Interesting Picks

The week in pictures from Econompicdata.

I think had linked this before, but just in case, here's a graphical explanation of CDOs. Meanwhile, Felix Salmon has a really good explanation of synthetic CDOs.

Aaron Swartz lists the blogs he'd like to see.

Martin Wolf on why many economists didn't see it coming. He also discloses part of his economist scorecard, noting the economists who, at least partially, got it right- I would also love to see his Fs in addition to his As and A-s. In a similar vein, Casey Mulligan and Brad DeLong take stock.

I have referred to them quite a few times, but as The Big Picture notes, both WSJ and NYT have extensive overviews of the crisis.

Casey Mulligan returns to an old debate.

Big Picture has a credit crisis watch as well (Calculated Risk has been running one for quite some time now).

I noticed a couple of days ago that the long end of the US yield curve has started to decouple from from stocks and the dollar. Yves Smith adds a third anomaly as well as offer some explanations.

Dr. Doom on the three dreaded D's: Debt, debt deflation and defaults. FT Alphaville elaborates on why debt deflation is actually worse than deflation.

Quantitative easing in pictures.

Monthly guest blog in Turkish: Natural Selection (Dogal Seleksiyon)

It is time for hedge fund manager Afsin Alp's monthly guest blog, published in the November issue of BORYAD. Even though it was written in October, it is still extremely relevant. Since Afsin wrote the article, Chinese growth forecasts have been sharply revised downwards, but that only supports his points. Two additional points are worth underlining:

First, Afsin rightly concludes that all major US recessions are followed by strong growth. I agree, but as I'll discuss in my weekly HDN column on Monday, we may be getting just a pinch of inflation this time around, and that's before the economy recovers. Second, while Afsin provides one of the best one-liners for the dollar strength, that dose of inflation, coupled with things getting back to normal, may mean that the dollar and US Treasuries may be prone to some nasty surprises in 2009. I will expand on these in my column, but before that, here's Afsin's excellent article:

Daha önce neler söyledigimi ve simdi neler oldugunu karsilastirabilmek için Temmuz ayindakini yazima sizlerle birlikte bir göz atmak istiyorum. O tarihlerde yatirimcilari emtia piyasalarindan ve hatta temkinli yatirim diye taninan altindan bile uzak durmalari konusunda uyarmis ve bir balonun patlamasinin söz konusu oldugunu belirtmistim. ABD’de yasanan gerilemenin, er geç gelismekte olan ülkeleri etkileyeceginin altini önemle çizmistim.

Gelismekte olan ülke denildiginde akla ilk olarak Çin geliyor. Çin’in açiklanan GSMH’sindaki büyüme %9.9 seviyesinde olup tahminim 2009 yilinda %8’e kadar gerileyecektir. UBS, Çin’in GSMH büyüme orani tahminini 2008 yili için %10’a ve 2009 yili için %8.8’e indirdi. Ihracat ve konut yatirimlarindaki büyüme yavaslayacak ancak bunlar devlet politikalari ile desteklenecek, iç talepteki artis ile biraz da olsa hafifletilecektir.

Yine önceki yazimda Türkiye’deki fiktif olarak sisirilmis YTL kurundaki riskten bahsetmis ve yüksek faizde dahi YTL’yi kesinlikle yatirim araci olarak tavsiye etmemistim. O tarihlerde 1.18 olan YTL/ dolar kuru, sonrasinda 1.70 YTL/dolar seviyelerini gördü. Bakalim kur dengesi Kasim ayinda nasil bir seyir izleyecek?

Temmuz ayindaki yazima “Kredi Imparatorlugunun Çöküsü” basligini atmistim. Su an tam da böyle bir dönemden geçiyoruz. ABD’de baslayan finansal kriz, bugün tüm dünyayi etkisi altina almis durumda. Peki bu duruma nasil gelindi? Neden finansal sistem kilitlenme asamasinda ve kredi dagitimi tamamen durma noktasinda? FED Baskani Bernanke’nin ve Hazine Sekreteri Paulson’in verdigi kritik bir karar süreci etkilemis olabilir mi?

Peki Lehman Brothers’a ne oldu?

Devlet yardimi ile kurtulmus, daha dogrusu devletin bünyesine geçmis ya da devletin tercihli hisse alarak ortak oldugu sirketlere bir göz atalim… Bear Stearns, AIG, Fannie Mae, Freddie Mac, Washington Mutual ve liste böyle devam etmekte. Peki Lehman Brothers’a ne oldu? Digerlerine göre küçük ölçekli olan bu sirketin gerçek etkisi neydi? O dönemde FED ve Hazine, Lehman için bir hukuki açik bulamadiklari için sirketin iflas etmesine izin vermislerdi. Tüm yatirimcilar da bunu normal karsilayip devletin tüm bankalari kurtaramayacagi yorumunu yapmislardi. Ancak önemli bir nokta vardi; diger bankalar müsterilerinden topladiklari paralarin bir bölümünü likit ve risk orani düsük gördükleri kisa vadeli Lehman’in bonolarinda tutuyorlardi. Sirket batinca son 14 yilda gerçeklesmemis olan gerçeklesti ve kisa vadeli bu mevduat hesaplarinin degerleri düstü. Bankalar topladiklari mevduatlari sirketlere kisa vadeli kredi olarak veriyorlardi. Ancak mevduat hesaplarindaki bu düsüs panige sebep oldu ve yatirimcilar paralarini çektiler.

Ufak olarak görülen bu olayin sonuçlarina baktigimizda, islerini sürdürmek için kisa vadeli kredi kullanan küçük ve orta çapli sirketler batma noktasina geldi ve bunun ekonomiye etkisi çok büyük. Ikincisi, güvensizlik ortamindan dolayi bankalar birbirlerine kredi vermeyi durdurdular. Bu zincirleme olaylar, finans sistemini kilitledi. Devlet 700 milyar dolar yardimin üzerine, bu mevduat hesaplarini fonlamak için ekstra 500 milyar dolar daha ayirmayi planliyor.

