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Thanong
Thanong Khanthong
Permalink : http://blog.nationmultimedia.com/thanong
Wednesday , January 23 , 2008
Big US Rate Cuts
Posted by Thanong , Reader : 582 , 09:43:11  
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Wednesday, January 23, 2008

The US is in deep trouble

The US Fed Reserve has cut the target for the Fed Funds Rates by 75 basis points to 3.50 per cent. It announced the steepest cut in 23 years an hour before the US markets opened on Tuesday for trading. The Fed's move has arrested a plunge of the global equities over the past week.

The question is whether the US Fed is trying to save the US economy or the US financial markets? This is not easy to address.

DBS Group Research (January 23, 2008) said: "While there is little doubt that the outlook for growth remains weak, it is by no means clear from the incoming data that risks have increased of late. The Fed’s move is aimed at calming financial markets, in particular, it would seem, equity markets. Global stock market indices have fallen in near-panic fashion by between 5%-20% over the past week, mostly since Friday."

Now the financial markets have been so integrated into the real economy that it is almost impossible to separate them from each other. Events or panic in the financial markets could infect the real economy via consomer confidence and investors' willingness to finance risk.

However, if the US equities do not reflect the fundamental value -- due to bubbles in the subrime loan market which have burst -- should the Fed allow the equity prices to adjust downward in their natural course? 

DBS Group Research said: "But the line between the Fed’s explicit mandate – balancing growth and inflation – and the risks presented to that mandate by financial market developments is becoming increasingly blurred, particularly whenthose developments are occurring mainly in equity markets. It is one thing tounclog money and other interest rate markets to make sure the “plumbing” works for the economy as a whole. It is quite another to attempt to shore up equity

If the US economy is to weaken further, it would be better off to cut the rates sooner rather than later. If the economy fares better than expected, the Fed can retract the cuts.

We'll see whether Bernanke is the man who saves the US economy, if not the world economy.

**************************************************************************************************

Dr Liap might not be the man of this hour

Can Dr Liap handle the financial markets with a good sense of understanding and sharp decisions? If he were to really be appointed as finance minister, how should he handle the Thai financial markets, restore confidence and put the Thai economy back on track?

If Dr Liap does not see through the whole structure of the complicated functions of the financial markets and the economies, he should not take up this job. People in the financial markets mostly do not think that he can handle the job. There won't be any time for the honey moon. The new finance minister must be able to work on day one.

Will Thaksin change his mind over Dr Liap's appointment as finance minister? At this point, Dr Surapong Suebwonglee is set to become finance minister. Already, the global financial market jitters, which significantly affect the Thai market and economy, are putting the next finance minister to a big test.

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Khun Paisarn, our fortune man

I have received a brief note written by a foreign analyst in Bangkok. He visited a fortune man, who ventured to predict the Thai politics and the prospects of the market. Here it goes:

We paid a visit to the home office of our long standing Thai fortune teller, Khun Paisarn. This cheery man had lots to say about the future for Thailand.
  He banged away on his machine and came out with a zig zig of a year.
Political turmoil will finally come to an end
    Khun Paisarn felt that after two years of trouble Thailand’s political turmoil is coming to an end.
      His strongest prediction (or as we say high conviction!) was that the People’s Power Party (PPP) will definitely form the next government.
      His next strong prediction was that PPP leader Samak Sundaravej will be a successful prime minister for two years, thanks to his skills at delegating.
Will Mr. T return? Most definitely
      Khun Paisarn seemed convinced that former Thai Rak Thai party leader and Prime Minister, Thaksin Shinawatra, will return to Thailand.
       Mr. Thaksin will win some and lose some of the cases against him, but will return to politics in two years time.
       Khun Paisarn seemed strong in his view that Democrat party leader Abhisit Vejjajiva would have to wait four to five years to lead.
Consumption will return and the market will zig zag
       Consumption and investment (esp foreign direct investment) will lead Thailand out of its current doldrums.
       Now is a good time to buy Thai shares, though expect a peak in May; in June/July we will have good performance, but investors should be cautious of Aug/Sept. The index will do well after Sept, but investors should exit the market by Dec 5 2008.

 Khun Paisarn recommends a positive stance on energy and materials.

Read comment

comment 8
Dalmasian date : 04/02/2008 time : 23.10

This article appeard in today's (Feb 04, 2008) edition of the Bangkok Post Online.

Link: http://www.bangkokpost.com/Business/04Feb2008_biz25.php

QUOTE

ECONOMY / NOBEL LAUREATE'S VIEW

US stimulus package unlikely to help much

By: CHIRATAS NIVATPUMIN and PARISTA YUTHAMANOP

Japan launched many stimulus programmes in the 1990s to no avail, says Prof Kydland.

The US government's $156-billion stimulus package is likely to have little impact on the slowing US economy, according to Prof Finn Erling Kydland, the 2004 Nobel laureate for economics.

''Everything I know about economics, suggests that a temporary change [in household income] won't do much,'' he said in an interview in Bangkok.

