
deal with the problems in 1997. Governments and central banks have already
used these tools to a massive extent for the last two years. If we are having
another crisis, clearly they aren't working.
Disclosure: Long VXX.
Disclosure: Long oil.
Daryl Montgomery
Real e Finance
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