Financial Armageddon

Or not, who knows...

As anyone who is intimately involved in international financial markets knows, there are umpteen different opinions regarding what is actually going on in the financial world, and there is a wide divergence over the outcome following what is coming to be seen as the "end game", playing out in an economy near you right now.

What is known? Well, the US Federal Reserve Chairman is set to hike rates from current levels of 2.5% to at least 3.25 percent by the summer, yet US long yields are far lower than any players expected them to be this time last year; the US trade deficit is at 6% of GDP - and growing; the US fiscal deficit is huge, and set to get bigger with little appreciable impact from the Bush budget proposals; oil prices are considerably higher than this time last year, and set to stay that way.

And yet, and yet... Asian central banks (and private investors) seem happy to continue buying $ assets (bonds) despite the impact of the above on the $; the US consumer continues to spend, sucking in imports from China - which in turn sucks in imports from [mainly] Japan and other countries. And the US economy continues to grow at a reasonable rate, defying all predictions for a collapse in consumer spending/investment/growth/$ exchange rate.

What does this tell us? Merely that global economics is a far more complex and fluid than we thought, that one-plus-one does not necessarily equal two, when put on a ship and sent to China for processing and then selling on to the States.

The trouble is, we are once again in uncharted territory, and while we may have some very smart people at the helm (as it were), are they able to act without bias, without bringing their "wishlist" to the policy table? And does this mean that they might just make a mistake, which, as it extrapolates out through a globalised economy, could bring financial armageddon (or maybe just a teensy weensy collapse)? My answer to this is, no, they cannot. My reason for saying this, despite the fact the US economy has been able to "muddle through" since the collapse of the dot com boom, is that the Fed Chair, Alan Greenspan, has clearly shown that he believes 100% in the "financialising" of the US economy, and hence (eventually) the world. I am not going to make a moral judgement about this, but I do think that he has brought his "wish list" to the table, and this has blinded him to the obstacles that lie on the road ahead. Or maybe he is not blind, but thinks the technological lead that America holds over the rest of the world will help it retain it's economic edge, and thus steamroller through it's current growing problems.

These problems (consumer debt, lack of paying jobs, growing Medicaid bill etc.) have all been covered elsewhere, by pundits of various hues and reliability - check out Mr Nouriel Roubini's site for a good source of info - all lie scattered like tacks on the road ahead, waiting to puncture the tyres of the Us economy, and by default, those of most of the rest of the world too. The problems have been there for several years, it's just that the Fed's easy-money policy has managed to obscure them - so far.

Which brings us to the here-and-now. Some commentators (Stephen Roach of Morgan Stanley NY was among the first) started calling some time ago for the fed to raise rates, and by implication, to start facing some of the problems that the easy money policy had engendered. Now the fed has started to do this, it seems the distortions in the US economy have merely morphed into yet more difficult-to-explain items - low long-end yields, for instance. However, I have a feeling the end game approacheth, although (unlike a lot of pundits) I have absolutely no idea what to do about protecting myself as an individual from what is coming.

Do you remember Enron? A tiny company that, through it's contacts and connections, took advantage of the deregulation of electricity supply, and surged (no pun intended) to become one of the biggest companies in the world - on paper. And paper was all it was. History is littered with companies that appeared to be doing something useful, when in fact all they were doing was shifting the same assets around so fast we mere mortals began to see the same asset as 2 different assets, then 3, then 4... But the truth dawned eventually, and someone realised it was all hot air. I think I can see the next Big One coming, and by golly, they seem to get bigger every time (although the LTCM numbers were mind-boggling enough). This time, I think it will be the GSEs - in particular Fannie Mae - those that borrow cheap, lend a bit higher, and pile up billions of dollars in portfolios no one really understands. "Too big to fail" seems to be the cry whenever it is mentioned. Trouble is, nothing is too big to fail, it's just a question of what is required to clear up the mess.

So why might Fannie Mae fail? Well, I mentioned above that the Fed is on course to raise rates to 3.25%, following years of low rates. As it raises rates, anybody who has based their business plan on low rates will suddenly find their business plan doesn't work - be they an individual with a maxed-out mortgage, a company with weakening cashflow and growing interest payments, or a GSE with a portfolio built on cheap borrowing that ain't so cheap anymore. The Fed has to raise rates; it has to get them to "neutral" or thereabouts or risk inflation building up; in raising rates, it risks bringing Fannie Mae down. So, there's the rub: The Fed has created a monster, through it's attempt to move the US economy into a new era; in recognising the new era doesn't really exist, it risks unleashing the monster on a less-than-robust financial system. All it has really proved is that if you feed an athlete steroids, he (or she) can further, faster and longer, he or she is still just a human with big muscles, prone to muscle strain, bad joints, and probably a heart attack.

If Fannie does fail, the shock to the financial system will be huge - it's debt is considered a proxy for government debt, and thus is deemed to have rock-solid guarantees; as such it has been scooped up by foreign banks & investors in armloads, and a failure would spread far beyond the US. This in turn would have a huge impact on global economic activity (which, ironically, would bring about the re-balancing of the world economy that has been lacking, albeit far more painfully than if the Fed had bitten the bullet 5 years ago). My question to you is, does the Fed have the firepower to prevent such a collapse, or has it used up all it's bullets over the last 5 years, and thus will be far more constricted if it has a major financial mess to clear up? And what we can we poor individuals do to protect poor little old us from the ensuing falling debris? Answers on an email, please...

