A not so scary movie about global asset markets.

Here’s someone talking about financial markets offering a different perspective to the doom and gloom we have been hearing (and seeing) for the past year.

It’s a really interesting piece that holds a contrarian view to the way people suggest things are and will be mapping out in global capital markets. I’ve started to develop a similar view only because everyone has an extremely bearish opinion on the US economy, the US dollar and global economic health. So being long the US dollar has been a fairly lonely time over the past few weeks.

I think this guy has been able to connect all the dots reaching the conclusion that the US dollar is about to make a major turn ( even if a slow one) and if it does it will eventually carry the global economy to a better place. In terms of the big picture the major problem of late has been the weakness of the US dollar as most things could be de-constructed down to that poblem. Turning this oil tanker around is going to be hard; however once it (if) does turn things may begin to improve over time. I think he’s hitting in the right ballpark.

The current weakness and the possible recovery of the US dollar cannot be overstated in terms of improving the world’s economic direction. In fact part of the tension we have been experiencing globally has been the result of a weak US dollar.

Is it coincidence that we may see such a different outlook with regards to interest rates so quickly around the world? Is it that the economic wheels of change are spinning in a new direction, and the timing is unique? Or was it a coordinated hand shake deal at the April G7 meeting? History will only tell us that. But, if you listen to Treasury Secretary Paulson, you have reason to believe that “benign neglect” is no longer the standing policy for the USD and that there is some kind of coordinated effort on the parts of the world’s financial ministers to shore up the USD. Regardless, this scenario of a stronger USD with a financial sector in a much healthier environment is in the very best interest of every single country out there.

Most economic pundits are looking around for the next big upset in the financial sector. And who’s to blame them when we’re all sitting around looking at dire news coming in left and right. But, the world’s financial ministers have been there every step of the way. Look no further than the efforts of the Federal Reserve to stave off a potential catastrophic event that keeps rearing its ugly head almost every other week. There is a plan, and it’s the single best plan available to put a final nail in this imbalanced coffin.

Unlike the 1985 Plaza Accord, however, where the G5 finance ministers came out of the meeting pounding their chests about their intention for the USD, this time around, considering the fragile state of the world’s financial system, finance ministers can’t risk rocking the boat too much, too fast.

So, quietly, they will walk…. and carry a really big stick. And this week, that really big stick is going to be swung…. Very Hard…. Very Loud…. And Very Clear.

It’s worth reading the whole thing to get a different perspective rather than the doom and gloom mongering the pundits are selling these days.

19 thoughts on “A not so scary movie about global asset markets.

  1. People (including some very cluey investment banks) have been talking about a US recession since January this year.

    So far, the figures have shown very slow growth, but never negative growth and always better than expected industrial output and so on.

    I can’t see how the US and world economy haven’t reacted to expensive oil and the loss of cheap subsidised credit. It’s been a year.

  2. The moat surprising thing of all, mark, is just resilient the US economy has been in all this. We’ve literally thrown the bloody kitchen sink at it along with the plates and saucepans. It’s has two wars going: three if you count the internal war on terror along with all the credit stuff yet the preliminary estimate for 2nd quarter GDP is 1.9%. Sure that can be rounded down with future revisions, but it’s not going to go negative and even if it is revised down by 1%, which would be a huge revision, it is still a mouth opening number in view of what’s happened.

    Wall street wasn’t happy with the GDP number because they felt a large component of that growth came from exports and import displacement. Well color me purple as there’s just nothing you can do to make people happy at times.

    I think the real big news is if the dollar turns around and money starts to move back into US asset markets. that would be interesting to say the least.

    The overwhelming consensus view is bearish and that is fully discounted. The risk is now selectively taking the other side of the bet.

    It may be a little slower here because we’ve had a negative yield curve to contend with and that has to normalize before we motor along.

  3. You guys have to be kidding.

    Mark Hill – the figures haven’t shown recession yet because there is an avalanche of financial sector losses that has yet to be brought back onto the books. Looking at the market for Credit Default Swap tells us the market gives a 95% probability that either GM or Ford will collapse.

    $3 trillion of debt that has yet to be brought back onto the books, and the banks will try and slow it down and ask for repeated bail-outs. There is going to be another year (at least) of bank failures and massive share price/housing deflation.

    America has been in the biggest, longest credit bubble ever, and you expect it all to be over within a year ? I’m sorry but this is blind optimism, have you been watching Jim Cramer or something !?

  4. Jono,

    Please show me the negative GDP growth that hasn’t been recorded. Don’t piss in my pocket.

    Have you been reading Steve Keen again?

  5. Jono:

    What avalanche of debt that hasn’t been accounted for? Loans seem to be accounted for in the sense that we know where all the loans are. Merrill Lynch, the second biggest dog on the street is essentially a new bank with the most recent sell down of its loan book and recapitalization

    everyone knows Ford and GM are heading the chapter 11. In fact it will be a good things as they will finally be able to renegotiate their health care arrangements. In fact I bet the market is looking forward to it.

