China’s Third Plenum: Expectations Were Too High, As Expected
The communist party in China finished its four-day Third Plenum this weekend and the announcements following(Alt) have thus far been less than hoped for. Many are criticizing President Xi Jinping for his vaguely worded communique, which called for “fewer investment restrictions, greater rights for farmers and a more transparent system for local and national government;” however it did not lay out any specific plans to accomplish these things. We continue to see “an intention on the part of the new leadership to accelerate reform, and that is good,” the question remains what the reforms will look like. Here are some analysts’ takes. Also, here are a few things China didn’t address: 1) Reforming China’s state-owned enterprises, 2) Changing the residence-based registration system and 3) Fixing China’s local government debt problem. Speaking of local government debt…
Sharks in the Water: When the Going Gets Tough, the Tough Buy Puerto Rico and Freddie Mac
Hedge Funds have been buying up distressed municipal debt lately(Alt) and they are bringing their aggressive strategies with them. While hedge funds may provide more liquidity and increase the capital base for the muni bond market, they aren’t shy about demanding higher interest rates, more financial information from muni officials and intervening to improve disclosure and discipline. In other words: “they can smell the blood and the fear.” Meanwhile, some hedge funds and private equity investors are proposing a large acquisition of Fannie Mae and Freddie Mac(Alt). Their proposal would provide them “control of Fannie and Freddie’s core businesses of guaranteeing mortgage-backed securities, in two newly-capitalised insurance companies.” In addition, the proposal would “capitalise the new insurers by converting their preferred securities into common equity and then carrying out a $17.3 billion rights issue.” Perhaps hedge funds are feeling the pressure to step up their game? On average, hedge funds are underperforming the S&P 500 by about 13 percentage points year-to-date. But maybe what hedge funders really need are self-help styled life coaches. “A whole new cottage industry has cropped up in which statisticians track performance data, and coaches and psychiatrists work to help hedge fund managers make smarter decisions by getting them to talk about their personal histories and biases. The thinking goes that if an athlete can use coaches, wny not traders?”
Russia’s Oil-Based-Economy Conundrum and the Value of Economic Forecasting
Vladimir Putin has announced a $500 million joint investment fund between South Korea and Russia; the fund aims to increase cross-border investments in various companies and projects. As oil prices weaken, Russia is looking for foreign investors to fill the gap in growth. In 2009, South Korean investments in Russia were at $428 million; so far this year South Korean companies have invested $44 million in Russia. Furthermore, the Russian government is slashing economic forecasts(Alt) for the next two decades, warning that “oil-fueled growth is over and there’s nothing likely to take its place, given the country’s poor investment climate and aging infrastructure. Meanwhile, Russian Economy Minister Alexei Ulyukayev revised the Russian growth forecast down from 1.8% to 1.5-1.6% GDP growth, adding “it is highly likely that the annual result will turn out to be lower than our current forecast of 1.8 percent.” Which begs the question: What is the point of economic forecasting when your true expectations don’t seem to match your formally stated expectations? Another consistent pattern in mainstream economic forecasting has been to “project improving growth in the year ahead, and then to mark down those projections when the rosier future does not arrive…just because a pickup looks like it is right around the corner doesn’t mean it will actually arrive.”
An interesting comparison of wage growth post-recession from 1982, 1991 and 2001 recovery periods suggests that the current disparity between high and low wage income growth isn’t normal.