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Posts by Campbell Harvey
This Winter of Our Hardship |
The ‘Winter of Our Hardship’ are the words of President Obama in the inaugural address. He refers to the common dangers that we face in his somber message. The common danger is that this recession turns into a depression. In this video blog shot on January 22, 2009, I explore the economic death spiral. It goes something like this. Corporations cut back more than they need because they want to be sure they are safe. But in doing so, there is additional unemployment and the demand for the corporation’s goods decreases leading to even more cutbacks in employment. This is the death spiral. or Streaming Video from Duke University  Image courtesy of flickr/Wayne MacPhail |
The Impact of the U.S. Economic Crisis on the Rest of the World |
For those of you who are familiar with some of my research, you know how I have railed against people overselling the concept of “Global Diversification”. While there is an obvious benefit to diversifying your investments, it is not fair to mislead investors about the degree of benefit. It goes something like this. Investors are sold a package of international investments with the promise of global diversification. Correlation is the measure usually touted and the international investments, we are told, have a low average correlation, say 0.30. But this is how it works. When the U.S. market is down, the correlation increases, say to 0.6, which is bad news because it means other markets go down with the U.S. That is, you are disappointed that the correlation was higher than the 0.3. When the U.S. market is up, correlations decrease, say to zero. This means that while the U.S. is going up, you are being punished by low returns in other markets. That is, you are disappointed that the correlation was lower than the 0.3. Yes, the average is 0.3 (0.6 + 0.0)/2 — but you are worse off than you thought. In this video blog shot on January 22, 2009, I argue that the current episode is an extreme example of why there are limited benefits to global diversification. All major equity markets dropped like stone in 2008. There was no diversification. or Streaming Video from Duke University
 Image courtesy of flickr/Kennington Fox |
The Essential Need for Transparency |
We recently learned that the U.K. financial institution, RBS, lost $41 billion. We also learned that Citigroup lost $8 billion. How are we to interpret these numbers? Would you be surprised if it was the reverse, with Citi losing $41b and RBS $8b? Probably not. You see we have no way of assessing the current state of banks. There is very little transparency. For example, we do know that Citigroup as $300b in assets sitting “off balance sheet”. Who knows what those assets are worth. We also know that some of these assets are not being marked to market (fair market value) because there is supposedly no bid or extreme lack of liquidity. As a result, we are relying upon the model prices that the bank (rather than independent third party) provide. In this video blog shot on January 22, 2009, I make two points. First, in order to rebuild confidence in our banking system we need an extraordinary degree of tranparency. Second, the government has no business blowing taxpayers’ money on bailouts of institutions where the government has no idea what the value of the firm is. or Streaming Video from Duke University
 Image courtesy of flickr/Jurek Durczak |
Unemployment Fast Forward |
The unemployment rate in December 2008 was 7.2%. We heard that initial claims for unemployment were greater than expected last week. What does this mean? As usual, it is difficult to navigate the data. We were told there were 589,000 initial claims in the week ending January 17. This was 82% higher than the comparable week last year. What’s worse is that these are not real numbers — they are seasonally adjusted. The unadjusted number is 769,000 which is down from the disasterous 957,000 in the previous week. Yes, that’s correct. In the past two weeks, 1.7 million people made an initial claim for unemployment insurance. This bad news was not reported in the press. In this video blog shot on January 22, 2009, I analyze the outlook for unemployment. or Streaming Video from Duke University  Image courtesy of flickr/Daquella Manera |
What Do We Do About Banks? |
The government has dumped $45 billion of cash and back stopped over $100 billion in troubled assets for each of Citibank and Bank of America. Current market capitalization of Citi is about $17 billion and Bank of America about $27 billion. Put simply, without the $45 billion each, they would be bust. But what do we have to show for it? Not much. They have hoarded the money rather than aggressively used it to create credit. It is the classic mistake of throwing good money at bad. The American taxpayer has put into these firms far more than would be need to outright buy 100%. The government has been satisfied with a passive role. That must change. In this video blog shot on January 22, 2009, I explore the state of banks and what potentially can be done to make them work better. or Streaming Video from Duke University  Image courtesy of flickr/Sonya |
Here’s an Idea: Let’s Throw Some Good Money at Good |
Once upon a time, there were three good banks: Bank of America, JP Morgan, and Citigroup. When the financial crisis started, these banks stepped up and seemingly did some favors for the government. JP Morgan acquired Bear Stearns (with some government help). Bank of America gobbled up Countrywide (the infamous sub-prime lender) and then devoured Merrill Lynch. Citigroup made a deal to grab the troubled Wachovia (with government help). But the financial crisis kept on going and questions started to arise. Now the government is barfing money to save both Citi and Bank of America. And there is no end in sight. Read on…..  Image courtesy of flickr/assbach |
Unemployment and Recessions |
“The worst job numbers since 1945”, we heard from CNN this morning. Well, that is not true. Today is different from 1945 for two reasons. First, our population is much larger. Second, there was an important technical factor — WWII (in September 1945 non-farm payrolls plunged by almost 5%). Nevertheless, the news of 524,000 losses was bad enough. The real loss was close to 700,000 if you include the negative revisions to October and November. How many more jobs will we lose? |
Fed Loads Cutlery into the Cannons |
In a ‘historic’ move, the Fed slashes the Fed Funds rate 75bp. The new rate is only 25bp. Basically, zero interest rates. My opinion … this is no big deal. See my interview on BNN on this news. However, the effective rate was already close to zero. So what if the official rate is now 25bp. There is no real difference. What the market cares about is the effective rate. However, there are four other aspects of the Fed announcement that we should take note of.
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The Freefall – A View from Main Street |
Duke University/CFO Magazine survey 1,275 CFOs in the U.S., Europe and Asia was released today. I am the founding director of this quarterly survey and we have been conducting the survey for the past 51 quarters. The survey is unique because it focuses on CFOs. In the past, our survey has provided information in advance of other popular surveys, like purchasing manager surveys. The intuition is that the CFOs know the investment projects before they give orders to the purchasing managers. We inserted many special questions on this quarter’s survey to help central bankers assess credit conditions at the firm level. While the Fed has lots of information from bankers, our survey provides a look at how small, medium and large businesses are struggling in the current financial crisis. The current read is staggering. We all knew the economy was in the toilet but this is really bad. Let me highlight two examples: 1. Firms are in slash mode. They will slash employment by 5% and they will do it quickly. This implies a rate of unemployment well into double digits. 2. CFOs are fundamentally worried about the health of the financial institutions they deal with. 75% were concerned about the health of the financial firms they do business with. The FDIC recently told us that they had 177 banks (out of roughly 8,500 financial institutions) on the watch list. The survey suggests that FDIC’s estimate is at best a low-ball estimate and at worst a highly misleading indication of the health of financial system. |
Brother, Can You Spare a Trillion? |
 Image courtesy of Wikimedia Commons The (in)famous Credit Default Swap (CDS) market provides the market’s best guess that an issuer will default on its debt. A low spread is good. A high spread is bad. Check this out. Campbell Soups’ (no relation!) CDS is less than the U.S. government CDS. This means that the market believes there is a greater chance of the U.S. government defaulting than Campbell Soup. The 5-year CDS for U.S. government is 70 basis points. Campbell Soups’ is 65 basis points! This portrays a very pessimistic outlook for the consumer. There will be a high demand for soup – perhaps from the soup kitchens? Given this grim assessment, it is naïve to think that the consumer will lead us out of this recession. Here are the reasons why. |