In the eve of narcissistic psychopath being sworn in

Usually when a populist gets hold of power, their rein turns out to be less scary than predicted. I put this mellowing out down to their strategy of flattering voters with hollow promises and safety valves embedded in democratic systems (unless populists cling to power for years and dismantle civilised institutions as Mr Orban and his cronies have done in Germany). Same might be the case with Donald Trump and my fear of him taking over is combined with some hopes he does screw it up worldwide all along.

In his campaign he promised to proscribe a ceasefire between Russia and Ukraine within 24 hours. Currently his advisors claim a realistic time horizon to bring the war to a halt is between 100 days and 6 months. The longer it takes, the better. Each day of warfare depletes Russia's resources and buys Europe time to prepare for a widespread aggression towards NATO. Nevertheless, Mr Trump will insist on impacting the course of the conflict as thus he will prove his might and powerfulness.

USA's leading role in NATO as a guarantor of western Europe's stability and safety is in question. Europe will be to some extent left to its own devices. Maybe Mr Trump's presidency will be a wake-up call for Europe to get its act together, as simple matters such as shifting to daylight saving time for the entire year are beyond its bureaucrats' decision-making capacity.

Mr Trump's considerations of taking over Canada or having designs on Greenland are so far the biggest red flags. Wladimir Putin, in a television appaerance just before its army invaded Ukraine, denied that Ukraine's right to exist. I believe the redneck president will confine to talking his head off and any conquest of non-US territories will be foiled by international treaties.

The crony of Mr Trump I currently fear more is Elon Musk. Much more brazen and having the grip over the fourth estate, looms as a bigger peril than the elderly redneck. Both guys are psychopathic personalities with lust for power, so I sincerely hope they fall out before long. Even if this happens, separately they will remain harmful.

The paragraph above reminds me of my recent fourth anniversary of joining Twitter, then not controlled by Mr Musk. I use it less frequently, rarely contribute, but have not deleted my account there just to have access to contents smart people still share there. Or should I vote with my legs and give it up altogether, to undermine Musk's empire of evil possibly much?

Are we past the trough?

Had I been really good at economic forecasting, I would have been much richer, worked less and probably had more time to indulge in hobbies, including blogging. Sadly, predicting economic variables is, needless to say, subject to a lot of uncertainty. Time permitting, I keep track of what is going on in the real economy and on financial markets and spot some sparkles of optimism.

Stock markets, which usually anticipate economic recoveries, have rebounded recently, with the Warsaw Stock Exchange broad market index being some 20% above its low from early October. Some pundits warn it is just a major correction in the bear market, yet upbeat sentiment has definitely taken over recently.

Natural gas and electricity prices on commodity exchanges, though still volatile, have fallen off peaks from September. With natural gas storage facilities across Europe full, the threat of a severe energy crisis has been somewhat staved off. This also gives relief to entrepreneurs from who energy is an important item in the cost structure, except for those who hedged purchases at peaks.

Commodity prices have also adjusted to lower demand, which means, the demand for them might not necessarily fall. Brent crude oil now costs (in USD) roughly as much as before Russia invaded Ukraine.

The last glimmer of hope are PPI (producer price inflation) readouts, which signify decreasing cost pressure for entrepreneurs, which will with a delay of a few months should translate into lower consumer inflation.

Not all signals from the economy are bright. Profits of companies after 3Q2022 keep falling dramatically, which might hamper their investment plans and necessitate lay-offs.

Consumer confidence in Poland is also record-low, with wallets of ordinary people badly hit by prices of most basic goods rising faster than general inflation (+17.9% in October 2022). With negative real average wage growth (around -4% y/y) the discretionary spending must plummet and so far nothing indicates private consumption could recover soon.

Across Europe a big unknown is the threat of energy shortages during the winter. I lack competencies to assess how real that threat is, but if only the most energy-consuming industries are forced to suspend productions, effects of negative supply shock will spill over the entire economy, send inflation up.

In Poland much depends on the influx of refugees from Ukraine, where the Russian tyrant is trying to destroy the infrastructure to deprive civilians of electricity, heat and water during the winter.

Even if the worst has not come over, I believe it is a matter of a few months. Roll on spring!

Market update

Customarily, December on financial markets is hardly ever a season of bloodshed. Either everyone is celebrating, trading volumes are thin and markets are placid or fund managers are make use of shallow market to boost portfolio valuations before year-end. This year Santa Claus rally, if it is witnessed at all, will be at best considered a revival after the recent turbulent weeks.

The most frequently benchmark used for the Polish stock market its is large-cap index, WIG20, composed of twenty biggest, in terms of the market value, publicly traded companies in Poland. The index, with its historical high of more than 3,900 points recorded in October 2007 and this decade’s high of more than 2,900 in April 2011, has seen a few months of dreadful performance. In early May this year WIG20 peaked at 2,558 points, while on F11 December’s market close it dropped to mere 1,757 points, so it declined by 31% over 7 months. Raw numbers in theory should not bear a false testimony, yet what underlies the numbers might be biased enough to prompt market data recipients to jump to conclusions.

