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Archive for November, 2008

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Consumer Spending Will Not Bounce Back

Posted by Gregg Killoren on November 17, 2008

Nouriel Roubini, Professor of Economics at New York University’s Stern School of Business, has outlined 20 reasons why the recent drop in retail sales (-2.8 percent in October) is not a temporary phenomenon, but rather an early signal of a persistent decline in consumer spending that will drive the United States, and the world, into one of the worst recessions any of us has ever seen.

The analysis can be broken down into three categories: Unsustainable Consumer Debt Ratios; Falling Housing Prices; and Poor Savings Rates.

Unsustainable Consumer Debt Ratios

Professor Roubini writes:

The US consumer is debt burdened with the debt to disposable income having increased from 70% in the early 1990s to 100% in 2000 and to 140% in 2008. Not only debt ratios are high and rising but debt servicing ratios are also high and rising having gone from 11% in 2000 to almost 15% now as the interest rate on mortgages and consumer debt is resetting at higher levels.

Now, add an economic environment where jobs are becoming scarce and the threat losing one’s employment is very real (Citibank just announced an additional 53,000 layoffs today) and the reaction of consumers who owe more than they earn is not hard to figure out—they will stop spending altogether.

Falling Housing Prices

Roubini:

The value of housing wealth is now sharply falling by over $6 trillion as home price depreciation will soon be 30% and reach a cumulative fall of over 40% by 2010. Recent estimates of this wealth effect suggest that the effect may be closer to 12-14% rather than the historical 5-7%. And with home prices falling over 30% about 40% of all households with a mortgage (or 21 million out of 50 who have a mortgage) will be under water (negative equity in their homes) with a huge incentive to walk away from their homes.

Mortgage equity withdrawal (MEW) is collapsing from $700 billion annualized in 2005 to less than $20 billion in Q2 of this year. Thus, with falling housing wealth and collapsing MEH US households cannot use their homes anymore as ATM machines borrowing against them.

The value of the equity wealth of US households has fallen by almost 50%, another ugly wealth effect on consumption.

The credit crunch is becoming more severe as the recent Q2 flow of funds data and the Fed Loan Officers’ Survey suggests: it is spreading from sub-prime to near prime to prime mortgages and home equity loans; and from mortgages to credit cards, auto loans and student loans. Both the price and the quantity of credit are sharply tightening.

The point here is that, in other recessions that we have experienced, falling housing prices made consumers “feel” poorer, so spending declined temporarily.  This time around, consumers really are poorer as a result of falling real estate prices because prices had shot up so high above the long-term trend line during the last few years.  All of the home equity that consumers borrowed against to pay their debts, buy a car, send their kids to college, etc., is gone.  Not only that, but many consumers now owe more on their mortgage than their home is worth.  On top of that, even those who have equity to borrow against cannot get a loan, or to the extent that they can, it is much more expensive to borrow now.

Poor Savings Rates

Roubini:

To bring back the household savings rate to the level of a decade ago (about 6% of GDP) consumption will have to fall – relative to current GDP levels – by almost a trillion dollars. If all of this adjustment were to occur in 12 months GDP would contract directly by 7% and indirectly (including the further collapse of residential and corporate capex spending in a severe recession) by 10%, an exemplification of the Keynesian “paradox of thrift”. If such an adjustment were to occur over 24 months rather than 12 months you would still have negative GDP growth of 5% for two years in a row with a cumulative fall in GDP from its peak of 10% (note that in the worst US recession since WWII such cumulative fall in GDP was only 3.7% in 1957-58). One can thus only hope that this adjustment of consumption and savings rates occurs only slowly over time – four years rather than two. Even in that scenario the cumulative fall of GDP could be of the order of 4-5%, i.e. the worst US recession since WWII. Note that the cumulative fall in GDP in the 2001 recession was only 0.4% and in the 1990-9 recession was only 1.3%. So, the current recession may end up being three times as long and at least three times as deep (in terms of output contraction) than the last two and worse than any other post WWII recession.

