2 posts tagged “interest”

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

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