Home - Index - Krisen 1992 - EMU - Cataclysm - Houseprices
US Dollar - New Era - Stagflation - Wall Street today
Economics - The Great Recession 2007 - Moral Hazard
1637 - Tulips
1720 - South Sea
1974 Very Big Crash
The Nasdaq Composite Index collapsed from its March 2000 high of 5,100 to 1,700 by February 2001 and to a low of about 1,100 by August 2002. (diagram Nasdaq) - Diagram Dow
It is always a mistake to confuse a cycle with a trend.
Optimists about the stock market
Robert J. Shiller
Why people don't understand
Monday, 29 Apr 2013 | 1:52 PM ET
The bond market is an accident waiting to happen
When the bond market finally does crack, it is going to be one epic nightmare that is going to make 2008 and 2009 seem like a picnic.
Bill Fleckenstein, 21 April 2013
Lessons of the 1930s
Stiglitz describes a different view of the Depression which purports to overthrow the current macroeconomic understanding
decline in America's agricultural sector
The Economist Dec 13th 2011, by R.A.
THE economic rough patch of the past few years inevitably inspires comparisons to and reconsiderations of last century's big economic calamity. This week, in fact, The Economist features a briefing examining some as yet unheeded lessons of the Depression.
Economist Joe Stiglitz describes a different view of the Depression in Vanity Fair, which purports to overthrow the current macroeconomic understanding of the troubles of the 1930s. The Depression, he says, can be chalked up to decline in America's agricultural sector
Will the dam break in 2007 ?
Stiglitz, The Guardian, 27/12 2006
a Nobel-prize winning economist
Top of page
For those of us who lived through the ERM crisis of 1992 and followed German events closely at that time, all this has a familiar ring.
It was not just recession in the UK, Italy, Spain, and parts of Scandinavia that caused the fixed exchange system to blow up, it was the deadly cocktail of slumps and banking troubles in these countries combining with German overheating. The mix triggered the final crisis.
Ambrose Evans-Pritchard, February 21st, 2011
Based on one measure of volatility, stocks haven't risen this much amid price swings this narrow since 1971
Don't get complacent.
CNBC 17/2 2011
The S&P 500 hit 1334 in morning trading Wednesday.
You may not have inscribed that number on your forehead, but it is noteworthy all the same because
it means the big-cap stock index has doubled its financial meltdown low of 666.79 on March 6, 2009.
CNN February 16, 2011
*Ekonomiläroböckerna och finanskrisen
"Börsutvecklingen har varit mera svängig i Sverige än i USA."
Dannne Nordling 23/10 2008
Kreditfesten har gett rekordvinster och bankdirektörerna har belönats med enorma rikedomar.
Rikast av alla är SEB:s Annika Falkengren, 46.
Hur smart är det med bonusar som gör bankernas chefer rikare ju större risker vi som låntagare uppmuntras att ta?
Aftonbladet 12/10 2008
Handelsbankens vd har i stället ett av branschens mest frikostiga pensionsvillkor. Han får gå i pension vid 58 års ålder och behåller då 65 procent av lönen. Räknat på dagens lön ger det en pension värd 101 miljoner kronor fram till 80 års ålder.
Nordeas vd Christian Clausen får enligt samma beräkningssätt en pension värd 74 miljoner.
- Vi kan mycket väl vara väldigt nära botten och jag tror börsen står högre vid årsskiftet, säger topprankade fondförvaltaren
Ann Grevelius, snart 42, ansvarig för svenska aktieförvaltningen på Handelsbanken Fonder
Privata Affärer Placeringsguiden, pressläggning 2-3 oktober 2008
Bor: Villa på Lidingö
Fritidsintressen: Golf, tennis, resor och sommarstället i Loftahammar
Som den fondförvaltare hon är, så tycker hon självklart att fonder är ett lysande spartips.
"Jag slår ett slag för månadssparande i fonder. Då köper man billiga andelar om börsen går ned och går börsen upp är man med hela vägen. Jag tycker man kan välja svenska bolag. Vi har många svenska exportbolag som har stor exponering mot tillväxtmarknader", säger Ann Grevelius.
Dagens Industri 2008-05-01
Det finns inga tecken på att bostadsmarknaden i Sverige är övervärderad
"prisökningarna har varit lägre än i "bubbelländer" som Norge, Spanien och Storbritannien".
SEB:s /dåvarande/ chefsekonom Klas Eklund 10/5 2005 DI
Top of page
This week's 18% decline, and Friday's 1018.77-point swing from low to high, were the biggest since the Dow was created in 1896. Until now, the Dow's worst week was in 1933. Total trading volume of stocks listed on the New York Stock Exchange also hit a record, 11.16 billion shares.
The damage has been devastating both to households and to major investment institutions. Investors' paper losses on U.S. stocks now total $8.4 trillion since the market peak one year ago, based on the value of the Dow Jones Wilshire 5000 index, which includes almost all U.S.-based companies.
The blue-chip average is down 40% from last October's record, its biggest decline since 1974
Wall Street Journal 11/10 2008
Very nice clickable Chart of the Dow from 1896 to 2007
Extremely long sideways periods
Gary D. Halbert, Aug 2008
Sedan toppen, som inträffade den 17 juli 2007, har börsen nu fallit med exakt 50 procent.
Börsens sammanlagda marknadsvärde på onsdagen var vid 15.00-tiden 2 430 miljarder kronor.
Det betyder samtidigt att värden för ungefär 2 500 miljarder kronor vid Stockholmsbörsen har gått upp i rök på 15 månader.
Affärsvärlden 8/10 2008
"Börsen på träsknivå"
DI 28 juni 2008
Klicka här för att se Stockholmsbörsen de senaste fem åren
Top of page
China's main share index
The Shanghai Composite Index, is trading 50% below the peak level reached in October 2007.
The index had previously risen almost sixfold in two years.
BBC 22/4 2008
100 x 6 = 600/2 = 300
Reuters reports that consumer sentiment has plunged to a new 26-year low.
Let's see... That would be 1982...
Wasn't that the beginning of the last bull market in stocks?
Tim Iacono 11/4 2008
More than $6.7 trillion has been wiped from world stock markets since the beginning of the year
Bloomberg 9/2 2008
Top of page
People don't seem to grasp that we've had a historically long (since 1982),
broad (every asset class in the world) and
steep (e.g., the DJIA from under 1,000 to over 13,000, interest rates from 15+% to 5%)
economic and financial boom.
It's gone on so long that everyone pretty much feels that prosperity and profit are just the way the world works.
Doug Casey, July 2007
But if you credit Austrian School economic theory, which I certainly do, you're forced to believe that the Business Cycle exists.
The Business Cycle is driven largely by government intervention in the economy... most importantly, currency inflation.
These things give false signals to businesses and investors, which cause distortions and misallocations of capital. When, inevitably, the errors start to be corrected, the result is an economic downturn.
It will be called a "recession" if the government succeeds in preventing widespread bankruptcies and unemployment through one more dose of inflation.
Or it will be called a "depression" if things slip out of the government's control.
Am I predicting the Greater Depression may be upon us?
Well, I'm not a fortune teller.
But my gut feel is: yes.
Top of page
The Fed can indeed be accused of being a serial bubble-blower.
But this is not because it has been managed by incompetents.
It is because it has been managed by competent people responding to exceptional circumstances.
Martin Wolf, August 22 2007
Anybody who has borrowed to buy securities – a category that includes a lot of banks – has a problem.
Lenders want their money back, but selling assets is difficult, so there is a squeeze on cash.
That, in a nutshell, is what has been happening in the past couple of weeks and what may continue.
Financial Times editorial 18/8 2007
The falls have not made the market cheap. While the price of the S&P 500 index of US stocks may seem reasonable at about 15 times its earnings, those earnings are unusually high and will fall back at some point. Other real assets, such as houses in much of Europe and North America, are also expensive relative to their historical levels.
The market has been expensive for a long time, however, and trying to predict when it will fall has been a dangerous and unprofitable game.
With the world economy growing fast, now seems an unlikely time for profits or equity valuations to collapse. If you were happy to buy shares a month ago, there is little reason to sell them now.
Sommarens fall har skapat köpläge. Det säger Ronny Jacobsson, aktiechef på Swedbank Markets som i dagarna reviderar sin aktiestrategi.
"Börsen handlas betydligt under vårt fair value.
Det är en historiskt sett lågt värderad börs", säger Ronny Jacobsson.
DI 28/8 2007
Nu är det värsta över
Gissa om jag får äta upp den här rubriken om jag får fel.
Gunnar Örn, DI 2007-08-24
Den som påstår sig veta säkert har antingen dåligt omdöme eller dåliga placeringar att bli av med.
Centralbankscheferna i Europa och USA lyckades avvärja en allmän panik genom att pumpa in extra mycket likviditet i banksystemet. Fedchefen Ben Bernanke och ECB-chefen Jean-Claude Trichet har agerat helt enligt regelboken.
Det började med att ECB pumpade in närmare 900 miljarder kronor i det europeiska banksystemet den 9 augusti. Andra centralbanker följde snart efter.
Den avgörande insatsen kom förra veckan, då den amerikanska centralbanken Federal Reserve sänkte diskontot med en halv procentenhet och meddelade att alla banker kunde få låna obegränsat till denna ränta i upp till 30 dagar - även med bostadsobligationer och ”relaterade tillgångar” som säkerhet.
Det har länge hetat att lågt belånade svenska börsbolag inte berörs av kreditfrossan. De har ju inga som helst problem med finansieringen!Men det går inte att komma ifrån att de svenska börsbolagen gynnats indirekt av de senaste årens osunda lånemarknad. Ökad global efterfrågan har delvis spätts på av billiga krediter till betalningssvaga hushåll och företag.
Precis som vid andra tillfällen när börsen rasat träder proffsen fram, analytikerna, aktiestrategerna och mäklarna och råden är sig lika:
Ha is i magen och sitta still i båten!
Fredrik Braconier, E24.se 18/8 2007
Och när den amerikanska kreditmarknaden är så skakig att centralbankerna runt om i världen tvingas till massiva stödåtgärder talar svenska analytiker om tillfälliga hack i kurvan och en nyttig korrigering.
Frågan är varför förståsigpåarna alltid manar till lugn och besinning när de i själva verket talar mot bättre vetande eller, i bästa fall, är lika villrådiga som de som ska följa råden? Svaret är naturligtvis att man inte ger bort de bästa råden. Dem behåller man för sig själv eller sina kunder som har råd att betala för dem.Alla aktörer på finansmarknaderna är delar i ett system vars mål är överordnade objektivitet och sanning. Målet för deras organisationer är att tjäna pengar. Till sig själva och till sina företag medan marknaden, hur den än definieras, förväntas betala.
Precis som när fastighetsmäklare alltid ser stigande priser och en ökad efterfrågan på fastigheter framför sig, är det otänkbart för en aktieanalytiker eller mäklare att ge rådet ”Sälj så fort som möjligt”. Även om det skulle vara det klokaste just då. Sådana råd skulle bara skapa ett säljtryck som sänker kurserna ytterligare och i slutänden drabbar det egna företaget.
From article WSJ, October 17, 1999
Despite Terrible Week for Stocks, Advisers Urge Investor to Stay Put
"Nu gäller det att ha is i magen"
"Nu har det vänt" - Ha is i magen"
5 ways to know if the bull is over
Before it keels over, a bull market typically leaves a few road signs.
Here's what to keep an eye on - from Money Magazine.
CNN 16/8 2007
The doubts burst into the open on August 9th when central banks were forced to inject
liquidity into the overnight money markets because banks were charging punitive rates to lend to each other.
The Economist print 16/8 2007
hela uppgången från tidigare i år är borta.
Sedan toppen för exakt en månad sedan, den 16 juli, har börsen backat nära 13 procent.
Dagens Industri 16/8 2007
Central bank intervention last Friday to inject liquidity into the global financial system
did not mark the beginning of the end of financial market turmoil.
It was merely the end of the beginning.
Liquidity injections will not deliver lengthy respite. The next phase of market volatility will be more vicious than before, led by downgraded ratings on credit instruments and followed by further dislocation in the credit markets that will spill over to equity markets.
Avinash Persaud, Financial Times 16/8 2007
The writer is chairman of Intelligence Capital Limited and an emeritus professor at Gresham College, London
Credit markets are the big brother of equity markets. In the US and Europe, capitalisation of private debt securities is a combined $28,000bn, compared with $23,000bn in equity markets.
Over the past 20 years, governments built regulatory systems to avoid credit problems at one bank becoming systemic. These systems succeeded, but only by shifting risks elsewhere. A measure of this failure is that the instances of emergency rate cuts have become no less frequent. Think of 1987, 1989-92, 1995, 1998 and 2001-03. Today, the principal avenues of systemic risk are via investment losses, not bank runs. The example from Japan in the 1980s and emerging Asia in the 1990s is that large and widespread investment losses will lead to big reductions in consumption and investment.
Full textMoral Hazard
Sedan årshögstanoteringen i mitten av juli har Stockholmsbörsen tappat 557 miljarder kronor i värde.
Räknat på nedgången var Stockholmsbörsen vid klockan 14.30 sammanlagt värd cirka 4.327 miljarder kronor
DI 10 augusti 2007
Top of page
Is the turmoil in the U.S. stock market starting to resemble the biggest financial crisis of the past century?
Play video at CNN August 10 2007
Where was the PPT today?
Things are really starting to get interesting now . . .
The Big Picture Friday, August 03, 2007
I have never been a big believer in the Plunge Protection Team (PPT).
The 78% drop in the Nasdaq from 2000 to 2002 was my proof.
The recent sell-off in financial markets is good news.
It may, at last, have brought people to their senses.
The Economist 2/8 2007
Dow tumbles 280 points as credit fears intensify
Credit market concerns and negative Bear Stearns news sparks last-minute selloff sending the Dow, Nasdaq and S&P 500 more than 2% lower.
CNN 3/8 2007
- Bond market turmoil sending investors fleeing from risk may be a worse predicament than the 1980s stock market fall and Internet bubble burst, Bear Stearns Chief Financial Officer Sam Molinaro said Friday.
"These times are pretty significant in the fixed-income market," Molinaro said on a conference call with analysts.
"It's been as bad as I've seen it in 22 years. The fixed-income market environment we've seen in the last eight weeks has been pretty extreme."
"So, yes, we would make that comparison" to market events that also include the debt crisis of the late 1990s, he said.
Top of page
It's time to panic. Why? I'll tell you.
What has been frustrating for me is that, despite having forecast a number of our domestic economy's problems, the world's stock prices have embarked upon an almost unrelenting advance.
This story originally appeared on RealMoney Silver on July 23, and is being reprinted as a bonus for TheStreet.com readers.Full text
300-point drop? It's just the start
Bill Fleckenstein thinks we're headed for an even bigger fall
Read more here
Why did central banks not follow BIS 1995 agreement?
Financial Times, letters, October 22 2008 from Mr Jim Blum.
• Investment grade securities must be rated by two authorised credit rating agencies (page 8)
• Central banks responsible to monitor performance of rating agencies (page 9 top)
• Central banks may restrict inclusion in calculation of capital of "non-qualifying" issues and assess charges against them (page 9 bottom)
• Banks responsible to recalculate on a regular basis valuations of derivatives equities, on and off the balance sheet (page 19)
• No capital charge required on "structural positions" on items "deducted" from bank capital when calculating capital base in investments in "unconsolidated" subsidiaries (page 24 bottom).
Turmoil reveals the inadequacy of Basel II
Harald Benink and George Kaufman, Financial Times February 27 2008
The turmoil in world financial markets, triggered by defaults on subprime mortgages in the US, raises questions about macroeconomic policy, financial stability and the design of financial regulation, including the new Basel II capital adequacy framework for banks.
The implementation of Basel II coincides with massive losses reported by some of the world’s largest banks, requiring large-scale recapitalisations. The risk models that anchor Basel II are basically the same as the ones many of these banks have been using in recent years.
Sheila Bair, chairman of the Federal Deposit Insurance Corporation in the US, recently noted that these models had important weaknesses which, in the light of today’s market turmoil, were a flashing yellow light to drive carefully.
One of the bedrocks of finance has been that sovereign debt is a sure thing. The risk-free rate, for example, is the yield on short-dated government bonds. The Swiss-based Bank for International Settlements also treats high-quality, longer-term debt as risk free for solvency purposes.
This position may no longer be credible.
To be sure, at 60 per cent, Spain has a much lower level of gross government debt versus the size of its economy compared with Italy, Ireland, Portugal and Greece. But the chance that Spain will default is no longer zero.
Top of page
Bankvärlden håller andan.
Idag och imorgon möts Baselkommittén för att besluta om nya regler för bankerna som mest sannolikt kommer att leda till högre räntor för hushåll och företag.
Annelie Östlund E24 2010-07-14
– De ekonomiska effekterna av det ursprungliga förslaget skulle sannolikt bli mycket negativa. Det är ingen mening att göra banksystemet så otroligt robust att ingen vill låna pengar för att det blir för dyrt, och ingen vill ge kapital till bankerna för att de inte är tillräckligt lönsamma, säger Anders Kvist, SEB:s treasurychef.
Det som skulle få störst konsekvenser för svenska banker är enligt SEB-chefen Annika Falkengren de föreslagna så kallade likviditetskvoterna: ”Liquidity coverage ratio” och ”Net stable funding ratio”.
Även industrin har räknat på vad de nya bankreglerna kan komma att kosta. Och vissa är oroliga, däribland Anders Nyrén, vd för högbelånade Industrivärden.
Larger polygamous financial institutions were allowed by the Basel capital regime to run with lower capital buffers than their smaller monogamous partners.
John Plender Ft Feruary 23 2010
As Andrew Haldane of the Bank of England has pointed out, bank profits ceased in the mid-1980s to be boring as the banks appeared to have discovered a money machine. While the return on assets, which reflects management skill in extracting profits from a pool of assets, was mediocre, the return on equity, powered by luck and leverage, soared. At the same time, larger polygamous financial institutions were allowed by the Basel capital regime to run with lower capital buffers than their smaller monogamous partners. Now this bias in favour of size has been made worse by crisis-induced mergers.
We are left with a financial system in which over-leveraged banking behemoths operate as an off-balance sheet adjunct of the public sector, while nurturing many profit centres that are increasingly oligopolistic. In wholesale finance, super-profits are generated by a handful of giants in opaque over-the-counter markets. In retail finance, there are numerous areas where oligopoly and customer inertia underpin excess profits.
It follows that bankers in the boom were being paid bonuses not for brilliance but for excessive risk taking via leverage and for oligopolistic super-profits.
Remove the punchbowl before the party gets rowdy
By John Plender
Published: January 19 2010
It was the 1988 Basel Accord that first created the opportunity for regulatory arbitrage
whereby banks could shunt loans off the balance sheet.
John Plender, FT November 6 2007
In effect, a new capital discipline designed to improve risk management had the unintended consequence of creating a parallel banking system whose lack of transparency explains the market seize-up since August. As the new "originate and distribute" model reduced the incentive for banks to monitor the credit quality of the loans they pumped into collateralised loan obligations and other structured vehicles, the Basel rules failed adequately to highlight contingent credit risk. That is, when conduits and structured investment vehicles (SIVs) ran into difficulties, credit risk started to come back on to bank balance sheets, putting strain on bank capital.
Within banks executive bonuses and other incentives have the effect of encouraging a perpetual dash for growth at ever-increasing risk. Why be prudent when you can bet the ranch in the knowledge that a losing bet pays so handsomely?
The snag is that in banking, betting the ranch increases systemic risk.
Top of page
“Where are the buyers getting the money to buy all of this stock and bond madness and act like a bunch of morons?”
“‘Margin Debt’ Hits Record $353 Billion on NYSE”
Mogambo Guru on Jul 24th, 2007
Why are the stock markets and bond markets rising?
For the only reason that there is: Because there are more buyers than sellers! Hahahaha!
Perhaps your question would have been better phrased as,
“Where are the buyers getting the money to buy all of this stock and bond madness and act like a bunch of morons?”
If that had been your question, I could have saved us both a lot of time by merely sending you to Online.wsj.com, which reports that, “‘Margin Debt’ Hits Record $353 Billion on NYSE”, which means that, “Investors are borrowing record sums of money to finance trades on the New York Stock Exchange.”
“Specifically, under Basel II, a broker-dealer must set aside just 56 cents in capital to hold US$100 of triple-A-rated securitizations.” Yow! Fifty-six lousy cents?
# Moron (psychology),
a psychology-related term for a person with a genetically determined mental age between 8 and 12
Top of page
Bear Stearns’ sobering lessons
It raises questions about the exposure of market participants to risk,
and the wisdom of aspects of the Basel II accords on bank capitalisation.
Sean Egan, Financial Times August 2 2007
“The trend is your friend.”
That is an old saw on the market, and it has made many rich.
When the trend breaks, you have nothing to hold on to. That is when panic ensues.
John Authers, Financial Times, June 8 2007
That is what happened on Thursday morning in the markets for government bonds, led by US Treasuries. It led to a wave of selling that threatened to change the underlying mathematics on which much of the world’s financing is based.
It also put the bull market in global stocks, now in its fifth year since equities began to recover from the bursting of the tech bubble in 2002, to one of its stiffest tests.
For 20 years, bond yields have been falling steadily. This reflects growing confidence that inflation has been squeezed out of the world economy.
Yields have fluctuated, but the peak of each cycle over the last two decades has been lower than the peak that preceded it.
Those peaks formed a perfect downward trend line. The straight line perfectly crosses all the peaks.
That line had been a great source of confidence. Once it was crossed – and that moment came when the 10-year yield reached 5.05 per cent early on Thursday in New York – traders had nothing left to hold on to. They started selling indiscriminately, with yields coming to rest at 5.13 per cent by the time most Wall Street traders left their desks on Thursday.
What caused that trend line to break? There was no news of any great importance on Thursday. Rather, an accumulation of evidence at last reached critical mass.
This is not yet the end of the five-year bull market in stocks. At 5.1 per cent, Treasury bond yields remain low by historical standards.
But it may mark the beginning of the end.
"The Germans have received back again that measure of fire and steel which they have so often meted out to others.
Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."
Winston Churchill following the victory at El Alamein, 10 November 1942.
More of the same
"We shall never surrender!"
"We shall not flag or fail. We shall go on to the end. We shall fight in France, we shall fight on the seas and oceans, we shall fight with growing confidence and growing strength in the air. We shall defend our island, whatever the cost may be. We shall fight on the beaches, we shall fight on the landing-grounds, we shall fight in the fields and in the streets, we shall fight in the hills.
We shall never surrender!"
Any excuse will do as markets continue to move on the expectation that global central banks don't have the cojones to withdraw liquidity, that is, to increase the cost of debt in our highly leveraged global financial system
May 17, 2007 (iTulip)
The historical pattern of a 10-year rhythm of cyclical financial crises
The 30% US market crash of 1987, in which investors lost 10% of 1987 GDP, was set off by the 1985 Plaza Accordto push down the Japanese yen with an aim of reducing the growing US trade deficit with Japan.
The 1987 crash was followed 10 years later by the Asian financial crisis of July 2, 1997
Henry C.K. Liu, Global Research, May 9, 2007
The Fed's stated goal is to cool an overheated economy sufficiently to keep inflation in check by raising short-term interest rates, but not so much as to provoke a recession. Yet in this age of finance and credit derivatives, the Fed's interest-rate policy no longer holds dictatorial command over the supply of liquidity in the economy. Virtual money created by structured finance has reduced all central banks to the status of mere players rather than key conductors of financial markets. The Fed now finds itself in a difficult position of being between a rock and a hard place, facing a liquidity boom that decouples rising equity markets from a slowing underlying economy that can easily turn toward stagflation, with slow growth accompanied by high inflation.
Top of page
US consumer credit jumped in March. But the greater rise was in
revolving consumer credit, ie borrowing on credit cards at 13½-14½% interest.
This is not sustainable.
Moreover, personal spending and car sales both weakened in March. If that still needed a jump in borrowing to finance, then the outlook when borrowing growth slows, is very bleak. (Gabriel Stein)
The last time stocks were setting records the way Wall Street is now was way back in March of 2000,
and we all remember how that ended. A recession and a brutal bear market were just around the corner.
