[OPE] Pundits world: it might be a Volkswagen-type recession after all

From: Jurriaan Bendien <adsl675281@telfort.nl>
Date: Sat Sep 26 2009 - 07:53:36 EDT

John Authers in the FT ("A risky revival", 25 September 2009) points out

"Concerns are prevalent that US consumers will not return to their old
buying habits because of high unemployment and the debts they need to pay
off. There are also concerns that China, the other leading source of growth,
has achieved that only by stoking lending - notably, Chinese stocks sold off
sharply in August when authorities hinted at tightening lending.

The speed of the rally is itself cause for concern. Historically, big
sell-offs have typically been followed by big bounces. But as measured by
the S&P 500, the current rally is stronger after six months than any
predecessor, including those that followed the lowest points of the market
in 1932, 1974 and 1982. Relationships between markets also imply unhealthy
levels of speculation. Currency and stock markets had minimal correlations
before the crisis took hold in 2007, while oil and stocks were usually
inversely correlated. But oil and stocks have been rising in tandem this
year, just as they fell together during the crisis, while the correlations
between the dollar and stock markets remain remarkably close.

The implication of such correlations is alarming. Tim Lee, of Pi Economics
in Connecticut, puts it this way: "[Since early 2007] 40 per cent of all
movement in the S&P 500 can be predicted or explained from the movement of
the yen and vice versa. If we assume, quite reasonably, that the yen and the
S&P 500 should be fundamentally unrelated instruments, this implies a
breakdown of efficient price discovery in the markets."

 Complete text

Investors are going to go for yields at lower risk, but in fact this
jeopardizes the recovery. It's sort of like, risk-taking is all fine and
good, especially if it's your risk and not mine, but we want to make real
money (let's talk "profit efficiency") even if they don't call us heroes of

The situation would imply that the stockmarket rally of previous months
would crash down again, amplifying global currency speculation, the gold
trade, possible diversification out of USD, and placements in good real
estate etc. as well as adding to the general economic malaise. If the USD
hemorraghed downward some more, against near-zero interest rates, it has
some economic benefits (facilitating US exports, and inward FDI etc.) but
it's not really attractive for the large masses of shortterm idle money now
sloshing around the world economy. Initially in the recession there was an
investor rush to USD safety, but if the yield in real terms now starts to
become zilch, global fund managers are going to look somewhere else, at
least for the shorter term stuff.

If "US consumers will not return to their old buying habits", that is
obviously not simply because of high unemployment and debt levels, but also
because of capped real wages and a more conservative lending stance by the
institutions: as I predicted previously, banks and finance companies are
actively reducing the maximum credit that ordinary consumers can get. It was
a fairly safe bet that would happen, actually. Effectively, that means that
a large chunk of credit which fuelled consumer spending previously, is
simply being taken out of the market altogether, it must be somewhere around
a trillion dollars of spending power, who knows. Roughly speaking, financial
policy nowadays boils down to the principle that capitalists can borrow
more, but workers can borrow less. Why? Because capitalists have more
collateral. It's a class action.

Goldman's Jim O'Neill's hunch is that the Yen rally is unsustainable,
because of Japan's economic hernia slowing it down ("fundamentals") even
although the Japanese are wellpositioned to sell to the Chinese. In that
scenario, if the Yen fell, the USD might rise again. But, rationally
speaking, what you would expect of the "price discoverers" is a
diversification out of both the Yen and the USD. Of course they might not be
so rational. Best to emigrate to Australia, if you don't mind a spot of red



ope mailing list
Received on Sat Sep 26 07:55:50 2009

This archive was generated by hypermail 2.1.8 : Wed Sep 30 2009 - 00:00:02 EDT