[Scary] Inflation

Excellent article on Inflation...

Many banks today have “excess liquidity,” enabling them to lend, yet they choose not to because of fears they won’t get paid back. We wish at this moment in time that they would lend more to get the economy moving again. The difficulty is that once the economy starts to strengthen and recover, that is precisely the time when our banks would decide to start lending more. And that is precisely when we want the banks to stop lending too freely, lest we stretch the economy to the limit once again.

Happy Halloween, everyone.

Two heads are better than one

Norges Bank Investment Management (NBIM), who manager Norway's massive state pension is forcing four U.S firms to assign separate people to the positions of CEO and Chairman of the Board.

Good!

This is very good news. This introduces internal control and accountability. Evidently, this is fairly common practice in Continental Europe, Canada and Australia.

More on this shareholder action:

• Someone to watch over [The Economist]
• Norges seeks reform in U.S. Governance [The Financial Times]
  

Larry Summers: Reconciling Prudence with Profits

An excellent talk from Larry Summers-- the questions at the end are quite interesting and entertaining.

Looks like he has a sane head on his shoulders. He also self-admits to be a contrarian in his thought pattern, even though he doesn't directly invest in the market.

It is a long speech, but it well worth it. Enjoy.

Chinese Consumer: The world economy's next growth engine?

I think many people are relying on Chinese consumer to wake up and start consuming. The expectation is even higher because the American consumer appears to be still sleeping. There is even talk that the American consumer may not be the same for a very long time.

However, it appears that the state of non-chinese businesses in China is quite dismal.

The promise—and frequent disappointment—of doing business in China has been a common theme since at least the 19th century, when weavers in Manchester were said to dream of adding a few inches to every shirttail in China. Thanks to recession at home, foreign firms are keener than ever to capitalise on China’s growth. But Europe and America’s exports to China have remained broadly flat over the past year and amount to less than 7% of the total, even though shrinking exports to other countries flatter the figure. Even if the Chinese economy grows by the official target of 8% this year, the impact on Western firms’ total sales would be little more than a rounding error, says Ronald Schramm, a visiting professor at the Chinese European International Business School.

There are a number of businesses that are succeeding in China, but they face severe headwind.

[...there are] explicit legal impediments and hidden obstacles continue to hamper access to Chinese customers, despite China’s promises of reform when it joined the World Trade Organisation (WTO) in 2001. Publishing, telecommunications, oil exploration, marketing, pharmaceuticals, banking and insurance all remain either fiercely protected or off-limits to foreigners altogether. Corruption, protectionism and red tape hamper foreigners in all fields.

The foreign business lobbies "complain about subsidised competition, restricted access, conflicting regulations, a lack of protection for intellectual property and opaque and arbitrary bureaucracy."

It shouldn't be surprising to anyone that the Chinese government has their own interest at heart. Even America, probably the most pro-trade nation, is guilty of that. What I find interesting is that Chinese government hasn't been explicitly protectionist, for example, by placing tariffs-- but rather overtly by creating hurdles for foreign businesses to jump.

I am sure many will succeed, but the pace may be much slower than anticipated. And, more likely than not, the beneficiaries of the Chinese consumers will be Chinese firms! Good.

Complete Article is available here. Enjoy.

Decoupling emotions from investing

This is funny.

The device, a prototype of which was unveiled this week, is an emotion-sensing system designed to help investors keep a cool head when buying and selling.

The idea was dreamed up by Philips, an electronics group based in the Netherlands, and the Dialogues Incubator, an initiative sponsored by ABN AMRO, a Dutch bank with intimate experience of rash decision-makers. Philips has been exploring emotion-sensing systems for a number of years, in part to see how electronic devices might help people cope with stress. ABN’s interest stemmed from research showing that day-traders who exhibit more intense emotional reactions to monetary gain or loss also have significantly worse trading results.

Although it is still under development, I honestly suspect that a device like this would actually stop an emotionally charged trader. When the emotions are high-- greed or fear, a device like this would quickly come unplugged.

I wonder if value investors would consider using something like this--- think of it as another layer of sanity check.

The next debate: Is the recession over?

Perhaps this is the next debate that all the media circuits would be spending time on. If not the next one, it would certainly be an upcoming one. This particular article claims that the recession may have ended in May 2009. The article talks about a statistical method to deduce the end of the recession.

To construct these data, I took the logarithm of the twelve-month difference of the S&P 500 and the log of the twelve-month difference of the unemployment rate beginning in 1929 and ending in September of 2009. I constructed fourteen separate charts, one for each of the fourteen recessions. The charts are labelled by the month in which the recessions began.

The article does point out that their claim does not disqualify the double-dip thesis.

The fact that the current recession is over does not mean that we are out of the woods, even if unemployment does begin to come down a year from now.  The Great Depression, for example, consisted of two consecutive recessions. The first began in August 1929 and ended in March 1933. The second began in May 1937 and ended in June 1938. As the first two charts in Figure 1 illustrate, both of these recessions were accompanied by significant stock market declines. The end of the current recession has been accompanied by massive injections of public money into the credit markets and large fiscal expansions.  In my view, there is a real danger of a relapse when this life support ends.

Aggregate demand can be propped up by government expenditure. It can also be propped up by central bank intervention in the asset markets. When the US fiscal expansion comes to an end, as it must eventually, government demand will fall. If the Fed also chooses to end its policy of supporting the value of private assets through the purchase of long term government bonds and private securities, there is a significant danger that the stock market will fall again as it did in 1937. This will cause private expenditure to collapse, and it may lead to a larger increase in the unemployment rate than that which has already occurred.

Enjoy.