Posts Tagged ‘leverage’


Where is the global market heading?

Monday 17 November, 2014

Nouriel Roubini, a professor @ the NYU Stern School of Business presided over Keiko Tashiro, the Chairperson/CEO of Daiwa Capital Markets America Holdings, Inc. to discuss this topic @ the Japan Society in New York.

It’s been an anemic recovery, & the only change has been the decelerating growth in the emerging markets.  The question is how strong & resilient will they be?  The recovery has been so anemic because the crisis was brought on by extreme leverage.  The fiscal stimulus that was implemented to combat it has led to an accumulation of debt that will take 5-10 years to de-leverage.  Emerging markets need robust growth of 5% , not 1-2 1/2 % less their debt.

To get 1-2% stronger growth in the industrialized countries, we need:

  • fiscal consolidation, except in Japan
  • advance de-leveraging to create better balance sheets with lower debt ratios
  • lower risk probabilities by keeping the Euro together, not falling off any fiscal cliffs, avoiding conflicts, etc.
  • keep low inflation, as the velocity of money has collapsed as stocks are in search of markets.  There is still slack in the employment market, so there is no wage inflation.  Central banks can be less conventional.  The Fed won’t start tapering until 3-4 years from now.
  • Japan needs to create a virtuous cycle with structural reforms, which should be a gradual process.  There is a risk with monetary easing in asset inflation creating a bubble.  The central bank has been able to keep bubbles @ bay by keeping inflation & interest rates low for now.

Emerging markets are devaluing their currencies to spur growth.  Internally, macroeconomic policies are granting excessive credit.  State capitalism causes them to move away from free markets.  The most fragile are China, India, South Africa, & Turkey.  With elections, growth falls.  Now the risks are much lower because of less currency mismatches, debt ratios are better, & Argentina, Venezuela, & Ukraine are now the problems.  China’s hard or soft landing is fragile.  Fixed investment is too low as is consumption.  Banks have made too many bad loans.  They’re lowering risks, but it’s open to question as to whether they can implement changes quickly enough.  Growth is decelerating from 7% to 6 %.


India’s fed chief on the financial crisis

Wednesday 28 September, 2011

Dr. D Subbarao, the governor of Reserve Bank of India, i.e. India’s Ben Bernanke, came to the school where I teach the GITAM Institute of Management to talk about “India & the Global Financial Crisis:  What have we learnt?”  He opened by summarizing India’s recent economic history like so: India embarked on economic reform in 1991 with 3 pillars:
1. (I missed the 1st 1)
2. Open up the Indian economy
3. Downsize the public sector
Then he noted that globalization is a double-edged sword with invisible costs & benefits. The 2008 financial crisis took a deep toll on India’s growth. The cause of the crisis was global imbalances & too much financial leverage. Irrational exuberance led to the crisis. But this most recent crisis differs from prior crises in these ways:
1. Earlier a crisis might hit only 1 country, but now it leads to the rest of the world
2. It hit the wholesale side of banking, not the retail level
3. There is no buffer for recovery
Subbarao took office just days before Lehman Brothers collapsed, so he jumped in when India & the rest of the world were just falling into the crisis. GDP fell. Exports fell. The Indian rupee fell. Capital fell. This was a crisis of confidence in real channels which resulted in a flight to safety. Lines of credit dried up & there was a strong liquidity crunch. Despite it’s current economic strength, India was hit too because it’s closely integrated with the rest of the world economy. Trade (20%->40% of GDP) & finance (44%->112%) integrated much more deeply from 1998-99 to 2008-9.
India’s response was fiscal stimulus with “accommodative” monetary supply. Their priorities were to keep the financial markets functioning, provide liquidity, & prevent insolvencies. They created ample rupee & foreign exchange liquidity, & enabled credit to flow. Generally they had to manage confidence & expectations.
The result is India recovered sooner from the financial crisis than most other countries in the world. However inflation is creeping up. India’s fed has raised interest rates 11 times since March, 2010. Inflation is driven by food & oil prices, & demand as incomes increase. The focus today is on rural India. They need to ensure the mid-term range to balance the trade-off between growth & inflation, & savers & investors.
What are the lessons of the financial crisis?  Was there creative destruction? It’s probably too early to tell.
1. Decoupling doesn’t work-the world is already too well-connected
2. We must address imbalances to enhance stability. 3B workers have been added to the world’s workforce in China in the 1980’s & India in the 1990’s. Investors are seeking higher rates, but that’s riskier for the banks.
3. Global problems require global coordination. Each country couldn’t douse the flames of the crisis in it’s own land. The G20 helped, but is losing its effectiveness because now there appears to be less urgency.
4. Capital controls are advisable & unavoidable because there are no benign solutions. There is a preference for equity over debt, but capital flows are difficult to manage.
5. Economics is not physics. Everything cannot be captured in equations. There are different contexts & economics depends on real-life behavior.
6. Economic history prevents & resolves crises. Over the last 800 years, the causes have always been the same. Has the world changed that much?
• In India, derivatives are centrally regulated
• The early warning signals to the financial crisis could have been too much leverage, financial institutions lending to the same sector, & even having too much stability for too long.


