Wednesday, December 31, 2008

Interesting Picks

Picture of the day: Celebrating the New Year Carsi (or Iraqi) style.

Chart of the day: Not USDTRY or EURUSD, both of which are far away from parity. This is parity of a different kind.

I don't know how to call it when the Treasury and the Fed are involved, but Econompicdata is right to note that in Excel, it is called a circular error.

The humbling of the Economist, an extension of the main theme of my most recent weekly column.

Zubin Jelveh's the year in Economics research. I would add to his list the Rogoff etal paper on commodity prices and exchange rates.

In the same vein as one of early columns, Simon Johnson argues that inflation in the US would be hard to avoid, irrespective of how fiscal policy plays out.

Felix Salmon responds to a WSJ article on investment lessons from 2008. I agree with Felix's view on corporate bonds, and I'd additionally argue that EM sovereign bonds are equally as risky, not only because of crisis risk, but also because global bond issuance is likely to swell, meaning more and fatter kids trying to eat a potentially smaller pie.

Yves Smith on the poor prospects for the US banking industry.

Financial Times declares "We are all Keynesians now"- I am amazed how much Carsi inspires:) Boston Globes puts it in a slightly different way: Keynes' comeback.

Brad Setser responds to Tyler Cowen's NYT piece, whee he argues that the roots of the current crisis lie at the rescue of LTCM back in 1998.

Ending the year in a funny tune: 2008 Investment Guides, as summarized by the Big Picture.

Rebecca Wilder summarizes the latest Conference Board and University of Michigan consumer surveys.

Dani Rodrik's big questions for 2009.

A glimmer of hope from income growth (from Dave Altig).

Turkey November Trade Balance: Exports are Surging

Well, not really....

But the 17.5% decline in exports was significantly lower than expected (exports turned out to be USD9.3bn versus expectations of USD 8.7bn). Normally, such a divergence from expectations would not get my attention; after all, forecasting is a difficult task. But exports forecasts have mostly been on the mark in the past because they use the Turkish Exporters Association preliminary exports data (released on the first day of the month), which closely follow the official figures.

Moreover, at USD 12bn, imports turned out to be lower than expected (USD 12.7bn), resulting in a trade deficit of USD 2.7bn versus expectations of USD 3.9bn (even though the divergence here is much larger, I do not find this as interesting, as imports are much tougher to forecast). The November trade figures led me to a small brainstorming session:
  • Is the divergence between TEA and official figures a one-time thing, or is it going to be more frequent in the future. If so, why?
  • More generally, does the divergence simply reflect the uncertain environment, as I have argued in an earlier column. I'd say maybe for the imports, but definitely a no for exports.
  • Everyone has been raving about the need to get into global supply chains. Could it be that countries more integrated in global chains, such as China, will see their exports retract more. The November figures support this, with exports from China, South Korea and Taiwan retracting fast, along with commodity-exporters like Chile.
  • Is the worldwide retraction in exports due to financing woes or does it reflect the pullback of global demand (see Econbrowser for more on this).
  • How much of the retraction is due to the recent rise in protectionism (see a recent article in the Economist for more). Could protectionism stage a comeback in 2009?
All these questions are relevant for Turkey since if exports pull back stronger than expected, we may not see the slight positive contribution to growth from net exports. So the better than expected November exports figure, if it will not be revised later on, is definitely a figure on the positive side, but trade figures will be important to watch in 2009.

Tuesday, December 30, 2008

Project Topics for Metrics

Thanks to all those who answered my plea for help. Most of the students have chosen their projects, and they all look very interesting. Here's a laundry list of what we have so far (all for Turkish data):
  • The link between bond rates and inflation
  • Estimating export demand and supply functions
  • The relationship between inflation and growth
  • Current account equation
  • Exchange rate passthrough mechanism (exchange rates and inflation, esp. import prices)
  • The effect of carry trade on the stock market
  • Unemployment and growth
  • Industrial production as leading indicator of growth (growth, industrial production, hours worked in manufacturing)
For students in the class who have not chosen their project so far, have a look at project suggestions, there are a couple of project suggestions in the comments section as well. In addition, here's a summary of some project topics which have recently come up in class discussions:
  • Import demand function
  • GARCH models (e.g. exchange rate, stock market)
  • Cointegration tests for bond rates
  • Lead-lag relationship between spot and futures markets
  • Tests of purchasing power parity using cointegration
  • Relationship between inflation and stock returns
  • The relationship between exchange rate and size & composition of bank deposits
  • Forecasting exercises (growth, industrial production, inflation, exchange rate, interest rates)
I will edit this post as I come up with a few more relevant (meaning important for the Turkish economy) ideas in the next few days.

Interesting Picks

Businessweek's list of worst predictions for 2008.

WSJ look back at 2008, listing the year's most surprising economic events.

Picture of the day: How Wall Street devised exotic securities to earn fees from the debt boom.

As I had mentioned in my latest Hurriyet Daily News column, it's not mostly fiscal anymore, as IMF chief economist Olivier Blanchard and Carlo Cottarelli, Director of the Fiscal Affairs Department note in an interview. Incidentally, I wonder if Cottarelli, the ex IMF mission chief to Turkey, and the only IMFer to gain celebrity status in Turkey, is still a fan of Saibesaray and still does not have a Turkish girlfriend. Anyway, if someone told me a couple of years ago that IMF would publish a paper starting with the words fiscal policy, I would say "not in your wildest dreams". NYT Economix blog has a nice summary.