The bottom line is that our economic growth during the last 10 years was fueled almost entirely by debt.  Now, in order to restore the U.S. consumer to a net saver, as we should all be, we must endure a great deal of pain.  Our tremendous spending habits have come home to roost, and now the butcher’s bill is due.  The TV talking heads and pseudo-academics benignly refer to this as “deleveraging.”

[SOURCE: 20 Reasons Why the U.S. Consumer is Capitulating, Thus Triggering the Worst U.S. Recession in Decades, Nouriel Roubini, RGE Monitor.com.]


Posted in Economy, Market Commentary | Tagged: , , | 4 Comments »

Economic Roundup (Week of 11-10-08 to 11-14-08): Corporate Earnings Sour; More Job Losses; Treasury Adjusts Goal of TARP; Interest Rates on Bank Deposits Rise

Posted by Gregg Killoren on November 16, 2008

It’s time for another roundup of distressing economic data.  I have upped the usual three categories to four this week if only so that I could report some positive news among the gloom.

Let’s get the ugliness out of the way first.  By now, my readers know that the economy is tumbling into a deep recession.  So it should come as no surprise that corporate earnings are shrinking (Wal-Mart excepted for the moment), unemployment is rising and the Treasury is still trying to figure out how best to spend the money the Congress gave it.  What is alarming, once again, is the speed at which corporations are feeling the effects of sharply reduced consumer and business spending.  In its dismal earnings report, Best Buy noted a “seismic shift in consumer behavior.”  What Best Buy and other retailers are experiencing is a consumer spending freeze that can be directly attributed to the credit market freeze.  If consumers cannot borrow money or must to borrow at higher interests and are concerned about their job security and housing situation because their employers are losing money and cannot borrow money or must borrow at higher interest rates and the values of their homes (if they have not been foreclosed upon) are declining seemingly without end, then practically all economic activity ceases.

Corporate Earnings Headlines

Here is the summary of the overall earnings data:

As of Friday, November 14th:

463 companies in the S&P 500 have reported earnings for third-quarter 2008, 59% of the companies have beaten expectations, 10% were in-line, and 32% missed.
The blended earnings growth rate for the S&P 500 for Q3 2008, combining actual numbers for companies that have reported, and estimates for companies yet to report, fell to -18.4% from -13.9% can be attributed in part to lower than expected earnings from AIG and GM.
On April 1st, the estimated growth rate for Q3 was 17.3%, and by July 1st, the estimated growth rate had fallen to 12.6%. (Data provided by Thomson Reuters)

And now the headlines:

Kohl’s and Nordstrom, two large U.S. retailers, reported sharply lower quarterly profits Thursday and warned of worse-than-expected results for the rest of the year, just weeks before the critical holiday shopping season gets under way.

    Wal-Mart Stores reported a slightly better-than-expected 10 rise in quarterly profit Thursday as shoppers seeking relie…

      Applied Materials, the No. 1 chip equipment maker, warned that profit in the current quarter would fall far short of Wa…

        Data storage maker NetApp reported quarterly results ahead of Wall Street expectations, although most of its customers …

          A hefty tax gain boosted Computer Sciences’ second-quarter net income and the U.S. technology services provider said it…

            Department store operator Macy’s posted a smaller-than-expected loss on Wednesday, and reiterated its forecast for the …

              Best Buy slashed its fiscal 2009 profit forecast on Wednesday driven by weak consumer spending trends heading into the …

                Tyco International warned that fiscal-year profit would be well below Wall Street forecasts because of the economic dow…

                  Brazilian state oil company Petrobras posted a record third-quarter net profit that was nearly double that of a year ea…

                    Procter & Gamble raised its second-quarter and full-year profit forecasts on Monday as it estimated higher-than-expecte…

                      Toll Brothers said Tuesday cancellations rose and traffic fell to record lows as the financial crisis worsened in the l…

                        TJX, which operates the T.J. Maxx and Marshalls stores, says third-quarter profit slipped 5 percent as unfavorable exch…

