Marketing or Ignorance or Is Capitalism a paradox ?

I am sure every one of us out there agree with Benjamin Barber's point that we are in a materialistic world that has dominated us from choosing our Needs and Wants.



It's not only the game gadgets that become a big hit among kids, but the gadgets like phones with added features have been overwhelming the consumers in the recent past.
The market is being flocked with so many promotions and the media has created enough buzz now than ever before.



I highly agree with Dr.Barber's point that the short term return has become the focus of current corporate world. It's not just the innovative features that strike the market, but the timings of introduction of these products have been strategically improving for the benefit of the companies.



I think this is the area where Monetarists and Keynesians should influence through their combined strengths to get the corporate world look into the real needs to improve the human life to make this place a better place. Corporations should nurture innovation for developing real products; not just innovate instruments that falsely inflates the books.

MBS, SIV, CDO explained

The following article from Chicagofed.org defines how the Mortgage Backed Securities, Structured Investment Vehicle and Collateralized Debt Obligations are positioned in the grand schema and how they work.

http://www.chicagofed.org/publications/fedletter/cflnovember2007_244.pdf

With the Fed jumping in with additional liquidity, it is of some help to ease the hardlanding, however, as one of the author in either Time/BBC puts it, there is not much use in applying grease for a broken chain of the bicycle.

My analogy from a different view:

Assume you bought a big ship to catch huge amounts of fish from an ocean and a sudden oil spill has disrupted in the fish returns. Though the Fed here tries to nurture fishes through local ponds, rivers, and releases the reserved frozen fishes, the long term demand is unlikely to be quenched. A real fix of cleansing the spilled oil seems to be beyond Fed's cusp (at least based on actions till date) and left to voluntary action from banks/institutions. In addition, the increasing fund injection through reduced rates could potentially cause other side effects.

One medicine that I see of big helping hand is the Sovereign Wealth Funds (SWF), but the side effect of that in terms of political aspirations cannot be discounted, at least not yet.

Can I agree more with Greenspan ?

Though the news from Greenspan about potential Stagflation (Title : Greenspan sees early signs of U.S. stagflation)reported by Reuters is not pleasant, it was a pleasant surprise to read this alert from Alan Greenspan. I am a novice when it comes to Economics and the indicator analysis, but it is quite encouraging to me that this news, for the lack of better term, coincides with my forecast.

The above statement will make sense if you skim my post on Stagflation ( Nov 7, 2007 and revisiting with more details on Dec 15,2007)

How RBI ( Indian Fed) deals with heavy Inflowing dollars ?

I recently read this and planning to write more on the high dollar inflow to India and the dilemma faced by RBI.

Will Stagflation win ?

Alan Greenspan talks about increased odds of recession during his interview to NPR available at NPR site

According to Alan, it sounds like the housing market slump could have been inevitable due to the nature of recent global economic behavior catalyzed by long term interest rates that is out of Fed's control.

Knowing how the economic market works and the basic business cycles, I could only opine that the above is a weak defense. We will have to wait to see more analytical support from economists and media. I personally know few people who had bought hefty mortgage loans to join the bandwagon. In addition to new home supply, the volume of exchanges of used homes and leverage on home equities increased exponentially. In a booming market, one cannot agree more on the optimistic outlook and stretch goals to hit high returns. This has inarguably blinded the eyes of the public borrowing ARM's who are influenced by the positive marketing from the issuers and the media doing a great job on charting the facts around the increasing home return trends.

The reality that people not able to adjust when the Adjustable Rate Mortgages' rate stepped up from their comfort zone leading to increased rates. The inability of people not able to make their payments have resulted in the inability of the issuer's to meet their commitments to the whole another world of Mutual Funds and other Equity funds. While the homes are not selling anymore, the poor securities were being sold in all directions causing stress to Wall Street.

In short, while the global financial factors could have indirectly fueled the above, I think that the spark was the rock bottom Fed rate. Had we gone on a different tangent and asked, what if Fed didn't lower the rates in 2001. Would the US economy been in a better place today ? Maybe someone has already enjoyed analyzing this journey. Happy googling !!

