Bravery = Stupidity? Alibaba Takes on the PRC

♠ Posted by Emmanuel in at 1/30/2015 01:30:00 AM
In a fight between Alibaba and the PRC, I'd bet on the PRC to win.
 There's interesting news out today on Alibaba, China's giant business-to-business (B2B), business-to-consumer (B2C), and consumer-to-consumer (C2C) Internet giant. Just in September of last year, it supposedly set the record for the world's biggest initial public offering (IPO), making Jack Ma and company very wealthy people. I can only imagine that they were overjoyed then. But than was then and this is now: Alibaba stock is taking a beating since its earnings fell well below expectations in 3Q 2014. Alibaba now being a global company, its stock is sensitive to market sentiment the world over even if its reporting is a quarter later than that of US companies.

Partly it's bad timing as Alibaba has gone into forays like mobile services as China's economy has slowed down:
Alibaba Group Holding Ltd. revenue missed estimates as the e-commerce giant’s push into mobile curbed its advertising sales growth. The shares fell. Revenue was 26.2 billion yuan ($4.2 billion) in the third quarter, compared with the 27.6 billion-yuan average of 25 analyst estimates. Ads on mobile phones generate less money than on desktop computers because of smaller screens, and transactions on the Tmall platform grew at a slower pace, the Hangzhou-based company said Thursday. 
Even if its most recent results have been well below market expectations, the Chinese government has undoubtedly treated its homegrown technology firms better than foreign ones. The objective, of course, is to encourage the emergence of PRC-based alternatives to the likes of Amazon, e-Bay, Google, etc. However, Alibaba now alleges that heavy-handed tactics government regulators have more frequently used on Western firms are now being applied to it:
Alibaba, which connects consumers and businesses across its platforms, has a “credibility crisis” fueled by its failure to crack down on shady merchants, counterfeit goods, bribery and misleading promotions, the Chinese government said Wednesday. The report by the State Administration for Industry & Commerce [SAIC] accused Alibaba of allowing merchants to operate without required business licenses, to run unauthorized stores that co-opt famous brands and sell fake wine and handbags.

 “The scale of the revelations could leave Alibaba with substantial reputational damage,” said Cyrus Mewawalla, managing director of London-based CM Research. “We still see several risks in this stock that may in the coming months overshadow the earnings growth.” 
Apparently, Alibaba's leadership is not taking SAIC's clampdown in stride, accusing their own government of heavy-handedness:
Vice Chairman Joseph Tsai criticized the findings during Thursday’s earnings conference call and reaffirmed a commitment to ethical business practices. The company decided to file a complaint against the SAIC official who oversaw a meeting with Alibaba representatives in July to discuss the claims.

“We believe the flawed approach taken in the report, and the tactic of releasing a so-called ‘white paper’ specifically targeting us, was so unfair that we felt compelled to take the extraordinary step of preparing a formal complaint to the SAIC,” Tsai said.
Alibaba said in its IPO prospectus there were allegations in the past, and likely would be in the future, that the company’s platforms were selling goods that were counterfeit or infringed on other copyrights including music. The company takes a “very draconian” approach to counterfeits, Tsai said in an interview with Bloomberg Television on Thursday. “There’s nothing more important than the trust consumers have in our platform,” he said.
Now this is far more interesting than missed earnings: Alibaba complaining of unfair treatment from its government. My general take is that the Chinese government, which otherwise is a large champion of Alibaba, is wary of its forays into telecoms, financial services and what else have you since over-diversification may be an unwise strategy at a time the Chinese economy is being cooled down. Of course, Chinese government officials also have to consider the interests of other PRC industrialists whose turf Alibaba is muscling into. Hence, the government may be giving a not-so-veiled message that Alibaba should not expand so much so quickly into other industries and areas.

Moreover, since when did the Chinese government care about copyright infringement on a large scale? It's often been treated as nothing more than an American whine. The timing, target and complaint are triply suspect. Unless the Communist Party leadership really wanted to, this would probably not have happened under normal circumstances. Someone really want get a message across to Alibaba that it has to toe the (fine) line.

Besides, biting the hand that feeds is usually an unwise strategy. PRC leaders may feel they have to knock some sense into Alibaba since they may be holding themselves in too high regard relative to other Chinese businesses and must be knocked down a peg or two. The nail that sticks out gets hammered down: wham-wham-wham!

