Posts Tagged ‘economy’
I continue to be of the view that we are in the early stages of a revolutionary period and that the companys which survive will not be the ones that composed the DOW/ FTSE/ Nikkei indexes of the last 30 years. There is a shift occurring and the economic crisis is only a symptom, as global balances shift and move in ways we cannot even comprehend today.
Anyhow, in related news, yet another bastion of the old economy is in dire straits. JAL (Japan Air Lines) began in 1951, first flew to San Francisco in 1954, and in 1987 became 100% public owned. In 2002, JAL took over JAS (Japan Air Systems). 2009 November was their worst financials. JAL stock has dropped from ¥210 to ¥4 today.
Anecdotal evidence suggests that even government employees have been abandoning JAL for competitor ANA recently. Listening to my wife, there is a tremendous sense of patriotism and loyalty to JAL and they have continued to disappoint, yet this is a big day in Japan as they watch this situation unfold.
Out with the old companys and in with the new … banks, are you watching?
JAL’s expected filing for court protection from its creditors is one of Japan’s biggest corporate failures. The government is preparing at least Y900bn ($9.9bn) in new equity and credit lines to keep the airline operating while in bankruptcy.
Researched by Nobuyo Henderson
I was a little surprised to see the UK conservatives support a global bank tax. In any event the amount of the bonus at JP Morgan Chase caught my attention, so I took a look at their capital base. With tier 1 capital of $133 bn, the bonuses represent a significant 7% of capital.
Ironically, the international tax will produce the unintended consequence of reducing capital even more., within the limitations of Basle. It is hard to see how a tax would improve governance and capital retention.
George Osborne, shadow chancellor, said that it was “unacceptable” for banks to be paying large cash bonuses when they should be defending themselves against future disaster. On Friday, JPMorgan Chase, the US bank, kicked off the latest bank reporting season by announcing that it would pay $9.3bn (£5.7bn) in bonuses this year.
"Anders Borg, Swedish finance minister, told the FT that the Americans “have taken a lot of interest” in his country’s stability levy, suggesting some international convergence on the need to insure against the risky behaviour of banks.
This new piece of analysis from NIESR (UK) makes the point based on prior recessions, that 20 – 30 months are left, at a minimum, before we get close to where GDP was before this recession period began. This point gets lots when the only measurement that media speak of is the last quarters +/-. What matters is where we are relative to where we began, and there a long way to go.
Our monthly estimates of GDP suggest that output grew by 0.3 per cent in the three months ending in December, following on from a growth of 0.2 per cent in the three months ending in November. These data show that GDP fell by 4.8 per cent in 2009. This is a bigger fall than in any year of the great depression and is Britain’s biggest contraction since 1921. As the graph below shows, the broader picture of the depression is that output fell sharply for twelve months until March and has not changed very much since then, although evidence of a recovery is starting to emerge.
Figure 1: The Profile of the Depression: Months from the Start of the Depression
Calculated from three-month moving averages of monthly GDP
Despite the general view that Canada and its banks is in relatively better condition that international peers, down side risks remain, and are relatively unchanged since Jun 2009. This statement sums that up, and introduces a key point about this crisis and how little has been done to prevent re-occurrence.
Despite notable improvement in funding markets, funding and liquidity constraints remain an important area of vulnerability. Should a negative shock occur, such as a renewed downturn in the global economy or a loss of investor confidence, funding and liquidity pressures would likely reappear relatively quickly. Improvements in central bank liquidity facilities since the onset of the crisis and ongoing initiatives to support the resilience of core funding markets should help to limit the impact on the overall financial system. “Improving the Resilience of Core Funding Markets” (p. 41) discusses such issues
The Review confirms bank balance sheets have improved modestly, but that consumers have worsened. The concern for consumers is the underlying concern in this report, and their increased debt loads.
The leverage of Canadian banks, already low relative to that of their international peers, has fallen further since June, owing largely to an increase in their capital base from retained earnings. Nonetheless, given their key role as intermediaries between savers and borrowers, Canadian banks remain exposed to the risk of a marked deterioration in economic conditions.