So before we do this, three facts:

- as of 11 December 2015’s close, WIG20 components accounted for 27.6% of the whole stock market in Poland, in terms of market capitalisation,

- the index is dominated by two industries: financial sector (Alior Bank, Bank Zachodni WBK, mBank, Pekao S.A., PKO BP, PZU) and energy (Enea, Energa, PGE, Tauron),

- the index is a price index, i.e. takes into account only price movements, but fails to account for return from dividends, while the yield of the index in the long-run is close to risk-free return or slightly higher.

The first arguments persuades you to think of another, more representative benchmark for the Polish stock market, the second should tell you performance of two industries might substantially affect performance of the index.

And indeed, the shares of banks and the insurer have been falling for the recent months, as valuations discounted imposition of financial sector tax, higher bank guarantee fund contributions as well as anticipated, yet for a while put back, conversion of FX-denominated loans unfavourable for banks.

Shares of energy producers plummeted because of their planned involvement in the bail-out of coal mining, extensive CAPEX needs, both factors trimming down their dividend payout capacity.

Shares of banks dropped by 30% since May 2015, shares of utilities declined by 40% since May 2015. Besides, two vital components of the index are KGHM, punched by falling copper and silver prices (not well offset by stronger USD) and Bogdanka, thumped by falling hard coal prices. No wonder then even if other 8 companies perform decently (difficult, if the market is perceived as homogenous by foreign investors), the index could not fare well…

The better representative of the broader market is WIG. While WIG20 retracted to levels last seen in April 2009, during post-crisis rally, WIG, a total-return index (takes into account dividend income), is two times higher than in February 2009, but fell by 23% from its peak in May 2015, meaning the Warsaw Stock Exchange has officially entered the bear market.

A justified question is whether the factors depressing Polish equities are of local or global nature. If you look at performance of S&P 500, no pattern similar to what has observed in Poland can be discerned.

The same if you peek at DAX30. Both Wall Street and Frankfurt contracted at the news of faltering Chinese economy, but both are still in bull market.

If the stock exchange predicts troubles in the future, it begins to do when the troubles emerge on the horizon and they did so in May 2015, when lots of market participants realised PO was bound to lose the parliamentary election and PiS, as they got hold of power, would tamper with the economy. Policies pursued by PO were also to blame, as they also had put forward a draft of FX-denominated mortgages conversion and they set off to exploit energy companies to rescue insolvent coal mines.

With hindsight I am grateful to the New Factory for imposing stringent trading restrictions on me which have put me off trading and prompted to terminate my brokerage account. Had the limitations not been in place, I would have several times attempted to catch the falling knife. With hindsight, I see I would have been worse off.

Moving away from Poland… Prices of Brent Oil (traded in London), after bottoming out early this year, have been falling since early summer, but recently they tumbled, best evidenced by the 9% drop within the last week. Excess of oil supply is likely to persist, extraction is unlikely to be cut down by OPEC members, while macroeconomic environment remains shaky. All these factors combined ward off the scenario of crude oil prices drifting to where they were before November 2014.

And a quick glance at the copper. Quotations of the commodity have been in the downward trend for nearly five years and had a tremendous impact on market price of KGHM shares (in early 2013 it trade above 190 PLN per share, today mere 61 PLN would buy such security). Now the Polish copper behemoth is nearing the verge of breaking even, while the promises of lifting the copper tax, made by PiS ahead of the election, are up in the air.

The Polish currency, at least in comparison with our stock market, is holding up relatively well. EUR/PLN pair, as dull as ditchwater over the last three years, has climbed towards 4.40 and forges ahead to break out from the range within which it stayed for too long.

USD/PLN, far more volatile than EUR/PLN, began its ascent in 3Q2014 and in early December 2015 crossed the level of 4.00. It deserves to be stressed however, that the driver of the incline is on the USD side of the pair. The American currency is sent up by buoyant US economy, dwindling commodity prices (negative correlation) and expected interest rate hike (FED meeting due in the coming week).

Unfortunately, I am not a future-teller and even if I were, I would not dare to advise you how to reap profits from what is happening on the markets. Given high expenditures in the offing, I am keeping all my savings at banks. But even with longer investment horizon, I would not bet on stock market recovery. Fundamentally the Polish economy is holding strong, but the extent to which it can be spoilt by zipperheads behind the wheel is unknown. By analogy, in first half of 2008 everyone thought given good economic situation, the bear market should have drawn to a close and stock valuations were bound for correction. Over the next months they fell by some 50%. What I am rather confident is that if WIG slides into 30,000 points (I doubt this is probable), equity valuations will be attractive in long-term perspective.

