Investing Curiouscatblog

Tag: Economics

  • There is No Invisible Hand

    There is no invisible hand by Joseph Stiglitz, 2001 Nobel Prize in Economics

    This year’s [2002] Nobel Prize celebrates a critique of simplistic market economics, just as last year’s award (of which I was one of the three winners) did. Last year’s laureates emphasised that different market participants have different (and imperfect) information, and these asymmetries in information have a profound impact on how an economy functions.

    In particular, last year’s laureates implied that markets were not, in general, efficient; that there was an important role for government to play. Adam Smith’s invisible hand – the idea that free markets lead to efficiency as if guided by unseen forces – is invisible, at least in part, because it is not there.
    …
    That such models prevailed, especially in America’s graduate schools, despite evidence to the contrary, bears testimony to a triumph of ideology over science. Unfortunately, students of these graduate programmes now act as policymakers in many countries, and are trying to implement programmes based on the ideas that have come to be called market fundamentalism.

    Let me be clear: the rational expectations models made an important contribution to economics; the rigour which its supporters imposed on economic thinking helped expose the weaknesses underlying many hypotheses. Good science recognises its limitations, but the prophets of rational expectations have usually shown no such modesty.

    Related: Greenspan Says He Was Wrong On Regulation – Ignorance of How Markets Work – Leverage, Complex Deals and Mania – Estate Tax Repeal – Misuse of Statistics – Mania in Financial Markets

  • Using Capitalism in Mali to Create Better Lives

    Don’t let the talking heads on TV convince you that capitalism is about corrupt businessmen that think they are entitled to loot companies. That is about the powerful accepting money from their golfing buddies to share the loot among themselves. Capitalism is about places like Trickle Up, micro-finance, appropriate technology and entrepreneurs making better lives for themselves and their families. Donate to Trickle Up (I do).

    Related: High School Student Provide Clean Water Solution – Creating a World Without Poverty – Microfinancing Entrepreneurs – Ignorance of Capitalism

  • Coca-Cola Chooses Bond Financing Over Commercial Paper

    In normal markets commercial paper is very safe. The very short term business borrowing is made possible by money market funds and provides businesses with short term financing at low rates and provides investors some return for short term cash holdings. But the recent credit crisis does not a normal market make. Companies that depended on the commercial paper market now are thinking about the risks of such dependence.

    Coca-Cola Flees Commercial Paper for Safety in Bonds

    Coca-Cola, health-insurer WellPoint Inc. and more than 30 other companies are issuing bonds and using the proceeds to repay their short-term IOUs, according to data compiled by Bloomberg. The amount of commercial paper outstanding shrank 16 percent since Jan. 7 to $1.48 trillion last week and daily issuance dropped to a four-year low, according to the Federal Reserve.
    …
    By lessening their reliance on commercial paper, borrowers are paying higher interest rates to avoid the risk of not being able to roll over the debt every few weeks. With the gap between short- and long-term debt rates the widest in at least two decades, the cost of swapping $1 billion of 30-day paper with long-term debt can cost more than $75 million in additional annual interest

    Related: Where to Keep Your Emergency Funds?

  • A Survival Plan for Global Capitalism

    This week the Financial Times starts a series on the Future of Capitalism with A survival plan for global capitalism

    Finance has already changed irrevocably. The grand investment banks which once strode alone have either collapsed, or joined the flock of retail banks. Governments are now borrowers, lenders, investors and insurers of last resort for much of the financial system. The future of finance will be determined by their efforts to disentangle themselves from the thickets of guarantees they have been forced to make. The depth of the crisis will determine how easily they manage it.

    The fiscal cost of this episode is unclear. In some countries, it may be state-busting. Some nations will need to cope with extraordinary fiscal tightenings in the coming years. The domestic impact of government spending – and its geopolitical ramifications – could yet be colossal. Again, much depends on how soon the downturn ends.