Dolarin arzinin sürekli yüksek tutuldugu bu durumda, kendi fonumdaki yatirimcilardan sikça gelen soru su: “Neden Amerikan dolari kuvvetleniyor?” Bunun çok basit bir sebebi var; dolar su anda tüm kurlar içerisinde kötünün iyisi. Yani insanlar diger kurlara oranla dolari tercih ediyorlar, ancak dolardaki bu deger kazanci ekonomi için negatif etki yaratacaktir. Bütçe açiklarindan kaynaklanan problemler, ihracatin azalmasi ile tekrar gündeme gelecektir. Endüstriyel üretim %6.2 oraninda gerileme kaydetmistir ve bu ihracatin hizla azalacaginin bir göstergesidir.

Sermaye piyasalarindaki bu volatilite artisi, kredi piyasalari ile açiklanabilir. Bonolarin nominal degerlerinden bu kadar iskontolu seyretmesi, sermaye piyasalarinin vadeli bir opsiyon gibi trade edilmesine sebep olmaktadir. Hiç görmedigimiz günlük degerlerden standart sapmalar karsimiza çikmaktadir. S&P-500 endeksindeki örtülü volitalite göstergesi olan ve korku endeksi olarak bilinen VIX, 1987’den beri en yüksek seviyesi olan 80’e ulasmistir. Bu rakamin yorumu, eger VIX degeri yüksek ise bu daha çalkantili piyasalar ve riski hedge etmek için kullanilan pahali opsiyonlar anlamina gelmektedir. Yatirimcilar, piyasalarda risk gördüklerinde bunu sigortalamak için kullanilan opsiyonlarda daha yüksek prim talep etmektedirler ve böylece VIX degeri yükselmektedir.

Çalkanti yil sonuna kadar devam eder

Yatirimcilara her çeyrek sonunda fonla ilgili stratejilerimi aktardigim yazimda, yil sonuna kadar bu çalkantinin devam edecegini yazdim. Bunun sebebi; finansal piyasalardaki krizden dolayi kötü performans göstermis, sermayesinden çok alim yapmis tüm fonlarin, kredi de bulamayinca yatirimcilarindan gelen paralarini çekme taleplerini karsilamak için portföylerini nakde çevirmeye yönelmeleridir. Birçok hedge fon bundan dolayi kapanma tehlikesi ile karsi karsiya kalacaktir. Devletin piyasalara yaptigi likidite enjeksiyonunun etkilerini göstermesi, biraz daha süre alacaktir. Ekonomisinin üçte ikisi tüketici harcamalarina bagli olan bir ülkenin bu dönemde ve özellikle son çeyrekte yasayacagi sikinti asikârdir. Issizlik orani bugün %6.1 (Eylül) seviyesinde, ama tahminim önümüzdeki yil içinde %8 oranina ulasacagi yönünde.

Bilançosu güçlü ve iyi yönetilen kurumlarin ayakta kalacagi ve digerlerinin yok olacagi dogal bir seleksiyon döneminden geçmekteyiz. Kapitalizmin sorgulandigi ve insanlarin gözünde hiçbir aktifin degerinin olmadigi bu dönem, aslinda karsimiza inanilmaz yatirim firsatlari çikariyor. 1929, 1987, 1998 ve 2001 resesyonlarinin sonu hep büyüme oldu. Resesyonlar en fazla 8-10 ay sürmesine ragmen içinde bulundugumuz ortamdaki sorunlarin büyüklügü göz önünde bulunduruldugunda, bu zaman iki misli daha uzun olacak gibi görünüyor.

Ancak piyasalarin stabilite kazandigi, LIBOR oranlarinin düstügü, bankalarin birbirlerine tekrar kredi vermege basladigi, issizlik rakamlarinin yükselmedigi ve cari açiklarin azalma egilimi gösterdigi an, sermaye piyasalarindaki yatirimlari arttirma zamanidir.

Some more tips on TIPS

I had noted in my weekly HDN column that TIPS are behaving rather weirdly. The Economist expands on my point, as well as raise additional issues and offer some answers. Arnold Kling goes into the details.

Speaking of TIPS, both KNZN and James Hamilton argue that they should be taken off the market, albeit for different reasons.

Interesting Picks

Charts of the day: US bailout pledges and S&P dividend yield vs. 10-year Treasuries.

I was waiting until I found the perfect article on the Obama'a economic team.

If you are going to do fiscal stimulus, should it be G or T?

Mortgage rates finally fell (see the excellent graph in the article) with the Fed's latest packages, but is this really a good thing in the long run (before we are dead)?

Mark Tahoma reports a Dallas Fed paper that weighs the costs and "benefits" of moral hazard.

John Muellbauer gives some unorthodox monetary policy advice. Incidentally, as he notes the latest Fed announcements are in line with his proposals, and we could definitely see more of that as the Fed approaches zero policy rate.

Menzie Chinn summarizes the latest OECD forecasts.

David Altig talks about the monetary transmission mechanism and poses an interesting question at the end.

Calculatedrisk looks at the relationship between house prices and PCE and concluded that consumption might have much further to go. Incidentally, this is the last of a series of really good posts on house prices, the rest of which are linked in the article.

Rebecca Wilder notes that the latest government actions amount to the monetization of public debt. Not that there's anything wrong with that, as William Buiter argues in a well-written note.

Interesting Picks

Chart of the day: From Chart of the Day.

I just came across the NYT credit crisis essentials page. What next- credit crisis for dummies?

WSJ against WSJ: I see it as an indicator of how uncertain the future direction of Fed policy has become.

Economix has a short article on why oil and gas prices do not move one to one- an issue often debated in Turkey- naturally, the issue in Turkey are somewhat different.

Speaking of oil, James Hamilton, my favorite academics blogger who is an energy economist in his spare time, has a working paper, Understanding Crude Oil Prices.

An omen for Saturday.

My answer to those claiming that yesterday's 10% IMF surge was due to the (still-unannounced) IMF package.

Rebecca Wilder continues to discuss issues of opaqueness for the world's largest hedge fund.

Another interesting piece on the sustainability of dollar strength- this one from the London banker. FT Alphaville expands on one particular reason- a more complete discussion is here.

Zubin Jelveh demonstrates that in times of crises, all correlations tend to one (or -1).

