Paulson鈥檚 predicament
When gales are blowing through global financial markets, as they are, in some ways it helps to have a former boss as . Certainly Hank Paulson鈥檚 interview in today鈥檚 shows a grasp of market technicalities well beyond the knowledge and vocabulary of most of the world鈥檚 finance ministers.
His message can be boiled down as follows:
1) The gyrations of debt and equity markets will continue for some time
2) There will be a negative impact on economic growth from the market mayhem
3) But US and global growth is so strong currently that we won鈥檛 be tipped into recession
4) Some financial institutions will go out of business
5) A more robust system for lending to US homebuyers with poor credit histories has to be put in place.
As for the implications for the structure of financial markets, there he was a little less confident. He talked in fairly general terms of the need for the agencies that rate debt 鈥 and which underpin the way that markets price that debt 鈥 to show 鈥渁 better understanding about the risk鈥.
You can say that again. The credit rating agencies are belatedly reviewing the quality of CDOs, CLOs and other specially manufactured debt securities, weeks after many financial institutions wouldn鈥檛 touch much of this stuff with a fifty-foot barge pole.
Paulson also paid lip service to the need to gather better information from banks and hedge funds about where financial risk actually sits in the global system.
But it鈥檚 not just locating the risk that is tricky to do. If you talk to three different regulators, as I have, about something as basic as how much leverage is in hedge funds 鈥 how much they鈥檝e borrowed 鈥 you get three different answers. That鈥檚 not reassuring.
My favourite Paulson quote however came in response to the question whether what鈥檚 happening in markets is welcome. He said:
鈥淚鈥檓 going to say it鈥檚 inevitable. When you have periods of benign markets, particularly in situations where parts of markets and the economy are growing at levels that are unsustainable, market participants aren鈥檛 going to be as vigilant as they should. You鈥檙e always going to have these events from time to time. When they come鈥t鈥檚 difficult to predict what might happen鈥hat might be the precipitating cause. But as long as you have capital markets, there will be events like this鈥︹
At the moment, it looks like it鈥檚 worth paying the price of 鈥渆vents like these鈥 for the faster global growth that globalised financial markets have delivered over the past decade.
Paulson and his former Goldman colleagues will be hoping beyond hope that a fully-fledged recession does not set in, because that would create significant political pressure to increase regulation of these markets, and do something not very nice to their golden goose.
UPDATE 19:27 Well, the markets are convinced that global growth is set to slow sharply, which may imply that Mr Paulson and other politicians are whistling in the wind.
There were sharp falls in the price of oil and base metals. Copper and zinc are down around 8 per cent, lead and nickel are 6 per cent lower.
Some of that was a consequence of forced sales prompted by margin calls on leveraged investors. But much of it reflects the view that US consumer spending will slow, and that will feed through to lower demand for Chinese exports, and hence to lower demand for natural resources.
It is also worth noting that the mining-heavy London stock market has been led down by the international mining stocks: Anglo American, Lonmin and Antofagasta all fell more than 9 per cent; Rio Tinto, BHP and Xstrata were all about 7 per cent down.
Standard Chartered was the worst performing bank, because of its dependence on Asian growth. Man was the worst performing financial stock 鈥 because it rode the hedge-fund phenomenon up and up, and now is riding it in the other direction.
The stock to watch, however, is Northern Rock. As one of the most aggressive lenders in the UK housing market, and heavily dependent on funding from the bond market, its shares have fallen almost 50 per cent from their peak of the past 12 months: a pretty soft rock.
I'm 
颁辞尘尘别苍迟蝉听听 Post your comment
I have studied market history in detail over the last century and a half.In less detail over the last 3,000 years.
Let me tell you what I have found. Since the baker of bread first decided not to directly find his own buyer to swap his bread for eggs, a system ,well intentioned and worthy, designed to solve that issue has degenerated into a self propogating 'ball of slime' designed to do nothing ,but grow rich exploiting the greed and fear of the crowd. That's it in a nutshell.
Markets do not on aggregate make money in net purchasing power terms for the crowd . They churn that money creaming out of it a ridiculous margin for themselves.
I don't wish to get into rant mode as it fails to support what is an incontrovertable fact based conclusion. Simply there is not enough real additional wealth created to supply both real gains for the crowd and to pay the high margin demanded by the financial industry. Massage the numbers all you like with statistics and you will not escape the validity of the conclusion reached.
SC - What are you talking about!? Who are 'the markets' that are creaming off this wealth? Are they some new species of animal?
Work hard at school, work hard at work and you'll be in a position to take some of that cream for yourself.
Don't work hard at school, don't work hard at work and you won't be.
Simple as really.
I don't wish to get in to a confrontation with you. the person you are talking about is not me as you perceive him. I am probably the working definition of prudent, earn more spend less and accumulate long term for when the distribution will exceed income in old age.