''Consider Japan, whose economy did very poorly through the 1990s. They launched package after package of stimulus programmes, and it did nothing.''

Prof Kydland, who received the Nobel prize for research on business cycles and macroeconomic policy, was equally critical of the Federal Reserve's move to cut interest rates in mid-January. ''Cuts by the Fed were inevitable. But it looked suspicious, to call a separate meeting out of sync with its schedule. ... The timing looks bad that the 75-basis-point cut was to try to save the stock market. And that's not their business,'' he said.

The Fed was already ''clearly behind the curve'', as the reduction in the Fed Funds rate only brought rates into balance with short-term market rates.

On Jan 22, the Fed made its biggest rate cut in 23 years in an emergency meeting held in the wake of massive global market volatility over a possible US economic recession and growing losses from the sub-prime crisis. The Fed last week followed with another 50-point cut, bringing the Fed Funds rate _ which governs overnight lending between banks _ to 3%.

Prof Kydland said the move raised questions about the credibility of monetary authorities.

''If the Fed provides an environment of stable inflation, that's the best they can do,'' he said. ''Growth is not the role of monetary policy. Economists are having a hard time finding a link between monetary policy to real aggregates. Even if it does have an effect. ... It would be negative in the long run.''

Real interest rates fluctuate in theory with the economic cycle, he said.

''For the Fed, there's much that it can do to affect real rates,'' he said. ''It can affect inflation premiums. But its role is to keep this stable.''

Prof Kydland is in Bangkok as part of the Bridges programme, an initiative sponsored by the International Peace Foundation. He will speak today at the University of the Thai Chamber of Commerce in an address titled, ''Peace and Economic Development in the Age of Globalisation''.

UNQUOTE

I wonder why The Nation Online did not carry the article?
comment 7
Dalmasian date : 30/01/2008 time : 00.37

Ian, you are correct in saying that the Wall Street moguls and the Republican politicians are in bed together. Yes, they all belong to the same club. They contributed heavily to the Republican Party's war chest during election time, and so they expect the Republicans to come to their rescue in time of need like these.
Quite frankly, the current credit crunch situation was created by these very same greedy investment bankers who are now crying all the way to Capitol Hill. They were the ones to invented these CDOs and derivatives instrument and misrepresented the elevated risks involved in them to unwary buyers of these notes.
Merrill Lynch is one of the largest issuers of these instruments and it looks like they were caught holding a big portion of the unsold units that they issued. Goldman Sachs was smarter. They also issued a lot of these but apparently were able to sell them all and then turn around and shorted them in the market. Now you see how dirty these liars are?
Anyway, I just read this article in the MarketWatch.com web site today (link -- http://www.marketwatch.com/News/Story/Story.aspx?column=Irwin+Kellner) where Dr. Irwin Kellner also opined about Washington's stimulus package is the wrong prescription for the current market situation.

Quote:

Washington's stimulus won't help the economy
By Dr. Irwin Kellner, MarketWatch
Last update: 6:14 a.m. EST Jan. 29, 2008
PORT WASHINGTON, N.Y. (MarketWatch) -- Washington's cure for our ailing economy is not the panacea policymakers think it is.
For one thing, the $1,200 rebate (plus $300 for each child) that some 117 million households will receive under the current plan pales by comparison with the losses that most have sustained from the decline in home values and stock prices.
Average prices for existing homes fell over 6-1/2% in December from last year's level and are still declining. This alone is a loss of $14,000, not counting the drop from peak levels a year or so earlier.
And while the stock market has bounced off its recent lows, it is still far below its October 2007 high, suggesting additional losses in wealth for those households that have investments in equities.
For another, there is no stipulation that these tax rebates must be spent this year -- or next year, for that matter. That being the case, many recipients may well use these funds to pay down debt and/or to bolster their savings.
Here's another point to ponder: a lot of goods that people buy nowadays come from overseas. Thus the effect of any increase in spending that these rebates might generate will not be all that large.
As for business, even though companies must invest in new equipment this year to get a special tax break in the form of an increased depreciation write off, the record shows that lowering the cost of capital won't stimulate such investments if the demand for their products does not justify it.
As you know, the slowdown in overall economic activity means that the demand for most goods and services that industry produces nowadays has declined.
There are two more points to note regarding business spending:
1. For over a quarter of a century, all the increase and then some in capital spending has been for equipment; spending on bricks and mortar (factories, office buildings, shopping centers, warehouses, etc.) is down nearly 15%, adjusting for inflation. Since most equipment comes from abroad, the economy does not get the benefit of such expenditures.
2. In addition, this new equipment is usually purchased with the intent of boosting productivity. So besides not helping our domestic economy, this new equipment might very well result in actual job losses.
On the monetary side, neither lending nor borrowing is likely to jump as a result of lower interest rates.
As I observed in my column of Dec. 11, we have fallen into a liquidity trap similar to the one we encountered back in the 1930s, when the banks were reluctant to lend and borrowers would (or could) not borrow. See earlier column here.
Additionally, those who have savings will find that they will get lower interest on their deposits.
At any rate, neither fiscal nor monetary stimulus can address the real problem our economy faces today: too many homes for sale at prices potential buyers cannot afford.
Until prices fall low enough to make these homes affordable, housing will continue to drag down the economy. And while home prices are searching for a bottom, the value of mortgage-backed securities will remain in flux as well.
This means that the credit markets are likely to remain frozen for some time to come.
Irwin Kellner is chief economist for MarketWatch.

