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Archive for April 2005

Temporary yuan float

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This is a weird story – the value of the yuan was allowed to float up slightly from 8.276 to 8.270 to the dollar for 20 minutes on Friday. The Times article suggest it may have been due to human error, but other sources report that the unpegging was deliberate.

NYT: Traders used to seeing a flat line on their screens day after day for the value of the yuan were especially transfixed by the brief surge because it came the same day that a state-run newspaper, The China Securities Journal, ran an article on its front page that seemed to depart from previous government statements ruling out any shift in currency policy soon.

The article asserted that China’s financial system and currency regime were finally ready for the yuan to rise, provided that the rise was only a few percentage points.

The People’s Bank of China, the central bank, issued a public denial by midafternoon that it had received any formal instructions from the country’s political authorities to push the yuan to a new level. But the brief movement of the yuan prompted some economists to say that China may have been testing its ability to manage a small fluctuation in the value of its currency, as a possible preparation for managing an eventual change in the yuan’s value.

From a comment on this housing bubble blog: “BTW, I just read a news from China saying China’s central bank is going to unpeg Chinese yuan for a few hours before most Chinese start taking the week-long May 1 holidays in China. Apr 30 is like the Friday after Thanksgiving in China that most traders and brokers are on vacation, so volume is usually very light and the best time to test the market.”

Written by infoproc

April 30, 2005 at 5:00 pm

Posted in globalization

PIMCO on Bretton Woods II

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The “Bretton Woods II” currency arrangement, under which China, Japan and other nations are fixing their currencies at undervalued levels relative to the dollar by funding the U.S. current account deficit, will be a key topic at PIMCO’s upcoming 2005 Secular Forum.

Commentary by PIMCO MD Chris Dialynas: It is interesting because the presumption that we have a semi-fixed exchange rate system is a farce because the greater the imbalance, the greater the inclination to speculate against the debtor country in favor of the large creditor countries. This suggests that there will be a lot of speculation in Chinese assets, including property, for purposes of not only the productivity of the asset or property, but to capitalize on the revaluation of the currency as well. That means this presumed stable exchange rate regime has engendered a much riskier financial environment because as the trade imbalances grow and grow, then the risk associated with speculation against the debtor country currency becomes lower and lower.

The recycling of money is in essence providing externalities in the form of a higher U.S. dollar than should otherwise be the case, lower U.S. interest rates than would otherwise be the case, much tighter credit spreads because foreign investors are such huge buyers of U.S. corporate bonds, and lower mortgage rates because they are also investing in U.S. mortgage-backed securities. And they obviously own a lot of Treasury and agency securities. So the U.S. has much lower interest rates generally. This process has led to artificially low interest rates, low inflation rates, and an overvalued currency, and it probably manifests itself in the domestic economy in much higher housing prices, so perhaps a housing bubble as well.

The system that is advertised as Bretton Woods II, a semi-fixed exchange rate stable system, by virtue of the system itself, creates greater imbalances and a much more speculative environment. That takes us to the commodity complex. The natural equilibrating mechanism for trade balance is exchange rate adjustment and under BWI, the transfer of gold from one country to another settled trade imbalances. Gold was the stable value global asset.

If you think the dollar is at some point vulnerable to a decline in purchasing power then you obviously want to purchase hard assets now because those hard assets will retain their value in global terms if they are globally traded assets like gold, diamonds, or oil, among many other commodities. This is particularly true if the yield on dollar denominated bonds is very low.

But just as importantly, if you think that this imbalance leads to the potential for more military action, then there would be a natural tendency, it would seem to me, for leaders of foreign countries to begin stockpiling assets that they might deem valuable in time of war. Just as the U.S., during an election year, refused to open the strategic oil reserve, then you would think there would be copycat countries that, if they had not already, would establish strategic oil reserves and fill them. In that event, you get precautionary demand for oil so that the oil comes out of the ground and goes right back in to the ground. The demand for oil looks very high and prices go up based upon not only commercial demand, but also actual precautionary demand and the speculative demand derived from this BWII system.

The BWII system results in speculation and instability. Importantly, the growth rates of “emerging” economies, like China, are quite high in a BWII system as are the infrastructure requirements. The transformation of growth to newly industrialized areas results in additional demand for commodities that are inputs to the infrastructure development, resulting in a structural demand for particular commodities.