The 'markets' are the financial services industry that has exploded to try to sell you what you do not need if you do the above.
The 'cream' is the deliverance of negative value. You think about it. Whether it actually means anything to you depends upon just how much you really know about the said industry.
I must agree with the sentiments of the first commenter and would ask the second, surely if you are simply making money (cream) from other money, then you are not actually contributing anything tangible to our society. In fact, the contrary.
Basically, you are advising to be greedy and self indulgent whilst wallowing in your own misguided and egotistical perceptions of "wealth".
I hope your "assets" diminish in "value" and we shall see how you cope in the real world, not this capitalist midden, which, both realistically and rationally is doomed.
Was that not always the proverbial blueprint anyway.
regards,
I agree with SC about the markets exploiting fear and greed. The recent run up in stocks et al has been at times ridiculous. Aggressive pricing in of good news and ignorance of any bad news or potential risks but the market will always be like this and therefore I agree with tb also. If you're in the markets for speculative reasons exploit the extreme moves in your favour and get some of the cream to yourself. Otherwise you'll end up some doomsday economist who's views may come good, but has to sit offside for 6-8 months to get the small ego boost of calling the top.
What is the expected scenario from this 'inevitable' scenario?
Well, even if we go into recession for a short period it will have positive effects on correcting bubbles in China, India et all. This would encourage local growth and self reliance which has been lost to the effects of globalisation.
The extra 'cream' that has been churned out will be burnt and lead to a healthy recovery model around the world.
In all, there are long term benefits for the masses at a short term price.
For the super rich, I don't have any sympathy if they can't earn their millions in bonus this year.
Welcome to living within your means!
tb - what are you talking about!? Whilst the 'work hard, take some cream' may apply to some people (mainly those who had a public school education!) most of us under the age of 35 have found it v. hard to find any sort of meaningful (or profitable) employment - in spite of the working hard at school.
The UK hardly makes anything these days - the economy appears to be entirely sustained by people in suits selling 'financial products'. Now the stock markets are in turmoil and these same suited individuals are in a panic... it's hard to feel sorry about that!
This is not about two opposing sides this whole issue is about being in a market where there are no limits and where few take in fully consequesnces of their actions.
Markets need freedom to operate effectively all that is needed are parameters of play. Excessive greeed and the desire generate ever convoluted derivitive products serve no purpose if teh ability to unwind them is nigh on impossible.
Supply the balance and volatility will diminish.
For sure this collapse has been the total and undeniable fault of investment banks and hedge funds alone and they must not be bailed out. For to do so would be unforgiveable and set a precedent that will be used by every failed company for years to come
SC is exactly right.
The manufacturers and service providers that do more than shuffle papers, these people that are adding real intrinsic value are not making as much as those in financial houses shuffling papers raking in the cream.
Incredible amounts of brain power have been expended by the financial sector in devising more and more fancy ways to earn money, when in reality all they have been doing is devising new methods of usury.
All the wealth of the world's systems depends on adding value, the greater the rise in value at the lowest cost gets you the cream. This is called efficiency. Machines add to this efficiency, a tractor does more work, adds more value than an ox. Not complex. What has happened here is the smoke and mirrors of all the intertwined complex financial deals had a few threads break, this passes more strian to fewer strands, so more break. The strands in this instance are poor borrowings masked as good borrowings. We hear a lot about "sub prime" and the USA. We too have sub prime in the housing market - its called self certification. Soon those threads will break here too as everyone unloads debt. Then the cost of over easy credit supplied by greedy banks, allowing (dumb) people think they were making real gains on property without adding real value. (scarcity factor aside) will hit home (no pun). We will all benefit in the long term as prices of all things should reflect true values, false low cost credit will be factored out. Bring on the crunch. It'll hurt but it'll work in Mr Average's favour I believe
If the banks selling financial products to those who can not afford then it's about time they took a hit for this level of exploitation. I guess they thought they would just re-possess the house and sell it on if the the owner could not pay the loan, again reducing their overall risk, but house prices in then US have been falling making this scenario non viable.
problem is, when it all recoveres, and it will, who will have ultimatly paid the price, and who will learn so it does not happen again!
Guys! CHILL! OK, so the equity market has taken a bit of a fall - but the drop is barely into double figures in percentage terms from its peak of 6750 this year.
In the grand scheme of things this is a correction not a collapse. People have got their fingers burned, and rightly so, for underwriting or buying packages of bad loans in the US mortgage market.
On top of that, the LBO market is currently shut, but in my view that is good news because debt pricing was not reflecting the risks involved. Leverage multiples on new deals to market had been rising since 2002 but debt pricing had continued to fall. Then people really began to take the mick when they asked for lender protection to be reduced (i.e. covy-lite deals). However, the LBO market will return once price expectations have been realigned.
