By Ajay Shah, on March 16th, 2010
I have long collaborated with Achim Zeileis, Ila Patnaik, Anmol Sethy and Vimal Balasubramaniam on testing, dating and monitoring of structural change of the de facto exchange rate regime. A few weeks ago, Anmol Sethy had done a talk about the ZSP methodology in Singapore. In April, Achim Zeileis will do a talk about this in Chicago.
Here’s a quick status report of this work:
- The key methodology paper is forthcoming: Testing, Monitoring, and Dating Structural Changes in Exchange Rate Regimes, in Computational Statistics & Data Analysis, Volume 54, Issue 6, June 2010, pages 1696–1706. If you don’t have access, here is a preprint.
- The R package fxregime has the full code. While this package has been in development for a long time, it is now at version 1.0-0 which is our way of saying it’s ready for use. You can do the full analysis of any currency series — testing, dating and monitoring for structural change in the exchange rate regime — using this package.
- An application paper on China and India: The difficulties of the Chinese and Indian exchange rate regimes, in European Journal of Comparative Economics, 6(1), June 2009.
- An application paper where the dates of structural change of the exchange rate regime are used in an analysis of firm data: Does the currency regime shape unhedged currency exposure?, in Journal of International Money and Finance, 2010 (forthcoming). If you don’t have access, here is a preprint.
 
By Rok Spruk, on March 16th, 2010
Here’s a list of interesting readings for this week.
In NY Times, Paul Krugman discussed (link) the painfulness of financial crisis in Ireland and the U.S and suggesting what we should learn from banking regulation in Canada to prevent future crises of similar proportions.
In Waging War on Black Teens, Richard W. Rahn and Izzy Santa wrote (link) about the high unemployment rate among young African Americans. Furthermore, they suggest that minimum wage mandate is the main cause of steep unemployment rise thereupon.
The Economist (link) summarized the estimated total cost of reconstruction after the earthquake in Chile at $20-30 billion (13-19 percent of the GDP). Chile’s sovereign wealth fund has just over $11 billion saved during the pre-crisis period of high copper prices which, at that time, stood at record levels.
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By Richard Daughty, on March 15th, 2010
I was laid out on the couch, which I remember distinctly because my wife was yelling, “If you’re going lay down on the couch instead of doing something around the house to help me out, at least take your damned shoes off!” and I was using the remote to idly flip through the channels on TV, hoping to catch something in the vein of happy mindlessness, maybe something in the Gilligan’s Island-Bewitched genre, so that I did not have to keep track of a complicated plot and/or a bewildering cast of multi-faceted characters.
I needed this kind of mental break to take my mind off of, for one thing, the sheer horror of today’s economic situation and how we are So Freaking Doomed (SFD).
Finally, I happened to catch a moment on CNBC just where Larry Kudlow was correctly making fun of Greece for saying that it will raise taxes and cut spending in an effort to get its ludicrous deficits and preposterous budget under control, and he had a deliciously snotty, supercilious, sarcastic attitude (the True Mogambo Way!) towards the idea of raising taxes and reducing spending as an economic stimulus of some kind! Hahaha!
I was with him all the way, too! And I had a few choice things that I wanted to say to Greece, too! Most of my complaints about Greece are about how Greek salads always seem to come with a damned oil and vinegar dressing that is terrible until you add some sugar, then it’s pretty good, so why in the hell don’t they add sugar to start with, the lazy bastards? God knows they had the money!
And then to add sour ripe olives to the mix – which is more of the same, only worse! – makes me want to jump to my feet and shout, “What is the matter with Greeks that they would they would do such a terrible thing to an otherwise delicious salad?”
So with Mr. Kudlow on the case to make sure that Greece gets its act together, I am sure that their deficit problem will soon be resolved, and this salad dressing thing will soon be a thing of the past, too, which may be part of the reason why I thought he was really good for about, oh, three seconds, which is about as long as the average period of time that I usually agree with Mr. Kudlow, or my wife, or my kids, or my boss, about anything.
The aforementioned three seconds during which I agreed with Mr. Kudlow is because he said something scornful in a rapier-like rebuttal, something like “Raising taxes and cutting spending is not the answer!” which is true.
But it is only true because there IS no answer! To even ridiculously assume that someone can come up with a plan to dissolve consumers’ debt and simultaneously pay off their creditors – the fabled “win-win” situation! – is ludicrous! Hahaha! Beyond ludicrous! Hahaha!
Mr. Kudlow and his little panel of “experts”, however, ignore my scornful laughter and the way that Icky Mogambo Spittle (IMS) shot from my lips, and implied that there really is a solution to this problem out there, somewhere, anywhere, maybe over here, maybe over here, which would marvelously, and magically, enable debtors to get rid of their debts without paying anybody anything, and creditors to get all their money back without being paid anything by anybody! Hahahaha!