                          Fewer U.S. customers and venti-sized costs for closing poorly performing stores led to lower sales and profit in the fo…

                            Troubled insurer American International Group posted its largest-ever quarterly loss on Monday, hurt once more by write…

                              McDonald’s on Monday said global sales at its fast-food restaurants open at least 13 months rose 8.2 percent in October

                                Europe’s biggest bank HSBC Holdings said its profit in the third quarter was ahead of a year earlier as growth in Asia …

                                  Fannie Mae, the largest provider of funding for U.S. residential mortgages, on Monday said it lost a record $29 billion…

                                    Nortel Networks reported a large quarterly loss and announced a round of sweeping cost-cutting Monday, from laying off …

                                    Job Losses

                                    The following is from a Bureau of Labor Statistics report on third-quarter 2008 on mass layoffs (keep in mind that the credit market freeze occurred during the third-quarter, so this report reflects only the beginning of what is to come based on how the economy had been deteriorating prior to the total freezing of the credit markets):

                                    In the third quarter of 2008, employers initiated 1,330 mass layoff
                                    events that resulted in the separation of 218,158 workers from their
                                    jobs for at least 31 days, according to preliminary figures released
                                    by the U.S. Department of Labor’s Bureau of Labor Statistics. Layoff
                                    events reached their highest level for the third quarter since 2001,
                                    while separations reached their highest level since 2003. The total
                                    number of layoff events was 312 higher in the third quarter 2008 than
                                    the same period a year earlier, and the number of associated
                                    separations increased by 58,134. (See table A.) Third quarter 2008
                                    layoff data are preliminary and are subject to revision. (See the
                                    Technical Note.)

                                    Both events and separations in the construction industry reached
                                    third quarter program highs in 2008. The number of separations in
                                    manufacturing rose sharply (+32,175) over the year, largely due to
                                    increased layoff activity in the transportation equipment sector
                                    (+12,930).

                                    Among the seven categories of economic reasons for layoff, business
                                    demand accounted for the highest share of events (43 percent) and
                                    number of separations (76,979) in July-September 2008. (See table B.)
                                    The largest over-the-year increases in the number of separations
                                    occurred in layoffs attributed to business demand factors (+27,711)
                                    and organizational changes (+10,533). Within business demand, the
                                    number of separations due to slack work nearly doubled to 41,116,
                                    while in organizational changes, layoffs attributed to business-
                                    ownership changes more than doubled to 11,692. Within financial
                                    issues, the number of workers terminated because of bankruptcies
                                    nearly doubled over the year to 12,156.

                                    Permanent closure of worksites occurred in 15 percent of all
                                    extended mass layoff events and affected 50,025 workers during the
                                    third quarter of 2008. Thirty-one percent of employers reporting a
                                    layoff indicated they anticipate some type of recall, down from 38
                                    percent a year earlier and the lowest third quarter proportion since
                                    2002. Excluding seasonal events, employers anticipated recalling
                                    workers in 20 percent of the layoffs, matching third quarter 2002 as
                                    the lowest proportion for any quarter since data collection began in
                                    1995.

                                    The national unemployment rate averaged 6.0 percent, not seasonally
                                    adjusted, in the third quarter of 2008, up from 4.7 percent a year
                                    earlier. Private nonfarm payroll employment, not seasonally adjusted,
                                    decreased by 0.6 percent (-672,000) over the year.

                                    Here are the reasons given for the layoffs:

                                    Among the seven categories of economic reasons for extended mass
                                    layoffs, events related to business demand factors (contract cancel-
                                    lation, contract completion, domestic competition, excess inventory,
                                    import competition, and slack work) accounted for 43 percent of the
                                    extended layoffs and 35 percent of separations during the third quar-
                                    ter of 2008. (See table 2.) Separations in this category registered
                                    the largest over-the-year increase (+27,711), with those related to
                                    slack work/insufficient demand/nonseasonal business slowdown nearly
                                    doubling. The numbers of workers terminated because of business de-
                                    mand reasons were highest in temporary help services, light truck and
                                    utility vehicle manufacturing, and professional employer organizations.