The Wedding of the Year

Evenin' all. Despite the acres of coverage of the wedding of HRH Prince Charles to Camilla, I cannot see a) what interest it has for the general public, and b) what relevance it has to modern Britain. On the basis that EVERY UK paper is providing some information about it (I particularly like the picture of the Queen on the front page of today's Times), I must be missing something. I am not anti-monarchy, I am not even a republican (despite parental pressure to become so many moons ago), I just don't view the monarchy as something to occupy my time, except insofar as it seems to be to some a source of a number of jokes, good and bad. Let the poor sods get on with their lives, I am not interested.

One thing though, it does raise the old saw that when you've got something to hide, put the Royals on the front page, or start a war. Question is, what is there to hide? There is always something, but there doesn't seem to be anything at the moment, unless there is a conspiracy among all political parties to keep the impending general election from the great British Public...

In which Pooh talks about budgets

So, George W. has spoken, the US budget deficit will shrink dramatically from here on, helped by growth and cuts in discretionary spending. This seems to have riled a few people - not the Democrats, I mean REAL people. Nouriel Roubini is one, and he really gets his teeth into the figures submitted in the budget: http://www.stern.nyu.edu/globalmacro/. Now Nouriel, I don't want to wag a finger but, Bush is a politician, and politician's don't tell the truth. This is the way things are, and anyway, Bush wasn't elected because of his financial acumen, he was elected because the other guy looked worse.

Still, this comes back to my previous blog, where I avowed that lacing the truth with fiction reduces the likelihood of the true parts being believed - except when presented in a specific, spin-doctor-ish way. Perhaps we need to revisit this hypothesis, and make our model for truth/fiction-impact more sophisticated. Perhaps you can help - if a news feature is 90% fact, laced with 10% "assumption", would you let it by as "factual"? If the mix was 70/30, what then? Obviously, by the time you're into 50/50 that's tabloid territory, and as the song says, what a fool believes...

Actually the Nouriel Roubini response to the budget has raised a few questions: first, the website had a certain gravitas, and therefore was worth checking most days to see what insight he and his colleagues have on the [economic] issues of the day. By chucking his toys out of the pram over the - I agree with him incidentally - blatantly manipulated budget data, he has lost some of his hard-won credibility; second, by reacting so vehemently, my immediate inference is that he expected something better. Doh! As we all know, ask 50% of the people and they'll tell you America, burdened with massive consumer debt, is going to hell in a handcart. The other 50% think the sun will shine eternally on the Union. Somewhere between the 2 views is a median, but it is anybody's guess where that is. In short, there really aren't that many truly effective leaders able to take a long-term view of the future for a large organisation, let alone a whole country, and thus politicians are, on the whole, no more able than the rest of us. If someone told me I had to cut a $500bn deficit, AND make the pension outlook bomb-proof, I wouldn't know where to start. But if someone was to offer me the chance...

Good Morning He-Ate-Ham!

I don't give credit. I don't take cheques. I do notice changes, and one I have noticed recently is the increase in the sophistication of the propaganda presented as news. I use the word "sophistication" with care, because it has nuances that might not stand up to scrutiny, but in this case I feel justified, and this all came to light as I discussed the popular novel "The Da Vinci Code" with my partner. The fact that I have failed to read this best-seller leads me to feel I am well-qualified to pontificate on the subject - in truth, I managed just half a page before I threw it down in disgust, reckoning that to read it would be akin to chewing bark - I'd get less out than I put in. My partner's point was that "it was still a good read". Returning to the propaganda, I can't help feeling that, somehow, the perpetrators of this thing masquerading as news have worked out the formula that enables them to turn on the "it's on the news it must be true" button, just as Dan Brown gets away with passing off fiction as fact.

Take the coverage of the Iraqi election. Was the election a good thing or a bad thing? I can't be sure, but I get the feeling that a 60% turnout in the face of death threats and ongoing violence is an indication of how much the Iraqis want to determine their own leadership. I know people who won't go to a polling station if it's raining...

So there I was, giving my partner the benefit of my unequalled clarity of thought on Dan Brown, the attempt to bring democracy to Iraq, and the waste-of-celluloid that is Fahrenheit 9/11, and she clearly did not share my views. I'm all for a bit of dissent, it sharpens the mind, but after a while I found myself manouevring around the subject like a 4X4 driver trying to find a way though a bog. I decided to give up the moral high ground and go to bed - when your voice has risen an octave or 2, time for a time-out.

But I shall revisit this question: Am I the only one (in our house, anyway) who feels that if you lace the truth with a dose of fiction, to bolster your arguments, the true parts are devalued by association? It was the same with John Pilger - he passionately believed in the things he wrote about, and he uncovered some apalling cases of inhumanity perpetrated by politically-targeted Western aid, but he believed so passionately he was blind to some of the untruths he included in his journalism. As a result, he has lost all but the most die-hard anti-corporate, anti-Western supporters. His value has totally eroded.

I don't have value - not as a journalist, anyway. The only way I can go is up (at the moment). What I can do is question the information we are presented as "fact" by those with a goal in mind. Roll on the EU referendum! Bring me your news, bring me your views, I don't want your dirty linen, we'll get to that political spinnin'.