Sunday, December 13, 2009

out of the country

Friends, you guys must be wondering why I haven't updated the blog as frequently.

I have been out of the country visiting my family for weeks. Visiting friends and relatives takes up most of the time, more than I have expected. with very limited access to the internet.

Sorry for any inconvenience. Will be back to normal in mid January.

Have a good holiday season and Happy New Year!

Monday, December 7, 2009

The Danger of Hot Money

Dubai shook the world last week with a potential default. The country, until recently, with $60 billion foreign debt has been the rising star in emerging markets in the recent years. On Wednesday, Dubai said it would ask creditors of state-owned Dubai World and Nakheel, the builder of its palm-shaped islands, for a standstill agreement as a first step toward restructuring billions of dollars of debt. Influential bank analyst Richard Bove said in a note "it does not appear that American banks have any major direct impact from this event."

Dubai’s problem may not have direct impact on the global economy. However, Dubai’s crisis is just a tip of an iceberg of a potential global calamity. Since the eruption of subprime crisis that originated from the United States, historic low interest rates and weak economic recovery in the United States and Japan have led to massive carry trade. Arbitrageurs borrow “cheap money” at very low interest rates from countries like the United States and Japan in search for higher returns in many emerging markets.

China's foreign currency reserves rose $141 billion from July to September alone, up 20 percent from the same period in 2008. The China International Capital Corporation estimates that $50 billion in speculative capital flowed into China in the third quarter. In the meantime, Southeast Asian countries are growing increasingly concerned about strong inflows of hot money that could lead to asset bubbles in the region, says the Asian Development Bank (ADB). Noritaka Akamatsu, senior adviser at ADB’s Office of Regional Economic Integration, said that some regional governments are thinking of limiting capital inflows in the “short-term, liquid side of the market” as they could destabilise financial systems. “Last week, Indonesia’s central bank said that it was “studying” possible limits on foreign ownership of short-term debt but has no plans for controls on capital or the currency. The South Korean government plans to hold talks on what can be done to handle inflows financed with cheap US-dollar loans. Outside Asia, Russian Finance Minister Alexei Kudrin said that he was alarmed by the amount of hot money flooding into Russia and would support 'soft measures' to stop speculators from inflating the value of the stock market.

Hot money is speculative and destabilizing short-term capital flow. Its elusive and abrupt reversal characterized many previous financial crises such as the Asian Currency Crisis in 1997. Should carry trade unwind due to monetary policy tightening of the United States and/or sudden heightened risk aversion among foreign investors, a financial calamity in emerging markets is foreseeable in the absence of preemptive actions to slow down hot money.

Friday, December 4, 2009

Job Market Recovery

Initial job claims' trend very close to creating job?

In a report of Market Watch on December 3,
The number of Americans filing for state unemployment benefits fell by a seasonally adjusted 5,000 to 457,000 in the week ending Nov. 28. It's the fewest initial claims since September 2008. Claims in the previous week were revised lower by 4,000 to 462,000. Economists surveyed by MarketWatch had expected initial claims to rise to about 480,000.

The figures come just a day before the Labor Department reports on November's unemployment rate. Economists expect the jobless rate to remain at a 26-year high of 10.2%, with 100,000 nonfarm payrolls lost. It would be the fewest jobs lost since January 2008.

In Thursday's report, the Labor Department said the four-week average of new claims fell 14,250 to 481,250, the lowest in 13 months. The four-week average smoothes out distortions caused by one-time events, such as bad weather, holidays or strikes.
 The most recent data were collected in the Thanksgiving week. The seasonal factors attempt to adjust for the shortened workweek, but cannot do so perfectly.
It is generally believed that once initial claims fall to the range of 400,000 and 425,000, new jobs can be created.

Unemployment Rate Fell
In Reuters today,
U.S. employers cut a far fewer-than-expected 11,000 jobs in November, the smallest decline since the start of the recession in December 2007, government data showed on Friday, strongly suggesting the deterioration in the labor market was in its final stages.

The Labor Department said the unemployment rate fell to 10 percent from a 26-1/2 year high of 10.2 percent in October. The government revised job losses for September and October to show 159,000 fewer jobs lost than previously reported
These data are consistent with our previous discussions on this blog that the economic recovery is on track.