2017, the Year Indian Growth (Finally?) Beats China's

♠ Posted by Emmanuel in , at 1/29/2015 01:30:00 AM

As per the story of the and the hare, the World Bank is predicting something that's been a long time coming: With China slowing from its years of (reported) double-digit growth year in and year out to focus more on growth quality rather than quantity on one hand and India (hopefully) speeding up with a reformist, pro-market leadership under Nejendra Modi on the other, the World Bank is predicting that 2017 is the year Indian's growth rate moves ahead of China's. See the 2015 Global Economic Prospects from which the chart above is taken from. Onto the story:
This is a short-term forecast based on some very specific circumstances. India, for example, now has a credible central banker [Raghuram Rajan] doing sensible things like tackling inflation. The country's popular new government is finally building infrastructure and cutting the red tape that held the economy back for so many years. If India keeps it up, the World Bank expects its economy to grow 7 percent in 2017, up from 5.5 percent in 2014. Meanwhile, the forecast calls for growth in China to slow as its government reduces spending, tightens credit, and unwinds its housing bubble. The bank expects China's growth to fall from 7.4 percent in 2o14 to a modest 6.9 percent in 2017.

There are reasons to believe that the slowdown isn't a temporary blip and that, over the long term, India's economy will ultimately overtake China's. At the moment, both countries are growing so quickly because they're catching up to richer economies. They are shaking off the effects of market isolation, under-educated populations, limited access to technology, poor infrastructure, and regulations that stifled business development. Eventually, when these economies catch up, adding machines won't increase productivity. It's impossible to predict exactly how long this will take.
Then there are the supposed advantages of superior demographics and openness that should see to it that India pulls ahead:
Then growth will depend on demographics and each country's ability to innovate. India has a better outlook on both fronts. Its population is growing; China's is shrinking. It's harder to predict which country will be better at innovation. Signs point to India because democracies, with their secure property rights and general stability, tend to be better at fostering successful entrepreneurship. China's authoritarian capitalism is a new model, and it's not clear whether it can produce the sort of environment in which people take chances, form businesses, and invent things.

India still faces many hurdles. It needs to build lots of infrastructure, improve access to quality education, and remove the bureaucracy that has existed for years under many vested interests. This is an area in which China's more authoritarian system has an edge. Its leaders have greater liberty to make hard choices and smooth out rough patches. China's may prove to be a better model for catch-up growth. But managing a thriving, mature economy requires entrepreneurship and innovation. So far, India has the edge. 
I would also like to point out that the environment may be even worse in India than it is in China, but let's give the new Indian leadership the benefit of the doubt. Predictions are a terribly tricky business, and it is certainly quite possible that we will look back at this post two years from now thinking it rather foolish.

Remember also that we all had high hopes for Manmohan Singh when he became prime minister given his track record promoting economic reform as finance minister, but look how that turned out as he was unable to confront entrenched Congress Party interests. As always, we wish our Indian colleagues the best--with a guarded optimism. 

PRC Goes From Devaluing to Defending Yuan

♠ Posted by Emmanuel in , at 1/28/2015 01:30:00 AM
Pile 'em high, but don't sell 'em cheap: the yuan circa 2015.
China amassing $4 trillion in foreign exchange reserves by 2014 is an astounding if somewhat mindless feat. Everyone thought that a developing country amassing $1 trillion in reserves was mad; what more four times that amount? It's not because the dollar is tanking at the moment--quite the opposite.  Rather, all that money cannot be spent on things that can spur Chinese development like health and education. After all, they are foreign reserves whose previous purpose was to keep the yuan weaker than economic fundamentals would apply to help Chinese export competitiveness.

