Global Investing

Watch the bezzle

  Who is next? After the Madoff and Satyam scandals, rattled investors are looking anxiously over their shoulders for the next big financial fraud.   It is generally assumed that the downturn will expose more wrongdoings - but that doesn’t mean people become more dishonest when the economy is sick. In fact, quite the opposite, according to John Kenneth Galbraith’s definitive 1954 work “The Great Crash, 1929.”   When it comes to embezzlement, it’s all a question of how visible the “bezzle” is, he argues.   Galbraith’s 200-page history of the world’s biggest boom-and-bust has stormed back into the bestseller lists in recent months, giving modern-day readers a glimpse of how speculative markets became divorced from reality 80 years ago and the hazards this created.   His words are as relevant as ever:   At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s businesses and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.   (Reuters photo: Disgraced financier Bernard Madoff is escorted by police as he departs U.S. Federal Court after a hearing in New York, January 5, 2009)

from Africa News blog:

Forgiveness in paradise?

If you lived on an archipelago that defined paradise with palm-fringed white sand beaches and emerald green waters, you would expect a relaxed, lazy pace of life.

Lazy would be a generous description of the Seychellois soldier’s wave at the entrance to State House as I arrived with my local colleague George Thande - who is admittedly a regular visitor here.

The Seychelles were ruled by the French before the British and State House in the capital Victoria is every bit the luxurious colonial mansion: a lush garden exploding with tropical colours; an oil painting of Britain's Queen Victoria hangs in the wood-panelled reception room close to a portrait of Castor, a runaway slave from the 19th century with a fearsome reputation; a Daimler and Rolls Royce are parked on the forecourt.

from MacroScope:

Sssh. Don’t say stimulus

William Safire, the language maven whose musings on how we use words have graced The New York Times and other newspapers for decades, has discovered something about the current crisis. Not for the first time, politicians are scrambling to avoid using common words that might get too close to the truth.

This time the target is the economy, specifically what needs to be done about it. In a column, Safire notes that some Democrats, notably the incoming White House chief of staff Rahm Emanuel, are steering away from using the world "stimulus" when referring to efforts to, er, stimulate the economy. "Recovery" is being used instead. As in, recovery plan.

Who could argue with that? Republicans, apparently. According to Safire, they are favouring "spending", presumably as in spend, spend, tax, tax etc.

Robin Hood in reverse?

Thirty-first U.S. President Herbert Clark Hoover once said: “Blessed are the young, for they shall inherit the national debt.”

Governments around the world are borrowing heavily to finance their fiscal expansion – unprecedented in size and scale – to prevent severe economic downturn.

However, outspoken independent economist Roger Nightingale thinks fiscal stimulus will not work.

To spend, or not to spend?

A day after Britain unveiled a multi-billion-pound fiscal stimulus package to spend its way out of recession, market analysts have been busy figuring out what it all means, in the context of a sharply slowing economy.

Nick Parsons, head of market strategy at nabCapital, has come to this conclusion:

“People need to spend less, not more, and though little Johnny’s Xbox is indeed 4 quid cheaper, his Dad’s house is worth £3.97 less every hour,”he wrote in his daily note.

Are you revolted yet?

Financial markets might be in distress and stocks are falling through the floor, but according to James Montier, global strategist at Societe Generale, we are not in the final stage of bubble burst yet. For one thing, the Financial Times is still too big.

At a fund managers conference in London today, Montier — a renowned bear — noted a thesis by economists Hyman Minsky and Charles Kindleberger that bubbles go through five stages — displacement, credit creation, euphoria, critical stage/financial distress and revulsion.

Currently, he says, financial markets are going through the critical/distress stage but we are not in revulsion yet.

“In revulsion, the Financial Times will be three pages long and we will all be ashamed to be working in finance. Stocks will be unambiguously cheap,” he told a group of financial professionals.

from Pakistan: Now or Never?:

“Plan C” – Pakistan turns to the IMF.

Pakistan has agreed with the International Monetary Fund (IMF) on a $7.6 billion emergency loan to stave off a balance of payments crisis. 

Shaukat Tarin, economic adviser to the prime minister, said the IMF had endorsed Pakistan's own strategy to bring about structural adjustments. The agreement is expected to encourage other potential donors, who are gathering in Abu Dhabi on Monday for a "Friends of Pakistan" conference.

The government had long delayed announcing its plans to turn to the IMF for help and President Asif Ali Zardari said in September the country did not want to seek IMF assistance. Tarin said in October that going to the IMF was "Plan C" if other lenders failed to come through.  "If we want to go to the IMF, we can ... but only as a backup," he said.

A riot of a recession

Every month, the financial services company State Street studies the trillions of dollars in institutional investor money it looks after as custodian and tries to gauge where things stand. Over the years, it has come up with a map consisting of five different regimes, or moods, to reflect this. They range from the bullish “Liquidity Abounds” in which investors buy equities and focus on growth, to the uber-risk averse “Riot Point”.

Guess what? Investors moved into “Riot Point” last month after flipping about for four months in the slightly less bearish but still risk averse “Safety First” regime. This essentially means that they gave up in October – which is not a particularly stunning finding given that many stock markets had their worst performance in decades.

So now comes the bad news. In the 11 years State Street has been drawing its map, the longest period of risk aversion as measured by investors being in “Riot Point” or “Safety First” was the nine months between February and October 2001. This almost exactly coincided with the then-U.S. recession.

Some shock, horror numbers from global stocks

Some mind-boggling numbers from the MSCI all-country world stock index, which is one of the broadest measures of how equity markets are doing and is a benchmark for many institutional investors. The index has some 2,500 companies in it from 48 developed and emerging economies.

First off, it has lost around $15 trillion in value since the end of October last year (graph below). That is more than 21 times the $700 billion U.S. bank rescue plan. It also more than graph.jpgthe annual gross domestic product of the United States. It is more than three time Japan’s annual output and more than four times that of Germany.

Secondly, the speed with which this fall has taken place has been breathtaking by investment standards. It took companies that make up the index about four years to gain the $15 trillion in share value before hitting an all-time peak last November. About a third of the losses since hitting that peak came in a free fall from mid-September to mid-October this year.

Tick, tock to global recession?

Every month, Merrill Lynch asks a few hundred fund managers around the world what they think of the state of things. Not surprisingly, this month’s survey is probably the gloomiest yet. Everyone, says Gary Baker, the strategist charged with explaining the poll, is a macro bear suffering from hyper risk-aversion.

Of particular note for readers of Macroscope this time is the finding that 84 percent of fund managers, more than four in five, say it is likely that the global economy will experience recession over the next 12 clock.jpgmonths. It is actually possible that the figure is greater than that, given the question’s definition of recession as two quarters of negative real GDP growth. That definition is fine for countries, but for the global economy it is a bit nebulous.

At least one should hope so. According to the International Monetary Fund, global GDP should end up having grown 3.9 percent at the end of this year and drop to 3.0 percent in 2009. Blistering growth in places like China may cool, but is still likely to keep the world economy in growth. So many fund managers may have been considering a less specific definition of global recession. The IMF informally used to think of it as below 3 percent growth, for example, but is not so keen on this now.