Chris Isidore, CNNMoney.com senior writer May 8 2007
That's why it's easy for some investors to be worried now, even with the Dow Jones industrial average on its best run in 80 years. At the same time the S&P 500, a broader measure of blue-chip stocks watched more closely by Wall Street pros, is nearing its record high as well.
But while the stock market's partying, economic growth is the weakest it's been in four years. Two key parts of the economy - housing and auto sales - are already in recession. Home prices are posting historic declines and auto sales have been tanking. And another pillar of economic growth, business spending, has been weak.
Top of page
Countdown to a Meltdown
America's coming economic crisis. A look back from the election of 2016
James Fallows, The Atlantic Monthly July/August 2005
Top of page
We found 28 bubbles. Every one of the 28 went back to trend, no exceptions, no new eras, not a single one that we can find in history."
Mild stagflation, predicted as the ultimate outcome of radical Fed easing in this column five years ago, is now here.
So, how does the market react to the bad news? By going higher, naturally. It has now been up 19 of the last 21 trading days. Amazing.
John Mauldin, 27/4 2007
I believe US stocks are now very attractive for investors.
5 per cent real return on stocks still yields a 3 per cent premium over inflation-indexed bonds
Jeremy Siegel, FT, 26/4 2007
Top of page
A real recession would quite likely end the current bear market in stocks,
just as in 1974, when a recession arrived to put an end to a savage bear market.
It was a period, in its combination of economic slowdown and post-bubble financial meltdown,
with a striking resemblance to the bear market that started in 2007
Jim Jubak CNBC 30/9 2008
The risk of a downward spiral of house prices is the primary danger facing the American economy.
Because of the structure of securitised mortgage finance, this risk has the potential to cause a global financial crisis.
Both of these problems will remain until a new policy brings stability to house prices.
Martin Feldstein, Financial Times, August 26, 2008
Very Important Article
The prospect for the economy isn’t V-shaped, it’s L-ish
When will it all end?
The answer is, probably not until 2010 or later. Barack Obama, take notice.
PAUL KRUGMAN, NYT July 18, 2008
Barclays warns of a financial storm as Federal Reserve's credibility crumbles
US central bank accused of unleashing an inflation shock that will rock financial markets
Ambrose Evans-Pritchard, Daily Telegraph 27/6 2008
Global Recession Monitor:
Which Countries Are on the Brink of Recession?
US; Canada, UK, Italy; Spain; Ireland, Baltics, Japan, New Zealand
Nouriel Roubini, June 25, 2008
Comment by Rolf Englund
Note the members of EMU, The Economic and Monetary Union with a Single Interest Rate:
Italy; Spain; Ireland, Baltics
Start of recession part of this page
Bernanke believes that the danger of a “substantial downturn” in the US economy has abated over the past month,
but that inflation risks are increasing.
FT June 10 2008
Start of recession part of this page
US unemployment rate reaches 5.5%
The US unemployment rate rose at its fastest pace in more than two decades in May,
Top of page
How well can an economy long characterised by soaring house prices, exploding debt and a dynamic financial sector adjust to a new world?
Martin Wolf, Financial Times May 1 2008
Case for an "L" Shaped Recession
Now that it's clear we are in a recession, the question has arisen as to what shape it will take:
"V", "U", "L", or "W".
Mish April 08, 2008
The current new consensus among macro forecasters and Wall Street firms is that the recession will be V-shaped, i.e. be short and shallow.
More likely to me is something like an "L" or a "WW" kind of scenario with the U.S. slipping in and out of recession for a prolonged period of time, perhaps 3-4 years or more.
Why this crisis is still far from finished
The writer is co-chief executive and co-chief investment officer of Pimco
Mohamed El-Erian, Financial Times April 24 2008
-Denna kris börjar redan utmana nedgången 1989/90,
som var den allvarligaste av de fem finanskriser som varit de senaste 20 åren.
Den ser också allvarligare ut än Dot Com-krisen och krisen i Mexiko 1994/95, skriver Morgan Stanley
E24 1/4 2008
Top of page
"Downside risks to growth remain, including the possibilities that the housing market or the labor market may deteriorate to an extent beyond that currently anticipated, or that credit conditions may tighten substantially further."
Ben Bernanke, testimony before the Senate Banking Committee, February 14, 2008
It it is far from obvious that we face a major worldwide recession.
Samuel Brittan, FT January 31 2008
One of the reasons I went into economics was a puzzle about involuntary unemployment: the paradox of unsatisfied wants side-by-side with idle hands. While there are enough genuine problems because of the scarcity of real resources to satisfy everything we should like to do, depressions associated with lack of spending are an unnecessary extra; and there are more than enough ways of stimulating citizens or governments to spend more.
It took John Maynard Keynes’ elaborate theory to persuade policymakers of the obvious.
The late Christopher Dow in his mammoth study, Major Recessions, defined these as occasions when gross domestic product showed a clear absolute fall between one year and the next.
The UK has experienced five of these since 1920: 1920-21, 1929-32, 1973-75, 1979-82 and 1989-93.
Alan Greenspan in the unjustly neglected, more speculative second half of his autobiography suggests average world inflation rate will by 2030 be at about 4½ per cent.
The snag is that unless policymakers put up a show of aiming at something like 2 per cent inflation,
the end result could be much more than 4½ per cent.
A recession is a normal part of the business cycle.
It takes a major policy mistake by a government or central bank to create a depression.
John Mauldin, February 2, 2008
If the US suffers a recession in 2008 or 2009 it will not be due to an industrial decline or an oil price shock.
It will be a recession that began in the financial system.
The response of the general public is confusion, tinged with horror,
at how intangible finance can impinge on their daily lives.
Financial Times editorial January 25 2008
The debate about recession is now about how deep and global its impact will be.
Lawrence Summers, FT January 27 2008
Top of page
The intensifying credit crunch is so severe that
lower interest rates alone will not be enough
Dominique Strauss-Kahn, managing director of the International Monetary Fund.
Reported by Chris Giles and Gillian Tett, FT January 27 2008
A recession of global dimensions?
U.S. consumers have the past six years been
the most maniacal spending machines the world has ever seen.
CNN, Geoff Colvin, senior editor-at-large, January 22 2008
The issue here is not whether there is going to be a recession in the world or individual countries,
but what governments and central banks could do about it.
There are many problems about policies to maintain activity,
but lack of policy instruments is not one of them.
I anledning av DNs huvudledare om att
En så stor enskild sänkning av räntan har Fed inte gjort sedan recessionen 1982.
Läget i den amerikanska ekonomin är av allt att döma värre än väntat.
Rolf Englund 23/1 2008
Don't count on a 'normal' recession, Jubak
Top of page
The recent government report that US gross domestic product increased 0.6 per cent in the first quarter was very misleading.
Monthly data since January indicate that GDP have been declining since the start of this year.
Martin Feldstein, FT May 7 2008
Because US mortgages are “no-recourse” loans (lenders have no recourse to the house’s owner beyond the value of the house), individuals with negative equity have an incentive to default. There are now an estimated 8m negative-equity mortgages – more than 15 per cent of all outstanding mortgages. Defaults are rising and foreclosures are now at twice the rate of a year ago.
A downward spiral in house prices would cause a fall in household wealth and in the capital of financial institutions, potentially resulting in a deeper and longer recession than any seen in the past several decades.
Now is the time for policy action to forestall such a house price collapse.
A key cause of the present slowdown and potential recession was not a tightening of monetary policy but the bursting of the house-price bubble
The Fed therefore will not be able to end the recession as it did previous ones by turning off a tight monetary policy.
Martin Feldstein, Wall Street Journal, February 20, 2008
If a recession does occur, it could last longer and be more painful than the past several downturns because of differences in its origin and character. The recessions that began in 1991 and 2001 lasted only eight months from the start of the downturn until the beginning of the recovery. Even the deeper recession of 1981 lasted only 16 months.
But these past recessions were caused by deliberate Federal Reserve policy aimed at reversing a rise in inflation. In those cases, the Fed increased real interest rates until it saw the economic slowdown that it thought would move us back toward price stability. It then reversed course, reducing interest rates and bringing the recession to an end.
In contrast, the real interest rate in 2006 and 2007 stayed at a relatively low level of less than 3%. A key cause of the present slowdown and potential recession was not a tightening of monetary policy but the bursting of the house-price bubble after six years of exceptionally rapid house-price increases. The Fed therefore will not be able to end the recession as it did previous ones by turning off a tight monetary policy.
Full text here - or here or here.
Is the US heading into a recession? New Economist, Stephen Roach, James Grant, Martin Feldstein
RECESSION 2008 » DEPRESSION 2009, Aubie Baltin
House Prices - Monetarism
Top of page
Morgan Stanley has issued a full recession alert for the US economy,
warning of a sharp slowdown in business investment and a
"perfect storm" for consumers as the housing slump spreads.
Ambrose Evans-Pritchard, Daily Telegraph 12/12/2007
In a report "Recession Coming" released today, the bank's US team said the credit crunch had started to inflict serious damage on US companies.
Wake up to the dangers of a deepening crisis
The odds now favour a US recession that slows growth significantly on a global basis.
There is the risk that the adverse impacts will be felt for the rest of this decade and beyond.
Lawrence Summers, FT November 25 2007
Top of page
In 1929, days after the stockmarket crash, the Harvard Economic Society reassured its subscribers: “A severe depression is outside the range of probability”.
In a survey in March 2001, 95% of American economists said there would not be a recession, even though one had already started.
The US consumer is on the precipice of experiencing the first recessionary phase since 1991
– the last time we had the combination of punishingly high energy prices, weakening employment, real estate deflation and tightening credit conditions.
Kronkursförsvaret var 1992
David Rosenberg, chief North American economist for Merrill Lynch, FT November 14 2007
More easing by the Federal Reserve is likely. Much more. We would not be surprised to see Fed funds go as low as 2 per cent.
Comment by Rolf Englund: Ahh, that is why he is writing this. That is what Merril Lynch wants now.
In the housing market, September was a watershed. Builders cut housing starts to a decade-low 1.19m (annualised rate), and there are still 4.4m unsold homes for sale, 16 per cent more than a year ago. This points to sustained deflation pressure and lower sales volumes. Housing starts could be forced as low as 800,000 to clear the market.
Housing is a $23,000bn asset class, but this market is going to be under pressure for years and the deepest retrenchment from the negative wealth effect has yet to be felt by consumers.
Top of page
What masquerades as the sharing of risk is in fact a system malfunctioning, with the potential to undermine the integrity of the financial system. Sharing risk can under certain circumstances be inherently destabilising.
One person who would have had a field day with this discussion is Hyman Minsky, the US economist who died in 1996 and whose writings have recently enjoyed a renaissance.
One of his contributions is the financial instability hypothesis – a theory about the impact of debt on the financial system. In contrast to much of modern macroeconomics, Minsky treats banks and investors as the most important economic actors.
Wolfgang Münchau, FT 23/4 2007
A Minsky Meltdown in the most important asset in most Americans' asset portfolio is not a minor matter.
Paul McCulley at Johan Mauldin 12/3 2007
The Bank Credit Analyst's Latest Thinking
As you know, BCA has maintained all year that a recession was not the most likely scenario, and that the US economy could surprise on the upside. As usual, they were right on.
However, in their latest report for November, the editors take a more cautious stand in their outlook:
"The U.S. economy will be sluggish in the next few quarters as the housing downturn grinds on, consumers retrench and businesses remain reluctant to invest. It would not take much in the way of additional negative shocks to tip the economy into recession... Even though recession should be avoided, the outlook is fraught with uncertainty."
This language is definitely more cautionary than in previous months. This is primarily because the editors believe the housing slump is far from over, and I agree.
While their most likely scenario is that we avoid a recession, they are quick to add in this latest report that it is possible that housing woes could lead to a further slump in consumer confidence, and therefore spending, which could tip the economy into a mild recession sometime next year.
John Mauldin 2007-11-06
Top of page
The only silver lining so far has been that these adjustments to the US currency have been orderly - declines in the broad dollar index averaging a little less than 4% per year since early 2002. Now, however, the possibility of a disorderly correction is rising - with potentially grave consequences for the American and global economy.
A key reason is the mounting risk of a recession in America.
Stephen S. Roach 2007-10-22
The dollar has finally begun its long overdue correction.
Its recent decline is just a prelude to the much more substantial fall needed to shrink the US current account deficit
Martin Feldstein, FT October 15 2007
The United States Heads for Recession
John H. Makin, American Enterprise Institute, September 26, 2007
First, as the Fed acknowledged on August 17 when it cut its discount rate from 100 basis points above the federal funds rate to just 50 basis points above it, "Financial market conditions have deteriorated and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward."
The second major event spurring the Fed's transformation from concerned about inflation to fighting recession was the annual late-summer economic symposium at Jackson Hole, Wyoming.
Two major themes emerged from the impressive set of research papers presented at Jackson Hole.
The first, featured in a paper by Edward Leamer of UCLA, reminded the participants--including Chairman Ben Bernanke--who listened carefully to all of the presentations that over the last half century every housing downturn comparable to the magnitude of the one currently underway in the United States has translated into a U.S. recession.
Another paper on housing and consumer behavior by John Muellbauer of Oxford University presented convincing evidence that it is credit market problems associated with housing weakness, not necessarily wealth losses, that can severely depress consumption.
The Northern Rock episode underscored how quickly things could deteriorate in today's nervous credit markets and probably softened central banks' determination to emphasize moral hazard problems over the need to accommodate financial institutions.
The next six months will show how well the world economy and the U.S. economy can perform without a strong contribution from U.S. consumption growth.
The adjustment process--global rebalancing--will include continued dollar weakness and a fall in U.S. consumption, invariably a sufficient condition for a U.S. recession.
Spain's housing sector is due for a sharp correction.
The global economy is achieving a much-sought rebalancing away from dependence on U.S. demand growth and large U.S. trade deficits and toward more dependence on global demand growth and lower U.S. external deficits. That said, the process may not be as painless as some have imagined.
The dominoes are toppling.
What began as a credit crunch has turned into a dollar crunch.
We are witnessing a run on the world's paramount reserve currency,
an event that occurs twice a century or so, and never with a benign outcome.
Ambrose Evans- Pritchard, Daily Telegraph 1/10 2007
The US dollar has fallen through parity against the Canadian dollar and
plummeted to all-time lows against a basket of currencies.
This is dangerous. None of the mature economic blocs seems able to take the strain, let alone step in to restore order.
Ultimately, Europe and Japan are in worse shape than the US.
Until now, the euro has served as the "anti-dollar", the default choice for Asians and petrodollar powers wary of US assets. This cannot last.
A rate of $1.43 (it was 83 cents in 2000) will combine, after a one-year lag,
with deflating property bubbles in the Club Med bloc to cause a crisis in 2008.
It will then become clear that the needs of the Germanic and Latin zones are incompatible and
that a coin with no treasury, debt union, or polity to back it up cannot displace the dollar — if it survives at all.
French President Nicolas Sarkozy is in guerrilla warfare against the ECB, threatening to invoke Maastricht Article 109, which gives EU politicians power to set a fixed exchange rate (by unanimity) or a "dirty float" (by majority).
am not sure that the Bernanke Fed will move fast enough, given fears of moral hazard, or, indeed, whether the rate cuts on offer are enough to head off an insolvency crisis. The chart of S&P 500 looks eerily similar to October 1987, the last time a tumbling US dollar set off a crash.
Euron spricker när dollarn faller
Rolf Englund i EU-krönika i Nya Wermlands-Tidningen 2001-01-08
The possibility of a disorderly correction /of the dollar/ is rising
— with potentially grave consequences for the American and global economy.
STEPHEN S. ROACH, New York Times, September 25, 2007
A key reason is the mounting risk of a recession in America.
So far, the dollar’s weakness has not been a big deal. That may now be about to change. Relative to the rest of the world, the United States looks painfully subprime. So does its currency.
Let me cover the big picture.
I do think we're approaching the end of the world as we know it…
I think there is such thing as the business cycle.
Doug Casey, september 26, 2007
It exists. And we've had the longest expansion - and the strongest expansion - in the world history. But we're at the end of a 25-year boom. It's gone on more than a full generation now. And I'll tell you how it's going to end: It's going to end with a depression, and not just a depression; not just another Great Depression; it's going to be the Greater Depression.
What's a depression, incidentally? It's a period of time when distortions and misallocations of capital are liquidated; that's called a depression.
Beware moral hazard fundamentalists
The world has at least as much to fear from a moral hazard fundamentalism that precludes actions that would enhance confidence and stability as it does from moral hazard itself.
Lawrence Summers, Financial Times September 24 2007
Top of page
Federal Reserve cut interest rates by an aggressive 50 basis points.
If low interest rates cause foreign investors to lose confidence in the US currency
then the chance of recession in the world’s largest economy will rise.
Financial Times editorial 22/9 2007
What will worry Mr Bernanke is the rise in long-term interest rates – yields on Treasury bonds maturing in 10 or 30 years rose – and a sharp 1.5 per cent fall in the dollar’s effective exchange rate in the space of only a few days.
A decline in the dollar would be welcome if it was slow,
but if foreign investors anticipate inflation and start to dump some of their $12,000bn in US debt, it could turn into a rout.
In the worst case the Fed would lose some control of monetary policy, with long-term rates responding to foreign selling no matter what the Fed did at the short end,
and the economy plunged into recession.
Questions and answers on the debt crisis
Martin Wolf, September 5 2007
Danger: Steep drop ahead
Even if the credit crunch passes without a major catastrophe,
the prices of stocks, bonds and real estate have a long way to fall.
By Jeremy Grantham, CNN/Fortune September 5 2007, 9:27 AM EDT
(Fortune Magazine) -- Credit crises have always been painful and unpredictable.
The current one is particularly hair-raising because it's occurring amid the first truly global bubble in asset pricing.
Is A Subprime Recession Inevitable?
John Mauldin 28/8 2007
Recession? What Recession?
Only two recessions (1990-91 and 8 months in 2001) in the United States over the past 25 years;
over the previous 35 years there were eight.
Bob Pisani 24 Aug 2007
This "great moderation" of the economy has been explained many ways: luck, structural changes in the economy, etc., but in the end even the cautious NBER admits that improved policies on the part of those steering the economy are the likely reason we have avoided recessions:
"This hypothesis has obvious appeal. In our own work, we have found that monetary policymakers have been guided by a better understanding of the economy in recent decades and have largely avoided episodes where they first pursued expansionary policies that caused inflation to rise and then pursued extremely tight policies to bring inflation back down."
Nice list of recessions in full text
Top of page
Over the past 20 years major financial disruptions have taken place roughly every three years
Financial crises differ in detail but, just as there are plot cycles common to literary tragedies, they follow a common arc.
Lawrence Summers, Financial Times August 27 2007
The 1987 stock market crash; the Savings & Loans collapse and credit crunch of the early 1990s; the 1994 Mexican crisis; the Asian financial crises of 1997 with the Russian and Long-Term Capital Management events of 1998; the bursting of the technology bubble in 2000; the potential disruptions of the payments system after the events of September 11 2001 and the deflationary scare in the credit markets in 2002 after the collapse of Enron.
Sure enough the problems of subprime mortgages – initially seen as a confined issue – went systemic as the market began to doubt the creditworthiness of even the strongest institutions and rushed to buy US Treasury debt.
First there is a period of overconfidence, rising asset values and growing leverage as investors increase their faith in strategies that have enjoyed a long run of success.
Second, there is a surprise that leads investors to seek greater safety. In the current case it was the discovery of huge problems in the subprime sector and the resulting loss of confidence in the ratings agencies.
Third, as investors rush for the exits, the focus of risk analysis shifts from fundamentals to investor behaviour. As some investors liquidate their assets, prices fall; others are in turn forced to liquidate, further driving prices down. The anticipation of cascading liquidations leads to more liquidations creating price movements that seemed inconceivable only a few weeks before. The reduced availability of credit then has a negative effect on the real economy.
Eventually – sometimes in a few months as in the US in 1987 and 1998; sometimes over a decade, as in Japan during the 1990s – there is enough price adjustment that extraordinary fear gives way to ordinary greed and the process of repair begins.
While it is too soon to draw policy lessons, we can highlight questions the crisis points up. Three stand out.
First, this crisis has been propelled by a loss of confidence in ratings agencies as large amounts of debt that had been very highly rated has proven very risky and headed towards default.
Second, how should policymakers address crises centred on non-financial institutions? A premise of the US financial system is that banks accept much closer supervision in return for access to the Federal Reserve’s payments system and discount window. The problem this time is not that banks lack capital or cannot fund themselves.
Third, what is the role for public authorities in supporting the flow of credit to the housing sector?
I am among the many with serious doubts about the wisdom of the government quasi-guarantees that supported the government-sponsored entities, Fannie Mae, the Federal National Mortgage Association, and Freddie Mac, the Federal Home Loan Mortgage Corp , as they have operated in the mortgage market. But surely if there is ever a moment when they should expand their activities it is now, when mortgage liquidity is drying up.
The Savings and Loans Bailout
It is downright hilarious to hear so many now clamoring for the return of Fannie Mae and Freddie Mac to act as "white knights" to save a very troubled mortgage industry
when they're the ones that started it all about five years ago with the first tidal wave of mortgage backed securities and derivatives.
Tim Iacono, August 9, 2007
The central banks have been forced to pump in billions of dollars to oil the wheels of lending.
But what happened in previous financial crises, and what are the lessons for today?
BBC 26/8 2007
Nice list of financial crises in full text
Top of page
The Forthcoming Fed Rate Cuts May Not Prevent a US Hard Landing
Nouriel Roubini, Aug 17, 2007
The Fed can indeed be accused of being a serial bubble-blower.
But this is not because it has been managed by incompetents.
It is because it has been managed by competent people responding to exceptional circumstances.
Martin Wolf, August 22 2007
The “core” U.S. economy is doing fine.
That is, if you exclude consumer spending, business capital goods spending and housing – almost 85% of U.S. real GDP – the outlook is rosy
inasmuch as exports will surely surge because of the strong economic growth in the rest of the world. Other than the fact that exports are only about 11-1/2% of real GDP, a record high, there are other problems with depending on the rest of the world to be America's economic locomotive.
Paul L Kasriel, at The Market Oracle, 14/5 2007
Speaking of households, even though they are cutting back on their real spending, they seem to be tapping their credit cards more now that their home ATMs are draining – i.e., home equity growth is slowing – and mortgage lenders are requiring more than a pulse to qualify for a loan. Chart 4 speaks to this point. Is this an act of desperation?
Economist Paul Kasriel at the Northern Trust has come up with
a recession indicator that has called six consecutive recessions with no misses
and no false positives dating back to 1962.
Michael Shedlock 30/3 2007
Top of page
NASD - the brokerage regulator - said that the amount of debt that investors took on to buy securities, known as buying "on margin," had soared to a record $321.2 billion
That topped the previous record of $299.9 billion in March 2000, at the peak of the last bull market in stocks. Margin debt has more than doubled from $141.3 billion in January 2003
Reuters, 10/4 2007
NASD has long served as the primary private-sector regulator of America's securities industry. We oversee the activities of nearly 5,100 brokerage firms, about 171,000 branch offices and more than 662,000 registered securities representatives. In addition, we provide outsourced regulatory products and services to a number of stock markets and exchanges.
NASD Home page
Top of page
Interest rates, Recession or Depression?
Aubie Baltin 2007-04-05
Interest rate is just another word for price. It is the price to borrow money and its price is supposed to be determined exactly the same way as the price of any other commodity, product or service is - through the interaction of supply and demand.
However, unlike every other product, commodity or service, interest rates and money do not operate in a Free Market. Interest rates and the supply of money are manipulated (controlled) by the Fed.
They do this by controlling the amount (supply) of money that is available in the banking system through their Open Market Operations (buying & selling treasury bonds in the open market) and by changing their deposits that they hold with their individual member banks, directly affecting their reserves and thus their ability to lend.
They also increase the money supply the good old fashioned way, by printing it
So why hasn’t IT happened yet?
Aubie Baltin 20/9 2006
Top of page
Recession in 2007?
Greenspan's recession comment opened the floodgates for the use of the "r word."
John H. Makin, 21/3 2007
Currently, markets are expecting the Fed's Open Market Committee to cut the federal funds rate by a total of 50 basis points, to about 4.75 percent, by the end of this year.