End-year* thoughts

My last success this year was surviving the idle period between Christmas and New Year’s Eve. I don’t know why, but over five years of my studies it was the most depressing period of the whole year. I’m putting it down to low amount of daylight, imminent exam period and the fact that virtually everything comes into the standstill on those days. In the office we also were ticking over, but somehow being put through this period in the company of colleagues made it much less painful.

On Friday morning I kept refreshing the page showing current EUR/PLN quotation to witness the battle between Polish state, represented by NBP and BGK, and speculators. The former were to sell foreign currencies just before the fixing, the latter were to bet against zloty. The tug-of-war was short, featured with increased volatility and not really fascinating. The government got what it had wanted – public debt to GDP ratio was at ca. 54% - safely below the threshold triggering austerity measures.

Time to look back on my predictions from mid-January and bring myself to account for all the guesses that have turned out to be wide of the mark. Polish central bank’s benchmark rate is indeed 4.50%, in line with my forecasts, but home-owners paying off mortgages denominated in foreign currencies saw their instalments soaring in the summer, rather than slowly decreasing. WIG20 at the end of 2011 fell below 2,150 points, while I predicted 3,200 points. At the end of the day I’m an analyst so the outcome above should not surprise you at all ;-)

Financial markets have become so wobbly, as the situation in real economy has gone, that I will not dare to come up with any predictions for the coming year. I have some scenarios of possible future courses of event, but may they not be disclosed to the public. While I’m holding back, Michael decided to have a stab at it. Come the end of the year and we’ll see if he can rely on his intuition.

Just to recap the year which will has become a history.

In January I thought Polish economy would be thriving in the coming year and I was actually right, only the rest of the world was falling apart since then, the first report on causes of Smolensk crash was unveiled and prompted questions and heated disputes.

In February I took up my first permanent job and began to cast doubt on robustness of Polish economy.

Key issue in March was the pension system reform.

April passed very quickly for me, while the key event in Poland was the first anniversary of Smolensk disaster.

In May Catholics celebrated beatification of John Paul II, and end of days, due on 21 May didn’t happen to come.

In June I had first inklings of coming tsunami on financial markets and graduated from SGH.

July was extraordinarily wet…

In early August politicians in the United States were haggling on what conditions to raise the debt ceiling and despite the assent to raise it, panic took over financial markets, and was exacerbated after S&P downgraded US rating.

September was marked by 10th anniversary of 9/11 attacks.

In October Poles chose that a predictable, but timid and often inactive PO-led government should run Poland for the second term.

In November I realised what the word ‘insecurity’ in the corporate would means (no link and no details) and the first re-sworn-in prime minister delivered his inaugural speech in which he focused on painful programme of healing Poland’s public finances and which brought about a sudden revaluation of stocks of one of the biggest Polish companies.

In December the story of lent 1,000 PLN dragged on and weather was very merciful.

The list of random events of 2011 is patchy and does not cover many issues which you might find important, yet which were not mentioned on the blog and escaped my notice.

Now when 2011 is left behind, try to guess what the future holds. I surmise in 2012:
1) financial markets will stay very volatile. Where exchange rates and stock markets head will depend on performance of real economies (watch out, I’ve just reinvented wheel) and strength of the eurozone,
2) politicians of the eurozone, faced with pressure of unrelenting financial markets will have to get to grips with insolvent, inordinately indebted PIGS and pull the plug on them. Greece will be forced to secede from the eurozone, re-establish drachma and devalue it to regain competitiveness,
3) winter will stay mild, there will be three incidences of proper winter, including one bringing heavy snowfalls and another with temperatures much below –10C at nights. Winter-time low in Warsaw will be –16C.

In 2012 all adverse effects of economic slowdown, that Poland escaped until now, will make themselves really felt. Polish economy will be expanding at slower pace, along with its trade partners who may even face a contraction. Weak zloty should prop up exports, but will also push up prices of imported goods, and thus inflation. Private sector will have to adjust their scale of operations to shrinking demand and many companies will be downsized. Savings will be looked for on cost side and because companies’ influence on prices of inputs is highly limited, payroll expenses will be cut. This will result in a wave of lay-offs, lower or no pay rises and higher unemployment.

Tax-burden-raising programme will hit Poles’ wallets. On 1 January excise tax on diesel fuels hike takes effect. From 1 February sickness benefit contributions paid by employers will be increased by two percentage points. Rising prices of fuels, energy and gas will probably keep reducing Poles discretionary income. This, in conjunction with job insecurity might put to the end gold times of consumer confidence that prevented Polish economy from shrinking in early 2009.

All property market analysts expect another year when prices will be going down, they only vary in determining the scale of decline. The factors that will contribute to lower property prices will be:
1) recommendation SII, issued by Polish Financial Supervision Authority, ordering banks to calculate creditworthiness of borrowers taking mortgages with longer than 25Y maturity as if they were to repay them in 25 years, this might reduce available loan amounts by some 5%,
2) implementation of more restrictive credit risk policies in banks, including virtually scrapping FX lending,
3) supply of properties on primary and secondary markets, much surpassing demand,
4) aforementioned lower discretionary incomes of households who might spend less on debt service,
5) drop in job security which prevents people from buying things they cannot afford to have
6) fading optimism among buyers, far less eager to live for 30 years with ball and chain called mortgage and more often noticing property prices have been exorbitant and hence holding off on buying a property,
7) growing number of young Poles working on “junk” contracts rather than having a permanent job, who, without stable source of income, are deemed to be not creditworthy for banks.