Back to the subject of the FTSE100 - I'm piling into the market if it hits 5000!! Come on!
The Fed (Oringinally led by Mr Greenspan) and all other Central Banks are largely to blame for this inevitable meltdown as they kept interest rates artificially low by printing so much money that 'anyone' could borrow as much as they wanted, encouraging banks and other lending agencies to make loans to people that had no hope of paying it back. The whole financial world has gone mad..... U.S 10 year notes yield just above 4.5% when even official inflation is 2% a single year (much higher in reality).. so who would lend them when your money is worthless in just 3 years.... We're doomed for the foreseeable future.
Its not a 200 billion dollar question. Its about credibility. There is a sense that the so called big boys have somewhat misled investors, while stuffing their own pockets with hefty bonusses.
For all those who are looking forward to a fall in the value of assets to teach those fat cats a lesson, unfortunately we all loose, the rich man with $1bn will find he only has $500m, the poor man with $5000 will have $2,500. When asset values fall it is most likely the poor that pay the price even more. For poor read recent graduates, nurses, any professionals trying to build a life and have the prospect of losing their houses and jobs and all the turmoil this brings with it.
Those who have made vast sums will not lose those sums they will only re-position themselves and even in this turmoil will be adjusting portfolios to make even more wealth - selling the market as it crashes.
Thats why I hope the turmoil ends soon otherwise we could all be counting the cost (except for those who have made so much who can sit it out until the next bubble)
Going back to the original article (rather than the debate about whether the market itself adds any value)....
The only thing that I take issue with is the statement that we will not go into recession because of this.
Oil at around $75 per barrel and the prospect of an Iraq withdrawl - what will that do to the oil price ? Not to mention the peak oil scenarios, war of words with China and this whole sub-prime credit mess.
I think a recession is a dead cert. In the UK even more so because of our overvalued housing market.
Every so often we do need the odd "cold spell" - it is painful but it also shakes companies back into considering which parts of their business add real value. This drives better efficiency and is the springboard for the next growth cycle.
Well done babyblue. The one sensible comment to come out this debate. Does anypne really understand what sc is babbling on about??
Leave commenting on the markets to those who really understand them and don't forget that markets are efficient and you get rewarded (and sometimes punished) for taking risk.
Get yourself a decent financial adviser not some lazy product sales-geek.
What we have here is a bubble that is the process of bursting.
The US has been living beyond its means and capital assets have been appreciating in a way that is wholly unjustifiable when you consider the US's competitive position and its overall level of debts.
The problem in the short-term is that the consequence of the fallout only serves to exacerbate the problem. Because American Institutions, Companies and Individuals have been repatriating to funds as a consequence of the crisis. The dollar is appreciating when it needs to be devalued. The next crisis will be with the dollar which has to drop in value, but because of this unhelpful short-term strengthening, instead of gradually readjusting, it is likely to pancake.
The interesting thing about oil is that a fall in demand caused by a drop off in economic activity will of course lead to a lower oil price. That lower oil price will lead to lower levels of investment by the Western oil companies and so decline in current oil production levels will accelerate.
This in turn will lead to a tightening of supply and so when economic activity begins returning to normal - whatever normal is - and demand begins to rise again then the price is going through the ceiling.
The fun is still to come folks...
Such occurences should be relatively easy to remove surely with a bit of training in the right places, vis. better understanding about the risk. I would like to add expectation on regulators regarding inspections and the like. Who's watching the watchdog?
Whilst I'm agnostic regarding recession on this issue, I would like to emphasise another salient point in the original article- the implied shambles that's also existing in the regulatory sector. Our expectation for government is in protecting markets vis. 'a better understanding of the risk', inspections and the like. Who's watching the watchdog? Marketeers seem to be let off the hook more and more these days as they seem to deem it 'not in their natures' to operate with ethics.
I think, the root cause of this credit crunch is the big boys have forgotten the basics. Sub-Prime mortgage is so called because, it is sub! and lending to those people was and is, risky. Banks lured people who cannot afford it, because those people pay a high premium. oh, yeah, 20% increase in revenue, 拢8 bn net profit, etc etc etc.
But same time, they simply forgot the risk is really there, and one day they may have to face up to it.
Well, after all, the risk statements are in small letter, and boys forgot to read it :0)
Maybe I`m missing something here but why are these sophisticated financial institutions, run by presumably intelligent people, investing in funds based on lending money to people who can`t pay it back? In addition, why do other financial institutions, including other banks, take on these debts themselves. Are they all braindead?
It proves the point of that well known word that rhymes with BANKERS.