Thus far, the Bernanke Fed has not been forced to confront a situation in which its goal to slow inflation conflicted with its desire to avoid a rapidly escalating chance of recession.
The awkward reality is that, at least in the past, the Fed has only been moved away from a conservative stance by extraordinary market volatility and attendant systemic risk that force the Fed to ease, as it did after the Long-Term Capital Management crisis in 1998 and during the deflation scare of 2002–03.
The strength of the Fed's desire to lower inflation may be tested by markets in coming months.
A brief recession may be a small price to pay to retain the low and stable inflation required for long-run, sustained growth and wealth creation.
Bernanke’s Sophie's Choice:
"The housing market or stock market Mr. Bernanke.
You may only be able to try and save one..."
Brady Willett, May 18, 2006
Top of page
Det finns en myt, som gärna kolporteras också av journalister, att ingen varnar för en kommande krasch.
När kraschen väl är ett faktum skrivs artiklar och böcker om att ingen varnade för det uppenbara.
Det finns ALLTID varningar.
Problemet är inte att "alla" är efterkloka, utan att ingen vill lyssna.
Dan Lucas, DN Ekonomi 19/3 2007
Börsen nådde sin högsta nivå i början av september 1929 då Dow Jones Index (DJI) stod i 381,17.
Det skulle dröja till 1954 innan börsindex passerade nivån från september 1929.
Under 1987 oroades allt fler av en försvagning av den amerikanska dollarn, ökande handelsunderskott och stigande inflation. När den amerikanska centralbanken, Federal Reserve, höjde räntan för första gången på tre år utlöstes fallet.
En valutakris i Sydostasien hösten 1997 fick efterverkningar på börser runt om i världen.
I mars 2000 började fallet, först som en pyspunka, därefter i allt snabbare takt.
Rolf Englund på Nationalekonomiska Föreningen januari 1990:
källa: Ekonomisk Debatt 1990, nr 3, sid 327 ff
Vi ser också att affärsbankernas lånestock i utländsk valuta är nästan lika stor som den är i svenska kronor. Lånen i utländsk valuta hos affärs- och sparbankerna är tillsammans nästan 300 miljarder. Det är mer än dubbelt så mycket som sparbankernas utlåning i svenska kronor. Jag föreställer mig att de som har lånat upp dessa 300 miljarder inte avser att ha dessa lån när nästa devalvering kommer.
Hela texten här
Sänt till Carl Bildt 90-11-02
Utlagt på Internet 96-10-29
Rolf Englund 1990 11 02
Mycket förtroligt Eyes Only
Marshall-hjälpen och nästa svenska devalvering
Med dagens kurs SEK/USD på cirka 5:60 uppgick alltså den totala Marshall-hjälpen till 382 miljaaarder svensk kronor.
Enligt dagens Dagens Industri (2/11) uppgår Sveriges utlandsskuld till 454 miljaarder kronor:
Min tes är nu att om det skall devalveras så är det av avgörande strategisk betydelse - ekonomiskt och politiskt - att devalveringen kommer före valet.
Hela texten här
Det är den stora utlandsskulden, snarare än budgetunderskottet eller frånvaron av konkreta besparingar inom sjukförsäkringen, som framtvingar en högre ränta i Sverige än i omvärlden. Riksbanken måste se till att företag och andra som lånat i utlandet bibehåller sina utlandslån.
Rolf Englund på DN Debatt 26/8 1992
Det kommer inte att vara möjligt att länge till bibehålla den rekordhöga svenska realräntan. Om regeringen inte låter kronan flyta är risken alltmer överhängande för att marknaden kommer att se till den saken. Det blir genant för de ansvariga i nuvarande och tidigare regeringar men är ingen nationell katastrof.
Hela texten här
Vi har listan!
De som varnade för kronkursförsvaret
Top of page
"Gardera med kryss och tvåa - grundtips etta"
USA är visserligen på väg in i en svagare konjunktur, men det mesta talar fortfarande för att det blir en mjuklandning.
Sverige har hittills haft strålande tider, som ser ut bestå ännu ett tag.
Den senaste tidens fall på Stockholmsbörsen ser därför ut att bli en övergående episod
Snart kommer det hela att mest likna ett hack i en uppåtgående kurva.
Ändå är det bättre att vara förberedd på ett omslag till det sämre, som förr eller senare måste komma.
Johan Schück, DN 10/3 2007
Klicka på grafik börsutvecklingen
Top of page
Equities look overvalued,
but where is the turning point?
Martin Wolf, Financial Times, March 7, 2007
David Tice, whose bet against U.S. stocks the past four years punished his Prudent Bear Fund, said that the market is headed for a drop of as much as 50 percent.
Herald Tribune 12/3 2007
"We see the first crack," Tice said. His Prudent Bear Fund, based in Dallas, is always positioned for a decline. "I've never been more confident in our economic theories."
Welcome to Prudent Bear Funds
Could it really have arrived? Are global stocks about to tank in an all consuming way?
Indeed, is this the moment Albert Edwards has been waiting for since 1996?
Of course, Edwards is perhaps London’s best-known doom-monger when it comes to stocks.
FT Alphaville Monday, March 5th, 2007
For Edwards, Dresdner Kleinwort’s notoriously bearish global strategist, this truly is the moment.
/His ‘Ice Age’ thesis is that the US market is locked into a long-term trend of declining p/es that could easily continue until the ratio reaches ten or lower. Factor in a possible recession – which could reduce earnings by around 20% – and he believes that the S&P could fall by about 40% from current - 04.08.2006 - levels./
Here’s what he told Dresdner clients this weekend:
“We believe the long and widely awaited equity correction is upon us. The sharp deterioration in the US economic dataflow should extend that loss below key support levels. We expect government bonds to be the safe haven, especially as risk assets generally are likely to suffer as the Yen carry trade now unwinds.”
Det vi nu ser under första kvartalet i år är en toppformation,
som sedan bör följas av en sidlänges rörelse på hög nivå
innan det hela troligen bär i väg nedåt
under andra halvåret i år.
Di.se:s krönikör Ingemar Carlsson 5/3 2007
Baisse på börsen
Stockholmsbörsen backar rejält i börsöppningen på måndagen.
Efter femton minuters handel hade index fallit 3,2 procent.
DIse 5/3 2007
Markets fall, sometimes very sharply.
By 3:02 it had dropped to 12,089.02 – off more than 540 points for one of the worst days in history.
John Authers, FT Investment Editor, February 28 2007
When did the much-expected wave of risk aversion of 2007 finally break? It can be timed with precision. At 2:57 on Tuesday afternoon in New York, the Dow Jones Industrial Average stood at 12,346.33 – off about 2 per cent for a day on which traders had been spooked by 9 per cent falls in Chinese stock indices overnight.
Top of page
Jag reverserar nu min strukturellt optimistisk syn på världen som jag antog förra våren.
DI/Nyhetsbyrån Direkt 2007-02-27
The optimists will be right until they are wrong.
Wolfgang Munchau, FT 11/12 2006
Det är svårt att hitta rationella skäl för en total panik.
Bengt Carlsson DI 2007-02-27
Början på sidab - Top of page
Strategists at 12 of the biggest Wall Street firms agree that U.S. stocks will rally next year (2007).
The last time Wall Street unanimously predicted an advance for the S&P 500, in 2001,
preceded a 33 percent slump over the next two years.
The U.S. economy fell into recession and the Sept. 11 attacks battered financial markets.
Bloomberg 18/12 2006
Lou Dobbs - The War on the Middle Class - Book Introduction
George W. Bush claimed through two presidential campaigns that America has become the "ownership society." I couldn't agree more. America has become a society owned by corporations and a political system dominated by corporate and special interests, directed by elites who are hostile -- or at best indifferent to -- the interests of working men and women of the middle class and their families.
November 20, 2006
In terms of the euro the Dow Jones's 60 point plus decline this week
translates into the equivalent of a 320 point decline when measured in euros.
Peter Schiff, 24/11 2006
In fact, year to date the Dow is only up by about 3.5% when priced in euro's, compared to its 14.5 % advance when measured in depreciating U.S. dollars.
Dr Kurt Richebächer:
Past recessions were all triggered by true monetary tightening, hitting both the economy and the markets.
The current economic downturn is unfolding against the backdrop of unmitigated monetary looseness
Proffset tror på Stockholm
DI 24/11 2006
Han ser inte några större risker för den svenska börsen 2007 men tycker att den svenska kronan rör sig överraskande mycket och det skulle i värsta fall, tillsammans med en högre ränta, kunna hota det positiva scenariot.
En övergång till euro skulle därför vara oerhört positivt för den svenska aktiemarknaden, enligt Rolf Elgeti.
The Dow Jones Industrial Average, adjusted for inflation, is down 17 percent from its all-time high on January 14, 2000.
It would need to rise another 2,378 points to set a new record, adjusted for inflation.
Center on Budget and Policy Priorities, 5/10 2006
"Det är mycket annat som inverkar på om anställningarna skall öka, däribland konjunkturutvecklingen.
En väntad nedgång i USA blir märkbar också i svensk ekonomi."
Att få ut fler som aktivt söker arbete är förhållandevis enkelt.
Svårare är att få arbetsgivare att anställa fler, utöver vad de ändå hade gjort
Johan Schück, DN Ekonomi 23/9 2006
So why hasn’t IT happened yet?
Thus far the Fed has succeeded in playing Fire Chief and kept pouring liquidity into the system.
But the Fed CAN NOT keep the money and credit spigots wide open indefinitely:
All they are doing is delaying the inevitable, not curing it.
Aubie Baltin 20/9 2006
In a few years, the low bond yields of recent years will look like an anomaly rather than the norm.
Globalisation is more likely to push real interest rates and inflation higher than lower in the next few years.
Joachim Fels, FT, 21/9 2006
The writer is managing director and chief global fixed income economist at Morgan Stanley
"Baby boomers with 80pc of UK wealth shouldn’t feel guilty about younger generations' problems"
80 pc of the Britain's net personal wealth is owned by people aged over 50
while younger folk often have no savings, substantial debts and little hope of becoming homeowners any time soon.
Daily Telegraph, December 24th, 2011
The baby boomers, those born between 1946 and 1970, were the richest, and largest, generation that the world has ever seen.
Unsurprisingly, they created a truly golden age for housing, auto sales and overall consumer demand.
Mr Paul Hodges, Letter FT, 6 september 2011
Babyboomgenerationen kan komma att hålla ned börskurserna i två decennier framåt.
Det spås bli följden när en åldrande befolkning säljer sina aktieandelar för att finansiera pensionen.
Varningen kommer från Federal Reserve Bank of San Francisco skriver bloomberg.com.
DI 24 augusti 2011
Förhållandet mellan aktiekurs och vinst trefaldigades för de amerikanska börserna åren mellan 1981 och 2000.
Under samma period nådde babyboomgenerationen toppen av sin arbetsföra ålder. Båda kurvorna har dalat sedan dess.
Americans born between 1946 and 1964 are beginning to retire as the U.S. stock market is still recovering
from the financial crisis that began in 2007 with the collapse of the subprime-mortgage market.
Bloomberg 22 August 2011
The timing is “disconcerting” and, since stock prices have been closely tied to demographic trends in the past half century, “portends poorly for equity values,” adviser Zheng Liu and researcher Mark Spiegel wrote in a paper released by the bank today.
Boomer Retirement: Headwinds for U.S. Equity Markets?
By Zheng Liu and Mark M. Spiegel
Top of page
Vilket börsfall klarar en genomsnittlig pensionssparare utan att gripas av panik?
Valfrihet har varit honnörsordet, men extrem aktieexponering har blivit effekten.
Peter Malmqvist, DN Debatt 14/2 2011
PPM-systemet förklarar en del av rörligheten, men ännu viktigare är den ökade valfrihet som utvecklats inom det privata pensionssparandet. I stället för att placera i livbolag med professionell förvaltning och balanserad risk, väljer svenskar numera så kallade fondförsäkringar, vilket i praktiken medfört att pengarna placeras i aktiefonder.
Mitt förslag är att risk skall beskrivas som det största kursfallet under ett år som en sparprodukt råkat ut för under den senaste tioårsperioden. För exempelvis placeringar på Stockholmsbörsen skulle den siffran i dag bli minus 53 procent, att jämföra med exempelvis index för svenska statsobligationer, där det största kursfallet stannat på 1,6 procent. Det är denna maximala aktierisk som sparare riskerar att drabbas av om de har oturen att gå i pension det år börsen kraschar.
Den nuvarande finanskrisen
According to IMF calculations, the credit crunch, bank bailouts and recession only account for 14 per cent of the expected increase in Britain’s public debt burden.
The remaining 86 per cent of the long-term fiscal pressure is caused by the growth of public spending on health, pensions and long-term care.
2020 the majority of the baby-boomers will be retired.
Anatole Kaletsky, The Times June 2, 2010
The book The Pinch by David Willetts, the Tory Minister for Universities, and its subtitle conveys his main message with his characteristic clarity and directness: “How the baby-boomers took their children’s future and why they should give it back.”
Mr Willetts shows how the overwhelming size of the baby boom generation, in comparison with the generations just before and after, allowed people born in the two decades after VE-Day not only to dominate culture, fashion and morality, but also to accumulate wealth, monopolise employment and housing and reduce social mobility for the next generation.
Nearing Retirement and Unemployed or Underemployed
One of the groups seriously impacted by the great recession is the "pre retirement" generation - currently the "Baby Boomers" - the workers between the ages of 45 and 64.
CalculatedRisk 13/3 2010
The unemployment rate for these age groups hit an all time high during the great recession (highest since WWII).
Michael Winerip at the NY Times has a story about the plight of several "Boomers" who he has tracked for the last year: Time, It Turns Out, Isn’t on Their Side
As retiring Baby Boomers flee to safer investments, some analysts fear there will be too many stocks and too few investors. But, a lot depends on how many of the more than 70 million Boomers can really afford a more conservative investing style, as they try to recover from a lost decade for the stock market
CNBC 1 Feb 2010
Nearly half of the drop in household wealth since 2007 can be ascribed to a 48 percent plunge in homeowners' equity. And, though home equity has edged higher since the first quarter of 2009, it still remains in a range last seen in the second half of 1999. As recently as 2008, few expected homeowners’ equity to sink to levels last seen 10 years ago. The $6.2 trillion of homeowners’ equity in the third quarter of 2009 had sunk by $7.25 trillion from its $13.5 trillion zenith in the first quarter of 2006.
About 27 percent of the household sector’s loss of wealth since 2007 stemmed from a $3.4 trillion, or 22.7 percent dive in the market value of stocks and mutual funds directly held by households. Boomers have fresh memories of how the market value of equities and mutual funds was down by an even deeper 44% from its 2007 level as recently as the first quarter of 2009. A 38 percent run-up by the market value of equities and mutual funds between the first and third quarters of 2009 quickly restored $3.2 trillion of household wealth.Full text
Top of page
The crisis and its impact on pension plans have focused attention on the baby boomers,
typically 20-25 per cent of the populations of western economies,
who are now starting to head off into retirement.
George Magnus, FT August 13 2009
Since the boomers, and baby boomer women especially, were the backbone of the economic expansion of the last 25 years, we may lose a growth driver of great significance. Expected changes in the numbers of people of working age and of those over 65 underlie a unique shift in age structure that may result in weaker economic growth and growing financial stress for individuals and the state.
Top of page
Although it is widely known that our Social Security and Medicare Programs are threatened by these demographic trends, there are many who believe that they have accumulated sufficient private wealth to fund their retirement.
But this may not be so. The same crisis that strikes the public pension programs can overwhelm private pensions as well. Since there will not be enough workers earning income, there will not be enough savings generated to purchase the assets the retirees must sell to finance their retirement.
Jeremy Siegel, Wall Street Journal, September 20, 2006
More by Jeremy Siegel
The inter-generational clash between the interests of those who have already grabbed the rewards of postwar prosperity and the young people now expected to support them in retirement.
Philip Stephens, Financial Times 20/2 2007
“Please, Proceed to the Nearest Exit,”
With such pretty pie charts predicting fair winds, they feel secure aboard the “USS Stocks for the Long Term,” chanting the “Buy-n-Hold” mantra should they ever feel a tinge of concern. Yet, when this modern marvel collides with the iceberg of science and history, the pain will cause them to begin searching for what went wrong.
Doug Wakefield, September 14, 2006
Investors are not even aware of their incapacity to take action to prepare for a sharply declining market.
Herding is a natural instinct
Doug Wakefield, August 25, 2005
Real Estate: Good News for People Who Love Bad News
the stock market follows the NAHB Housing index nearly perfectly, with a one-year lag
Michael Nystrom, September 14, 2006
Top of page
Protecting Your Future from Four Impending Catastrophes
Crash Proof: How to Profit from the Coming Economic Collapse
Time 30/3 2007
Among the doom crowd, Greenspan's decision to slash interest rates as the stock market plummeted in 2001, which fueled the last leg of the real estate boom, is seen as his gravest error.
The reckless masters of "economic armageddon"?
There have been many books written about the financial crisis: What caused it, who’s to blame and how it could have – and should have – been prevented
This new one, “Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon,” lives up to its lengthy title and gets deep into the weeds of who did what, when and how.
In short, Gretchen Morgenson and Joshua Rosner name names and connect the dots.
CNN 27 May 2011 with nice pic
Armageddon hits US housing
House prices to fall, Fed to cut rates in 2007
Lombard Street Research, Gabriel Stein, 26/3 2007
Sales of new homes fell sharply in February after plummeting in
The overhang of unsold homes jumped to a 17-year high of 8.1 months.
As long as this overhang remains, builders are unlikely to build more meaning that the housing market correction has further to go.
This situation will remain until prices of new homes fall in earnest or until the Fed begins to cut interest rates.
Is this the subprime apocalypse?
(Or is it just a scary story?)
CNN 13/3 2007
Top of page
The problem, as I laid it out in my March 9 column,
is that every day that goes by without letting the steam out of the global financial market -- brought to a boil by an excess of cheap capital and even cheaper debt -
raises the odds of a financial market Armageddon.
Jim Jubak 13/3 2007
I say Armageddon is in the eye of the beholder. To me, if a 10% drop is a correction, a 30% fall in stock prices is Armageddon. And before you pooh-pooh that number as just another crash, remember that if Armageddon is driven by the debt markets, the damage would be worse on that side than in the stock market.
Top of page
The United States, the world's biggest debtor, and
China, the world's biggest creditor, each passed major statistical milestones this month.
In the second quarter, the Commerce Department announced this month,
the United States paid more to its foreign creditors than it took in from its overseas investments -- the first time that's happened in 91 years. The gap was relatively small, $2.5 billion for the quarter, when measured against a $13 trillion economy, but it was still a milestone.
At the end of September, China's foreign-exchange reserves topped $1 trillion.
Jim Jubak, CNBC 30/9 2006
Top of page
The Fed has just voted for stagflation, a dreadful mix of slow-to-no growth and high inflation
Jim Jubak, CNBC 22/8 2006
Top of page
The NASDAQ is Crashing. Have You Noticed?
Since the NDX topped at 1,721 on May 8th, the NASDAQ 100 has crashed 15.94 percent. It is down nearly 18 percent since its January 11th top
by Robert McHugh July 30, 2006
Top of page
In an attempt to avoid the consequences of the late-1990s stock mania, the Fed managed (after 13 rate cuts and several tax cuts) to precipitate a bubble in housing. That bubble, in my opinion, is a far more dangerous problem than the stock mania was, because of all the leverage involved
Bill Fleckenstein, CNBC 3/7 2006
The Federal Reserve precipitated, aided, abetted and cheered the largest (by dollar volume) stock mania in the history of the world. That mania exhausted itself in 2000. The exhaustion was not caused by the Fed tightening, contrary to what many folks believe, any more than the 1929 market break (and ensuing Great Depression) was caused by Fed tightening.
Manias end in exhaustion, though there are always coincident events surrounding the end of the move that get blamed for the decline. In both 2000 and 1929, higher interest rates were present, but they were not the cause. The preceding bubble was the cause of both the subsequent exhaustion and the ensuing bust.
In an attempt to avoid the consequences of the late-1990s stock mania, the Fed managed (after 13 rate cuts and several tax cuts) to precipitate a bubble in housing. That bubble, in my opinion, is a far more dangerous problem than the stock mania was, because of all the leverage involved -- and the damage that will eventually inflict on the financial system, in addition to consumers whose overspending ways will be throttled back as the housing mania unwinds.
Alan Greenspan and Asset Price Bubbles
Raising the spectre of stagflation BIS, the central bankers’, bank highlighted the threats that now exist after global interest rates have been "unusually low for an unusually long time"
Chris Giles, Economics Editor, Financial Times, June 26 2006
Anything is possible in financial markets, but the probability that the plunge in asset prices that began just a month ago could really be over after such a short time — and with so little damage being done to personal fortunes and financial institutions — must surely be very small. Much more likely is that any recovery that may or may not develop in the next day or two will turn out to be a “dead cat bounce” — in market parlance a brief and illusory rebound, whose main effect is to lure over-eager investors back into the market and then quickly deprive them of their wealth.
Anatole Kaletsky, The Times 15/6 2006
"Dramatically lower interest rates 'transferred' the tech stock bubble to a real estate 'bubble,'
"The tide of liquidity further lifted all speculative boats, including small- and micro-cap stocks, commodities and emerging markets."
"Hedge funds now number 9,500 and are managing $1.3 trillion," Sonders says. "Their time horizons are often measured in minutes, not months, quarters or years like traditional institutions."
Charles Schwab's chief investment strategist Liz Ann Sonders,
San Francisco Business Time 15/6 2006
If you're a true pessimist you know a rally like that which began on June 13 doesn't really change anything.
It's just a trap, a fake to get you feeling good about stocks, so that the market can slam your portfolio again.
Jim Jubak, CNBC 16/6 2006
Pessimist's Scenario No. 1
Not much has changed. Despite all its saber-rattling, the Federal Reserve isn't really all that committed to fighting inflation to the death.
Pessimist's Scenario No. 2
The central banks raise interest rates until inflation cries uncle. But they overshoot and crush economic growth, too.
Pessimist's Scenario No. 3
The Federal Reserve raises rates a couple more times but then stops while the central banks of Japan and the European Union keep going.
Det går bra för Sverige just nu, med mer än fyra procents tillväxt. De nya BNP-siffrorna för årets första kvartal visar på en snabb tillväxt i ekonomin, som troligen fortsätter ett tag till.
Längre fram kan diskussionen om hur bra det just nu går för Sverige framstå som aningslös och oansvarig.
Johan Schück, DN 10/6 2006
Dollarkursen kommer, troligtvis, att falla i takt med att USA-konjunkturen försvagas. Det betyder att svensk export till de amerikanska och asiatiska marknaderna försvåras. Men följden skulle också bli en avmattning i Europa, där tillväxten är nära kopplad till utvecklingen på andra sidan av Atlanten. Sveriges ekonomi är numera tillräckligt robust för att klara enstaka motgångar. Däremot är det svårare att möta en situation där konjunkturen plötsligt försvagas, kronan stiger mot dollarn och priserna samtidigt skjuter i höjden.
A depression is probably inevitable this time.
The only serious question in my mind is whether it will be essentially deflationary in nature, as it was the case in the U.S. in the 1930s, or inflationary like in Germany in the 1920s Doug Casey, 13/6 2006
Is the Greater Depression really inevitable? How bad will it be? Is there another side to the argument? Can it be avoided?
I suppose it's not absolutely inevitable. Perhaps friendly aliens will land on the roof of the White House and present the government with a magic technology that can undo all the damage it's done. But we live in a world of cause and effect where actions have consequences. That being the case, I expect truly serious financial and economic trouble. And the government will make it vastly worse by trying to "do something" instead of recognizing itself as the cause and backing off. I don't see any way out.
What indicators should we watch for that might tell us it's about to get ugly?
Gold... Then there's the CPI itself--although I don't think it's very accurate, in that all the adjustments, exclusions, weightings and what-nots the government has insinuated into it over the years makes the CPI as much of a floating abstraction as the dollar itself. It's funny how the government plays with figures for fear of hurting confidence. They believe the economy rests mainly on confidence, which, ironically, in today's world, is true. Unfortunately, confidence can blow away like a pile of feathers in a windstorm--and we have a class-5 hurricane coming. If the economy were sound and people for some reason lost confidence, the currency and the banks would be unhurt, and the next day things would go back to normal. But that's not the world we live in. So, higher CPI numbers are another thing that could destroy confidence and supercharge the gold price. They're coming.