So everyone who has taken it for granted investments in properties are the quick and safe way to grow reach, please prepare for a rude awakening. Prices have already fallen by some 25% from peak noted in 2008 and are set to drop by some 10%, before they level off, at best. If four ago you pointed out that if in London for an average one can buy 0.35 sqm of a flat, the ratio should be the same in Warsaw, just keep your head down. Market will strike a health balance if the monthly-wage / sqm price ratio hits some 0.75.

I look at people who run up huge debts in CHF in 2007 or 2008 to buy tiny flats and I’m sorry for them. They’re carrying a burden disproportionate to what they “own”. There was no fully-fledged property bubble in Poland, but what was witnessed from early 2006 to mid-2008 had many features of a typical bubble.

I have already got the idea of taking out a mortgage out of my head. I don’t feel secure in terms of employment. I realise 2012 will be a year of ruthless cuts in banking sector and despite my good performance one day I might be made redundant. My savings are going up, property prices are going down, one day in two or three years they should meet half way. Cards aren’t stacked against me.

To make this post more optimistic, it is worth mentioning that several hundred kilometres of motorways and expressways will be opened in 2012 in Poland. Most not before Euro 2012, but we’ll have to lap this up, as construction will grind to a halt as soon as taps with EU funds are switched off.

And for a bitter ending, I’ll share with you a gut(-wrenching) feeling that’s nagged me over the past two weeks. In 2012 we’ll see a big disaster, not the one prophesised by Mayans, but an economic disaster which will be a shock for many and will result in huge turmoil on financial markets and in widespread social unrest. Something tells me the blow will be dealt in April or May.

Despite the doom and gloom emerging from the paragraph above, I wish you all a prosperous year. May you find self-fulfilment in everything you do.


* When I was setting out to write this post yesterday, these were supposed to be end-year thoughts. By some coincidence, I didn’t make it to the end yesterday and had to finish writing today; with some more effort ;-)

Beautiful late summer

A shame I haven’t illustrated this post with some photos. An egregious error…

The summer of 2011 did not pamper Poland with beautiful weather. It wasn’t actually cold, as average temperature of July was around long-term average and August was slightly warmer than average, but both months gave a rough ride to holidaymakers as both were much wetter than normally. For me, as I didn’t go on holiday, it was great – I was exempted from duty of watering the garden, plus the water bill was lower.

But September did a good job and made up for wet and moderately warm summer months. It was much drier and sunnier and even the typical September’s nuisance – big daily temperature amplitudes weren’t as bothersome as usually. In a word – weather was perfect.

Superb Spanish weather site Ogimet gives some stats concerning weather in Warsaw in September 2011 (note for weather anoraks)

Average temperature: +15.1C – 3 degrees warmer than last year, 0.4 degrees cooler than in 2009 and some 1.5 above long-term average.

Month-time high: 5 September, +26.5C

Month-time low: 17 September, +2.7C (I don’t recall it…)

The warmest day: 12 September – average temperature of +19.4C (typical for July)

The coolest day: 17 September – average temperature of +11.1C.

Two more facts bear out that this September was pleasantly warm: firstly on no single day I had to wear more than two layers of clothing in the morning, I always could do with a shirt and a jacket and quite often got sweat on my way to work (too hot in the underground trains) and this year until today we haven’t turned the heating on. In 2008, 2009 and 2010 we were forced to do it respectively on 16 September, 1 October and 29 September.

Two first days of October also brought a whiff of warm air, yet it wasn’t as warm as forecasters had predicted – yesterday day-time high hit +21C, in line with meteorologists’ forecasts, today it was no warmer than +16C, two degrees colder than what weather forecasts had said. Over the whole weekend the gloss of the sunshine was taken off by northerly winds and one had to find shelter to bask in the sun. Actually despite some chill the weather’s been up to the mark. I mown my lawn today in the afternoon and then cycled in a T-shirt only and during both activities I broke sweat it means it wasn’t cool. The bike ride was perfect, but again, shame on me, I didn’t take the camera and couldn’t take pictures of all the stuff I was taking delight in. But comes another warm and sunny Saturday or Sunday, shall I go there again and snap, snap, snap…

Such warmth is not really unusual for this time of year. On 8 October 2009 temperature in Poland’s capital hit +24C and Poland’s October heat record of +28.6C was set on 14 October 1966. The coming two days should be warmer, with temperatures in Warsaw up to +22C and sunshine (how lovely), then Wednesday is going to be cooler, Thursday again warmer, and true Autumn is predicted to hit on Friday and stay over the election weekend. Weather in the second decade of October is rather unforeseeable, I saw forecasts of both dull days with temperatures between +10C and +15C, as well as return of gold autumn with temperatures up to +20C. Hope the latter proves true. The later gloomy autumn comes, the longer will people be able to save on heating (how practical).

