Are we at the brink of financial collapse? Will we pull back in time?

Having shared with someone the text of my 1998 speech "The Role of Law and Ethics in a Globalised Society"***, I received the following response:

"your article is based on an assumption which I am in doubt of, namely that Man is willing to give up getting more for himself in order to let others have their piece of the cake. Whereas I agree fully with your assessment that we are at the brink of disaster, I still see nothing convincing pulling us back from jumping!"

The response is based on two assessments. The first relating to humman nature, and the second relating to our current financial crisis. On the second, you read often enough on this blog

For the first, there are two (and only two) possible assumptions about human nature.

(a) that humans are no different from animals and will always act in their self-interest only. This view is observably false (nearly all humans operate right now philanthropically, and have always done so). Moreover, holding and propagating such a view makes it impossible to build any practical legal, social or political system. Acting on this assumption erodes and eventually destroys any possibility of civilised life. In other words, this assumption is both false and destructive.

(b) though indiivduals do act selfishly and to the detriment of others from time to time, such individuals lower the level of humanity and are to be held in contempt; most individuals are, most of the time, capable of rising, do rise, and should rise, above mere selfishness, to care for the common good. Those who do so most self-sacrificially we consider the heroes of humanity, whether Mother Teresa or Martin Luther King or Mahatma Gandhi or Mahatma Phule or Jesus of Nazareth. We actually increase the possibility of building beneficial law, society and politics as we hold up such ideals before humanity, which always has to choose between evil and good. Holding such an asuumption is the only way of preserving, let alone building up the possibility of any civilised life. In other wordss, this assumption is both true and construcive.

And what has all this to do with the current financial crisis?

If you hold the first assumption, you are bound to be negative and to be bearish, and so will contribute to the collapse of the system - with all the negative consequences for everyone including yourself.

On the other hand, if you hold the other assumption (which is sometimes considered "naive"!!!), you will contribute to preserving the system and even try to help reform it.


*** the text of the speech (at the Conference on The Role of Law and Ethics in a Globalised Economy, organised by the Max Planck Institute for Intellectual Property, Competition & Tax Law, co-sponsored by The European Academy of Sciences and Arts as by The Bavarian Ministry of Economic Affairs, Infrastructure, Transport and Technology; held at the Bavarian Academy of Humanities & Sciences, Munich, Germany, May 22-23, 2008) was published as a chapter in the Proccedings of that conference, Springer, Germany, edited by Professor Joseph Strauss.
This was a version of material that had been presented initially at The Club of Budapest conference in 2004, and arose out of material initially presented in 1998 as "Life, Work and Careers in the 21st Century" at a meeting of the Career Innovation Group and published by them as a Discussion Paper in 1999 and, in a related form, as a chapter "Managers' Lives, Work and Careers in the 21st Century" in Leadership and Management in the 21st Century (edited by Cary L. Cooper), Oxford University Press, December 2004, pages 107-138. Sphere: Related Content

So are we finally going to have a Transaction or "Tobin" Tax?

Delighted that the European Union is finally taking this seriously - and that even the Financial Times has come out in support of it.

The simplest explanation of the Tobin Tax is at: http://en.wikipedia.org/wiki/Tobin_tax

John Plender's column in the Financial Times: http://www.ft.com/intl/cms/s/0/39051e9c-e83c-11e0-9fc7-00144feab49a.html#axzz1ZKZm1Jz5 Sphere: Related Content

Unethical BBC interview with trader who would like to panic people into abandoning the euro and thereby make money from it

Traders, by definition, cannot be unbiased commentators, because they hope to make money from a bet they have placed.

It is in their financial interest to swing public opinion in their direction so that people bet with their money alongside them, and so move the market in their direction and thereby increase their chances of winning the bet.

It is like asking an intelligent and totally selfish arms trader or weapons manufacturer, in an uncertain situation, if he thinks there will be a war. He will know that the more emphatically and persuasively he says that war is likely, the more he will persuade people to act as if there will be a war, and will thereby make war more likely - and guarantee his profits.

The BBC has been highly unethical in broadcasting this interview, and I have complained to the BBC. Sphere: Related Content

'A Final Chance?: The Economic Crisis and the Future of the USA'

If you live in the Phoenix AZ area and would like to be at my talk on the above subject, which is scheduled to be held on 16 October 2011 from 7-9pm, please email me: the event is free of cost but by invitation only. Sphere: Related Content

What game is Pakistan's Foreign Minister playing?

