date Dec 20, 2008 2:29 AM
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How far can we see and what can we make out of past....
1. There was an era from 1990 to 2006 when Japanese economy experienced worst ever financial crisis and recession as well. Japan used this worst phase in making its clearing and settlement systems, corporate governance, laws, reporting, monitoring and online markets strong and transparent.
2.This period saw japan strengthening its banks, recapitalising and consolidating its banking. During the same period debt padding was given to the economy and worlds largest debt market was created. Government in the last two years have started redemption's and also reduced short term issuance T bills.
3.Zero rate policy along with such structural changes saw international banks started borrowing heavily in yen which is known as carry trades.
Yen has strengthened and is back to 1995 levels. In fact, last year, many banks in India were selling Knock out deals with yen at 87. Now that the yen is going to go below 87 just like companies lost heavily last year when bankers sold Swissi(CHF)with knock out at 1.2 to 1.6 levels. I remember having not going for the deals and asking for 77 levels.
The yen traded at 89.03 to the dollar in Tokyo Friday afternoon, compared with 89.48 in New York late Thursday. Earlier in the week the yen hit 87.11 to the greenback, the weakest level for the dollar since July 1995.
Rx
4. American economy though in terms of structural changes are fast and robust, the insurance of NYSE trades itself will be at stake as the whole USD settlements takes place through NYSE. This contingent liability and contingent liability arising out of Stock /Commodity exchanges will eventually be so high that in case systems go burst, the losses will not be met even by the US Govt.
5. The process of settlement and actualisation has begin and that now FED and banks have understood that worst is over and now they can work on passing the entries and creating the securities against the bad debt which eventually they will write off and finally they will have to earn to repay the debt to get back to capitalism and make themselves private.
6.In fact the outflow of money from USA in USD will be higher now as the returns will have to be made for CEO's to be intact. The dual job of cleaning the balance sheet and doing the business will call for cautious approach and reduced top line pressures.
7.Contingent and of the balance sheet transactions will have restrictions for times to come and capital protection and safe prudent hedging will be practiced.
8.Depreciation of the dollar will be good for the industry and the dollar denominated goods in other countries will be cheaper and accordingly.
9.As commodity and crude prices have fallen like dry leaves, inflation has come down world over, china reduced oil prices by 32%, India by 10% and it is expected that with such cuts, sectors like housing, real estate, automobile , fmcg etc are going see price cuts. These price cuts will eat away the super natural profits and to that extent the bottom line will get impacted. But at the same time this seems to be more realistic and sustainable.
10. This gives a signal towards price discovery and growth phase in the Asian continent on account of heavy dependence of western world for technology, intellect, people and markets.
11.The thought of BPO/ITES not doing well doesn't augur well as more and more companies will find means of shifting support operations to third world or hiring them at reduced rate there in US and Europe. Either ways the industry will benefit.
12.The spiralling effect will have an impact in the countries like India where the impact of the correction is still not quantified and the banking sector seems to be healthy.The restructuring of the loans and fresh loans cannot go for long and banks simply cannot give moratorium to every borrower. The mismatch of expectation at this stage is felt in the banking system.
Road ahead...It might take couple of years /may be many couple of years more for the US economy to recoup the burden of bad debts and securities backed by bad debts with zero return, unless the consolidation, re channelising of the efforts and strategies take place.
Food for thought series,
Happy Investing!
mailed-by gmail.com
How far can we see and what can we make out of past....
1. There was an era from 1990 to 2006 when Japanese economy experienced worst ever financial crisis and recession as well. Japan used this worst phase in making its clearing and settlement systems, corporate governance, laws, reporting, monitoring and online markets strong and transparent.
2.This period saw japan strengthening its banks, recapitalising and consolidating its banking. During the same period debt padding was given to the economy and worlds largest debt market was created. Government in the last two years have started redemption's and also reduced short term issuance T bills.
3.Zero rate policy along with such structural changes saw international banks started borrowing heavily in yen which is known as carry trades.
Yen has strengthened and is back to 1995 levels. In fact, last year, many banks in India were selling Knock out deals with yen at 87. Now that the yen is going to go below 87 just like companies lost heavily last year when bankers sold Swissi(CHF)with knock out at 1.2 to 1.6 levels. I remember having not going for the deals and asking for 77 levels.
The yen traded at 89.03 to the dollar in Tokyo Friday afternoon, compared with 89.48 in New York late Thursday. Earlier in the week the yen hit 87.11 to the greenback, the weakest level for the dollar since July 1995.
Rx
4. American economy though in terms of structural changes are fast and robust, the insurance of NYSE trades itself will be at stake as the whole USD settlements takes place through NYSE. This contingent liability and contingent liability arising out of Stock /Commodity exchanges will eventually be so high that in case systems go burst, the losses will not be met even by the US Govt.