    I don’t expect it to last just a year. However it isn’t the end of the world either.

    Don’t forget how quick the US banking system has been able to recapitalize itself.

    I would also hasten to add that a great deal of the write downs may have already been taken we may actually start to see write ups in 2 years time.

    Don’t be so gloomy.

  6. Oh that Steve Keen. this is the guy who wrote Debunking Economics?

    Even he’s calling the end of the world. That’s the point when these dudes get on the band wagon that game’s over.

  7. Steve Keen:

    While the Dow has fallen substantially in the last year, its inflation-adjusted value is still three times its long-term average, and more than 4 times its average prior to the start of this bubble. Even if the index falls merely to its long term average, it still has another 62% to go (in real terms) from its current level. If it reverts to its pre-bubble average, it has another 73% to go.

    If those figures seem ludicrously pessimistic and unrealistic to you, take a look below at the CPI-adjusted Nikkei–which fell 82% from its peak at the end of 1989 to its low in 2003. At the time, most commentators blamed Japan’s Bubble Economy and subsequent financial crisis on the opaque and anti-competitive nature of its financial system. We were assured that nothing so ridiculous could happen in the transparent, competitive and well-regulated US financial system.


    This is pretty amazing. He’s comparing the US to Japan. The US has essentially recapped its banking system while the Japanese allowed theirs to act like dead men walking for years before they took action and closed and/or liquidated loan books.

    Loans are getting written down quickly in the US while the Japanese let them fester on banks books for ages.

    This is the problem we have people like this guy thinking he’s doing analysis and it’s basically incomplete.

    And he’s also predicting the US stock market will fall 60% from the current levels. Here’s my bet, it won’t and the reason is that the stock market is a discounting mechanism. Keen thinks he knows more than other people or they haven’t discounted enough. He’s wrong.

  8. Jarrah,

    Keen used some fairly weak data to try and conclude that most consumer goods faced highly inelsatic demand, contrary to the basis of most trade and even foreign exchnage studies.

    He was wrong. He faced problems like micronumerosity. With more data, his errors were shown to be highly significant. In fact much of his book was wrong. His understanding of debt verges towards anti-banking bigotry [typical of a certain blogger you know who was booted from catallaxy]. Why does he worry about things like CAD which other economists rightly realise is a non-issue? On the issue of debt, he is about four to five decades behind the policy debate.

    There are far better economists to listen to than him.

    The simple explanation is what he says is scary and is good for ratings.

  9. i’m with jono, i’m afraid.

    total US credit as a % of GDP is even higher than during the 1920s. the deleveraging forest fire will be long and painful. however asset prices are correcting quickly and the US will bounce back.

    jc – i cant see how the $$ can turn whilst real rates are negative 3% and going lower and there is absolutely no will on the part of the Fed to move rates higher.

  10. Pomm

    there’s a more than decent chance we will be seeing the UK cut rats over the next few months and trichet could become more dovish.

    There’s also the fact that the US doll is extremely undervalued. the potential for higher rates in the US down the road and lower rates elsewhere could help the buck, me thinks.

    Pom, I can’t see what isn’t discounted for the US.

  11. Jono

    all that stuff isn’t turning to be right. A lot of that was fear mongering. And the banking index is lower than its equivalent in 1929/30.

  12. jc, i don’t care where the banking index is, there is absolutely no way its bottomed out. When markets hit a bottom, they spend months and months there, and we are still in the middle of high volatility.

    Looking at the actions of the Fed and the US government, it is beyond doubt that they are stalling for time and doing everything to bail out the banks. But neither the TAF, the TSLF, or the PDCF, have helped the banks recover.

    The credit crunch is only beginning, wait till it spreads to commercial real estate. This is going to be a slow motion train wreck over the coming years.

    Also, there is really no reason to be bullish on the USD. The article linked only discusses currency strengths in terms of interest rate differentials between countries. What they don’t realise is that the recently the USD nearly lost its positions as the world’s reserve currency.

    The currency is backed by the full faith and credit of the US government, but who in their right minds expects the US government to be able to pay for its $9 trillion in liabilities. Half of the USD are sitting in foreign banks and when another slump in the USD will trigger an avalanche of people dumping their reserves, further pushing down the USD.

  13. Volatility hasn’t bottomed?

    I’ve seen good resource stocks that used to trade 500 000 volume down to zero on most days.

    I’m confused as to why AFG won’t go to zero.

  14. You might like to add a huge CAD deficit on the pessimistic side also, which doesn’t seem to be shifting too quickly even with the massive drop already experienced.

  15. that the recently the USD nearly lost its positions as the world’s reserve currency.

    That’s not true. The US Dollar is still around 65% of reserves. Surprisingly the Euro has hardly made any ground in this regard.

    Jono, stop being so pessimistic.

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