                                    Seasonal factors (seasonal and vacation period) made up 15 percent
                                    of the extended layoff events and resulted in 38,742 separations, pri-
                                    marily in school and employee bus transportation and in food service
                                    contracting.

                                    Job losses related to financial issues (bankruptcy, cost control,
                                    and financial difficulty) accounted for 13 percent of events and
                                    resulted in 32,812 separations during the third quarter of 2008,
                                    compared with 28,461 separations a year earlier. This increase was
                                    largely due to bankruptcies in full service restaurants.

                                    Treasury Switches Purpose of TARP

                                    This week Treasury Secretary Henry M. Paulson, Jr., announced that the Troubled Asset Relief Program (TARP) would not be used to purchase “toxic” mortgage-backed securities from banks, but rather would now be used to continue to recapitalize banks by buying preferred shares of stock, and thus, taking an ownership position in the banks.  If you are interested in more on this topic, click here for an article at The Wall Street Journal.

                                    Rates on Bank Deposits Rising

                                    Facing increasing competition for deposits, banks are increasing rates on certificates of deposits and other savings accounts to make themselves more attractive.  This is good news, and a pleasant side effect of the credit crisis, for savvy investors looking to escape the volatility of the stock market for awhile, without having to simply stuff their retirement funds under a mattress.  Usually, when the Federal Reserve lowers its overnight lending rates in order to spur economic growth, banks pass on the lower rates to borrowers and simultaneously penalize depositors by lowering rates on the interest-bearing accounts.  However, as The Wall Street Journal reports, banks are in competition with one another to increase their deposit bases in order to shore up their balance sheets.  So, even though we are in a low-interest rate environment, banks are boosting the rates they offer on certain savings accounts.  Anyone who is interested in reading the whole article may link to it here.  Also, be sure to click over to Bankrate.com (under the Blogroll) to check out the latest rates on interest-bearing accounts in your area.

                                    Posted in Credit Crisis, Economy, Finance, Market Commentary | Tagged: , , | Leave a Comment »

                                    G-20 Meeting Focuses on Regulation and Reform, Not Repair

                                    Posted by Gregg Killoren on November 16, 2008

                                    As expected, the unprecedented meeting between the heads of the G-20 countries resulted in a general agreement that the world is indeed in an economic crisis.  However, other than recognizing a need to “provide liquidity” to credit markets, the statement following the meeting was very short on specifics as to how to resolve the crisis.  But as I pointed out in a previous post on the G-20 meeting, the purpose was to begin a dialogue for international cooperation on the crisis (and the need to retain free market principles).  Certainly, the credibility of the United States and our economic principles has been greatly damaged by the reckless use and trading of complex debt instruments.

                                    Therefore, our country must lead the way out of this crisis and convince emerging economies like India, China, Brazil, Argentina, Mexico, among others, that free markets with reasonable regulation are the best path to prosperity.  Participation in the G-20 is a great opportunity for the United States to engage directly with those emerging economic powers, and whatever cooperation can be achieved through the G-20 should be applauded, no matter how small.  And so, I hope that the world markets do not react negatively to the meeting results when trading resumes tomorrow.  If there is a sell-off in equities, then the markets’ expectations were simply misplaced.

                                    Below, I have reproduced a Fact Sheet issued by the White House summarizing the outcome of the G-20 meeting.

                                    President Bush And World Leaders Agree On The Washington Declaration To Address Current Financial Crisis

                                    Today, President Bush and world leaders gathered for the first in a series of meetings to discuss efforts to strengthen economic growth, deal with the financial crisis, and to lay the foundation for reform to help to ensure that a similar crisis does not happen again. Since the outbreak of this crisis, the world’s leading nations have coordinated actions more closely than ever before. Thanks in large part to these decisive measures, once frozen global credit markets are beginning to thaw and businesses around the world are gaining access to essential short-term financing. This problem did not develop overnight, and it will not be solved overnight. No single nation will be able to fix this crisis, but with continued cooperation and determination, it will be solved as long as we are steadfast in our commitment to reforming our financial sectors and maintaining free and open markets.