Rogue Economist rants on the three laws of risk and their implications on an interconnected financial system, using CDSs as an example.

I had mentioned last week that economic forecasts are getting more dispersed in Turkey. Menzie Chinn reports that a similar thing is happening for the US.

Table of leverage ratios of big banks, on which FT Alphaville elaborates.

Financial Armageddon argues that durables and non-residential investment are especially vulnerable. However, Casey Mulligan shows that hasn't been the case for non-residential investment and has a neoclassical explanation to go with it.

The deflation is coming?

Starting today, I will be writing a weekly column in Hurriyet Daily News on global developments and their impact on Turkey. Since this is the first time, I had to deal with a couple of unexpected developments, like not being able to find a neat-looking picture (and hence the Sopranos-style look) and having to shorten the article due to a miscommunication with the editor on the space alloted to me. Anyway, I am pasting the uncut version (wow, that made me feel like Ridley Scott) below:

I will be sharing in this column my two cents on global developments and their effect on the Turkish economy every Monday. Based on conversations with market participants and fellow columnists, I have decided to try to predict the future as much as explain the past, which means that inevitably I will sometimes be wrong. Given the uncertain times we are in, I would like to state upstart that I should be deemed successful as long as I am right 51% of the time. If Mustafa Denizli gets so much, so should I. Having got that out of my system, I can now turn to more serious matters:

Deflation fears are growing by the day, whether you look at search trends at google or mention of the d-word in newspapers. While a smaller inflation print would be interpreted as a positive number as recent as a couple of months ago, deflation is now in the headlines, and I mean literally, if you just have a look at the cover pages of Thursday’s Wall Street Journal and Financial Times. So to whom does deflation owe its newly-acquired fame to? While there have been serious analyses pointing towards deflation as early as the spring, most deflation-mongers base their case on two pieces of data: Wednesday’s October US CPI release and the inflation expectations derived from Treasury inflation-indexed securities. It is useful to assess how useful a predictor of deflation each is.

With the CPI falling at its fastest pace on record and the core index achieving its first decline since 1982 in October, Wednesday’s release is anything but inflationary. In fact, when I look at the distribution of price changes of the individual components, I can see a broad-based downward pressure on retail prices. But trimming the components of the index from extreme outturns and doing a couple of forecasting exercises point to an inflation rate in the order of 0.5%-1.5% for next year. Note that I am not an incurable optimist; in fact, I am expecting another large fall in the US CPI in November, which would bring yearly inflation to around 2%. However, for negative inflation, we would need much more than that: Boston-based economist Rebecca Wilder notes that eight consecutive declines on the order of the October fall would be needed for annual inflation to fall before zero. So, while there are deflationary trends in the US economy, deflation itself is still far away on the horizon.

In fact, economic theory and history have taught us that deflation will not be a serious problem unless falling prices get embedded in the consumers’ and firms’ expectations. In this respect, the recent rise in yields on inflation-indexed and inflation-protected Treasury securities (TIPS) over nominal Treasuries of similar maturity (see graph below) is being interpreted as expectations of deflation. For starters, inflation-linked securities have an inflation-risk premium and a liquidity premium, making a comparison with nominal Treasuries tantamount to comparing apples and oranges or Fenerbahce and Besiktas (I am not disclosing who I think the rotten apple is). In fact, the Cleveland Fed used to provide TIPS-based expected inflation estimates that accounted for these biases, but they have discontinued the practice since end-October, noting that the extreme rush to liquidity is affecting the accuracy of the estimates. This is not to say that something weird is going on in US Treasuries. The best answer to the puzzle has (so far) been provided by (future) Nobel prize winner Robert Barro, who notes that nominal Treasuries might have a negative beta- unfortunately the short life-span of inflation indexed Treasuries makes testing his theory impossible.

Leaving the oddities of US fixed income market aside (I assure you that market has more rarities than the Amazon jungle nowadays, with corporate bonds trading more cheaply than credit default swaps and the like), for the deflation threat to materialize, market expectations of deflation are not really important. The relevant expectations are those of consumers and firms, and in that regard, the data looks much better: For example, Conference Board’s expected inflation over the next 12 months is still at a hefty 6.9%. While this measure almost always overshoots actual inflation by a wide margin, falling prices are still far away from expectations.

But the fact that expectations are tame today does not rule out that they could deteriorate rapidly because of the credit crunch. Such a deterioration could come, for example, by a rapid contraction in money supply, but that is unlikely to happen as long as the Fed keeps up revving at this speed. But with the Fed finally having confessed that quantitative easing is underway –after having confused me and many fellow economists on what exactly it had been doing-, money supply is likely to be an important, if not the most important, gauge of the effectiveness of monetary policy in the near future, especially as the Fed hits zero-lower-bound at policy rates.

So, I hope to have demonstrated that if Paul Revere were as much of a cry-baby as the deflation-mongers, no one would have believed him when the British did come, and he would not have his statue standing near the Old North Church in Boston. Of course, the key question for us in the periphery is what all this would mean for Turkey? I think I have made enough predictions for the day, so this is where I will pick up next time.

Cry, the beloved think tank

Hurriyet Daily News recently ran a short article on the closure of ASAM. What I particularly liked about the article is that rather than talk about the political motives underlying the end of funding from its main sponsor, the article managed to relate to general problem of think tanks in Turkey, independence or rather lack of it.

Before I go on, I should explain that the idea is a think tank is relatively new for Turkey. For a country of some 60mn, there are an amazingly small number of think tanks, most of them in Ankara. Suffice it to say that the Hurriyet article manages to cover all the major think tanks I know of.

Having worked at a think tank as well as interact with other think tanks in the capital Ankara for one and a half years, I can unfortunately concur that independence is really one big issue. In my specific case, while no one from our sponsor institution ever called us to order tailored-to-needs research, our papers and policy notes were carefully edited to make sure we did not offend the policies of the sponsor. Perhaps more disturbingly, the staff of the sponsor saw us more or less as its research assistance arm. In one particularly funny instance, my counterpart at the sponsor tried to scold me for having made a trip to the Starbucks next door for getting my morning cappucino as I was not available to answer her questions on a particular project.

