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...
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...
posted by Jambutty at 4:20 pm
1 Comments:
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