Saturday, May 23, 2009

U.S. Adjusted Monetary Base -> Uncharted waters

Over the last few days, the USD has been 'sliding' against most global currencies.

The FED has been working over-time, bailing out one bankrupt and insolvent institution after another. Maybe the state of California is next in line for the intensive care unit at the Fed/Treasury

The 'Adjusted Monetary Base' has exploded.
While the 'market meltdown' has resulted in a collapse of paper profits and wealth supported by debt, we may be setting up the foundations of a massive surge of inflation!

How exactly does the Fed propose to 'take away the punch bowl' at some stage in the future?
For now, rising Treasury yields will mean that the borrowing costs of the US government will rise just a time when its borrowing program steps into overdrive.
The Fed will have to step up its purchases of US Treasuries, so that it can stem the upward rise in Treasury yields

The quantitative easing/ money printing / 'Bailout everyone' experiment is getting more complicated by the day.

The charts below have been sourced from

Friday, May 22, 2009


A hectic day in the markets today.
The US Equity Markets + USD +Treasuries + Crude Oil = were all down.

Gold has rallied steadily upward, just getting over the $950 level as I write this. Is the weak USD causing some forced short covering in gold?
Meanwhile, former Federal Reserve Chairman - Alan Greenspan was in the news again , saying that the financial crisis is not yet over!! Hahaha!
Green shoots not green enough I guess?
It's getting quite choppy out there.
Are we going to see the USD rebound, if this bear market rally in global equities starts to stumble?
This is going to be critical, as the US Bond market desperately needs some massive inflows, in order to keep rising Treasury yields in check. A USD rebound led by a flight to safety could just help the US Fed's cause.
Is the unemployment rate of 9.2- 9.6% projected by the US Fed far too optimistic?
The guys at S&P are getting concerned about the AAA sovereign credit rating of the UK.
Is the US next in line for a AAA rating with a negative outlook?
Well it's about time someone started to get concerned about the "intervention and stimulus" strategies of the leaders of the developed world.
Just imagine if Asian central banks started buying their domestic government debt by printing money. The rating agencies would be slamming them with downgrades and junk ratings!

Friday, May 15, 2009


Well, its time for the election results!

Once all the campaigning and election promises are over and done with, there's a whole lot of work that is yet to be done.

This is a Financial Blog, so I'm not going to get drawn into an election debate, but I'd still like to make a few points.

  • India has survived the global financial tsunami, with its economy and banking system in far better shape than many countries.

  • While politicians from every political party are only too eager to take credit for this, there were obviously other reasons for that outcome.

  • The Indian Central Bank ( The RBI) has been very prudent through this crisis, monitoring the balance sheets of banks and avoiding frantic interest rate cuts. While Bank non - performing loans will definitely rise as the economy slows, overall most banks look to be in good shape. Leverage levels in the banking system, are far far lower than those at the largest US Banks.

  • The Indian Economy is a domestically oriented one, in comparison to some of her Asian counterparts who are export driven economies. Domestic demand has held up well so far. (although rising unemployment over the next year could hurt demand.) GDP growth isn't driven by Indian IT service exports or the financial sector alone. Agriculture and Industry (mining, manufacturing, electricity) as well as other Services (transport, communication and construction) make vital contributions

  • Although India will be unable to match the strong growth rates of recent years, current GDP growth rate estimates range from a conservative 4.5% to an optimistic 6.5%. I would think the lower end estimate to is more realistic; as I do not believe we are near the end of this down turn just yet

  • Given increasing levels of urbanisation, there is still a lot of infrastructure that needs to be set up. Transport infrastructure and Power Generation investments will have to increase, irrespective of which government comes to power.

  • Over the last few months, every political party has been campaigning aggressively and trying to secure allies incase the need of a coalition government arises ( a very likely outcome!). As the game of 'side swapping' and 'outside support' take centrestage over the next week, I hope these guys don't forget that they have a country to run.

  • India has great potential to emerge stronger from these trying times. Indians are savers and hard workers; and as a bonus: Companies operating here have a huge domestic market to cater to.

  • Lets not froget that they are many many people in this country for whom the Sensex at 21,000 and the BRIC (Brazil, Russia, India, china) nation concept means nothing!!!! Years of neglect by the political system post election time has resulted in extremely poor standards of living. Given that a social security/ welfare system is out of reach to so many, the government will have to pay close attention to the needs of this section of 'emerging India ' when times get tough.

