Thursday, October 09, 2008
Blow By Blow Commentary (Pun Intended)
Important Posting -
Want to go on holidays also so difficult. Now in Tokyo and quite reluctant to spend my yen as it has risen more than 5%...sigh. My last trip was more than 10 years ago, and I immediately knew that I was back in Japan when I saw a small fruit stall selling durians for 3,500 yen per fruit. It was displayed on a small pedestal as well. Thats close to RM120 for one ordinary looking durian and its not even the good ones, its probably from Thailand cause there is little pungent smell being emitted.
a) Whats up with Iceland banks? Who even knew they needed to have so many banks? The banks got into trouble apparently by being big in "internet banking", a delayed dot-com bust apparently.
b) Though I have featured Nouriel Roubini a number of times, I have to say that he called it brilliantly and has mapped out the step by step destruction even before it happened. He is way better than the always doom and gloom Marc Faber, or even the successful investor but poor macro commentator in Jim Rogers. Though I agreed with most of his writings, I was not as bearish as he was, he was much more convinced. He expected the massive bailouts, and he even predicted that there will still be bank runs despite the bailouts. What we are seeing now are akin to bank runs except that the central bankers are trying to pre-empt that. Roubini's prescription is for each major country affected to come out and say that they will guarantee ALL DEPOSITS just like Ireland has done ahead of everyone else. I expect the Fed and Treasury to come up with a similar announcement in the US, and even by HKMA and Australia. But it may not happen in EU because the ECB would be loathed to do that as the union is made up of varying "quality of banks".
c) Is this a confidence thing, we all thought that the bailout fund would have assuaged that!!! What Happened?? What is happening is that the bailouts in US and UK and parts of Europe have confirmed investors' fears that things are really bad. Even with the bailout packages, banks are still NOT WILLING to deal or lend with one another as your counterparty risks are too high. That freezes credit. People with good credit cannot even get a car loan in the US.
d) What we are seeing is not completely a crisis of confidence. It is also a unique situation which has brought about certain unanticipated events (thus delaying the recovery and calm): USD went up after the bailout, not because the USD is strong, how can it be strong when the Fed is now ladened with toxic assets backing the issuance of new dollars? The USD went up NOT because its a reserve currency, which was what I thought initially as well, but rather there is a shortage of USD as institutions and companies sought USD to pay down their debt in USD. People just did not want big outstanding loans. So, we are seeing companies and institutions trying to be careful and cautious, not that they want USD but to pay off their loans which are mostly denominated in USD. The unexpected spike in USD caused a panic among latent demand for USD which exacerbated the USD's unworthy strength.
e) The yen gained even more over the past week as hedge funds all unwound their yen carry trade, i.e. sell OZ bonds and buy back yen. Hedge funds are crippling the recovery despite the bailout because September was the worst single month for most hedge funds. They had to sell everything, even good assets such as commodities in anticipation of the massive outflow and redemption of funds by hedge funds investors.
f) So I do expect calm and confidence to return very quickly. Its just that the bailouts and concerted efforts to lower rates came at such rapid succession that it cause hedge funds and investors to do many other things seemingly to increase volatility of markets. I believe investors are OK with the measures enacted so far, guaranteeing deposits would be the final kicker. Its just that investors and hedge funds went and did other stuff as well, which destabilised markets hence prompting the broader media to conclude that investors ARE NOT HAPPY with the bailouts and rate cuts - wrong reasoning you all, pretty pathetic.
g) Finally, why I am getting more comfy with the global situation.... is that Jim Cramer asked all to SELL SELL and sees 7,700 for the Dow. If ever there was a consistent financial idiot, it would be Cramer. If you look up the dictionary under "idiot" you'd probably find his picture there. I am so glad he panicked and call for a sell. I am so so relieved. I rarely call anyone a financial idiot, but apparently the phrase "financial idiot" was invented strictly for him. (Even if the index does get to 7,700 he is still a financial idiot... randomness alone can get you 2/5 correct)
p/s photos: Li Bing Bing