UK Economists' Letter to Her Majesty The Queen

The UK economists wrote a rather lengthy letter to the Queen, in an attempt to answer the question raised by the Queen 'why had nobody noticed that the credit crunch was on its way?'. - and the answer is:

'In summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.'

'Collective Imagination Failure'? I know 'market failure' and 'government failure'.... but failure of collective imagination?. Simpler answer, though not politically correct of course, would be 'the Economics is not, at the least has not yet been, able to predict a course of such a complex phenomenon'.

No, it is not a shame. Suppose you put a certain pressure on a glass. Some physicists would be able to tell you the glass will break at some time, in some way in the future, but not exactly when nor how.

The Global Financial Crisis – Why Didn’t Anybody Notice?

Dr Barr Rosenberg on the current crisis

I don't know if this crisis is 'a little hardship', but I tend to agree with what Dr Barr Rosenberg (of AXA Rosenberg) has to say about the crisis...

Considering the positive aspects of this crisis, first of all, a little hardship is good for each of us. I think, of course, there is health in alternating good times and bad, in terms of our individual psyches. And it also makes us prudent and gives us experience.

From The AXA Rosenberg 'Advantage' - Issue 12.

The Fed : There is something you should never rush on...

The Fed seems to be in trouble. President Obama's proposals for strengthening the Fed's supervisory power to eventually turn it into the 'systemic-risk regulator' are, alas, threatening the Fed rather than enhancing it.

The proposal is, at the least, ill timed. The Fed is particularly vulnerable now. The proposals, by stirring up unnecessary anti-Fed sentiment, could trigger full blown assault against the Fed and undermine its independence.

The oppositions against the proposals are abound and there seems to exist little consensus about the Fed's expanded role. There are oppositions from agencies that would lose their supervisory authority and power or could be wiped out completely. So many people (not only libertarians and extreme lefties who are more than willing to wage crusade against the 'supra-legal entity') are now questioning wisdom of giving more power to the Fed that failed to foresee and prevent the crisis. Lawmakers are getting louder to push through 'auditing of the Fed' (but, audit what?).

To be clear, it is not the Fed's fault that they could not foresee the bubble and the burst. After all, the market could not foresee them, neither. The basic premise of the market economy is that there are few, if any, that can be consistently smarter than the market. If we expect the Fed should be wiser than the market, we should abolish credit market, nationalize all the private banks to integrate them into the Fed, and entrust the Fed to conduct all the allocation of the funds to businesses in the U.S.

The current administration's rushed proposal, if pushed prematurely, could blow up all the intricate and delicate fabric of arrangements and consensus around the Fed's independence, whether explicit or implicit, and damage the very idea of the 'independent central bank'.

There always exist something you should never rush. The reform of the role of the central bank is certainly one of them. Mr Obama should have heeded Volcker's advice not Summers's.

(To be very clear, I do not like the contents of the proposal itself, not just the timing of it - the idea of the market where the super-sized regulator governs a few super-sized gambling-banking conglomerates sounds just horrible).

Don't rush on US systemic risk regulator--Volcker (March 24, Reuters)

Fake or Real? S&P 500 Breaks Downtrend

Last week S&P 500 seemed to have formed beautiful 'head and shoulder', but this week the index shot up and broke upward the downtrend since June 12, rather than fell off the 'neckline'. We still do not know whether this bounce is real or 'fake'.

Yes, Q2 earnings are largely above consensus. However it should be noted that the consensus has been drastically revised down for several months - the consensus for second quarter operating EPS for the S&P 500 was $19.92 at the end of 2008, and it now stands at $14.06 (and this estimate is 5% below March when the market bottomed out). So, it seems that markets are still largely driven by sentiment rather than fundamentals.

Yet, it should also be noted that we saw industrial output in EMU turned positive (MoM) in June, and industrial output in the US also seems to be bottoming out. Thus, there should be more, not less, good news in coming months.

Japan: Ruling LDP Crumbled in Tokyo Local Election

The ruling Liberal Democratic Party seems to have suffered crushing defeat in the Tokyo metropolitan assembly. This could be a fatal blow to Taro Aso, the prime minister and the LDP as they are heading for a general election that must be held by October.

This is disturbing development. The opposition Democratic Party of Japan (DPJ) is promising heavy transfer payments and hand outs to various sectors of constituents (such as farmers), and (yet) more regulation on already rigid labour market.

The only good news is that Japan may finally be able to get rid of the incompetent prime minister (Taro Aso, having been unable to push through any meaningful reform, deserves this defeat) - but I am skeptical if the next one would be any better.

DPJ Set To Become Top Party In Tokyo Assembly After Election

UK ID card 'to be accelerated' (toward abolishment, that is)

The UK's Government seems to have reversed policy toward controversial national ID card program. The announcement claims 'ID card roll-out to be accelerated' (very much Brownesque ...), but states that ID cards will no longer be mandatory for UK citizens.

Well, UK citizens can still apply for card - but I doubt there would be many people who want ID tags for themselves. I believe, if the number of UK citizens who 'opt-in' is not large enough, the program is likely to be scrapped.

By the way, India is moving toward universal ID card scheme (for 1 billion people?, within 3 years?). Good Luck.

Japanese Equities：More Room to Run ?

Japan’s industrial output rose for a third month in May (by 5.9% MoM). The growth could largely be attributed to re-stocking of inventories that saw drastic decline in the wake of the financial crisis. Yet, total inventories fell 0.6 per cent month-on-month in May, according to METI (Ministry of Economy, Trade and Industry).

There still remain significant causes for concern (or even alarm), such as weak end-market demand (both domestic and overseas) and sluggish domestic investment.

However, as Japan is highly cyclical economy, Japanese equity market is expected to perform well with global economic recovery (well, it will recover eventually..), and industrial output is one of the most robust leading indicators for economic activities (while jobless rate typically lags for about 10 months to one year). Thus, I believe there still is upside for Japanese market in mid. term (unless global economy stalls badly in near term).

One caveat: Japan has structural issues such as rigid labour market, and these issues are likely to persist with the lack of political will to reform. Japan will remain 'pure cyclical play' that depends heavily on global demand for its capital goods. So, buy low and sell high with economic cycles - it is not for long term holdings.