Israel's construction un-bust
The headlines have been screaming that the Israeli economy is in recession -- as if anyone needed to be told that. The reason why this is a news item is because the data for GDP growth in the first quarter of 2009 (published on 17/5) showed, to no-one's surprise, that this key measure of economic activity shrank at an annualised pace of 3.6% in January-March 2009. The fact that this was the second successive quarter of negative economic growth confirms that Israel (too) is in a recession - because two straight down quarters is the standard definition of a recession. Beyond that statistical fact, there was no real news. The declines registered in all the main components of GDP had been presaged by the regular flow of economic data over the previous weeks and months. Thus we learnt afresh that imports and exports dropped sharply - with imports declining faster, so that the trade deficit actually improved - and also that private consumption and investment both fell. Investments were one of the sectors hammered hardest: 'gross fixed capital formation', as investment is termed in the GDP jargon, fell at an annual rate of 27.8% in the first quarter. That sounds horrendous, and it is, but it means that if the rate of decline from the previous quarter, of 7.8%, was maintained for four straight quarters, then investment would have fallen by 27.8% in a year. Fortunately, that is unlikely. The race to the bottom - and what lies beyond
Thursday February 20, was another important day in the markets - especially the US. The main reason is that the Dow Jones Industrials Index closed below its November lows. In technical parlance, this is known as 'making a new bear market low' and, by so doing, the market has 'confirmed' that the bear market is still in force. That confirmation was reinforced by the fact that the market fell further on Friday, rather than bouncing back. This reflects technical analysis principles which demand that every trend has to 'confirm' itself every so often, by pushing to new extremes, whether on the upside or downside. If that doesn't happen, the trend ultimately ceases to be in force and the market may be described as in a 'sideways trend', until such time as it makes a big move in the opposite direction to the previously-dominant trend - at which point it is legitimate and correct to define a new major trend as being underway. Risk is 'out' and will remain so
The previous blog focused on how so many supposedly smart people and famous names from among the professional investment community could have been taken for a ride by Bernie Madoff's scam. The inescapable conclusion was that they were guilty of either stupidity, or incompetence, probably mixed up with a good dash of either arrogance or laziness. These sterling qualities, rather than outright villainy and criminal intent, are likely to have been the cause in the great majority, if not all, the cases. So what? Where does that leave the huge profession of money management, which has grown so massively over recent years - indeed, over the three or four decades since private wealth started to expand rapidly? Will the money managers be able to put the crash and the scam behind them and get back to what they like to think of as 'business as usual'? Too good to be true, but not too bad to be true
I am pleased - no, make that proud - to say that I had never heard of Bernard Madoff until last weekend. Maybe I had come across his name when he was Chairman of the Nasdaq, or in the context of Nasdaq trading, the arena in which his company was one of the biggest players. But, in common with a surprising number of other people supposedly 'plugged-in' to the investment scene, I had never heard of him in the context of asset management. That lacuna has now been compensated for, by reading hundreds of pages about 'the Madoff scandal' or 'affair'. Yet I still have no idea how he managed to do what he himself claims he did, let alone answers to the endless list of questions about this mess. Obama's kinda town?
Almost two weeks after the US presidential election, I'm still looking for one of the pundits to make a fairly obvious point: Obama's from Chicago. He is the first president to emerge from the mid-West since Harry S. Truman, and that was so long ago as not to be relevant anymore. What difference does it make? Especially in the case of Obama, who seems to hail from anywhere and everywhere simultaneously - Kansas or Kenya, Indonesia or Illinois, Hawaii or Harvard: you name it, he's been there, done that, and probably sent a postcard as well. Save and go to hell
The key government response to the crisis - by all governments, everywhere - has been to throw money at whatever was perceived to be the problem. This solution was pursued via the two main tools of economic policy, namely monetary policy and fiscal policy. Monetary policy centers on interest rates, with the central bank of each country reducing rates to make money cheaper. Reducing rates is done by pumping money into the money markets and buying short-term bonds and bills, until their rates come down to the level the central bank wants. Fiscal policy means using taxation and the government budget; when you want an expansionary fiscal policy, to boost the economy, you either cut taxes or give tax breaks, or you spend extra money - or both. Bye-Bye 'Buy-Buy'For over a year now, since the financial crisis really took off, I have kept a crude, hand-written slogan over my desk which says 'An economy based on people buying things they don't need with money they don't have'. It is my way of summarizing what went wrong with the US economy (and, indeed, that of the entire Anglo-Saxon world) and why and how we got into this extraordinary mess. It is also a much-needed lifeline to simple ideas and clear thinking, in the face of reams of pseudo-sophisticated garbage that I receive in the guise of research and plough through on a daily basis. |
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