Of course, as the Jersey saying goes, "Money talks, BS walks"- the route to independence for think tanks goes through securing their own funding, but that ain't so easy. As the Hurriyet article notes, people just don't want to pay for knowledge. Even though the top brass of our think tank were more connected than an OTC derivative, we still had difficulty getting projects for a fee.

But as an Isparta saying goes, "In democracies, you never run out of solutions". In fact, there are alternative funding methods for think tanks. For example, a think tank founded in Argentina by a couple of friends from Boston uses (at least used to use, as I haven't been in touch with the founder for some time) donations from diversified sources to fund its activities. So in way, my words of wisdom to think tanks: "If you're looking for the guilty, you need only look into a mirror"...

Interesting Picks

Chart of the day: Mankiw's puzzle

The week in pictures from Econompicdata

Really good one-page summary of the financial turmoil.

I talked about the switch to low-cost retailers and the lipstick index before, but apparently, a relatively new finance web site allows the consumer to track frugalizing at the micro level.

I just came across a leading indicator for euro-area GDP.

Surprise surprise: A recent paper shows sliced and diced loans suffered from moral hazard and adverse selection.

Dani Rodrik reports on a new survey on the role of international finance on growth.

Soon after I had voiced my concern regarding TIPS as a deflation indicator, I get support from Felix Salmon, who summarizes his conversation with a TIPS expert.

And speaking of TIPS, interesting take on Robert Barro (via Greg Mankiw) on the relationship between Treasuries and TIPS.

A couple of really interesting papers from the IMF: First, since he beat me to it, Zubin Jelveh catches the gist of a new IMF paper by highlighting that counterparty positions imply losses from OTC derivatives exceed USD 1,500bn. Second, an IMF paper on the US current account deficit and the dollar concludes that needed decline in the US trade deficit could be achieved with only a modest exchange rate depreciation.

Pedagogical piece on the financial turmoil- great read for a class.

New research shows that financial dependence (a la Rajan& Zingales) explains for 2/3 of the variation of employment across firms. No wonder then the dismal US employment figures during the ongoing credit strains.

Given there are bound to be an increase in bankruptcies across the globe, we might want to where closing down will be relatively easy. Simeon Djankov summarizes World Bank Doing Business research on the issue.

On deflation: I

Whether you look at search patterns at google trends or mention of the "d" word in newspapers, with the latest release of the US CPI, suddenly deflation is at the headlines (literally, just look at the front pages of today's WSJ and FT). I would like to offer my two cents on two important questions: How likely is deflation and what would be the Fed's response? Today, I start with using bond yields to argue for deflation.

Before I go on, however, I should note that I am struck by the sudden shift in sentiment from inflation to deflation in the span of a mere couple of months. My awe comes not only from the shift but also the media jumping like hungry wolves on the latest US CPI data. In fact, the signals were there, and I know at least one blogger who has been calling for deflation since spring. Well, lesson learnt: It seems that the media is a lagging indicator....

Coming to the first question, the easiest way to search for deflation is to look at what markets are reflecting. A Bloomberg chart that has been circulating around the web a lot during the last couple of days compares yields between bonds that provide protection against inflation and those that don't to show that most all major economies are heading towards deflation. For the US, the five-year break-even rate suggests that investors are expecting annualized inflation to be -0.70% over the next five years.

However, there are a number of issues with using such yield differentials to measure expected inflation. For starters, there are issues about liquidity: Not only you are comparing apples and oranges (assets with different liquidity), because of structural changes in the bond market, you might be looking at Florida oranges while in fact you are chewing on the local Finike variety.

Moreover, if you control for liquidity, if people are risk-averse, the yield differential would include an inflation risk premium, giving an upward bias to inflation expectations derived from yield curve differences. I guess you could estimate this risk premium (and then scrap it to get at true inflation expectations) using volatility implied in options prices. But I am not sure if there are options on inflation...

The take from all this is that I would not put my money on deflation just based on bond yields. But there are other signs pointing towards deflation, as I will argue on my next entry on this topic...

Interesting Picks

While the latest US data smell of deflation, energy analyst Gregor Macdonald argues that the two steep curves, yield and oil futures, hint that there is inflation and growth on the way.

While the dollar continues to advance against major currencies, BOA argues (and has argued for some time now) that USD illiquidity accounts for the greenback's strength. This means that as credit strains ease and VIX falls, so will the dollar...I am not sure I but the view, but I appreciate the courage to argue for a weaker dollar.

NYT reports on an online market for selling IOUs.

FT Alphaville sums up the latest Fed actions -scrapping of supplementary financing program, encouraging excess reserves- as well as what lies ahead (more quantitative easing) and what to do if all else fails.

Applying his own research on the effect of large uncertainty shocks on the US economy, Nicholas Bloom argues that 2009 will the nightmare on main street.

Speaking of recession, Bloom's methodology of linking uncertainty to the real economy is rather unique. The most common way of predicting recessions is by way of a limited dependent variable (probit) model. Fellow bloggers James Hamilton and Orhan Karaca use such models, to predict probability of recession in the US and Turkish economies respectively. If you want to know how it is actually done, I just stumbled upon a pedagogical paper.

And also speaking of volatility, here's an article that shows that more globalized countries have less stock market volatility in good times but suffer from excessive volatility during crises (has nice graphs).

Earlier, I had linked to an article showing the similarity between stocks and bonds. Now, I have a piece that argues, because of the structural changes in the market, bonds are getting less liquid and starting to look a lot like bonds.

Menzie Chinn continues with Brad Setser's ut-oh on the latest US trade release.

In case you wanted to know the nitty gritty of the Fed's swap line with other central banks.

More on using Graham's ratio, brought to sunshine from dust by Bob Shiller, to see where US stock might be headed in the long run.

Summary of World Bank research on financial crises.

