Inflation, the market, govt stimulus and years 2010/2011

Here is an interview with Harvard professor Martin Feldstein, says
that the stimulus is supporting the market rally and that support
runs out by 2010. We may be in a precarious position by 2011.
Ofcourse, I think there is more to it than just the stimulus – the
dollar value, commodity prices, inflation.

LINK:
http://blogs.harvardbusiness.org/tjan/2009/09/the-next-crisis-coming-in-2011.html?cm_mmc=npv-_-DAILY_STAT-_-SEP_2009-_-STAT0929

Why India escaped the financial meltdown

The Indian economy was not as battered as the other world economies in the past year’s meltdown: why?

The answer is simple: government control over the banks and a conservative approach that is focussed on an expanding middle class.

India’s major banks are 75% owned by the central government, and hence they do not own exotic investment portfolios. According to the US Banker, during the meltdown, the indian financial sector ended up with only $500 million in toxic assets: the conservative financial policies set by the government (thanks to former PM Indira Gandhi) saved India.

Having said that, as the Indian middle class further grows from 50 million people to more than 500 million people in 2025, Goldman Sachs projects that the Indian GDP could expand to $28 trillion by 2050 and the per capita income will increase. Indian retail business will get competitive as well, because the domestimc consumer demand will increase as a result of per capita increase.

What will happen: most possibly, the banks in India will need capital and they will have to come out to the public. Government ownership will decrease and eventually, banks will raise money via share offerings. Hopefully, when all this happens, I hope that the India does not step into the steps of US: mindless consumer spending and highly leveraged consumers are no good for any economy.

New Exotic Investments Are Emerging on Wall Street

By: Jenny Anderson
The New York Times

After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.

The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.

Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them. But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.

The idea is still in the planning stages. But already “our phones have been ringing off the hook with inquiries,” says Kathleen Tillwitz, a senior vice president at DBRS, which gives risk ratings to investments and is reviewing nine proposals for life-insurance securitizations from private investors and financial firms, including Credit Suisse .

“We’re hoping to get a herd stampeding after the first offering,” said one investment banker not authorized to speak to the news media.

In the aftermath of the financial meltdown, exotic investments dreamed up by Wall Street got much of the blame. It was not just subprime mortgage securities but an array of products — credit-default swaps , structured investment vehicles, collateralized debt obligations — that proved far riskier than anticipated.

The debacle gave financial wizardry a bad name generally, but not on Wall Street. Even as Washington debates increased financial regulation , bankers are scurrying to concoct new products.

 

In addition to securitizing life settlements, for example, some banks are repackaging their money-losing securities into higher-rated ones, called re-remics (re-securitization of real estate mortgage investment conduits). Morgan Stanley says at least $30 billion in residential re-remics have been done this year.

Financial innovation can be good, of course, by lowering the cost of borrowing for everyone, giving consumers more investment choices and, more broadly, by helping the economy to grow. And the proponents of securitizing life settlements say it would benefit people who want to cash out their policies while they are alive.

But some are dismayed by Wall Street’s quick return to its old ways, chasing profits with complicated new products.

“It’s bittersweet,” said James D. Cox, a professor of corporate and securities law at Duke University . “The sweet part is there are investors interested in exotic products created by underwriters who make large fees and rating agencies who then get paid to confer ratings. The bitter part is it’s a return to the good old days.”

Indeed, what is good for Wall Street could be bad for the insurance industry, and perhaps for customers, too. That is because policyholders often let their life insurance lapse before they die, for a variety of reasons — their children grow up and no longer need the financial protection, or the premiums become too expensive. When that happens, the insurer does not have to make a payout.

But if a policy is purchased and packaged into a security, investors will keep paying the premiums that might have been abandoned; as a result, more policies will stay in force, ensuring more payouts over time and less money for the insurance companies.

“When they set their premiums they were basing them on assumptions that were wrong,” said Neil A. Doherty, a professor at Wharton who has studied life settlements.

Indeed, Mr. Doherty says that in reaction to widespread securitization, insurers most likely would have to raise the premiums on new life policies.

Critics of life settlements believe “this defeats the idea of what life insurance is supposed to be,” said Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute, a trade group. “It’s not an investment product, a gambling product.”