Higher interest rates, which we're already seeing, will inevitably burst the real estate bubble, which is floating on a sea of mostly adjustable-rate debt, a lot of it interest-only or even with negative amortization. Higher rates will also crush bonds and probably stocks. And they'll devastate the economy since everybody is deeply in debt. However, I feel the Fed will keep short-term rates--which are really the only ones they control--as low as possible for as long as possible. For one thing, they don't want a recession, which this time could snowball into the Greater Depression.
The biggest single problem, however, is that there are trillions of U.S. dollars outside of the U.S. Unlike Americans, foreigners have no reason to hold them. And at some point very soon, perhaps when the Fed finally hits the wall on its ability to raise rates, these overseas dollars are going to start flooding back home, while the products and titles to real wealth flow out of America. Therefore, when the trade deficit starts turning around--which most people will think is a good thing--that will be the real tip-off the game is over. Trillions coming back to the U.S. will skyrocket long-term interest rates and inflation. The dollar will go into freefall.
More by Doug Casey
Svenskarna tömde sina fondkonton i maj. Totalt flödade 33 miljarder netto ut ur aktiefonder under den svarta börsmånaden. Samtidigt flödade 20 miljarder netto in i korta räntefonder.
DI 2006-06-09 Cecilia Aronsson
- Det behövs en anpassning där dollarkursen försvagas
Men denna förändring kan komma successivt. Sannolikheten för ett plötsligt dollarras har minskat, säger Stephen Roach.
Jag är optimist om Kina, som gradvis kommer att lägga om sin politik. Kinesernas långsiktiga intresse är bygga upp sitt eget land, inte att köpa amerikanska statsobligationer.
Johan Schück, DN 1/6 2006
Under flera år har Stephen Roach pekat på de växande globala obalanserna och varnat för en kommande krasch i världsekonomin. Han har nått stor uppmärksamhet, men hittills inte fått rätt.
- Det behövs en anpassning där dollarkursen försvagas, samtidigt som andra valutor stärks. Men denna förändring kan komma successivt. Sannolikheten för ett plötsligt dollarras har minskat, säger Stephen Roach.
Han tror att Kina och andra asiatiska länder kan ta över en del av USA:s roll som motor i världsekonomin. Men övergångsvis bör man vara beredd på en global avmattning, eftersom nedgången i den amerikanska ekonomin kan komma snabbt. Framför allt är det hushållen där som kan tvingas dra åt svångremmen, om huspriserna börjar sjunka på allvar.
- Riskbubblan måste spricka, även om allt inte behöver komma samma gång.
Jag är optimist om Kina, som gradvis kommer att lägga om sin politik. Kinesernas långsiktiga intresse är bygga upp sitt eget land, inte att köpa amerikanska statsobligationer, framhåller Stephen Roach.
Mer av Stephen Roach
I think there is real potential for a 10% to 25% decline over the next six months -- with the harsher end of the spectrum the more likely.
We had bear markets in 1949, 1953, 1962, 1966, 1970, 1974, 1978, 1982, 1987, 1990, 1994, 1998 and 2002.
This is sort of like one of those easy math tests that schools give fifth-graders.
What is the next likely number in this series?
Jon Markman, CNBC, 31/5 2006
Today we look at a very interesting set of ideas proposed by one William R. White of the Monetary and Economic Department of the Bank of International Settlements (BIS).
Let's look at one paragraph in particular, which I am sure will show up in bearish commentary all over the world:
"Should any or all of these series revert to their historical means, the sustainability of future global growth would also be open to question, perhaps leading to a deflationary rather than an inflationary outturn. To combine the two possibilities, the worst case scenario would be inflationary pressures, leading to a sharp tightening of policy, which in turn could precipitate a process of mean reversion in a number of markets simultaneously."
John Mauldin, 26/5 2006
We need a Plan B to curb the debt headwinds
An unsustainable level of private sector debt is the main factor explaining the present severe downturn,
as well as many previous downturns in history.
William White FT March 2 2010
Why have markets reached their exposed position? The answer is that success breeds excess.
This is the argument of a fascinating new paper from William White, economic adviser to the Bank for International Settlements.
Martin Wolf, Financial Times 24/5 2006
The longer the period of macroeconomic stability, the greater the underlying excesses in investment and borrowing are likely to become. What happened to Japan in the 1980s is an example of this danger.
High inflation did not precede the great depression of the 1930s, Japan’s lost decade in the 1990s or the emerging market crises in east Asia in 1997 and 1998. What preceded all these extreme events were credit-fuelled investment booms in an era of stable inflation.
This, argued Friedrich Hayek, the Austrian economist, in the 1930s, was also the cause of the great depression.
This approach disappeared from view in the environment of the 1950s and 1960s. But, argues Mr White, it is due for reconsideration.
Is price stability enough?
Working Papers No. 205, April 2006 by William R. White
The Bank for International Settlements (BIS)
Go, go, go
Morris considers this to have been a fabulous achievement ... But Morris concedes that Volcker’s success formed the seed for today’s mess, because the new climate of stability left banks confident enough to crank up their leverage and risk-taking.
Trillion Dollar Meltdown:
Easy Money, High Rollers, and the Great Credit Crash, by Charles R Morris
thought-provoking for experts and a readable primer for the layperson
Review by Gillian Tett, FT, September 23 2007
Friedrich Hayek, the Austrian economist
Portentous /Portent=Omen/ time but what does it all signify?
With reference to Shakespeare’s Julius Caesar
Andrew Hill, Financial Times May 23 2006
The problem with portents is working out precisely what they portend. As Cicero points out in the first act of Shakespeare’s Julius Caesar, “men may construe things after their fashion”: interpreting signs to mean something quite different from – or even at odds with – reality. Only in retrospect is it possible to assess which omens really counted.
Here is Charles Mackay’s 19th century account, in his classic Extraordinary Popular Delusions and The Madness of Crowds, of how John Law’s Mississippi investment project seized the imagination of 18th century France, boosting a whole range of “asset classes”, from food to fine fabric: “For a time, while confidence lasted, an impetus was given to trade which could not fail to be beneficial. In Paris, especially, the good results were felt. Strangers flocked into the capital from every part, bent not only upon making money, but on spending it . . . New houses were built in every direction; an illusory prosperity shone over the land, and so dazzled the eyes of the whole nation that none could see the dark cloud on the horizon announcing the storm that was too rapidly approaching.”
Shakespeare’s frightened courtiers may not have known what it meant when they saw lions roaming the Capitol or horses eating each other. But they could be utterly confident they were not a harbinger of good news. Alas for modern market strategists, even that level of certainty is absent these days.
Extraordinary Popular Delusions and The Madness of Crowds
Omens or portents are signs encountered fortuitously that are believed to foretell the future.
Their interpretation is a form of divination.
Shakespeare’s Julius Caesar
Bernanke’s Sophie's Choice:
"The housing market or stock market Mr. Bernanke.
You may only be able to try and save one..."
Brady Willett, May 18, 2006
För veckan som helhet väntas Stockholmsbörsens OMXS30-index sjunka med 0,39 procent.
Eftersom börsen redan fallit med 2,1 procent på måndagsförmiddagen till OMXS30.931,2, är den genomsnittliga förväntningen att börsen kommer att vända uppåt från denna nivå.
Alla håller dock inte med om denna genomsnittsprognos.
DN Ekonomi, publicerad 22 maj 12:51
The market is gripped by two scares: an inflation scare and a dollar scare.
Of the two scares, investors should worry less about US inflation and more about the dollar (though the two are obviously related).
Financial Times editorial 20/5 2006
Even after the recent declines, world stock markets remain far above their 2003 lows. The FTSE 100 index is up 73 per cent, the S&P 500 58 per cent, the Eurotop 91 per cent and the Nikkei 112 per cent. It is too soon to say the bull market is over.
The dollar is a bigger concern. While a steady and broad-based decline of the kind seen in late April/early May is both necessary and desirable, it could give way to a dollar rout and higher US interest rates. Much depends on Asian central banks, whose intervention to support fixed exchange rates frustrated a decline in the dollar in the post-dotcom bubble period, and their counterparts in oil exporting countries.
The yen "carry trade" (borrowing in yen at low interest rates and investing in higher yielding assets), which helped boost all risky assets, is fading away as Japan's economy revives.
In one day in October 1987 the Dow fell 500 points, equivalent to 2,500 points today.
Anyone predicting that now would be taken away in a van.
Tony Jackson, contributing editor, Financial Times 19/5 2006
So why had they kept on buying before? That at least is an easy one. What we have here is the Greater Fool Theory. This says that even though you are perfectly aware a thing is overvalued – copper, say, or shares in a fly-by-night oil explorer – you keep buying it anyway. Why? Because the thing is still going up. When the time comes, you will find a Greater Fool to take it off your hands. Until, of course, the music stops and the Greater Fool turns out to be you.
Paul Tucker, director of markets at the Bank of England, on Friday said the recent climate of ultra-low interest rates and low volatility might have prompted investors to become complacent about underlying risks in the financial market. In particular, an explosion in the use of structured financial products, such as credit derivatives, might have distorted market interest rates – and left investors mis-pricing risk, he said.
Financial Times 20/5 2006
Så var det dags för ännu en dag med kraftigt sjunkande kurser.
Det börjar kännas minst sagt tjatigt och fortfarande anges oron för dollarn och den amerikanska ränteutvecklingen som främsta orsakerna.
Pia Gripenberg, DN Ekonomi 22 maj 2006 17:00
Pia Gripenberg, varför faller börsen?
- Alla är jättenervösa att det här ska vara början på en längre nedgång och säljer - sedan finns det inte tillräckligt många som köper.
DN Ekonomi 22/5 2006
Placerarna på börsen har tappat fattningen
Att det runt om i världen finns samhällsekonomiska tecken som oroar placerarna har analyserats fram och tillbaka, senast förtjänstfullt i gårdagens DN av Johan Schück, så dem lämnar vi därhän i denna krönika.
Med tanke på hur bra företagen går är den kraftiga, generella börsnedgången helt obegriplig.
Pia Gripenberg DN Ekonomi 21/5 2006
Why people don't understand
Huvudfrågan kvarstår: vad händer när USA tvingas minska sitt underskott mot omvärlden, om inte överskottsländer - som Sverige - är beredda att ta ett större globalt ansvar?
Ingen centralbank, varken i USA eller någon annanstans, är villig att släppa fram en snabbt stigande inflation. Hellre låter man ekonomin gå in i en tillfällig svacka, även om den skulle övergå i recession
Johan Schück, DN Ekonomi 20/5 2006
Osäkerhet om vart världsekonomin är på väg kan ses som en övergripande förklaring till att aktiekurserna har fallit under den gångna veckan.
Världen har vant sig vid att lita på USA och accepterat att tillväxten där till stor del sker på kredit. De amerikanska underskotten har tillåtits växa, både när det gäller bytesbalansen och den federala budgeten. Hushållen där sparar inte, utan tar allt större lån i takt med att deras bostäder stiger i värde.
Följden har blivit ett växande underskott mot omvärlden, på för närvarande cirka 800 miljarder dollar - eller mer än 6 procent av USA:s BNP. När liknande situationer - fastän inte i samma enorma skala - tidigare inträffat, har detta medfört en kraftig nedgång för dollarn
En försvagning av dollarn mot andra valutor inleddes också 2002 och pågick i några år. Men under 2005 stärktes dollarn på nytt, trots att obalanserna mellan USA och övriga världen fortsatte att växa.
Tillfälligt kunde det verka som om alla varningar varit obefogade. USA hade inga problem att finansiera sina underskott till låga räntor och fortsatte som draglok för världsekonomin. Andra länder, där man inte hade lika stark efterfrågan, gavs goda exportmöjligheter och kunde befästa stora överskott i sina bytesbalanser.
Under de senaste åren har dock den största ökningen av överskotten inte kommit i Kina, utan i de tio främsta oljeexporterande länderna. Denna grupp - bestående av Algeriet, Förenade arabemiraten, Kuwait, Mexiko, Nigeria, Norge, Ryssland, Saudiarabien och Venezuela - svarar nu för mer än hälften av världens samlade bytesbalansöverskott.
Federal Reserve, med sin nye chef Ben Bernanke, står inför svåra val. Men ett rimligt tips är att ingen centralbank, varken i USA eller någon annanstans, är villig att släppa fram en snabbt stigande inflation. Hellre låter man ekonomin gå in i en tillfällig svacka, även om den skulle övergå i recession.
För USA beror en stor del av underskottet mot omvärlden på att exporten är betydligt mindre än importen.
Vad som skymtar är en motsvarighet till Plaza-överenskommelsen 1985, där USA, Japan och de viktigaste EU-länderna gjorde upp om att minska den tidens globala obalanser.
Riskerna, som tidigare inte har tagits på fullt allvar, ger nu upphov till överdriven försiktighet. Omsvängningen kan bli kännbar för många inblandade, alltifrån spekulanter till pensionssparare.
Huvudfrågan kvarstår: vad händer när USA tvingas minska sitt underskott mot omvärlden, om inte överskottsländer - som Sverige - är beredda att ta ett större globalt ansvar?
Stagflationen från det hemska 70-talet kan komma igen
Början på sidan
Martin Guri, analyschef på SEB, är inte orolig.
Börsen slutar på plus i år och företagen klarar eventuella räntehöjningar med glans
Ur Affärsvärlden 8/6 2006
En myt är att det ska finnas en koppling mellan dollarkursen och börskursen. Man brukar ju säga att en svagare dollar ger en svagare börs. Men det är inte heller sant. Det finns ingen statistiskt signifikant koppling.
Utifrån det vi vet i dag anser Mats Guldbrand att det inte finns någon anledning till oro.
- Vi ställer oss frågan: Har världen ändrat sig eller är det bara bilden av världen som har förändrats. Jag vill tro på den senare.
Mats Guldbrand, sedan 15 år aktiechef på AMF Pension som tillsammans med dotterbolaget AMF Fonder förvaltar motsvarande drygt 281 miljarder.
Ungefär 150 miljarder av tillgångarna är placerade på aktiemarknaden.
DN 19/5 2006
Konjunkturinstitutets chef Ingemar Hansson är än så länge inte oroad över den senaste veckans börsras eftersom drivkrafterna bakom tillväxten nu är så starka.
- Det finns inga fundamentala nyheter som motiverar 10 procent lägre börskurser, och jag tror heller inte på ett fortsatt börsras, sade KI-chefen i ett anförande på torsdagen, och tillade att det inte är något onormalt att det går upp och ned lite
Han ser ingen risk för överhettning på bostadsmarknaden, utan prisuppgången är en anpassning till en långsiktig jämviktsnivå.
Ingemar Hansson DN 18/5 2006
Med dagens nedgång är Stockholmsbörsen nere på minus 15 procent sedan den 3 april, startdatumet för raset.
"Jag har ingen bra förklaring till rörelserna på börsen. Det är mer skakigt än jag trodde det skulle vara"
Peter Malmqvist, DI 8/6 2006
Börsen i Stockholm föll tungt i går.
Värden för 149 miljarder raderades ut. Sedan nedgången startade i fredags har börsen tappat drygt 300 miljarder kronor i värde. Börsfallet var brett, alla branschindex backade. Även börserna i London, Paris och Frankfurt rasade.
N24 18 maj 2006
Ingen fara för ras
Peter Malmqvist, DI 2006-05-17
Stockholmsbörsen är nere 9 procent sedan början av april. Enligt Nordnets analyschef Peter Malmqvist är det en gränsnivå för att klassa in som korrektion. Skulle börsen falla över 15 procent finns det anledning att prata om ökad osäkerhet och rädsla. Sedan 2 april, då den neråtgående trenden började, är Stockholmsbörsen ned 9 procent.
I april i fjol och i juni för två år sedan var nedgången i samma storleksordning, minus 10 procent. Skulle börsen falla ytterligare blir det alltså ett dystert rekord för de senaste tre åren.
"Skulle börsen falla över 15 procent kan man prata om ett nytt mönster, med en rädsla som inte funnits tidigare", säger Peter Malmqvist.
Men Peter Malmqvist tror inte att det inträffar.
"När jag går igenom nyckeltal som börsvärderingar, vinstutveckling, inflation och räntor kan jag inte hitta något som skulle motivera ett ras. Jag tror börsen stiger cirka 5 procent i år", säger Peter Malmqvist.
Ingen tycks tro att det hittills inträffade utgör början på något stort börsras
Johan Schück, DN 15/5 2006
Dollarns nedgång, som visserligen bröts på måndagen, är sedan länge väntad. Långsiktigt måste dollarkursen ner, om USA ska kunna minska sitt väldiga underskott mot omvärlden. Men anpassningen har länge fördröjts av den starka amerikanska konjunkturen, som gjort att kapital har strömmat in från övriga världen.
IMF acts to avoid markets meltdown
Heather Stewart, economics correspondent, The Observer, May 14, 2006
The International Monetary Fund is in behind-the-scenes talks with the US, China and other major powers to arrange a series of top-level meetings about tackling imbalances in the global economy, as the dollar sell-off reverberates through financial markets.
At the IMF's Spring Meetings last month, its managing director, Rodrigo de Rato, was handed new responsibilities to carry out 'multilateral surveillance', assembling groups of relevant countries to discuss critical issues in the global economy. With the long-predicted dollar bear market sending ripples throughout the world, the IMF is keen to use its powers as soon as possible.
In The Stock Market's DaVinci Code by Jonathan Moreland, the topic of
the Plunge Protection Team
is once again discussed by a somewhat mainstream financial writer
Tim Iacono, 14/3 2006
The US dollar suffered a severe sell-off on Friday, taking it to its
weakest level against a trade-weighted basket of currencies since
October 1997, in a tumble that helped to trigger falls across world
The dollar ended at $1.293 to the euro
Financial Times May 12 2006
The bear market started yesterday
WE SUGGEST: Those convinced should act accordingly – shifting to yen cash
Lombard Street Research (Tim Congdon), Friday, 12 May 2006 17:55:37
Peter Malmqvist bedömer att den nuvarande rekylen fortsätter cirka två veckor till.
Dagens Industri 12/5 2006
Börsen backade kraftigt med omkring 2,7 procent på fredagen. Den senaste månaden har det varit ett par rejäla hack i kurvan och en nedgång totalt på 6-7 procent. -Men jag tror inte att det här är början på det stora raset, säger analyschefen Peter Malmqvist.
Efter flera års kraftiga uppgångar ökar nu oron för en större börsnedgång. Frossan kan orsaka stora rörelser - den 28 april föll börsen med hela 1,9 procent, och även tidigare i april var det kraftiga nedgångar. Med gårdagens fall på 1,6 har börsen backat uppemot 6 procent sedan den 14 april.
Enligt Peter Malmqvist, analyschef på Nordnet, finns det dock inget som pekar på att det skulle vara någon större nedgång i sikte.
- Däremot kan vi konstatera att vi haft en väldigt stark uppgångsfas det senaste året, i accelererande tempo, det har gått bättre och bättre och någonstans blir det en andhämntningspaus, säger han.
Publicerad 12 maj 17:38
In March 1999 as the stock market was in the last phase of a massive speculative bubble, James Glassman and Kevin Hassett of the American Enterprise Institute wrote a provocative column in the Wall Street Journal entitled "Stock prices are still far too low." The arguments in this piece were then reprised in a voluminous article in the September 1999 issue of the Atlantic Monthly and entitled "Dow 36,000." Finally in November 2000 as the stock market was beginning its precipitous descent, they unveiled their book "Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market."
Read more here
As two distinguished financial economists, John Campbell of Harvard and Robert Shiller of Yale, have shown,
returns demonstrate “negative serial correlation”.*
They revert to average valuations.
Martin Wolf, Financial Times 22/3 2006
Valuations are not as crazy as they were in 2000. But they still remain very high.
In the case of the US market, two similar measures of fundamental value – “q”, or the valuation ratio (the ratio of stock market value to the replacement cost of corporate capital), and the cyclically adjusted ratio of prices to earnings – continue to show exceptionally high values by historical standards.
Real returns have recently been extraordinarily high in the following stock markets: Australia, Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Spain, Sweden, Switzerland, the UK and the US.
The fact that every asset price is high strongly suggests that the aggressive post-bubble monetary expansion explains today’s strong equity prices. Safe bonds, risky bonds, equities, gold, property and commodities are all expensive by historical standards. It is as if markets are expecting both inflation and deflation. That is not as irrational as it may seem. When asset prices are out of line with incomes, one of two things is likely: asset prices may collapse (which is deflationary) or incomes may soar (which means inflation). Markets are betting on both extremes.
More by Martin Wolf
Latest at this site
Contrarians At The Gate
One of the challenges of investing is when to move with the crowd and when to move against it. While it's taken as common wisdom that contrarian investing (placing trades that are on the opposite side of the "crowd") is a profitable strategy in the long run, the historical evidence suggests that a persistently contrarian approach - jumping on the contrarian bandwagon, so to speak - isn't always optimal.
John P. Hussman, Ph.D. January 23, 2006
The January issue of Science includes an article on bounded rationality in economic games, and has interesting implications about contrary investing. Economists Colin Camerer and Ernst Fehr explain that "strategies are complements if agents have an incentive to match the strategies of other players. Strategies are substitutes if agents have an incentive to do the opposite of what the other players are doing." (For some reason, we economists like to call normal people "agents"... we tend to call agents "spies").
Selling panic closes Tokyo market
Tokyo's stock exchange closed early for the first time ever on Wednesday, as market bosses attempted to head-off a meltdown after a frantic day's trading.
BBC 18/1 2006
Globaliseringen får mycket svårare konsekvenser än vad nästan alla ekonomer tror,
hävdar professorerna Mats Persson och Marian Radetzki
Johan Schück, DN 8/1 2006
En omvälvande förändring pågår i världen, utan att de akademiska ekonomerna inser det.
Det nya är att låglöneländerna Kina och Indien, med sina stora befolkningar, får tillträde till den globala ekonomin på alla nivåer. De nöjer sig inte längre med att ta över enkla uppgifter, utan konkurrerar snart lika mycket på marknaden för högutbildade.
Jobb har slagits ut även tidigare, till exempel då textilindustrin och skeppsvarven flyttade utomlands. Men då gällde det en strukturomvandling där enskilda branscher kunde ersättas av andra, med mer kvalificerat innehåll.
Att sänka fastställda löner är dock inte det enklaste, vare sig i Sverige eller andra länder. Men det viktigaste är inte de nominella lönerna, utan att reallönerna justeras ner, anser Mats Persson och Marian Radetzki. De tror inte att det räcker med de ofta upprepade recepten om ökad utbildning, mer forskning och utveckling eller förbättrat företagarklimat.
"Från att ha varit ett teorem i forskarkurserna i utrikeshandelsteori har plötsligt faktorprisutjämning, och ett fall i reallönerna i västerlandet, blivit en högst konkret realitet. Och då väljer de flesta nationalekonomer att blunda för teoremet, och/eller att krångla till ytterligare, så att lönenivån inte nödvändigtvis behöver falla - och sedan slår de sig till ro. Varpå sjukskrivningarna, skatterna och riksbankspolitiken fortsätter att dominera våra ledande debattfora och tankesmedjor, också inom den nationalekonomiska professionen."
The factor-price equalization theorem
The fourth major theorem that arises out of the Heckscher-Ohlin model is called the factor-price equalization theorem.
Simply stated the theorem says that when the prices of the output goods are equalized between countries, as countries move to free trade, then the prices of the factors (capital and labor) will also be equalized between countries.
Chapter 7. SAMUELSON’S FACTOR PRICE EQUALIZATION THEOREM
Nästan alla ekonomer underskattar effekterna av globaliseringen, hävdade professorerna Mats Persson och Marian Radetzki i måndagens DN. Deras budskap till kollegerna var tydligt: i stället för att intressera sig för sjukskrivningar, a-kassor och styrräntor borde de oroa sig för vad som händer i den globala ekonomin.
Det vore välgörande om någon eller några tog upp den handske som Radetzki och Persson kastat. Litet talar nämligen för att deras förutsägelser är korrekta.