Interesting Picks: Turkey

I decided to extend Interesting Picks to links related to the Turkish economy. I doubt the Turkish version will be as frequent as the regular version, but I plan to post one at least once a week. Another major difference will be that apart from the occasional tasteless joke, the Turkish entries will be much more research-oriented, reflecting my increase in utility when I spot a policy-oriented paper on the Turkish economy. Enough said...:

Batman against Batman: I wonder how I missed this in the Turkish papers. Nice post, but this surely can't beat my own Batman joke back in 2006 when I was trying to lighten up the dull Economics news: "There has been a break of avian flu in the Southeastern town of Batman, and it isn't Robin!"

Paper on regional poverty in Turkey (HT to Orhan Karaca)

Evaluation of Turkish Domestic and Foreign Banks By Using Financial Ratios: I am no expert to evaluate the paper, but since accounting and balance sheet analysis is French (at least, the banlieu variety) to me, I got something out of it.

Speaking of banks, a paper just published looks at the board characteristics of Turkish banks.

An IMF paper from more than a year ago measures sovereign risk in Turkey with the contingent claims approach.

Another new paper looks at at the relationship between financial development and growth using multivariate time series.

A model of the Turkish 2000-2001 tablita-style stabilization program.

Speaking of exchange rates, a new Spanish Central Bank working paper looks at the exchange rate pass-through in new EU members- plus Turkey.

Interesting Picks

Macroman summarizes the G20 statement in one word. FT Alphaville reports on the UBS meeting performance monitor; apparently G20 should apparently try harder.

IMF programs cause consumption (but not the economic one).

Michael Lewis does it again- he made laugh my brains out and now everyone at the Astoria Starbuck's, where I am writing this blog, rightly think I am a lunatic.

Enough fun; now, to the more serious stuff:

Chart of the day: Net exports and residential investment for the US.

Timeline of the crisis (goes as far back as 1970!).

Both Mark Tahoma and Rebecca Wilder argue that US labor market woes are here to stay.

James Hamilton returns to the effective Fed funds rate puzzle- I has summarized the puzzle and various arguments at a recent post.

Dr. Doom thinks that US consumption is likely to fall severely over the course of several years, and he has twenty reasons.

Steve Hsu uses statistics to explain securitization.

Krugman discusses the extent of macro policy during a liquidity trap and once again that's what the US is in, if anyone noticed, but Tyler Cowen thinks that a liquidity trap is unlikely.

History lessons from FT Alphaville: Intraday Dow volatility in historical perspective and how bank profits and loans reacted to previous crises.

Rebecca Wilder and Mark Perry ask where the credit crunch is (not in loans data). Joking aside, their figures and discussion show, in my humble opinion, how complex the credit crisis has turned out to be in the US. And that's why we have Fed economists from Minnesota and Boston dueling as well (see second entry from post from early November).

The crisis and Turkish tourism

A friend recently pointed me towards an article about the the effect of the global recession on the Turkish tourism.

It is true that the lira's recent depreciation against the euro and especially the dollar has made Turkey relatively cheaper and boosted profits for the industry (hotels and travel agencies/ tour operators), where contracts are usually made in in these two currencies but the costs are in lira. So far is more or less obvious, but the article goes further than that. Quoting the contracts manager of a Swedish tour operator, it claims boldly that the Turkey may see a boom in tourist arrivals in 2009:

“The middle class in Europe has been hit by the crisis. The demand for expensive countries has fallen. People have started canceling tours to Italy, Spain and Greece. Turkey is the cheapest country for tourism. Then comes Bulgaria and Egypt. The U.S. and the Far East are distant dreams for Europe's middle class,” he said. “Tourists will now go to inexpensive countries,” Gunes said. “I really think we will bring in 100,000 tourists. Miami, Italy, the Canary Islands and Greece will take a hard hit. In order to keep up with the tourism boom, we are going to invest in Cesme, Foca and Gumuldur. If this crisis had hit in the summer season, we would have hit the jackpot,” he said. “Let's be cautious of overbooking because there will be a boom. Germans, Scandinavians and English will flock to cheap countries."

The same frugalizing I have mentioned earlier for US shoppers or New York women hunting for lipstick might also turn out to be the case for European vacationers hunting for sea, sun and fun. While I did not manage to find a study looking at income elasticities for Turkey tourism exports (there are studies that estimate import demand and export supply functions, and I had referred to one of those in an earlier post, but not for tourism), I doubt that Turkish tourism is an inferior good to begin with. Moreover, even if the contacts manager turns out to be right, there are bound to be regional differences. For example, Marmaris has transformed into a major Russian destination recently, while Antalya is more diversified, with Germans in addition to Russians. Further depreciation in the ruble and a severe depression in Russia are likely to be felt in Marmaris even if the noted substitution effect materializes. The article, while having failed to account for intra-tourist differences in Turkey's destinations , it does point to a potential decoupling between destinations catering to domestics residents and foreigners.

The crisis will, however, affect regions that cater to domestic tourists, said Gunes. "In this respect, Cesme will be hit the hardest. After that it might be Bodrum. Alanya, Side and Marmaris will have a really good season. Cesme will be hit in two ways. It appeals to domestic tourists for two months. And domestic tourists will avoid high prices,” said Gunes. “Cesme should turn to foreign tourists and make 80 percent of its agreements with foreigners. Aside from Cesme, Turkish tourism will experience a boom.”

But what does the data actually say? TURKSTAT recently released quarterly tourist arrivals/departures figures for 3Q08. Revenues are up 14.4% yoy and the number of tourists visiting Turkey has increased 12.5% yoy (these data are from the departing visitors survey). While there is no similar data for Turks vacationing in Turkey, Returning Resident Visitors survey points to a small (2%) cutback in spending. So a first look in the data seems to support the claims of the article.

But there is a catch: The effects of the global recession would not alter many people's travel plans until into 2009, as travel plans and more importantly reservations (and payments) are well made well in advance. This goes for both consumers and tour operators that work (and sign contracts months in advance) with Turkish hotels and tourism agencies. Moreover, most of Turkey's tourism revenues come in the summer months, so statistics and the condition of the world economy now do not tell us much. We'll just need to wait and see if new contracts for the summer are being signed.