VIX, what is it good for?

FT piece on a topic I have mentioned several times in this blog (eg here): Developed country sovereign bond issuance is likely to swell and crowd out emerging market issuance in 2009. You should see the Turkish Treasury's efforts to tap the sukuk market in this respect.

Brad Setser shows that both capital inflows and outflows from the US have collapsed, but the US current account is still being financed, thanks largely to central banks.

David Beckworth summarizes the recent discussion on whether recessions can be "healthy" , i.e. the hangover debate.

Does employment increase spending (or vice versa)?

Speaking of employment, Casey Mulligan believes the US recession is partly due to a reduced willingness to work, which is refuted by David Beckworth. Mark Tahoma summarizes the arguments as well as provide links to a couple of useful papers on the same subject.

The Economist's The World in 2009 blog.

FRB Cleveland economists show that with the crisis, the structure of consumer finance has changed.

Rebecca Wilder summarizes the latest developments in the Fed's balance sheet.

All About Alpha, VIX and More and MarketSci list their most popular blogs in 2008.

Top 10 quotes of 2008 from the Big Picture.

An old idea having come back to life: The Fed should target asset price bubbles. Mark Tahoma responds.

Should the Swedish Central Bank stop handing out Nobel Prizes to financial economists? The Economist blog has a balanced view.

Model of optimal fiscal policy in a liquidity trap- While I really liked the model, he is bound to be accused of of hiding behind formulae again. Here's one unhappy customer, but about general macroeconomics rather than Krugman's model per se.

FRB Cleveland economist go over the most recent trends in labor costs.

Monday, December 29, 2008

Weekly Hurriyet Daily News Column: The humbling of the economist

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. In addition, I would like to add in two clarifications: First, there was a small minority of economists who correctly forecasted the crisis, with the most notable exception being NYU Economics professor Nouriel Roubini, a.k.a. Dr. Doom, who has correctly predicted four of the last two crises. Second, while Bagehot's conservative central banker is a thing of the past, many of his principles do remain, so my apologies if I did injustice to the great Lombard Street. For one thing, central bankers today have well-trimmed facial hair (e.g. US and Turkey) just like in Bagehot's day.

In the last column of the year, it would be appropriate to summarize the major events and themes of 2008 in the Turkish economy, starting with a global detour to provide the background.

Major global themes

One major theme of 2008 across the world has been the humbling of the economist: Until as late as the Lehman collapse, many economists did not believe that the U.S. was experiencing its worst financial crisis since the Great Depression. Along with the U.S. financial crisis came a global slowdown.

Monetary policy response in the U.S. was swift, as the Fed became the lender of last resort for the world, while at the same time throwing anything short of the kitchen sink to get credit markets working again, and turning itself, in effect, into the world’s largest hedge fund in the process- the change in the size and composition in the Fed’s balance sheet is one of the big tales of the year. Other central banks were quick to follow in Fed’s footsteps and join the easing bandwagon towards year-end. In effect, gone is Walter Bagehot’s conservative central banker in Lombard Street, replaced by the desire to minimize tail risks. We have also seen the rebirth of Keynesian policies, as many countries have enacted fiscal stimulus packages. Having noticed the extent of the growth pullback, even the IMF Is not Mostly Fiscal anymore, as the Fund has been increasingly supportive of fiscal policy.

In a similar fashion, the roller coaster ride in oil prices was totally unexpected; to see this, just look at forecasts at the end of 2007 and mid-year. Finally, 2008 witnessed the great capital plight: The inflows to emerging markets during the liquidity glut years were sharply reversed, which, combined with volatility, uncertainty, risk aversion and deleveraging, brought down high carry currencies like the lira, where the consensus view early in the year was that USDTRY was on its way to parity.

The Turkish economy in 2008

The Turkish economy had already entered a downward trend when it was faced with the global picture outlined above, with growth figures until the end of the third quarter, contrary to the consensus view, relatively unscathed by the crisis. In fact, the most puzzling aspect of the great Turkish slowdown so far has been the trigger-happiness of the economy. Producers and consumers alike have sharply pulled back during the second half of the year, much more than economic theory (or empirics) can count for. Obviously, all the political bickering has not helped, either. Unfortunately, preliminary indicators hint that the global developments have started to take their toll on the economy through trade and financing channels in the last quarter, so expect the growth picture to turn ugly.

On the policy side, the unexpected hike in oil prices led the Central Bank of Turkey (CBT) to reverse its premature easing mid-year, as the impact on inflation became apparent. To its credit, the CBT realized the worsening inflation outlook earlier than markets, but the Bank still had to revise its inflation targets. Recently, the CBT has initiated a strong easing cycle, encouraged by the favorable domestic and global headwinds for monetary policy. However, the CBT is taking more risk than the Fed and other central banks going down the same path, as we close the year with a challenging and uncertain inflation outlook.

In fact, 2009 brings a great deal of uncertainty, not only globally but also for Turkey. This will be a good place to kick off the new year next week.

Sunday, December 28, 2008

Interesting Picks

The week in pictures from Econompicdata.