                                    • Today’s Summit achieved five key objectives. The leaders:
                                      • Reached a common understanding of the root causes of the global crisis;
                                      • Reviewed actions countries have taken and will take to address the immediate crisis and strengthen growth;
                                      • Agreed on common principles for reforming our financial markets;
                                      • Launched an action plan to implement those principles and asked ministers to develop further specific recommendations that will be reviewed by leaders at a subsequent summit; and
                                      • Reaffirmed their commitment to free market principles.
                                    • The leaders agreed that immediate steps could be taken or considered to restore growth and support emerging market economies by:
                                      • Continuing to take whatever further actions are necessary to stabilize the financial system;
                                      • Recognizing the importance of monetary policy support and using fiscal measures, as appropriate;
                                      • Providing liquidity to help unfreeze credit markets; and
                                      • Ensuring that the International Monetary Fund (IMF), World Bank and other multilateral development banks (MDBs) have sufficient resources to assist developing countries affected by the crisis, as well as provide trade and infrastructure financing.

                                    The Leaders Agreed On Common Principles To Guide Financial Market Reform:

                                    • Strengthening transparency and accountability by enhancing required disclosure on complex financial products; ensuring complete and accurate disclosure by firms of their financial condition; and aligning incentives to avoid excessive risk-taking.
                                    • Enhancing sound regulation by ensuring strong oversight of credit rating agencies; prudent risk management; and oversight or regulation of all financial markets, products, and participants as appropriate to their circumstances.
                                    • Promoting integrity in financial markets by preventing market manipulation and fraud, helping avoid conflicts of interest, and protecting against use of the financial system to support terrorism, drug trafficking, or other illegal activities.
                                    • Reinforcing international cooperation by making national laws and regulations more consistent and encouraging regulators to enhance their coordination and cooperation across all segments of financial markets.
                                    • Reforming international financial institutions (IFIs) by modernizing their governance and membership so that emerging market economies and developing countries have greater voice and representation, by working together to better identify vulnerabilities and anticipate stresses, and by acting swiftly to play a key role in crisis response.

                                    Our Nations Will Continue To Take The Right Steps To Get Through This Crisis

                                    The leaders approved an Action Plan that sets forth a comprehensive work plan to implement these principles, and asked finance ministers to work to ensure that the Action Plan is fully and vigorously implemented. The Plan includes immediate actions to:

                                    • Address weaknesses in accounting and disclosure standards for off-balance sheet vehicles;
                                    • Ensure that credit rating agencies meet the highest standards and avoid conflicts of interest, provide greater disclosure to investors, and differentiate ratings for complex products;
                                    • Ensure that firms maintain adequate capital, and set out strengthened capital requirements for banks’ structured credit and securitization activities;
                                    • Develop enhanced guidance to strengthen banks’ risk management practices, and ensure that firms develop processes that look at whether they are accumulating too much risk;
                                    • Establish processes whereby national supervisors who oversee globally active financial institutions meet together and share information; and
                                    • Expand the Financial Stability Forum to include a broader membership of emerging economies.

                                    The leaders instructed finance ministers to make specific recommendations in the following areas:

                                    • Avoiding regulatory policies that exacerbate the ups and downs of the business cycle;
                                    • Reviewing and aligning global accounting standards, particularly for complex securities in times of stress;
                                    • Strengthening transparency of credit derivatives markets and reducing their systemic risks;
                                    • Reviewing incentives for risk-taking and innovation reflected in compensation practices; and
                                    • Reviewing the mandates, governance, and resource requirements of the IFIs.