The Pakistani Foreign Minister has apparently told the US it could ‘lose an ally’ if it continues to cajole Pakistan about how little it is doing to eliminate terrorism IN the country and being exported FROM the country. Instead of responding by saying something like "Pakistan is doing all it can do, and will do even more in the future", all that she could say was that the US ‘can’t afford to alienate Pakistani people’ and that 'Pakistan is the first one to suffer because of terrorism, because of militancy. Pakistan is doing it for itself. You don't need cajoling on that, that is in our national interest.': http://www.reuters.com/article/2011/07/23/us-asean-usa-pakistan-idUSTRE76M1BT20110723

Unfortunately, as is evident to everyone, except apparently the Foreign Minister, Pakistan does not seem to pursue very vigorously what she claims is in Pakistan's own national interest. Or, if it is pursuiing that interest, Pakistan does not seem to want that to be known.

Even Pakistan's younger generation (the FM is 34, apparently) is quite bound by the country's Muslim "honour-shame" culture. She needs to grow up, just as the culture as a whole needs to mature, into dealing with issues as issues rather than on the basis of honour and shame: if you point out to me that something is going wrong, I should have the maturity to examine that statement on its merits rather than as an insult. Sphere: Related Content

As expected: Asia down, Eurozone up

As readers of my blogs should have expected, Asian stocks continue to slide while the Eurozone is to be strengthened (see http://link.ft.com/r/4RNQTT/DWIRDB/DFEV/ZGB0JQ/MSN3SZ/XL/t?a1=2011&a2=9&a3=23
and http://link.ft.com/r/4RNQTT/DWIRDB/DFEV/ZGB0JQ/C4DY40/XL/t?a1=2011&a2=9&a3=23)

Further, commodities are down while the US dollar is up (see: http://link.ft.com/r/4RNQTT/DWIRDB/DFEV/ZGB0JQ/L9FNSR/XL/t?a1=2011&a2=9&a3=23 and http://link.ft.com/r/4RNQTT/DWIRDB/DFEV/ZGB0JQ/5V7MVB/XL/t?a1=2011&a2=9&a3=23)

China has not yet admitted that its growth rate has declined but expect the truth to come out one or another sooner or later. In my view, the real growth rate is not roughly 9% sa the Chinese claim but, so far as I can work out, closer to 4%.

While the FT regards yesterday's sharp selloff as evidence that the fundamental trading pattern of the financial crisis has been "Risk-on risk-off’, the FT does not relate that to excess liquidity (too much money) in the world http://link.ft.com/r/4RNQTT/DWIRDB/DFEV/ZGB0JQ/16V2O6/XL/t?a1=2011&a2=9&a3=23. However, liquidity is being squeezed out of the global market, and must be squeezed out, so expect over the next 5 years or whenever the world returns to balance, risk-appetite to be off (that s not to say that it will never come "on" during the next 5 years or whatever, just that the trend will be in the direction of risk "off")

US stocks are over-valued at present, so don't rush to buy, but expect US stocks to rise in comparison to other stocks in the next 5 years or so, though US stocks are apparently low at present:
http://link.ft.com/r/4RNQTT/DWIRDB/DFEV/ZGB0JQ/5V7MVB/XL/t?a1=2011&a2=9&a3=23 Sphere: Related Content

How high/ low will oil go?

Two stories in today's FT characterise the bullish view: "Oil rises back above $112 a barrel after the US government reports a big decline in domestic stocks"
http://link.ft.com/r/S4XZQQ/U1G60H/3K7L/AM75LS/KQRQBC/VU/t?a1=2011&a2=9&a3=22

and "Oil takes tight turn on Libya shortfall: Brent for immediate delivery is trading at a strong premium to forward months, another sign of physical tightness (right now)
http://link.ft.com/r/S4XZQQ/U1G60H/3K7L/AM75LS/8Z4ZSX/VU/t?a1=2011&a2=9&a3=22

Shell's CEO Peter Voser can only say that we are in an era of energy volatility (we have been in this era ever since the first oil crisis!)
http://link.ft.com/r/S4XZQQ/U1G60H/3K7L/AM75LS/U1B1ZM/VU/t?a1=2011&a2=9&a3=22

But the question for the future is: HOW MUCH volatility?