Chart of the day: Get a Fed credit card.

Paul Krugman agrees with me that with short-term rates at zero, the yield curve has lost its usual interpretation.

Mark Perry and The Economist manage to find the good anywhere.

Tyler Cowen continues his series about the countercyclical asset.

Businessweek lists the worst then predictions of 2008.

More fiscal stimulus skepticism: Casey Mulligan, David Backus and Tyler Cowen. The first is a short summary of how fiscal stimulus works while Backus goes over the main arguments for fiscal skepticism.

Casey Mulligan uses labor supply and demand to arrive at seven conclusions, but Mark Tahoma summarizes the arguments against two of his conclusions.

Noting that the dollar used to rally in times of geopolitical tensions, Yves Smith argues that the recent lack of dollar strengthening might be pointing to the dollar's diminished status. Her argument makes sense, but I wonder if it has been formally tested.

Saturday, December 27, 2008

On moral character

At the end of weekly sojourn to Izmir today, I ended up sipping coffee with a friend who is an academic economist. My friend, a native of Izmir, started complaining about illegal parking in the city. While I tend to think such issues in the concept of tragedy of the commons and incentive issues (cars don't get towed much in Turkey), my friend seemed to think that it is lack of morality and selfishness at the core, which, coming from an economist, surprised me. However, a new paper surprisingly (not only to me but also to previous research) supports my friend's arguments. FT columnist Tim Hartford summarizes:
Simon Gächter, Benedikt Herrmann and Christian Thöni invited subjects in 16 cities across the world to play a “public goods” game, in which players had to choose, repeatedly, between contributing to a pot for the benefit of all or selfishly hoarding their own resources.

Earlier research had found that if players were given the option of punishing the selfish by removing their resources, they did so and near-full co-operation quickly emerged. Gächter and his colleagues found that, in many societies, the opposite occurred: rather than accepting their punishment and co-operating, those who had been punished tended instead to take revenge.

The results were striking: co-operative behaviour seemed to flourish in countries where market democracies were long established.

The Americans, Australians, Britons and Swiss were the least likely to inflict recriminatory punishment. Russians, Greeks and Saudis were most prone to reprisals. Co-operation was best sustained in the US, Denmark and Switzerland, and fell apart in Turkey, Saudi Arabia and Greece.

Co-operation and aversion to vengeance are hardly the sole definitions of moral character; and this was merely a laboratory game. Still – despite a long history of reasonably free markets in the US, Australia, the UK, Switzerland and Denmark, important aspects of morality in those countries seem to have held up rather well.
I am not sure if I buy Tim's explanation (link between free markers and morality), but I definitely found the article interesting. Also of interest are the supplementary materials for the paper: the graphs on page seven are particularly interesting. BTW, if you are into these things, Benedikt Herrmann, one of the authors, has another joint paper titled Betrayal aversion: Evidence from Brazil, China, Switzerland, Turkey, the United Arab Emirates and the United States.

Friday, December 26, 2008

Interesting Picks

Chart of the day: The fallen giants of finance.

NYT credit crisis page.

Christmas Economics from Economix.

The pain of some (e.g. Turkey) is the gain of others.

Buti & Gaspar and Jeff Frankel celebrate the first ten years of the euro.

How to conduct quantitative easing.

Good summary of the latest new home sales data (with links to other blogs) from Rebecca Wilder.

Josh Hendrickson summarizes what macro theory has to say about the financial crisis.

VoXEU article on uncertainty and the crisis.

Hail the new ADP methodology.

Macroblog looks at labor force effects versus job losses effects in explaining higher unemployment.

World Bank credit crisis talk on reforming the credit rating agencies.

Krugman and Wolf on Keynes (via Mark Tahoma).

Thursday, December 25, 2008

Help Wanted: Project Suggestions

One of the requirements of the time series (it is rather metrics for finance) class I am teaching in Izmir Economics University is a short, 3-4 page paper utilizing the tools I teach in the class. While I have not limited the topics, I am encouraging the students to do something relevant to the current events. Towards that purpose, I am asking my friends in Finance and Economics in the real! world to come up with topics that are relevant to what they are doing. Here's what I have so far:

From a research head of an equities firm:
Durables good demand as a function of GDP, construction (residential unit deliveries – iskan izinleri?), household formation – population growth?

Current account deficit as a function of domestic GDP, global GDP, REER, terms of trade.
From a research head at a portfolio management firm:
bu aralar bizim gündemimizde 2009 dış dengesi, büyümedeki sert düşüşü engellemek için kamu harcamaları ne kadar artırılmalı, bunun kamu finansmanına /büyümeye/enflasyona etkisi ne olur, kurların fiyatlara yansıması olacak mı, olursa ne zaman olacak, MB’nin faiz indirimleri kalıcı olabilir mi gibi konular var.
In addition, the ideas in today's Missing Deposits piece came from a retail banker.

So, if you would like to suggest topics, please use the comments section of this blog or email me at Anything is game: Feel free to specify regressions as the equities guy or just what you are thinking about, like the portfolio guy...