The markets are for the few who are prepared to risk, its an educated gamble unless there is inside information. Take insurance and pensions, people would be better off investing the money themselves rather than investing in pensions just look at the bad advice
'opt out" and "the endowement mortgage" these people move the goalposts to suit themselves. Keep your money invest in yourself and let the boys in the striped suits go and find a proper job.
Crashes happen every 15-20 years or so. It's a cycle. You can speculate on the reason, but I'm a firm believer that it's the human factor. Once a significant number of the people calling the shots (i.e. investors, fund managers) are too young to remember the last big crash, then the market does not have an appropriate awareness of the risks involved. The result is overly bullish sentiment.
And then the psychology turns. When you've had no appreciation of risk, and suddenly get bitten on the backside by a massive crisis, the end result is normally a massive overreaction and flight to safety. The market has probably got a lot further to fall.
Well said, Tom T-D.
Its interesing to see comments about the financial markets 'creaming' money for their own gain. The profit mark-up attached to manufactured goods is completely different, I suppose?
Financial markets do not directly generate an increase in net purchasing power amongst 'the crowd', but that isn't their purpose. In the same way, a factory in Scotland manufacturing pins doesn't directly improve the wealth of a fisherman in Cornwall, unless you take an incredibly long-term view of the situation.
The financial system grew up as a facilitator of trade. Rather than creating tangible objects, it creates opportunities. Loaning money to a successful company allows them the opportunity to invest it, innovate, and generate more wealth.
They could do this via prudence, but it would take far longer. The profit taken by the lender is reflective of their risk in the bargain and a necessary evil for the company which has now received benefits faster than would otherwise have been possible.
It seems hypocritical to overly criticise the financial industry when I doubt that the average person here could afford to buy a house, insure a car or provide a pension for themselves without the support of financial companies.
Prudence does work, but its a very slow method to improvement where large sums of money are concerned. The correlation between the boom of the financial sector and growing improvements in the average person's lifestyle is no accident.
I agree with the first poster. There are loans and there are investments and there is risk. That is all there is to banking.
As soon as i hear the words "financial instruments" or my favourite "financial products" I know someone is earning a huge marketing fee, someone is earning a huge commission and someone is getting ripped off.
Mr. Paulson is being disingenuous at best when he says that only the speculators will get hurt after this bubble is over. When you look at who's involved in feeding the subprime frenzy, you find not only mortgage financiers and private hedge funds, but the banks and brokerage concerns that have lent these people the money to do their dirty deeds in the first place.
In the United States, that includes major institutions like Citibank, Goldman Sachs, Bear Stearns, Merrill Lynch, Wells Fargo, etc.etc etc. As these financial titans close their loan windows and take hits, ANYONE with a loan or a potential need for a loan will suffer.
I predict that the end result will be a daisy chain effect. Already, OPEC is predicting a downturn in demand due to the subprime crisis, and the vast majority of US stocks have been affected by this. This means that companies will lay off people and cut production.
The only thing that remains unanswered as far as I am concerned is whether the next year will see a garden variety deep recession, or whether it will spread into something far worse.
The US have caused this drop in markets with financial corporations greed and lack of regulation in the lending market. You can expect more problems to come from this in the next six months as some US financial institutions will collapse, anyone remember Enron and Andersons, they collapsed from lies and poor regulation. Avoid US markets.
World equity markets have now been in a bull run for the the past five year and anyone who invests in markets should expect a negative year every five years. Over the next decade you will see a negative every three or four years as economic cycles continue to rise and fall more sharply in a shorter time period than they have ever done before.
The American Dream!!!!! Is now a nightmare. History will repeat itself and the Far East will be the superpower again within a century. Equity interests in that area of the world is where to be.
Seems a bit rich for people to point the finger at the banks. At the end of the day they're providing a service, albeit a potentially lucrative one.
It's the people borrowing and borrowing and borrowing to fund a lifestyle they can't afford that fuel the debt bubble. If you can't buy a house without committing 5x your annual salary then don't buy one. Eventually prices will fall to a more reasonable level once demand dries up. It
Can anyone say if all these losses,(and any others in the pipeline for next year),once they eventually work through the financial system will ever influence currency values ? Maybe through future inflation / interest rates ? I'm primarily interested in the value of the yen-which I believe is 40% undervalued against the euro.
I must say that this blog has one of the best debated comments I have ever read. The level of debate is worthy of the Oxford debating society. Anyway, recession i don't think so as not enough things have aligned themselves. A general slowdown in spending in the UK, job losses, housing crash (not a slowdown). The old adage when america sneezes the rest of the world gets a cold hopefully won't apply. Why should the rest of the world suffer for the USA's unregulated lending market and why oh why are bad debts allowed to be traded like they were bonds or shares around the world. I hope the EU puts a block on it asap.
"Cream", the average person in this country pulls about 20k a year for delivering 40 hours a week to produce something. What does the average city body average in finance?