More: http://www.cnbc.com/id/32707038

US-China trade relations

Trade tensions have risen during the financial crisis as exports contract and job losses mount on both sides.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aDaADw2buNgg

  • The U.S. imposed tariffs of 35% on Chinese tires on September 11, 2009, backing a United Steelworkers complaint that came on the heels of the U.S. International Trade Commission’s ruling that Chinese imports were harming U.S. manufacturers.  The Chinese Ministry of Commerce said the tariffs violated WTO rules and retaliated by announcing an investigation into alleged U.S. dumping of autos and chicken. (Bloomberg)
  • August 2009: China lost a WTO ruling on media distribution.  The U.S. complained that China’s requirement that foreign media be distributed through state-owned companies fell short of WTO rules. (WSJ) 
  • June 2009: The U.S. and the E.U. filed their third joint WTO complaint against Chinese export restrictions on raw materials, which they say provide Chinese manufacturers with inexpensive access to raw materials.  China denied the allegation, and said the restrictions were put in place to protect the environment and are WTO-compliant. China called for a WTO probe of US restrictions on poultry imports. (Bloomberg)
  • China previously lost an appeal at the WTO over Chinese duties on auto parts after the U.S. and E.U. complained.  The U.S. called on China to revoke orders for all personal computers equipped with web-filtering software, saying the requirement may be in conflict with WTO obligations. China deferred the requirement in part because of issues with the software. 
  • China is trying to shift exports away from raw materials and toward finished goods, while U.S. manufacturers seek to keep Chinese finished goods out, but import China’s raw materials. However, the focus on the composition of trade does little to alleviate the overall trade imbalance. (FT)
  • China has not signed the WTO Agreement on Government Procurement, and its National Development and Reform Commission issued a decree in May requiring foreign companies to receive contracts for government stimulus projects unless Chinese companies cannot deliver certain technical goods at a reasonable price or time frame.
  • The U.S. stimulus package included a similar “buy American” provision for construction projects as long as they do not violate WTO trade agreements.  Because China has not signed the relevant WTO agreement, Chinese firms can be restricted from stimulus contracts.
  • Brookings: The U.S. has engaged the formal WTO dispute settlement mechanism to manage its bilateral trade tensions with China since 2006.  While this avenue has worked well with U.S.-E.U. trade tensions, “it remains to be seen if China and the U.S. will be able to use the WTO to avoid self-destructing political landmines.” (Global Economy and Development Nonresident Fellow Chad P. Bown, Winter/Spring 2009)
  • As in the past, the most recent U.S. Treasury report in April declined to label China as a currency manipulator, although it believes the renminbi is undervalued. 
  • During his presidential campaign, Obama proposed higher import duties on Chinese imports to compensate for its undervalued currency and dumping, and greater scrutiny of its investment in the U.S.
  • The U.S and China earlier agreed to cooperate on inspection and certification of food and other products following growing concerns about food safety.  China will allow foreign firms to invest in securities joint ventures/issue debt and list domestic market in late 2009. China eliminated tax benefits to foreign-invested enterprises in January 2008. 
  • Upsides for U.S. include rising exports to China on improving Chinese domestic demand, and the Chinese financing of the U.S. deficit.
  • Other contentious issues remain including the trade deficit with U.S. (China surpassed Canada to become top exporter to the U.S.); policy on climate change; and violation of intellectual property rights. Trade with China may lead to cheaper import of goods but also higher commodity prices.  The U.S. has problems with China’s undervalued currency, subsidies for job loss, wage pressure and trade deficits.
  • Source: RGE Monitor

    Bullish on PDE

    Pride International Inc. (PDE)

    http://finance.yahoo.com/q/pr?s=PDE

    Pride International, Inc. provides offshore contract drilling and related services to oil and natural gas exploration and production companies. It conducts operations through the use of mobile offshore drilling rigs primarily on the oil and natural gas basins of South America, the Gulf of Mexico, west Africa, the Mediterranean Sea, the Middle East, and the Asia Pacific, as well as in the United States and international waters. As of February 2, 2009, the company operated a fleet of 44 rigs, including 2 deepwater drillships, 12 semisubmersible rigs, 27 jackups, and 3 managed deepwater drilling rigs. It also offers rig management services on various rigs, such as technical drilling assistance, personnel, repair, maintenance, and drilling operation management services. The company was founded in 1966 and is based in Houston, Texas.