However, the part of the industry catering to Turkish tourists, traveling abroad as well as domestically, has started suffer from the great Turkish slowdown. Conversations with a friends in the outgoing departments (sending Turks abroad) of tour operators point to a slowdown in the order of 10% yoy, much more than the reported 2%. Of course, it could be argued that this year there was a major religious holiday at the end of September, which was at the beginning of October last year- this might have boosted the official yoy numbers, but most Turks returned around on October 4th or 5th and would show up in the 4Q survey, so it is hard to resolve the discrepancy- maybe the dismal numbers will come starting October, as the Turkish economy started to turn exponentially more sour in the last couple of months. Regardless , and perhaps more importantly, reservations for the second religious holiday, at the beginning of December, have been going awfully slow, the same sources tell me. Because of the lag effect I mentioned above, I see the second bayram as a much better indicator of what's to come, so I have all the reason to worry for tourism.

So, while it is too early to declare that foreigners will flock to Turkey this summer, it is safe to say that more Turks will stay at their homes at the bayram and beyond...

Some nontraditional observations on the latest Turkish data

Below is my take on Turkish data of the last week. I know it is not the usual data turned out to be X; implications are Y type of analysis, but if you are interested in that, I'll be writing a blog on my favorite Turkish economy reports soon.

First, the obvious: As many columnists market economists have reported, the latest data point to a slowdown and growth and several analysts have cut their 2008 and 2009 growth forecasts in the last few days. Moreover, while it is always problematic to read into one-month of data, the September current account as well as other data released in November hint that the economy might be adjusting faster than you can solve a Calvo model (one of the more challenging ones, at least).

Second, the less obvious: Forecasts of market economists have started to really miss the target. Forecasts are bound to to be different from actual realizations, and anyone who follows such forecasts knows to take them with a grain of salt- in fact, Ferhan Salman shows that market forecasts tend to be outperformed by simple time series models. But what is more intriguing that the accuracy of the forecasts has increased considerably over the last couple of months. When I simply compare the mean of the big three market forecasts (inflation, current account and industrial production), as reported by CNBC-E, I see the absolute value of the difference between the forecasts and realizations widening considerably in the last two months. Therefore, the strong form (see below) of the unskillful analyst explanation can be rejected unless all research houses fired their economists and hired less skillful ones at the end of summer.

Now, there is a catch: Leaving aside the issue that my data is only from 2008 (9 observations!), it could be that a couple of outliers could be driving the results. For example, it could be that the less skillful analysts could be driving the mean away from the realizations. Therefore, I looked at the forecasts of each bank in the CNBC-E sample separately, and I still get the same result. Therefore, I am able to reject the weak form of the unskillful analyst explanation as well.

In fact, it is rational for each analyst to follow the herd. While I have not seen a similar study for economists recently ( but there are quite a few papers from Makriadis in the last two decades), there are many papers that explain why equity analysts flock. Basically, if you are wrong (and so is everyone else), it won't look that bad, but if you make a radical forecast different from everyone else's and you are wrong, the traders who depend on your input won't be very happy, as I can personally tell from my experience as a bank economist. However, if this is the case, then the all the forecasts should be bundled together. And they were, until the end of the summer.

This brings me to my third and least obvious point: Not only are the forecasts being less accurate, they are also getting increasingly disperse as measured by their standard deviation (again, I am talking about the big three for 2008).

What do I make all of this? I think we are entering a very uncertain environment and because of the unpredictability of certain key assumptions, even professional forecasters are having a hard time seeing where the Turkish economy is headed. I am not trying to say they are clueless. Think of it it as a ship sailing south somewhere in the Pacific before longitude could be measured at sea; they all know that we are heading south, but they are just not sure we'll end up landing in Australia or New Zealand. The scary part is that we could also be heading to Antarctica and not be aware of it yet...

Interesting Picks

The week in pictures: From Econompicdata

Yet another sort of decoupling: Between the Fed and other central banks

Understanding liquidity and its role in the credit crisis

Macroblog continues its discussion on the changing operational face of monetary policy. FT Alphaville takes on the issue as well.

Menzie Chinn and Rebecca Wilder look at US real retail sales- this data as well as exports and and some other recent indicators hint that the US economy is going downhill.

The perfect gift for a banker or regulator alike: A visual guide to the financial crisis- just print and have it framed.

Heizo Takenaka outlines an eleven-step financial sector proposal. One and four are really the same thing, and while attractive, switching between the regulator and regulated might not work well in practice (e.g. Korea pre-1997), the list is still comprehensive.

If you are not sure what CDOs and CDSs and the other three-letter things that entered into our daily speak in the last couple of years, I just came across the perfect blog that demystifies all these and more.

If you are following more blog regularly, you have probably seen quite a few NYT interactive maps. Here's another great one- on US homeowner negative equity.

Interesting Picks

Here are some more appropriate names for TARP, now that there won't be (and indeed there was never any) buying of troubled assets: TERP (Troubled Equity Relief Program) or PFKATARP (Program Formerly Known as TARP). FT Alphaville summarizes views on the U-turn as well as showing the consequences.

Economics goes into the bedroom.

Mish argues that industrial and Treasury bond yields are supporting the deflation argument.

John Cochrane discusses in WSJ whether it is time to buy stocks. I particularly liked the part Bryan Caplan quotes, where Cochrane shows how stocks, contrary to conventional wisdom, are a lot like bonds.

Menzie Chinn looks at the path of US consumption in 2009 with some basic assumptions.

Macroblog explains the changing operational face of monetary policy by summarizing a recent FRBNY policy paper that shows how money can be decoupled from monetary policy- basically, what the Fed has recently been doing.

The Fed, FDIC, OCC and OTS recently released a joint statement, which is saying to banks, among other things, please lend. While Economix gives some background on the statement, if the constraint is in the credit demand rather than supply, even if you lend it, they won't come.

BIS just released its latest (end 2Q08) statistics on the global OTC derivatives market.

After looking at the relationship between the Ted spread and stocks last week, MarketSci is taking on VIX and the stock market this week. Again, there are no official links established, but nevertheless, it's enjoyable to read.

Corsetti and Muller summarize some recent recent research (mainly theirs) showing that the effectiveness of a fiscal expansion depends on how it is financed as well as the stance of monetary policy. The article is a well-written explanation of some of the issues I had briefly touched in an earlier post.

