Tuesday, October 21, 2008
Mexico trade volume data
I'm struggling with a mystery in Mexico export data. Their national accounts show a healthy growth in real exports (~5.5% YoY growth) while US import data from Mexico deflated by their import price index for Mexico shows a real decline of around 9%. Given that the US is about 80% of Mexico's total exports, this difference is hard to believe. I've so far looked at all possible culprits and haven't found an answer (maquila, deflators, etc).
FDI Performance and Potential Index
Based on UNCTAD data. This was prepared by me for a work that will no longer use it, so I'm putting it here for whomever is interested. It would actually be interested in seeing this in motion over time.
Thursday, October 16, 2008
Those who ignore history....
...are doomed to make everyone else pay for their mistakes.
What (was) the matter with Sweden | Free exchange | Economist.com
If you read this account of the Scandinavian crisis it reads like the mini-version of what is currently happening in the US and the rest of the world. It is important that everyone understand that this is not a case of "no one could have predicted that...". There are people who warned about the crisis (the most visible one was Noriel Roubini), there are emails from Wall Street firms mentioning the incredible risk to the entire system ever two years ago, and there is the Scandinavian crisis that came on the heels of a boom-bust cycle in the housing market.
It is also interesting that under Gordon Brown's plan, the implementation in the UK involved the resignation of the heads of many institutions. Nothing like this is happening in the US. The heads of these institutions are being given ample protection (don't be fooled by "limits on compensation", they are nil) and are being given taxpayer money.
Want to know the end game? The US will come out of this crisis licking its wounds, but it will emerge. The taxpayer will foot the enormous bill, and the financial companies will profit immensely through fire-sale mergers and acquisitions as well as off-loading their losses to the taxpayer while pocketing all of the gains from the last few years.
Rinse and repeat...
What (was) the matter with Sweden | Free exchange | Economist.com
If you read this account of the Scandinavian crisis it reads like the mini-version of what is currently happening in the US and the rest of the world. It is important that everyone understand that this is not a case of "no one could have predicted that...". There are people who warned about the crisis (the most visible one was Noriel Roubini), there are emails from Wall Street firms mentioning the incredible risk to the entire system ever two years ago, and there is the Scandinavian crisis that came on the heels of a boom-bust cycle in the housing market.
It is also interesting that under Gordon Brown's plan, the implementation in the UK involved the resignation of the heads of many institutions. Nothing like this is happening in the US. The heads of these institutions are being given ample protection (don't be fooled by "limits on compensation", they are nil) and are being given taxpayer money.
Want to know the end game? The US will come out of this crisis licking its wounds, but it will emerge. The taxpayer will foot the enormous bill, and the financial companies will profit immensely through fire-sale mergers and acquisitions as well as off-loading their losses to the taxpayer while pocketing all of the gains from the last few years.
Rinse and repeat...
The banks got into trouble in all-too-familiar ways. Financial deregulation gave them greater freedom to lend, which they exploited unwisely. Scandinavian property went through a nasty boom-and-bust cycle. And recession (especially severe in Finland when trade with the former Soviet Union collapsed) led to mountains of bad debts.
Friday, October 10, 2008
What to do and how to stay sane
If you are interested in macroeconomics at all you have surely been following the developments in global financial markets and the debacle that the last 15 years have caused. As everyone is adding their opinion, here are some of my own thoughts.
It is clear that this is not the fault of individual companies or people. Nor is it the fault of the market. Their behaviour has been a rational set of actions dictated by what we all know their incentives to be. Companies want to profit and individuals want value. No, I don't blame them for doing what is obvious they would do. Much like previous crises, this is a severe failure of regulators and legislators to ensure that the incentives were balanced with safeguards. There is a reason why regulation exists at all, isn't there? So why wouldn't people think that there is such as thing as not enough (or too much) of it? And if the debate is on the degree of regulation, isn't it pretty clear that the current events are proof that there hasn't been enough?
