That Was The Week That Was

Politique
-As the financial crisis rolls on, the next phase of government (re)action is developing: US House approves an $819bn stimulus package (with a certain provision we don't like very much) and the FT reports that Obama will unveil a "Big Bang" package of banking/financial/housing reforms this week (now next), Harper's minority government unveils a federal budget that includes the country's first fiscal deficit in over a decade, Merkel has reportedly settled on a plan to create government-backed "bad bank" vehicles to clean up balance sheets, and Aso unveiled his own stimulus package under considerable opposition (he also pledged $17bn in aid to other Asian nations).

-62% of Bolivian voters approved a new constitution in last Sunday's referendum. The new constitution increases the government's control over strategic industries (including natural resources), strengthens indigenous rights, and furthers land reform. Despite the popular majority, 4 of the country's 9 provinces voted against the changes.

-North Korea voided all political and military agreements with the South this week, as mounting tensions on the Korean peninsula threaten all out military conflict. While Kim's motivation is unclear, a few theories seem plausible: 1) he is pushing his way onto Obama's agenda, 2) he is provoking an international crisis to stem any internal revolt amid his ailing health, 3) he has lost control and hardliners are their authority over foreign policy.

-Social and political instability is spreading across Europe: Iceland's government fell, massive strikes paralyzed France, and British workers walked off the job to protest the use of foreign workers amid rising British unemployment. Nationalism, protectionism, and industrial action are all on the rise.

-Iraqis voted in provincial elections. Despite a lower than hoped turnout, the elections were peaceful.

Economia
-The IMF reduced its global GDP forecast for 2009 to 0.5%, and the global economy shed over 70,000 jobs in one day.

-Sterling had a small recovery this week on a slight confidence jump in UK banks, the Euro slipped amid eurozone economic weakness and lack of faith in the ECB, and the USD and Yen both endured "rollercoaster" weeks.

-Exxon Mobile reported record earnings for the 4th quarter. The Lex column in the FT praised the company for "generating free cash flows as others invested" during the good times, positioning itself to pick off rivals and acquire assets in the bad. This conservatism has acted as a hedge against the rapid fall in prices.

The Rest
-In the Prem, ManU go 2 clear with 1 in hand, Liverpool score 2 late to take all 3 from a 10-man Chelsea, and Arsenal throw up a big 0 at home against West Ham. Elsewhere, Becks scores his second for Milan as speculation mounts over his return to LA.

-In tennis, Nadal beat Federer in 5 for the Australian Open title. Rafa's performance was simply incredible, coming less than 48 hours after his Australian open record 5 hour, 14 minute semifinal match against fellow Spaniard Fernando Verdasco. Many took Federer's uncontrollable tears in the post-match ceremony as a sign that even the Swiss great doubted his ability to ever beat Nadal again in a major final and catch Sampras' record 14 major titles.

-In Olympic swimming, Oops!

-While much of the fashion world has been tailoring collections to reflect our dark economic times, these designers look to color.

-Move over Highlander, meet Turritopsis nutricula: immortal jellyfish.

The Week Ahead

Last week I speculated about the possible market reaction to the promise of a massive government injection through the Paulson Plan. So far, that reaction has been something akin to a spoiled child who, having been promised a treat, throws a tantrum when it doesn't arrive now now now!

There are two sentences that I will be keeping in mind as I continue to watch these events unfold over the course of the next couple of weeks. The first comes from J. K. Galbraith, who wrote in The Affluent Society that "In areas of large economic affairs, the march of events... has again left the conventional wisdom sadly obsolete." Although Galbraith penned this line in the late 1950s and was referring to something completely different, I think it's fair to say that the march of events continues uninterrupted, dislodging a lot of comfortably-held beliefs along the way.

Over the weekend, presumably exhausted negotiators reached a tentative agreement to buy up $700 billion in "troubled assets." The plan - which ballooned from 3 pages to 110 - also includes possible restrictions on pay for CEOs of firms who make use of the plan, as well as warrants (convertible into non-voting stock) for the government. The notion that the government could place restrictions on the pay of Wall St. executives is antithetical to the entire spirit of American capitalism, and represents a pretty enormous shift away from the conventional wisdom.

Meanwhile, over in the UK, Bradford & Bingley - a troubled mortgage lender - has been nationalized by the government. Whereas the nationalization of Northern Rock last fall made a big splash, it's unlikely that this B&B deal will dominate headlines for long.

That being said, not everyone has given up faith in the markets. If nothing else, this article in the Washington Post is a refreshing change from the usual headlines. It points out that small banks in America are weathering the storm quite nicely - in fact, their lending has actually increased. Alex Tabarrok, who references the above WaPo article, also makes a couple of other points worth reading (I consider Alex's own plan below).

The second sentence that caught my eye this week came from Barry Eichengreen, a Berkely economic historian and prolific writer. Adjusted somewhat, Barry points out that "Watchers tend to internalize the views of the watched." I thought that was interesting, because there's no doubt that the "watched" right now include first and foremost Henry Paulson and Ben Bernanke. Those two spent their week warning of impending financial meltdown. This, in turn, has been the story carried all week by the media. Because of the authority these two gentlemen command, I think it's fair to say that us "watchers" have mostly been convinced that the conventional wisdom is no longer viable. Whether this is actually true or not remains to be seen.

Moving on. Other upcoming events this week:

• Speaking of the behaviour of spoiled children, North Korea continues to move towards reinstating its nuclear processing plant in Yongbyon.
• Despite the power-sharing deal signed on September 15, Zimbabwe's leaders will continue to struggle this week to resolve the crisis of government.
• The Economist is reporting that "Russian warships set off to Latin America to take part in joint manoeuvres with Venezuela, for the first time since the cold war." (no link)
• Market gloominess will continue to impact the economy in various ways: oil drops below $103; East Asian markets are unimpressed.
  
• Arsenal is looking to rebound after a poor showing over the weekend: they play Porto in the Champions League on Tuesday.
  

Enjoy your week!