  • Over the next 6 months many difficult decisions will have to be taken as unemployment numbers and bank non performing assets rise. This means labour disputes at factories and companies (especially the ones that over extended themselves) will need to approach the banks for debt restructuring. The government will have to work towards finding a solution to these problems rather than just resorting to populist policies at a time when tough decisions are needed.

The Equity markets here have been following global markets upward since early March, so lets wait and see how they respond to the results when they open on Monday morning.

Lastly, here is a clipping from the Business Standard newspaper( 8th May, 2009)



"""In an interview published in the Sunday Times, London, Ratan Tata admitted with hindsight that he might have gone too far too fast, but said that nobody saw the
economic recession coming.
If one had known there was going to be a meltdown then yes [Tata went too far] but nobody knew,” Tata said in an interview to Sunday Times of London. He was referring to his prized acquisitions Corus and Jaguar and Land Rover (JLR).
Both the acquisitions were made, I would say, at an inopportune time in the sense that they were near the top of the market in terms of price.” Tata Steel paid $ 12.1 billion for Corus (acquired in 2006) and Tata Motors paid $ 2.3 billion for JLR (2008)."""

I admire the Tatas, for being a multinational Indian business conglomerate that stands for integrity and trust, qualities that seem to have been totally ignored by many in the business world recently. Its group companies include giants like Tata Consultancy Services, Tata Chemicals, Tata Steel and Tata Motors.

I was surprised by their aggressive bidding in the case of the above two acquisitions, considering that the Tatas are known to be a very conservative group.

These deals will add value, but the high acquisition price and acquisition related debt, will mean that they will be earnings accretive only in the very long term.

In FY 2005, 2006 & 2007 Indian corporates were very active in the M&A space. Many corporates both in India and overseas; miscalculated risk and underestimated the difficulty of successful integration of target companies.
Many never anticipated that the credit markets would be this tight, and thus bridge loan refinancing is proving to be a serious problem.
Companies like Hindalco (Novelis), Suzlon (RePower), Tata Motors (Jaguar Land Rover) and Tata Steel (Corus) are now busy reorganizing their debt as they tackle an economic slowdown, declining commodity prices and tight credit markets.

Expensive deals made in bull markets, can be extremely difficult to complete in bear markets!

Monday, May 11, 2009


FERDINAND PECORA (January 6, 1882 – December 7, 1971)
He was a former assistant district attorney from New York, and then the Chief Counsel of the Senate Banking and Currency Committee hearings, held after the Stock Market Crash of 1929.

''He grilled the top bankers of the early 1930’s, asked tough questions and highlighted many systemic failures and market manipulations. The results of these investigations led to legislation like the Securities Act of 1933, the Glass-Steagall Act of 1933 and the Securities Exchange Act of 1934.''
(I will write a post on the Glass- Stegall Act 1933 soon. It’s important to note that this Act was repealed in Nov 1999, under the Clinton administration when it was felt ‘ that such regulation was no longer needed’ – Big mistake, big, huge !!)

In 1939 Ferdinand Pecora wrote a book about the Senate investigations titled ‘Wall Street Under Oath: The Story of Our Modern Money Changers.’ The book is long since out of print. Michael A. Perino, a professor at St. John's University School of Law, is writing a book about Ferdinand Pecora. The book should be out next year.

The reason I wrote this post was to draw attention to the fact that no government or regulator or investigator is working towards finding any long term solution.
Merging smaller bankrupt investment banks into larger banks, pretending that an insolvent and overleveraged bank is still solvent, bailing out inefficient and unproductive auto companies, encouraging more spending and borrowing instead of savings ; I could go on and on.

There is no quick fix to this mess, so it’s time we got down to finding a viable long term solution.