Apparently, with dollar strength causing turmoil in global markets, China is hardly immune. The fear in China is not that it will become the next Brazil or Russia hemorrhaging reserves since it is not quite in as bad a shape. Rather, it is the possibility of a disorderly outflow induced by dollar strength--investors dumping the yuan all of a sudden--that is causing a unique trend after all these years. Instead of keeping the yuan down, Chinese monetary policymakers now appear to have instituted measures to keep the yuan up:
After more than a decade of curbing the currency’s gains to help turn the nation into a manufacturing colossus, there are signs the People’s Bank of China is now propping up the yuan to stem an exodus of capital that’s threatening the economy

A gauge of capital flows on the PBOC’s balance sheet fell by the most since 2003 last month in a sign it’s selling foreign currency, while the yuan’s reference rate set daily by policy makers is at its strongest-ever level compared with the market price. Chinese Premier Li Keqiang said today the nation would implement measures to manage the economy more effectively and boost competition...

China amassed a world-leading $4 trillion of foreign-exchange reserves by mid-2014 as exports surged and capital flowed in, attracted by a currency that strengthened for four consecutive years. Now that the yuan’s gains are faltering, the PBOC is trying to prevent its declines from turning into a rout that could deter investment just as the economy suffers its slowest growth in 24 years.  
What's more, China may be attempting to move the yuan from being synonymous with "beggar-thy-neighbor" to the proverbial "store of value" by making it keep its value, or at least not depreciate over time. Speculation is that the Chinese are now keener on maintaining the yuan's value so more countries would be willing to hold it:
A stronger exchange rate would also boost the yuan’s prestige as China seeks to promote it as a currency of global commerce. In the past 12 months, the Asian nation has appointed yuan-clearing banks in cities from London and Frankfurt to Singapore.

An appreciating currency may also reassure U.S. officials who have accused the PBOC of debasing the yuan for economic advantage. “If there are signs of significant depreciation pressure, the PBOC will intervene,” Kewei Yang, the head of Asia-Pacific rates strategy at Morgan Stanley in Hong Kong, said by phone on Jan. 16. “The risk of capital outflows weighs more in importance than temporary support for exports from a weak currency.” 
Welcome to the new world economy.

"Kicking Out Greece Bodes Well for the Euro"

♠ Posted by Emmanuel in , at 1/27/2015 01:30:00 AM
Sorry, Greece, but you're on the way back to drachmas (and the EMU may be glad you're gone).
Sherlock Holmes once said something to the effect that if all other alternatives have been ruled out, then the remaining one, however implausible, must be true. Today, we saw the election of an anti-austerity party in Greece in Syriza. Its leader, Alexis Tsipras, has threatened at various points in his short but eventful political career to upend the status quo by leaving the Eurozone, repudiating Greece's debts, or at least renegotiating the terms of its obligations to the EU and the IMF. Consider:
As for investors. there are two reasons why Syriza's victory is significant. First, and as I've mentioned, its leader Alexis Tsipras has a clear mandate to negotiate an easing of austerity imposed by Brussels and the IMF, and a write-off of at least some of the country's massive public sector debts.
At the moment, he and his colleagues are stressing that they want to negotiate and are sending out emollient signals. But the Germans are saying that the deal done with Greece in the rescue is the deal that holds. So compromise may prove impossible - Greece rudely ripped from or bolting from the eurozone is not an impossibility,
The reaction of markets to Syriza becoming the party in power was a distinct yawn. The euro went nowhere and actually strengthened a touch in the aftermath of the result. The thing is that polls already foretold this outcome well in advance, so no one was surprised. So, one argument is that the Greek revolt was already "priced in" by the euro dropping in value days before as the likely result of the elections became evident. However, a more intriguing one is that, instead of keeping Greece in the Eurozone as a precondition for the single currency's continued viability, it would be better off if Tsipras got his death wish and Greece got kicked out of the EMU:
So why aren't investors in a state of frenzied panic? Why have the euro and stock markets bounced a bit this morning? One slightly implausible explanation is that investors believe the eurozone would actually be stronger without Greece, so long as no other big country followed it out the door. 
Think about it: other countries bailed out like Ireland and Portugal are regaining their footing, leaving Greece in a standout position as an exceptionally troubled economy. (It must be to vote in a bunch of economic extremists, after all.) Might the situations of these other troubled economies be "manageable" in relation to Greece? Instead of Greece dragging everyone down by adjusting monetary policy to the weakest link, why not remove the weakest link from the chain? The assumption, of course, is that the remaining links will not be in similarly dire condition.

There may only be one way to find out if this is true (that market participants actually prefer by now).

