One had hoped with all the global specialists the patient might at least be out of the ICU (Intensive Care Unit) and have some basic stability of the vital parameters. Despite what the doctors administered the patient seems to have shown only a marginal improvement. While it is difficult to say if the patient is out of danger, the circulatory system which had totally stopped with the heart hardly pumping, has seen some signs of revival, albeit the heartbeat rate/pulse is far from what can be considered as safe. The money markets appeared to melt slightly with LIBOR (London Inter-bank Offered Rate – the rate at which London banks lend to each other in various currencies) with overnight and three month rates starting to ease off. But they are way off from what can be termed as the official rate as indicated by the Central Bank rates. For instance the current three-month dollar Libor remains well above the U.S. federal funds rate of 1.5%.
This is a patient with not only a heart problem. In fact it has been diagnosed to have blood cancer that has spread too many of its organs – including many vital ones. It therefore required fresh blood infusion to even before other basic treatment could be thought of, or provided. We thus saw blood donation in the form of unlimited dollar loans from Fed, European Central banks and the Bank of Japan recently. Sensing that, to address the toxicity of the disease, the patient first needs to survive (be solvent), the US treasury decided to pump in USD 250bn. by way direct stake in many large and small banks. The Swiss central bank too joined in providing capital. It is estimated that more than USD2 trn. has been injected, and no one is sure that how much more infusion may be required.
In the meanwhile many other parts of the body have started showing signs of deterioration and have called for treatment. Hungary and Ukraine were offered financial help by international institutions in an effort to stop both countries following Iceland into turmoil. Others that have been mentioned are Russia, Kazakhstan, Argentina, South Korea, Serbia etc. The list is only going to increase.
One has to understand this situation in context. The patient has been diagnosed of cancer very close to terminal stage and right now the effort is to keep him alive, so that further treatment can be given. This has been achieved by and large. This does not mean that respirator, IV, and monitors have been removed. The condition is still serious and any further mishandling of the situation can cause irreparable damage. Also given the elephantine nature of the patient, the doctors have treated the parts that they thought were relevant to them/were experts in, with some level of coordination. Each of them has announced their own treatment/management plan, which they believe is right under the circumstances. They also need to come together to chalk out a common approach and execution strategy. So chemotherapy has to be administered and if necessary radiation will also have to be given. The frequency and dosage has to be assessed in a coordinated fashion. The pain, suffering & side effects of this treatment are going to be enormous. If the patient does withstand this and come out of it we are lucky. If the treatment and its management turns out to be faulty the patient may be no more with us and may take all of us with him, given the resources we would have spent on him to keep him alive.
The meeting in New York in November of the key world leaders post the American election announced today, is the beginning of the discussion on a coordinated management plan and execution strategy that I have talked about. This execution plan will have multiple players with different view points with local political compulsions. The so called ‘Sinatra doctrine’ needs to be avoided. The only silver lining is that they all stand to vanish if the management & execution is not coordinated with the desired effect i.e. a common enemy they need to fight to avoid extinction.
The environment in which such a plan is to executed is to be understood.
1. Trust in the system is at its lowest….some of the sentiment expressed provide a taste
--- Vladamir Putin was on CNNMoney.com saying that the world has probably lost confidence in Wall Street FOREVER. Forever is a long time. Why have they lost confidence? Because Wall Street and its "investment experts" have been selling fraudulent securities to the American public and to foreign investors for years. And now the game is OVER. The fraud has been exposed.
--- Americans and foreign investors have entrusted their money (and their retirements) to these fraudulent firms for years. Sadly, because of Wall Street's deception and greed, America will FOREVER lose its position as the center of world finance and investment. Why should investors, foreign or domestic, place their money into the trust of Wall Street money managers who have bankrupted their companies, walked away with million dollar salaries and bonuses and are now bankrupting America and the rest of the world?
--- A survey of more than 100 chief financial officers and other senior executives -- conducted Wednesday -- found 56 percent expect to reduce payrolls over the coming year. A majority polled by CFO Magazine also predicted falling revenues and plan to cut operating costs by at least 5 percent.
2. Admission by a senior executive like John Mack Chairman and CEO, Morgan Stanley that a lot more deleveraging is to come.
3. Also the fact that banks around the world have acknowledged $600 billion in losses as part of the financial crisis. The latest International Monetary Fund analysis suggests they still have another $800 billion in losses ahead of them — and a good chunk of them will occur in US.
4. Experts’ opinion that the banks may not use the capital injected to lend but look at possibilities of retiring high cost debt and take further write downs. Further new toxins are being injected daily further postponing lending. If forced to lend given the current condition of the consumers, especially in the western world, possibility of increased defaults is also high.