I hope the coming winter will be milder than two previous ones. Long-term forecasts, hardly ever reliable, say winter will come early and go early as well. The current predictions for the coming months are as follows:

October: chilly and windy, what anyway means is will be warmer than in 2010, the worst will be the last decade, when temperatures will be often dropping below +5C.

November: cold and wet, the author of the forecasts adds “just like last year”. Doesn’t she / he remember the beautiful warm and sunny long weekend in mid-November 2010?

December: frosty and dry, with white Christmas. This to some extent resembles December 2010. I’m alright with white Christmas. Afterwards the winter may go to Russia.

January: frosty, dry, with changeable weather.

February: should bring above-average temperatures and early spring.

March: spring in overdrive.

I personally hope the forecast proves true for February and March, the rest doesn’t fill me with optimism. I would prefer a warm winter for three reasons:

1. the aforementioned heating bill,

2. I’ll keeping the car outside the warm garage for the first time. I have to replace the battery, and with a new one I shouldn’t be afraid of temperatures above –20C as long as the car will be used every day and the battery will be charged up, but heavy snowfalls accompanied by low temperatures can play havoc with the battery and other sensitive elements of the car. But wait, so many people keep their cars in open air, so maybe I’m seeking out problems. But on the other hand I saw so many people having troubles with their cars kept in open air in winter…

3. I wish the builders of roads for Euro 2012: Niech im zima lekką będzie. If the weather allows them to press on with works, then there will be a chance that roads will be completed by the end of 2012 (the odds that they’ll be passable in June 2012 are negligibly low).

When trying to predict weather for the winter on my own, I tried to find correlation between politics, economy and weather. Take a look:

2005/2006 – winter is harsh and snowy. Polish economy enters the period of boom, power is wielded by Kaczynski brothers (some say it is a punishment for voting for PiS).

2006/2007 – until 24 January there is no snow, heat records are beaten in mid-January, then ensues a short, yet typical winter that ends for good in the last week of February. Polish economy still grows rapidly, Poles are sick of twin brothers wielding power.

2007/2008 – the warmest winter of the last decade. Snow lingers for less than ten days, on the coldest day the temperature drops to mere –14C. Polish economy is still doing well, but the power is taken over by PO.

2008/2009 – typical Polish winter, with frosts hitting –22C in Warsaw, periods of thaw and snowstorms. Nothing new in politics, but Poland is hit by world-wide economic crisis. Funnily enough, Warsaw is paralysed by a snowstorm exactly the day bear market on Warsaw stock exchange and zloty against other currencies hit their troughs.

2009/2010 – harsh and snowy winter. PO still wields power, economy is rebounding. When stock markets go up in the second half of January, Poland suffers in the fetters of winter. When in first week of February winter eases off, bringing sunshine and temperatures slightly above zero, stock market in Warsaw plummets by 4% for two days in a row.

2010/2011 – cold and snowy December, normal January, cold, but dry February. PO is still ruling, yet the party is falling into pieces, economy still grows, albeit the peak of the business cycle is near.

To recap, I couldn’t observe any significant correlation. If you see any linkages, feel free to share them with other readers and me.

And regardless of what future holds, expect another Winter timeline in March 2012.

Polish economy proves its resilience

A long expected move has just been made. After nineteen months of standing at 3.50% benchmark interest rate of Polish Central Bank was raised by 25 basis points. The decision taken by Monetary Policy Council was anticipated by financial markets.

Thus Poland joined the group of countries where monetary tightening has got under way. The prudent step confirms Polish economy is back on the growth track and in the middle term inflation poses a bigger threat to macroeconomic stability than low pace of GDP growth. Quite probably this year we will witness three interest rate hikes, each by 25 basis points, so at the end of the year the benchmark rate will reach 4.50%. This series of gentle increases will not hamper economic growth, but will ensure price stability (conducive and indispensable to sustain long-term growth) and will head off the risk of overheating the economy. In the long term I expect Polish central bank to focus mainly on inflation data; pace of economic growth will recede into background.

Markets have already discounted the hike. FRA quotations had indicated one hike in 2010, so according to the markets, the decision was belated. Valuations of bond funds and money market funds, both sensitive to interest rate movements (correlation is negative) were down in the recent weeks (bond funds), or levelled off (money market funds). What was felt by participants of "safe" investment funds will soon affect borrowers who have taken out variable-rate loans (that applies to mortgage loans denominated in PLN as well). Mortgage borrowers whose debts are denominated in foreign currencies can expect, holding everything else unchanged, slightly lower installments, as rising rates should cause zloty to appreciate. Interests paid by the banks for time deposits and saving accounts will pick up, but here you ought to expect a considerable lag - banks are not hard up for cash and will not pay over the odds for your savings.