DN-ledare 14/1 2006
Enligt Persson och Radetzki väntar svåra tider för dem som arbetar i västvärlden, inklusive Sverige, som en följd av att "hundratals miljoner människor i Kina och Indien på kort tid blir tillgängliga för världsmarknaden". I konkurrensen på den globala arbetsmarknaden kan svenska löntagare tvingas välja mellan lägre reallöner och arbetslöshet. Så lyder i sammanfattning domedagsprofetian, som utvecklas i en kommande artikel i tidskriften Ekonomisk Debatt
Ur Marian Radetzkis bok "Klarspråk om arbetslöshet" (SNS Förlag, 1996)
The causes of Germany’s fundamental economic weakness are still there. There are several conventional explanations, none of which is fully convincing.
The consensus among central bankers is that failure to reform labour markets has depressed the trend growth rate, which may now be as little as 1 per cent a year. Switzerland has been a model of a deregulated, low-tax economy. Yet its average growth rate since 1991 has been 1.1 per cent.
Wolfgang Munchau, Financial Times, January 16 2006
»Mycket av det som många med mig trodde var välfärdsstatens kris på 1990-talet visade sig vara något som mer hängde ihop med felvärderad växelkurs och dålig makroregim än med grundläggande strukturfel.«
Anders Borg, citerad i Ordfront, 27/9 2005
“Foreseeing change in the conventional basis of valuation” is the cat’s meow of professional investment management.
This is not a new game. Indeed, none other than John Maynard Keynes described the game beautifully in Chapter 12 of the General Theory:
Paul McCulley, Pimco, January 2006
“It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investors, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing change in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it ‘for keeps,’ but with what the market will value it at, under the influence of mass psychology, three months or a year hence. Moreover, this behaviour is not the outcome of a wrong-headed propensity. It is an inevitable result of an investment market organised along the lines described. For it is not sensible to pay 25 for an investment of which you believe the prospective yield to justify a value of 30, if you also believe that the market will value it at 20 three months hence.”
John Maynard Keynes
20 Triggers for the Coming Collapse
There's an 86% probability that America will collapse into a major economic recession
Richard Rainwater is No. 112 on the Forbes 400 list of America's richest, worth $2.3 billion made in oil and real estate
Fox News 10/1 2006
What could go wrong and, more important, whether the risks of its doing so are adequately priced. They are not.
On a cyclically adjusted basis, the US stock market is as highly valued as in any period of the past 120 years, except the late 1920s and the late 1990s.
Martin Wolf 3/1 2006
The biggest non-economic risks are those relating to security, as Harvard’s Ken Rogoff pointed out in yesterday’s FT.
According to the US Energy Information Administration, the total energy supplied by oil, natural gas and coal will need to grow by about three-fifths between 2002 and 2025.
The economic risks are most evident in today’s “imbalances”.
The principal domestic counterpart to the huge US current account deficit is the financial deficit of US households, currently running at an all-time record of more than 7 per cent of gross domestic product.
As Wynne Godley, the Cambridge economist, has pointed out, with such a financial deficit, the indebtedness of the household sector must rise continuously. And indeed it has, from 92 per cent of disposable income in the first quarter of 1998 to 126 per cent in the third quarter of last year. That rise in indebtedness has pushed household debt services payments to an all-time high of 14 per cent of disposable incomes, despite today’s modest interest rates.
What would happen if house prices ceased to rise or interest rates increased? Households would cut back on their borrowing. If they did, how would a sharp US slowdown be avoided?
The big question, however, is whether these risks are correctly priced. The reason to believe they might not be is our natural tendency to ignore the likelihood of low probability events, however calamitous. Nassim Taleb made this point in his brilliant book, Fooled by Randomness*. In a “Taleb distribution”, catastrophic loss follows a long history of small gains. Lulled into a sense of security, people greatly overestimate the probability of winning in the long run.
After such a long period of stable growth and low inflation, precisely this mistake seems evident in almost every asset market.
On a cyclically adjusted basis, the US stock market is as highly valued as in any period of the past 120 years, except the late 1920s and the late 1990s
I am neither clever enough nor foolhardy enough to make forecasts. It may be more likely than not that this year will be very like 2005.
But it may well not be.
More by Martin Wolf
Nassim Taleb, Fooled by Randomness
Wynne Godley works for Levy Economics Institute
The unaffordability of housing in the early 1980's led to an epic collapse in the housing industry. ... And ... was one of the main factors in the worst economic slump since the Great Depression, which brought the unemployment rate to a peak of 10.8 percent at the end of 1982.
Paul Krugman New York Times January 2, 2006
cit at economistsview
What if Pharaoh had beheaded Joseph for daring to suggest higher taxes during the fat harvest years so people would not starve during the lean ones? Instead, Egypt’s leader cast his lot with the world’s first recorded business cycle theorist and the rest is, well, history.
But are our leaders today preparing for the inevitable downside of the cycle? I wonder.
Kenneth Rogoff, Financial Times, January 2 2006
The writer is professor of economics at Harvard University and former chief economist at the International Monetary Fund
It does not take a prophet to think of things that might go wrong.
The number one risk to global growth over the next few years has to be the global security situation, particularly a terrorist incident involving weapons of mass destruction.
As good as the economic fundamentals are, it is easy to find more down-to-earth vulnerabilities. Top of the list has to be global housing prices – which are not actually all that close to earth any more. With US prices up 60 per cent since 2000 and even higher price inflation in many other countries it is not hard to imagine a collapse, especially in frenzied regional markets such as California – which, after all, still has a larger economy than China’s.
Speaking of China, the leadership there still faces a delicate social, economic and political balancing act to sustain the country’s break-neck development pace.
Then there is energy. Yes, the run-up in oil prices over the past two years seems to have had a relatively modest effect on global growth.
This was actually in line with most academic assessments, which suggest that at least half the perceived damage from pre-1985 oil shocks was due to monetary policy mistakes.
Lastly, the global financial system, while fundamentally a source of strength, is also a source of weakness. The explosion of unregulated hedge funds and the widespread use of derivatives...
Perhaps that complacency is the greatest risk of all.
En komplikation är emellertid att snart sagt alla hinder inom OECD står inför uppgiften att rätta till sina underskott. Sedan oljeprishöjningen 1973 har OPEC-länderna haft ett mycket stort betalningsöverskott. Detta överskott motsvaras av lika stora sammanlagda underskott hos de övriga länderna. OECD-länderna och u-länderna utan olja.
Rolf Englund, Svensk Linje nr 7-8 1976
To listen to the Bears over the past few years, you would have thought we would all be in breadlines and soup kitchens by now.
Why Hasn't "IT" Happened Yet?
Even though the markets, at their lows in March of 2003 had lost over $6 trillion of value, IT still hasn't happened yet.
Aubie Baltin 27/12 2005
So far, all of the ranting about doom and gloom sounds more like the boy who cried wolf than accurate forecasting. But I do believe that when IT happens, things are going to get much worse than anyone can imagine.
If there is any doubt that the world's investment community is suffering from irrational exuberance, just look at the German and French Stock Markets; in the face of 12% unemployment rates and less than 1% growth rates to look forward to unemployment rates can only get worse and yet their Markets are making new five year highs just as Paris is burning after two solid week of Muslim rioting.
The Six Horsemen of the Apocalypse.
by Joe Average, November, 2005.
Fed would like to see a little inflation come back, as well as significantly higher interest rates, before they have to deal with the next recession or slowdown.
It would not be politically correct to state they intend to stop the increase in housing prices.
John Mauldin, 21/10 2005
Back in the dark ages, or around five years ago, Fed rates were at 6.25%.
The Fed would like to get some more "bullets" in their gun, a bullet being a 25 basis point increase in rates. It is just a matter of time until they will need their bullets, and as we saw last time, you may need more than you think.
Third, they are concerned about inflation. But not that much. If they were really concerned, they would have been raising rates at a much faster clip. They would be throwing in a 50 basis point increase very now and then. But in fact, I think they are happy to see a "little" inflation. It gives them cover to keep raising rates for real reasons #1 and #2.
It would not be politically correct to state they intend to stop the increase in housing prices. There would be lynch mobs forming. So "fighting inflation" is a nice cover.
WHY THE FED HAS NO OTHER ALTERNATIVE BUT TO PRINT MONEY!
Why is the US Fed so concerned about deflation that Mr. Bernanke even suggested dropping US dollar bills from a helicopter in order to combat it?
There is one condition under which deflation is a disaster and this is when total credit market debt is high as a percentage of the economy
Marc Faber, October 18, 2005
Governor Ben S. Bernanke, November 21, 2002,
Deflation: Making Sure "It" Doesn't Happen Here
How do we get out of this scenario alive?
By Rolf Englund, Financial Times 4/10 2005
Clyde Prestowitz, like many other commentators, warns us of what could happen: "a decline in the dollar, a rise in interest rates, a slowdown in growth, a rise in unemployment and declining home equity and household wealth - in a word, a recession, if not a depression"
I suspect the stock of outstanding synthetic credit derivatives - $ 1500 b in synthetic CDOs in 2004 v. $300 b or so in 2001, is the only thing than has increased more rapidly than China's reserves over the past few years.
China's reserves are probably above $800b now, up from $165b in 2000.
Brad Setser 18/9 2005
The Nobel Prize in economics in 2002 went to a psychologist, Dr. Daniel Kahneman, who helped pioneer the field of behavioral finance. He basically shows that investors are irrational.
But what gets him a Nobel is he shows that we are predictably irrational.
We continue to make the same mistakes over and over.
John Mauldin, 26/8 2005
What makes for a bubble? Why do things get so out of hand? One of the reasons is simply human behavioral psychology. The longer a trend is in place the more confident we are in our belief that it will continue. Especially if we are participating in the trend to our benefit, we find all sorts of reasons that reinforce our belief that the trend will continue.
The runaway budget deficits are compounded by the persistent and growing imbalance in our trade accounts -- jeopardizing the inflow of foreign funds we have used to finance our debt.
At a private dinner the other evening where many of the men and women who have steered economic and fiscal policy during the past two decades were expressing their alarm about this situation, one speaker summarized the feelings of the group:
"I think it's 1925," he said, "and we're headed for 1929."
David S. Broder, Washington Post 11/9 2005
Even the unflappable Bank for International Settlements (BIS) seems uneasy. In its quarterly report released on Monday September 5th, it gives warning that
“the complexity of some products and the associated risk-management systems, the growing presence of leveraged players in credit markets and the possibility that investment strategies may be less diverse than anticipated make it difficult to predict how credit markets will function under more stressful conditions.”
IMF’s economic counsellor, Raghuram Rajan: While recent changes in the financial system have made it more stable most of the time, they may also have increased the possibility that it will be excessively unstable in really bad times, as well as increasing the chances that really bad times will occur. We will not know how big the risks are, or what to do to mitigate them, until the system has been tested. “The danger,” he writes, “is that before the economy is stress-tested, it will be hit unexpectedly by a perfect storm.”
Buttonwood, The Economist 6/9 2005
Banks now securitise and flog to third parties their plain vanilla mortgages, keeping on their books the more complicated and less liquid assets that are harder to sell. When interest rates spike upwards, asset prices crash or for any other reason lots of investments have to be unwound in a hurry, banks may be looking for liquidity rather than supplying it to others to keep markets orderly.
We recently marked the fifth anniversary of the peak of the great millennial stock market Bubble.
From the March 2000 top to the October 2002 trough, the U.S. stock market gave up more than half of its value, some $9.2 trillion.
Aubie Baltin, august 2005
Five years ago Cisco Systems was the world's biggest company by market capitalization. Its line of business, computer networking, was universally heralded as the industry of the future. Owners of Cisco still devoutly believe this still to be true. Never the less they have lost 75 percent of their investment.
Alan Greenspan, the chairman of the Fed, had worried about a stock market bubble as early as 1995 and had warned against "irrational exuberance" in 1996, and batted around the possibility that there might, indeed, be a stock-market bubble in discussions with his Federal Reserve colleagues as late as 1999. But he was not the man to stick a pin in the bubble.
Indeed, he himself became a vociferous booster of the "New Economy." In a speech he gave only four days before the Nasdaq touched its high, he sounded as if he were working for Merrill Lynch, cheering that "the capital spending boom is still going strong."
By 2006 we should be in recession and the Republican will lose at least one of if not both the houses of Congress and by 2008 the USA will be in depression and Hillary will win in a landslide and become the FDR of the 21st Century.
IMF justerar i dag upp sin tillväxtprognos och talar nu om en global tillväxt detta år på cirka 4,2 procent. Det drivs av den rekordstarka USA-ekonomin på runt 4,3 procent, medan EU kommer ungefär en tredjedel efter på cirka 3,2 procent.
Det är imponerande siffror. Att den amerikanska ekonomin fortsätter att ånga på i rekordfart trots inte mindre än fem räntehöjningar - även om effekten av sådana alltid kommer med fördröjning - visar åter styrkan i den omvandling som skett där.
Ur Carl Bildts veckobrev v14/2000
Vecka 14 bör ha varit i april...
Investors recently had expressed optimism - some disbelief - that the market had stood face to face with record crude-oil prices and barely blinked.
This week, however, the market didn't just blink; it fell to pieces as the Dow Jones Industrial Average shed 325.23 points, or 3.1%.
Blue chips fell each day this week, most of the losses coming Thursday and Friday.
Wall Street Journal 24/6 2005
I am going to write here about a coming depression in general terms. I have some suggestions for how to prepare, (as if anyone can).
There are two types of depressions, hyperinflationary and deflationary.
The end results are the same.
Chris Laird Gold Eagle May 15 2005
First, the main thing the logistics equations suggest is that when the economic system becomes unstable, it is not possible to determine the outcome.
Remember the stock market bubble? With everything that's happened since 2000, it feels like ancient history. But a few pessimists, notably Stephen Roach of Morgan Stanley, argue that we have not yet paid the price for our past excesses.
I've never fully accepted that view. But looking at the housing market, I'm starting to reconsider.
In July 2001, Paul McCulley, an economist at Pimco, the giant bond fund, predicted that the Federal Reserve would simply replace one bubble with another.
Paul Krugman New York Times 27/5 2005
As Boomers Retire, a Debate:
Will Stock Prices Get Crushed?
In speeches and a new book, he is warning that a flood of boomer retirees with trillions of dollars of assets to sell over the next 20 to 40 years threatens to crush stock and bond prices.
Jeremy Siegel, the Wharton School finance professor well-known until now for recommending stocks as a long-term investment.
Wall Street Journal 5/5 2005
Prof. Siegel, 59 years old, was born in November 1945, just before the baby boom started in 1946. As a child, he delighted in charting the number of morning glories in his backyard. Thus began a lifelong passion in explaining and predicting trends, including the stock market. He earned his economics Ph.D. at the Massachusetts Institute of Technology and has taught at Wharton since 1976.
His 1994 book, "Stocks for the Long Run," came just as the bull market was switching into high gear, turning him into a sought-after stock-market guru. Prof. Siegel used historical data going back to 1802 to argue that stocks have consistently been better investments than bonds. The book sold more than 350,000 copies and was translated into eight foreign languages. His reputation got another lift in 2000 when he warned that technology stocks were overpriced just as the tech bubble was about to burst.
In 1935, average 65-year-olds worked until they were 69 and were dead before they were 77. Today, the average worker retires at 62 and can expect to live another 20 years. And the number of retirees will start surging in a few years when the first big chunk of the 1946-64 baby-boom generation retires.
The cumulative gap between what retirees would need to keep 90% of their standard of living and what they'll actually get -- given all those assumptions -- is about $123 trillion between now and 2050, the model suggests. That's the U.S. figure; if the same calculation includes Japan, Europe and other industrialized regions, the gap rises to $347 trillion.
The Future for Investors: Why the Tried and the True Triumphs Over the Bold and the New
I am not a believer in conspiracy theories. But
In all my years in this business, never before have I seen a central bank attempt to spin the debate as America's Federal Reserve has over the past six or seven years.
From the New Paradigm mantra of the late 1990s to today's new theories of the current-account adjustment, the US central bank has led the charge in attempting to rewrite conventional macroeconomics and in making an effort to convince market participants of the wisdom of its revisionist theories
It is a concentrated effort on the part of the Fed to exonerate itself from the Original Sin of failing to address asset bubbles. The result is an ever-deepening moral hazard dilemma that poses grave threats to financial markets.
Stephen Roach - Morgan Stanley Global Economic Team - April 25, 2005
The Great Transition Part I: Giant Popping Sound
Did you hear it last week? I mean the Giant Popping Sound of the largest financial mania in history
another step along the way in the ongoing, seismic readjustment that it taking place in the global social, economic and political order.
M.A. Nystrom 18 April 2005
Did you hear it last week? I mean the Giant Popping Sound of the largest financial mania in history as it continues to deflate, ripping through stocks and markets across the globe.
The Giant Popping Sound last week was actually just another step along the way in the ongoing, seismic readjustment that it taking place in the global social, economic and political order.
Peter Drucker describes it quite bluntly in the introduction to his book, "Post-Capitalist Society:
"Every few hundred years in Western Civilization, there occurs a sharp transformation. . . Within a few short decades, society rearranges itself - its worldview; its basic values; its social and political structure; its arts; its key institutions. Fifty years later, there is a new world, and the people born can't even imagine the world in which their grandparents live and into which their own parents were born.
We are currently living through just such a transformation.
RE: "Vi lever i en brytningstid."
Last bubble was brief, but still irrational
Short duration does not necessarily mean small magnitude.
The size of the late 1990s stock market bubble at its peak still supports a very pessimistic reading of stock market rationality.
By Brad de Long and Konstantin Magin Financial Times 18/4 2005
Brad DeLong is professor of economics at the University of California, Berkeley, and Konstanin Magin is a post-doctoral fellow at the Center of Integrated Nanomechanical Systems
Nasdaq Composite index exploded in late 1999, more than doubling in value in the year up to its late-winter 2000 peak, and the huge bath taken by investors in the Nasdaq from February 2000 to September 2002 as the index lost three-quarters of its value.
It is next to impossible to interpret these events within the context of a rational-expectations model, in which stock prices provide the best possible forecasts of future values. Only those who want their colleagues to doubt their own rationality even try.
By the end of 1996, Alan Greenspan, chairman of the US Federal Reserve, was worrying about the stock market. "How do we know," he asked an audience at the American Enterprise Institute, the Washington think-tank, "when irrational exuberance has unduly escalated asset values?" If you had invested in the Nasdaq while Mr Greenspan was writing his speech, you would have realised a real return from then until now of 8.1 per cent per year.
The answer to the question Mr Greenspan implied in December 1996 - "Are asset prices unduly escalated by irrational exuberance?" - is no.
Today many people - including us - are worried about high levels of bond prices and real estate in the US and elsewhere that seem incompatible with likely scenarios for the world economy. This look back at the bubble of the 1990s is somewhat reassuring: financial markets were not as dumb as we feared then, and so are probably not as dumb as we fear now. Like the late 1990s, any bond or real-estate bubble this decade will probably be of short duration.
However, short duration does not necessarily mean small magnitude. The size of the late 1990s stock market bubble at its peak still supports a very pessimistic reading of stock market rationality.
Paul A. Volcker:
there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will.
Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot.
What really concerns me is that there seems to be so little willingness or capacity to do much about it.
Washington Post April 10 2005
We sit here absorbed in a debate about how to maintain Social Security -- and, more important, Medicare -- when the baby boomers retire. But right now, those same boomers are spending like there's no tomorrow. If we can believe the numbers, personal savings in the United States have practically disappeared
We fill our shops and our garages with goods from abroad, and the competition has been a powerful restraint on our internal prices. It's surely helped keep interest rates exceptionally low despite our vanishing savings and rapid growth.
The difficulty is that this seemingly comfortable pattern can't go on indefinitely.
Stein's Law: If something cannot go on for ever it will stop.
U.S. Trade Deficit: Causes, Magnitude and Consequenses
Rolf Englund May 2001
Richard Clarida in Wall Street Journal
Alan Greenspan stirred up the bond market by opining that the then-low level of bond yields -- in tandem with strong growth, $50 oil
and a succession of Fed rate hikes since June -- represented a "conundrum."
From the TIPS market, we learn that the expected real return over the next 10 years on a riskless investment in government bonds is 1.81%.
Mr. Clarida, professor of economics at Columbia and economic strategist at the Clinton Group, is a former assistant Treasury secretary in the Bush White House.
From the TIPS market, we learn that the expected real return over the next 10 years on a riskless investment in government bonds is 1.81%. This compares with an average of 3.1% over the past eight years, and a level of 2.86% in October 2001 when the economy was still in recession and prospects for economic growth were sure not as buoyant as they are today. Monetary economics and practical experience teach us that the Fed has limited ability to adjust the long-term average real rate. Instead, the expected long-term average real rate is determined in the global capital market.
The real puzzle is why required real rates of return are unusually low in the U.S. and abroad (as confirmed, for example, by the inflation-indexed yield of 1.8% offered in the U.K. government bond market).
The answer is that we are to some extent still in a post-bubble world, in which there is an excess of global saving compared with perceived profitable global investment opportunities.
I believe the U.S. will run a structural current-account deficit of 2% to 3% of GDP even after this adjustment is completed.
The World Bank;
The severity of the coming slowdown will depend on the extent to which foreign investors lose their nerve about buying U.S.-dollar-denominated assets.
"A reduction in the pace at which central banks are accumulating dollars, a weakening in investors' appetite for risk, or a greater-than-anticipated pickup in inflationary pressures could cause interest rates to rise farther than projected, providing a deeper-than-expected slowdown or even a global recession
Wall Street Journal 6/4 2005
In an annual report on the risks confronting developing economies, the bank said the global recovery of the last three years has masked cracks that can't be left unattended for much longer.
The bank said, a new global recession is a possibility.
"A reduction in the pace at which central banks are accumulating dollars, a weakening in investors' appetite for risk, or a greater-than-anticipated pickup in inflationary pressures could cause interest rates to rise farther than projected, providing a deeper-than-expected slowdown or even a global recession," it said.
China - With floating exchange rates you do not need such a big currency reserve
Rolf Englund Financial Times 8/12 2004
– Welcome to the Bubble Economy, 2005.
There’s the housing bubble and the commercial office space bubble. There’s the bond-market bubble and its two progeny, the junk-market bubble and the emerging-market-debt bubble. That nearly $2.50-a-gallon price you see at the pump has all the markings of an oil bubble. And the premiums being paid for all those corporate mergers and acquisitions is a pretty good indication of a stock-market bubble.
Steven Pearlstein 5/4 2005
In fact, nearly every asset market you can think of is showing signs of bubblelike behavior. The reason is pretty clear: The global economy is awash in free cash.
“There is an excess of liquidity around, and it is proving very hard to get rid of it,” said John Makin of the American Enterprise Institute, using the term preferred by economists.
Fed maestro Alan Greenspan has argued that nobody can really identify a financial bubble until after it has popped, which was one reason the Fed did little to try to prick the stock market bubble in the late 1990s. That sophistry was exposed last month when transcripts of Fed meetings from 1999 were released showing that Fed officials, including Greenspan, were quite aware that they were dealing with a bubble of immense proportions.
From January 1980 to January 2005, M3 US grew 420%.
Dow Jones Industrial Average returned 1,098%
Jim Jubak CNBC 1/4 2005
A bubble or mania is a type of investing phenomenon that occurs when investors put too much demand on a stock or sector.
A crash is a sudden, dramatic drop in value of individual shares of stock and the total stock market as a whole. It generally occurs in a very short period of time. It is attributable to the bursting of a bubble.
Rich Scott & Ramsay Simmons March 2005
We will look at three examples of historic speculative bubbles: the Dutch Tulip Mania (1634-1638), the South Sea Bubble (1720), and the Bull Market of the Roaring Twenties (1924-1929).
Five years to the day after the peak of the last global investment bubble, signs that another one may be about to burst could be seen, ironically enough, in the telecommunications industry.
Chuck Prince, chief executive of Citigroup, said: "The possibility of a liquidity bubble around the world concerns me. A very cautionary thing is that it feels like the world is changing and traditional indices may not give a complete picture."
Financial Times 14/3 2005
For much of the last two years, a credit boom has encouraged a flurry of highly-leveraged takeovers and allowed the refinancing of dozens of troubled companies. In Europe and the US, more than $100bn of so-called "high-yield" debt has been sold in the last eight months alone at barely half the premium over bank rates issuers were forced to pay in 2002.