But I understand that it’s Mr. Kudlow’s job to take positions on monetary, fiscal and economic policy that are the opposite of mine, because my job is to stay away from the majority, and his job is to get people to join the majority.
My position is so antagonistic because in these three cases, “the majority is always wrong.”
The majority is wrong in encouraging monetary insanity by always yammering for more and more monstrous Federal Reserve money-creation to buy the fiscal insanity of Congress’s avalanche of new government debt to fund Obama’s spendthrift imbecilities, which will cause inflation in prices, which is The One Big Freaking Thing (TOBFT) that you don’t ever, ever, ever want to have, which means that you can never, never, never allow excessive amounts of money to be created in the first place.
The majority is wrong on economics because they still, laughably, believe in the proverbial “free lunch”, a childish fiction where somebody gets something and nobody has to pay for it, and the majority are willing to bankrupt themselves, and destroy their own country, by letting Congress try to provide a free lunch to anyone and everyone who walks up with a hand out or a sad story.
And the biggest reason to go against the majority is in investing, because it’s less than a zero-sum game, and thus the majority must lose money and be bled dry by a ghoulish financial services industry (that is so large that it makes up 70% of all profits made in the country, and thus pays most of the taxes, which are actually paid by the “investors”) so that a minority of people (hopefully, me!) can make money despite being bled dry by the financial services industry and despite paying taxes on the gains. “Investing for the long term!” Hahahaha! I snort with derision! Snort!
So you can see why my natural anti-establishment makes me pound the table for gold and silver simply because the majority ignores them!
Okay, the real reason is that today’s dire economic condition, due to a staggeringly incompetent government and incompetent citizenry, has been played out thousands of times in the last 4,500 years, and in each case, the only thing that saved anyone’s butt was gold and silver.
There are those, of course, who say, “That explains why you are buying gold and silver, but it does not explain why you are always screaming at people to invest in oil, as well as in gold and silver.”
Well, since you asked, I say invest in oil because it has the most energy per cubic centimeter, and now that it is used in practically everything everywhere, nobody in the industrialized world can live without lots and lots of it, with guaranteed continual rising demand, but it is being rapidly depleted. Rising demand and falling supply? Who could ask for more in an investment?
As for those who go on to say, “Well, that is pretty convincing, alright, but it doesn’t explain why you are such a hateful, disrespectful, little creep”, I admit that, no, it doesn’t.
Bet Against the Majority. Buy Gold. originally appeared in the Daily Reckoning.
By Eldon Mast, on March 15th, 2010
U.S. retail sales posted a surprising gain in February despite falling car demand amid trouble at auto maker Toyota MotorCorp. and fierce blizzards that crippled the East Coast for days.
Retail sales rose last month by 0.3%, the Commerce Department said Friday. An average of economists surveyed had forecast a 0.3% decrease in February sales. The Super Bowl early in the month had electronic store sales bounding higher.
“This is a pleasant surprise, especially in the light of the severe winter weather across large parts of the country last month,” said Ian Shepherdson, an analyst at High Frequency Economics.
Retail sales data are an important indicator of consumer spending and consumer spending makes up 70% of demand in the U.S. economy.
The unexpected increase moved Macroeconomic Advisers to pushed their forecast for first-quarter gross domestic product growth way up, by four-tenths to 3.1%. Other analysts agree with the strong first quarter forecast.
“Consumers are beginning to come out of their shells,” IHS Global Insight analyst Nigel Gault said. “Today’s data suggests that real consumer spending will rise about 3% in the first quarter, the fastest increase in three years.”
By Ajay Shah, on March 15th, 2010
A few years ago, when Percy Mistry’s committee was working on the MIFC report, I used to joke that of the two great industries in Bombay, movies will make it first to international customers. A few days ago in the New York Times, Anupama Chopra has a story showing that some action on that front is now visible.
Winning on a global scale in finance and in movies has some common features : it involves raw materials like human capital, top end computer technology, freedom of speech, openness to other cultures, a large home market, the natural opportunities of connecting up with the disapora, and Schumpeterian creative destruction.
With all these in place, Bombay’s movie industry is nicely globalising itself. Finance requires all these – and that bodes well for BIFC. But finance requires a few more things. It requires sophisticated financial regulation, and a sound macroeconomic policy framework. It requires that the government get out of producing financial services just as the government does not produce movies. India has a tonne of work to do on these.