As far as I can see, oil is unlikely to go beyond 110 now, nor below 50 for any extended period. I expect the average price over the next 5 years to be somewhere around 70. Some conservative companies I know are planning on the basis of an average price for 2012 of 85. They may be right, but I expect lower. Sphere: Related Content

Expect Asian stocks to continue to fall for the foreseeable future

http://link.ft.com/r/S4XZQQ/U1G60H/3K7L/AM75LS/NJ3J6F/VU/t?a1=2011&a2=9&a3=22

India will suffer the least of the Asian countries because it is the least dependent on exports.

The real rate of growth in China, inspite of official claims, I take to be something in the region of 5%.

Expect therefore huge problems in the whole of south-east Asia and other emerging markets as repeatedly stressed by my postings. Sphere: Related Content

Anti-euro propaganda now switches from being Greece-centred to being Spain-centred

See: http://link.ft.com/r/S4XZQQ/U1G60H/3K7L/AM75LS/WT8TMA/VU/t?a1=2011&a2=9&a3=22

However, every reasonably-intelligent observer knew that the eurozone consists of a relatively solid centre, and a relatively soft periphery.

That was exactly what caused people such as me to be skeptical of it when it was launched. With the crisis that started in 2007, it was also clear that some of the soft peripheral countries (e.g. Greece) are too small to matter on their own, and that the battle over their future has primarily a symbolic significance. Once that battle is won (or lost), the battle will move to each of the peripheral countries.

So expect this to be a continuing tussle till the euro is demolished (the less likely result, because of the enormous cost to each of the eurozone countries as well as related countries such as Switzerland and the UK) or, more likely, the euro is finally established as being solid because of internal changes in each of the soft peripheral countries as well as the determination of the Germans to keep the euro going. Sphere: Related Content

How much austerity, for whom?

Surprisingly, after four years of the current crisis, the UK's "officials are nervous that slow growth appears persistent and the (UK) government might have to prolong or deepen its austerity drive" http://link.ft.com/r/S4XZQQ/U1G60H/3K7L/AM75LS/FKEKUH/VU/t?a1=2011&a2=9&a3=22

Meanwhile, as we all know, Greece is unveiling further adrastic usterity measures, including massive cuts to pensions and public sector salaries
http://link.ft.com/r/S4XZQQ/U1G60H/3K7L/AM75LS/R3L3V6/VU/t?a1=2011&a2=9&a3=22

What we do not yet know is what austerity measures are going to be required by the public sector in all middle-income countries as their growth stalls.

China and other export-dependent countries are going to be badly hit.

Commodity producers and exporters are also going to be hit.

It is only the rich who will carry on regardless - but only if rising taxation does not catch up with them.

That is why the rich all over the world are watching tax-related developments with keen interest - as they should. Much wealth built up over the last two decades or so because of the decline in taxes collectable from the rich. Sphere: Related Content

Now you can praise something for being bad if you are transparently told that its bad!

From the start of the current crisis in 2007, collateralised loan obligations have been labelled "toxic".

But the rating agency called Moody's has just raised the ratings on these, arguing that they they have performed ‘exactly as marketed’.

This is like a shopkeeper saying "You should buy this snake because it looks beautiful and if it gets anxious or angry its going to bite you": http://link.ft.com/r/S4XZQQ/U1G60H/3K7L/AM75LS/U1B1Z1/VU/t?a1=2011&a2=9&a3=22
Sphere: Related Content

How badly have hedge funds performed?

On average, pretty badly.

Arrowgrass is considering closing its equity fund
http://link.ft.com/r/S4XZQQ/U1G60H/3K7L/AM75LS/8Z4ZS7/VU/t?a1=2011&a2=9&a3=22 Sphere: Related Content

Paul Donovan and Julie Hudson's FROM RED TO GREEN (Earthscan, UK, just published)

Donovan and Hudson apparently set out to show "how the financial credit crunch could bankrupt the environment".

But they conclude that there are actually two separate but intertwined crises, that of finance and that of the environment.

Having provided an excellent, thorough and highly-readable analysis of the two crises, they do not offer any solutions beyond what I call "hope for the sake of hope": "If policymakers have the wisdom to listen to both economists and environmental experts, we should be able to keep the bailiffs at bay".

Now if policymakers HAD had the wisdom to listen to environmental experts (or, for that matter, to financial experts), we would not be in the messes that we are in!