Got $50B? IMF's Ukraine Money Pit & Franklin Templeton

♠ Posted by Emmanuel in , at 1/26/2015 01:30:00 AM
There's "postwar reconstruction," but the IMF has completely lost the plot with "duringwar reconstruction."
I am unsure of many, many things, but this I know: Ukraine is a bottomless money pit. I figured this out a long time ago when I said that if the West really wanted to "punish" Russia, it should have let the Putinists "have" Ukraine. Think of the untold sums of money the Russians would have wasted instead of the West. Predictably if stupidly enough, the powers-that-be thought that the "country" of Ukraine was worth saving and have forced the IMF to act on their cause. You can read the hilarious econospeak elsewhere, but the situation remains the same: they believe a financial fix is possible for an ongoing security crisis. I have never heard of such a thing.

[I] As I keep repeating, there is no such country "Ukraine" anymore as the Crimea has been annexed and its eastern parts are controlled by externally-funded militias. To expect "Ukraine" to pull through is like expecting "Afghanistan" or "Somalia" to do the same--these are failed states whose problems are far beyond the salvation of IMF-style financial fixes. If there were IMF peacekeeping forces I'd be a smidgen more optimistic about its prospects, but no. Why does the IMF persist in this nonsense, though? Again, Western powers-that-be have forced it to "do something" about Ukraine despite its unsuitability to the task of keeping a crumbling nation apart. Witness:
The country has been choked by the loss of control to pro-Russia rebels of its key industrial region in the east, sapping productive output and revenues for the government. A new IMF program "will allow us to gain access to additional resources, which in turn will enable us to return to economic growth, restore adequate foreign exchange reserves, and ensure economic and financial stability going forward," said Ukrainian Finance Minister Natalie Jaresko.
Whoever this Natalie Jaresko woman is, she is completely nuts since she suffers from the same delusion that the IMF which has failed time and again to resuscitate Ukraine and must now do so under conditions of civil war will succeed. The situation is surreal:
With Ukraine it has to reach into its pockets for a country brought economically to its knees by nine months of civil war. "The IMF is entering unchartered waters," [former IMF Board Member Domenico] Lombardi said. "In recent times it hasn't supported a country at war with such a substantial package..."

Peter Doyle, a former economist with the IMF and strong critic of its policies, said it would be a mistake, and that the IMF is being "compulsive" in a desire to "be visible". "Until the civil war is successfully resolved, the IMF is absolutely the wrong institution to take the lead in financing," he told AFP.

"In particular, given the conflict, continued IMF lead compromises further its rules requiring that borrowing country policies are sufficient to secure sustainability." Moreover, the IMF is weighing more money for Ukraine just as it mulls a restructuring of the country's huge debt to commercial lenders, already equal to more than 73 percent of gross domestic output.
We then get to the kicker: Ukraine is estimated to need another $50 billion just to stabilize its financial situation--to say nothing of its security situation--likely making Greece like a bargain for the West since at least it's not at war (yet?):
It is a complicated equation, according to Mitov. A debt restructuring, especially one that forces investors to write off some debt, would alleviate financial pressures on the country. But it also "risks alienating foreign creditors for quite some time," meaning Ukraine would have limited access to debt markets, he noted.

The financing needs are Dantean. According to the Institute of International Finance, the country will need $50 billion from now through 2018, as it sinks into its worst recession since the Second World War.
[II] Speaking of which, one of those hoping for a bailout is Franklin Templeton, the American investment firm. It is on the hook for a lot of Ukrainian debt denominated [demoninated?] in US dollars. A massive haircut for those dumb enough to have bet on Ukraine is certainly in order, but we once again get into this Asian financial crisis-like situation that whenever American financial firms get in trouble during foreign misadventures, Uncle Sam is always there to bail them out:
[Franklin Templeton's Michael] Hasenstab will be an important figure in these [debt restructuring] negotiations. He runs bond funds for Templeton that held $8.8 billion of Ukrainian debt at the end of September 2014. (They have not yet reported newer data.) In June, the fund manager, who has won big on Irish and Hungarian debt in the past, painted a rosy picture of this investment...

