A long silence

It is now over a month that I have not posted on this blog. Sorry, I am very busy and I have to focus on my day job while juggling with my private life. I'll get back to blogging once I have the time and the energy again.

The Divide over Market Efficiency

Here is a great article about Eugene Fama, Robert Shiller, and the debate over the informational efficiency of financial markets.

What's Worse, Russian Ruble or Ukranian Hryvnia?

As you can see, it's Ukraine by a country mile which is worse off, but that's not saying much for Russia's economic prospects.

In Latin America, the two junk currencies and economies du jour are the Venezuelan bolivar and the Argentinian peso. In Eastern Europe, the two notably horrible performers are of course the Russian ruble and Ukranian hryvnia. Almost everyday we read about how these currencies have hit all-time lows. Ukraine's currency recently fell 30-plus percent y-o-y before recovering to "only" a 20% depreciation. With its economy already in dire straits, Ukraine is headed for a default unless someone to stupid enough to (temporarily) prop it up does so. Can it dupe the IMF again?

Ukraine's interim government said Monday it wants a $15 billion rescue from the International Monetary Fund as officials from the emergency lender kicked off a 10-day visit to shape a bailout of the struggling economy. Ukraine's newly appointed economy minister, Pavlo Sheremeta, said the government is aiming for a two-year IMF loan modeled on Ukraine's previous bailout program...

Many of the conditions the IMF has previously required for emergency financing for Ukraine will most likely remain. The IMF halted loan payments in 2011 after Kiev failed to meet key terms, which included phasing out gas-price subsidies and slashing government spending...

Ukrainian Prime Minister Arseniy Yatseyuk on Monday called the IMF's prior financing requirements "harsh demands." But he said his government is ready to take politically unpopular steps the emergency lender is likely to require to open up its war chest.

What does Yatsenuk mean? Harsh demands = "we'll renege again when the natives get restless" (and probably try to reinstall another pro-Russian government).

How about Russia? It's economy is being buffeted by Putin's adventurism, "market discipline" in action. As the ruble too plunges, monetary authorities have begun intervening in FX markets:

Bank Rossii [the Russian central bank], which ING Groep NV estimates sold as much as $12 billion yesterday, said it will start setting ruble intervention parameters daily, a move that will give the central bank more room to ease swings. Goldman Sachs analysts anticipated a change in tack, writing in a note to clients before the move that Bank Rossii may favor a policy that allows for “discretionary interventions” while predicting the ruble has limited “downside” after sinking to a record low. 

Still, I wouldn't worry too much about them since they've saved a lot of FX reserves over the last few bountiful years of elevated energy prices. How does half a trillion--give or take--sound?

Russia’s foreign reserves have fallen $40 billion since May to $493 billion, according to data through Feb. 21. ING said the country’s “net” war chest, excluding its sovereign wealth fund, gold and International Monetary Fund reserves, is about $270 billion. Allowing for funds to cover three months of imports, it shrinks to $150 billion, he said.  

Is simple terms, Russia will set a daily trading band, outside of which it will intervene to move its currency's value back within the band. Russia has a lot of reserves, so it's probably betting that it can insulate itself from Western pressure for a while. We'll just have to wait and see the rate it burns money to determine how long it can hold out.

Double or Nothing: Can Malaysians Revive Las Vegas?

Can Malaysians complete Echelon, Las Vegas' boulevard of broken dreams?

A few days ago, Bloomberg TV aired "The Player: Secrets of a Vegas Whale" on how Don Johnson--the gambler, not the Armani-wearing, Ferrari-driving 80s Miami Vice star--magnified the US casino industry's losses post-subprime crisis by "beating the house" through honing his blackjack strategy with the help of math PhDs. Along the way, the documentary recounts the fate of the American casino industry overall. Suffice to say, it has not been particularly lucrative in recent times.

After besting Las Vegas in 2006, Macau has long since left the US gaming destination in the dust. Today, Macau's betting revenues are some seven time greater than those of Las Vegas. Asian high rollers have largely deserted Las Vegas for Macau and other nearby Asian destinations. In the wake of the US subprime crisis, there were consequently many stalled developments in Sin City. While Las Vegas gambling revenues are not falling precipitously alike, say, Atlantic City, they are not growing either.