For transparency, I ought to say that Paul and Julie are ex-colleagues of mine (they are still with UBS, I retired in March - though I don't know either of them well). Sphere: Related Content

The relationship of religion to inequality versus the relationship of religion to wealth

A friend draws my attenton to an article putting forward the view that the prevalence of religion in any country is related to the degree of inequality: http://tinyurl.com/693v8ao

I'm afraid that only exposes the superficiality of thinking among Christians. If they knew their Scriptures, they would know that extreme inequality is reprehensible but is not the explanation for the prevalence of relgious belief.

The correct explanation is that belief in the existence of God is universal, but the pride of the rich inhibits that belief.

We can expect the rich to tend to be unreligious, and we can expect the educated rich to tend to be anti-religious.

In every country and culture.

Of course, in every country and culture, there is no correlation between religion and genuine commitment to seeking after God, since religion is basically a systematised attempt to innoculate people against God - or, to provide an alternative metaphor, to anaesthetise people against any sensitivity towards God. Sphere: Related Content

ETFs, the UBS debacle and other concealed and impending disasters

The case of the UBS employee who hid some $2billion in losses from 2008 has been hitting the headlines for the last few days while I have been travelling.

Some analyses suggest that the financial instrument at the centre of the fraud, Exchange Traded Funds (ETFs) started "simple and transparent" and that was fine, but the problems commenced when ETFs became "complicated and obscure".

While there is some truth to such analyses, they miss the essential point that anything that starts without any underlying "real assets" is very quickly, by that very fact, going to move into "complicated and obscure" territory.

Where there are underlying stocks, bonds, commoditiees or at least alternative assets, those assets will keep the instrument, to a certain extent, from becoming too "complicated and obscure", though of course even real assets cannot prevent such a development entirely as seen by the way in which mortgage-backed securities developed. However, in the absence of any tangible backing, even that little constraint is absent.

The worrying thing about the UBS case is this: the "rogue trading" existed from 2008 and it has only just come to light, so how many other such fraud cases exist in banking? When will they come to light?

And we must be clear that such frauds are not merely "failures" on the part of an individual manager or institution, such frauds are endemic to investment banking because of the huge time-lag between deals and the issuance of the relevant documentation.

Indeed, investment banking is based to a very large extent on trust, and that trust-environment was created by Protestantism in the West. With the decline of Biblical belief, investment banking is by its very nature more and more exposed to such fraud. In boom times, any fraud that might exist can be easily covered up, but such frauds emerge sooner or later in times when the economy, as currently designed, is going through one of its predictably-frequent recessions. Sphere: Related Content

Jose Ramos-Horta on Palestine and Israel (with reflections on India-Pakistan)

Jose Ramos-Horta, 1996 Nobel Peace Prize laureate and President of Timor-Leste, has just published an article taking the position that "the Palestinian issue is one the Israelis have failed to manage in a wise and pragmatic manner".

It appears that the Nobel Laureate does not have any friends, relatives or enemies.

If he did, he would know that one cannot "manage" friends or relatives, let alone enemies.

Moreover, he (along with most other supporters) seems to think that the Palestinians are already one people.

Rather, their situation is like the situation of India in the 1930s or early 40s: there were competing philosophies of what the state should be, ranging from "fundamentalist Hindu" to "fundamentalist Islamic" to secular. In Palestine, the range is from "fundamentalist Islamic" to "moderate Muslim" to secular.

Once the Palestinians have sorted out their internal differences on such basic matters and have a Constitution ready to go, then it would certainly make sense for the world to re-evaluate the situation.

Otherwise, the world will be faced by one more failed state, like Pakistan, where they cannot sort out their own internal differences and so end up killing each other.

Unfortunately, we do kill each other in India as well but, in spite of much geater differences on all levels, the worst of the internecine killing that happens in India IN A YEAR is far less (on a comparable per-thousand-inhabitants basis) with the internecine killing that happens in Pakistan IN A WEEK.

I repeat: Palestine is likely, if it is recognised now, to end up being a failed state. If we wait for recognition, till basic differences among the Palestinians have been sorted out, we are much more likely to get a viable state. Sphere: Related Content

What's happening with the Euro?

In my view, EU leaders will pursue brinkmanship because they want the Greeks to agree certain conditions, otherwise the EU will be issuing a blank cheque

Equally, Greek leadets will pursue brinkmanship because they don't want to accept intrusive EU rules and personalities

Ultimately, however, neither party wants the euro to be broken up.