"Facilating trade" ?.You are shooting yourself right in the foot. That is, you are absolutely right, that is exactly what I alluded to in the first post I made. I then went on to say that these markets have had a parasitic leech built on to them that has nothing to do with the purpose mentioned (facilitating trade). The financial markets are not even marketed for the original purpose.
The central message of it's marketing is we can make you more money and keep you ahead of the crowd in the wealth stakes. That is it, sell the product. Does that message get delivered in reality , no it does not and that is what I am saying. The reality is consistently avoided not only by most of the parasitic leech ,but all of the many clientele who take the message onboard. In fairness to the latter a lot of them are not equippied ,or qualified to understand this reality. Others choose to suspend their brains and that is their choice.
For context I have no axe to grind I am equipped to take it off the so called professionals day in day out as a trader and as an investor year in year out. That does not mean I do not have compassion for all of the cannon fodder who don't.
In the latest gambit of win-lo$e, sub-prime lending is not a unique catalyst for the current market panic and recession/non-recession talking heads. It makes news because its mortgagors have bet wrong on hope, selling mortgage rates short on the costliest purchase of their lives--their homes. Absent the humongous per-capita value involved here, we would still make news growing debt and swinging the market by gyrating to harmful decisions about energy sources, prices and consumption; unfair trade practices and our eye-popping trade deficit; and limitless access to "no-sweat" credit cards and "advantageous" balance exchanges, etc. etc.
We are in mass Duh! mode, repeating bad history. We have lost our compass and grip, and have become our worst enemy. The scenario of perpetrators vs. victims is not valid in the sub-prime arena, nor in any of the above situations. Until our personal responsibility trumps the bogus:"easy" path or buck and the notion of gaining something for nothing; or we perform smart work and perseverance to support ourselves, our families and our communities; and private enterprise (including rating agencies) and Congress axe their perpetual motion machines of enlightened self-interest, the debt beat and its consequences will swell on.
Without the rest of us, the private and public fat cats would starve. Look at their untested hands. We hear of "The Suits," not "The Suit." The greedy love company, their own first. They need us because they cannot game without us. Rip van Winkle is awake. So must we be. Caveat emptor.
The same excessive investment in capital markets, leveridged buyouts and excessive expansion in money supply at unrealistic interest rates last occurred in 1929. Financial Institutions folded then too. All the regulation designed to prevent this occurring again has been unwound since the early 1970's with reversion to neo-classical models of economics. Those that remember 1929 are now deceased. GATT was set up to liberalise trade including agricultural goods which was seen as a contributor to depression. What we see now is protection in these commodities across Nth America and Europe. Read the History. Capital/ Financial markets are not perfect. Regulators were stupid to allow leveridged buyouts which are fine when interest rates are low, but destroy these businesses and peoples prosperity when the credit crunch finally arrives
I think we can all agree that the financial markets can contribute to adding economic growth, its just a case of regulating these banks and hedge funds and making sure they do not give out bad loans. However, this is getting increasingly hard to do.
Don't look for a complicated answer as the reason for stock market meltdown. There are three simple bodies of people to blame and here they are....
1. Banks (the boards of) with big bonus incentives linked to profit changed from having a long term, responsible view to a short term 'lend to anyone, lend quickly and retire on fat bonus's view'. The boards said to themselves 'who cares about the lending risk to the bank in 5 or 10 years? I can retire in 3 years on these profit bonus's, let someone in the future clean up the mess. I am outta here!'
2. Government - Let banks get away with no1 and also failed to teach any of the population about finance at school. Result - 90% of the population get financially raped by the other 10% who do know about money.
3. The population - shouldn't have to be taught finance to realise that 拢200,000 for an average house is obscene. The population turned into lending lemmings.
Hi everyone,
I'm an IFA of 23 years experience.
I just want to be the last person on this website tonight.
It is 22.56pm.
You've all got an hour to ruin my day.
I'm off to review my mini cash ISA.
Chill out boys
You want to know the real problems?
People are sheep. They just follow the herd.
The other problem is that debt is a non linear system. It introduces exponential movements into our monetary system. As if markets weren't unstable enough before.
The pending economic melt down is and was completely predictable.This word wide phenomenon of escalating property prices fuelled by speculation has to fall.Investors buying commercial property at a fraction of what they would get by leaving their money in the bank only relying on the capital gain have done very well till now.In reality a commercial is only worth what it earns and how secure the tenant is. Residential property has suffered a similar fate. There is going to be fingers burnt in the finacial and property sectors It's time to sell up,retire debt and wait for the bargins.
I can only add this after reading all the above by stating what was stated Mahathma Ghandi ..the world has enough for everyone's need but not enough to feed the greed of everyone, and that's the trouble with the world.