Granted, it only constitutes a small part of the $185 billion in bonds he runs for Templeton, but for someone who has a reputation as a successful contrarian to maintain, the almost inevitable restructuring is a blow quite out of proportion to the actual financial effect of the losses. 
You have to give credit to Franklin Templeton though for daring to stay with their Ukraine, er, "investments." As the saying goes, no guts, no glory--but this time around it's been proven foolhardy more than anything else. That said, being paid, what, 60 cents to the dollar for bonds as the restructuring is believed to offer when they bought these bonds at 80 cents isn't so bad.

For the funders of the IMF, though, it's another story since their commitment seems limitless and open-ended--a money pit, in fact.

Dead Cat Bounce? Oil Prices After King Abdullah's Death

♠ Posted by Emmanuel in , at 1/23/2015 09:44:00 AM
Meet the new boss [L], same as the old boss [R]?
This has been an atypical year with lots of Saudi-related posts, but this one cannot be ignored: The newswires were all abuzz this morning about the passing away of King Abdullah, formerly Crown Prince Abdullah before his half-brother King Fahd passed away in 2005. Now that he too has died, Abdullah's half-brother Salman has become Saudi king. In terms of the broader energy market, the notable news is that oil prices have bumped up slightly on the news. To be sure, Abdullah's passing was not unexpected since he has not been in the best of health in recent years and succession plans were already well-known:
Oil prices jumped on Friday as news of the death of Saudi Arabia's King Abdullah added to uncertainty in energy markets already facing some of the biggest shifts in decades. Abdullah died early on Friday and his brother Salman became king in the world's top oil exporter. Salman named his half-brother Muqrin as heir, moving to forestall any succession crisis at a moment when Saudi Arabia faces unprecedented turmoil on its borders and in oil markets.
Brent crude futures rose to a high of $49.80 a barrel shortly after opening before easing back to $49.30 a barrel by 0650 GMT, up 78 cents. U.S. WTI crude futures were at $47, down from a high of $47.76 earlier in the session."This little spike in prices is understandable. But this is a selling opportunity in our view. It should be sold off quickly and it won't last long at all," said Mark Keenan of French Bank Societe Generale. After seeing strong volatility and price falls earlier in January, oil markets have moved little this week, with Brent prices range-bound between $47.78 and $50.45 a barrel
To be sure, there are no expected changes in Saudi policy, especially in terms of cutting oil production as OPEC's most vulnerable members like Venezuela suggest:
The new king is expected to continue an OPEC policy of keeping oil output steady to protect the cartel's market share from rival producers. "When King Salman was still crown prince, he very recently spoke on behalf of the king, and we see no change in energy policy whatsoever," Keenan said.

Analysts said almost equally as important as the royal succession to energy markets would be whether Saudi oil minister Ali Al-Naimi, in office since 1995, might step down. "The real question is if there is a new oil minister soon," asked FGE analyst Tushar Bansal, adding that Al-Naimi had reportedly wanted to step down but been convinced by King Abdullah to stay on.
Even if the oil minister Al-Naimi is replaced, there is little likelihood that Saudi leadership will curtail Saudi output. Why this move upwards in oil markets, then? I believe that the phenomenon of  none of the major producers curtailing their output (least of all Saudi Arabia) is still putting downward pressure on oil prices. What appears to be a brief move upwards is a "dead cat bounce" in what appears to be a prolonged bear market absent major supply disruptions in the near future. So King Salman is a force for continuity rather than change, and replacing the oil minister with someone else is unlikely to result in any changes. However, in this kind of market, any sort of event that can at marginally raise doubts about the continuity of policy in the world's largest oil exporter is viewed with some interest. Perhaps Salman is ever-so-slightly more hawkish on output? Perhaps Al-Naimi will be replaced by someone not as bold as to say Saudi Arabia will "never cut oil prouction"?

When trading is range-bound as it is now, those few dollars and cents of movement mean a lot more than they did in the months before, and we are bearing witness to that right about now. 

Professional Stand-In-Liners, a Venezuelan Profession

♠ Posted by Emmanuel in , at 1/22/2015 01:30:00 AM
"Everyday I dream dipeys don't run out once I finally get into the store."
To be sure, professional waiters-in-line are not unique in Latin America. In countries like Brazil where red tape was (still is?) prevalent and people had to stand in line at government offices to obtain various licenses and permits, there already were folks offering to wait for you all day long. There is a term for them; it's on the tip of my tongue but I forget at the moment. (Do e-mail me if you can provide the correct Portugese term.) Indeed, it is not only a "third world" phenomenon as those buying Apple iPhone 6s have relied on those offering to stand in the queues outside Apple stores. (Such meaningful lives these people lead, living for the release of new Apple phones.)