Unquote

Have a nice day!
comment 6
Ian date : 28/01/2008 time : 10.34
http://blog.nationmultimedia.com/anterian36

Dalmasian, "Wall Street moguls who caused the current credit crisis should be prosecuted and their companies forced to pay for the damages done instead of the Fed coming to the rescue and bailing them out.'
But are these people not the true governments of most western countries, particularly America?
A multinational by definition has no national loyalty, it is only loyal to its shareholders.
comment 5
Dalmasian date : 27/01/2008 time : 13.48

The US Federal Reserve is now the greatest stock manipulator of all time. It used to be that the Fed was the guardian of the value of the US currency and the primary defender against inflation in the good ole US of A. But not anymore. The Fed is now being used as a political tool by the incumbent Republican government under the super fiscally irresponsile cowboy of a president called Bush. To hell with the US dollar. If it tanks, so be it!

Last Tuesday's surprise cut in the Fed fund rate by 0.75% marked the steepest interest rate cut in one single day by the US Federal Reserve, which was unthinkable in the past. Such an action can and did caused a temporary change of sentiment by market participants, whose knee-jerk reaction practically reversed the initial 600+ points drop in the Dow Jones index futures market. This was followed by 2 days of market index increases until the momentum run out of steam and reality onces again set into the minds of Alzeimer disease-infected speculators, hedge fund managers and so-called investors alike.

And this latest interest cut was made in the midst of increasing inflation in the country. I for one do not believe in the official inflation numbers published by the government of any country because those numbers were arrived at using formulas designed to deceive rather than to enlighten. To know if there is actual inflation happening one has only to look at the prices being paid now for all kinds of daily necessities as well as housing. It does not take rocket science to arrive at how much you are paying for these items now versus how much you were paying for the same items a month, 3 months, 6 months and 12 months ago. Go figure.

In fact, the US economy may already be in recession, according to many market observers and analysts. The temporary shot in the arm caused by the sudden drop in the Fed funds rate can only be temporary. The same with the upcoming $150 Billion tax-rebate scheme to shore up the US economy by giving back some small change to US taxpayers and expecting them to spend money like there is no tomorrow again.

Whose economy is the US government trying to stimulate anyway? If you think the stupid president and his men are smart, think again. They are actually going to be stimulating the economies of the Arabs and South American oil exporters and developing countries such as China, Taiwan, Singapore, Malaysia, Thailand, etc. since most consumer products being sold in the USA come from these countries. It is really a no brainer, and it really shows how smart or stupid these government officials are.

I think the US government should really ask the Iraqis and the Agfhans to take charge of their own destinies and futures quickly and decisively and get out of the stupid wars in both countries within the next few months. THAT should help the economy. Also, the US government should put in place measures to get American and foreign businesses to set up manufacturing operations in the US instead of exporting jobs overseas in great numbers and then importing products from these offshore factories. THAT should also help the economy. Income taxes for the masses should be cut in half or more while those for the very rich and obscenely high paid company executives should be increased by a factor of 4 or more to compensate for the lost revenues. THAT should really help the economy and let the Joe Bloes and Mary Janes of the country enjoy more purchasing power!

Instead of encouraging Americans to spend money like crazy, they should be encouraged to save a lot more, and the savings should be chanelled into more productive investments and not into over-priced housings, mortgage-backed securities, derivatives, CBOs, etc. Wall Street moguls who caused the current credit crisis should be prosecuted and their companies forced to pay for the damages done instead of the Fed coming to the rescue and bailing them out.

These are my 2 cents for today.
comment 4
MakubeX date : 24/01/2008 time : 00.30
http://blog.nationmultimedia.com/babylon

Khun Paisarn seems to be the only fortune teller that's upbeat this year...but I've never found him to be very accurate anyway.
comment 3
MaxHeadroom date : 23/01/2008 time : 14.41
http://blog.nationmultimedia.com/maxheadroom

Furtune telling - a very Thai way to substitute economic analysis and investment planning with clairevoyancy and lucky charms.

Max says stop non-sense - return to this earth - with two feet on the ground now.
comment 2
Ian date : 23/01/2008 time : 13.31
http://blog.nationmultimedia.com/anterian36

" Democrat party leader Abhisit Vejjajiva would have to wait four to five years to lead. "
I actually find this a good idea, he is a good man but inexperienced, one of the best places to learn is on the opposition benches.
comment 1
Tawan date : 23/01/2008 time : 12.30
http://blog.nationmultimedia.com/tawan3

If Khun Paisarn says so it is good enough for me.
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