7 posts tagged “economy”

Ten days ago I reiterated my view that "The dollar will collapse and US interest rates will have strong upward pressure" (see US Economic Prospects: These are the Good Days. March 10, 2009). And this seems to be happening, faster than I expected.

And within a few days ago, the first sign of these movements took place, with the US starting to buy up long term debt, causing the US dollar to decline for the week by more than 5 percent against a basket of currencies. This has been the largest decline since 1985. And according to Reuters, a fall of 5.2 percent at the close later on Friday would [would] make this week's dollar plunge the biggest since 1973 when the Bretton Woods system of fixed exchange rates was finally abandoned.  This decline may also signal an equally significant currency regime change and shift in long run US economic role and fortunes.

From the US government perspective, this is a good move, assuming they also see the same crisis on the horizon. Essentially, they are shifting borrowing that would be short term (e.g. 90 days) to long term debt. This would make a lot of sense if they thought that short term rates would increase substantially during the term of the long term debt, and not have much prospect of falling again. It is an unprecedented opportunity to profit from intertemporal (between time periods) arbitrage -- an opportunity of which few others can take advantage.

By the way, if you haven't read it already, you should see Wired Magazines excellent article about David X. Li's Gaussian Copula Function, and how its misuse to measure risk in Credit Default Swaps (CDS) has been a key factor contributing to the current credit market crisis. 

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all d

According to the Economist's Economic Intelligence Unit, Vietnam may have 0.3% economic growth this year. That makes a lot of sense given what is going on in the rest of the world. But it is certainly a slap in the face to Standard Chartered's 5% growth estimate, and official Vietnamese government assertions that things would soon get better.

At a conference in Hanoi this week, estimates were all over the map. But all agreed that the government estimates were too high.  A lack of reliable and timely data was one reason reported for a lack of consistency in estimates.

Believe it or not, the United States is in a relatively good economic state right now. When the rest of the global economy improves, that's when things may start to get really bad for America.

It is ironic that while the fundamental and increasingly desperate state of US finances, debt burden, and economic growth prospects would suggest  a collapse in the US dollar, and the US' ability to borrow, quite the opposite has happened. The dollar has remained strong. And the US has had no trouble borrowing unprecedented amounts and at exceptionally low interest rates.  In a panic, everything is relative, and while bad, everyone else seems worse off.  So there is a flight to the safety of the US dollar, and the one last apparent bastion of security, US Treasury Bills (lending to the US government).  But expect another irony: when things start to look better around the world, investors will have less fear and more alternatives. The dollar will collapse and US interest rates will have strong upward pressure.

Pacific Airline traffic is declining: Delta, the world's largest airline,  said its transatlantic capacity this winter would be down 11 percent to 13 percent compared to the winter of 2008, while its transpacific capacity would be down 12 percent to 14 percent. They are cutting capacity by an additional 10 percent in September following earlier cuts. (REF: reuters.) The number of foreign travelers entering Vietnam by air is reportedly down dramatically in 2009, although cruise ships tours are up (REF: vietnamnet.)

Vietnam's Economy is starting to feel the heat. For a long time the global meltdown had apparently left Vietnam largely untouched.

Even this year some employees of mine complained when I gave them pay raises of only 100% per year. I suspect we will learn that last year's double digit growth in wages has not persisted into 2009.  The real culprit is a lack of information that reflects the increasingly harsh economic reality. The Economist reports that the economy needs about a million new jobs each year just to provide work to new entrants into the economy. Yet last year about half a million workers lost their jobs, and almost as many may lose their jobs this year. That year saw 6.2% economic growth, the lowest rate in nine years. For 2009, the IMF, and many other observers outside the Vietnamese government, believe that economic growth will decline to 5%. Part of the problem is that the government is still trying to cover up the problem, and insists that it can achieve 6.5% growth. Either figure is a big decline compared to last year's government declarations that 2009 would see 8.1% economic growth, and expectations based on 2007's reported growth of 8.5%.