The Case of the Missing FX Deposits

The title sounds like a Sherlock Holmes novel (or a development economics paper), but is in fact from a recent speech by Ersin Ozince, the CEO of Is Bankasi (and the head of Banks Association of Turkey). First, it was thought that he was talking of of total deposits, but he clarified the next day, saying that the 10% was referring to FX deposits. Mr. Ozince does not mention which dates he was referring to (or at least, it was not reported), so using the latest CBT weekly bulletin, I graphed FX and TRY deposits for the last 13 weeks (ending with early December, figures in thousand TRY). For added entertainment, I also graphed the weighted exchange rate (50% EUR, 50% USD) on the secondary axis (RHS).

Just looking at this graph brings out quite a few interesting points:

It is just a matter of algebra to use weekly the exchange rate figures to verify Mr. Ozince's claim. By using this particular weighted exchange rate, I am assuming that deposits are equally divided between EUR and USD, which gets me close to the 10%figure Mr. Ozince was mentioning.

But this above calculation would only be rough estimation because of what a retail banker friend of mine has aptly called "the parity illusion". In this time period, the dollar gained quite a bit against the euro- this was reversed in December in the wake of the end of a great wave of deleveraging and the Fed's strong policy actions. Once you clean the data of exchange rate movements and the parity illusion, you'd probably find that the total deposits have remained stable, with the increase in TRY deposits compensating for the decline in FX deposits. So the case of the missing FX deposits is really a case of misplaced deposits.

But to undertake this exercise, you'd need to know the share of EUR and USD deposits in the first place. Theoretically, it should be possible to estimate this by using EURUSD, EURTRY and USDTRY. I have to think through this, but concentrating on an extended time period when one of the latter two was constant might do the trick.

The same idea could be reversed: It could also be possible to model the depositors' switching between TRY and FX deposits (and in between FX deposits, to add a further layer of complication). The main issue is that both quantities (deposits) and prices (USDTRY, EURTRY) would be endogenous, so you'd want to do a VAR perhaps, but I haven't done any literature review yet. I am just thinking aloud for now, but all of this would make a couple of great papers for the time series class I am teaching at Izmir Economics University.

Wednesday, December 24, 2008

More on my weekly Hurriyet Daily News Column

Since my Hurriyet Daily News column needs to be limited to 550-600 words, I find that I sometimes do not end up saying all I wanted to say. I would like to add a few things to my latest column:

First, what the CBT did with its latest rate cut is indeed very similar to what the Fed has been doing for quite some time: Minimize the tail risks. Indeed, tough times do call for tough measures, and today we might be needing Helicopter Bens rather than Bagehot's conservative central banker. But the CBT, unlike the Fed, is faced with two tail risks: While the risk of all the Fed easing finding its way to inflation is very small for now (see my recent Hurriyet Daily news column for more on this), we cannot say the same for Turkey.

Second, while the CBT has not explicitly said so, I believe they have been tempted by a chart similar to the one above, which shows currency movements since around the time of the CBT's surprise rate cut in November. The lira has been doing quite well against the dollar since then, but so are many currencies. In fact, the lira's strong performance partly reflects recouping from the large deleveraging September-November, when lira was one of the worst performers. What if another wave of deleveraging hits? Do I need to mention Turkey's own woes due to the large external financing gap?

Finally, it might be fair to ask me what I would have done. While I dare not have the wisdom of my country's central bankers, I would have gone for a less preemptive move, to make sure that I do not end up with another policy reversal, as in 2006 and early this year. That would really damage the credibility of the Bank. I would have preferred the Brazilian way, where the central bank is going through the easing path more slow-footed, but definitely not weaker.

You might encounter that the Bank does not have the time to wait, as 2009 could be a negative growth year, which I discuss in a recent Hurriyet column. But as I have argued before (last in this Monday's column), the monetary transmission mechanism is not likely to be effective as long as there is an external financing gap and the economy is liquidity-constrained. The rate cuts will surely help, but we need more innovative measures, such as the recently in-vogue credit guarantees. Rather than discuss the high interest rate, low exchange rate conundrum, is anyone thinking of doing anything on the surging costs in letters of credit? I am just asking because cutting rates will not help there...

Tuesday, December 23, 2008

On Turkish Treasury issuing sukuks

There is a well-written article in Hurriyet Daily News on the the possibility of the Turkish Treasury issuing sukuks, i.e. Islamic bonds, in 2009. The economics editors asked my two cents before writing the article, and just to help myself think through the issues, I wrote the small piece below. The paragraph before last (starting with "First") complements the Daily News article really well. Note especially that if the relative resilience of sukuk issuance was indeed mainly due to hedge funds, the USD 200bn market the Treasury is counting on may not materialize, at least not by 2010.

I am not an investigative journalist (I am neither investigative nor a journalist), so I really don’t care if the rumor is true or not. But the fact remains that a large external financing gap looms over the Turkish economy. Moreover, the external financing picture is rather uncertain due, mainly, to the indeterminate outlook of corporate borrowing. Turkey is likely to come to an agreement with the IMF early next year and get at least USD 15bn or so, but even that may not lead to sighs of relief from the Treasury and markets, especially if credit woes continue and the US economy is yet to reach its trough.

