4th Quarter 2015

Macroeconomic analysis, for Strategic investments.

How Financial Madness is overtaking the world ? In January 2001, at the G7 meeting in Washington, the participants came out with a New Strategy:“The New Order”,  on how to boom the world economy: Banks will lend money to any and all good and bad risk countries and to any and all good and bad risk private investments in industry, service and real estate. This will generate phenomenal consumption: Payment reimbursement will easily cover payment default of bad risk countries and bad risk private investments. This beautiful strategy ended with catastrophic bad results!  Reimbursement defaults were more phenomenal than Reimbursement payment. Thus, today I do not say and none of us would say thanks to Barak, François, Angela, George, Jacques, Gerhard, Tony, Yasuo, Sylvio and Jean. Now, let’s get back to what happened, what is happening and what our crystal ball is saying for the near future. If you’re having a little trouble coping with what seems to be the complete unraveling of the world’s financial system, you needn’t feel bad about yourself. It’s horribly confusing, not to say terrifying; even people like me, with a combined 20 years of writing about geo- politics, economy, banking, finance and monetary policy, are much frightened about what’s going on. Some of the smartest, savviest people in this political and economic world find themselves reacting to problems rather than getting ahead of them. It’s terra incognita, a place no one expected to visit. The subprime story,  Lehman’s collapse, madoff’s story, and now Greece collapse, and soon Italy, Spain, Portugal, France and Ireland, precipitated the latest chapter of that crisis, causing stock markets, bonds, euro currency and overall credibility in total instability. Every day brings another financial horror show, as if Steven Spielberg was channeling Ben Bernanke, Mario Draghi and Toshihiko Fukui to produce scary movies full of negative numbers.

There are two ways to look at this. First, the stock markets way, which features theories, numbers, equations and gobbledygook and, ultimately, rationalization. Second, there’s the right way, which involves asking the questions that really matter: How did we get here? How do we get out of it? And what does all this mean?  So take a deep breath and bear with me as I try to explain how financial madness overtook not only worldwide stock markets but also banks, businesses and countries. And why, in the end, almost all of us, collectively, are going to pay for the consequences. Going forward, there’s one particularly creepy thing to keep in mind. In normal times, problems in the economy cause problems in the financial markets because hard-pressed consumers and businesses have trouble repaying their loans. But this time — for the first time since the Great Depression — problems in the financial markets are slowing the economy rather than the other way around. If the economy continues to spiral down, that could cause a second dip in the financial system — and we’re having serious trouble dealing with the first one. Stock Marketers didn’t have to worry about regulation, which was in disrepute, and they didn’t worry about risk, which had supposedly been magically whisked away by all sorts of spiffy nouveau products — derivatives like credit-default swaps. This lack of fear became a hothouse of greed and ignorance on major Stock Markets. When greed exceeds fear, trouble follows. Stock markets have always been a greedy place and every decade or so it suffers a blow resulting in a bout of hand-wringing and regret, which always seems to be quickly forgotten.  This latest go-round featured fund operators, leveraged-buyout boys (who took to calling themselves « private-equity firms ») and whiz-kid quants who devised and plugged in those new financial instruments, “hedge funds” and “derivative products”, creating a financial Frankenstein the likes of which we had never seen. Great new fortunes were made, and with them came great new hubris.

Ignorant folks in the world of finance created, bought, sold and traded securities that were too complex for them to fully understand. I predicted this financial crisis many years ago. Revert to my analysis dated December 2008. What is that catastrophe?  Threats of global financial meltdown, stocks plunging, corporate capitalization disappearing, bursting of housing, equity, bond, credit, commodity, funds and private-equity bubbles, Lehman brothers already forgotten, worldwide banking system on the edge of bankruptcy, global recession looming, starting of deflation, beginning of crash landing of some better- performing economies such as Brazil, Russia, India and China, unemployment growing, social unrest increasing, revolution in Arab countries and Persia  putting at risk export of crude oil, possible bankruptcy of Greece, Italy, Spain, Portugal, Ireland, pressure on the euro, et cetera. The global economy will slow close to a halt this year.

What is the quick action undertaken? France and Germany heads of State, central bankers, finance chiefs, worldwide heads, and moreover, G8 and G20 meetings after meetings, pledge to take all necessary steps to prevent the failure of the world economic system and confirm launching of new rules and regulations of « state expenditure » and “doing banking”.