                                    The leaders agreed that needed reforms will be successful only if they are grounded in a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively-regulated financial systems. The leaders further agreed to:

                                    • Reject protectionism, which exacerbates rather than mitigates financial and economic challenges;
                                    • Strive to reach an agreement this year on modalities that leads to an ambitious outcome to the Doha Round of World Trade Organization negotiations;
                                    • Refrain from imposing any new trade or investment barriers for the next 12 months; and
                                    • Reaffirm development assistance commitments and urge both developed and emerging economies to undertake commitments consistent with their capacities and roles in the global economy.

                                    Posted in Credit Crisis, Economy | Tagged: , | 1 Comment »

                                    A Holiday Market Rally?

                                    Posted by Gregg Killoren on November 14, 2008

                                    It may not seem like it given the recent market volatility, but markets do behave in generally predictable patterns.  After yesterday’s drop to the October lows followed by a furious rally off the lows, the market appears poised for a classic bottom-retest rally that may last anywhere up to about four weeks.  However, while it may be a smart trade to buy stocks now in anticipation of the rally, I would caution not to expect to hold those positions beyond December 15 or when the S&P 500 Index reaches 1000, whichever comes earlier.  While quantitative analysis is useful to determine market timing opportunities, one must never ignore the macro economic environment.  We are still in the midst of a severe recession, and much more bad news is yet to come, probably in January and February.  Contrary to some opinions, this bad news is not “baked in” to the market.  Next year will be very difficult, and the markets may yet crash through the October lows.

                                    Normally, I would have the Economic Roundup for you today.  However, given that there is more news coming out today (such as retail sales for October, which were down a nasty  2.8 percent), I will wait until tomorrow so that I can paint a complete picture of the current environment and adequate discuss what may come next. For now, I have reproduced below Barry Ritholtz’s discussion of the current market posture and the technical reasons for a short rally:

                                    Markets have come increasingly close to their October 10th lows. Contrary to what you may have read or heard on TV, this is precisely as it should be. Why? Major lows get retested. That is a basic tenet of market behavior, and crowd psychology. (This has been verified by a variety of studies by different technicians, economists and traders).

                                    There are a variety of different ways to define the terms, yielding some variations, but the basic outline remains the same: All major sell offs hit a point where markets become so deeply oversold, that a rally ensues. Depending upon how deep the prior sell off is, this rally typically lasts anywhere from 3 to 6 weeks. Our work at FusionIQ shows that these snap-backs typically go for about 4 weeks and average ~24%.

                                    Others have come up with some variations of these findings: David Rosenberg of Merrill Lynch looked at the 12 biggest market bottoms of the past century; he found that 35 days is a good rule of thumb for the length of time for the rally; the subsequent retest lasts a similar length of time.  Justin Mamis developed a variation on this theme of bottom, rally, retest, rally. Ned Davis Research has also written on the subject.

                                    On a closing basis, the SPX is a 3 points above its October 27th low, but 48 points below its October 10th lows. Nasdaq is significantly below the October 10th lows and 5 points below the end of month lows. The Dow is also below the closing lows of October 10th, but above the October 27th close.

                                    Under most circumstances, I prefer to use closing data. However, October 10th was such a significant panic sell off — the Dow freefell 1000 points before snapping back intra-day — that trading, rather than closing prices might be preferred.

                                    On that basis, the Dow and the SPX are above their intraday October 10th lows; the Nasdaq traded slightly below its intraday 10/10 lows, but climbed back over those levels.

                                    The past 30 days saw a move that gained about 18%. We have traded around our October 10th and October 24th buys (which made money) and other subsequent buys (which did not).  While these trades certainly did not capture the full 18%, they have overall outperformed the SPX over the past month.

                                    Hence, we are buyers as markets approach those levels again. The October 10th intraday lows remain our line in the sand as far as trading stops go.

                                    JPM Retest Window

                                    >

                                    Dow Industrials, 3 Month Charts

                                    S&P500, 3 Month Chart

                                    Nasdaq, 3 Month Chart

                                    I also submit the post reproduced below from Bespoke Investment Group for your review.  Note that three of the worst ten years for the stock market were consecutive: 1929, 1930, and 1931.  So, just because 2008 may be one of the worst years ever does not necessarily mean a new bull market next year.