In the June 2009 FSR, the Bank judged that, since the onset of the recession, the risk that substantial credit losses on Canadian household loan portfolios could be a source of stress for the broader financial system had increased, although it remained a low-probability risk. This was illustrated by a stress-testing exercise to assess the effect of a hypothetical increase in unemployment on the financial health of the household sector. While arrears and bankruptcies have continued to rise since June, the start of the economic recovery has reduced the likelihood of this risk materializing in the near term. However, it remains a key source of vulnerability over time, given that the debt-to-income ratio is at historically high levels.
Confederation of British Industry (CBI) have issued this paper. It is a short but useful discussion on what business ought to consider in the UK, but my reading suggests most western economies. It touches on the main categories of concern of business, people issues, environmental, partnerships, supply chain and technology
Here is an excerpt from the Table of Contents, followed by the conclusion.
Download: The shape of business – the next ten years (PDF 2MB) | CBI
The Changing Business Environment
- Changing finance and capital conditions
- The decline of trust in business and markets
- A less benign macroeconomic environment
- Social and demographic change
- Sustainability and resource issues
- Technology trends
The Business Response
- Capital and investment
- Organisation and location
- Governance and sustainability
The next decade will be one of fundamental change for businesses in the UK and the actions business takes will begin to have a significant impact on the shape of the UK economy.
In ten years time, businesses will typically be involved in a range of collaborations, partnerships and joint ventures, supporting investment finance, R&D and innovation, training and new organisational structures. There will be much more rigour in identifying investment and innovation projects for funding and businesses will have outsourced the next level of activities, including many specialist tasks. The workforce will be more diverse, highly flexible and mobile, making the most of new ways of working and using more business-relevant professional skills. This will leave organisations focused on a smaller core of people and projects, supported by a much wider range of individuals and businesses around the periphery. Building and maintaining trust with business partners and the public will become critical to the smooth operation of these structures, and compliance with governance and sustainability standards will be a major objective. Effective management will be the key determinant of survival and success.
These changes will have a range of implications for the UK economy, which have been highlighted in the previous section. Taken together, we identify the following as the main areas of concern and opportunity:
- In the short term, the UK will see slower (but more sustainable) growth and a longer climb out of recession, with elevated unemployment for an extended period, and the socio-economic consequences this will bring
- An increased number of burdens coalescing on business at the same time will increase business costs, reducing profits and tax revenues
- Until new systems of governance, collaboration, risk management and SME financing come into place, and start to work effectively, businesses are likely to miss opportunities for more radical innovation and the UK may fall behind some of
- its competitors
- But, by the middle of our five to ten-year time frame, these same systems will make the UK more productive and competitive and our expertise in implementation will be valuable in its own right
- New business structures, new ways of working and new relationships with employees will make businesses even more flexible and this will enhance what is already our most important competitive advantage
- Towards the end of the decade, some key aspects of the UK economy may ultimately fall under the control of overseas governments, and as market opportunities shift, current prominent businesses in both services and manufacturing may move substantially overseas.
Gillian Tett voices her concerns here, based on background discussions with bankers. We are not out of the woods yet, despite the equity markets.
Yet, if you talk at length to traders – or senior bankers – it seems that few truly believe that fundamentals alone explain this pattern. Instead, the real trigger is the amount of money that central bankers have poured into the system that is frantically seeking a home, because most banks simply do not want to use that cash to make loans. Hence, the fact that the prices of almost all risk assets are rallying – even as non-risky assets such as Treasuries bounce too.
In the meantime, it is crystal clear that the longer that money remains ultra cheap, the more traders will have an incentive to gamble (particularly if they privately suspect that today’s boom will be short-lived and want to score big over the next year). Somehow all this feels horribly familiar; I just hope that my sense of foreboding turns out to be wrong.
In the regular Monetary Policy Report the Bank of Canada keeps their focus on a low interest rate environment right through 2010.
On inflation the view is mixed …
The main upside risks to inflation relate to the possibility of a stronger-than anticipated recovery in the global economy. A stronger global recovery would be transmitted to Canada via trade, financial, confidence, and commodity price channels. There is also the risk that Canadian domestic demand could be more robust and have a more sustained momentum than projected.
On the downside, a stronger-than-assumed Canadian dollar, driven by global portfolio movements out of U.S.-dollar assets, could act as a significant further drag on growth and put additional downward pressure on inflation. Another important downside risk is that the global recovery could be even more protracted than projected if self-sustaining growth in private demand, which will be required for a solid recovery, takes longer than expected to materialize.