In respect of the comments above regarding financial education. I would applaud attempts to raise basic numeracy ,BUT in my experience the absence of this is not the causual factor of financial mayhem. Emotional control ,or the lack of it is a much larger factor. Much larger. It embraces all of those actions which people were they calm and objective are numerate enough to comprehend,BUT choose to ignore because they cannot control their emotions. Instant gratification is but one small example of same.Greed and fear in confronting gains and losses are others. Numeracy is not the central problem, the willingness to use it IS. In saying that I would also acknowledge the blantant marketing doublespeak that seeks only to confuse what are really simple number crunching issues and turn them into something designed to give the companies in question and out when things go wrong.If it is not provable misrepresentation it is certainly not in the spirit of seeking to support the clients rights in the contract.
what a load of...
SC - first post - i dontunderstand him either...but then if you read his post correctly (i.e the literal meaning) he must be gettgin on a bit...studying for the last 3000 Years? arent you bored by now.
Nick G - investment - fundamentally the higher the risk the better the potential profit. Purchasers of the sub prime debt would have it as part of a portfolio. Not brain dead, just part of a calucated risk that didnt pay off. re you comment about rhyming with bankers, to you i would say consider yourself the word after oxy-
JB -well said. no one forces people top borrow, the banks just make it available.
Chad 37 - one of the more riduclous posts (running closely behind mine)Banks are uin business to make money for their shareholder - get over it.
Government - it doesnt take a genius to know that spending more than you can afford, and not making provision for unforeseen circumstances is a recipe for (financial)disaster. And if people would just swallow their pride and ask when they dont undertsand something (instead of ignoring their ignorance and hoping everything will be ok) then they wouldnt , as you so eloquently and misguidedly put it, get raped by the 10%
Housing costs are at least partly function of supply and demand. Financial education would help people realise how to afford housing, the actual cost is, whatever people say, largely irrelevent.
Rant over
Last time when we head to recession -- policy makers blame over hype of NET and corporate scandals and this time it seems scape goat is bad lending practices -- when we stop blaming causes and start looking for root of issues - and would able to escape from this vicious circle -- or somebody is going to repeat same old rhetoric "Mistakes make history"?
Has the UK stock market overreacted to US credit problems?
The answer is in the charts. Compare the one year Dow curve to the one year Ftse 100 and the answer is obvious.
I can only conclude that many of our commentators and market Gurus are gaining from self-fulfilling threats of a bear market
"It's time to sell up,retire debt and wait for bargains"
Have to disagree with you. If you had much of property held with gains you should HAVE been selling in each of the last two to three tax years. Selling now you will be selling into an increasingly buyers market and if you have not sold anything yet you will find it difficult to mitigate tax on gains as well.
The point I am making is waiting for situations like this to become so transparent that they can be seen by a blindman is what the crowd actually does. Optimum selling mitigates tax and sells while their are still people in quantity who wish to buy.
Now here's a question.. The UK trade deficit is astronomic and growing, household debt is a record levels and growing and so of course is Govt debt.
The increase in cheap imports has fuelled the credit boom along with high house prices which has benefitted the banks, low interest rates have helped the private equity boys buy/sell companies but not create new ones. Our competitiveness has slipped below even that of New Zealand because we're not doing much that's new anymore whereas despite their current troubles the USA is still investing well in new companies.
When this current "readjustment" is over does anyone think there might be also be a slow rebalancing of the economy to grow our - lets call it manufacturing - sector to reduce our reliance on financial services, imports etc or will we just carry on as what we now consider to be normal?
"Has the UK stock market overreacted to US credit problems?"
I think better question is has the US market under-reacted? Part of the reason we are in this situation is that US traders continually ignore obvious bad signs and shrug them off as blips or somebody else's problem. The chickens will come home to roost sooner or later
Reply to Nick. The US traders are more realistic than ours.
The sub-prime market problem is small in relation to risk of fear-led market melt down. Western banks could afford to pay the mortgages of the US "Ninjas" for a few years and give them a free home. Whilst we ought not to bail out the careless lenders, neither should we be chasing down the market value of thousands of well run, highly profitable companies. Global economies are strong and growing and benefitting from technology transfer. Confidence is justified.
I'm sorry, I don't understand all of this "financial stuff", but I do have some observations and questions.
Is the sub-prime mess similar to the problems the Lloyds names had several years ago, names accept the risk, took there cut, sell some risk on to another broker who takes a cut etc etc. Until a claim is made and the bubble bursts, because so many have had there cut, there is no money left in the "pot" to pay out?
And isn't this in some ways also the way Britain has run it's rail and water, with companies increasing the price, failing to improve the infastucture but paying there chief execs well plus bonuses and then selling on to the next money grubbing fat cat to do the same? Leaving consumers with vastly increased bills, and a worstening service.