Hence the deal: why not make the cash-laden Asians "fix" Las Vegas? Actually, it's already happening. A year ago, the Boyd family of Stardust fame sold its stalled mega-development Echelon (pictured above) to Genting, a Malaysian firm that has the sole gaming license in that Asian country. Thinking big, Genting is betting that it can bring the Asian clientele back to Las Vegas with an Asian casino operator. Far fetched? Genting is upping the ante to the billions of dollars...or is saying so at least:

Genting Bhd, Southeast Asia's biggest gaming group, will spend an initial $3 billion to $4 billion to develop an unfinished resort on the Las Vegas strip, as it seeks to build a U.S. empire of casino and leisure assets. The Malaysian company is seeking to expand in the United States as the world's largest economy starts to recover, and as various states relax restrictions ranging from casino licenses to online gambling. Genting, which has held Malaysia's sole casino licence since the 1960s, has focused its international expansion drive on the United States. It opened a casino in New York City in 2011 and has since bought upmarket waterfront properties in Miami.

Genting bought the Las Vegas resort this year from Boyd Gaming Corp for $350 million, in its first push into the U.S. gambling mecca dominated by the likes of Las Vegas Sands. Construction of the resort was suspended in 2008 after the onset of the global financial crisis. "We are looking at $3-4 billion in total if we get approval for a casino licence (in Las Vegas)," Chief Executive Officer Lim Kok Thay, who was widely credited with Genting's global expansion, told reporters.

Let's just say Genting has doubters aplenty. It had something planned for Miami, but it has not yet borne fruit. Still, there may be enough money to be made in Vegas to swing the deal there:

There are also painful memories of Genting’s first foray into Miami in 2011, when it announced the development of a $3.8bn resort on 30 acres of land downtown. While the Resorts World Omni hotel that was to form the core of that resort still exists, the wider project never materialised, partly due to opposition from rival existing hotel businesses, analysts say...

While gaming revenues in Asia are expected to grow by almost a fifth each year to 2015, according to PwC, against 5 per cent growth in the US, he argued that a US push made sense as long as rates of return were above Genting’s cost of capital. “This year stands to be a very exciting year for them because a number of things might come good. In two or three years’ time people are going to realise these guys are formidable competitors,” Mr Pinge said.

We'll see. Genting seems ready to shuffle up and deal.

Is the Obama administration right in pushing for a trade deal?

1. Paul Krugman says no.
2. The Economist says yes.

If I Were the West, I'd Let Russia 'Have' Ukraine

Gazprom-sponsored German star offers opinion on an EU rescue of Ukraine?

Ukraine is a poisoned chalice insofar as it resembles Russia: corrupt and inefficient. Yes, there are geopolitical advantages in being Ukraine's ally. Yet, the list of advantages Russia retains from keeping it within its sphere far exceed those of the West taking it. For Russia:

Russia, which straddles Europe and Asia, has sought a role in the rest of Europe since the reign of Peter the Great in the early 18th century. An alliance with Ukraine preserves that. “Without Ukraine, Russia ceases to be a Eurasian empire,” the American political scientist Zbigniew Brzezinski wrote in 1998. Russian President Vladimir Putin wants Ukraine to join his Eurasian Union trade bloc, not the European Union. Russia’s Black Sea naval fleet is headquartered in Sevastopol, a formerly Russian city that now belongs to Ukraine. Last year Russia’s state-controlled Gazprom (OGZPY) sold about 160 billion cubic meters of natural gas to Europe—a quarter of European demand—and half of that traveled through a maze of Ukrainian pipelines. Those pipelines also supply Ukrainian factories that produce steel, petrochemicals, and other industrial goods for sale to Mother Russia. “Ukraine is probably more integrated than any other former Soviet republic with the Russian economy,” says Edward Chow, a senior fellow at the Center for Strategic and International Studies in Washington.

For the EU--the US largely delegates the matter to it--all the article offers is a one-liner:

Western nations want to keep Ukraine from becoming a failed state and to discourage Putin from retaking the nation by force.  

Nobody doubts Ukraine is hemorrhaging cash at a prodigious rate--even more so during this prolonged political crisis. At first I thought its claim of needing $35B was ridiculous. Then, less biased sources actually said that was not far off the mark:

On Feb. 26, Secretary of State John Kerry said the U.S. was organizing a stopgap $1 billion loan guarantee—far short of the $35 billion in aid Ukraine is seeking. The Institute of International Finance, which represents big banks, estimates that with no change in policy Ukraine would need $30 billion in foreign assistance this year alone. The IIF predicts that the International Monetary Fund will insist as a condition for aid that Ukraine cut natural gas subsidies to consumers and industry, and allow its currency, the hryvnia, to fall further, shrinking the trade deficit. The problem: Those measures will be so unpopular that they will jeopardize any new government.

