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Why China Should Buy Citigroup
Tweet Share on Facebook April 10, 2009 Comment (6)Should the Chinese buy beleaguered Citigroup? The perspicacious David Goldman of the Inner Workings blog notes that Citi owns a bit less than 4 percent of Shanghai Pudong Development Bank. It has a market cap of $18 billion. Citi has a market cap of $17 billion. How about a reverse takeover by Pudong? Here is why Goldman thinks it makes sense:
1) Citigroup’s structured portfolio of “toxic” assets is extremely cheap and manageable now that it doesn’t have to be marked to market. You own a bunch of this garbage anyway, and fund managers turn up on your doorstep daily to pitch distressed investing. You can do a whole lot better buying a distressed bank and leveraging a distressed asset play.
2) You can sell off most of Citi’s operations for a modest profit. America doesn’t need another branch bank after Wells Fargo/Wachovia, Chase/Washington Mutual, and Bank of America. Citi should get out of its consumer businesses and devolve into an international wholesale bank. Its main profits should be the runoff on its portfolio, which out to be worth a lot more than $3 a share.
3) By owning a major bank you get a seat at the table of corporate America. You get a peak inside the kimono at every American corporation and the inside track on future mergers and acquisitions. The business intelligence value of owning the franchise has to be worth a few billion dollars. That’s not counting Citi’s international branch network, which would give you the inside track on a dozen countries you don’t know much about.
Me: Of course the political uproar here would be eardrum shattering, though it could mean a profit for Uncle Sam on its Citi investment.
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Unemployment Headed to 10 Percent?
Tweet Share on Facebook April 10, 2009 Comment (2)There's a 61 percent chance of double-digit unemployment by year end, according to betting market Intrade.
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Would China Dump the Dollar?
Tweet Share on Facebook April 10, 2009 Comment (29)I found this to be the most interesting bit from the Pentagon-sponsored war game that simulated a global economic conflict. According to Politico, Yale business professor and war game attendee Paul Bracken said the event "left him questioning one prevailing assumption about economic warfare, that the Chinese would never dump dollars on the global market to attack the US economy because it would harm their own holdings at the same time. Bracken said the Chinese have a middle option between dumping and holding US dollars – they could sell dollars in increments, ratcheting up economic uncertainty in the United States without wiping out their own savings. 'There’s a graduated spectrum of options here,' Bracken said."
Me: And look at it this way, the Chinese may view our return to massive deficit spending as a form of accidental economic warfare on them since it could lead to vastly higher inflation and a plunge in the dollar's value.
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Federal Reserve: Terrible Economic Pain To Come
Tweet Share on Facebook April 8, 2009 Comment (5)Here is what staff economists at the Federal Reserve think about where the economy is heading (via today's release of the FOMC minutes from March):
The staff's projections for real GDP in the second half of 2009 and in 2010 were revised down, with real GDP expected to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses in financial markets ease, the effects of fiscal stimulus take hold, inventory adjustments are worked through, and the correction in housing activity comes to an end. The weaker trajectory of real output resulted in the projected path of the unemployment rate rising more steeply into early next year before flattening out at a high level over the rest of the year.
Me: This is no V-shaped recovery. This is an exteremly gloomy forecast. Should be fun for incumbents on Election Day, 2010. Also expect to hear calls for a second stimulus package and against raising taxes in 2011.
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Nouriel Roubini and a Defense of Optimism
Tweet Share on Facebook April 8, 2009 Comment (5)Maybe the bears like Roubini and Meredith Whitney are right. Maybe not. But have a look at some great stuff from the great Tom Barnett that may inform your analysis:
I made a decision a long time ago not to make my career a bet on bad things happening. I think that approach simply corrodes your strategic thought capacity. Human history is progress, so if you're constantly having to screen out the good to spot the bad, your vision will unduly narrow. If you bet on progress, you can easily contextualize the bad, because progress is never linear. But if you bet on retreat, you must consistently discount advances as "illusions" and "buying time" and so on, and after a while, you're just this broken clock who's dead-on twice a day.
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Roubini vs. Cramer: Who's Right?
Tweet Share on Facebook April 8, 2009 Comment (5)So CNBC's Jim Cramer criticized Nouriel "Dr. Doom" Roubini in his blog for being too persistently gloomy in light of the stock market's recent rebound and some bits of positive economic news. Roubini responded by attacking Cramer as a "buffoon." Roubini also thinks the worst is not yet over for the economy. A few thoughts on this financial commentator flare-up:
1) While Roubini has been correctly bearish, let's also not forget that one reason he was so bearish originially was that he thought the dollar would collapse, sending interest rates soaring. So he was kinda right for the wrong reason, at least at first.
2) The economy could strengthen and the market could head higher ... while at the same time unemployment continues to worsen. In fact, that is exactly what is likely to happen at some point. It is a familiar economic dynamic.
3) I would be surprised if the same folks who "correctly" called the recession are also able to call the recovery. Could happen. But I doubt it. Luck is often mistaken for skill. And identifying economic inflection points is tricky business, indeed.
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How Many Trillions for TARP?
Tweet Share on Facebook April 7, 2009 Comment (3)The always insightful Peter Davis over at Capital Gains and Games puts TARP in perspective:
However, the bigger picture is that there are approximately $3.6 trillion of troubled assets on bank balance sheets, a lot more than can be cleaned up with $700 b. of TARP. ... So will Congress put more taxpayer money into TARP when the need arises? For the next few months, the answer is clearly a resounding NO! Over the past month, in hearing after hearing, members of both parties in both houses of Congress have railed against the bad deal the taxpayers are getting under TARP.
Me: And that, of course, is a big reason why Hank Paulson abandoned his plan to buy toxic assets. He needed a bigger boat and knew Congress would not give him one.
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Stop Apologizing, Obama
Tweet Share on Facebook April 7, 2009 Comment (5)Does the president know a) that leverage at European banks was far higher than at American banks, b) that Europe also had a property bubble, c) that Europe has terrible long-run financial problems related to its demographics, 4) that Europe has been able to build a massive (though now unsustainable) welfare state, in part, because it skimped on defense spending thanks to the American defense umbrella. I think these things are worth pointing out.
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Why Liberals Hate Larry Summers
Tweet Share on Facebook April 7, 2009 CommentLarry Summers, Team Obama's economic guru, made a ton money working at hedge fund D.E. Shaw. Now this is going to worry some liberals who were already concerned that the Obama economic team looks too much like the old Clinton economic team in its ties to Wall Street. These are same folks who have been grumbling for years that Clinton chucked his investment agenda to instead cut the deficit. They loathed the Bond Market Strategy of Clinton-Rubin-Greenspan. And they have been grumbling anew that concern about budget deficits is preventing the White House from proposing an even bigger economic stimulus/recovery page. And Summers is a powerful voice for budget deficit sanity, so much so that he would like to kill all the Bush tax cuts ASAP if he had his druthers.
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Polls, Obamanomics and Taxes
Tweet Share on Facebook April 7, 2009 Comment (5)The NYTimes buried this interesting little facoid from their poll on people's current economic attitudes: "Mr. Obama’s push to increase income taxes on people making over $250,000 a year was supported by 74 percent of respondents. When presented with the possibility that taxing those in the higher income bracket might hurt the economy, 39 percent of those polled still backed the plan."
Me: This is why it is important that people understand the complex linkages between taxes and economic growth. Framing tax cuts merely as a way of giving consumers more dough to spend is self-defeating in the long run.