                                    Bypass the Depression and Head Straight for 1907

                                    51WglWku4XL._SL160_ “On Oct. 17, 1907, panic began to spread on Wall Street after two men tried to corner the copper market. In the months preceding the panic, the stock market was shaky at best; banks and securities firms were contending with major liquidity problems. By mid-October, Wall Street was paralyzed; for days, there were runs on several large banks. Millions of dollars were withdrawn, and banks closed their doors.”

                                    Sound familiar?  The above passage is from an article on the NPRs website titled “Lesson’s From Wall Street’s Panic of 1907.”  101 years later, the US economy finds itself in an eerily similar situation, and following today’s lunchtime plunge in the Dow, the index is now closing in on 1907 to be on pace for the index’s worst year ever.

                                    Ten worst years

                                    Finally, here is Professor Nuriel Roubini’s explanation of yesterday’s bounce:

                                    bolsa.jpg

                                    Posted in Economy, Finance, Market Commentary | Tagged: , , | Leave a Comment »

                                    G20 Leaders to Meet This Weekend

                                    Posted by Gregg Killoren on November 13, 2008

                                    The November 15, 2008, meeting between the leaders of the Group of 20 (G20), which is an informal group of finance ministers and central bank governors of 19 countries and the European Union, is widely viewed as the event that will bring about the end of the global recession.  However, that is a dangerous and wrong assumption – one that could trigger a broad market sell-off next week and beyond.  This weekend’s G20 leaders meeting is a beginning.  It is a dialogue between the countries that may be able to resolve the economic crisis.  However, the dialogue is meant to see where the G20 countries have common ground and under what conditions they might agree to coordinate an economic rescue effort.

                                    “People are wondering if their expectations for the G20 are met or exceeded,” said Fumiyuki Nakanishi, chief equity strategist at SMBC Friend Securities in Tokyo. “But there is so much uncertainty at this point.”

                                    To get a sense of what the G-20 expect out of this meeting, one need only look to the communique issued by the G-20 out of its regularly-scheduled meeting last weekend. “We welcomed that the Heads of G-20 countries will convene for a Leaders’ Summit on Financial Markets and the World Economy to be held on 15 November 2008 in Washington, noting that the global crisis requires global solutions and a common set of principles and that the forthcoming summit is an important step in enhancing international cooperation.”  Note, the meeting is “an important step,” rather than a final battle plan for tackling the credit crisis.

                                    One should also note that the G20′s focus is not entirely on ending the current crisis, but also on how to regulate the global financial industry:

                                    “Furthermore, the G20 proceedings argue for the need to improve the supervision and governance of financial institutions, at both national and international levels. In this regard, the G20 argues that we should consider ways of enhancing the identification of systemically important institutions and ensure proper oversight of these institutions, including credit rating agencies. Also, it is important to address the issue of pro-cyclicality in financial market regulations and supervisory systems. Another related issue is the one on the role financial institutions and the fact that they should have common accounting standards and clear internal incentives to promote stability and that action needs to be taken, through voluntary effort or regulatory action, to avoid compensation schemes which reward excessive short-term returns or risk taking. Regulators and supervisors should enhance their vigilance and cooperation with respect to cross-border flows.”
                                    (SOURCE: The G20 Role in the Current Financial Crisis, Vitoria Saddi, Global Macro Economonitor)

                                    The world financial system has long been dominated by U.S. and European influence.  The current crisis may be viewed by some countries as an opportunity to diminish that influence and exert their own.  For that reason, I do not have great expectations for international cooperation on the economic crisis unless some extraordinary bargaining is done.

                                    There is an excellent article chronicling a collection of essays written by prominent authorities about what the G20 should accomplish this weekend by Barry Eichengreen and Richard Baldwin at VoxEU.org.

                                    Posted in Economy | Tagged: , , , | Leave a Comment »

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