Wednesday, December 9, 2009
Via Bloomberg:
Pacific Investment Management Co., which runs the world’s biggest bond fund, said the dollar is poised to fall and the decline may help spur the U.S. economy.
“Fear not the falling dollar,” Scott Mather, head of global portfolio management at Pimco, wrote in an article on the company’s Web site. “A gradually weakening dollar may help heal the U.S. economy” by encouraging demand for the nation’s exports, he wrote.
“There are few viable alternatives,” Mather wrote. “No other currency offers the size and liquidity — not to mention the political and legal stability — necessary to match the dollar as reserve currency of choice.”
“Deflation is a bigger near-term threat than inflation…”
Read the full article here
Via FT:
We can make four obvious replies to Mr Wen. First, whatever the Chinese may feel, the degree of protectionism directed at their exports has been astonishingly small, given the depth of the recession. Second, the policy of keeping the exchange rate down is equivalent to an export subsidy and tariff, at a uniform rate – in other words, to protectionism. Third, having accumulated $2,273bn in foreign currency reserves by September, China has kept its exchange rate down, to a degree unmatched in world economic history. Finally, China has, as a result, distorted its own economy and that of the rest of the world. Its real exchange rate is, for example, no higher than in early 1998 and has depreciated by 12 per cent over the past seven months, even though China has the world’s fastest-growing economy and largest current account surplus.
Do these policies matter for China and the world? Yes, is the answer. Mark Carney, governor of the Bank of Canada, notes in a recent speech, that “large and unsustainable current account imbalances across major economic areas were integral to the build-up of vulnerabilities in many asset markets. In recent years, the international monetary system failed to promote timely and orderly economic adjustments.” He is right.
Read the full article here
Wednesday, December 2, 2009
Via SSRN:
Investors are often concerned that managers might hide negative information in the maze of mandated SEC filings. With advances in textual analysis and the availability of documents on EDGAR, individuals can quite easily search for phrases that might be red flags indicating aggressive accounting practices or poorly monitored management. We examine the impact of 13 suspicious corporate phrases identified by a recent Barron’s article in a sample of 50,115 10-Ks during 1994-2008. There is evidence that red flag phrases like related party and unbilled receivables signal a firm may subsequently be accused of fraud. At the 10-K filing date, phrases like substantial doubt are linked with significantly lower filing date excess stock returns, higher stock return volatility, and greater analyst earnings forecast dispersion.
Tuesday, December 1, 2009
Via Felix Salmon:
You’re a bank, and one of your customers owes you $2,000 on her credit card. You have two choices:
(a) You cut off her credit, convert the $2,000 to a loan, and she pays it off with 6% interest over four years.
(b) You keep the credit card open, she struggles to pay back the balance at 30%, and eventually declares bankruptcy with a principal balance of $1,205 outstanding, which you never collect a penny on.
Which of the two options do you choose? Mike Konczal has run the numbers, and it turns out that option (b) — driving the poor customer into bankruptcy — is actually more the more profitable of the two.
What’s more, the option value of option (b) is enormous: if she doesn’t declare bankruptcy you can make more money still, and of course if she keeps on spending on her credit card, that’s even more debt on which you can make predatory and usurious profits.
This is a prime example of what Ronald Mann calls the “sweat box” of credit card debt:
Debt-based issuers focus on debt servicing revenues… the most profitable customers are sometimes the least likely to ever repay their debts in full…
As the credit card borrower spirals downward, with the monthly balances growing to amounts that equal, or even surpass, the borrower’s annual income, the issuer begins to earn large monthly profits on the relationship.
This syndrome, Konczal explains, is the reason why Jackie Ramos was encouraged by Bank of America to deny people the ability to convert their credit-card debt into an easier-to-repay loan. Just don’t expect the banks to ever admit as much.
8:33 pm | 
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