Today WIG20, the main index of Warsaw Stock Exchange hit its many months' high and climbed to levels last seen in summer 2008 (and subsequently plummeted). In the short term I expect stock prices to go up, in the mid-term a correction by round about 10% would be quite natural, my target for the end of the year is 3,200 points (WIG 20). I will look back on these forecasts at the end of the year, to check how accurate they were.

In the meantime I took a glance at comment threads following the news items informing about the hike. Commentators either fulminate against prime minister Tusk and the ruling Platforma Obywatelska (as if they were responsible for the move) or blame conspiracy of foreing banks, all in league to fleece poor Poles... Thoughtless comments, which by the way are indispensable part of the Internet (educated people have little time to comment), remind me that Poles' grasp of mechanics of economics still needs to be worked on...

Turn on your printing machines

This post may be treated as a follow-up to my short essay on monetary policy from December 2009. On 3 November Mr Bernanke, the governor of Federal Reserve Bank, announced the launch of QE2 programme under which the central bank of USA will buy up government securities in the total amount of 600 billion dollars to kick-start US ailing economy.

Almost two years after Fed’s discount rate was slashed to 0.00% – 0.25% range US economy is still in the doldrums. Unemployment rate fluctuates around 10%, figures of economic growth are positive mainly thanks to large-scale stimulus programmes which slowly peter out (the two factors above combined give a new buzz-phrase “jobless recovery”), consumer prices also levelled off, but central bankers say despite extremely loose monetary policy deflation is still a much bigger threat than inflation.

The recent crisis has changed American consumers’ habits. Before the meltdown an average American household had negative savings and consumers generally tended to consume more than could afford, thus propelling world economy. This was easy to attain, as banks were eager to provide them with lending and turned a blind eye on creditworthiness criteria many borrowers didn’t meet. Much has changed since then. Consumers are now reluctant to part with cash they have, their propensity for spending and borrowing has declined. The tough lesson of crisis they have learnt will probably bring about a gradual shift from spending and borrowing towards saving.

Also banks, severely hit by write-offs on bad loans have modified their credit policies. Gone are the times when credits were foisted upon not creditworthy borrowers, these days bankers think twice before the grant a loan. Just think what happens when a loan goes bad. Can it be prevented? Can financial standing of a debtor be monitored effectually? Probably not. How long does it take to recover money? Sometimes years. What the recovery ratio will be? No one knows – a bank can recover principal and interest, a principal only or nothing, and costs have to be borne to wrangle with bad loans. Is there any alternative? Is something less risky?

Regular readers of this blog surely remember the story of 1,000 PLN lent to an ex-classmate. I still didn’t get that money back. For a comparison, on my worst speculation on stock market I lost 23%, so out of 1,000 PLN put in I still could put out 770 PLN (minus transaction costs), so it’s much more than zero. Stock markets look like an alternative. Stock indices reached their many-year lows in late winter 2009, bottomed out and since then have risen by 50% - 100%. The bull run was spurred on by loose monetary policy. Ample liquidity provided by central banks was not directed at lending activities, but at stock and commodity markets. Yes, the capital markets are said to anticipate changes in real economy, but this time market valuations discounted a rapid recovery owing to a flow of newly printed money. Just look at it from the perspective of a bank. A central bank gives you an unlimited credit facility, you begin to buy fundamentally undervalued stocks. If you don’t have power to drive the market up, you just pull back. Such a scenario is unlikely, so the prices do go up and because you are obliged to comply with mark-to-market accounting rules, your profits also rise. You report profits to shareholders and get a generous bonus from them. This is how it works… And there’s no need to grapple with bad debts, positions can be closed as quickly as they were opened and after all at the end of the day stocks will be distributed to some nitwits who will believe the prices will be rising forever and eventually will be end up duped. Stocks seem riskier assets than loans, but for the reasons I delineated above I think this is where the money from QE2 will go.

I forgot to mention the mechanics of the programme. Fed will not be buying up securities from individual holders but from financial intermediaries, i.e. banks, with a view to provide them with extra liquidity that should buoy up the economy through bank credit channel. However, the Fed is not in the authority to tell banks to turn the new money into corporate loans. Bank are free to do with that money whatever they won’t and this money in the long term will cause lots of bubbles on asset markets (excluding real estate market) to arise. The beneficiaries of the programme will be mostly financial institutions and other speculators who might strike it rich on increasing market prices. The programme might result even in hampering recovery, mostly if prices of commodities (crude oil, copper, even food) shoot up. Finally, it will cause US dollar to depreciate against other currencies and make US exports more competitive. And in the long run the rising money supply will result in higher inflation. I surmise Fed in liaison with US government were absolutely aware of long-term implications of this decision, mostly because it will allow US government to pay off its whopping debts, at the expense of its creditors, at the expense of the rest of the world actually.