Breaking up the euro would be far more costly than staying in!

See the calculations published by UBS, which have been widely reported – e.g. by the Wall Street Journal at http://blogs.wsj.com/economics/2011/09/07/costs-of-euro-zone-breakup-underestimated

Therefore expect slow and painful political consolidation within the euro zone.

And consider buying the euro as well as suitable european shares (after due diligence!) as they are both undervalued at present. Sphere: Related Content

This is not the right time for recognition of a Palestinian state

A friend asks why I believe that the time, and the terms and conditions, are NOT right for recognition of a Palestinian state right now.

Here is the text of my response:

Dear ...

I could write a long mail in answer to that question!

But, to be brief:

1. It is clear, objectively, that a 2-state solution is the only one that is fair. However, a majority of Palestinians oppose a 2-state solution. On the other side, a majority of Israelis are not convinced that a Palestinian State would be governable by any reasonable political party: they are concerned that a so-called Palestinian State would amount to, not a settlement of the Palestinian issue, but a launching pad for further attacks against Israel. Considering the "moderate" Erdogan's statement today that he will send convoys with armed ships NOT to the place designated by Israel for the receipt of humanitarian supplies (Ashdod) but to Gaza, this clearly shows that even "moderate" muslims are more intent on provoking Israel to war than to helping Palestinians with humanitarian assistance.

2. Most of the money that has gone to assist Palestine has come from Europe, and very little of that has gone into actual humanitarian assistance - it has either been corruptly siphoned off for personal benefit, or gone into the acquisition of guns and rockets. That certainly does not create confidence in the ability or willingness of Palestinians to govern themselves.

3. If we take the Oslo peace process as a starting point, that was based on Israel enabling Palestinians to run their own politics and economics, in exchange for Palestinians renouncing violence and promoting peaceful co-existence (including recognition of Israel). Neither side delivered fully on its commitments - though in my assessment, the Israelis did perhaps a little more than the Palestinians. For example, in 2005 Israel withdrew substantially from the Gaza Strip, but that did not lead to any reduction of violent attacks against Israel. Today, while Fatah claims to be willing to foster co-existence in the context of a 2-state solution, they have leaders such as Mahmoud Abbas who publicly state that Israel should not exist at all. In any case, Fatah is clearly the minority party at present among Palestinians, and the majority party, Hamas, is by its very nature opposed to Israel's right to exist (its charter itself makes this clear, and that is the essence of what makes Hamas different from Fatah).

4. The Arab Peace Initiative is a comprehensive proposal, and the two sides have discussed it off and on - though the Israelis of course have some disagreements with it, I think it could have a chance of success. Clearly, Erdogan and others are concerned precisely by the fact that it might succeed and are determined to torpedo any discussion between the two sides.

5. In my view, the Palestinians have the worse quality of life (compared to Israelis) so of course we sympathise with them. However, they are simply being used as pawns by extremist Islamists, who do not want Israel to exist at all. The Arab world has plenty of money and could easily have looked after their brother Palestinians if they had wished to do so.

6. In any case, the questions in relation to the 2-state solution are basically:
(a) Can Israel contain its extremists? (Answer: yes, and it does so whenever it wants to)
and
(b) Can the Arabs contain their extremists? (Answer: no, even when they do want to do so).

Conclusion: A 2-state solution can only be reached if a (preferably united) Arab force is able and willing to commit itsef to containing its own extremists. That does not appear to be the case at present.

I hope the above is enough for a short answer

Of course, you and others are free to disagree with my view, as there is no shortage of points of view in this matter.

Warm regards

Prabhu Sphere: Related Content

So the Swiss Franc has fallen and is no longer as much of a safe haven

The move of the Swiss National Bank to effectively link the Swiss Franc to the Euro should be seen in the context of the currency wars that started in the 1970s with the US delinking from gold and starting to print money in unconstrained quantities - encouraging everyone to follow suit.

As anyone who has even elementary economics understands, this naturally led to much faster growth but much more volatile growth. When the Chinese starting printing more money (I mean that not only literally but also figuratively - there are many sorts of money), it resulted in the export boom which has benefited China over the last few decades. As that started hurting the American economy, the Americans instead of going for sensible global trade rules, asked the Chinese to revalue their currency. This the Chinese refused to do. Americans, instead of going for sensible trade rules, decided to devalue their currency further. I have mentioned only the US-Chinese ding-dong, but hardly any country stayed outside the competitive devaluation of currencies, except Switzerland (which has also tried once or twice to devalue its currency, but without any conviction or effectiveness till now).