The recent Zimbabwe-fication of Venezuela, however, is setting new standards in this, ah, line of depravity. In the absence of anything better to do--abundant workers and no real jobs to be found can do this to you--there are now legions of Venezuelans who line up without anyone asking them to. Their logic is that desperate folks will come along later in the day who will pay relatively great sums in today's inflation-hit Venezuela for their places in line to buy necessities of life which are in short supply:
There's a booming new profession in Venezuela: standing in line. The job usually involves starting before dawn, enduring long hours under the Caribbean sun, dodging or bribing police, and then selling a coveted spot at the front of huge shopping lines.

As Venezuela's ailing economy spawns unprecedented shortages of basic goods, panic-buying and a rush to snap up subsidized food, demand is high and the pay is reasonable. "It's boring but not a bad way to make a living," said a 23-year-old man, who only gave his first name Luis, as he held a spot near the front of a line of hundreds outside a state supermarket just after sunrise in Caracas. 

Unemployed until he tried his new career late last year, Luis earns about 600 bolivars, a whopping $95 at Venezuela's lowest official exchange rate but just $3.50 on the black market, for a spot. He can do that two or three times a day. "There's a lady coming at 8 a.m for this place. She's paid in advance," Luis said, patting his wallet despite nods of disapproval around him. "I'll have a break and then maybe start again. I chat to people to pass the time, the conversation can be fun. If it's not, I play on my phone."
Apparently, there is another variation on this practice. Another group of these folks eager to queue all day long as long as it earns them some money are more like professional grocery shoppers who wait in line to buy your orders:
Krisbell Villarroel, a 22-year-old single mother of two small children in Caracas, makes a living by queuing up to buy things she then sells to clients who pay her for the time she spends standing in line. “Every day, I have to get up at two in the morning and call my friends to find out where things are for sale or what is for sale,” Villarroel told AFP.

“That is how I spend my day. I get out of the first line at 10am and then perhaps go to another to see what they are selling,” she explained. “In one store, I might get milk, sugar or coffee, but in another – flour, rice, diapers or shampoo.” Villarroel said her customers are families who do not have the time or really the need to wait in line – business people who have their own lives and money to pay someone to do this kind of thing.
Once more, there is an analogue Stateside since there are those who purchase groceries for seniors who are not active enough to do the grocery shopping themselves. Still, that young, active Venezuelans in the prime of their years are literally being paid to waste time suggests the brokenness of their socialized economy. A lot of this nonsense could be subsidized when oil was at $120 a barrel; nowadays, what you see is what you get. 

After Swiss Capitulation, Will Danes Keep Their Peg?

♠ Posted by Emmanuel in , at 1/21/2015 01:30:00 AM
Older bills feature a homburg wearer. Should we keep faith in homburg wearers?
First off, you can discount the headline from the rather sensationalistic Daily Telegraph--bastion of economic illiteracy--that the removal of Denmark's krone (DKK) peg may cause similar effects to the disruption caused by the Swiss uncoupling the franc's value from that of the euro. From BIS figures, the Swiss franc (CHF) is the world's sixth most-traded currency in global markets--involved in 5.2% of all transactions--whereas the Danish krone's share of 0.8% is a rounding error in comparison. It's simply not one of the world's most widely traded currencies, and Denmark is not quite a global trading powerhouse despite being a very advanced country due to its size.

That said, the Danes are wading into dangerous territory by attempting to ward speculative money away through negative interest rates on short-term deposits. That is, they are trying to prevent speculators from going "long" on krones since you would actually lose money holding onto it:
Denmark is trying to silence currency speculators as the government and central bank insist the Nordic country won’t follow Switzerland in severing its euro ties. “Circumstances significantly different from Denmark’s” were behind the Swiss National Bank’s decision, Danish Economy Minister Morten Oestergaard said in a phone interview. “Any comparison between Denmark and Switzerland is impossible.”

