August, 2011 Archives

20
Aug

SuperCycles – The New Economic Force

by Riaan Nel in News

SuperCycles: The New Economic Force Transforming Global Markets and Investment StrategyIn the following interview with Arun Motianey he explains succinctly his theory of SuperCycles – the new economic force transforming markets. http://nourielroubini.blogspot.com/2010/03/rge-arun-motianey-explains-super-cycles.html

 

17
Aug

Gloating China, Hidden Problems

by Riaan Nel in News

Headshot of Niall FergusonNiall Ferguson

Ferguson’s recent article on the hidden problems in China is worth considering.  Here is a link to the article in The Daily Beast (http://www.thedailybeast.com/newsweek/2011/08/14/china-faces-its-own-fiscal-problems.html).  I recently spoke at a meeting regarding the Federal Reserve’s policies to avoid deflation and stimulate the economy.  One of the other speakers was from a well known money management firm.  He spent a lot of time espousing the virtues of the Chinese economy.  It is my belief that China has become a fad in the global political economy.  It is not a “done deal” that China will take over as the leading economy in the world.  Ferguson’s article brings some perspective.

16
Aug
11
Aug

Are We On The Precipice Of Another Financial Crisis?

by Riaan Nel in Global Economy

Cartoon by Nate Beeler -

Since we cannot predict the weather with accuracy three days out, it is indeed folly to try and predict what the complicated global financial markets will do tomorrow or next week.  It is worth remembering what the market is.  Financial markets are social institutions where financial instruments are exchanged.  Modern global capitalism is dependent on a multitude of financial instruments to facilitate the production and exchange of goods and services.  Fundamentally modern finance has to do with credit – the creation of credit, the availability of credit, and the allocation of credit.  The point I’m trying to make is that the financial markets (or capital markets) aggregate human emotions about the future – markets are, and will always be, emotional.

Since the end of July we’ve seen stock markets around the world decline, and we’ve seen bond markets go up in price (with the concomitant decrease in interest rates).  Typically this tells us that the participants in the capital markets are concerned about something.  Negativity about the future is what drives bond prices up and stock prices down.  We’ve also seen incredible volatility over the last few days.  Four hundred point up days and five and six hundred point down days.  What does this mean?  Are the markets schizophrenic? 

Of course there are legitimate concerns worrying market participants – the US economy is exhibiting very anemic growth; globally there seems to be a slow-down; the European sovereign debt crisis is spreading to larger economies like Italy and Spain; the European sovereign debt crisis is turning into a full blown European banking crisis; there is uncertainty in the US regarding the regulatory structure; US political institutions seem unable to produce long-term solutions to the problems facing America; there is a growing divide in America between two opposing philosophies of the role of government in society and the economy (a clash of ideologies about the political economy, if you will); and concerns about the relative decline of the West.  The rancorous squabble and brinkmanship of our political leaders regarding the raising of the debt ceiling, culminating in the S&P downgrade of the US’s AAA status, ignited and galvanized all these fears to cause the big market drop on Monday, August 8. 

But let’s remember there is also encouraging news about the state of the global political economy.  Unemployment in the United States seems to have stabilized. For sure the real unemployment and underemployment rates are much higher than the official rate, but it seems like we’re not going to see significant increases in unemployment.  Corporate America in general is doing very well, and generating profits.  We know US corporations are flush with cash – the fact that Bank of New York Mellon will start charging fees to customers with more than $50 million on deposit is indicative of how much cash there is on the sidelines.  We also know the emerging markets continue to be the engines of growth in the global economy.  Deficit reduction and entitlement reforms are actually seriously being discussed in our political system – whereas in the past they were sacred cows not to be subjected to any fiscal reality. 

Although there are many things to be concerned about, on balance I believe the US economy will avoid another recession this year.  Yet I do concede that the likelihood of another recession is increasing because of a potential retrenchment of credit due to the European banking crisis impacting our banks, as well as the stock market volatility and other concerns leading people to further rein in their spending.