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By Trace Mayer, on March 12th, 2010
The IMF gold has serious geo-political ramifications in the background because of the nature of foreign exchange reserves, credit default swaps and gold. Wikipedia:
South Korea and Japan are both home to large numbers of United States troops and neither are going to invite a nuclear attack. The Kuomintang, which the US backed, retreated to Taiwan when they lost power and China still asserts their ownership over the tiny island and the US continues to honor their agreement to defend Taiwan. Russia has been discharging dollars and acquiring gold while Brazil is bucking the buck. Neither China nor India have significant reported physical gold holdings; they need a hedge to the major currency illusions. In my book The Great Credit Contraction the liquidity pyramid represents the FRN$ will be the last major currency to evaporate.
The Euro’s evaporation has increased and ultimately has only one outcome. Sure, Germany wants to retain its voice on the world stage and is faced with a Hobson’s choice of bailing out Greece and eventually the other unproductive free-riding members of the Euro or let the Euro evaporate and lose their relevance on the world stage because Germany only matters if Europe as a whole matters.
CREDIT DEFAULT SWAPS
But the Damocles sword of credit default swaps, which is falling toward’s Greece, can, ultimately, be measured only against gold because gold is no-one’s liability. Just like the Chinese have feigned their interest in acquiring gold; many sophisticated investors have feigned ignorance of gold’s monetary role. Many sophisticated investors, like George Soros who broke the Bank of England doubled his gold position in Q1 2010, Paul Tudor of Tudor Investments, John Paulson, David Einhorn, Eric Sprott, Jim Rogers, Peter Schiff, John Embry and many others are likewise allocating their capital based on the premise that gold is a major world currency.
Even Janet Tavakoli, a former adjunct associate professor of derivatives at the University of Chicago’s Graduate School of Business, and author of six books on derivatives recently wrote:
U.S. credit default swaps currently trade in euros. After all, if the U.S. defaults, who will want payment in devalued U.S. dollars? The euro recently weakened relative to the dollar, and market participants are calling for contracts that require payment in gold. If they get their way, speculators on the winning side of a price move will demand collateral paid in gold.
The market can create an unlimited number of these contracts very rapidly. The U.S. wouldn’t have to ever default to trigger a major disruption in the gold market.
The fiat currency and fractional reserve banking system is merely a confidence game built on an illusion and fraud. Fiat currency is to be valued like the common stock of a government and in gold. As such the current system will end and holder’s of capital will demand to be shown the money. Just ask Harry Reid about karma.
The price of gold in evaporating currencies would not so much create a disruption in the gold market as cause a serious loss of confidence in the current system which would result in a tremendous increase in gold’s liquidity, hopefully through use by individuals in ordinary daily activities like what happened in Zimbabwe last year. After all, who really needs to use fiat currency illusions and why? In this case, we are seeing both China and India demanding to see the IMF’s gold, the Damocles sword jitters and there is only one protection. Assets with intrinsic value.
By Rok Spruk, on March 12th, 2010
Here (link) is the story of how decades of economic freedom prevent the unthinkable consequences of an earthquake which recently damaged Chile.
By Ajay Shah, on March 12th, 2010
When central planners take the outcome away from the self-organising system of the market economy, we often get strange outcomes. At the end of June 2009, 32 foreign banks
were in India with 293 branches. In addition, 43 foreign banks were in India through `representative offices’. (Source: RBI Annual Report. Hat tip: Radhika Pandey).
In a news item today, I saw Domino’s say that they have 300 branches in India and will go up to roughly 500 in three years. With RBI giving out permissions for all foreign banks (put together) to open 18 branches in India a year, this means we’ll soon have more outlets of Domino’s in India than all foreign banks put together.
By Richard Daughty, on March 11th, 2010
The pills that I thought were tranquilizers turned out to be vitamins, and although I am on the verge of some kind of mental breakdown because of the mix-up, I feel great!
Turning to the old tried and true, I soon learned that I had started too late, and I was not nearly drunk enough to have properly anesthetized my nerves when I chanced to read Agora Financial’s 5- Minute Forecast report that “The CBO’s latest numbers reveal that President Obama’s proposed fiscal 2011 budget would add $9.7 trillion to the national debt over the next 10 years.”
My hands shook and my guts churned at the horrific prospect of adding $9.7 trillion to the money supply, which means (I gulp in horror at the prospect) inflation in pieces like you never saw! Yikes!
I mean, (my voice rising in pitch and volume) the entire GDP of the USA is about $14 trillion, and the government wants to increase, over ten years, government spending by 70% of everything that this country currently makes!
Apparently eager to change the subject since I seem to be getting worked up about this and could, possibly, probably, almost certainly, damned near guaranteed, erupt into some loud Mogambo Hysterical Tirade (MHT) and make a shambles of everything, The 5 says, “Further, the CBO projects the national debt will be 90% of GDP by the end of this decade”, which I guess they thought would calm me down or something, but it didn’t, which was bad enough to cause me to have chest pains accompanied by loud howls of pain and outrage in another tiresome Screaming Mogambo Fit (SMF), but then went on to make it all worse by saying that debt will equal 90% of GDP, which is “higher than the 83.4% recorded at the end of fiscal 2009 last fall.”