However, all that so far,  without detailing how that would be accomplished, without unveiling new  initiatives for thawing credit markets and without concretizing specific fresh measures. Global central banks cutting in emergency interest-rate, pumping in emergency more cash into markets, backing « systematically important financial institutions » –they forgot my banking institution, but they know I have been very wise-  making encouraging speeches. But, this is not enough, as Don Quichote has been fighting against windmill too. Don’t we forget that European growth is disappearing, companies are filing chapter 11, unemployment is growing, and social unrest is developing.

The CAM Plan:

There’s no question that the crisis has gone so deep that it cannot be halted by one stroke. Banks, industrial, commercial and service corporate around the globe are struggling to pull themselves out of this mess. Rebuilding will take time, vast amounts of money and constant attention. Sooner or later, the hundreds of trillions of Euros and dollars that the central bankers are throwing into the markets, the New Banking Order, the regulation of the wild capitalism, will stabilize worldwide economy. I suggest the following plan, called “CAM Plan”. First, let the US dollar go higher –I would say 1/1 to euro-  so as to attract foreign investments in the USA, and develop growth and absorb unemployment, second, let interest rates be lowered to zero, so as to increase export, in order to get liquidity and growth, and third, let’s control commodities prices in order not to destabilize inflation rates; fourth, all central banks simultaneously to print as many trillions as needed to salvage banks, industries and countries, that will lead to more employment, that will lead to more taxes on salaries and that will lead to growth. In Europe, the “CAM Plan” urges EU heads of state to establish a worldwide new “New Order.” The “CAM Plan” suggests Central Banks to launch an ambitious and coordinated plan to tackle the financial crisis in lowering to “zero” key lending rates as part of a coordinated easing of monetary policy with global counterparts. Central Banks should offer to banks unlimited funding every week at the main refinancing rate. After that, stock markets need to accept that these « measures take time to work ».  To salvage the markets, maturing process will be long. It suggests total new banking rules and regulation, policy and procedures and recapitalization in worldwide banks.  No more hanky-panky investments. The “CAM Plan” suggests thus to shake-up global financial architecture and to map out stable, integer and regulated plan and high-quality accounting standards, to overcome the financial turmoil, to deepen cooperation, to improve world banking policy and procedures, rules and regulation, to supervise the overall functioning of the world’s financial markets and to avoid the go-it-alone protectionist trade strategies that worsened conditions during the Great Depression of the 1930s.. It urges China to allow faster appreciation of its Yuan. I view excess volatility in exchange rates as detrimental. It proposes countries with current-account deficits and those with surpluses to maintain orderly financing of deficits and « avoid a disorderly adjustment of such imbalances. » And not to limit the flow of goods, services or capital isolationism and protectionism and to offer a way to contain the spreading damage. The “CAM Plan” suggests that indecent cash revenue and savings accumulated by oil rich producing countries go to help developing countries facing growing misery. Coping in this new world will require adjustments by millions of investors and hedge funders. We all will have to start living within our means -or preferably below them- If you don’t over borrow or overspend, you’re far less vulnerable to whatever problems the financial system may have. And remember one other thing: the four most dangerous words in the world for your financial health care « This time, it’s different. »  My answer is: It’s never different. It’s always the same, but with bigger numbers.

What my crystal ball is saying: On short and medium terms, hedge funds deleveraging soon will push stock markets lower another 20%; volatility will remain; worldwide economy will slow down until 2015. US dollar will go higher so as to attract foreign investment so as to absorb unemployment; this is on line with President Obama’s policy. Moreover, barrel prices will go lower, maybe back to US dollars 50 (fifty) so as to limit inflation, on line with lowering interest rates to zero to boom growth; and as democrats politicians are not oil producers. If such monetary policy, “CAM Plan” is well managed, thus achieving and anchoring stable inflation, otherwise, gold prices will go higher. And last but not least are some observers cautious because government’s commitments « have not been tested », i.e. investors will only trust them after governments have actually paid interest or capital of a bond of a supported bank. We still expect conditions to improve as pressure on banks to sell troubled assets is abating. And we regard the commitment of the governments to support the banks as given. Yet the normalization will take some time. Recapitalization of the banks being the right strategy, money market tensions will ease soon, while the credit market will remain tight. Investors should already look one step ahead and focus on the impact of the economic slow-down on the quality of their holdings, in terms of shares, commodities and precious metals. A consolation: This crisis, as of today, is much smaller than the 1929 great depression crisis and the 2002 dot-com crisis.  Today, I am happy to say that “wild capitalism will be regulated”.