Markets have witnessed a substantial rally from the beginning of August as speculators have anticipated the move of Fed, they could only bet how big the scale of the programme would be. Fed met their expectations, but hopes for a continued rally in the coming months might be dashed. Markets have priced the programme before, another price surge will ensue soon as the new money has to be allocated somewhere, but a significant correction should not come as a surprise. How long can stock prices rise if the economy is on its knees and even near-zero interest rates and printing money fail to bolster it up?

The experts tear Mr Bernanke’s move into pieces. One of the most eminent investors, Jim Rogers said the governor of US central bank “doesn’t understand economics (…) all he understands is printing money”. I would like to remind you mustn’t turn on your printers and print as much money as you want because you or your friends are hard up for cash. It is a crime! But Mr Bernanke can do it and he is not dubbed a criminal.

For the past few days I’ve been mulling over a concept of economic crime. Is there anything like this? In Poland we have police departments that deal with przestępczość gospodarcza those are economic crimes, but I’d prefer “business crimes” term. In Polish public discourse there is an insult szkodnik gospodarczy (economic pest), used by Andrzej Lepper and his fellows to describe Leszek Balcerowicz and his fellows, or conversely, by liberal intellectuals to name statist populists. But I don’t recall hearing about zbrodnia ekonomiczna.

General Wojciech Jaruzelski chose the lesser of two evils and declared martial law, many Poles have forgiven him. Current prime minister failed to carry out painful, but necessary reforms, but if he had had more courage, many Poles with hindsight would forgive him. Will the world forgive Mr Greenspan and Mr Bernanke their thoughtless decisions?

I believe one day we’ll bear the brunt of what is getting under way now. The next financial meltdown will be much more severe because indebted government will not be able to step in and bail out financial institutions on the verge of bankruptcy. I don’t claim to have come up with this scenario. Many far wiser people have spoken about such scenarios much earlier, it is estimated to come to a pass in 2014 or 2015. Before it happens we will witness era of super bubbles, so take advantage of it before the whole machinery goes under :)

Forecasters got it wrong, again

If my memory serves me right it was around the middle of September when first warnings of extraordinarily harsh winter appeared in the media. According to some long-term forecasts (based of mathematical models) published round about two months ago, the coming winter would be extremely frosty and snowy in Europe.

Predictions of met offices across the world, all heralding severe cold in the coming winter were picked up by sensation-chasing media in Poland and abroad which launched out into scaremongering campaign. The fear of imminent harsh winter led to many misrepresentations, including the most widespread one, which credits Polish meteorologists with predicting the coldest winter in 1000 years on the assumption that the Gulf Stream has weakened… This shows how gossips are put about. One Polish meteorologist said the Gulf Stream held up well and did not seem to abate at all and somebody mistranslated it and sent out into the uncritical rest of the world.

Articles heralding the harsh winter give two reasons why such scenario is conceivable. Firstly, the alleged demise of the Gulf Stream, caused by the oil spill in Mexico Gulf. Not confirmed officially piece of information, disseminated by conspiracy theorists. The other cause is far more plausible, as we already experienced it last winter when most of the Europe was in the fetters of winter and during this summer’s heat wave. Those are disruptions in air circulation that may prevent the masses of warm air from getting into Europe and may draw in arctic and continental air from north and east.

I don’t remember much from the forecasts for the last summer, but according to meteorologists this September would have been cold (partly right) and rainy (right), October would have been chilly (right) and wet (wrong). The last decade of October was said to bring first snowfalls. And here forecasters parted with their luck. The last days of October brought beautiful sunshine and warmth blown in from over Sahara. Hot spell continued on the first day of November, when temperature in the afternoon hit +17C. The consecutive days were balmy – in the evenings on last weekdays temperature still hovered above +10C, yesterday day-time high hit +15C and even despite gusty wind one could feel pleasant warmth (no wind chill!). Today the weather was rather inclement, next days will probably bring gloomy and grey Polish autumn, but no winter on the horizon. But according to long-term forecasts, November would bring typical winter with snowfalls and sub-zero temperatures (at the present wide of mark). Well, those forecasts are fallible. Now let’s look at what Polish long-term predictions say about the weather in the coming months…

December – winter in overdrive, sub-zero temperatures will cause snow to linger, to boot Poland will be plagued by gales.

January – some thaws and hot spells will give us some occasional breaks between attacks of winters

February – dry and frosty, I surmise this means inflow of chilly continental air

And spring will come later than usual, will be cold and dry.

Funnily enough, German long-term forecasts predict early winter followed by… early and warm spring. I believe my western neighbours :)

According to predictions I’ve read this winter will resemble the last, 2009/2010, one, which went down in history as snowy and cool. Do two harsh winters in a row happen that often? Data for Poland do not bear out absolutely any correlation. How about past winters?