Written by infoproc

April 27, 2005 at 7:37 pm

Posted in globalization

Pension funds make FX bets

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It seems pretty clear to me that in the medium term the dollar will likely decline against a trade-weighted basket of currencies. But, I’m not sure it’s a good idea to gamble pension money using FX derivatives. Our current low-return environment is great for hedge funds and advisors – big pools of money are forced to take risk in search of return, and need help doing it.

WSJ: Pension funds traditionally have kept the bulk of their money in U.S. stocks and bonds, where they are among the markets’ biggest investors. Only in recent years have they begun to invest abroad. But with bond yields low and stocks volatile, an increasing number of pension funds are turning to the currency market in hopes of boosting their funds’ returns.

This interest in currency trades reflects how an aging population and ballooning health-care costs are putting pressure on pension-fund managers to find more creative ways to increase returns. The difficult environment also is compelling many large investors to consider private equity, hedge funds, real estate and other areas they once would have dismissed as inappropriate.

Consultants such as Russell Investment Group, a Tacoma, Wash., firm with $133 billion in assets under management world-wide, are among those urging on the pension funds, saying a currency program offers several unique advantages and should be part of the typical investment portfolio. Since currency wagers are made with derivatives — financial contracts whose value is based on the performance of an underlying asset — funds don’t need to raise large amounts of money. Currency movements also have low correlations with other markets, helping to reduce a portfolio’s overall risk.

“Getting a meeting with pension funds in the past was very hard when clients were getting 20% returns from stocks,” says Arun Muralidhar, a managing director at FX Concepts, a New York money-management firm with about $12 billion in assets. Now, he says, the firm is in talks with about a half-dozen pension funds that are preparing to hire a currency manager.

Foreign exchange is the world’s deepest and largest financial market with a daily trading volume of $1.9 trillion. But paradoxically, it can also be one of the least efficient. That is because as many as three-quarters of the participants aren’t dedicated to getting the best possible price, according to Deutsche Bank. These include exporters and importers, foreign stock managers, central banks, even tourists changing money.

International fund managers, for instance, weigh a company’s share price, future earnings prospects, and broader economic considerations when determining the optimal time to buy a particular stock. Normally, they are less likely to hurry up or postpone a stock purchase based on how a currency is trading. That creates an inefficiency in the foreign-exchange markets that currency managers can exploit, says Robert Stewart, a portfolio manager for the J.P. Morgan Fleming currency-management group.

The California Public Employees’ Retirement System, known as Calpers, is among the pension funds already active in the currency market. Earlier this month, the largest public pension fund in the U.S. received permission from its board to increase the size and aggressiveness of its currency bets. “We are looking into that possibility,” says Eric Busay, a fund manager at Calpers.

Written by infoproc

April 27, 2005 at 4:02 pm

Posted in globalization

Asian cellphone mania

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Advertising via mobile (WSJ): Cellphones now are defining a generation of Asians. There’s nothing geeky about calling a South Korean a “technosexual,” explains Jaehang Park, a strategy executive for Korean ad agency Cheil Communications Inc. “Devices like cellphones define how trend-setting you are,” he says. One-quarter of all South Koreans maintain “cyworlds,” photo Web logs that can be updated using a cameraphone.

Experimenting in Asia, U.S. companies have already learned that cellphones offer access to consumers’ deepest desires and concerns. In Japan, Procter & Gamble Co.’s Whisper brand of feminine-hygiene products has signed up 80,000 women to receive messages about their “happy cycle.” A February message: “Your skin gets even more sensitive and dry, especially during this period. … Try not to use new skin-care products.”

Anti-Japan protests organized via text msg and email (NYT): “Chain letter” e-mail and text messages urged people to boycott Japanese products or sign online petitions opposing Japanese ascension to the United Nations Security Council. Information about protests, including marching routes, was posted online or forwarded by e-mail. Banned video footage of protest violence in Shanghai could be downloaded off the Internet.

“Text messages, instant messaging and Internet bulletin boards have been the main channels for discussing this issue,” said Fang Xingdong, chairman of, a Web site for China’s growing community of bloggers. “Ten years ago, this would have been unthinkable.”

In Shanghai, the local police even sent out a mass text message to cellphone users the day before that city’s raucous protest. “We ask people to express your patriotic passion through the right channel, following the laws and maintaining order,” the message said. Some marchers saw the message as a signal to proceed, while others took it as a warning.