    There is one certainty. While recessions are inevitable, deep depressions or slumps – or whatever you call them – are neither necessary nor welcome. They destroy wealth, sap happiness and crush old certainties. What is more, increasing poverty is a grave threat to world stability and democracy. Revolutions often start as bread riots, and economically-stagnant countries make belligerent neighbours. Growth must be restarted.
    …
    governments must take responsibility for dealing with their financial systems. The toxicity which started in mortgage-backed securities is spreading through the world’s banks as ever more assets go bad in the recession. Politicians must make sure that their banking systems are adequately capitalised and deal with the illiquid securities at the heart of this crisis.

    The Financial Times has done a good job of presenting the credit crisis, the current state of affairs and what can be done.

    Related: Leverage, Complex Deals and Mania – Too Big to Fail = Too Big to Exist – Monopolies and Oligopolies do not a Free Market Make – posts on capitalism – Ignorance of Capitalism – Greenspan Says He Was Wrong On Regulation

  • OPEC Quota Cuts are Reducing Oil Inventory

    Oil at $50 Looms as OPEC Plans Cut, Keeps to Quota

    Now that the Organization of Petroleum Exporting Countries reduced supplies 13 percent since September, inventories are falling 1.4 million barrels a day, according to PVM Oil Associates Ltd., the world’s biggest broker of energy trades between banks. OPEC will limit exports again when the group meets March 15, according to a survey by Bloomberg News.

    OPEC states have more of an incentive than ever to restrict output because the combination of declining prices and the global recession will reduce earnings 59 percent this year to $402 billion, according to the U.S. Energy Department. Crude demand will drop for a second year, the first back-to-back decline since 1983, the International Energy Agency said.
    …
    Dubai crude, a benchmark for OPEC oil exports to Asia, now costs more for immediate delivery than in the months ahead. The so-called backwardation is a sign of tightening crude supplies. In the last two weeks, BP Plc, the world’s third-largest oil company, sold and unloaded more than 2 million barrels stored on the supertanker Eagle Vienna it had moored off Scotland’s Orkney Islands.

    “The market is going to have strong upside, 10 or even 15 percent, even if OPEC doesn’t cut,” said Johannes Benigni, chief executive officer of Vienna-based consultant JBC Energy. “The contango is slowly, but surely, disappearing and that shows the earlier cuts are working.”

    Still, the deepening global economic slump may erode oil demand faster than OPEC can cut as chemical plants shut, cargo ships sit idle and motorists stay at home
    …
    The IEA in Paris forecasts a 1 million barrel-a-day drop in consumption this year because of the recession. In the second quarter, demand will contract by 600,000 barrels a day to 84.2 million a day, as refiners perform seasonal maintenance work, the agency said.

    Contago is the name for when investors buy oil and sell futures contracts for the oil at a latter date. They then rent a container ship to store the oil until delivery. In the past few months the future price of oil has been nearly $20 a barrel over the current price, meaning investors could make a tidy profit even after paying to rent the ship. As current excess supply is reduced the profit in contago is likely to disappear.

    Related: Curious Cat Investment Dictionary – I Wouldn’t Sell Oil at $40 – Forecasting Oil Prices – posts on energy and economics

  • The USA Economy Needs to Reduce Personal and Government Debt

    The economy has structural problems. The solution at this time is not to convince people that everything is fine and just go spend money you don’t have. Personal debt is much to high. The practices that allowed huge anti-competitive and economy endangering institutions to threaten the economy have not been addressed. Hundreds of billions of dollars have been given to those who caused the credit crisis. Making the federal debt problem even worse.

    Some suggest we need to regain consumer confidence. Unfortunately that fixes nothing. That “strategy” is just to convince people problems don’t exist and buying what you can’t afford is fine. Just convince people to go spend more money, run up their credit card debt, borrow against their house, as long as everyone believes it can continue. That can work for awhile but it then fails due to structural issues. And the solution becomes more and more difficult the longer such a strategy is used. The same way a ponzi scheme eventually implodes.

    If you could convince those in a ponzi scheme (and new investors) that they should just be optimistic it can continue. But eventually people ask for their money to buy something and none exists and the scheme fails.