The crisis occurred because there were lax regulation on the origination of loans and on the ability of companies to leverage this risk. Now, I also blame pure ignorance (of the good kind: now knowing something that hasn't been discovered). You see, the creation of new instruments based on mortgages on paper sounded like, and still does, like a good idea. I can't see why the risk mitigation scheme doesn't work beyond the fact that it does. Perhaps it is simply a measure of optimism (see my post below on "the making of a mortgage CDO". I guess they shouldn't have expected to loose only 10% to defaults, and should instead have priced it much higher. I suspect this is the big failure in the model.
I haven't seen an analysis of how the CDO structure fell (with numbers) to see how wrong they were. It would be nice to see that.
There is also the issue of the procyclical nature of leveraging. As the SEC waived rules that limited the amount of leveraging that some companies could do, they gave them the rope with which to hang themselves. I don't believe for a minute that these people didn't understand what the risks were. Just that they didn't care (remote risks against immediate gratification - like me with chocolate).
There must be mechanisms in place to act counter-cyclically. But before talk of reform can be started, we have to get through the worse. And we are not there yet. Emerging markets (China!) has not really seen a strong impact on the real sector (I don't much care for stock market indices aside from their effect on pensions and such, as as indicators of sentiment once you discount the bubbles).
So brace yourselves and buy government bonds.
It is clear that this is not the fault of individual companies or people. Nor is it the fault of the market. Their behaviour has been a rational set of actions dictated by what we all know their incentives to be. Companies want to profit and individuals want value. No, I don't blame them for doing what is obvious they would do. Much like previous crises, this is a severe failure of regulators and legislators to ensure that the incentives were balanced with safeguards. There is a reason why regulation exists at all, isn't there? So why wouldn't people think that there is such as thing as not enough (or too much) of it? And if the debate is on the degree of regulation, isn't it pretty clear that the current events are proof that there hasn't been enough?
The crisis occurred because there were lax regulation on the origination of loans and on the ability of companies to leverage this risk. Now, I also blame pure ignorance (of the good kind: now knowing something that hasn't been discovered). You see, the creation of new instruments based on mortgages on paper sounded like, and still does, like a good idea. I can't see why the risk mitigation scheme doesn't work beyond the fact that it does. Perhaps it is simply a measure of optimism (see my post below on "the making of a mortgage CDO". I guess they shouldn't have expected to loose only 10% to defaults, and should instead have priced it much higher. I suspect this is the big failure in the model.
I haven't seen an analysis of how the CDO structure fell (with numbers) to see how wrong they were. It would be nice to see that.
There is also the issue of the procyclical nature of leveraging. As the SEC waived rules that limited the amount of leveraging that some companies could do, they gave them the rope with which to hang themselves. I don't believe for a minute that these people didn't understand what the risks were. Just that they didn't care (remote risks against immediate gratification - like me with chocolate).
There must be mechanisms in place to act counter-cyclically. But before talk of reform can be started, we have to get through the worse. And we are not there yet. Emerging markets (China!) has not really seen a strong impact on the real sector (I don't much care for stock market indices aside from their effect on pensions and such, as as indicators of sentiment once you discount the bubbles).
So brace yourselves and buy government bonds.
The crisis will eat us all
So today we had a bloody day in the markets, and as my job deals with trade and integration, I became very interested in the impact on commerce. I've been following the volume data on trade and have seen the deceleration, even if the values are steady or growing. Now this could mean that elasticities are acting in such a way to offset quantities and value, but there could be other issues at play.
I will look into this more carefully, but to start I would like to point out the reports that the Baltic Dry Goods index is down
and that there are reports that a lack of letters of credit are having an effect on trade from South America and the US (h/t to free exchange.
Much like this silly discussion about whether we are in a recession, if it quacks like less trade and it walks like slow trade, then we have a problem for exporters.
I will look into this more carefully, but to start I would like to point out the reports that the Baltic Dry Goods index is down
The Baltic Dry Goods Index, the main measure of shipping rates, is down 74% from its high back in May when trade with China was still strong.
and that there are reports that a lack of letters of credit are having an effect on trade from South America and the US (h/t to free exchange.
Much like this silly discussion about whether we are in a recession, if it quacks like less trade and it walks like slow trade, then we have a problem for exporters.