Written by infoproc

April 25, 2005 at 3:50 am

Posted in globalization

Roubini parses Greenspan remarks

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Nouriel Roubini’s latest post dissects Greenspan’s statement to the Senate Budget Committee. On the renminbi, Greenspan notes the negative effects of the peg on China’s economy – mentioning sterilization costs and resource allocation distortion – and predicts a revaluation “sooner rather than later.” He also distances himself from testimony in 2001 which seemed to support the Bush tax cuts. He now says (as Paul O’Neil claimed in his book) the cuts should have had built-in triggers, limiting them if large deficits resulted.

Sen. Paul S. Sarbanes (D-Md.) said he believed it was “fair to consider how your message would be taken” and that lawmakers saw Greenspan’s 2001 remarks as “providing a green light” for tax cuts, which were enacted without triggers.

“I plead guilty to that,” Greenspan said. “If indeed that is the way it was interpreted, I missed it. In other words, I did not intend it that way.”

…”The federal budget deficit is on an unsustainable path, in which large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years,” Greenspan said in his prepared testimony yesterday.

Written by infoproc

April 23, 2005 at 3:53 pm

Posted in Uncategorized

Credit boom ending?

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Barron’s: SPEAKING OF PICTURES that aren’t very pretty, as we just were, take a gander at the two charts that adorn these scribblings. They’re both lifted from Stephanie Pomboy’s latest MacroMavens commentary and, frankly, they’re more than a little ominous. For what they show is how dependent this quixotic economic recovery has been on IOUs.

The remorseless decline in wages as a percentage of personal income has reached an historic low of 62% (the chart to your left). Meanwhile, consumer spending as a percentage of wages continues to spiral upward (the chart to your right). In the past three years, Stephanie reckons, shop-happy consumers, cheerfully determined to live beyond their means, leaned a lot more heavily on borrowings ($675 billion of non-mortgage debt) than paychecks ($530 billion) to cover the $1.3 trillion increase in their spending.

Great while it lasts, but even the best of sprees — and it hurts to be the bearer of sad news — can’t go on forever. And this one looks like its time is almost up. Higher interest rates, obscene gasoline prices and the rising cost of just about everything are starting to sap consumers’ confidence, to say nothing of their capacity to consume. Retail sales this month, Stephanie takes somber note, have been the weakest since the last recession.

Over on the other side of the fence that separates presumed investment sophisticates from us poor civilians, risk-consciousness is suddenly the in thing. The spread in yields between junk and Treasury paper — a handy gauge of how venturesome or apprehensive the folks who speculate in bonds are — has begun to widen, and the flow of corporate bond issues is contracting sharply. Which Stephanie proclaims as clear proof of the dearth of liquidity in the corporate bond market.

Making things infinitely more disturbing is that the companies in the crosshairs, as she puts it, are the very creators of credit — the likes of GM, Ford, Fannie Mae — along with the facilitators (nice euphemism, Steph) of credit — AIG, Ambac, MBIA, to name only a few.

That the demon debt is finally exacting its due from consumer and corporate borrower leads her to the melancholy but unsurprising conclusion that “the great credit boom is now drawing to a close.” And here we were so hoping Mr. Greenspan could take his leave smiling.

Written by infoproc

April 23, 2005 at 3:42 pm

Posted in Uncategorized

JHU Talk

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I’m going to be at Johns Hopkins next week, giving a talk on the null energy condition and instabilities. The slides (big PDF file, subject to change, no fair peeking if you are a JHU theorist) can be found here.

Written by infoproc

April 22, 2005 at 3:58 pm

Posted in Uncategorized

Rent-buy arbitrage

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The analysis below of bay area rent-buy arbitrage is taken from Bay Area Housing Crash, where you can find much more information on the housing bubble. The author claims that recent reported sales price numbers are inflated and that prices have already started to decline in certain bay area markets.

“There are great tax advantages to owning.” FALSE.

It is now much cheaper to rent a house in the San Francisco Bay Area than it is to own that same house. This is true even with the deductibility of mortgage interest figured in. It is possible to rent a good house for $1800/month. That same house would cost $600,000. Assume 6% interest ($3000 per month), $2000 closing costs, and a buyer loses $770 more per month buying than renting. Renting is a loss of course, but buying is a bigger loss.

Renting: Monthly Rent: $1,800.00

Property Tax: $400.00 ($625 per month at 1.25% before deduction, $400 lost after deduction)
Interest: $1,920.00 ($3000 per month at 6% before deduction, $1920 lost after deduction)
Other Costs: $250.00 (insurance, maintenance, etc)
Total: $2,570.00

Buyers still have to come up with the principal payment as well, just to watch it wiped out as the value of their house declines.