    With an economy, after structural problems are addressed then you need to convince people to be less fearful and to be more optimistic. Because often by that time people have become so fearful that they are not taking even reasonable steps. They don’t buy even though they have the money in the bank and have a real need for the purchase. When this happens, convincing people that the economy is stable is important. However, cheerleading and convincing people to just continue to run up their debts to spend more is not wise when the economy is already far to in debt is not wise (though it is politically expedient).

    The USA needs to stop living beyond its means. That is the most important factor to long term economic strength. But the focus doesn’t seem to be on doing this, instead it seems to be on printing money to paper over the problems. There are many great strengths of the economy and those have allowed huge federal deficits, huge personal debt, monopolistic practices, destabilizing financial risks taking… Even with that things have been quite good. But those areas need to be addressed over the long term.

    Related: Let the Good Times Roll (using Credit) – Families Shouldn’t Finance Everyday Purchases on Credit – Living on Less

  • I Wouldn’t Sell Oil at These Prices

    Oil has fallen to $40 a barrel from nearly $140 less than a year ago. Now that $140 level was the result of a huge spike in the price. But if I owned a bunch of oil (as a country or a company) I sure wouldn’t want to sell it at $40. I would much rather just keep it in the ground and sell it later.

    OPEC has reduced quotas in an attempt to react to the global recession. But it strikes me as bad management to sell your resources at these low levels. Now you might have to sell some to service debt and meet fixed expenses. But continuing to sell at these levels instead of just keeping it in the ground and waiting a year or two (or longer) just seems like a very shortsighted action.

    Now you would have great difficulty acting on my opinion if you don’t plan ahead. To do so you would need to bank profit when you are selling at high prices so you can ride out low prices without being forced to sell to meet your obligations. And it seems many countries are unable to do that. And my guess is many oil company contracts require production based on what the country wants done.

    It just doesn’t seem to me that the I would do much better waiting to sell my oil than sell it at these prices.

    Related: Forecasting Oil Prices – Oil Consumption by Country – South Korea To Invest $22 Billion in Overseas Energy Projects – Curious Cat Science and Engineering Blog posts on energy

  • When Will the Recession Be Over?

    6 months ago I figured we could hope than in late 2009 we would see the beginning of the recovery. I am much less optimistic about the later half of 2009 now. The initial reports for the last quarter of 2008 showed GDP Down 3.8%, the worst since 1982. That has now been updated to an annualized decline of 6.2%. Still the economy actually grew for all of 2008 by just over 1%, something I don’t think most people realize.

    The New York Times has published the thoughts of several economists on When the Recession Will End, from the always true to the “dismal science” name, Jame Grant, “the end is unknown.” A. Michael Spence, 2001 Nobel Prize in Economics, “The short answer is not soon“:

    The recession is global: exports, production and consumption are in high-speed descent. The headwinds are powerful because of excessive leverage, damaged balance sheets and the resulting tight credit.
    …
    Governments and central banks are the only major sources of credit, liquidity and incremental demand — private capital and sovereign wealth funds, having experienced losses, are largely sidelined. If governments are quick and clear in their intentions and intervene in a coordinated way in both the real economy and the financial sector, we will probably have an unusually long and deep global recession through 2010. If they don’t, it is likely to be worse than that.

    Nouriel Roubini, this recession may last 36 months:

    Today, as we enter the 15th month, it’s obvious that we are already in a painful U-shaped recession that has become global and will last at least until the end of the year — 24 months, the longest since the Great Depression. Even if the gross domestic product grows in 2010, it is likely to be no higher than 1 percent. And at that rate, with the unemployment rate rising toward 10 percent, we will still be substantially in a recession.

    And from the Google CEO

    But when looking at our economic decline, we can all agree on two things: we did not get here overnight and we will not recover tomorrow.
    …
    By the end of the year, we may see some growth, with gains in employment to follow a few months later.