how bad is the global financial crisis?

Friday 5 June, 2009

I attended this event hosted by DePaul University’s Center for Financial Services. James Pressler of the country risk unit @ Northern Trust Bank sent over his presentation: China Presentation 0509 I requested presentations from the other presenters, but haven’t heard back from them.

K. Pakravan of DePaul opened by setting the stage.  Tighter integration throughout the world has opened up new opportunities in the last 15 years, such as new products/investment classes like ETF’s, commodities, currencies, & derivatives.

J. Pressler came next with his presentation on China.  China’s growth, although it’s fallen from 11% to 6%,  can help mitigate the world recession, but not by itself.  China holds $2 trillion reserves, more than twice as much as the next closest country, Japan & $1.5 trillion in US Treasuries.  If the Chinese choose to sell these, the $ will fall into a free fall.  In 1997, China’s export led economy led it to fiscal health.  Now that exports comprise 40% of the Chinese economy, China needs to develop more of its domestic economy.  Since loosening its currency in 2005, it appreciated steadily until 2008, when it stabilized.  Beijing needs to address its financial imbalances.

P. Christopher of Eclipse Capital Management suggested we need to deleverage our debt by separating our credit worthiness from our credit capacity, noting Japan in the 1990’s & US in the 1930’s needed 10 years to return to normal leverage ratios.  Rogoff & Reinhart found that home prices have fallen 35% in 6 years, equity has fallen 55% in 3 1/2 years, & government debt is @ 86% & will be @ 100% for 2010-2019.  He also pointed out, that business cycles in Japan in the 1990’s accelerated so that each cycle had 1/2 the length & 1/2 the amplitude of normal business cycles, which led to much more volatility.  Thus the current outlook is negative-to-neutral.  Managed futures in currencies & commodities can allow you to take advantage of volatility.

R. Gernstetter of Mastholm Asset Mgt. admitted the world is flat…broke.  He maintained that our short-term policies are undermining our long-term outlook.  The smart money is on the sidelines because sectors are rotating, & moving sideways.  People no longer believe in long-term investing.  As institutional investors, pension funds & endowments are decimated.  Alternative investments have not reduced risk.  Liquidity is low due to funding needs & prior commitments.  As for individual investors, baby boomers are dead from unsustainable spending patterns.  Hitting the bottom of residential real estate is the key to expansion & sustainable equity markets.  Many banks are already @ the maximum stress levels.  Prime mortgages & commercial real estate are next to fall.  The US will go from a AAA credit rating to AA.  There will be no innovation for 10 years.  Winners will simply be survivors.

My take-these guys paint a pretty ugly picture, but it is reality.  The situation is bad & prospects for getting better are not good.  It’s going to take a lot of readjustment & pain to recover from this economic mess  Big changes may be difficult to stomach, but they are necessary for the world to move forward.