Finally, Switzerland has also joined the world in devaluing its currency.

But this game cannot go on forever. Competitive devaluation of currency is a fool's game, with temporary gains and long-term damage to the global economy. When this fool's game reaches its limits, there are only two further games possible: protectionism and war. The alternative was always stable currencies and sensible global rules. Sphere: Related Content

I was wrong on how far the US markets fell yesterday

I thought Americans were a little more rational, but apparently not - so the US market stabilised less than I thought it would

Whether they were really worried by Eurozone matters is doubtful, as they have never earlier displayed more concern for Europe than Europeans themselves!

And were they really spooked by the foreseen link between the Swiss Franc and the Euro, which actually helped the Euro?

If so, we should expect the markets to be completely upset by the decision which is expected from Merkel and co tomorrow (Thursday) announcing a rescue package for Greece

But don't expect markets to be roiled by the decision, expect the euro to stabilise - whether America will fall further, as Americans and others switch more money to the euro is difficult to say

In the medium term, I continue to expect the dollar as well as the euro to stabilise and strengthen, as against emerging market currencies (excluding the Indian rupee which should continue strong)

Expect gold to continue stabilising and coming back into line with reality, unless President Obama's jobs speech disappoints too badly (it is expected to disappoint somewhat anyway as there's not really much he can do about that without changing global trade rules in line with environmental and human responsibility) Sphere: Related Content

Following SNB announcement, expect the Euro to stabilise today and to strengthen from Thursday or Friday

As I expected (and mentioned in my Twitter and Blog over the last several days), the Swiss National Bank (SNB) has now announced that it is prepared to buy "foreign currencies" (read dollars and euros) in “unlimited quantities“ as “the current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk" of deflation.

This efffectively sets a ceiling to the franc’s strength and aims "for a substantial and sustained weakening of the Swiss franc”.

Whether the SNB's interventions will be effective remains to be seen - but, I expect, that combined with the marginal effect in stabilising the euro and strengthening of the dollar (the latter was going to happen anyway, even without support from the SNB, but will now happen the more effectively).

Briefly, expect the Swiss Franc to stabilise and perhaps weaken a bit; and expect SNB intervention to help stabilise the euro and strengthen the dollar. Sphere: Related Content

Shadow-fighting between sheepdogs and sheep

US regulators have now moved to try to calm markets: http://www.ft.com/intl/cms/s/0/3602091a-d7e0-11e0-a5d9-00144feabdc0.html#axzz1X76F4SXC

This is classic shadow-fighting. Announce a legal action after markets close on a long weekend, and then, before that long weekend itself closes (i.e. just before midnight last night UK time) announce that the suit MIGHT be settled out of court, and for something like a tenth of the value of the original action.

Certainly, this should calm markets today - whether it does so remains to be seen, because this is merely a public statement about a possible deal, whereas the legal action is already underway, so how the markets will respond depends on the chances they assign to the deal going ahead versus the legal action going ahead.

Equally clearly, FHFA has the upper hand, though the banks are no doubt lobbying as hard as they can against the legal action, and negotiating as hard as they can in relation to the possible deal. My guess is that the deal will be reached, and on terms not too unfavourable to the banks - though the key is not only the terms of the deal but more crucially WHEN the deal is reached.

The impact on the markets today? NOT as severe as I wrote last night - we have pulled back from Armageddon, at least so far this source of trouble is concerned. So watch the Eurozone problems much more carefully, because the Eurozone will therefore get that much less relief from the opening of American markets later today. In other words, we may still get close to Armageddon between now and the Thursday rescue package that I expect from Merkel. Sphere: Related Content

Damned if you do, and damned if you don’t

Following the substantial losses in the Euro markets today (Monday), and in view of the anticipated fall in American markets tomorrow (Tuesday), Asian markets will probably take a beating when they open tomorrow.

The question is: how much of a beating.

The more of a beating they take, the more of a beating we can expect the Euro markets to take when they open, and the more of a beating we can expect American markets to take when, in turn, they open (though the dollar and T-bonds should strengthen as a result).

