Beer consumption to grow besides recession
In this dark and difficult times, there’s nothing like a pint to get you through the day.
Oil Prices: Near Vertical Supply Curve?
Not everybody believes that the spectre of high oil prices has been banished. We are operating on the close-to-vertical side of the supply curve, the argument goes. The plunge in oil prices does reflect falling demand, but the magnitude of the price fall exaggerates the actual volume change in oil demand. Unless we see a strong shift towards alternative energy, or a significant expansion in oil production, the stage will be set for another oil rally when global demand picks up again.
We should all be watching these price indicators very closely, but the magnitude of the dips can be somewhat difficult to interpret. Being hyper-sensitive to changes in demand or sentiment, sudden spikes driven by isolated or industry-specific events may not make them the most reliable economic indicators. But if there is indeed a real turnaround in growth, you’ll probably catch wind of it there.
My Volkswagen is bigger than your Porsche
As financial drama rages on the global stage, the Volkswagen-Porsche side plot has to be one of the more memorable ones.
“The huge rise in demand for Volkswagen shares came after Porsche disclosed its indirect, 31.5% stake in Volkswagen over the weekend, which it had built up via cash-settled options. When added to Porsche’s 42.6% direct stake, and the state of Lower Saxony’s 20.0% holding, investors who were shorting Volkswagen suddenly realized that there was only 5.0% of equity left with which to close their positions, or reverse their bets that Volkswagen’s shares would fall. Volkswagen’s shares skyrocketed on Monday and Tuesday as a result.”
To me, this illustrates that the popular market dogma that short-selling makes the market more efficient doesn’t hold if there are other barriers to efficiency - in this case, lack of perfect information. But of course, what you don’t know can’t hurt you. Even if you know the truth (in this case, that there have been more Volkswagen shares short-sold than those available), it doesn’t hurt you until everyone else knows it too. Then the drama begins.
A discussion on Marginal Revolution, with a comment from a reader which I found particularly helpful in explaining the whole saga.
Read the rest of this entry »
Ironies of life
The reason we are in this mess - cheap credit, a global savings imbalance, and a large fiscal expansion.
The solution - cheap credit, a global savings imbalance, and a large fiscal expansion.
The Difference between a Liquidity and a Credit Crunch
At this stage of the game, some people are still puzzling about whether we’re in a liquidity crunch or a credit crisis. When presented to the man on the street, both explanations sound reasonable. To the extent that businesses find it difficult to get financing from banks, the differences may even seem academic. But the basis for Nouriel Roubini’s prophetic prediction of financial meltdown (more than a year ago) hinges precisely on this distinction.
He explains it well:
Economists distinguish between liquidity crises and insolvency/debt crises. An agent (household, firm, financial corporation, country) can experience distress either because it is illiquid or because it is insolvent; of course insolvent agents are – in most cases - also illiquid, i.e. they cannot roll over their debts.
Illiquidity occurs when the agent is solvent – i.e. it could pay its debts over time as long as such debts can be refinanced or rolled over - but he/she experiences a sudden liquidity crisis, i.e. its creditors are unwilling to roll over or refinance its claims. An insolvent debtor does not only face a liquidity problem (large amounts of debts coming to maturity, little stock of liquid reserves and no ability to refinance). It is also insolvent as it could not pay its claim over time even if there was no liquidity problem.
[T]hus, debt crises are more severe than illiquidity crises as they imply that the debtor is insolvent, i.e. bankrupt, and its debt claims will be defaulted and reduced.
The distinction matters because of the solutions. Liquidity crunches are somewhat easier to solve - simply to flood the market with easily available short-term credit for banks so that they can keep lending again. Solving a credit crunch is somewhat more complicated - no one is going to lend to a company that might go bust, no matter how much money you have. Of course, what makes things worse is that it’s difficult to assess who is teetering on the edge of bankruptcy and who isn’t.
Anna Schwartz argues Bernanke’s experience in Great Depression has been both a boon and a liability. The bank runs during the Great Depression were classic liquidity crises. This is a very different animal.
“This was [Bernanke's] claim to be worthy of running the Fed,” she says. He was “familiar with history. He knew what had been done.” But perhaps this is actually Mr. Bernanke’s biggest problem. Today’s crisis isn’t a replay of the problem in the 1930s, but our central bankers have responded by using the tools they should have used then. They are fighting the last war. The result, she argues, has been failure.
I have to agree with what Marginal Revolution says, though. Better to nibble away at the tenets of capitalism than let the whole edifice collapse into rubble.