Suddenly, there was an uproar as I jumped to my feet and shouted “What kind of bizarre crap is that? The national debt is already $12.5 trillion in a $14 trillion economy, and somehow you add $9.7 trillion to $12.5 trillion to get 90% of the economy which means that …that…that…”
Well, I knew what I meant to say, but did not have a calculator handy, and the security guards had me by the arms and were hustling me out of the room pretty quick.
I later found out that what I meant to say, but did not have the figures handy, is that this means that the CBO thinks that, unbelievably, in ten short years, a staggering $22 trillion of national debt will be 90% of the economy, which means that the CBO thinks that the economy in ten years will be, I gulp to report, $24 trillion, which is a whopping 71% higher than today! I am stunned!
What can one say but, “We are freaking doomed!”
Perhaps hearing my plaintive voice with its unmistakable undertone of angry paranoia and wanting me to calm down, The 5 says, “We’re 100% certain this comment will elicit the customary response: ‘Look at Japan, its debt is 170% of GDP…and it’s been running massive deficits for years!’”
I think to myself, “Okay, they just take time to raise the blade of the guillotine higher and higher, but the end result will be the same, and if anyone thinks that Japan proves otherwise, then I laugh the Mogambo Laugh Of Scorn (MLOS) at them and turn around to wave my buttocks in their faces in a final fillip of disrespect!”
The 5, in what I imagine is said with a deliciously snotty tone, says, “To which we can only sigh and respond: ‘Exactly.’”
Well, I can do more than that, because I am, after all, The Loudmouth Mogambo (TLM)! And I say that if all prices doubled, today, GDP (which measures spending) would instantly double, too! Hahahaha! Everything costs twice as much, but the economy looks like it boomed! Hahahaha! Welcome to Inflationary Hell!
I often marvel that it’s a good thing that the poor are usually ignorant or stupid, because if they could, or would, comprehend how this huge explosion of money is going to make prices rise and make them enormously poorer and more miserable, worse and worse, and probably for the rest of their lives, they would go freaking berserk.
As for the middle class, they are supposed to be smart and educated enough to know this stuff, but they don’t, and so they don’t understand the sheer enormity of how much poorer and miserable they will be for decades to come, either, and they will suffer, too.
Then there are those of us who are buying gold, silver and oil to protect ourselves against the ruinous, crushing, cataclysmic inflation in prices that this inflation in the money supply, and debt, will cause, because then, for us, it all becomes idle dilettantism and pleasure, which is, once you boil it down, the whole point of investing, isn’t it?
And could anything be easier? Whee! This investing stuff is easy!
CBO Budget Projections and the Horrors of Inflation originally appeared in the Daily Reckoning.
By Eldon Mast, on March 11th, 2010
The Manpower Employment Outlook Survey is conducted quarterly to measure employers’ intentions to increase or decrease the number of employees in their workforce during the next quarter. It is the most extensive forward-looking survey of its kind, unparalleled in its size, scope, longevity and area of focus. The Survey has been running for more than 45 years and is one of the most trusted surveys of employment activity in the world. The Manpower Employment Outlook Survey is based on interviews with over 61,000 public and private employers worldwide and is considered a highly respected economic indicator.
According to the Survey released on Tuesday, employers in most major labor markets expect to hire in the second quarter at a pace equal to, or stronger than, the same period last year.
Many employers have yet to reach their pre-downturn hiring pace, but prospects in the Asia Pacific, the Americas, Europe, and the US, are all registering modest improvements compared to three months ago and the same period last year. Employer hiring intentions are strongest in India, Brazil and Taiwan.
In the US, nearly three-quarters of employers surveyed say they plan to keep staff levels stable, Manpower said, while 12 of 13 industry sectors surveyed said they plan to add staff during the second-quarter. “We continue to see encouraging signs in hiring activity in the U.S.,” said Manpower CEO Jeff Joerres in a statement. “Key industries such as manufacturing and construction are seeing notable improvements on a year-over-year basis.”
The Manpower survey shows employers in 27 of 36 countries and territories expect some positive hiring activity in the second quarter. Employers in Panama were surveyed for the first time this quarter and report upbeat hiring plans for the next three months.
Of the 10 countries surveyed in the Americas region, hiring plans are stronger in comparison to one year ago in all countries where year-over-year data is available and stronger in six countries quarter-over-quarter. Regional hiring plans are again strongest in Brazil, Costa Rica and Peru. At the same time, hiring expectations from U.S. employers are stronger than those reported in the second quarter of 2009.
The survey adds to a mounting list of evidence that labor markets have turned the corner with healthy net US job additions in the months to come.
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