5. The regulatory system and its related organizations as they exist are going to be increasingly unsure in the wake of the call given by various world leaders –
a. European Central Bank President Jean- Claude Trichet said officials reshaping the world's financial system should try to return to the ``discipline'' that governed markets in the decades after World War II. “Perhaps what we need is to go back to the first Bretton Woods, to go back to discipline,'' Trichet said after giving a speech at the Economic Club of New York. ``It's absolutely clear that financial markets need discipline: macroeconomic discipline, monetary discipline, market discipline.''
b. “Measures should entail a rethink of supervisory rules on markets, banks, mortgage firms, hedge funds and private equity”, European Commission chief Jose Manuel Barroso said.
c. U.K. Prime Minister Gordon Brown called for an overhaul of global financial regulation and an ``early warning'' system to prevent banking crises, setting up a trans-Atlantic clash over world economic management. ``Now we have to create the institutions that are relevant not for national and sheltered economies, but are relevant for the global economy,'' Brown said.
d. Lord Turner of Ecchinswell, who took over as chairman of the Financial Services Authority UK last month said, "When you've been through a crisis like this, it's rather sensible to wipe the slate clean in terms of all your previous assumptions," Regulators should be prepared to engage in a fundamental debate about how to set banks' minimum capital requirements following state banking bail-outs in Europe and the US.
e. French President Nicolas Sarkozy called for regulating rating companies and ``necessary supervision'' for hedge funds. Treatment of tax havens such as the Cayman Islands and Monaco may be overhauled as part of any new global financial framework, he said.
f. Australian Prime Minister Kevin Rudd said credit-rating companies face a ``day of reckoning'' as he blamed ``obscene failures'' for a financial crisis threatening to engulf the world.
g. United Nations chief Ban Ki-Moon has called for “deep and systemic” reforms based on inclusive multilateralism for a global financial system that can better meet the challenges of the 21st century.
One therefore needs to look at a new global social contract – a global new deal, which given the diversity of the players may take some time to be put in place, and then keep changing based on how the power equation and local political compulsions change.
6. Any change in the mark-to-market/fair value accounting standards could have far reaching consequences as commented by an expert:
“The Savings and Loans crisis in the US during the 1980s and the Japanese crisis of the 1990s prolonged for lack of fair value accounting. In both cases, many banks had become insolvent because market values of their assets had fallen below their liabilities.
They, nevertheless, continued to operate because the then-prevailing accounting rules permitted them to hide their losses by recognizing assets at their unrealistically high historical costs. They were therefore solvent according to their reported numbers, which did not reflect their de-facto insolvency. The accounting solvency is one reason that prevented regulators from stemming the loss.”
This is just a sample and I’am sure there are many more such issues to be handled. The point I have been trying to make with cancer patient analogy is that it is not going to be a easy way out and trying to use the contrarian approach of ‘buying when others fear’ may not be prudent at this stage which the legend Warren Buffet has touted through his editorial in last Friday’s New York Times. It may suit an investor like him who can get hedged deals and can talk in terms of billions. For the average investor I would tend to go along with Jeremy Grantham who says the biggest mistake may be buying too soon. But his best comment is to the question:
Do you think we will learn anything from all of this turmoil?
We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term. That would be the historical precedent.
My focus next week will be the Indian Markets. We should hopefully see a short term bounce back of Nifty from the 3000 level this week.
Best Luck.
This is a patient with not only a heart problem. In fact it has been diagnosed to have blood cancer that has spread too many of its organs – including many vital ones. It therefore required fresh blood infusion to even before other basic treatment could be thought of, or provided. We thus saw blood donation in the form of unlimited dollar loans from Fed, European Central banks and the Bank of Japan recently. Sensing that, to address the toxicity of the disease, the patient first needs to survive (be solvent), the US treasury decided to pump in USD 250bn. by way direct stake in many large and small banks. The Swiss central bank too joined in providing capital. It is estimated that more than USD2 trn. has been injected, and no one is sure that how much more infusion may be required.
In the meanwhile many other parts of the body have started showing signs of deterioration and have called for treatment. Hungary and Ukraine were offered financial help by international institutions in an effort to stop both countries following Iceland into turmoil. Others that have been mentioned are Russia, Kazakhstan, Argentina, South Korea, Serbia etc. The list is only going to increase.
One has to understand this situation in context. The patient has been diagnosed of cancer very close to terminal stage and right now the effort is to keep him alive, so that further treatment can be given. This has been achieved by and large. This does not mean that respirator, IV, and monitors have been removed. The condition is still serious and any further mishandling of the situation can cause irreparable damage. Also given the elephantine nature of the patient, the doctors have treated the parts that they thought were relevant to them/were experts in, with some level of coordination. Each of them has announced their own treatment/management plan, which they believe is right under the circumstances. They also need to come together to chalk out a common approach and execution strategy. So chemotherapy has to be administered and if necessary radiation will also have to be given. The frequency and dosage has to be assessed in a coordinated fashion. The pain, suffering & side effects of this treatment are going to be enormous. If the patient does withstand this and come out of it we are lucky. If the treatment and its management turns out to be faulty the patient may be no more with us and may take all of us with him, given the resources we would have spent on him to keep him alive.
The meeting in New York in November of the key world leaders post the American election announced today, is the beginning of the discussion on a coordinated management plan and execution strategy that I have talked about. This execution plan will have multiple players with different view points with local political compulsions. The so called ‘Sinatra doctrine’ needs to be avoided. The only silver lining is that they all stand to vanish if the management & execution is not coordinated with the desired effect i.e. a common enemy they need to fight to avoid extinction.