2009/2010 was remembered as cold (actually temperatures in December and Febauary were normal, January was very frosty) and snowy (not because of high precipitations, but because the snow didn’t melt).
2008/2009 was normal in terms of temperature of snowfalls.
2007/2008 was warmer than average with almost no snowfalls at all
2006/2007 was one of the warmest in the history and lasted from the third decade of January until the end of February
2005/2006 was cooler than the last winter and kept Poland in its grip until late March
2004/2005 saw a brief cold snap in late November and then proper winter hit around 20 January and refused to let up until mid-March.

First snowfalls in Warsaw were respectively on: 14 November 2007, 22 November 2008 and 14 October 2009. Winter has failed to turn up as early as in the previous year, but it seems unlikely that we’ll see Warsaw brought to a standstill by a layer of white flakes earlier than in 2007 and 2008. Time will tell. I want white Christmas and then winter may go away.

How about short-term predictions. If there are any prophets (of doom) among the readers, please mark your presence somehow. I have two questions.

1. On 9 November stocks of Warsaw Stock Exchange will be floated on… Warsaw Stock Exchange. They were offered for 43 PLN per share and after reading “The Intelligent Investor” and having done a brief research, I deemed them to be overvalued and settled on not subscribing for them. Then it turned out the demand from institutional investors had surpassed 25 times supply. What will the open price on Tuesday be? Will it fetch profits to subscribers?

Update, 10 November. Open price was 50.75 PLN (I do not regret not subscribing for GPW stocks. I still think they are much overvalued, but I'm glad the Polish treasury made a good deal on taxpayers' behalf, in the meantime I struck another, more profitable deal with use of money I would have had to freeze), close price was 54.00 PLN (ever-time high till now).

2. Bulgarian clairvoyant Baba Vanga is said to have predicted the outbreak of Third World War for 10 November 2010. Finally a prophecy that can fulfil quickly, I don’t have to wait until December 2012 :)

Update, 10 November. Not a WW3 in sight. But conspiracy theorist claim the puzzling California missile case might indicate the prophecy is fulfilling.

Before it goes under once again

It has to be said that if the plane had crashed on trading day the turmoil on the market could have been as wobbly as in the finest days after the collapse of Lehman Brothers Bank. But given two days to get over, Polish financial markets proved absolutely indifferent to the Smolensk tragedy. Stock market until last Wednesday was heading north, driven upwards by the positive sentiment among speculators. Currency market saw some uncertainty after intervention carried out by National Bank of Poland on 9 April to prevent further abrupt appreciation of Polish currency.

As many analysts pointed out, after ten week long rally market was in the short run bought up to the limits (what is plain English means no one wanted to buy stocks), so a small spark was enough to set the flame and drag the stock prices down.

Schadenfreude – is what comes to minds of many market observers when we read the news that SEC pressed charges against Goldman Sachs for misleading its clients who had been buying structured products based on subprime mortgage market. The products had been designed in collusion with a hedge fund, which later had shorted derivates linked to them. Wall Street firms, acting within a letter of law but not necessarily morally, already have a dented reputation. I have read some opinions that state the Goldman case might be just a tip of the iceberg and the next lawsuits against other big banks might follow. In the short term such news may help bring back markets into balance by reminding about the element of fear and curbing increasingly hazardous complacency.

But what about the long term? Last week George Soros, world’s most prominent speculator (I sincerely recommend reading wikipedia entry, mostly the passage which describe his views on stability of financial markets) warned of an unprecedented market crash which is going to hit in a few years. Mind this long-term prospect is a very probable scenario. The time of robust economic growth is still ahead (if it comes, given the scale of public indebtedness we cannot take it for granted), low inflation will be beneficial for equities, the resources of untapped funds of individual and institutional investors who still are wary of entering the market are not to be sneezed at. The last ingredient is complacency, at the present already dangerous, in the future it will be stoked to reach record-breaking levels.

And what if the market crashes vehemently? Be prepared, take what you amassed during the golden years and short it using leverage. Those who did it after Lehman went bust or in January and February 2009 and had a capital cushion thick enough not to get a margin call could afford to retire. Anyone can earn when the prices are rising, a real art is to rake in profits when prices are falling.

The alternative scenario is that if SEC charges next banks with frauds, the bull market driven to a considerable extent be those institutions will lose momentum for a while. If it materialises, the correction may last even a few months and may bring the indices down by even thirty per cent.

The notions above are left to your further consideration. In the current phase of business cycle and shortly after the last crisis stock indices are unlikely to plummet.

Good news for today is that Polish financial market regulatory body is going to introduce short selling on Warsaw stock exchange. It is the next step towards developing Polish stock market. In every civilised country it should be possible to bet against stocks and profit not only from rising prices. I am in two minds about the restrictions – it is all about taking risks. If stocks are much overvalued they should be allowed to reach an optimal level, also with help of speculators. If not, like the shares of Volkswagen in 2008, then short-sellers have to cover their positions and take losses. This is the life!

As a small speculator I would also embrace first Polish investment funds for bears ;)