The comments followed yesterday’s surprise decision by the Danish central bank to cut its deposit rate by 15 basis points to minus 0.2 percent, matching a record low last seen during the darkest hours of Europe’s debt crisis in 2012. Like the Swiss, the Danes lowered rates after interventions in the market proved insufficient.
What the Daily Telegraph unsurprisingly neglects to mention [surprise!] is that the Danish authorities actually have an agreement with the ECB formalizing its longstanding peg. Unlike the Swiss authorities who are Johnny-come-latelys to the pegging sweepstakes, the Danes have been at it since the German occupation:
According to the exchange-rate agreement between Denmark and the ECB, currency interventions to defend the peg will “in principle be automatic and unlimited...” Denmark has “a long-lasting and politically firmly anchored fixed-currency policy,” [Economy Minister Morten] Oestergaard said. “This situation should not be overly dramatized.” 
On one hand, then, global consequences of the Danish krone breaking its peg to the euro from around its current level of 7.43 should be minimal (outside of Denmark). Whether it's in the interests of Danish officials to do so is another question. Sure Danish officials say their situation is different from that of Switzerland and that they will defend at all costs, but the latter reassurance was also made by the Swiss a week before their peg was broken.

My take? The Danes will attempt to tough it out--perhaps by making short-term rates even more negative in the coming days. However, if these attempts prove unsuccessful or too costly, they will remove the peg...and reset it at a somewhat lower EUR/DKK level. Like Dick Cheney and waterboarding, I believe pegging is in their blood. 

National Debt That's 245% of GDP? No Worries, Japan

♠ Posted by Emmanuel in at 1/19/2015 01:30:00 AM
Relaaaaax; it's not as bad as it looks for Japan?
Economics Professor Masazumi Wakatabe at Waseda University was prompted to write commentary on Japan's fiscal situation by a recent FT article calculating Japan's national debt to be a world-leading 245% of GDP. In Greece, it's a puny 176% by comparison. 245%! Why haven't financial yellow journalists been proven right in predicting Japan will be crushed by hyperinflation and other laughable nonsense? As the good professor explains, the fiscal situation in Japan is not nearly as bad as it looks.

First, consider the usual explanations concerning how the assets held by the Japanese government significantly offset its paper liabilities:
The key to understand Japan’s fiscal situation is the net debt as opposed to gross debt. First, the Japanese government holds large amount of assets, therefore the net debt relative to GDP ratio goes down to 132 percent as of June 2014.

Second, the Bank of Japan holds a large amount of Japanese government bonds. “Since the central bank could, in principle, forever hold its current stock of JGBs, the government need not worry about how it is going to repay these bonds,” [Columbia Professor David] Weinstein wrote. Then the net debt relative to GDP ratio goes even further down to 80 percent as of June 2014.
There is some sleight of hand here that won't pass muster with international standards regarding national-level bookkeeping, of course, but thankfully he doesn't reiterate the old chestnut that most Japanese government bonds (JGBs) are held by Japanese since their exceedingly low yields make them unattractive to international investors. So, Japan is not really vulnerable to a crisis of confidence among foreign holders of its debt since, well, most debt is held at home.

But wait, there's more. Updated figures suggest the situation is note even as dire as the "adjusted" figures indicate:
The Ministry of Finance has been compiling the balance sheets of the government from 2003. According to the recent figure (in Japanese. Curiously, the English version is not updated since 2003), the Japanese government owes debt of 1,269.1 trillion yen, and owns assets of 822.2 trillion yen, therefore the net debt is 447 trillion yen at the end of March, 2013. The net debt relative to GDP ratio is about 90 percent, which is lower than the Weinstein estimate.

The statistics for 2014 fiscal year is not yet released, but assuming that the net debt has increased by 5 trillion yen from 2013 to 2014, the net debt would be 452 trillion yen. As of December 31, 2014, the BOJ holds JGBs worth 254 trillion yen. If we subtract this from the net debt, the net debt relative to GDP ratio becomes 41 percent.
However, even more caution should be exercised in "magicking" Japan's debt from 245% down to 41%. For, some of the assets identified are already set aside for servicing future obligations--chiefly pensions. That said, he is still more sanguine about Japan's fiscal situation than most:
Now some might argue that the assets which the Japanese government owns are earmarked, and thus not salable. This is true for funds reserved for the pension fund worth 130 trillion yen, but the Japanese government has 41 trillion yen of cash, and 272 trillion yen of securities. The government also owns real properties in good locations. They may not be sold, but could certainly be leased to the private developers. As the real estate market in Tokyo is picking up, a lease of government properties could generate a considerable amount of revenue to the government’s coffer.