Given the challenging external financing outlook and looming FX liquidity strains in the economy, it certainly does make sense for the Treasury to borrow as much as it can externally and to introduce new instruments for doing so. Increasing the variety makes more sense if you think global sovereign bond issuance is likely to swell next year, as developed and developing countries alike start enacting expansionary fiscal policies to counter the slowdown in their economies. Among the more exotic instruments out there, sukuks definitely make sense, as they are one of the few areas in finance that have remained relatively unscathed by the crisis, at least until the final quarter of the year. While overall sukuk issuance is lower this year, compared with the same period in 2007, it has managed to remain more resilient than fundraising in conventional bond markets. Moreover, the Treasury is definitely far from clueless on sukuk-financing, as it has, to my knowledge, worked on sukuk-issuance as early as 2003-2004. However, some challenges do remain:

First, other countries have been eager to tap the sukuk market as well. Indonesia will be issuing its first international sukuks in February 2009, while Britain remains committed to become the first Western government to do so. So, Turkey will face competition, not only from established players like Singapore and Malaysia, the world’s largest sukuk insurer, but also from a couple of newcomers like herself. Moreover, in addition to more hungry kids around, the cake itself may become smaller. In fact, hedge funds, which were betting on a revaluation in the Gulf currencies against the dollar, were at least partly behind the strong issuance during the first half of the year, and with them gone, oil prices tumbling, Gulf real estate losing its momentum and global economic crisis deepening, it is not surprising that sukuk issuance has suffered since October. It remains to be seen whether the market can pick up next year.

I wouldn’t expect the Treasury to borrow significantly with sukuks next year. But in the current tough environment, for a country with an external financing gap like Turkey, every penny counts.

Monday, December 22, 2008

Weekly Hurriyet Daily News Column: Casino Royale in Ankara

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. I like to keep both versions available at my blog for personal reasons: My editors do a very good job in making the main points of the article stand out with a couple of cosmetic changes, so I just want to be able to go back to both versions as part of my crash course in journalistic writing.

The Central Bank of Turkey (CBT) managed to surpass the Fed in engineering the perfect surprise rate cut last week. The statement accompanying the rate decision leaves no doubt that the Bank’s focus has shifted from inflation to growth, but a closer look is called for.

Joining the global rate reduction bandwagon

It may be argued that the Fed’s strong move on Tuesday paved the way to preemptive action by the Turkish central bank. However, the CBT was not acting alone: Nearly a dozen central banks cut rates this past week. If anything, it seems that the CBT has a good nose for detecting global trends, as it showed in joining the global rate reduction bandwagon with its surprise rate cut in November. In fact, with more and more emerging markets enacting fiscal stimuli and cutting policy rates, developed and emerging markets’ policy responses during a crisis are finally looking much alike.

It is normal for developed countries to be running countercyclical monetary and fiscal policies, but lack of a strong fiscal hand and fear of depreciations, among other things, have prevented emerging markets to ease money and use fiscal stimuli during downturns. But contrary to earlier episodes, the current crisis has started in developed countries, and emerging markets are now in a much better position to undertake expansionary policies.

Turkey, however, decouples from the relatively more comfortable part of the emerging world in two important aspects: First, while running tight fiscal policies for the past few years, it is still not in an as comfy fiscal seat as some of the commodity exporters. Perhaps more importantly, the external financing gap and banks’ preference for liquidity could lead to a slowdown in the traditional monetary transmission mechanism, reducing the effectiveness of monetary policy. While a potential IMF agreement could partially solve this problem, it will at the same time undoubtedly limit the scope for fiscal policy.

Making sense of the Bank

To support its policy stance, the CBT has been emphasizing the weak demand, the growing output gap and the limited exchange rate pass-through. Moreover, in the current environment of deleveraging, it will be global risk aversion, not lower rates, that will drive foreigners away. However, the CBT is also grossly understating the risks to prices. Inflation in Turkey is still mainly a domestic phenomenon, with service inflation continuing to be sticky, and last month’s flat producer prices reading could as well be due to the plunging oil prices rather than the weakening exchange rate pass-through. In addition, disruptions to capital inflows and liquidity could magnify the second-round inflationary effects from a weaker lira, which is yet another risk the Bank chooses to downplay. It also makes sense for the Central Bank to try to make up for FX liquidity with lira liquidity, but even if this works, rising domestic liquidity could put further pressure on the currency and prices.

While I understand the rationale of the Bank and even sympathize with it, the CBT is increasingly reminding me of 007 at the poker table in Casino Royale: Extremely self-confident and willing to take excessive risk. It can be argued that you should be willing be reckless when you are fighting global recession or global terrorists, as sometimes that’s the only way to walk with the chips from the poker table. But you may also end up emptying your pockets, with the Bank’s two recent policy reversals (in 2006 and early this year) being cases in point.

Sunday, December 21, 2008

Interesting Picks

The week in pictures from Econompicdata.

Chart of the day: Quantitative easing in Japan versus the US.

Tim Duy on the Fed's recent statement.

Menzie Chinn looks at the relationship between monetary policy and the exchange rate and money multipliers when monetary policy is not what it used to be anymore.

While David Beckworth summarizes the essence of both and Tyler Cowen discusses a particular point of the former, Steve Waldman and James Hamilton have excellent pieces on the Fed's everly expanding balance sheet- both highly recommended (read the Hamilton piece first).

Daniel Gros argues for transfers to the private sector rather than infrastructure investments, adding that tax cuts will be most effective in countries with net-borrower households.

Rebecca Wilder shows a glimmer of hope that Fed is working in corporate spreads, money supply and mortgage rates.