    I am much less confident that by the end of 2009 we will be in a recovery. That is still very possible, but I am much more worried we will not be. Frankly if we keep the decline in the 2009 GDP to under 2% I think that will be a success. And if the 2010 GDP declines less than 1% or increases I think we should be happy. Another key is how high the unemployment rate goes. It is almost certain to go significantly higher. If 2010 sees a return to the decent or good job growth that will be a huge success. But job growth the last 8 years has been horrible (500,000 more jobs lost).

    Related: Uncertain Economic Times (March 2008) – The Economy is in Serious Trouble – What Should You Do With Your Government “Stimulus” Check? – Economic Fault: Income Inequality

  • What the Bailout and Stimulus Are and Are Not

    The huge banking bailouts and stimulus bill are meant to counter-balance the huge problems the economy is suffering through. The damage caused to the economy, is largely from unwise risks that were allowed by regulators and politicians that have not panned out and are now greatly damaging the economy. It is always easy for politicians to pay out money in an attempt to buy our way out of problems. That is what the stimulus and bailout bills are doing. They are yet again heaping huge debts on our children and grandchildren.

    The bailout and stimulus packages are not about preventing foolish risks to the economy by huge banks that would make the economy safer in the future. Those types of bills are very hard to pass as the politicians get great sums of money to allow people to risk the economy for their own benefit. The concept of the stimulus is not to fix the cause of the problem but do cope with the problem we are left with due to people that paid themselves huge amounts of money. Now the taxpayers get to fund the huge payouts wall street has given themselves.

    This is because they never actually provided the value they claimed. They merely created false returns to claim they provided a benefit to justify obscene pay (many of them truly didn’t understand this is what they were doing so beyond failing they were so incompetent [while accepting well over a million dollars a year] they didn’t even understand that the financial games they were playing were failing. It is hard to know what is worse, being so incompetent while claiming you deserve millions or knowing you are just paying yourself money based on false claims of value.

    Either way, the banks are left bankrupt – having worthless securities created by those paying themselves huge amounts of money. If the huge banks fail the financial system collapse creates huge problems – businesses that have operated for decades by borrowing some funds (responsibly) go bankrupt because no funds are available to lend them, etc..

    The stimulus is not about fixing the problems of the past it is about countering the huge decline from the bubble economy. That bubble economy was funded largely by claiming value where none existed thereby allowing people to spend huge amounts of money based on those faulty claims. How people are shocked that playing financial games doesn’t actually make hundreds of billions of dollars appear out of thin air is beyond me.
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  • Drug Giant Pledges Cheap Medicine for World’s Poor

    Drug giant GlaxoSmithKline pledges cheap medicine for world’s poor

    The world’s second biggest pharmaceutical company is to radically shift its attitude to providing cheap drugs to millions of people in the developing world.

    In a major change of strategy, the new head of GlaxoSmithKline, Andrew Witty, has told the Guardian he will slash prices on all medicines in the poorest countries, give back profits to be spent on hospitals and clinics and – most ground-breaking of all – share knowledge about potential drugs that are currently protected by patents.

    Witty says he believes drug companies have an obligation to help the poor get treatment. He challenges other pharmaceutical giants to follow his lead.
    …
    He said that GSK will:

    • Cut its prices for all drugs in the 50 least developed countries to no more than 25% of the levels in the UK and US – and less if possible – and make drugs more affordable in middle-­income countries such as Brazil and India.

    • Put any chemicals or processes over which it has intellectual property rights that are relevant to finding drugs for neglected diseases into a “patent pool”, so they can be explored by other researchers.

    • Reinvest 20% of any profits it makes in the least developed countries in hospitals, clinics and staff.

    • Invite scientists from other companies, NGOs or governments to join the hunt for tropical disease treatments at its dedicated institute at Tres Cantos, Spain.

    The extent of the changes Witty is setting in train is likely to stun drug company critics and other pharmaceutical companies, who risk being left exposed.

    This is a good move by GSK.

    Related: Shop Around for Drugs – Traveling To Avoid USA Health Care Costs – International Development Fair: The Human Factor