Coming back to the topic, going by Alan's word that recession odds raise and with November CPI numbers hinting inflation, Details from Bloomberg

While this can be a good coincidence at a time in point, my forecast of stagflation on my post on Nov 7th encourages to follow up closely and look at future indicators and make adjustments. Considering the evils of stagflation, I wish I am wrong. I think this would be an interesting time to look back in history as to how these perils were defeated through financial and policy innovation or if US succumbed to it due to forces within and outside (oil price, pressure on dollar, cut-throat competition for resources from emerging economies) its control. I stress innovation because the market efficiencies have never been quick at work in the past. Thanks to the internet.

As always, I am not even going into war and other political aspects including the good Green forces at this juncture.

Sub-prime mortgage loss and SWF (Sovereign Wealth Funds)

Who would have imagined that the sub-prime loss could have caused such a punitive damage in less than one year wiping off the previous year's profits. Some of the numbers as stated by BBC on the write offs by high profile financial institutions that bundled these complex loans are listed below.

UBS: $13.5bn
Citigroup: $11bn
Merrill Lynch: $8bn
Morgan Stanley $3.7bn
HSBC: $3.4bn
Bear Stearns: $3.2bn
Deutsche Bank: $3.2bn
Bank of America: $3bn
Barclays: $2.6bn
Royal Bank of Scotland: $2.6bn
BNP Paribas: $2.1bn
Freddie Mac: $2bn
Credit Suisse: $1bn
Wachovia: $1.1bn
IKB: $1bn

Source: http://news.bbc.co.uk/2/hi/business/7135872.stm

While few selected quarters discuss how the voluntary rate freeze would help, its really the monetarist theory at work where SWF's play the role of the FED, of course, for their own benefit. Though this is capitalism at work again, I wonder if these SWF's are not asking the same question and how far have they looked into their supposedly revenue generating machine, ie the companies, they just rescued. Since no medicine has been applied to the fundamental problem, within the realm of my knowledge, I am yet to understand how these investments would meet their expected returns. Only thing that stikes is CIC's rescue to Blackstone causing the former to lose 40% of its investment value due to continued poor performance of Blackstone. We will have to wait and see on case by case basis as US economy struggles to come out of this web.

As per estimates from Morgan Stanley, these SW funds have spent $35 billion since the start of last year on stakes in financial organizations, with $26 billion coming in roughly the last six months. Abu Dhabi's planned $7.5 billion investment in Citigroup is one big part of it.

Where is US Economy heading ?

My opinion on the US macroeconomic outlook is based on the information from websites http://www.forecasts.org and http://www.gpoaccess.gov/indicators/07sepbro.html. The former website gives useful insight by forecasting the leading economic indicators whereas the latter tracks the trends and thus helps to get an historical view and current picture. Based on my analysis, the US economy is poised for a slow down due to various reasons like recent sub-prime mortgage issue, increasing trade deficit, fed’s recent move to lower discount rate to 4.75% and possible quarter point decrease pressuring the strength of the dollar, increasing oil price. The housing sector is poised for a high slowdown with thousand units annual rate reducing from 1281 to 1074. The growing cost of health sector also decreases the discretionary income.

While unemployment rate has risen in the recent months to 4.7% based on the actual indicator from gpoaccess.gov, the forecasts.org suggests this to be rising in the future to 4.73%. The forecast for CPI is also high leading to 209.5 in March 2008 suggesting inflation. The PPI also leads to a constant lower 170’s with no significant decrease. Based on these, ie the increasing energy price and the decreased economic activity could be a double edged sword leading to stagflation. The slowdown in US economy along with an increased global inflation index will discourage US consumer spending and hence the imports. The $9 trillion US debt only sheds the investors away from dollar backed sectors.

While economic indicators can go so far as stated above, history shows that inventions and innovations have always come to the rescue. With US leading the green effort and being a house for R&D till date, a viable alternative to oil that address the scale can turn things around. Interestingly, this is clearly one of the pressing issues that humankind needs an answer. Even more to save the US Dollar.