Thursday, October 9, 2008
The crisis and other agenda
So I'm interested in doing an analysis of the impact of previous financial crises on commercial flows around the world. It would be interesting to see if the channels of transmission have changed as much as I think they have.
I suspect that I will find that the rise of leveraged institutions such as MNCs has made contagion a much bigger monster that is harder for goverments to control. In the past it was probably more true that government policy that impacted FX rates and capital flows could do a great deal, but today this is less likely to work.
I'm also working on a product-level view of FX competitiveness, whereby I try to isolate the changes in competitiveness that occur from FX variations according to competitors for a third market. If that isn't clear, think of Brazil competing for the Chinese market against other Asian economies. How does the marketshare for each product (at 6 digits) and FX changes affect competitiveness for the companies involved.
I also have a long list of thoughts. Now to find time to get them into paper.
I suspect that I will find that the rise of leveraged institutions such as MNCs has made contagion a much bigger monster that is harder for goverments to control. In the past it was probably more true that government policy that impacted FX rates and capital flows could do a great deal, but today this is less likely to work.
I'm also working on a product-level view of FX competitiveness, whereby I try to isolate the changes in competitiveness that occur from FX variations according to competitors for a third market. If that isn't clear, think of Brazil competing for the Chinese market against other Asian economies. How does the marketshare for each product (at 6 digits) and FX changes affect competitiveness for the companies involved.
I also have a long list of thoughts. Now to find time to get them into paper.
Becoming a father turned me into a feminist
Amen to this
Education is the best tool for anyone to have safe sex and to make responsible choices about when to do it. The fearmongering is a relic of our religious side, and it is just one of these things that seem like would work, but doesn't.
When younger people have sex despite being warned about eternal damnation, it is blamed on everything else (tv, music, etc). But not one do they consider that it is probably due to a combination of natural desires/instinct and a lack of guidance about what it entails physically and emotionally.
I'm also convinced that this is one of these issues which defines people, so no minds will ever be changed. The only hope is that young people learn this through exposure to different worldviews prior to making any mistakes.
end of personal rant.
as a note, this blog will start to be updated more often from now on.
So for the record: I think virginity is fine, just as I think having sex is fine. I don't really care what women do sexually, and neither should you. In fact, that's the point. I believe that a young woman's sexual choices - no matter what they be - shouldn't have a bearing on how they're seen as moral actors. I also believe that slut-shaming and fetishizing virginity is not just about only valuing women for their sexuality (or lack thereof), but that it's also part of a larger agenda that seeks to regress women's rights and return to traditional gender roles. But if you want to know more about that, you'll have to read the book.
Education is the best tool for anyone to have safe sex and to make responsible choices about when to do it. The fearmongering is a relic of our religious side, and it is just one of these things that seem like would work, but doesn't.
When younger people have sex despite being warned about eternal damnation, it is blamed on everything else (tv, music, etc). But not one do they consider that it is probably due to a combination of natural desires/instinct and a lack of guidance about what it entails physically and emotionally.
I'm also convinced that this is one of these issues which defines people, so no minds will ever be changed. The only hope is that young people learn this through exposure to different worldviews prior to making any mistakes.
end of personal rant.
as a note, this blog will start to be updated more often from now on.
Sunday, June 29, 2008
You know this, but do you feel it?
I've been looking at global economic events for work and have this puzzle that I can't solve. First we know that the fallout of the US financial crisis is affecting the real economy not only in the US, but around the world. But the impact hasn't shown up in consumer spending, which is about 70% of the US GDP. This is in light of record oil prices, which is mirrored in many other commodities (for many reasons). So why hasn't the US consumer taken a bearish attitude and started saving for a rainy day, if the thunder claps are all around?
It's been obvious that the boom in consumer spending from 2002-2007 is largely due to credit expansion (lower rates, mortgage-backed debt refinancing, etc) since real incomes and employment has not improved significantly over that period. But now that the refinance "credit card" is running out and lending standards are up (while consumer demand is down), what is financing continued consumer activity? And will this financing dry up soon, impacting GDP growth?
My bet is that GDP forecasts for 2008 are still optimistic at around 1-2% growth. I think the year will be at the lower end of this.
