The funny side of capitalism

I came across two very interesting pieces of work that take potshots at the way capitalism works:

The first one is an article by Jonathan Weil, a Bloomberg columnist.
Weil talks about GM's 2033 bonds, whose prices indicate that the market is betting GM will go down under in the next 2 years, even with a government subsidy. The article argues that in the current market, knowing government's plans is the only way to make money. If one doesn't then there is a very good possibility of losing money, irrespective of whether you are long or short.

This does not come as a surprise to people who follow the Indian markets. The Indian finance minister has many times reversed market sentiment just by calling a press conference!



The other is a post on a blog, in which one of the commenters had combined the news on Somali pirates with the news of Citigroup shares tumbling 46% in two days, to come up with this masterpiece:

The Somali pirates, renegade Somalis known for hijacking ships for ransom in the Gulf of Aden, are negotiating a purchase of Citigroup. The pirates would buy Citigroup with new debt and their existing cash stockpiles, earned most recently from hijacking numerous ships, including most recently a $200 million Saudi Arabian oil tanker. The Somali pirates are offering up to $0.10 per share for Citigroup, pirate spokesman Sugule Ali said earlier today. The negotiations have entered the final stage, Ali said. ``You may not like our price, but we are not in the business of paying for things. Be happy we are in the mood to offer the shareholders anything," said Ali.

The pirates will finance part of the purchase by selling new Pirate Ransom Backed Securities. The PRBS's are backed by the cash flows from future ransom payments from hijackings in the Gulf of Aden. Moody's and S&P have already issued their top investment grade ratings for the PRBS's. Head pirate, Ubu Kalid Shandu, said "we need a bank so that we have a place to keep all of our ransom money. Thankfully, the dislocations in the capital markets has allowed us to purchase Citigroup at an attractive valuation and to take advantage of TARP capital to grow the business even faster."

Shandu added, "We don't call ourselves pirates. We are coastguards and this will just allow us to guard our coasts better."

Credit Default Swaps in India?

The Indian Finance Ministry has asked the Reserve Bank of India (India's central bank) to consider introducing Credit Default Swaps (CDS). I think this is a welcome step.

In my post of April 8, 2007, I had argued about the need to enhance liquidity in the debt market. Credit derivatives are essential tools to mitigate risk and the introduction of the derivatives is a step in the right direction. However, introducing CDS alone will not be enough - credit derivatives market cannot be moved onshore unless India moves steadily towards full capital account convertibility.

Some people argue that India should never allow full capital account convertibility. In their defence, they cite the example of how some of the East Asian countries were battered during the crisis of 1997. The article by Easwar Prasad and Raghuram Rajan (link) offers a balanced perspective.

China's $600 bn stimulus package

It is only two weeks ago that I was discussing with my friend Bala about the global implications of a slowdown in the Chinese economy and what the Chinese government could do to prevent a sharp slowdown. We agreed that the Chinese government would, as a last resort, deploy its massive reserves to build assets and keep the growth rate from collapsing. I had also argued in my previous post that the Chinese authorities are unlikely to allow the growth rate to drop below 9 to 10 percent, to avoid the risk of their political system becoming unstable.

We could not have been more prescient. The Chinese government has now declared a huge stimulus plan worth nearly USD 600 billion over the next 2 to 3 years on infrastructure build up. As always with China, there is not much information available on how the stimulus package will work and what part of it is in addition to the projects announced already.

There is no doubt that such a massive capex plan will ensure that demand in many basic industries do not fall off a cliff. However, one needs to guard against the build-up of non-productive assets, for which China is well-known.

The stock markets greeted the move with a big rally, but it will not be long before the rally peters out!