Are we at the precipice of a western meltdown? The US of A in hock to the tune of $8.9 trillion, and most other western economies running imprudent deficits. Britain remains on the face of it within the chancellors "fiscal rules" but to what extent do PFI and PPP contracts push them over the edge? Plus any medium to long term milatary costs involved for GB and the USA to bear in the middle east.
Could the sub-prime mess, started in America have a massive effect, certainly as lending becomes tighter the buy to lett people will feel the pinch, and others, who with there imagined house price profits have bought a second home in the country or abroad, (Spanish house prices have already dropped some) get to be squeezed on both fronts? with many others gaining mortgages and loans from self certified earnings or ridiculous earnings multiples, the consequences could be quite horrible.
Most of the EU countries have some very nasty pension provisions to face up to, (see 大象传媒 article on pension crises on 17th Aug 2007) and I personaly don't see economic growth being enough to cover promised future pension provision.
Will Britain fair any better than the USA in the financial meltdown? I don't think so, with so many described as "ecconomically inactive" (21.2% according to the Daily Mail) ie unemployed, students, long term sick, disabled etc. And an ever increasing army of civil servants, local government officials, jobs for the boys quango's draining the public purse plus assorted needs on the public purse for desperatly needed improvements to the health service, prison service, water and rail infastructures, and with the low and middle income families already facing one of the highest tax regimes in UK history, where can any government find the funds to stop the heamoraging of expenditure that will become our national debt?
With all stock markets now heading towards last years levels, (managing to wipe out a whole years stock market growth) can anyone explain why gold is now at $662 an ounce, a drop from $685 in July, when it is the traditional "safe haven". are central banks buying and selling gold/shares to hold up or artificially hold down prices? Sorry to ramble, but if any questions or thoughts here make sense, can somebody provide the answers?
Matt
Re: My earlier post (45) regarding LSE overreaction. Here are some facts:
One year stock exchange movements to date including recent collapse:
USDow +15% US Nasdaq +15%
German Dax +15% Aus Sydney AO +15%
UK FTSE100 +1%
Given UK economy and currency are both reasonably strong and inflation remains low I conclude our typically profitable company share values are a bargain today and collapse is unjustified.
So there I am, regularly refreshing my short positions because I want to protect my pension and savings in a crashing stockmarket, and it's working a bit - it's lessening my loss. I know people made jokes about my other posts, but the above is what I was really doing, and Peston's blog's been great because his reading of the situation's been so good. But what to the Americans go do? Shift monetary policy and send the markets skyrocketing, and bust out all my short positions. It's madness - you can't just shift the goal posts like that. It highlights just how superior the British system is where we have a monetary policy committee making interest rate decisions in a transparent way (actually - I know the US changed not the main Fed rate but another one; are there several government interest rates here outside the MPC's remit?).
Anyway, shorted again after the rocketing and recouped quite a lot, but can't believe the Americans just did that - firing half-point interest rate cuts into the air like a bunch of cowboys. What we need now is surely some stability, some certainty, but at the moment it seems that even interest rate changes are clouded with uncertainty.
However the market cuts and slices it, there's only so much genuine profit to go around. If someone is offering greater 'profits' its either being stolen from someone else's pocket or being borrowed from the future. The first is either theft or gambling, the second is a Ponzi scheme.
Traders and dealers take their commissions and fees whether the market goes up or down, so they don't really care whether shareholders money is safe or not.
Everyone wants to get rich quick! Whatever happened to working for a living? Or saving for retirement?
The stock market is not a win-win situation for all. It was never meant to be. It is a place where one makes money at the loss of others.The stock indices do not refect the true picture of the economy. The fed or for that matter any govt. agencies should not interfere in anyway. The regulatory authroities should conduct a proper investigation to establish the root cause of the subprime collapse. The scope of investigation should also include:
* to see if the financial products such as CDOs comply with the regulations.
* why did the rating agencies suddenly go wrong? or is there any scam involved.
Btw, the markets are now up after the fed cut the discount rates. But that should not deter a proper investigation.
"I have studied market history in detail over the last century and a half.In less detail over the last 3,000 years."
Never disagree with the wisdom of such an old man.
My first entry so congratulations first to Robert, finally a 大象传媒 economics reporter that knows his stuff and leaves his politics at home. The economics of the situation are clear, what we don't know but markets suspect is dishonesty is in play - Enron style -. Until the major finance houses start reporting (and we believe them)the situation will remain highly volatile and dangerous. A sniff of dodgy reporting and look-out!
Firstly, I wish to say about SC, I agree with every word of his 5 comments to this page.
It does not surprise me that others do not because he is ahead of the crowd. Very decent of him to talk to us.
Paulson does have a predicament. Keep talking about a recession and one will happen. But it need not.
The USA is solid and it is the rest of the world ( including GB) that is fragile. We all need the USA.