Zubin Jelveh writes on market microstructure, summarizing the key takes of a paper that explains why demand and supply are slowly integrated into market prices.

Understanding the fall of oil prices below USD55 through options.

The truth about the markets

I got the this picture, with the title as the name of the attachment, from a friend who is an Istanbul-based fixed income trader. He had the following note next to the picture:

This is really a classic

As a token for the meaning of the day

Interesting Picks

Thorsten Beck goes over the different methodologies to assess the relationship between financial development and growth. It is a comprehensive how-to guide.

There has been some recent discussion that the Chinese fiscal stimulus plan could mean the biggest buyer of US Treasuries could end up slowing down its purchases, putting upward pressure on yields. Leaving aside the issue if the low yields might be keeping the effective funds rate artificially low, such a rise might be a blessing in disguise (see my previous Interesting Picks entry), Brad Setser argues that won't be the case.

Chart of the Day: The now-defunct investment bank bonus matrix (inspired by the Lewis article mentioned in the previous Interesting Picks entry).

Menzie Chinn reviews some recent trends in US consumption.

Allan Meltzer proposes to solve the housing problem by boosting demand.

Some more really scary Fed charts (BTW, the charts are from St. Luis Fed, which I mention in my data sources blog entry)

Felix Salmon explains the difference between buying CDS protection and naked short selling).

Bank of America seems to agree with me that Trichet is delusional.

Now, the Fed is buying distressed assets. What next? A swap line with Turkey? Joking aside, it is the Fed, not the Treasury's TARP that is providing the bailouts for now.

The super-contango in the oil forward curve may have some long-lasting consequences.

A recent paper demonstrates that exchange rate movements between high-interest-rate and low-interest-rate currencies are negatively skewed, meaning that carry trades are subject to a currency crash risk. There are other interesting empirical findings in the paper as well, such as the comovement of currencies with similar interest rates.

Anchoring to the IMF, II

On Friday, there was a well-written article in the International Herald Tribune on Turkey's IMF dilemma, i.e. to anchor or not to anchor. Daniel Altman catches the gist of the article in his IHT blog by calling an IMF help a Faustian bargain. It is true that the Fund is mostly fiscal, so irrespective of whether the government genuinely plans to resort to fiscal stimulus against a slowing economy or is worried about the upcoming municipal elections (it has recently been reported in the media that one of the major disagreements between the IMF and the government is transfers to municipalities, so even a hopeless optimist cannot disregard the latter), it wouldn't be too happy with the IMF on its gullet, to quote the PM himself.

Leaving the issue of local elections aside, a case can still be made that Turkey should not go for IMF help. The same signalling argument I had made for IMF earlier could also be used for the counter-argument: An IMF agreement could put Turkey in line with countries like Pakistan, Ukraine, Iceland and the like. Similarly, it could be argued that in a time when East and West are going for fiscal stimulus (the Economist has an excellent recent article that makes the case for fiscal stimulus), going against the wind will hurt the country more than it helps.

I am not saying I buy these arguments. On the contrary, I believe that both theory and empirics support that an IMF anchor and tight fiscal policy would be beneficial for the Turkish economy. Here's why:

Leaving signalling issues aside, to quote a great economist, emerging markets, with balance sheet constraints, debt and current account sustainability issues and currency & maturity mismatches, are simply different animals and fiscal policy that works for developed countries may not work for developing countries (sorry for the awkward attempt at putting much of the EM-related international macro literature of the last two decades into one sentence)- for a simple example how the well-known IS-LM model changes in the context of EM, see this paper and its accompanying comment.

Leaving the ivory tower of theory in favor of practical economics, in a world where your sovereign risk premium is measured by your international reserves relative to your external financing requirement, having IMF cash ready would definitely help (forget the Krugman argument that your reserves would be depleted instantaneously during a currency attack, it is the perception of markets that matter here). And while there is some evidence that lax fiscal policy could promote growth in EM and be perceived positively by markets, even then revenue-based adjustment usually works better than spending-based adjustment and tax-financed spending is better than debt-financed spending. Moreover, in countries with weak institutions, fiscal restraint is likely to be more growth-enhancing than expansionary fiscal policy. When I add all of these together, IMF and fiscal restraint simply weigh more on my scale.

Therefore, I should seem happy by the recent convergence of the academia, media, economists and businessmen (basically anyone except the government and those against the IMF on political grounds) towards a new with-money IMF program (whatever its exact name be). In fact, I am not, even though I have formed my own opinion in favor of fiscal restraint and the IMF. The reason of my discontent is basically the lack of a debate on this important and controversial issue. I have read a couple of articles arguing against the IMF and fiscal restraint (and discussed one of them in a recent post), but the debate is extremely one-sided at the moment. Moreover, despite all the uproar, I have not heard that many convincing arguments from the IMF-fiscal restraint camp either. IMF is good because it will please markets is not a valid argument, unless you add a because to it. And frankly, leaving aside a few notable exceptions, that is unfortunately more or less the depth of the arguments.

Given the importance of the issue and the uncertainty in its nature (as are most policy discussions in Economics) I would have expected a more balanced and lively debate on the merits of an IMF program and fiscal restraint. Maybe, we Turks are just hoping that as in Faust, angels will descend and save us when the moment of truth comes.

Interesting Picks

I don't have many links today, but it's the Fed's fault- I just spent too much time on trying to understand both the quantity and price of the Fed's balance sheet, as the first two entries attest. But hopefully, you'll be getting some quality over quantity this time around...

I had been thinking I was confused by the Fed's balance sheet because of my lack of understanding. Thanks to Rebecca Wilder, I now know it's not me, it's the Fed. I guess the CBT is not the only central bank criticized for lack of transparency, at least the Turkish Central Bank hasn't been sued yet.