Meanwhile, American propaganda is attacking Euro markets as hard as it can. Some are attacking Merkel for not providing enough “leadership” (i.e. to provide support for Eurobonds, and for unconditional support to Eurozone periphery states). Others such as Alan Brazil at Goldman Sachs have apparently gone on the record to attack the Euro on the basis that the euro, "may weaken if additional financial support packages or stimulus measures ARE passed by European governments" (emphasis mine).

In spite of the loss of prestige associated with Merkel’s party suffering yet another defeat in a local election, the fact is that Merkel intends to push through a rescue package for Eurozone periphery countries on Thursday.

If so tomorrow will be a good day to buy Euros (I bought Euros 2 days ago, and am suffering the consequences temporarily; I expect to say a very loud “Ouch” tomorrow; however, I expect to recoup my losses and to make a bit by next week).
Sphere: Related Content

Further on sheepdogs biting sheep

Well, the damage across the Asian and European markets could be seen today.

Tomorrow, we will see further damage across not only Asian and European markets, but much more across American markets (assuming that Euro exchanges don't freeze first - if they do, the damage worldwide will be catastrophic).

The reason for anticipating a huge American hit is that the majority of bank sued by the FHFA are American.

Someone in the financial markets responds to me: "But I think the FHFY case is week. The banks are professionals underwriting mortgages, and are saying they didn't know the risks. So it will be settled".

I agree that it will be settled, but not because the argument above is valid, rather because of the damage being caused to markets will be unbearable.

So the question is: how damage the FHFA action will cause to markets before the settlement is reached - whenever it is reached.

My view is that the FHFA was totally right to want to launch a suit, but totally irresponsible in launching a suit of this magnitude at this stage in the global crisis. Sphere: Related Content

The consequences of sheepdogs biting sheep

If world governments do not take pre-emptive action this weekend, or by Monday morning at the latest, as the US is closed on Monday, expect Japan and the rest of Asia (with probably least impact on India) to take the first hit, and then expect Europe to be hit once that opens.

All currencies will fall relative to the USD. On Tuesday, when the US opens for business, expect the USD to strengthen further.

However, expect shares to tank right around the world. Expect commodities (excluding gold) to be hit.

Though bonds should strengthen, we are starting what will be the worst phase so far of the crisis which commenced in 2007.

Politicians have the responsibility to announce as soon as possible what steps they are going to take to address this.

Pray hard, and do everything in your power to keep attention away from nationalisations and from protectionism, and focus on promoting world trade and world growth - preferably in ways that strengthen care for the environment and for the poorest - who will, as usual, be hardest hit.
Sphere: Related Content

So the sheepdog has turned and bitten the sheep!

I seee that the Federal Housing and Finance Authority (FHFA) has launched mortgage-related lawsuits, worth nearly USD 200 billion, against 17 US and European banks - including JPMorganChase, Royal Bank of Scotland, Countrywide Financial, Merrill Lynch, Deutsche Bank, Credit Suisse, Goldman Sachs and Morgan Stanley.

This is ironic, considering that it was the US Government's Dept of Housing and Urban Development (HUD) which invented sub-prime securitisation and pushed it and persuaded banks to go in for it even when it was arguably illegal to do so! The practice remained technically illegal (even though "everyone was doing it") till the 1999 revocation of the Glass-Steagall Act - so the Administrations (from both Democrat and Republican parties, in turn) first encouraged breaking the law, and then changed the law in 1999

And it was the FHFA's predecessor body, the Office of Federal Housing Enterprise Oversight (OFHEO - an Agency within HUD!!!) which, if it did not actually cajole FannieMae and FreddieMac into going into sub-prime securitisation, at the very least signally failed in its official duty of ensuring the capital adequacy and financial safety and soundness of FannieMae and FreddieMac...

If the 2 FMs had not gone in the direction they did, it is doubtful that the housing bubble would have happened

Of course the housing bubble was only one of the many bubbles that was around at the time that the current crisis started (2007). The puncturing of that bubble I put down firmly to the speculation that drove the price of oil so high that the consequent rise in transport and commodity costs made it impossible for sub-prime mortgage holders (who were doing fine till then) to continue to maintain their mortgage payments, thus triggering the crisis.

Well, whatever the history, and however ironic it is, expect more fun and games to result from this suit, as the share price of banks (not only of the 17 targeted by FHFA) is hit by this action, which will have domino effects on their need for recapitalisation, and will create further uncertainty regarding the legal environment for finance and business - and, in the medium term, not only in the US.
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