PS: looking at the data for a lot of indicators, almost all seem to fit the pattern in every other recession (save for the one in 2001). If it quacks like a recession....
It's been obvious that the boom in consumer spending from 2002-2007 is largely due to credit expansion (lower rates, mortgage-backed debt refinancing, etc) since real incomes and employment has not improved significantly over that period. But now that the refinance "credit card" is running out and lending standards are up (while consumer demand is down), what is financing continued consumer activity? And will this financing dry up soon, impacting GDP growth?
My bet is that GDP forecasts for 2008 are still optimistic at around 1-2% growth. I think the year will be at the lower end of this.
PS: looking at the data for a lot of indicators, almost all seem to fit the pattern in every other recession (save for the one in 2001). If it quacks like a recession....
Thursday, December 27, 2007
An inverted Ponzi scheme?
The WSJ has a wonderful piece on a particular type of CDOs and how they concentrated the risk which is creating problems for the US economy. Remember the lesson of diversification? Well, if you follow their graphic, you'll see that these CDOs actually served to concentrate risk that was diversified in the Mortgage Backed Securities (which purchase individual mortgages and pools them into one instrument). You see, the CDOs would buy pieces of these securities that were all subject to similar default risks, thereby eliminating the advantage of diversification. Geniuses!
The reasons they were doing this was to generate transaction fees, and with the sorry state of the rating agency industry, information on the true nature of the risk was lacking. As these instruments were repackaged and resold, all based on the same underlying securities, you can start to see a analogy to a classic Ponzi scheme, where incoming investors pay the returns of existing investors, without any growth in the underlying security. Kinda like a bubble...
So the current crisis smells of a "reverse" Ponzi, where new investment instruments are created and sold based on existing instruments, all of which share the same underlying asset, and the same risk. The incoming instruments are paying for the returns of the previous instruments (not strictly though).
If it smells fishy, it probably is a big, rotten fish, or a big pile of shit!
The reasons they were doing this was to generate transaction fees, and with the sorry state of the rating agency industry, information on the true nature of the risk was lacking. As these instruments were repackaged and resold, all based on the same underlying securities, you can start to see a analogy to a classic Ponzi scheme, where incoming investors pay the returns of existing investors, without any growth in the underlying security. Kinda like a bubble...
So the current crisis smells of a "reverse" Ponzi, where new investment instruments are created and sold based on existing instruments, all of which share the same underlying asset, and the same risk. The incoming instruments are paying for the returns of the previous instruments (not strictly though).
If it smells fishy, it probably is a big, rotten fish, or a big pile of shit!
Friday, December 14, 2007
Three sources on the risks to the US Economy
Read these three:
Martin Wolf - Why the credit squeeze is a turning point for the world
Paul Krugman - After the Money is Gone
Nouriel Roubini - Coordinated Central Banks Liquidity Injections: Too Little Too Late To Address the Fundamental Problems of the Financial System
I don't think people really get how serious the problems are. The recent decision by the Fed to make available $40 billion is amazing. When Brazil still had its hard peg currency system, it pointed to reserves of $41 billion as their insurance that they would weather a crisis. That wasn't enough.
Part of me blames what can only be seen as a desperate attempt to shore up the system on politics. If a recession hits, there is no saving the Republican party in the coming elections. I would bet that whips are being cracked in Washington, but I agree with Roubini that this will get a lot worse.
Martin Wolf - Why the credit squeeze is a turning point for the world
Paul Krugman - After the Money is Gone
Nouriel Roubini - Coordinated Central Banks Liquidity Injections: Too Little Too Late To Address the Fundamental Problems of the Financial System
I don't think people really get how serious the problems are. The recent decision by the Fed to make available $40 billion is amazing. When Brazil still had its hard peg currency system, it pointed to reserves of $41 billion as their insurance that they would weather a crisis. That wasn't enough.
Part of me blames what can only be seen as a desperate attempt to shore up the system on politics. If a recession hits, there is no saving the Republican party in the coming elections. I would bet that whips are being cracked in Washington, but I agree with Roubini that this will get a lot worse.
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