Great exchange between Econbrowser and News'n'Economics: James Hamilton explains the difference between the target and effective Federal funds rate with the participation of non interest receiving institutions in the overnight interbank market and to the new 0.75% FDIC insurance fee. Rebecca Wilder counters that the latter could not be the reason because of the details of the opt-out provision, to which James Hamilton agrees. But then, he wonders why the arbitrage opportunity of borrowing at 0.25% from a GSE and putting it at 1% (excess reserves) at the Fed would not push the effective funds rate higher. I am just another perplexes soul at this point, but Deutche's explanation of low Treasury yields, which FT Alphaville reports, might be part of the answer. But then this all boils down to saying that Fed's quantitative easing is well under way and/or that Fed is losing control of the monetary steering wheel. Or am I missing something? Anyway, Zulbin Jelveh summarizes the Hamilton and Wilder posts as well as providing some more insight with a couple of interesting charts.

MarketSci summarizes his blogs from last week on the relation between the Ted spread and the stock market.

Yet another recession indicator: The lipstick index (in fact, this isn't as crazy as it sounds; think of it as a micro version of the frugalizing we see in same store sales data).

VoxEU.org has made it a a tradition: After their advice to the G7/8,On the eve of the G20 meeting, they have published a new book on what the G20 leaders should do the save the economy and fix the financial system. Eichengreen and Baldwin introduce the collection of essays.

The end of Wall Street, from the author of Liar's Poker.

Interesting Picks

I am changing the title of my regular links entry to Interesting Picks from Reads of the Day, mainly to reflect the facts that my picks do not always come from the same day and that I jot in that entry almost every day, but not every day...

The week in pictures from Econompicdata.

James Hamilton goes over the latest payrolls report. According to Krugman, the latest data puts the US into a straight course for ZIRP.

The two-trillion balance sheet.

Yves Smith has more on the DTCC CDS data. FT Alphaville summarizes the issues.

Former Argentina:) Central Bank governor argues that the IMF should guarantee EM debt. Joking aside, this isn't as crazy it sounds, as he also offers some solutions to some of the problems inherent in such a proposal, which would, if nothing else, create a level playing field for EM.

Interactive table on US bank bailouts.

Is the Ted spread a good leading or lagging/concurrent indicator of the US stock market? Never mind that none of these is a formal test, it's just fun to read.

David Beckworth has one more labor statistic to add to James Hamilton's comprehensive list of recession indicators. BTW, he has a simple recession prediction model.

History teaches us that looking at the money multiplier as sign of credit easing might be a good idea in times of stress.

Chart of the week: US same store sales for October. Note the negative correlation between the quality of the chain (low-cost, upperscale) and change in sales. Although I have not seen a similar data for restaurant chains, I recently read that McDonalds's is doing OK. So is the US consumer frugalizing?

Prediction markets for the new Treasury secretary.

Anchoring to the IMF

Suna Reyent has a well-written article at Seeking Alpha. While the article's main point of interest, as its title suggests, is whether or not Turkey needs an IMF anchor, Suna goes on to discuss other issues of relevance as well. Here are my random ramblings on some of the interesting arguments from her article:

I would have agreed with Suna that Turkey would not have needed an IMF program, if in fact other market-soothing/signaling mechanisms were in place or if I could have been sure that capital flows would not dry up and foreigners would not have to flee Turkey after a country-specific shock or, more likely, another bout of global risk aversion. Simply put, other mechanisms aren't in place, and the PM's populist remarks on the IMF are not helping either. Note that with Dr. Doom still predicting that the worst is to come and the father of currency crises reporting a likely hard landing in EM in the coming months, I can not say with confidence that the worst is behind us. Moreover, add the weakening demand and tigthtening credit and exporters faced with a global slowdown to Turkey's well-known vulnerabilities. I am convinced that the latest Fed and IMF initiatives made an IMF program a necessary condition to sail the crisis with minimum damage, but the long list of vulnerabilities means that it may not be a sufficient condition either...

One argument Suna makes against the IMF anchor is that Turkey doesn't need the money because high interest rates will keep the money flowing in. Leaving aside the signaling effect of an IMF program, I beg to disagree because i. nominal interest rates are high, real rates are not that high. ii. When there is a sudden stop and capital flight, all EM will be likely affected regardless of the interest rates. Speaking of interest rates, my main disagreement is with her high interest-overvalued currency argument. Specifically, she notes:

My pet theme has been about bashing the Central Bank of Turkey regarding their decision to keep a high level of interest rates. I have been writing about the “hot money” that has been pouring into the Turkish markets, and specifically about the fact that Turkish authorities have knowingly and consciously advocated the inflow of such money in order to sustain a growth rate that depended upon cheap financing of imports via an overvalued currency.

I know I am damaging my credibility by referring to someone who was in the control room for most of the so-called high interest-overvalued currency era, but his arguments are very similar to mine- for a more rigorous treatment, see here.

Being involved in risk management, Suna also makes a very interesting point:

Such capital flights and the ensuing devaluation of the currency need NOT cause severe damages within an economy as long as preventive risk management techniques and necessary liquidity valves (for emergencies) have been instituted throughout the economy.

Unfortunately, such measures are almost non-existent in Turkey. At my stint as a bank economist, I was shocked by the small volume of currency derivatives in Turkey [footnote: For Suna or anyone else interested, looking at the determinants of FX derivatives market development a la this paper would really be a very interesting exercise]. In fact, Suna concurs that firms outside of the financial sector have not instituted the kinds of risk management procedures that banks have. And it is the absence of liquidity valves that has prompted some of the more thoughtful Turkish economists on suggesting mechanisms aimed at providing a lifeline to consumer and business credit such as bank guarantees and incentives for making loans.

Reads of the day

I know this is starting to sound like Forrest Gump, but IMF cuts back growth forecasts, again...

The guy has finally gone insane.

I know what conference I am attending to at the end of May if wine gets hit by depression.

Call me mad cap, but I am somehow not surprised at all by the Fed's latest announcement. FT Alphaville elaborates.

Zubin Jelveh compares the performance of different methodologies used to forecast the US presidential elections. Prediction markets seem to have fared much better than either economic models or polls.

While the consensus view is dollar strength, there are also some signs of easing demand for USD, if you know where to look (even if you don't buy the arguments, some of the sources of info. mentioned are noteworthy).

Rebecca Wilder argues convincingly that pre-existing lines of credit are driving consumer and firm borrowing in the US.