Worldwide consumer demand rejuvenation is not assumed in the near term …
Vigorous and coordinated fiscal and monetary policy stimulus in the G-20 economies, including a wide range of measures to support the fl ow of credit, have been sustaining aggregate demand, but evidence of self-sustaining private demand remains modest. Necessary adjustments on both the real and financial sides of the global economy are under way, and will involve a significant and protracted rotation of global demand, as well as deleveraging by U.S. and European banks, households, and firms.
Canadian consumer confidence is very real estate focussed due to affordability.
On capacity …
After reviewing all the indicators of capacity pressures and taking into account the weakness in potential output associated with the ongoing restructuring in the Canadian economy, the Bank judges that the economy was operating about 3 1/2 per cent below its production capacity in the third quarter of 2009, in line with the July projection.
This chart is worrisome though, begins to sow seeds of doubt. Consumer credit is growing but business credit is lagging. Consumers are increasing mortgage debt but not purchasing ‘things’ – (sound familiar – 2007?)
On money supply enormous growth, but suggestions the money is being parked – i.e. low velocity of money suggesting low prospect of near term inflation.
The monetary aggregates have continued to grow strongly. In the three months to August, the narrow aggregate M1+ grew at an annual rate of 18.2 per cent, while M2++ grew by 7.0 per cent. It is diffi cult to assess the implications of monetary expansion for economic activity, since the demand for money is likely to be abnormally high in an environment of very low interest rates and tight credit conditions. The continued robust growth in narrow money reflects the desire of both households and firms to keep money in liquid assets until it is clear that the economic recovery is taking hold. Consistent with our base-case projection, the growth in money balances is expected to gradually decline over time.
On GDP – this is a very clear depiction that consumer spending has been replaced by government spending, and that won’t change consequently until 2011. The other factor also noted here is that currency shifts and changes in imports/ exports will be the real next thing that determines each country’s economy
On consumer confidence 2 …
In the wake of a short, severe recession, and with residual economic uncertainty, the personal savings rate remains elevated over the projection horizon.
Monetary Policy Report Oct 2009 mpr221009.pdf
I thought this a particularly succinct view of the next 10 years view prospects for banks and their business planning.
The view from New York | Buttonwood/ Economist
The bearish view came from Josh Rosner of Graham-Fisher. Mr Rosner was one of the first analysts to spot the potential havoc caused by the interaction between subprime mortgages and structured products like CDOs. He thinks the economy will not rebound as it did in the 1980s. Demographic trends are not as favourable (the baby boomers were entering their prime earning period in the 1980s; now they are retiring); while credit card use was about to explode (now it is contracting). He argues that small businesses, a key source of job creation are still being denied credit; one problem is that small businessmen can no longer afford to use their houses as collateral.
It is with some relish I see Mervyn King agreeing with me from last February.
King calls for break-up of banks | FT – Oct 2009
Mervyn King, governor of the Bank of England, called on Tuesday night for banks to be split into separate utility companies and risky ventures, saying it was “a delusion” to think tougher regulation would prevent future financial crises.
The Great Unwinding | part 1 of 3: 2009 – 2012 | The Bankwatch – Feb 2009
This will effectively split the financial community into two distinct sets:
- financial utilities – significant operating restrictions in light of implicit and explicit government guarantees underpinning the business
- risk takers – not clearly defined as yet – will be dependent on regulation applicability
I expect my commission cheque is in the mail.
Full Text of King speech at in Edinburgh on 20 October 2009: speech406 pdf
Edit: King provides attribution to John Kay here written Sept 09.
In this piece at the NY Times, Krugman points out the obvious that despite profits, Banks’ retail operations have not recovered. The large profits we are hearing about are all centred in the Investment Banking units.
I would add that it will take more than a turnaround in consumer confidence and reduction in unemployment. It will also take time to work through the de-leveraging impacts of consumer desire to reduce debts and save more for future crises while this one is firmly in peoples minds. For everyone who is still working they know of someone who is not, and that memory takes time to erase.
But there’s an even bigger problem: while the wheeler-dealer side of the financial industry, a k a trading operations, is highly profitable again, the part of banking that really matters — lending, which fuels investment and job creation — is not. Key banks remain financially weak, and their weakness is hurting the economy as a whole.