Fortune Global Forum - 2007 at New Delhi, India

At a time when globalization is the heart of talk at household level, the following link has few interesting video links that gives different perspectives from top echelons in today's corporate world, especially from US and India. Personally, the confident remarks made by Indian Business magnets and their recognition that India has a long way to go to join the Developed nation list, has never been better before. In my next post, I plan to write my forecast on how the US economy could head towards and its implications on other emerging countries or should I say growing countries would be ?

Ofcourse, the economical analysis can only go so far by making few political assumptions, in the absence of which writing this blog would have had a big opportunity cost of making that additional buck :)

Fortune Global forum 2007 videos at
http://money.cnn.com/video/globalforum/#/video/fortune/globalforum/

Invention Of the Year: The iPhone- Should it be Innovation ?

Time Magazine had recognized The IPhone as the Invention of the Year. Based on my understanding on the definition of Invention and Innovation, I am not convinced that this can be branded as an invention. Calling it innovation would fit this product and its features. With tons and tons of articles out there on the web to differentiate innovation and invention, it is quite straight forward to go through the 'Time' link below and ponder oneself.

http://www.time.com/time/business/article/0,8599,1678581,00.html

Burgeoning US Trade deficit

Few points that states the origin of US Trade deficit era, the causes for it and my 2 cents:

The 1990's had been primarily an era of internet revolution. Buzzing business activities with myriad of interesting products in the market have lured customer spending. Corporate increasing revenue and cheering Walstreet gave more confidence to the economy which further increased customer confidence supporting increased level of consumer spending. With China helping the manufacturing sector and countries like India on service sector, the product prices reduced which further increased the GDP. I think since the pie was growing larger, the unemployment level has not been alarmingly high, though underemployment is a different issue.

Basically with some of the above happenings, people have been encouraged to borrow more, be it credit card or loan or home equities eventually adding to the trade deficit. The major benefit of trade deficit has been the lower cost of products ( though quality is a different issue). The major cost is that the nation, which in turn points to the people are eventually obligated to pay off these debt. While Monetarists like Milton Friedman argue that the dollar going out comes back with other governments buying US Securities, it is not just the dollar in question. It is the real situation and question if majority of people holding these debts will be able to make their ends meet from a long term point of view.

Few economists argue that these trade deficits will weaken dollar thereby enhance exports or the weak dollar would be helpful to pay off the debts etc. However, being called as the world's superpower, US should be proactive through saving and funds at discretion to act on priorities like medicare, social security, medicaid, security measures etc. Currently the reserves held by US is much lower that even some of the developing countries.

Overall, I think that the trade deficit in a short term is okay. However, if it consistently grows in the negative direction for few years, then economy is going in the wrong direction. While the GDP can be quoted as a defense, there are questionable statistics there as well, as stated by the Phantom GDP link. Just like recession measured by GDP decline, we need to have some phase in economy to measure consequent trade deficits :)

IPod Index

Australian Bank has replaced Big Mac Index with IPod Index to measure global currencies and purchasing power. With reduced freight charges these days, it is surprising to see how the prices differ across the globe. The price details of the IPod 4GB Nano in different countries opens the opportunity for hedging based on the fluctuating currency rates. High tariff and tax policies are stated as the reasons for high prices in Brazil, Argentina. Details as stated in link below.

Details here

Interesting Sites on Economy

I stumble on so many websites on economics by googling. Planning to keep a list of those I would refer periodically. Something like a delicious link.

http://www.econbrowser.com/
http://www.forecasts.org/
http://www.bls.gov/opub/hom/homtoc.htm
http://www.businessweek.com/magazine/content/07_25/b4039010.htm
http://usinfo.state.gov/products/pubs/oecon/chap4.htm

Let me know if there are other handy ones that keep up with the current happenings with a perspective.

Thinking Economically

'Thinking Economically' by Maurice Levi is a light read if you are well versed with the basic economic concepts. I have completed 4/16 chapters currently. He has tried to introduce concepts that would reach a lay man and not jumping on the traditional supply, demand curve right away.