Casey Mulligan highlights that the current recession decouples from earlier ones that we have not yet seen negative qoq productivity growth. Is this something to cheer for, or does it just hint that the worst is yet to come?

Yves Smith argues that by buying almost any junk assets, the Fed, in addition to crowding out private buyers, is sinking more and more into the quicksand.

The Big Picture guest column looks at the "was there a financial crisis" argument. While the arguments will not be new to those that have followed the debate, I particularly liked the chronological comparison of the Beige books.

Once again Brad Setser on the central bank flight to safety.

There is flight to quality going on in the US market as well, here's Casey Mulligan's take on whether it is cause of effect.

A Cleveland Fed note offers some hope based on the relationship between the yield curve and GDP. I am not so optimistic given the three-month rate has not had more room to go for some time, so maybe we shouldn't read much into the recent flattening.

Friday, December 19, 2008

Interesting Picks

Market reaction to the FOMC meeting.

More on the Black Swan guy.

A new paper reopens (and in my opinion concludes) the credit discussion (have banks actually decreased lending during the crisis). In a similar vein, Menzie Chinn reports of a July NBER working paper that attempts to separate the demand and finance shocks during the crisis.

The credit crisis book guide from Paul Pedrosky- note that you can see my short reviews of some of the books in his list in here and here.

Yves Smith summarizes and discusses a wide range of views (and articles) on the Fed's latest move.

For the Fed skeptic: Yves Smith explains how low Treasury rates might be reducing repos while Mish Shedlock argues Fed lending could be crowding out private lending.

Credit vertigo- what I'd just call uncertainty.

Thursday, December 18, 2008

Casino Royale in Ankara

The Central Bank of Turkey managed to surpass the the Fed in engineering the perfect surprise rate cut: 125bp in the borrowing rate versus expectations of 50bp.

I will cover this in detail in my weekly Hurriyet Daily News column on Monday, but the CBT is increasingly reminding me of James Bond at the poker table in Casino Royale: Extremely self-confident and reckless. I keep reminding myself that 007 prevails in the movie, but real life is usually harsher than in movies...

Wednesday, December 17, 2008

Interesting Picks

Humor of the day: A tradition started by the Turks, continued with Turkish exports.

BTW, I just came across the perfect Wall Street CV.

On to more serious stuff: Brad Setser on the latest TIC data.

Tim Duy, on Mark Tahoma's blog, emphasizes that we may be missing the forest in favor of the tress: Fiscal and monetary stimulus without current account imbalances adjusting may not get the US that far. This is a recurring theme in Martin Wolf's writings, one of which can be seen in the FT Year in Finance.

Useful opinion piece in the FT explains why a fiscal stimulus will not always work. Essential reading for governments trying delay IMF negotiations to get away with fiscal tightening. Of course, you being stingy is not how you go about winning elections.

Speaking of fiscal stimulus, Tyler Cowen notes of a new NBER paper that tries to evaluate empirically (using VARs) what type of fiscal stimulus works best. I don't think Tyler takes the findings as god-sent, but the Economist has a critical view.

The latest issue of IMF's Finance & Development, has quite a few interesting articles on the financial crisis. If you don't have the time to go though all, I definitely recommend the El-Erian and Kose&co. pieces as well as the Shiller profile.

FT Alphaville explains what to make of sovereign CDSs.

Speaking of the Fed announcement, Vix and more looks at: Surprise surprise- VIX trends around FOMC announcements.

More on the FOMC announcement: Greg Mankiw makes a guess on where the Fed might be headed next, while WSJ reports on part of the unusual Q&A conference call after the announcement.

Tuesday, December 16, 2008

Two common misconceptions on two central banks

Today's Fed decision was supposed to be irrelevant. At least that's what most of the analysts, journalists and bloggers were saying. I don't know if it's just me, but I still managed to pull out a few interesting observations:
  • To me, the 0-0.25% target range officiates what we already knew: Quantitative easing, not the Fed funds rate, is the Fed's policy tool.
  • Moreover, the Fed has committed to keep rates low for some time, which is consistent with Bernanke's work on Japan (sorry, can't find the paper)- as long as the commitment is credible, of course.
  • Kudos to Rebecca Wilder for the excellent discount rate/TAF analysis. If I hadn't read her post prior to the Fed statement, I would have probably ignored the 75bp discount rate cut.
  • BTW, the Fed is now paying 0.25% on reserves- it'd interesting to see where reserve balances would be headed in the near future.
  • Nouriel Roubini's stag-deflation scenario is in the works.
  • The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.
  • The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.
  • With the money multiplier plunging, the inflationary effects of all this are small for now, but I still worry about the future.
If you are still unconvinced, please take a look at David Merkel's redacted FOMC statement.

Switching gears, the discussion on the relationship between growth and policy rate cuts in Turkey seems to be forgetting the basic constraint of the Turkish economy.

We are dealing with an economy that has an external financing gap and a liquidity constraints in the banking sector, both of which could lead to a slowdown of the traditional monetary transmission mechanism. Therefore, rate cuts are not likely to have the desired effect on growth, at least not by the desired amount.

Changing the direction of the arrows, the CBT has been using the growing output gap in arguing that currency depreciation will not have strong inflationary effects. However, disruptions to capital inflows and liquidity could easily magnify the second-round inflationary effects from a weaker lira.

