Via Alea, Small Lessons from a Big Crisis, Andrew G Haldane, BofE

During the golden era, competition simultaneously drove down returns on assets and drove up target returns on equity. Caught in this cross-fire, higher leverage became banks’ only means of keeping up with the Jones’s. Management resorted to the roulette wheel.

. . . when evaluating banks and their management, there is a need for greater focus on returns on assets rather than on equity. Good luck and good management need to be better distinguished. Put differently, returns to investors and managers need to be more accurately risk-adjusted if the right balance between risk and return is to be struck for individual firms and for the financial system as a whole. Second, there is a need to place much stricter system-wide limits on leverage.

Via Paul Kedrosky, Aguanomics: How Drought Promotes Entrepreneurship

… it is unmistakable that the most drought prone states, like Rajasthan and Gujarat, produce by far the most Capitalists while the well watered states like Kerala and West Bengal produce the most Communists. [Kerala and West Bengal have regularly voted Communist for at least the last 20 years and are the only states in India to have done so.] What is even more remarkable is that it is the rainfall/drought variable that appears to dominate regardless of variation in religion, ethnic group, or differential exposure to foreign trade or colonialism.

… ethnic Chinese arriving in tropical rainforests from colder, drier, more seasonally affected regions of China had a cultural advantage over their tropical counterparts when it came to saving, investing and other entrepreneurial activities. If “every cloud has a silver lining”, maybe occasional droughts have a silver lining as well.

Interesting take. Not quite tested on a statistical basis. But it’s easy to relate to, especially for me - I’m from Kutch, the driest part of Gujarat, and growing up it was obvious that entrepreneurship was a the way of life in the community, and getting a job meant something was wrong with you!

Mauldin @ Investors Insight:  A Tale of Two Depressions

… globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.

That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline. We therefore turn to the policy response.

Caijing: Fear the Dark Side of China’s Lending Surge

The current surge in commodity prices, for example, is being fueled by China’s demand for speculative inventory. Damage to the domestic economy is already significant. If lending doesn’t cool soon, this speculative force will transfer even more Chinese cash overseas and trigger long-term stagflation.

The international media has been following reports of record commodity imports by China. The surge is being portrayed as reflecting China’s recovering economy. Indeed, the international financial market is portraying China’s perceived recovery as a harbinger for global recovery. It is a major factor pushing up stock prices around the world.

But China’s imports are mostly for speculative inventories. Bank loans were so cheap and easy to get that many commodity distributors used financing for speculation. The first wave of purchases was to arbitrage the difference between spot and futures prices. That was smart. But now that price curves have flattened for most commodities, these imports are based on speculation that prices will increase. Demand from China’s army of speculators is driving up prices, making their expectations self-fulfilling in the short term.
 

‘Government knows best’ - at its worst!

Boston Magazine: Drew Gilpin Faust and the Incredible Shrinking Harvard

Most of Harvard’s endowment was tied up in illiquid investments whose values were fluctuating (i.e., plunging) daily. But Moody’s, the financial ratings firm, was predicting a 30 percent decline for university endowments for the fiscal year that ends this month. In a subsequent letter, Faust went further, warning that a drop so precipitous seemed probable.

Such a plunge would claw the endowment back by more than $11 billion. Subtract the endowment’s $1.4 billion contribution to the university’s operating costs for this year—a contribution paid for in previous years by endowment returns, but which this time would represent a withdrawal—and Harvard would be left with $24.4 billion. As the old saying has it, “A billion here, a billion there, and pretty soon you’re talking about real money.”

Especially interesting given that I’m currently reading Creative Capital: Georges Doriot and the Birth of Venture Capital by Spencer Ante. The book talks about the many innovations that Doriot brought to HBS and venture capital.

Maritime Global Net: Precious Shipping Expects Dry Rates Crash

Obviously, when you binge buy and compress imports of a single commodity, carried mainly by capesize ships, into a very short space in time, you tend to create two issues at the same time. Firstly, you tend to push up freight rates due to the time-compressed/explosive demand growth for that ship-sector. And more significantly, you create queues at loading and discharging ports which tend to reduce availability of spot ships driving prices even higher.

Based on the congestion at Chinese discharge ports and the present increased level of iron ore imports the index could actually cross 5,000 points. We think that congestion should clear up once this binge buying of iron ore abates or more new Capes are delivered from the ship-yards than the demand can absorb. Once one or both of these events take place, congestion will vanish very quickly with the BDI crashing down as quickly as it has advanced.

Commodity inflationistas much keep this in mind.

Daily Wealth: The DownTrend in Beef