One interesting area that caught my attention is an illustration where a fast, roaring, expensive car is being perceived by different people differently. An environmentalist criticizing the pollution, a physicist thinking about the horsepower and the pickup, a social person pondering the status of the person driving the car and an economist calculating the cost benefit or the value of possessing the car. This makes an interesting relation between how market demand is driven by the consumer taste and how marketing, psychology and economics are interwoven.

I have temporarily stopped continuing with the remaining chapters and saving it for the train ride.

China Shakes the World - Part 2

After finally completing this book, it is a good eye opener to realize how China is like Japan during its boom period and how China is different in avoiding the mistake Japan made. It is also interesting in how China capitalizes energy commitments from countries like Venezuela, Sudan, Iran that are already try to look for safe-havens other than US. It is also a dichotomy that China's bulk of the population is still to come out of the poverty zone while the country has close to 1 Trillian dollars in its reserve.

While hot discussions around global warming grow hot on one side, it is also scary that China and India are just on their initial stages of enjoying the economic fruits that is positioned on a different tangent to the environment needs. It's ironic that time, usually a medicine for most of the issues, could be a threat to today's unanswered complicated issues. The economic weapon controlling neo world is well buttressed by the internet that grows faster, wider and deeper demeaning the physical national boundaries.

As the book says, it takes countries like China and India to develop in half the time that it took for America. And it is natural that these changes reflect themselves on the business cycles that orient around them.

China Shakes the World

Started reading this book "China Shakes the world" by James Kynge. As with other Chinese books, this book shares some of the common facts on the history and the evolution of China post 1978 and overviews the Mao and Deng times.

Though I have not completed it fully, this has triggered the buds by covering some of the recent strategic moves like China National Offshore Oil Corporation's (CNOOC) bid for Unocol and Dalian's almost done acquisition of Ingersoll Milling Machine, which was working on few of America's sensitive projects.

The book also goes in length about how China were able to leverage the lessons learned from the world and pick the best brains in an amazingly short time before pumping the gas on their juggernaut economy. That's the gist for now.

Note: The next book I plan to read is "The Elephant and the Dragon" by Robyn Meredith unless I hear if there is something else that is more interesting.

Nice read

http://www.time.com/time/magazine/article/0,9171,1645150,00.html

The Rise of India

Recently finished the book 'The Rise of India' by Niranjan Rajadhyaksha. Very interesting read that gave a vivid picture of the Indian economic history ( on a high level) and the realistic issues the country faces ranging from corruption to population to poor government reforms etc. It is a good read for young MBA students to get a fast track view on the past and current bottlenecks that the country faces.

The author also talks in detail on how India missed the Asian race post independence till early 90's and how the energetic Indian youth is catching up currently and also talks about future projections. It was definitely an enjoyable read.

It is certainly encouraging that prominent leaders like Nandan M. Nilekani (one of the 100 most influential people in the world by Time Magazine, 2006.) have read this book and acknowledged it.
As a part of continuous learning, corporates and political parties should enforce that leaders read these kind of books for the benefit of those that they serve.

From Wall Street to the Great Wall

Marc Faber's 'From Wall Street to Great Wall' was the first of his books I had completed a few days back. Since I like the meat and not beating around the bush, the initial few pages repelled me from proceeding as the content was around his life-hood background etc etc. It was a light read until the contents started focusing on how different eras lead to the waves of developments that ultimately resulted in unbalanced growth on this planet.

For those interested in economic and history trends and how they are closely linked, this book is a good read offering a stratum of perspectives. For amateurs, this can help connect the social, political, economical dots from a history as well as contemporary standpoint.

In addition, it is imperative that while financial analysts' detail dashboard is the day to day numbers and the book driven financial stats, the macro-economic barometers are to be viewed with utmost diligence as well, as exemplified by Dr.Doom.

In response to http://us.rediff.com/money/2007/jan/06bspec.htm

With all the mega trends that India is going through, it is easy to forget the forces that pull them back. The prime vanguard of those enemy forces being CORRUPTION. In the long run, though the wide income gap can be handled through education, awareness, communication and govt. policies, the main results being savings gap of the mass middle class and the growth catalyst for them is highly challenged by the grass-root corruption. There have been tons and tons of movies on this subject with futile reaction.