5. The process of settlement and actualisation has begin and that now FED and banks have understood that worst is over and now they can work on passing the entries and creating the securities against the bad debt which eventually they will write off and finally they will have to earn to repay the debt to get back to capitalism and make themselves private.
6.In fact the outflow of money from USA in USD will be higher now as the returns will have to be made for CEO's to be intact. The dual job of cleaning the balance sheet and doing the business will call for cautious approach and reduced top line pressures.
7.Contingent and of the balance sheet transactions will have restrictions for times to come and capital protection and safe prudent hedging will be practiced.
8.Depreciation of the dollar will be good for the industry and the dollar denominated goods in other countries will be cheaper and accordingly.
9.As commodity and crude prices have fallen like dry leaves, inflation has come down world over, china reduced oil prices by 32%, India by 10% and it is expected that with such cuts, sectors like housing, real estate, automobile , fmcg etc are going see price cuts. These price cuts will eat away the super natural profits and to that extent the bottom line will get impacted. But at the same time this seems to be more realistic and sustainable.
10. This gives a signal towards price discovery and growth phase in the Asian continent on account of heavy dependence of western world for technology, intellect, people and markets.
11.The thought of BPO/ITES not doing well doesn't augur well as more and more companies will find means of shifting support operations to third world or hiring them at reduced rate there in US and Europe. Either ways the industry will benefit.
12.The spiralling effect will have an impact in the countries like India where the impact of the correction is still not quantified and the banking sector seems to be healthy.The restructuring of the loans and fresh loans cannot go for long and banks simply cannot give moratorium to every borrower. The mismatch of expectation at this stage is felt in the banking system.
Road ahead...It might take couple of years /may be many couple of years more for the US economy to recoup the burden of bad debts and securities backed by bad debts with zero return, unless the consolidation, re channelising of the efforts and strategies take place.
Food for thought series,
Happy Investing!
2 comments:
Well written, China and India shall drive the world economy and American and European ecomoies will be even more dependent on the third world countries.
-USA: An economy with super gigantic size propelled by over-extended consumption. Nearly 75% of the economy is consumer driven. The difference in size between first and second in the world (USA and Japan) is more than 100%... This difference in economic size has only increased over the last thirty years... What kept this unsustainable growing was the simple equation: Americans consumed more than they produced and finally borrowed to keep that ever GROWING appetite alive.. Both at the private and state level debt has become a way of life.. But what is debt? Its a draw on future earnings...From where will the earnings come from.. Americas are overpaid, so as workers are uncompetitive (so not much of help from remittances)... Americans have only shipped out industries and services to all over the world (So little room for major Job creation and wage increase).... All this while gap was being fulfilled by the financial sector. The financial sector became the only and gigantic sector, contributing in a big way to employment and wealth creation)... The phony wealth creation through stock market bubble and then through credit bubble, created an illusion of permanency... Americans then borrowed on that phony wealth to keep their standard of living alive.... So now all that phony wealth is disappearing and the country is standing in front of a MAJOR AND PRO-LONGED ADJUSTMENT.. Comparing the US with Japan will be flawed on bot in terms of degree of importance in both political and economic way to the World and also in terms of current global landscape.... I presume only a handful of analysts are trying to asses that, most are making the ANALYSIS THEIR ASSUMPTION BU SAYING " AS THE US ECONOMY STABILISES, ..... " IN MY COMMON SENSE ANALYSIS I SEE THIS AS THE BEGINNING OF THE WAY AMERICA IS IN THE WORLD....
CHINA: The problem with China is over-investment and under investment. So when their govt. says that they will spend another 0.5trillion, I don't understand how that could solve... So China is going face deflation in their economy in 2009... Only when they adapt to a more leaner US economy, will they be able to emerge stronger...
EMERGING MARKETS: Most of them are commodity producers.. So they are going to face not only economic issues but also social unrest...
INDIA: As a country we need are under-invested so channeling More funds into investment is a welcome step but ..
INDIA HAS MADE MAJOR OVER-INVESTMENT IN THE CONSTRUCTION INDUSTRY.. BOTH RESIDENTIAL AND COMMERCIAL AND ALSO CONSUMER CREDIT.. A stress from that side will immediately choke fund flows to other important sectors of the economy. Banks,which look healthy, will be facing MAJOR ASSET QUALITY PROBLEM IN THE DAYS TO COME....
CONCLUSION: THE ADJUSTMENT PROCESS THAT IS ON IS A NATURAL CORRECTIVE PROCESS, DECADES OF BAND-AID POLICIES ARE NOW OVER, WHAT WE FACE IS WORLD THAT WILL EMERGE STRONG AND VIBRANT... BUT TILL THAT TIME WE NEED TO KNOW HOW TO PLAY THESE TSUNAMI'S....
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