Local consumer demand has collapsed. Sales during the Tet holiday in January were down 50% from the previous year. Car sales were down 68%.  Clearly the downturn is affecting more than just rice farmers and labourers, it is also being felt by the middle class, and the rich (note that a basic car that would cost $25,000 in the US costs almost $70,000 in Vietnam after taxes, duties and shipping).

Vietnam's economic growth has been driven primarily by exports, and sustained by domestic oil resources. Domestic demand has largely contributed to a trade deficit. Yet exports fell by 5.1% year-on-year in the first two months of 2009, with electronic goods down by 13.7% and shoes by 7.3%.

REF: The Economist

Compared to the Global Economy, and the rest of the developing world, Vietnam remains relatively lucky. The World Bank has announced (recognized) that the global economy is likely to shrink in 2009.  Global industrial output could be 15% lower, year-over-year, by the middle of this year. And developing countries will find they have a financing shortfall of about $700 billion this year -- massive growth in rich world (e.g. US) borrowing, and restricted supply, are leaving little left for the economically uninfluential poor of Asia and Africa. REF: BBC

I have a lot of friends and acquaintances who think I am rather smart, even very smart. And with the exception of this post, I'm even considered rather modest. I have an MA in Economics. I've worked as an economist in the Canadian Ministry of Finance and Statistics Canada. I've been paid more than a million dollars as a business and data analyst at Morgan Stanley in Manhattan. But no one ever listens to my financial advice. 

When I've told friends they should sell at least some of their dot com stock, they've hung on, sure it was going to go up to peaks again, instead of down to nothing. When I've told my friends, at just the right times, they should sell their houses and rent, they just tell me there's one more special deal to do, or it is not the lifestyle they want. When I've told them they should get out of the US economy and enjoy the 80%+ returns in India and China, they've ignored me. And when I told them I was selling everything and holding cash, they've stuck with their portfolios. To be honest, I don't really bother anymore. No one listens. But it irks me.

But I do want to point out one unassailable fact for those who never listened. On January 17th, 2008, I sold all my retirement investments and put it in cash (sometimes diversified into multiple currencies). It is what I told anyone who would listen to do. I wasn't giving radical advice, or risky advice (like shorting). If I had been wrong, all I was going to give up was what was clearly going to be modest growth at best. I actually would have done it sooner, but Fidelity blocked trades for weeks while they processed a request to transfer from a 401k to an IRA. That simple, simple, simple little action put my wealth 82% higher today than it would have been if I had done nothing. 

Avoiding a loss may not be sexy, but the counterfactual return I've just quoted is just as real as a gain. In fact, human psychology is such that we feel a loss far more than a missed gain.

A lot of people read this blog. But I think most of my friends rarely do. I rather hope they're not reading this. I know many are suffering. I don't want them to suffer. I want to protect them, like I protect myself. In fact, I want everyone I come in contact with to be ok. I'm not perfect. I'm often wrong, especially about timing (I expected the economy to collapse years ago). But for their own good, I wish people listened more.

So, is this the bottom? Is it time to get back in? I'm sorry to say, but I think we are not even half way through the tough times. However much you have lost so far, there is more to lose.  Look, I hope I'm wrong; but nothing about our economic situation suggests that. About two thirds of spending in the US economy comes from consumers, and they have only just begun to start feeling the real pain of this recession. I don't think every investor really understands that, especially individual investors. This will become clear to them in time, and this will drive stocks, and the economy, even further into negative growth. 

Look, I'm not a financial advisor. This is just advice from someone who cares. Don't blame me if I'm wrong. But there is no way on earth I would buy now, and that means if you have any equities you could probably cut your losses substantially by selling now too. But I'm all too aware of the old adage, "you can lead a horse to water, but you can't make it drink".

In the short run, monetary policy is very important. And especially in the last six months, monetary policy and the  health of the global financial system (i.e. Bear Sterns, high yield debt crisis) have been critical factors in the US, and throughout the world.