Speaking of which, the IMF has been futile in attempting to structurally adjust Ukraine from unsustainable deficits:

As IMF Managing Director Christine Lagarde announced a team would travel to Kiev in coming days to assess the economic needs, fund spokesman Gerry Rice told reporters yesterday that Ukraine’s leadership is pledging “wide-ranging reforms.” Rice said he didn’t wish to “make comparisons between different governments.”

“I will be probably the most unpopular prime minister in the whole history,” Yatsenyuk told Parliament before being approved yesterday, heralding decisions on cuts in subsidies and welfare payments and later calling his job a “political kamikaze” mission. “But we will do everything possible to avoid default.”

The IMF has heard such promises before. In loans dating back to 1994, “usually the IMF had made two quarterly disbursements and then stopped because the Ukrainian government has refused to comply with the IMF conditions,” said Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington...

Under a $16.4 billion loan in November 2008, when Yulia Timoshenko was prime minister, Ukraine pledged to let its currency float and to balance its budget, in part by raising energy prices. The fund froze the loan after a year, ultimately canceling and replacing it with a $15.2 billion package in July 2010 with similar prescriptions under Yanukovych, who defeated Timoshenko in presidential elections. Disbursements on that program stopped the following year as the country again failed to meet conditions. 

Some takeaways:

1. Regardless of leader, "pro-Western" or "pro-Russian," Ukraine ultimately shies away from unpopular, leadership-threatening reform and continues on its way towards inevitable balance-of-payments crisis;
2. Russia has much more to lose than the West has to gain in keeping Ukraine in its corner;
3. In the sense that reforming Ukraine has proven near-impossible and even more hugely expensive at the current time due to business-as-usual, rescuing the country will be an immense money drain;
4. What's more, IMF reforms--if implemented--will only make the West massively vilified and cause another round of massive discontent;
5. Russia is not going to shut down pipelines supplying natural gas to Western Europe anyway, so there is no real economic threat on the energy front. 

All in all, I'd advise the West to let Russia try and get Ukraine out of its sorry situation. In all honesty Russia can't because its shortcomings are nearly identical. Good governance? Getouttahere! For a realist, making others throw away good money after bad on futile endeavors is welcome in making them financially worse off. The EU looks foolhardy enough to believe it can turn around Ukraine. Well, good luck with that. Me? I'd hang a big "TAKE ME" sign at the border with Russia to show the would-be invaders and be done with it. This isn't Russian "irredentism"; it's a Russian gift. Unlike with Cyprus, Greece, Italy, Portugal and Spain, there is no obligation here for self-inflicted masochism.

Ukraine, pardon the language, is FUBAR.

Migration's Goons? Repatriation Companies in Singapore

[You may want to play The Clash's "Know Your Rights" for musical accompaniment while reading this.] My, oh my. First we learn that migrant riots do occur in Singapore. Now we learn of hired thugs whose presence is condoned in the supposedly antiseptic city-state? Migrant workers are usually the most vulnerable of people in any nation: when they say your time is up, it's time to go. As with most nasty things in life, this can be made into a business--albeit a rather controversial one:

Singapore needs foreign workers, but it doesn't want them to overstay their welcome, and firms get fined when they do. That has created a market for "repatriation companies," which deny allegations from activists and the United States that they use illegal tactics to expel foreign workers.

The country's wealth and continued growth rely in large part on foreign workers like Jakir, who build its skyline and maintain its top-notch infrastructure. Yet as the numbers of migrant workers soar, tales of abuse and exploitation are threatening to take some of the shine off the city-state's international reputation.

Even the US State Department has gotten into the act, citing certain practices in its human trafficking report:

In its 2013 report on human trafficking, the United States said the some repatriation companies in Singapore had "seized and confined" workers and used "assaults, threats and coercion to get them to the airport." The report added that the high costs of coming to Singapore to work via agent fees "makes migrants very vulnerable to forced labor, including debt bondage."

Keep in mind though that conditions in Singapore are, on the average, better than in other countries. Supposedly, it's only when they are perceived as becoming militant or troublemaking that the enforcers are called upon:

Compared to other places that rely on migrant workers like Dubai, conditions in Singapore are seen as relatively good. Most workers leave after a few years with the kind of savings they would have little chance of building if they had stayed at home. Yet, activists like Wham say many employers use repatriation companies to help them manage workers whom they perceive to be giving them problems or to get rid of those who are injured. Some say employers use the threat of repatriation to keep workers from arguing over pay disputes.

I guess it's part of why workers in Singapore don't, well, unite.