Monday, December 15, 2008

Weekly Hurriyet Daily News Column: Growth likely to disappoint; not only today, but well into 2009

The unedited version of my column today is below. You can read the final version at Hurriyet's authors archive. As you'll notice, I have somewhat shifted gears, as my editors have asked me to have a Turkish rather than international focus. As always, comments are always appreciated; feel free to use the comments section of the blog or drop me an email at

As you are reading these lines, TURKSTAT – Turkish Statistical Institute, will be about to release, if they have not done already, the GDP – Gross Domestic Product- turnout for the third quarter of 2008 and employment statistics from August to October. We already know that the economy is slowing down fast, but as always, the devil will be in the details. More importantly, the fourth quarter will end up being much worse, as my favorite key indicators of growth, released just before the Bayram, attest to.

Two leading indicators of growth hint at tougher times ahead

Industrial production is widely used in Turkey as a leading indicator of growth by economists, and the dismal October figures released on December 5 hinted of a sharper slowdown in the fourth quarter. It is never wise to make too much of one month of data, but the November capacity utilization numbers, also released on the same day, suggest that the weak trend in industrial production is likely to continue. Moreover, the weakness in industrial production is across the board, as the slowdown has spread from sectors that depend on domestic demand to more external sectors since the end of the summer, when the first signs of the slowdown emerged- see my blog entry tomorrow for more on this.

The details of today’s growth release are likely to reveal that growth in the third quarter has mostly been a product of Turkey’s internal factors. But with the developed countries slowing down fast, Turkey has started to feel the effects of the pullback in global demand in the last couple of months. In this respect, TURKSTAT trade volume indices, also released on December 5, show that both exports and imports are sharply contracting. While TURKSTAT also releases trade figures, the indices, free of price effects, paint a more accurate picture for the real economy, and therefore while usually overlooked by economists until now, they are likely to be followed more closely in the future. Again, we should not make too much of one month of data, but for now, the data tell us that not only external demand is unlikely to contribute to growth significantly in the fourth quarter, the continued contraction in capital and intermediate goods imports paints a discouraging picture for growth going forward.

To contract or not to contract, that is the question

Looking forward, while most economists are expecting a small positive growth between 0 to 1 percent in 2009, negative growth can not be overlooked, either. At the end of the day, we are likely to see that our fate is increasingly taken off our own hands and tied to the fate of the global economy. The trillion dollar question everyone is asking is whether the US economy is about the hit bottom and is likely to recover in 2009 with the help of Fed’s quantitative easing and the fiscal stimulus (see my column of two weeks ago for more on this). If that is the case, Turkey may indeed end 2009 with small positive growth, with the economy starting to show signs of recovery in the second half of the year. But if you agree with Dr. Doom (NYU professor Nouriel Roubini who has so far been essentially right in predicting the global crisis) that even tougher times are ahead for the world economy, you should not be surprised to see Turkey grow less than -1 percent next year.

But the fact is that, negative growth or not, the Turkish economy is to grow significantly below its potential, not only this year, but also in 2009. In this challenging outlook, we are looking for a tough year for the Treasury and the Central Bank. This is where I will pick up next week.

Saturday, December 13, 2008

Interesting Picks

The week in pictures from Econompicdata.

Equation of the day: MV=PY.

Chart of the day: Citi's story of 2008.

You can catch Medoffs by looking at serial correlation.

While it is not fresh out of the oven (due to my having missed it when it was posted), Calculated Risk's thoughts on oil are definitely worth a read.

Gian Maria Milesi-Ferretti offers a solution to the weak dollar-continuing current account deficit puzzle.

Back in November when it was first initiated, I had argued that it was creating an unfair playing ground for the countries left out. But it seems that no one wants the IMF's money, at least for its new lending facility.

Rebecca Wilder summarizes the essence latest (3Q08) Fed flow of funds data.

Brad Setser discusses whether the dollar has peaked.

Thursday, December 11, 2008

Interesting Picks

Chart of the day: Volatility and the carry trade

Felix Salmon and Charles Davi defend credit default swaps: It is information and liquidity, they say.

NY Fed's one-pager Forms of Fed lending has finally been updated, but I don't think the next update will fit to one page.

Michael Dueker, through Econbrowser, tries to determine the recession's trough date using a VAR that incorporates qualitative and discrete variables. He is forecasting see a July or August 2009 trough and a jobless recovery until March 2010. Assuming a 6-month transmission to Turkey (courtesy of the IMF), don't get your hopes up for positive growth in Turkey next year.

Rebecca Wilder revisits Fed's interest on reserves.

The father of sudden stops warns against the infamous son.

Interesting concept via The Big Picture: The Shadow Gold Price. But I suspect that if you look at historical linkages, many things look very cheap nowadays, including bananas, as one commentator has noted.

Tobins's Q hints equities have not reached bottom.

I learned about the condition of trade finance as a credit crisis indicator from a friend in the shipping industry a few weeks back. FRB Atlanta does a great job in explaining the difficulty in getting letters of credit and how it is impacting the Baltic dry index.

Scary Movie 2009: Produced by Fortune films

Zubin Jelveh notes of a short Cleveland Fed article that evaluates Japan's quantitative easing.