In Vietnam, the exchange rate and monetary policy (driven by interaction with commercial banks) seem to be the key risk factors in the economy. But the most visible symptom of trouble is inflation. The Economist writes this week about inflation having reached almost 20% last month (March 2008), up from an already disconcerting rate of almost 16% in February.

Here are a number of discussions on these issues:
 
None of the issues are a surprise (IMF): an economic history of macroeconomic management in Vietnam from 2002 through 2005.

Oil is Vietnam's largest export earner, but also an important source of inflationary pressure. In past years prices had been declining relative to the rest of the world. Recent rapid increases in domestic fuel prices are probably just bringing them more in line with global oil prices and their rapid increases. An IMF presentation does a good job of describing the transmission mechanism in place. The following slide summarizes some of the key mechanisms:

A Japanese economics school provides a brief overview of modeling the Vietnamese macro economy: interest rates and exchange rates are key drives of the Vietnamese economy in an econometric model.

With the US dollar coming under relentless downward pressure against most major currencies, stock markets being hammered, and interest rates driven down by the Fed, it is not easy to justify keeping assets in the dollar if one has the choice to pull out.

Perhaps it would be wise to buy Vietnamese Dong (VND)? The Vietnamese government has set a fixed exchange rate at a level that is almost universally considered much higher than the medium term rate. So profits are built in. But banks are fighting back and doing everything they can to prevent people from buying at the artificially low VND exchange rate (according to The Financial Times):

In the black market, the dong is already trading at around 15,650 to the dollar, around 2.4 per cent stronger than the official exchange rate of 16,037 to the dollar. Banks are also trying to circumvent the exchange controls – some by levying special fees to change dollars into dong, or by converting dollars into third currencies, then converting that into dong.

The black market rate for the dollar on Ha Trung street in Hanoi is quoted at VND 15,800 compared to an official rate of VND 16,054 by the International Herald Tribune on Feburary 28, 2008.

One must also consider the cost of getting money out of Vietnam. There are generally fees of around 3% for converting Dong back into USD.  The existence of export restrictions has led to significant smuggling of money out of Vietnam.

However, Vietnam has its own monetary problems. Inflation in February 2008 was 15.7 percent.  The communist central government is reportedly trying to restrict the money supply in order to fight these inflationary pressures.  But this should cause even greater pressure for the currency to rise against the dollar.

Monetary policy has caused local currency shortages. Investors have had a hard time getting cash out of banks for their massive investments. Remember, in Vietnam, without cheques, and a cash culture, even massive transactions often take place in even more massive piles of physical cash -- only ten percent of Vietnamese have bank accounts. Even individuals have been hurt by the cash crunch, with at least one local bank this week arbitrarily limiting cash withdrawals to individuals to VND 3 million (USD 187).

The Financial Times cites cases:

In one sign of the currency crunch, last week Hanoi was forced to give special permission to Morgan Stanley to pay $217m in dollars for a 10 per cent stake in PetroVietnam Finance Corp, instead of making the payment in dong, as is normally required by law.

Elsewhere, an accountant for a foreign firm tried to convert $30,000 into local currency to pay staff salaries and office rent but was turned away when the bank said it did not have enough dong.

“It’s outrageous,” said a foreign executive, spurned in a recent attempt to convert dollars to dong. “We are going to have to go to the automatic teller machine and draw money out to pay salaries by hand.

And small change has also become strictly limited. Recently, when making a VND 65 million (USD 4,053) withdrawal at HSBC's head office in Ho Chi Minh City, the bank refused to give me any more than VND 500,000 (USD 31) in small VND 5,000 (USD 0.31) bills citing currency restrictions.  The bank would not even let me place an order for small currency to be delivered at some later date, such as a few weeks in the future.  Can you imagine running a business in the US and having your bank flatly refuse to give you more than $30 in quarters, and completely refusing to give you any stock of nickels or dimes?