Many of the biggest players in the debt market are reluctant to express their worries in public but privately admit to deep concern. The chief risk officer at a leading Wall Street firm says banks are being forced to lend on aggressive terms to "stay in the game", even though they know trouble is being stored up. "It's like a game of musical chairs. You just hope it is somebody else that gets hurt when the music stops."
The head of one of the biggest commercial lenders in the US describes the amount of leverage on some buy-out deals as "nutty". Much of the wildest lending is being done by hedge funds awash with cash, he says. "Some funds believe they have to invest the money even if it's not a smart investment. They think the people that gave them the money expect them to invest it. But it's madness." He concedes that it is difficult to predict when the market will turn - "it could stay frothy for some time" - but believes the catalyst is likely to be not an increase in interest rates but a large financing transaction that fails to get executed.
One of my deepest concerns is that the current complacency with the trade deficit which stems from the relative stability of the US economy and markets will lead to an event as dramatic as the fall of the NASDAQ.
The US economy is growing handily, thank you very much, and unemployment is slowly beginning to drop. The trade deficit has caused no problems.
John Mauldin 11/3 2005
When the Federal Reserve raises interest rates, trouble usually follows.
In 1987, the stock market crashed. In 1994, Orange County went bankrupt and Mexico devalued its peso, ravaging its economy. In 2000, the Nasdaq Stock Market bubble burst.
Others think it will be different this time.
Wall Street Journal 20/3 2005
Bubbles were once very rare—one every hundred years or so was enough
Nowadays we barely pause between such bouts of insanity.
The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being.
Eric Janszen, Harpers Magazine February 2008
The new economy belonged to finance, insurance, and real estate—FIRE. FIRE is a credit-financed, asset-price-inflation machine organized around one tenet: that the value of one’s assets, which used to fluctuate in response to the business cycle and the financial markets, now goes in only one direction, up, with no more than occasional short-term reversals.
"Eight hundred years of financial folly"
Carmen Reinhart has provided a synopsis of a paper she did with Kenneth Rogoff looking at financial crises over a longer time frame than most analyses, which have limited themselves to recent history
Naked Capitalism, April 20, 2008
Although the new paper is descriptive, the implications are not pretty for the US. Recurrent financial crises are the norm; it seems that countries get drunk regularly on too much capital inflows, go bust, sober up, and fall off the wagon again. In fairness, individual countries aren't necessarily recidivists, but the financiers and policymakers, who ought to know better, instead rationalize that each time that current circumstances differ from the not-too-distant past.
Ed Hyman reminded us that every Fed tightening cycle has brought a financial crisis. Here is his list.
Chad Hudson March 2, 2005
|Fed Tightening Cycle||Financial Crisis|
|1980||First Penn / Latin America|
|1997||Pac Rim / Russia / LTCM|
Let me be clear about what I think Roach is saying but cannot say directly.
He is referring to the "R" word - Recession.
Rates that would be high enough to slow (compress) consumer demand must be high enough to raise borrowing costs. They must be high enough to significantly slow down home equity loans for new consumption.
John Mauldin March 4, 2005
That will mean lower new home construction, a slower real estate market and thus slower increases or even (gasp) a fall in home values, and slower or no increases in consumer spending growth. Reduced home construction and falling ("compression" sounds so much gentler than falling!) consumer spending. In short, a recession.The mirror of the recession of a few years ago, when housing and consumer spending did not stop their growth, and the brunt of the pain fell on business. During the last recession we had falling rates and massive stimulus.Far be it from me to quibble with Roach, who is far smarter than I am, but again, I am not certain that this is the complete picture. I think there is more to it than a falling dollar and interest rates.
The fact is that the US consumer is in pretty good shape on an individual basis, or at least thinks he is. Our national wealth and income are at all time highs. Our ability to service our debt is well within our income. While "savings" are not growing, we are in fact saving in our pensions and homes and stocks, which do not count in the national savings rate. If this were not true, we would not be at all-time highs in wealth and income.
The experience of most people is that their job and income is secure during a recession. There are other reasons for this, which Barry Ritholtz will deal with in next week's Outside the Box.Bottom line, the American consumer is comfortable with taking on more risk than in the past. Thus, he sees real little reason to change his consumer spending habits, or increase his savings.
Whether from rising US rates or simply the end of a cycle, the US will eventually fall into recession. The engine of global growth will sputter, and this time it will be the consumer that is the problem. Whether that is in 2006 or 2007 or even later, it will happen. The business cycle has not been repealed.You can count on a major stock market decline in the next recession. The average decline is 43% in a recession. Can we say Dow 6,000? That means many boomers, who are only a few years from retirement, are going to be very disappointed, to say the least.
Kan man undvika recession i USA när man måste minska importen med 600 miljarder dollar?
Rolf Englund på Nationalekonomiska Föreningen 30/11 2004
Between them, the 10 most valuable companies on the Nasdaq at its peak have lost $1,500bn, or 65 per cent of their value.
FT 6/3 2005
Info about Foreclosures
has moved here
Because US mortgages are “no-recourse” loans (lenders have no recourse to the house’s owner beyond the value of the house), individuals with negative equity have an incentive to default.
Martin Feldstein, FT May 7 2008
Pain of Foreclosures Spreads to the Affluent
This home on Hettiefred Road in Greenwich, Conn., came close to being auctioned off three times as a result of foreclosure actions. But each time, its owner managed to rescue his position.
Info about Foreclosures
has moved here
ACROSS the United States, there were 243,353 foreclosure filings in April alone.
The trend is unmistakable, many millions of American families will be losing their homes before long.
ROBERT J. SHILLER, NYT May 18, 2008
nearly three times the total in the same month just two years ago, according to RealtyTrac, a company that follows the numbers. The trend is unmistakable, and suggests that, without government intervention, many millions of American families will be losing their homes before long.
What would this mean in human terms? Picture a line of moving trucks extending for hundreds of miles: they are taking the furniture of countless families to storage lockers. Picture schoolchildren saying goodbye to their classmates. They aren’t going on vacation: they are being abruptly moved to the other side of town.
Shiller was right about market irrationality then, and he’s still right now
— with two big bubbles that he called correctly under his belt.
The question we should ask, however, is why the economics profession has been so resistant to the obvious.
Paul Krugman December 3, 2010
I remember 1988; 1988 was a friend of mine. By 1988, it was already obvious that equilibrium business cycle theory had failed. Shiller had already circulated his devastating demonstration that asset prices were much too volatile to be explained by fundamentals, and the 1987 market crash had provided an object lesson in panic. Also, by the way, the savings and loan mess was illustrating the problems with inadequate financial regulation.
And nothing happened.
Robert Shiller, the Yale economist who nailed the housing bubble before it burst
"Housing traditionally is not viewed as a great investment.
It takes maintenance, it depreciates, it goes out of style. All of those are problems.
And there's technical progress in housing. So, new ones are better."
These were some of the issues Shiller addressed in his classic book, "Irrational Exuberance."
Business Insider 7 February 2013
The lessons of 1979-82
Paul Krugman July 30, 2009
Here’s what happened: the Fed decided to squeeze inflation out of the system through a monetary contraction. If you believed in Lucas-type rational expectations, this should have caused a rise in unemployment only to the extent that people didn’t realize what the Fed was doing; once the policy shift was clear, inflation should have subsided and the economy should have returned to the natural rate. If you believed in real business cycle theory, the Fed’s policies should have had no real effect at all.
What actually happened was a terrible, three-year slump, which eased only when the Fed relented.
USA:s tidigare centralbankschef Paul Volcker är mest känd för att ha blivit tillsatt av Ronald Reagan för att få ner inflationen, vilket lyckades genom en hård åtramning med recession som följd. Det ryktet kvarlever med märklig kraft. Men Kaletsky menar att det var Paul Volcker som ledde återgången till "demand management".
- In the United States, the return to demand management began as early as the summer of 1982, when a three-year recession and the bankruptcy of the Mexican government persuaded the Fed that its experiment with monetarism had gone too far.
I'm not an economist or a Wall Street strategist. Moreover, I'm not a senior financial industry executive or a central banker. So, based on the criteria the mainstream media uses to qualify its "experts," I guess my opinion doesn't matter very much.
However, there is one fellow who is widely viewed as an expert and who has proven that he actually understands economic reality. His name is Professor Robert Shiller
Financial Armageddon 11/4 2010
Check out the chart below, from Professor Shiller's web site. The blue line is the cyclically adjusted PE ratio for the last 130 years.
Financial bubbles are like epidemics
Robert J. Shiller, July/August 2008 Atlantic Monthly
America, from its inception, was a speculation,” begins the historian Aaron M. Sakolski’s 1932 classic, The Great American Land Bubble. George Washington himself was a land speculator, Sakolski notes, and by Washington’s time it was widely perceived that America would eventually be populated much more densely by vast numbers of immigrants, leading many investors to dream of rapidly rising land prices. Waves of speculative mania swept towns, cities, and regions from the 18th century onward, even along the vast and empty frontier. Up, up went the prices. And then, inevitably, down.
Sakolski was seeking to make sense of the biggest national housing bust in American history—at least so far. It began in 1926 and spread to the stock market in 1929, triggering a severe banking crisis that in turn affected almost all types of businesses. Home prices fell a total of 30 percent from 1925 to 1933, and the unemployment rate reached 25 percent at the depth of the Great Depression.
Bubbles are a lot like epidemics. Every disease has a transmission rate (the rate at which it spreads from person to person) and a removal rate (the rate at which those individuals recover from or succumb to the illness and so are no longer contagious). If the transmission rate exceeds the removal rate by a certain amount, an epidemic begins.
Irrational Exuberance is a March 2000 book written by Yale University professor Robert Shiller, named after Alan Greenspan's "irrational exuberance" quote. Published at the height of the dot-com boom, it put forth several arguments demonstrating how the stock markets were overvalued at the time.
Congress appears eager to help more than a million homeowners facing foreclosure
Robert Shiller, a Yale economist who has long argued there was a bubble in home prices, thinks the plan will do little to stop the slide in housing prices.
CNN 22/4 2008
The runup earlier this decade, fed by low interest rates from the Federal Reserve and lax underwriting standards by lenders, created a bubble that hasn't yet completely deflated. Shiller notes that prices shot up 85% when adjusted for inflation from 1997 through mid-2006 and have fallen only about 15% since then.
More than 10m would have negative equity in their homes and
more than 2m foreclosures would take place over the next two years.
Lawrence Summers, Financial Times February 24 2008
Info about Foreclosures
has moved here
Not even Alan Greenspan
One great puzzle about the recent housing bubble is why even most experts didn’t recognize the bubble as it was forming.
Robert J. Shiller, New York Times March 2, 2008
Two recent interviews, one with Yale University economist Robert Shiller and the other with National Association of Realtors Chief Economist David Lereah, paint a wildly divergent picture regarding the state of the nation's housing market.
Tim Iacono 5/3 2007
Equities look overvalued,
but where is the turning point?
The cyclically adjusted measure follows the method of Professor Robert Shiller of Yale university: it is the ratio of stock prices to the moving average of the previous 10 years’ earnings, deflated by the consumer price index.
Martin Wolf, Financial Times, March 7, 2007
If a prophet is only as good as his last prophecy, then you'd be wise to listen to Robert Shiller.
The stock market crash that followed was no surprise to Shiller and proved that he had called it right.
Now he's warning that a similar collapse may soon apply to the real estate market.
ABC News 24/3 2006
Shiller said that the same psychology that applies to stock market investors now drives the real estate boom. He called it irrational exuberance, coincidentally the title of his 2000 book about the stock market. Shiller argued that human emotion, not strategic economic factors, drives prices and property buying.
Just because prices are more reasonable than they were doesn't mean they're reasonable.
The preeminent teacher of that lesson is Robert Shiller, a Yale professor with a strong record of thinking independently and being right. His book Irrational Exuberance updated
Fortune 26/12 2005
"The trailing P/E ratio for the S&P composite is still around 25, vs. a long-term average of 15."
The commonly cited figures—a current market multiple of 17, vs. a historical average of 15.2—are based on the previous 12 months' earnings. But, as Shiller points out, that's foolish: "Twelve months is kind of short, only a fraction of one business cycle."
This site offers updated information relating to the book Irrational Exuberance by Robert J. Shiller
Mr Greenspan was not certain that the equity market was indeed a bubble. But by September, he was explicitly referring to it in such terms: "I recognise that there is a stock market bubble problem at this point," he said at the September 24, 1996 meeting - the day the Dow closed at 5874.03.
Three years ago, at the height of the stock bubble, Paul Volcker, Mr Greenspan's predecessor as Fed chairman, issued a famous warning: that the world economy was dependent on the US economy, which was dependent on the stock market, which was dependent on fifty stocks, half of which had never reported any earnings. (FT.com site; Jul 19, 2002)
A stock market bubble exists when the value of stocks
has more impact on the economy than the economy has on the value of stocks
John Makin November, 2000
The root cause of this recession
was the bursting of one of the biggest financial bubbles in history.
It is wishful thinking to believe that such a binge can be followed by one of the mildest recessions in historyand a resumption of rapid growth.
The Economist January 2002
Book: Bubbles and How To Survive Them
A non-technical guide to the economics of boom and bust
01 October 2004, John Calverley, IEA (Timbros storasyster)
Lessons from the Fed’s Mistake of 1932
This week sees the 80th birthday of a fateful Fed decision in 1932, a decision which some scholars believe led inexorably to the bank failures of early 1933, and the suspension of US membership of the Gold Standard.
That decision was to end the only period of aggressive quantitative easing which was attempted by the Fed during the worst period of the Great Depression between 1929 and 1933.
Gavyn Davies, Financial Times 29 July 2012
That is a point which the ECB, in particular, should reflect upon this week.
Most people think of the Great Depression as originating in the stock market crash of 1929.
But Nobel Prize-winning economist Vernon Smith's research indicates that the 1929 crash was itself
the result of an earlier collapse in the boom housing market during the Roaring '20s.
The Bellingham Herald, 5/6 2009
Smith, professor of economics and law at Chapman University, won his Nobel in 2002.
He spoke Friday, June 5, before a standing-room-only crowd in Fraser Hall at Western Washington University.
"We still have shoes to drop out there."
Examples: Large numbers of adjustable-rate mortgages will reset at higher rates in the next couple of years, putting more households at risk of foreclosure and piling more losses on mortgage lenders. And sharp drops in consumer spending have yet to play themselves out in the commercial real estate markets. Increasing numbers of commercial loans to retailers are likely to go sour in the months ahead.
"That has yet to hit the banking sector," Smith said.
The housing boom and bust that touched off the economic chain reaction was at least partly due to federal policies that made it easier for people to borrow money to buy homes. Politicians from both parties pushed those policies because they were popular, Smith said.
Finanskrisen gjorde 1930 års nedgång till depression
En allvarlig lågkonjunktur i USA utvecklades till Den stora depressionen genom att banksystemet inte fungerade.
Förluster och bankrusningar medförde att 9 000 banker gick omkull.
Detta var en medveten politik från finansminister Mellon.
Danne Nordling 27/3 2009
We should not try to avoid 1929. We have already failed.
The best we can do now is to avoid 1930, 1931 and 1932
What about the €200bn European Union stimulus package that was agreed in a watered-down form by EU leaders on Friday?
Unfortunately, it is a public relations exercise first and foremost, designed to dupe people into believing that the EU is finally doing something.
Wolfgang Münchau, Financial Times, December 14 2008
"This is the third time in 100 years that support for taken-for-granted economic ideas has crumbled.
The Great Depression discredited the radical laissez-faire doctrines of the Coolidge era.
Stagflation in the 1970s and early '80s undermined New Deal ideas and called forth a rebirth of radical free-market notions.
What's becoming the Panic of 2008 will mean an end to the latest Capital Rules era."
The Road To Revulsion
"There is nothing in the situation to be disturbed about."
-Secretary of the Treasury Andrew Mellon, Feb 1930
cit. by James Montier June 16 2008
We have long been proponents of the Kindleberger/Minsky framework for analysing bubbles (see Chapters 38 and 39 of Behavioural Investing for all the details). Essentially this model breaks a bubble's rise and fall into five phases as shown below.
Displacement - The birth of a boom
Credit creation - The nurturing of a bubble
Euphoria - Everyone starts to buy into the new era.
I see nothing in the present situation that is either menacing or warrants pessimism. . . . I have every confidence that there will be a revival of activity in the spring and that during the coming year this country could make steady progress.
Andrew W. Mellon, U.S. Secretary of the Treasury, December 31, 1929
John Makin, False Dawn, May 30, 2008
The bursting of every bubble is followed by statements suggesting that the worst is over and that the real economy will be unharmed. The weeks since mid-March have been such a period in the United States. The underlying problem--a bust in the residential real-estate market--has, however, grown worse, with peak-to-trough estimates of the drop in home prices having gone from 20 to 30 percent in the span of just two months. Meanwhile, the attendant damage to the housing sector and to the balance sheets tied to it has grown worse and spread beyond the subprime subsector.
Of the 130 million U.S. housing units, 18.5 million--almost 15 percent--are empty. This bodes ill for the outlook for homebuilding; house prices; and the balance sheets of commercial banks, investment banks, and American households. In June, Congress will pass the Foreclosure Prevention Act of 2008. This is a symbolic measure that will not become effective until October 1 and, given its cumbersome structure, will provide virtually no relief to the households facing foreclosure that it is designed to help.
As travellers, we all love the euro. It made my life marginally easier.
But let's be serious.
A minor convenience is nothing set against the fate of nations.
It was the perverse workings of the fixed exchange Gold Standard that turned the US slump into a global depression in 1931.
(See 'Fetters of Gold' by Berkeley’s Barry Eichengreen. A brilliant book.)
Ambrose Evans-Pritchard 8 May 2008
Det var inte inflationen - det var Depressionen
Germany "the new democracy survived serious threats to its existence in the early postwar years and
found a semblance of stability from 1924 to 1928,
only to be submerged by the collapse of the economy after the Wall Street crash of 1929."
Ian Kershaw, New York Times, February 3, 2008
This huge monetary expansion perpetrated by the Federal Reserve has contributed to the biggest speculation in every conceivable asset category and has been accompanied by unprecedented hubris, greed and outright fraud.
This will be punished. The punishment is likely to fit the crime.
Ian Gordon, Economic Forecaster and Interpreter of Kondratieff Cycle
Crisis may make 1929 look a 'walk in the park', Ambrose Evans-Pritchard
In the end, the Fed can always stop a deflationary spiral.
As Bernanke said to Milton Freidman on his 90th birthday, the Fed will not repeat the monetary crunch it allowed to happen 1930-32.
"Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
Ambrose Evans-Pritchard on 14 Dec 2007
The Forgotten Man: A New History of the Great Depression, by Amity Shlaes.
This new book is the finest history of the Great Depression ever written.
Steven F. Hayward, National Review, July 30, 2007
Farewell to the Mark
Amity Shlaes, member of The Wall Street Journal's editorial board.
Wall Street Journal, December 31, 1998
We are reminded of the 1929 crash.
Countless studies have blamed the monetary authorities for having stood by as the world economy slid into the Great Depression.
Charles Wyplosz, Eurointelligence 23.09.2007
Amazing similarity between the last month or so of the rise in Japan that ended on Dec. 29, 1989,
and the current advance in the Dow Jones
Bill Fleckenstein, CNBC 7/5 2007
TOO MUCH LIKE 1929
The final sequence of events that will lead to the implosion of the global economy
Bernard Ber, April 27, 2007
The Crash of 1929
You are Chairman Bernanke. What do you do?
A conscientious fellow, you try first to do no harm. You have made a lifelong study of deflation and the Great Depression. Of all the mistakes you could make at the helm of the Federal Open Market Committee, there is one you really want to avoid:
You do not want to go down in history as the scholar of the Great Depression who inadvertently steered the highly leveraged U.S. economy into Great Depression Part II.
You will be slow to tighten monetary policy when home prices are deflating, let the cpi be what it may.
James Grant, 9/6 2006
Ben S. Bernanke
Essays on the Great Depression
Princeton University Press
May 10, 2000
Ben Bernanke has gathered together his essays on why the Great Depression was so devastating. This broad view shows us that while the Great Depression was an unparalleled disaster, some economies pulled up faster than others, and some made an opportunity out of it. By comparing and contrasting the economic strategies and statistics of the world's nations as they struggled to survive economically, the fundamental lessons of macroeconomics stand out in bold relief against a background of immense human suffering. The essays in this volume present a uniquely coherent view of the economic causes and worldwide propagation of the depression.
He had presided over the greatest prosperity in U.S. history when Calvin Coolidge announced from the Black Hills of South Dakota, “I do not choose to run for president in 1928.” In March 1929, Coolidge turned the presidency over to Herbert Hoover, the commerce secretary he derided as “The Wonder Boy.” Six months later came the Wall Street crash and Great Depression with which Hoover’s name is forever associated.
Coolidge was enjoying retirement.
Is Alan Greenspan the Calvin Coolidge of our time?
Patrick J. Buchanan, february 2006
Greenspan's most vehement critics are convinced he has made a fundamental error as a monetary economist.
The hairshirt economists vs. the cheerleaders for growth-is-good
Business Week 28/6 2005
The Bursting Asset Bubbles - Wall Street, October 1929
Sam Vaknin, Ph.D. - 4/24/2005
One of the fascinating things about the extended media commentary on the 75th anniversary of the Wall Street Crash is that no one has a definitive answer as to the cause.
The interpretation that I find most interesting is the notion that bubbles and crashes tend to accompany the rise and fall of financial hegemonies. John Plender, FT 31/10 2004
Wall Street Crash: 75 years on
Markets may rise and markets may fall, but there was only ever one Wall Street Crash.
BBC 27/10 2004
In October 1929, Professor Irving Fisher of Yale University, a great guru of the markets, earned immortality with the pronouncement:
"stock prices have reached what looks like a permanently high plateau."
BBC 27/10 2004
Over a six day period, the high-tech NASDAQ stock index in the U.S. lost 17% of its value, dropping by November 13 2000 to below 2,900, its lowest value since November 3 1999.
In paper terms, it represented an evaporation of more than $1.7 trillion in share values since the all-time high of 5,123 in March 2000, or a drop of 44.3% in 8 months.
Market Plunges and Fed steps in again
1929: Wall Street Collapses
Near-panic seized stockE HTML PUBLIC "-//SoftQuad//DTD HTML 3.2 + extensions for HoTMetaL PRO 3.0(U) 19961211//EN" "hmpro3.dtd"> traders today in the wildest session Wall Street has ever seen.
International Herald Tribune Oct. 24, 1929
Market crashes through
BBC 16 July, 2002
Gerhard Stenberg, chef för Handelsbankens
kapitalförvaltning i Göteborg, hoppar av i protest mot
börshysterin efter nästan 30 års arbete i aktiemarknaden.
Han tror att en börskrasch är oundviklig och vill inte ta ansvar för att rekommendera placeringar i aktier för närvarande. "Kurserna är på tok för höga och måste ned med minst 30 procent.
Vi står inför ett kraftigt fall i börskurserna i hela världen. Det kommer att bli en rejäl smäll".
Vad kan man lära av
Rolf Englund i Smedjan nr 4/1992
|Stock Market||World Economy|
|Hong Kong Hang Seng 1993-1998||WE 1974-2002|
|Dow Jones 1970-1997|
|Dow Jones 1994-1999|
|Dow Jones 1991-2001|
|S&P p/e 1930-2000|
|FTSE dividend yields och P/E-ratios 1987-1999|
|Tokyo Nikkei 1986-1995|
|Frankfurt-börsen DAX 1989-1997|
roulett med skuldbördan
(Världsekonomin och aktiebörserna)
See also New Era?
Over two days this week, Gerrit Zalm, the Netherlands finance minister, and Nicolas Sarkozy, his French colleague, have set up a live experiment that will assure full employment for future graduate students of comparative economics.
Financial Times editorial 23/9 2004
The intriguing question facing eurozone policy makers is whether the two ministers, with their very different budgetary prescriptions for 2005, can boost employment more broadly in their economies while bringing their deficits below the limit of 3 per cent of gross domestic product set by the EU's stability and growth pact.