The environment in which such a plan is to executed is to be understood.
1. Trust in the system is at its lowest….some of the sentiment expressed provide a taste
--- Vladamir Putin was on CNNMoney.com saying that the world has probably lost confidence in Wall Street FOREVER. Forever is a long time. Why have they lost confidence? Because Wall Street and its "investment experts" have been selling fraudulent securities to the American public and to foreign investors for years. And now the game is OVER. The fraud has been exposed.
--- Americans and foreign investors have entrusted their money (and their retirements) to these fraudulent firms for years. Sadly, because of Wall Street's deception and greed, America will FOREVER lose its position as the center of world finance and investment. Why should investors, foreign or domestic, place their money into the trust of Wall Street money managers who have bankrupted their companies, walked away with million dollar salaries and bonuses and are now bankrupting America and the rest of the world?
--- A survey of more than 100 chief financial officers and other senior executives -- conducted Wednesday -- found 56 percent expect to reduce payrolls over the coming year. A majority polled by CFO Magazine also predicted falling revenues and plan to cut operating costs by at least 5 percent.
2. Admission by a senior executive like John Mack Chairman and CEO, Morgan Stanley that a lot more deleveraging is to come.
3. Also the fact that banks around the world have acknowledged $600 billion in losses as part of the financial crisis. The latest International Monetary Fund analysis suggests they still have another $800 billion in losses ahead of them — and a good chunk of them will occur in US.
4. Experts’ opinion that the banks may not use the capital injected to lend but look at possibilities of retiring high cost debt and take further write downs. Further new toxins are being injected daily further postponing lending. If forced to lend given the current condition of the consumers, especially in the western world, possibility of increased defaults is also high.
5. The regulatory system and its related organizations as they exist are going to be increasingly unsure in the wake of the call given by various world leaders –
a. European Central Bank President Jean- Claude Trichet said officials reshaping the world's financial system should try to return to the ``discipline'' that governed markets in the decades after World War II. “Perhaps what we need is to go back to the first Bretton Woods, to go back to discipline,'' Trichet said after giving a speech at the Economic Club of New York. ``It's absolutely clear that financial markets need discipline: macroeconomic discipline, monetary discipline, market discipline.''
b. “Measures should entail a rethink of supervisory rules on markets, banks, mortgage firms, hedge funds and private equity”, European Commission chief Jose Manuel Barroso said.
c. U.K. Prime Minister Gordon Brown called for an overhaul of global financial regulation and an ``early warning'' system to prevent banking crises, setting up a trans-Atlantic clash over world economic management. ``Now we have to create the institutions that are relevant not for national and sheltered economies, but are relevant for the global economy,'' Brown said.
d. Lord Turner of Ecchinswell, who took over as chairman of the Financial Services Authority UK last month said, "When you've been through a crisis like this, it's rather sensible to wipe the slate clean in terms of all your previous assumptions," Regulators should be prepared to engage in a fundamental debate about how to set banks' minimum capital requirements following state banking bail-outs in Europe and the US.
e. French President Nicolas Sarkozy called for regulating rating companies and ``necessary supervision'' for hedge funds. Treatment of tax havens such as the Cayman Islands and Monaco may be overhauled as part of any new global financial framework, he said.
f. Australian Prime Minister Kevin Rudd said credit-rating companies face a ``day of reckoning'' as he blamed ``obscene failures'' for a financial crisis threatening to engulf the world.
g. United Nations chief Ban Ki-Moon has called for “deep and systemic” reforms based on inclusive multilateralism for a global financial system that can better meet the challenges of the 21st century.
One therefore needs to look at a new global social contract – a global new deal, which given the diversity of the players may take some time to be put in place, and then keep changing based on how the power equation and local political compulsions change.
6. Any change in the mark-to-market/fair value accounting standards could have far reaching consequences as commented by an expert:
“The Savings and Loans crisis in the US during the 1980s and the Japanese crisis of the 1990s prolonged for lack of fair value accounting. In both cases, many banks had become insolvent because market values of their assets had fallen below their liabilities.
They, nevertheless, continued to operate because the then-prevailing accounting rules permitted them to hide their losses by recognizing assets at their unrealistically high historical costs. They were therefore solvent according to their reported numbers, which did not reflect their de-facto insolvency. The accounting solvency is one reason that prevented regulators from stemming the loss.”
This is just a sample and I’am sure there are many more such issues to be handled. The point I have been trying to make with cancer patient analogy is that it is not going to be a easy way out and trying to use the contrarian approach of ‘buying when others fear’ may not be prudent at this stage which the legend Warren Buffet has touted through his editorial in last Friday’s New York Times. It may suit an investor like him who can get hedged deals and can talk in terms of billions. For the average investor I would tend to go along with Jeremy Grantham who says the biggest mistake may be buying too soon. But his best comment is to the question:
Do you think we will learn anything from all of this turmoil?
We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term. That would be the historical precedent.
My focus next week will be the Indian Markets. We should hopefully see a short term bounce back of Nifty from the 3000 level this week.
Best Luck.
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