Fear and greed fuel the Dow Jones ( and FTSE) every second it is live. A mere one minute is a long time.
It's not numbers, but psychology and bluff and double bluff.
If financial products had the same quality standard that white goods and supermarkets have, many problems would be solved.
Have others noticed supermarkets are now offering financial kits along with their food packs?
For the fat cats with the cream, this is where their real danger lies. It may be a solution for everybody else.
Here's a question::
If the stock market turmoil originates from the US why is their market still 15% higher than it was a year ago whilst Ftse 100 is back where it was 9 years ago?
I am suspicious of the Sunday newspaper doomsters predicting falls to 4500. Given company profitability levels, GDP growth and a small amount of monetary inflation a historically "fair value" for Ftse 100 is around 7000.
Trevor - I agree it's annoying isn't it, that the market never pays attention to the fundamentals! Hardly a new phenomenon though
Personally, I'm bearish and I think there is still more bad news to come.
A lot of discussion so far around the sub-prime issue has been about its effect on the immediate owners of the mortgage debt (or packages of the mortgage debt). But I don't shed many tears for the sub-prime lenders or investors.
However, I am concerned about the wider impact of inappropriate mortgage lending combined with the house price crash on US consumer confidence and diposable incomes. The US consumer drives not only the US economy but also many other economies via demand for imported goods. A downturn in the US will have a knock-on impact across the globe. That is why the dismal comments from Walmart last week on the subject of the US consumer are more ominous signals to me than the woes of Bear Stearns or the Landesbanks.
Raphael - It sounds like you got burnt on Friday as a result of the stock market rally when the Fed cut rates. That just illustrates how volatile the market is and trying to second guess it... well let's say you need to be brave and you must expect to make the occasional loss.
I've not seen any of your other posts so I may have misunderstood but... are you day-trading your pension savings? I hope not
Re Post 57, if you take the time to read the not so small print you will see that ever supermarket's financial offerings are backed by a high st bank or insurance company. So the products are devised by the same people, marketed by the same people, approved by the same compliance department etc etc etc. Maybe it won't be Sir Fred Goodwin raking in the cream but Sir Terry Leahy in his place, or more likely both together - go read the tesco annual report if you believe they are holier than thou!
The only shame here is the contagion risk whereby hedge funds have invested directly, lost out and are rebalancing positions by selling more liquid assets. This has meant we have suffered, through our own prudential saving, pensions and so forth.
However, I think even this (now slight) correction, however unstable it may prove to be, will be for the greater good and those who have been prudent will be rewarded. So long as the new PM and Chancellor can stave off any significant unemployment rise, that is.
So let's try to be more balanced here, something i often criticise economists for being the epitomy of. But there are winners and losers in every trade - until we find another way of working just get your head down and do you must to survive.
I remember several things from my time working for one of the banks (I am retired).
Anyone can lend money and since few people look at interest rates (they look at the monthly payment) it is relatively easy to charge higher rates. The tricky bit is getting repaid and bankers who have not lent during a recession forget this. We have people who place reliance on the value of the underlying asset, they are called Pawnbrokers. Pawnbrokers can appraise the value of an asset and lend a smaller proportion of this value. Something the the sub-prime lenders fail to do. It seems to me that individual bankers are in a unique position. They can bet with other people's money, take their commission but not share in the risk. Hopefully when things settle down we will have a generation of bankers who will be a little older and wiser; who will provide a service to commerce and industy and make honest sustainable profits. Then we wait for the next generation who have not lent during the difficult times and the process repeats itself.
Interest throway comment about Norther Rock. Sure its shares have gone down a lot. But I'm not really sure why apart from the fact that people are worried. What they're worried about is not clear because very few people actually understand where the risks lie with securitised bonds. And in reality it lies with those institutions that have bought the bonds and made them into a variety of other products - the sausage industry - rather with the bank that originated them. The market isn't always right (remember the dot com bubble) and just because others are buying or selling doesn't make that a sensible thing to do. So yeh, Northern Rock shares have fallen a lot but that doesn't necessarily make them a bad buy - in fact isn't the art of investing to buy cheap and sell high?
Coments 4 & 5 -
"Otherwise you'll end up some doomsday economist who's views may come good, but has to sit offside for 6-8 months to get the small ego boost of calling the top"
Are you accepting the inevitable - and so short a timescale. Furthermore, are you suggesting that I will gain some sort of satisfaction from an economic crash - I would suggest you do not know me.
Put your "money" in gold, I would suggest your teeth, in the manner of a gypsy. That may be safe - but what is money.
regards,
Comment 51:
Aren't you overlooking the changes in exchange rates over the period and the different weightings of the various indices (towards financial, industrials etc.)? Surely a better comparison would be a comparison of similar companies from each indices allowing for currency changes?