The policies could not be more different. Mr Zalm, with determined rigour, has brushed aside street protests to present a hair-shirt, supply-side budget which combines belt-tightening for consumers and corporate tax breaks for business. He hopes the deficit will fall to 2.6 per cent next year from 3 per cent in 2004 and structural reforms will attract investment, creating growth and jobs in the medium term.
Mr Sarkozy's budget, by contrast, appears largely pain-free. Buoyed by a recovery in government revenues, the French finance minister forecast that the public finances next year would show a deficit of 2.9 per cent- meeting EU rules for the first time since 2001. An International Monetary Fund study, released last night, suggested that fiscal policy in the eurozone has weakened since the introduction of the single currency in 1999.
Against this background, it is difficult not to sympathise with Jean-Claude Trichet, the European Central Bank president, who warned again yesterday of the need for further budget consolidation and the dangers of loosening the stability pact's sanctions against excessive deficits.
What is the relationship between Weimar Germany and Wall St. of the late 90s?
On the surface, what could be more different?
Stock market booms are the best of times while hyperinflation is a nightmare.
Robert Blumen, Ludwig von Mises Institute
During the year ending in July, real disposable income grew at a 1.8 percent rate while real consumer spending grew at a 3.5 percent rate.
John Makin, AEI
Hans Tson Söderström: Tur att vi har vår flytande krona
Det är inte särskilt höga odds på tipset att efter det amerikanska presidentvalet följer en kraftig finanspolitisk åtstramning. I värsta fall blir den förknippad med stigande räntor och en fallande dollar. I så fall uppstår en svårbermästrad situation för ECB och EU:s finansministrar
Kolumn i DI 10/9 2004
Stand by for a pensions bail-out
A re-run of the S & L disaster
John Plender Financial Times 13/9 2004
In the light of United Airlines' proposal to stop contributing to its pension funds, comparisons are increasingly being made between today's overstretched US pension fund system and the savings and loans crisis of the 1980s. Not without justice, although the problem in pensions will be more of a slow-burn affair since pension funds, unlike S & Ls, are unleveraged.
The nub of it is that private defined benefit schemes in the US have a $400bn funding gap. Meantime, the Pensions Benefit Guarantee Corporation (PBGC), the agency that insures private pensions for 44m workers and retirees, had an $11.2bn deficit at the end of 2003. It also has $85bn in exposure to companies with junk bond ratings, which implies a high risk of default.
The position can only worsen given the degree of moral hazard built into the system, whereby the premiums paid to the PBGC do not adequately reflect the risks. One measure of this, highlighted by Bradley Belt, executive director of the PBGC, is the fantastic bargain United Airlines has enjoyed at the insurer's expense. It has paid little more than $50m in premiums since the agency's inception in 1974. Yet if its pension plans terminate, the PBGC would be hit by a claim of $6.4bn.
The agency is thus in a position not unlike that of the International Monetary Fund. Its mere existence encourages morally hazardous behaviour and everyone expects it to act as a financier of last resort for the whole system. Yet it lacks the resources to do more than a marginal firefighting job in the event of a systemic crisis. And the potential for systemic crisis increases all the time because the weaker players in the system are encouraged, as in the S & L fiasco, to speculate their way out of trouble.
"Risk för global kris"
Morgan Stanleys chefsekonom varnar för sammanbrott i världsekonomin
DN 9/9 2004 Reporter Johan Schück
När andra talar om ljusare tider, så menar han /Stephen Roach/ att skenet bedrar och att problemen bara skjuts på framtiden.
- De amerikanska konsumenterna håller igång ekonomin genom att skuldsätta sig allt djupare, uppmuntrde av skattesänkningar och rekordlåga räntor.
Räntorna är konstlat låga och måste upp till mera normala nivåer.
Numera är det inte privat kapital, utan pengar från centralbankerna i Ostasien /läs: Kina och Japan/ som täcker det amerikanska /bytesbalans/underskottet.
Roach tar tillbaka sitt råd från tidigare i år om en kraftig amerikansk räntehöjning: ekonomin är inte längre tillräckligt stark, det rätta tillfället har gått förlorat, menar han.
"USA har ryckt åt sig ett stort försprång och har världens mest framgångsrika ekonomi"
Klas Eklund på SvD:s ledarsida 2000-08-11
The risks ahead for the world economy
Fred Bergsten The Economist print edition Sep 9th 2004
Fred Bergsten is director of the Institute for International Economics in Washington. His book, “The United States and the World Economy: Foreign Economic Policy for the Next Administration” is forthcoming.
Very Important Article
Bubbles are getting blown out of all proportion
The financial press is full of grim prognostications of economic damnation postponed but not avoided.
The monetary moralists preaching inevitable doom for the US economy because the Fed dared to stabilise the economy after the bubble's collapse are simply wrong
Adam Posen Financial Times 8/9 2004
The writer is a senior fellow at the Institute for International Economics
Chart sources: Author’s calculations from Adam Posen ‘It Takes More Than A Bubble to Become Japan’ (Reserve Bank of Australia 2003)
Like the hellfire preachers of yesterday, today's economic pundits are taking a stern line on excess. Economies that enjoyed asset price booms, notably the US, are damned to pay for their wanton ways. Central banks that attempted to offset the negative effects of a bubble's burst, notably the US Federal Reserve, are merely postponing the day of judgment and, if anything, compounding their sin by blowing up other bubbles - in housing, or in government bonds, or both. The financial press is full of grim prognostications of economic damnation postponed but not avoided.
This is all pernicious (pernicious \pur-NISH-us\, adjective:
Highly injurious; deadly; destructive; exceedingly harmful/nonsense). Pernicious because it discourages central banks from responsibly doing their job of stabilising the real economy, as the Fed correctly did in 2001-03.
Nonsense because there is no evidence to support these claims. Bubbles have only rarely caused the lasting damage that these commentators assert as unavoidable destiny; when they have, it has been because central banks have failed to respond to the bubbles' aftermath.
The outdated but apparently still widely attractive monetarist image of liquidity as toothpaste - if you squeeze the tube in one place, it bulges somewhere else - does not stand up empirically.
This cross-national evidence is consistent with economic historians' assessments of the US experience. Among the many booms, panics and busts in the 19th and 20th centuries, only those accompanied by banking problems had negative consequences lasting beyond a few quarters. Bubbles can pop with limited macroeconomic impact, and usually do.
As for the second contention, the moral hazard story of “the Greenspan put” - in which investors believe the Fed will step in to protect them if the market crashes, and so act recklessly - is a cute story, but that is all it is. Investors do not decide whether or not to risk their money based on whether the central bank cut rates in the aftermath of the last bubble.
In fact the evidence is that, if anything, investors have less risk tolerance for extended periods after bubbles, whether or not the central bank cuts rates. Only two of the 15 big industrial economies (Finland and Italy) have had recurring bubbles since 1970 - all the rest had to wait through a long period of fading memories and turnover in financial services personnel before a second asset price boom emerged (if one ever did).
Deflation did not emerge in Japan until the end of 1997, many years after the bubble had burst. It was a consequence of years of failure by the Bank of Japan to respond adequately to slowing growth, the Ministry of Finance's decision to raise taxes in a recession and the corporate sector's inability to face up to bad loans, a problem that was allowed to grow to vast proportions. After the bubble burst, the BoJ's unwillingness to stimulate the economy unless government and business “got the rot out” served only to encourage more wasteful government spending, greater declines in corporate and bank capital and constant renewal of bad loans.
Thankfully, the Fed, as its aggressive rate cuts in 2001-03 show, has learnt these lessons. The monetary moralists preaching inevitable doom for the US economy because the Fed dared to stabilise the economy after the bubble's collapse are simply wrong.
All reasonable people agree that today, with rising inflation, burgeoning Federal deficits and the possibility of a stagflationary oil shock, interest rates should be on an upward path in the US. But the Fed is right to wait for the data to come in to determine the pace of that increase.
America on the comfortable path
These two facts - the rest of the world's surplus output and the US goal of full employment - explain the global macro-economic picture
Martin Wolf, Financial Times, August 18 2004
From 1996 to 2003 US real demand has grown faster than real gross domestic product in every year (see chart). When demand has grown slowly, as in 2001, output has grown even more slowly. Thus, the US authorities had to generate faster growth of demand than of potential output, with the difference spilling over on to the rest of the world via growing current account deficits.
Was the fiscal slide inevitable? No, but it could have been avoided only if the US had been prepared to accept a slump. Yet no US administration would have tolerated this outcome.
For the same reason, the desire of both presidential candidates to reduce the fiscal deficit in coming years is meaningless without change in the external position. The point is powerfully made in the latest in a series of papers authored by Wynne Godley and associates for the Levy Economics Institute and the Cambridge Endowment for Research in Finance. click here
Let us be blunt about it. The US is now on the comfortable path to ruin. It is being driven along a road of ever rising deficits and debt, both external and fiscal, that risk destroying the country's credit and the global role of its currency. It is also, not coincidentally, likely to generate an unmanageable increase in US protectionism.
Worse, the longer the process continues, the bigger the ultimate shock to the dollar and levels of domestic real spending will have to be. Unless trends change, 10 years from now the US will have fiscal debt and external liabilities that are both over 100 per cent of GDP. It will have lost control over its economic fate.
What cannot last will not do so, as the late Herb Stein famously remarked.
The essence of the needed changes is quite clear: a further substantial devaluation of the dollar, together with a sizeable rise in domestic demand, relative to potential output, in almost all other important economies of the world.
See also FT leader: Dollar stands
on a precipice
Financial Times; Jan 02, 2003
As the late Herbert Stein, former chairman of the US council of economic advisers, once said:
"If something cannot go on forever, it will stop."
The combination of an ever-rising US current account deficit with a strong dollar must cease. Indeed, it already is doing so. The currency weakened in 2002. It is rather likely to weaken further in 2003. The present course of the US economy is unsustainable.
Net US liabilities to the rest of the world are some 25 per cent of gross domestic product - in the neighbourhood of $2,500bn (£1,562bn). In the first three quarters of 2002, the current account deficit ran at close to five per cent of GDP. As recently as 1997, however, the deficit was only 1.5 per cent of GDP. It is bigger this year than two years ago, despite last year's economic slowdown. Since the beginning of 1997, trend growth of exports of goods and services, at constant prices, has been 2.2 per cent a year, of GDP 3 per cent and of imports 7.4 per cent. Even under quite conservative assumptions, the current account deficit could, on current trends, be over 7 per cent of GDP by 2007. By that year, US net external liabilities would, at current exchange rates, be close to 65 per cent of GDP. If the dollar is to remain strong, despite these deficits, the rest of the world must accumulate net claims on the US economy at $500bn a year, and rising, for the indefinite future. This is hard to imagine.
Already, there has been a steep decline in net private foreign purchases of US assets, from $978bn in 2000 to an annual rate of just $560bn in the first three quarters of 2002. Net foreign direct investment has collapsed, from $308bn in 2000 to an annualised $14bn in 2002. This decline in private foreign purchases of US assets has been offset by a big increase in foreign government net purchases of US
Greenspan is running out of buttons to push
Peter Hartcher, Financial Times, August 10 2004
The writer is international editor at The Sydney Morning Herald and a visiting fellow at the Lowy Institute for International Policy. He is author of a forthcoming book on Alan Greenspan and Wall Street, entitled Bubble Man
The US economy has grown reasonably fast since the
second half of 2003 and the general expectation seems to be that satisfactory
growth will continue more or less indefinitely.
The expansion may, indeed, continue through 2004 and for some time beyond. But... it will certainly not happen without a cut in domestic absorption of goods and services by the US which would impart a deflationary impulse to the rest of the world
Wynne Godley et al, The Levy Economics Institute, July 2004
The US economy has grown reasonably fast since the second half of 2003 and the general expectation seems to be that satisfactory growth will continue more or less indefinitely.
But with the government and external deficits both so large and the private sector so heavily indebted, satisfactory growth in the medium term cannot be achieved without a large, sustained and discontinuous increase in net export demand. It is doubtful whether this will happen spontaneously and it certainly will not happen without a cut in domestic absorption of goods and services by the US which would impart a deflationary impulse to the rest of the world.
Start with some of the elements in the global macroeconomic picture.
The US current account deficit has risen from about 1.5 per cent of gross domestic product to over 5 per cent today. During the recent US slowdown, the current account deficit has, remarkably, continued to rise. This is the opposite of what one would normally expect and of experience in the early 1990s.
A net creditor for most of the 20th century, the US has seen its net
liability position move from a rough balance in 1988 to minus 24 per cent last
Yet, despite a current account deficit of 4.9 per cent of GDP in 2003, net liabilities to the rest of the world fell as a share of GDP. The tumbling dollar reduced net liabilities by more than the current account deficit increased them.
On average, according to the International Monetary Fund's latest World Economic Outlook, real domestic demand will have grown at 3.8 per cent a year in the US between 1996 and 2005, while real output will have grown at 3.5 per cent.
The UK has an even bigger discrepancy, at half a percentage point a year. Meanwhile, the eurozone's demand will have grown at a pitiable rate of 1.8 per cent, with output growth of only 2 per cent, and Japan's demand will have grown at a still lower 1.2 per cent, with output growth at 1.5 per cent.
In 2004, according to the Organisation for Economic Co-operation and
Development, the Anglosphere (the US, UK and Australia, but not Canada in this
case) will run a combined current account deficit of $636bn, with the US
deficit alone accounting for $555bn.
Asia's current account surplus was recorded at $322bn.
The Asset Economy
The income-driven impetus of yesteryear has increasingly given way to asset-driven wealth effects. For consumers, businesses, policymakers, and investors, the asset economy turns many of the old macro rules inside out
Stephen Roach Morgan Stanley 21/6 2004
The equity bubble of the late 1990s was a transforming event in many ways for the US economy. But there is one lasting implication that stands out above all - an important transition in the character of the American growth dynamic.
The income-driven impetus of yesteryear has increasingly given way to asset-driven wealth effects. For consumers, businesses, policymakers, and investors, the asset eco nomy turns many of the old macro rules inside out. In the end, it could well pose the most profound challenge of all to sustainable recovery in the United States.
The threat of extreme events
Kenneth Rogoff, formerly chief economist of the International Monetary Fund believes there is a high risk of a housing slump in the US
Samuel Brittan Financial Times June 18 2004
Kenneth Rogoff, formerly chief economist of the International Monetary Fund, in the May issue of the Central Banker puts his finger on a weakness of official assurances by saying "people tend to resist thinking about low probability extreme events".
There are also dangers that are highly likely, but the timing of which is uncertain.
Mr Rogoff cites the US current account deficit of 5 per cent of gross domestic product, which he, like many others, regards as unsustainable. Suppose, however, this suddenly reverts to balance. For instance, a steep collapse in US house prices could lead to a sharp rise in private savings. Indeed, he believes there is a high risk of a housing slump in the US even though the boom there has not gone as far there as it has in the UK or Australia.
A future correction would need to be accompanied, according to the former IMF economic director, by a drop in the the dollar of over 40 per cent in the short run and in the long run of about 12-14 per cent.
Short-term real interest rates in the Group of Seven countries are still negative. In the US, they are minus 1 per cent. In core euro countries, they are around zero. This compares with a normal historical level of, say, 2 or 3 per cent.
There is also a gap of over 2½ percentage points between prevailing international nominal short-term rates and the rates on 10-year government bonds (an upwardly sloping yield curve). Monetary policy is, in the awful US financial jargon, "behind the curve".
I continue to believe that our stock market is the financial equivalent of an 8.0-plus earthquake waiting to happen.
Financial insanity is rampant. Folks are speculating in houses, with many having more than one real estate investment due to the financing that’s available and the belief that real estate is now bulletproof.
Bill Fleckenstein, CNBC 10/1 2005
The fact that Google could have a $50 billion valuation is one sign of the times.
I don’t believe that there has been a moment in time in the last 50 years where the stock market has been more lopsidedly tilted toward all risk and no reward.
Thinking About Low Probability
Marshall Auerback June 22, 2004
Americas vaunted economic flexibility is a mirage: it is fundamentally a product of financial engineering and endless debt creation, which has persistently created the image of a dynamic economy, successfully withstanding one shock after another, from the fall out of the Asian financial crisis of the late 1990s or the devastating terrorist attacks of September 11, 2001.
The financial markets have been hit by shocks from the Middle East over the past few weeks. But the real risk to world markets is that the speculative bubbles and "carry trades" that have developed as a consequence of American monetary policy over the past year will unravel as the US Federal Reserve moves to increase interest rates.
During the Nasdaq bubble of 1998-2000, US interest rates ranged between 4 per cent and 6 per cent. Since June 2003, they have stood at 1 per cent. The advent of such low money market yields has unleashed speculative capital flows to asset classes that played no role in the technology bubble of four years ago.
"Vi tror att dollarn kommer att tappa i värde i förhållande till andra större valutor"
Inför närmare 20.000 aktieägare på Berkshire Hathaways årsmöte i Omaha, Nebraska meddelade han därför sin intention att göra slut på investmentbolagets ansenliga kassa på 36 miljarder dollar, motsvarande 274 miljarder kronor, så snabbt som möjligt.
DI 3/5 2004
Warren Buffett, känd som en av de mest inflytelserika investerarna i världen, har alltsedan 2002 varit öppet skeptisk till dollarinvesteringar. Han gillar inte alls den räntepolitik som den amerikanska centralbanken för utan förspråkar i stället räntehöjningar.
73-åringen befarar nu att det redan gigantiska handelsunderskottet i landet kommer att öka ytterligare. Inför närmare 20.000 aktieägare på Berkshire Hathaways årsmöte i Omaha, Nebraska meddelade han därför sin intention att göra slut på investmentbolagets ansenliga kassa på 36 miljarder dollar, motsvarande 274 miljarder kronor, så snabbt som möjligt. "Vi tror att dollarn kommer att tappa i värde i förhållande till andra större valutor", sade Buffett, enligt norska Dagens Naeringsliv.
Return from the dead
Just when you thought deflation was the worry
ry.cfm?Story_ID=2594332">The Economist Apr 15th 2004
Remember inflation? Remember fretting about accelerating consumer prices and higher interest rates? Those days may soon be back.
John Makin, resident scholar at the American
Enterprise Institute in Washington:
The blissful combination of higher growth and lower inflation that has characterized the U.S. economy since last spring is the inverse of stagflation, the nightmare scenario that followed the oil shock of 1973-74 Still lower inflation is a distinct possibility.
John Makin AEI 29/1 2004
- We are nearing the end of a benign, unusual period of faster growth and lower inflation and moving into a period of slower growth and higher inflation
IHT 15/4 2004
On Wednesday, the government reported that U.S. consumer prices shot up more sharply than expected in March, rising 0.5 percent from a month earlier. Excluding food and energy prices, the rise was still 0.4 percent, the biggest monthly increase in two years. These early signs of a return to creeping price increases just a few months after the U.S. Federal Reserve pronounced the risks of inflation and of deflation almost equal may put the central bank in a tight spot as pressure grows to raise interest rates sooner than it might like.
We are nearing the end of a benign, unusual period of faster growth and lower inflation and moving into a period of slower growth and higher inflation, said John Makin, resident scholar at the American Enterprise Institute in Washington. The resulting whiff of stagflation may force the Fed to raise U.S. interest rates while growth is slowing.
Those with a memory of what happens when a bubble
bursts know that, if history is any guide, the bear market that began in 2000
is not over - not by a long shot.
By Maggie Mahar Financial Times April 11 2004 19:36
The writer is the author of Bull! A History of the Boom, 1982-1999 (HarperBusiness) What drove the Breakneck Market - and What Every Investor Needs to Know About Financial Cycles
How can one conclude that they are wrong? Because the US market has not yet "reverted to a mean". Past experience suggests that when a bubble collapses, a market cannot lay down a firm foundation for the next boom until the pendulum has swung back to its mean, or average price.
Historically, at its mean, the S&P 500 has traded at 17 to 18 times the previous year's earnings, and roughly 14 times estimates for the current year, while yielding dividends of about 4 per cent. When a bear market scrapes bottom, the pendulum inevitably swings too far in the other direction: price-earnings ratios usually sink below 10, while the yield rises to at least 5 per cent.
Today, the S&P 500 fetches approximately 29 times last year's earnings and roughly 18 times estimated earnings for 2004, assuming you believe analysts' estimates. As for dividends, the average stock on the S&P yields less than 2 per cent.
Meanwhile, the underlying economy deteriorates in what could be the prelude to a second fall in equity prices. Debt builds, the dollar declines, capital investment remains sluggish and, despite increased productivity, real wages barely budge. Sceptics argue that a recovery built on debt and consumer spending is no recovery at all.
So the crash of 1929 was followed by a 50 per cent rally. But then came the crash of 1930-1932. When it was all over, the market had fallen some 86 per cent from its pre-crash peak.
Similarly, the go-go market of the 1960s first sold off in 1970 when the Dow plummeted from a high of nearly 1,000 to a low of 631. Investors assumed that this was a nadir and, sure enough, late in 1970, the benchmark index began to climb. The bear market rally of the early 1970s ran for a little more than two years, reaching a climax early in 1973, with the Dow making a new high of 1,071. Many thought that a new bull market had begun. Within weeks, the the crash of 1973-1974 began. When it bottomed, the Dow had sunk to 577 - seven points below where it had traded in 1958.
An entire generation was driven out of the stock market. It would be another eight years before a new bull market began.
Using the seasonally adjusted total unemployment rate of 5.6% and adding to it "discouraged" workers, the rate grows to 5.9%. Factor in other groups of people who are underutilized in the work force, you can ratchet the number all the way up to 9.6%. And, for the sake of comprehensiveness, if you use the non-seasonally adjusted numbers, that rate would swell to 10.9%. So, those are the numbers, and I'll leave readers to draw their own conclusions.
What's particularly scary is how pathetic job growth has been, despite all the interest-rate cuts (nominal rates are near zero, and real rates are essentially below zero), the two Bush tax cuts and now the refunds from the last cut. Despite it all, we still can't get enough jobs created.
The failure of the US economic recovery, now
more than two years old, to produce meaningful job growth has generated much
talk about its political consequences.
It could undermine President George W. Bush's re-election prospects, and it certainly seems to be contributing to the national alarm about outsourcing, trade and overseas investment.
But the bigger concern is that it may be starting to threaten the strength and even the sustainability of the recovery itself.
Financial Times editorial 9/3 2004
With last Friday's dismal news from
This weakness is, of course, the reflection of the economy's stellar productivity performance; while US employment has remained at a standstill for the past year, gross domestic product is up by more than 5 per cent.
If employment does not begin to show strength soon, consumers are likely to retrench, weakening aggregate demand. To avoid that, either productivity growth must, improbably, collapse, or output must accelerate.
A more plausible gentle slowdown in output per hour would need to be accompanied by stronger demand and output elsewhere.
The American consumer has been surprisingly steadfast for the past three years. Figures last week from the Federal Reserve showed why: household net worth reached an all-time high at the end of last year as modest equity increases were augmented again by gains in housing wealth. But even if the Fed stays on hold for the rest of this year - as looks increasingly likely and sensible - it has scant room to provide the stimulus that lowered mortgage rates and helped raise house prices in the past three years.
The US has had a jobless expansion for more than two years. It will soon start to test the limits of its durability.
Varning för global bubbla
I botten på problematiken ligger att Fed har hållit styrräntan på en rekordlåg nivå efter att it-bubblan sprack 2000
Cecilia Skingsley, Dagens Industri 8/3 2004
Berkshire Hathaway, the insurance and
holding company run by legendary investor
Warren Buffett, amassed a record cash pile of $36bn in 2003 as the world's second-richest man
once again shied away from rising stock markets
Financial Times 8/3 2004
"Our capital is underutilised now...It's a painful condition to be in - but not as painful as doing something stupid," added Mr Buffett. The chairman's caution has been largely justified in the past, particularly during the technology bubble in 1999, which was the last time that Berkshire shares underperformed against the S&P 500 and the year after its previous cash peak.
Mr Buffett also highlighted a number of risks to the US economy that add to last year's warnings on derivatives, mutual funds and corporate governance.
In particular, he singled out the weak dollar as a cause for concern and revealed that Berkshire Hathaway had $12bn invested in foreign currencies to balance its exposure to the falling greenback. "Prevailing exchange rates will not lead to a material letup in our trade deficit. So whether foreign investors like it or not they will continue to be flooded with dollars," said Mr Buffett. "The consequences of this are anybody's guess. They could, however, be troublesome - and reach, in fact, well beyond currency markets."