I am not saying that fiscal consolidation is not necessary. But right now, Japan faces an output gap, a difference between potential and actual GDP, of 2.8 percent. Japan faces a shortage of demand. Against this background, the budget for the 2015 fiscal year is not expansionary enough. What the public should worry about is not the fiscal situation, but the dwindling economy.
Again, I am not so sure if Japan can spend its way to prosperity and much recommend opening the country up to significantly increased migration for both increasing the pool of working-age persons and generating consumer demand. To me that is the tonic for a dwindling economy that the Japanese remain so very reluctant to address but the most likely to work since almost everything else has already been tried to little effect.

Bleeding Forex Reserves: Russia & the 'Fragile Five'

♠ Posted by Emmanuel in ,,,,, at 1/19/2015 01:30:00 AM
The 90s "connected" developing countries through contagion . How about now?
Whether through coincidence or not, this article on developing countries quickly losing foreign exchange reserves from the Nikkei Asian Review--fast becoming my Asian periodical of choice after the demise of the late, lamented Far Eastern Economic Review--comes from an issue whose cover story is..."Living With Terror"[!] Having been a onetime foreign exchange trader during the height of the Asian financial crisis in a crisis-affected nation, I can sympathize with the feeling of being subject to fear-inspiring events I'd much rather avoid.

But the day of reckoning has come for these nations--again for a handful like Brazil, Indonesia, Russia and Thailand that were particularly hard-hit by the events near the turn of the millennium. There's an unmistakeable sense of deja vu for developing countries. Like in the aftermath of the Asian financial crisis, commodity exporters are taking it on the chin as the world economy slows down while the US seemingly does better. The combination of a developing world slowdown and dollar strength was bad then and is ominous now. A surefire sign of distress is of the aforementioned developing countries drawing down foreign exchange reserves to defend their currencies from further depreciation (the opposite of the Swiss situation in which excessive strength is the problem):
The foreign currency reserves of Brazil, Russia and four other big emerging countries fell 6% in the second half of 2014 from the preceding six months. The fall came as the countries' monetary authorities attempted to defend their home currencies in the foreign exchange market.

The decrease was the second largest since the 17% plunge in the latter half of 2008, when the global financial crisis led to emerging nations' currencies being dumped. The values of those currencies have been spiraling downward due to plummeting crude oil prices and increased dollar buying now that the U.S. Federal Reserve appears poised to raise interest rates.
Yet while the drawdowns on foreign exchange reserves have been substantial, so are the reserves these countries accumulated during the years after the Asian financial crisis. They feared a rehash during troubled times, and it appears the rainy days they saved for are upon us:
The total foreign reserves of Russia and the so-called fragile five -- Brazil, India, Indonesia, South Africa and Turkey -- stood at $1.36 trillion as of the end of December, down $92.8 billion in six months. The decline in the latter half of 2008 was $218.1 billion.

Russia suffered the largest decline, with a decrease of $89.7 billion, or 18%. Turkey recorded a 5% decline; Brazil also logged a slight drop. The Turkish lira and the Russian ruble plunged to record lows against the dollar in December, while the Brazilian real hit its lowest point in roughly nine years. The South African rand dropped to a roughly six-year low, the Indonesian rupiah to a 16-year low and the Indian rupee to a one-year low.

It is unlikely, however, that these six countries will run out of foreign reserves anytime soon; they have expanded these reserves by roughly 200% in the past decade. The market largely expects these countries will not spark a currency crisis or go into default -- at least not for the time being. Thailand, Indonesia, South Korea and even Russia experienced currency and foreign reserve crises in the 1990s. Monetary authorities have apparently learned a lesson from that era.
It's time to hang tough, then. Judging from their leadership, I'm relatively more sanguine about the prospects of India and Indonesia, but you never know how these things pan out.