Mark Tahoma summarizes the recent blogs on the infrastructure multiplier.

David Bekworth does a great job in explaining why Fed is thinking about issuing its own debt- quick resterilization. Yet another reason to watch Treasuries.

Tuesday, December 9, 2008

Interesting Picks: Turkey

Results of a survey from a Turkish private university shows that the children of self-employed are less successful academically and more entrepreneurial.

The demand effects of economic crises in Turkey

I wasn't a blogger when this article from Macro Man first appeared, but it is a great read anyway.

We all talk of the dependency of imported inputs as a curse for Turkey, but to my knowledge, nobody has looked at their role in Turkey's export variety, as a new paper does for India.

Expected social security wealth simulations for Turkey

A new paper looks at Turkey's Evolving Trade Integration into Pan-European Markets

During my stint as a bank economist, I was surprised to see that foreigners were usually a step ahead in the bond market. The most obvious explanation of them having deeper ears just did not make sense to me. A new paper formally shows my casual explanation using bond microstructure data and offers an alternative explanation.

A CBT paper (in Turkish) looks at the market responses to monetary policy surprises.

Evidence of propping in business group firms in Turkey in the 1990s, when all was wild wild west.

I saved the best for last: A new NBER working paper looks at ten developing countries (including Turkey) that are manufacturing exporters and contrary to popular belief, China's expansion during the period 1995-2005 has had only a minor contraction in export demand for each country.

Monday, December 8, 2008

Interesting Picks

Chart of the day: NYT bailout tab.

First, it was the Fed; now the US government is starting to look like a hedge fund.

Charles Davi continues his excellent discussion of Synthetic CDOs, ratings and super senior tranches.

FT Alphaville presents the key takes from the just-released BIS quarterly report.

Newcomers to the blogosphere (but well-known economists), Woodward and Hall discuss the different options for stimulating the US economy.

Speaking of fiscal policy, Tyler Cowen has a fiscal policy cookbook.

Down with CDSs...

I never thought anyone would call Dr. Doom an optimist.

Speaking of the Black Swan guy, he gets back at quantitative methods at an article published in FT (HT: Mark Tahoma).

The lesson from the market reaction to the nonfarm payrolls: The Cyrano Principle.

How bad is the crisis? If you'll judge it by stock market performance, as bad as the Great Depression- note the bellish shape of the chart as well.

This is the first time I am wishing a market is broken.

Sunday, December 7, 2008

Weekend Fun!

Thanks to the PM for spicing up an otherwise rather boring bayram:
We'll be the country least affected by the crisis. We are confident on that
I wish I had his contact info. so that I could persuade him into a small bet on his claim. That way, I'd at least recoup some of my recent losses.

Friday, December 5, 2008

Interesting Picks

The week in pictures from Econompicdata

Casey Mulligan thinks that the the US Treasury and the Fed are just creating the wrong incentives. An academic version of his arguments can be found in his recent NBER working paper.

Oliver Kamm reviews the year's books on Economics and Finance.

Has the quest in search of a Giffen good concluded?

Cato Unbound brings together four economists for an anatomy of the financial crisis. David Beckworth discusses one of the interesting (if not entirely original) ideas in one of the articles.

David Altig, Rebecca Wilder and Menzie Chinn explain the latest nonfarm payrolls data with intuitive charts.

But things will only get better, at least for equities, claim market economists. Yet another upbeat 2009 outlook report.

Speaking of charts, Jeff Frankel tackles the crisis in one chart- also has link to a Harvard panel on the economic crisis for new members of Congress.

More on TIPS and nominal yields from the guy who got me to write on this issue in my inaugural Daily News column (see also my followup on the same topic).

I just love market reaction to data charts, especially if they come as neat as the ones here.

Alphabet Economics: U, V, W, S, Z or L; that's the question- I can't believe I already covered almost 1/4th of the alphabet:)

Latest EPFR data paint a grim outlook for emerging markets.

Thursday, December 4, 2008

More on my latest Daily News Column

I have seen quite a few articles complementing my latest Daily News column. Here's my summary on those:

First, my explanation why the US is heading towards eventual inflation was not complete. While I mentioned inflation would be a blessing, I did not spell out why. Fortunately, Harvard professor (and ex IMF chief economist) Ken Rogoff lays out why inflation is actually needed to combat the crisis. And in case you found my argument for inflation less than crystal clear, FT Alphaville summarizes a couple of recent reports that make the same point.

Second, I have been rather quiet on investment applications of my scenario, which was by far the most common question I received on my article. I am really not a smart and rationale investor, as the recent number of bets I lost on Besiktas attest to, so I wanted to turn the interested reader to someone who is: Paul Kedrosky spells out the investment implications for a scenario along the lines I described in my column.

Third, there is the issue of the fiscal stimulus. While I briefly outlined why I think there will be a bias towards too much of a fiscal stimulus rather than too little, there is a valid counterargument as well, which blogger knzn does a pretty good job of explaining. But even before deciding on the amount, I should note that the effectiveness of fiscal policy is not a given. While I did not delve into this issue at all, one of the important considerations is whether public spending will crowd in/out private investment. Mark Tahoma tackles the issue after referring to another article written on the subject.

Last but not definitely not the least, Economix links to articles on the implications of the fiscal stimulus on US debt.