Remember that buyers don’t deduct interest from income tax; they deduct interest from taxable income. Interest is paid in real pre-tax dollars that buyers suffered to earn. That money is really entirely gone, even if the buyer didn’t pay income tax on those dollars before spending them.

Buyers do not get interest back at tax time. If a buyer gets an income tax refund, that’s just because he overpaid his taxes, giving the government an interest-free loan. The rest of us are grateful.

Under current conditions, a renter would be able to live in a house for 30 years, then buy that house outright with the saved principle payments, and have an extra $277,200 of savings on top of that: ($770 x 12 x 30). The renter comes out way ahead of the owner, and this doesn’t even count the huge losses the owner will suffer as housing falls year after year for the next decade or more, just as in Japan.

Another way to look at it is that except for the rich, everyone either rents a house or rents money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. Owners with a mortgage seem to be renting their house from the bank, but there’s an important difference. The bank takes no risk, the same as real renters take no risk. It’s the owners who bear all the risk of falling house prices, and all the costs of repairs.

Written by infoproc

April 22, 2005 at 3:51 pm

Posted in Uncategorized

Oppenheimer centenary

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2004 was the 100th anniversary of J. Robert Oppenheimer’s birth. See here for a partial list of recent biographies, and here for a Times review of two of them.

I can think of few figures as complex as Oppenheimer. “American Prometheus” (the title of one of the biographies) is a suitable characterization. From the Times review: “American Prometheus” is a work of voluminous scholarship and lucid insight, unifying its multifaceted portrait with a keen grasp of Oppenheimer’s essential nature. What did he do upon finding himself in a Capitol Hill elevator with Senator Joseph McCarthy, the embodiment of Oppenheimer’s comeuppance? “We looked at each other,” the physicist told a friend, “and I winked.”

“American Prometheus” sees the full implications of such a gesture: charm and bravado on the surface, Dostoyevskian darkness underneath. It traces Oppenheimer’s arrogance to the kind of upbringing that would give him his own sloop at age 16 (he named it for a chemical compound) and lead one of the oral examiners of his doctoral thesis to say: “I got out of there just in time. He was beginning to ask me questions.”

Many of the stories from his time at Berkeley, Caltech, Los Alamos and the IAS concern his role in the Manhattan project, or his communist sympathies and fall from grace during the McCarthy era. His contributions as the founder of what was at the time the leading school of American theoretical physics are often overlooked.

Perhaps most important was his work in the 1930’s on the endpoint of stellar evolution, with his students Volkoff and Snyder at Berkeley. They explored many of the properties of black holes long before the term “black hole” was coined by Wheeler. Oppenheimer and company were interested in neutron star stability, and gave the first general-relativistic treatment of this complicated problem. In so doing, they deduced the inevitability of black hole formation for sufficiently massive progenitors. They also were the first to note that an infalling object hits the horizon after a finite proper time (in its own frame), whereas an observer orbiting the hole never actually sees the object hit the horizon. The work received amazingly little attention during Oppenheimer’s life. But, had Oppenheimer lived another few decades, it might have won him a Nobel prize.

Written by infoproc

April 21, 2005 at 4:49 am

Posted in oppenheimer, physics

China labor market

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So, I guess this means that a middle manager for a foreign company in Beijing or Shanghai makes 20-30 times what the average rural worker does? And I thought the US had a problem with income inequality…

Economist: CAN China—population 1.3 billion—really be running short of people? In many of the most important parts of its booming economy, the answer, increasingly, is yes. Though China has a vast pool of unskilled labour, firms in the south now complain that they cannot recruit enough cheap factory and manual workers. The market is even tighter for skilled labour. As the economy grows and moves into higher value-added work, the challenge of attracting and retaining staff is rising with the skill level, as demand outstrips supply…

Pay and benefits are soaring. A Chinese middle manager at a foreign company in Beijing or Shanghai can now command total annual cash compensation (salary plus bonus) of $27,000-$32,000, says Hewitt. Senior managers receive between $46,000 and $54,000 and top executives can expect $80,000 to $90,000 or more. While underlying inflation in China is around 2%, average annual salary increases for mid-level and senior managers are now 6-10%. Lai Kam-tong at the Hong Kong Institute of Human Resource Management says that accountants’ salaries are rising by 14% a year. Jürgen Viethen, general manager for F&G China Electric, a small Spanish-owned electrical switchgear-maker, is offering key employees raises of up to 50%—and still losing them.

Written by infoproc

April 19, 2005 at 5:58 pm

Posted in globalization