Last week, Alan Greenspan was
a study in contradiction.
On Monday, he extolled the virtues of the levered-up homeowner to a credit union conference. The next day, in a speech to the Senate Banking Committee, he was singing a different tune altogether. Fannie Mae and Freddie Mac, the giant providers of mortgage capital, he warned, "are expanding at a pace beyond that consistent with systemic safety," and that "preventative actions are required sooner, rather than later."
The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of
CNBC on MSN Money - 1/3 2004
The next day, in a speech to the Senate Banking Committee, he was singing a different tune altogether. Fannie Mae and Freddie Mac, the giant providers of mortgage capital, he warned, "are expanding at a pace beyond that consistent with systemic safety," and that "preventative actions are required sooner, rather than later."
For a Federal Reserve chairman who has demonstrated that he couldn't identify reckless behavior if it ran him over, it was rather surprising to hear him chide Fannie and Freddie for their recklessness. (I should state, however, its an opinion I tend to share.)
Before quoting from the above, I would just note that Greenspan's latest comments reminded me of a speech he gave on March 6, 2000, which I have dubbed "An Ode to Technology." In the speech, he waxed on about the wonders of technology and how it had brought us a new era and all that other stuff. Folks may not remember that date, but it was four days before the Nasdaq Composite hit its all-time high of 5,048.62.
Despite the recovery over the past year ago, the composite is still down nearly 60% from the March 2000 peak.
This is not the first time Easy Al has been way off. On March 7, 2000, I wrote a column called Alan Greenspan: Friend or Foe that chronicled some of his prior quotes, speeches and the like. It includes his Jan. 7, 1973, utterance (right before the recession that ranks as our worst, at least until we get through the one we're in but haven't completed): "It is very rare that you can be as unqualifiedly bullish as you can be now." http://www.fleckensteincapital.com/old_raps/friend_or_foe.htm
Remarks by Chairman Alan Greenspan
The revolution in information technology
Before the Boston College Conference on the New Economy, Boston, Massachusetts
March 6, 2000
The fall in real yields
Rising real yields may come as a nasty shock to the stock
The blissful combination of
higher growth and lower inflation that has characterized the U.S. economy since
last spring is the inverse of stagflation, the nightmare scenario that followed
the oil shock of 1973-74
Still lower inflation is a distinct possibility.
John Makin AEI 29/1 2004
Since last spring, the United States has experienced the apparent happy paradox of sharply higher growth but lower inflation. However, listening to the persistent complaints about higher U.S. budget deficits and the uneasy murmurs about the need for the Federal Reserve to start tightening monetary policy--not to mention grave concerns about a weaker dollar (another way to boost aggregate demand)--it is easy to see that many economists and policymakers are clueless about recognizing the type of cycle we are in and how to respond to it.
The blissful combination of higher growth and lower inflation that has characterized the U.S. economy since last spring is the inverse of stagflation, the nightmare scenario that followed the oil shock of 1973-74, when higher oil prices produced lower output, lower growth, and higher inflation. The current cycle is fundamentally benign--more output at lower prices--but if policymakers fail to recognize it as such and ignore falling prices because output growth is strong, a global recession could occur.
A little reflection provides a straightforward explanation of the current cycle. The old bugaboo, stagflation, reflects a backward shift of aggregate supply to less output at each price level along a negatively sloped aggregate demand schedule. Output falls, and prices rise. In the inverted circumstance we see today, an outward shift of aggregate supply--that is, more output at each price level-a-long a negatively sloped aggregate demand schedule occurs, and the result is more output at lower prices.
Both types of supply shifts are confusing to policymakers and analysts because most of the time growth and inflation levels are positively correlated, with higher growth tied to higher inflation and lower growth to lower inflation. That is because aggregate demand shifts are typically larger than shifts in aggregate supply. An outward shift in aggregate demand results in a new intersection with a positively sloped aggregate supply schedule at a higher price level and a higher level of output, and a drop in aggregate demand has the opposite effects.
During the second half of 2003, when high levels of U.S. policy stimulus boosted demand growth, U.S. inflation and interest rates actually fell. The Fed's favorite measure of U.S. inflation--the year-over-year core PCE deflator--fell steadily, from 1.8 percent in 2002 to a cycle low of 0.8 percent in November of 2003. Now the core PCE (short for "personal consumption expenditures") deflator at 0.8 percent is below the 1 percent level designated by Fed governor Ben Bernanke as the minimum comfort level. Bernanke pointed this out in his talk before the American Economic Association in early January.
Interest rates on U.S. ten-year notes have been remarkably stable since peaking in August at 4.5 percent, following a sharp sell-off tied to a perceived change in Fed policy with respect to purchases of long-term notes and bonds. In fact, prior to August, two-thirds of the rise in ten-year yields resulted from a rise in expected real yields (based on TIPS pricing), from a low of 1.5 percent early in June to nearly 2.5 percent in August--an extraordinary and unprecedented move in real interest rates.
If there still is aggregate excess capacity in the U.S. economy, as suggested by the concurrence of low real interest rates and falling inflation, what can we expect to see in the future? Still lower inflation is a distinct possibility.
Low interest-rate peril
James Grant September 27, 2002
Japan and Asian emerging market economies have one thing in common: they are desperate to keep their currencies down against the US dollar. They would far rather lend the US the money with which to buy their exports than endanger their competitiveness or become reliant on fickle foreign finance. Does this behaviour make sense? Is it likely to change soon? The answer to these questions is: Yes and, in all probability, No.
The Europeans, in particular, long for the Asians to share in the adjustment to the weakening US dollar. This passionate desire is not surprising. According to the February Consensus Forecasts, the current account surplus of the Asia-Pacific region was $234bn last year, against only $35bn for the eurozone. This makes it puzzling, at first glance, that it is the euro, not the Asian currencies, that is soaring.
Asian emerging market economies have learnt from the experience of 1997 and 1998 a lesson that is rather different from that drawn by orthodox economists. The latter believe that the crisis showed the danger of adjustable pegs. It would be better, goes the argument, to choose between irrevocably fixed exchange rates (or, better still, dollarisation) and freely floating rates.
The directly affected countries drew a different conclusion. Polonius advised his son to be neither a lender nor a borrower. The Asians decided instead that it was far better to be a lender than a borrower.
The chief explanation for this is what economists have come to call "original sin", by which they mean the reluctance of international capital markets to lend in the currencies of emerging economies. If such economies become substantial net debtors in foreign currency, they become vulnerable to mass bankruptcy or public sector insolvency if their currency tumbles. Yet just such a collapse becomes likely as foreign currency indebtedness grows. The solution then is to prevent the country from becoming a net debtor in the first place.
The conclusion is that Asian exchange-rate policy is perfectly rational. So when might it change? The answer lies in what Prof McKinnon calls "conflihtml">Home - Chrashes - 1992 and all that - Dollarn - Real Interest Rates
See also: The Next Bubble - cted virtue". As the stock of foreign currency accumulates, speculation on an appreciation rises, making it ever more costly to hold the currency down. In addition, foreigners start complaining about the trade surpluses, arguing that they are the unfair result of currency undervaluation.
Whatever Europeans may desire, the prognosis is that Asia will continue to run huge current account surpluses and interfere in exchange markets. Its governments will not lightly abandon policies that they believe work well for the convenience of any outsiders.
Ronald McKinnon: The East Asian Dollar Standard
"Det mest sannolika", skriver
han, "är att vi får se ett börsras utan like följt av ett
sammanbrott för dollarn, en händelsekedja som kan tänkas
göra slut på USA:s imperieställning".
Carl Johan Gardell, SvD Kultur 17/2 2004
Emmanuel Todd - Låtsasimperiet. Om det amerikanska
(Après l"empire. Essai sur la décomposition du système américain) Övers: Pär Svensson 216 S.
Bokförlaget DN. CA 247:-
Under det sista århundradet före vår tideräknings början förvandlades romarriket från en regional stormakt i Italien till ett Medelhavsimperium som sträckte sig från dagens Irak till de brittiska öarna. Inflödet av tributer från erövrade provinser slog ut det italienska näringslivet. Tillverkningsindustrin blomstrade i periferin där efterfrågan stegrades och produktionskostnaderna var låga. Imperiets kärnområden blev ett svart hål - eller en keynesiansk konjunkturstimulator - med en stormrik samhällselit som konsumerade det överskott som den då kända västvärlden producerade. Relativt obetydliga störningar - som krig eller skördekatastrofer - riskerade till slut att utlösa en veritabel statskollaps. Under senromersk tid var det mäktiga imperiet, precis som USA i dag, en koloss på lerfötter.
Ovanstående reflexioner har hämtats från boken Låtsasimperiet, publicerad på franska 2002, som i dagarna kommit ut på svenska. Författare är den franske antropologen, demografen och historikern Emmanuel Todd som sedan 70-talet skrivit flera internationellt uppmärksammade böcker.
The power and influence of the United States is being overestimated, claims French historian and demographer Emmanuel Todd. "There will be no American Empire." "The world is too large and dynamic to be controlled by one power." According to Todd, whose 1976 book predicted the fall of the Soviet Union, there is no question: the decline of America the Superpower has already begun.
After the Empire, The Breakdown of the American Order,
Translated by C. Jon Delogu Foreword by Michael Lind
$29.95 November, 2003 cloth 192 pages ISBN: 0-231-13102-X Columbia University Press
"A powerful antidote to hysterical exaggeration of American power and potential by American triumphalists and anti-American polemicists alike. A best-seller in Europe, Todd´s book should be read by all thoughtful Americans for its provocative and well-informed analysis of their nation and its prospects." from the foreword by Michael Lind
"The most effective and most talked about of the new anti-American texts." Adam Gopnik The New Yorker
The non-partisan Congressional Budget Office says the US government will run up a budget deficit of nearly $500bn in 2004 - the largest in US history in absolute terms, and, at 5% of GDP, the largest since 1993 as a percentage of the economy.
The budget deficit is now one quarter of total Federal spending, and 80% of the total receipts from Federal income taxes.
It is equal to $1,600 per US citizen this year, and the accumulated deficit over ten years would be nearly $20,000 per person.
"USA har ryckt åt sig ett stort
försprång och har världens mest framgångsrika ekonomi"
Klas Eklund på SvD:s ledarsida 2000-08-11
SINCE September 11th 2001, it has become obvious to all
that the world is a risky place. Even before that atrocity, the world had
seemed far from safe to many, especially those concerned with business and
The end of the dotcom craze and the bursting of the stockmarket bubble had already created huge uncertainty. But those are only the most recent examples of unexpected events that can make a mockery of people's plans.
The Economist Survey 22/1 2004
This view from Davos is certainly a valuable guide, but not quite in the way intended. Rather than pointing to where the world is going in the next 12 months, the annual consensus established in Davos shows what will not happen.
Last year, the message was one of profound gloom the war in Iraq would engulf the world in years of violence, the global economy would slide into depression and stock- markets would suffer another collapse. In the event, of course, the opposite occurred. Looking back, a similar pattern emerges over the years: the view from Davos is usually a contrary indicator, at least of t House priceshe short-term trends. In 2002, Davos expected another terrorist attack even worse than that of September 11. In 2001, the consensus anticipated a Thirties-style depression, triggered by the collapse of technology shares. In 1999, there was the global peril of the millennium bug.
The view from Davos is not always gloomy, although the rich and powerful are often very insecure about the future, presumably because their happiness is so bound up with their power and their fortunes, which can quickly evaporate. In 2000, the consensus was manically enthusiastic, celebrating the limitless wealth created by the internet. In 1998, there was equally misguided jubilation about the launch of the euro and the new economic superpower it would create.
My aim is not to suggest that the participants at Davos are purblind or foolish, although it is true that success as a businessman or politician requires such fanatical concentration on a single company or political project that it is easy to miss the wood for the trees.
This, however, is not the main reason why the Davos consensus is so often misguided. There is another problem the very fact that these elites are so powerful and so rich. Between them, they control most of the worlds economic output and almost all of its military might. If they all focus on one opportunity or one danger, then the chances are that this particular opportunity has already been largely exploited or this danger warded off.
It is when no consensus exists among the worlds rich and powerful for example, on climate change or Israeli expansionism, or the Saudi support for Islamic terror that the dangers fester and grow. When a subject is not even mentioned at Davos it has maximum capacity to surprise and therefore to change the world, for good or ill.
Last year, I was struck by three huge economic issues which Davos completely ignored.
As I wrote here last year, the rise of the euro and its devastating effect on Europe hardly even got a mention.
I was also amazed that nobody even bothered to talk about the possibility that Wall Street would rebound rather than collapsing.
Finally, it surprised me that Davos paid so little attention to the rise of the Asian consumer and the shift in global growth leadership from America to Asia, especially China. In the event, all three of these issues turned out to be crucial for understanding the world in 2003.
So today it seems worth asking: what are the Davos dogs not barking at this year?
The easiest one to spot is the continuing overoptimism about Europe. While last years indifference to exchange rates has given way to a recognition that the euro is now dangerously overvalued, nobody seems to be drawing the obvious conclusion. The European economy will remain completely stagnant this year because the sharpest rise of the euro has been very recent and will not have its full impact until the end of 2004 and beyond. Unless the euro falls very soon and very abruptly, Europe will have no chance of sharing in this years global economic recovery. Geopolitically this means that the EU, like Japan in the 1990s, will be condemned to political paralysis and irrelevance for much of the decade ahead. The Davos elites outdated view of Europe as potential superpower looks like a big mistake.
A second case of rearview thinking concerns the US economy and the presidential election. Nobody in Davos seems seriously to believe that America might oust President Bush and put a Democrat in the White House. The surprise result in the Iowa Democratic Party caucuses has increased the chances of Wesley Clark, who I believe is the most plausible Democrat contender. Yet the confidence in an easy Bush victory seems to extend even to people who personally hate him. This is hard to reconcile with the opinion polls, which show the race as a dead heat. Perhaps the faith in Bush simply reflects the near-universal optimism about the US economy this year.
But what Davos ignores is that Americas economic problem in the years ahead will probably be too much growth, not too little. A booming and over-stimulated US economy will present the next occupant of the White House with a daunting challenge: to clean up the mess made by Bush not only in Iraq but also in the US Governments budget. The only way to do this will be to create a national consensus for unpopular measures to raise taxes. But will any politician be able to do this, especially after what is likely to be one of the dirtiest election campaigns in US history?
The third, and most important, subject that is not being discussed at Davos is inflation. Will 2004 be the year when the world moves from price stability into an era of accelerating inflation reminiscent of the 1960s? In America, the combination of very loose money, rapidly growing budget deficits, devaluation, protectionism and military spending has always been a recipe for inflation in the past. Rising oil, gold and commodity prices all point in this direction, as does the global boom in property prices and the new bubble in stockmarkets now being created by the US Federal Reserve.
Yet despite all these warning signs, the Davos consensus sees economic weakness, not inflation, as the main economic peril in the year ahead. This is exactly the situation in which inflation is likely to start. The people supposed to control inflation central bankers, politicians and bond investors are part of the global elite represented at Davos. So if Davos ignores inflation, the same will be true of the Federal Reserve and the other anti-inflationary vigilantes. Thus nothing will be done to pre-empt an inflationary spiral before it takes off.
The same is true of the other dangers overlooked at Davos. If the Davos elite is caught napping by European stagnation or by US political turmoil or by the rising euro, the central banks and governments and other guardians of global stability will also be taken unawares and will fail to ward off these dangers. That is why the Davos consensus is genuinely important and why it so often turns out to be wrong.
This page is,Stephen Roach, chief economist at Morgan Stanley, is
By keeping interest rates unnaturally low and greatly increasing fiscal spending, U.S. policymakers have fueled the creation of a series of bubbles in asset markets
International Herald Tribune 22/1 2004
Roach has been consistently bearish as the global economy weathered the dot-com stock collapse three years ago, followed by a recession in the United States and elsewhere and a less-than-scintillating recovery over the last year.
By keeping interest rates unnaturally low and greatly increasing fiscal spending, he said, U.S. policymakers have fueled the creation of a series of bubbles in asset markets. A new one might be forming now in technology stocks, he added.
By opening the fiscal and monetary taps, Washington policymakers have also inflated the current account deficit, the broadest measure of trade in goods and services. The current account shortfall has been cited by many economists as a cause of the falling dollar; the United States requires net inflows of close to $2 billion a day just to finance the current account, because it imports far more goods and services than it exports.
Greed, fraud, credulity and the bull
By Philip Coggan Financial Times; Oct 23, 2003
BULL! A HISTORY OF THE BOOM, 1982-1999
What drove the breakneck market and what every investor needs to know about financial cycles
By Maggie Mahar
Harper Business, £16.85
The bull market ofthe 1980s and 1990s was one of the most powerful in history. It incorpo rated all the classic features of abubble: easy credit, mass participation, fraud and a naive belief in a "new era" that would justify the euphoria.
Much analysis has focused on the final excess, the dotcom bubble and its idiocies. But in the history of the bull market, this was just the cherry on the cake. There was a lot more to the rise in share prices than profitless e-tailers.
Maggie Mahar, one-time English professor at Yale turned financial journalist, has attempted a more comprehensive look at the period. It is an entertaining romp, complete with pen portraits of the heroes - bears such as Gail Dudack and David Tice - and villains. The latter are clearly more numerous, ranging from the anchors of the financial TV network CNBC to the senators who in 1993 blocked an accounting standard that aimed to spell out the true cost of executive options. On this evidence at least, we must hope that Senator Joseph Lieberman does not win the Democratic nomination for president. For anyone who was involved in the bull market, the book does not provide any great new revelations. It is the incidental detail that keeps the story motoring, such as the abusive phone calls received by internet analyst Henry Blodget when whenever he dared question the credentials of one of his client's favoured stocks. Blodget, made a scapegoat for the sins of the analysts' community, emerges as a fairly sympathetic figure, a man clearly out of his depth.
All the main issues are covered, from dodgy accounting, the explosion in mutual funds, the belief in the new economy and the cheerleading role played by investment bank analysts. But if there is a flaw in the book, it is that it focuses almost entirely on the US and on the personalities in that market. While the US was undoubtedly the home of the great bull market, a proper history of the phenomenon would have to include Europe, where in the late 1990s, the equity culture appeared to sweep the continent.
Risk management for the masses
Mar 20th 2003 From The Economist print edition
Robert Shiller is professor of economics at the International Centre for Finance, Yale University, and the author of Irrational Exuberance (Princeton University Press, 2000).
His new book, The New Financial Order: Risk in the 21st Century (to be published by Princeton University Press on April 2nd; $29.95 and £19.95), on which this article (Risk management for the masses, Mar 20th 2003 The Economist) is based, lays out a vision for the future of finance, insurance and social welfare.
Warren Buffett, the influential
investor, warned derivatives were financial weapons of mass
destruction and that they were potentially lethal to the
In his letter to shareholders of Berkshire Hathaway, Mr Buffett said he and Charlie Munger, the investment and insurance companys vice chairman, viewed derivatives and derivative trading as time bombs.
Financial Times 4/3 2003
The boom that did not bust
By John Plender
Published: February 6 2003 21:02
Low interest rates is not enough
By Martin Wolf
Financial Times, November 12 2002
is not in danger of deflation
The writer is chairman of the US president's council of economic advisers
Financial Times, October 9 2002 22:19
Behovet av ett nytt ekonomiskt
/ finansiella bubblor/Mattias LundbäckSvD Inblick 2002-10-04
Bubble, bubble default trouble
By John Plender
Financial Times, October 3 2002 20:15
RE: Very important article - as always with John Plender
BBC 12 September, 2002
US economic guru Alan Greenspan has warned lawmakers that their inability to balance the federal budget threatens the country's economic stability. Mr Greenspan, chairman of the US Federal Reserve, urged Congress and the administration of President George W B obviously, under reconstruction, click here for old page
bubbla spricker härnäst? Det amerikanska undret
Mats Johansson 1/9 2002
USAs sparare flyr aktiefonder
Uttagen ur aktiefonder nådde en ny rekordnivå under juli månad i USA, då investerare plockade ut omkring 50 miljarder dollar netto.
Senast i september i fjol, efter terrorattackerna i USA, rapporterades rekordstora uttag ur aktiefonderna. De uppgick nettouttagen till 30 miljarder dollar. Det kan också jämföras med juni månad i år då uttagen var cirka 18 miljarder dollar netto.
There may be a knighthood
for Greenspan in stage-managing a bubble, but there's nothing but pain for
everyone if we tell lies to each other to keep it going.
By Bill Fleckenstein CNBC website 2002-08-19
Financial Times; Jul 15, 2002
So you think this bear market is rough? It is positively limp-wristed when compared with the depths of the mid-1970s.
The dilemma facing policymakers was neatly encapsulated by the European Central Bank (ECB), whose main governing body met on July 4th to decide what to do about interest rates.
The ECB continues to be worried about inflation: it has often failed to hit its inflation target (no bad thing say those economists who believe the target is too tight), and Wim Duisenberg, the banks president, admitted that the risks to price stability remain tilted to the upside. Yet the ECB left rates unchanged because, said Mr Duisenberg the uncertainties were too large to come to a decisive decision.
Since, in theory, at leastand in publicthe ECB insists that its only target is inflation (and not, unlike Americas Federal Reserve, economic growth as well), the principal uncertainty for Mr Duisenberg and his colleagues is the possible inflationary impact of recent currency swings.
By themselves, falling stockmarkets do not usually cause recessions. It is now generally accepted that the blame for the Great Depression in 1930s America does not lie with the Wall Street crash of 1929 but the unreasonably tight monetary policy which followed it.
Illusory profits cloud USA Inc
Sunday, 30 June, 2002
Nearly a year ago, Graham Turner warned that the US economy was driven by a huge bubble of artificially inflated profits. Writing for BBC News Online, he explains why the Enron, WorldCom and Xerox scandals are just the tip of the iceberg.
Den starka dollarn är bara en bubbla - den enda
som inte spruckit än.
USA:s ekonomi växer troligen långsammare än omvärldens de närmaste åren. Risken för ett nytt bakslag, en så kallad "double dip", är över 40 procent.
Det budskapet levererade Steve Roach, chefsekonom på den amerikanska investmentbanken Morgan Stanley, när han gästade Sverige i förra veckan. "
Vi har levt över våra tillgångar och
kommit undan med det", säger han. "Jag är här för att tacka
er å hela det amerikanska folkets vägnar, för att ni pumpade in
pengar i USA och hjälpte oss att blåsa upp en
Mer av Roach
Economic parallels between America and Japan
America's economy looks awfully like Japan's after its bubble burst
Jun 13th 2002 From The Economist print edition
The recovery myths
The world economy is coping with the aftermath of two huge asset-price bubbles: the Japanese of the 1980s; and the US-led worldwide bubble of the second half of the 1990s.
Adjustment to the end of the first is not yet over. Adjustment to the end of the second has, contrary to conventional wisdom, hardly begun.
By Martin Wolf, Financial Times June 11 2002
- Det exklusiva svenska fondbolaget Brummer & Partners har
värvat en riktig pessimist som USA-chef, eller "bear" (björn) som det
heter på Wall Street.
"Jag vet att jag har det ryktet, men jag vill hellre kalla mig realist", säger Douglas "Doug" Cliggott.
Sin pessimistiska syn på aktiemarknaden har Cliggott som sagt tagit med sig från J P Morgan.
"Kurserna är fortfarande höga, P/e-talen för de breda aktieindexen i USA är extremt höga", säger han.
"Förväntningarna om vinsttillväxt är uppblåsta och under de nästkommande två till fem månaderna är det hög sannolikhet för att förväntningarna kommer att skruvas ned. Det sätter press på börsen."
CAPITALISM has had a rotten time lately. Not as rotten as in 1917, when those revolutionary shots in St Petersburg launched a form of anti-capitalism that ended (except in Cuba and North Korea) only just over a decade ago.
Nor, with luck, as rotten as in 1929, when a stockmarket crash on Wall Street set off the global Great Depression.
But rotten, nonetheless. Nobody knows for sure yet, but 2001 might come to be seen as the year when two decades of mostly unbroken progress for capitalism gave way to something more ambiguous a