There’s not a lot of information that you can find on Ferdinand Pecora.
Listed below are some of the links that I came across.
(The Wikipedia article is a very concise summary.)
Ferdinand Pecora - Wikipedia, the free encyclopedia
Ferdinand Pecora - Why Didn't Bush and McCain Learn his Lesson?
Simon Johnson and Ferdinand Pecora on Bill Moyers The Big Picture
LETTER; The Largely Forgotten Legacy of Ferdinand Pecora - New ...
TIME Magazine Cover: Ferdinand Pecora - June 12, 1933 - Finance ...
The Ghost of Ferdinand Pecora

Sunday, May 10, 2009


The recent 30 year US T Bond issue may have proved to be costlier than the US Treasury first expected !
Whether you blame it on investors returning to risky assets or on the green shoots of recovery; rising bond yields will add to the 'cost of money' even as the US Budget deficit continues to widen.

In recent months, the Chinese have been concerned about the monetary and bailout policies of the US.
Bernanke is going to have to do a whole lot more, to keep 30 yr US T Bond yields down.

Saturday, May 9, 2009


The equity markets have been rallying since early March 2009.
At the same time, the USD has lost considerable ground, as can be seen on the USDX.

The 'flight to safety' buying seemes to have ended, and as market players back away from US Treasuries, seeking better returns from 'risky assets' - emerging market equities and foreign currencies; the USD has witnessed a selloff.
While a strong USD was affecting the profitability of large US MNCs, the current USD weakness has also resulted in a rally in commodities : read - Crude Oil, Precious Metals, Copper, Aluminium etc.
Despite worrying economic issues in certain EU nations, the Euro is well off its recent lows. Challenging times lie ahead as countries like Portugal, Ireland, Spain, Italy and Greece face rising unemployment issues and GDP growth problems. With a policy mandate that is quite different from the US Fed, the ECB is going to have to walk a tightrope by helping out weaker EU members, without annoying the larger and relatively 'economically stable' countries.
Unstable + collapsing economies in eastern europe are also a major worry!
The Pound Sterling had a horrid 2008, struggling against most currencies. While interest rate cuts may have helped so far, the UK is faced with record consumer debt levels, a weak housing market, and unemployment problems - just like its larger ally the USA. As the slowdown batters the financial centre in London, the Bank of England is going to have to get more creative with its monetary policy, especially if job losses acclerate in the second half of the year.
Swiss economy exports to the EU were struggling due to a strong Swiss Franc. The Swiss National Bank intervened in the currency markets, in order to stem the upward rise in the Swiss Franc. While it seems to have worked for a while, the Swiss Franc is rallying again!! Watch out for comments from the SNB if this trend continues.
Points to note:
  • Expect more quantitative easing and competitive currency devaluations if the second half of 2009 turns out to be 'more challenging' than first expected.
  • Unemployment could prove to be a major speed bump to any recovery. As I've said before, there are going to be a lot of angry people - whose homes and retirement funds and investments are falling in value. Many have debt to be repaid and a job loss will compound their problems.
  • Policy makers may breathe easy for now, as the renewed optimism of a 'quick recovery' seems to have kept 'the mob' at bay for now. Fact is : They haven't found any viable long term fixes just yet and the crowds continue to grow impatient, albeit distracted for now by the rapid rally in the equity markets.

Thursday, May 7, 2009


In the first week of March 2009, Wall Street was preparing for Financial Armageddon. Just a month later we are on the road to recovery and the stock market rally continues - totally ignoring any negative / bearish news flow. When markets totally ignore bad news or interpret any bad news as ‘better than expected bad news’ its wise to be cautious.

The Banks that were on the verge of total collapse are now quite confident of raising billions of dollars in capital from the private sector.
Gigantic derivative positions still haunt these ‘solvent banks’, and it's hard to believe these guys have enough capital to sustain further losses from derivatives/ mortgage backed securities/credit card loans.
For their sake, the economy better recover really quickly or we will be headed into round 2 of the ‘save the banks’ game.

It's important to note that as markets staged their incredible recovery, the USD has lost some ground, and commodities like Copper, Crude Oil and precious metals Gold & Silver have recovered somewhat. US Treasuries yields are also rising and the FED may have to step up its purchases here, as it struggles to keep rates down.

Rising commodity prices and rising treasury yields could derail any ‘green shoot recovery’ that the pundits claim they now see!!

Why We Are Absolutely Screwed
Bank of America May Need About $34 Billion of Capital
The Bottom
Preliminary Stress Test Results
Here's Ron Paul again - The one guy who still continues to grill Bernanke!

EDIT : FRIDAY 8th MAY 2009:
I just came across Ron Paul's reaction to the Bank Stress Test results.