![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
Happy Macro
Sep. 17th, 2005 05:57 pmWhere does spare time go? I'm sure that I had some when I got up. But since then I've been, well, doing things, and none of it seemed to leave any spare time. These days, you just keep running and running in order to stand still.
So, welcome to Pete's Saturday "we are all doomed" mode. First we can take the view of Morgan Stanley's chief economist Stephen Roach, perfectly summarised by the excellent columnist Stephen Schurr in today's FT. Mr Roach is saying, in blunt terms, that the US can't go on like this. Alan Greenspan and Warren Buffett and Bill Gates say the same. The only real difference between any of them is that Greenspan thinks the situation can be managed down, while Roach thinks we will reach a "tipping point". Whatever, it still seems like no-one in politics or in the public household is listening. Do you know what the personal savings rate was in the US in July (and I will admit that this number shocked even the normally unshockable me when it comes to observing the fiscal irresponsibility of Joe US PUblic)? It was minus 0.6%. Man, they must have good advertisers and marketers out there (or very stupid consumers). I'm not sure what the savings rate is in Germany and Japan is at the moment, but I can tell you for sure that it isn't negative (probably somewhere between 10% and 15% would be my guess).
The current account deficit in the US will climb above 7% as money is spent rebuilding New Orleans (wherever it is rebuilt) as expensive condos and "San Franciso on the Gulf", but no-one realizes that this also means that there should be a concomitant cut in personal consumption. All these numbers aren't just mad -- they are irredeemably nuts. The US overspend is funding about three-quarters of the rest of the world's current account surpluses. If and when the US stops being able to borrow against its future, there will be either a massive economic upheaval or a massive political upheaval, or both.
However, another obscure number slipped through this week which did not get the same kind of attention as is rightly being paid to the "spend on the never-never" economy which is keeping the rest of the world's economy moving. That number was the spread that investors in fixed income bonds were prepared to accept compared to T-Bills. In July it shrank to 44bps. Now, I can see why that might not make the headlines, especially since it only shrank something like .01bp from the month before. But let's put this in terms of simple numbers.
It basically means that investors are prepared to invest in a company that might go bust, rather than in US bonds, for just an extra 0.44% return. People in the market euphemize this as "an increased appetite for risk". We in the land of common sense prefer the slightly less technical term "insane beyond belief". If you ignore the tulip economics argument (that being, "yes, I know this bond is mispriced, but someone will pay more for it next week") then you are, as far as I am concerned, in a land where real risk has walked miles away from the price of risk. And you know what I blame? Yes, my old favourite, collateralised debt obligations. I think that, because investors tell themselves that they are investing in mathematically sophisticated relatively non-correlated "baskets" of 125 companies, they can afford a greater appetite for risk. But, it seems to me, this is Alice in Wonderland mathematics. If you get 125 companies all investing in CDOs consisting of 125-company baskets, no risk has disappeared. All that happens is that 125 companies suffer a bit of damage rather than all the damage lumping onto a single investor. In a sense this is like insurance -- everyone suffers a bit rather than one investor suffering a lot — but it doesn't eliminate the total amount of pain felt. The big worry is where the non-correlated turns out not to be non-correlated at all. The other worry is that if all the investors suffer "a bit", that means they will all shift in the same direction when there is a bad hit (say, for example, Ford and General Motors going broke). This could lead to a tipping point where the liquidity that Greenspan believes will keep us out of the shit will just vanish in a puff of smoke.
Of course, as this prophesier of doom, I desperately hope Greenspan is right and I am wrong, because the implication for the global economy is so horrifying that one has to see political upheaval following on.
How do these two topics tie together? Well, if Roach is right and there is no way to soft-land the current imbalance in global economies, then the only way to get things back in sync is to have a discrete event (or, in less technical terms, one hell of an economic and political shock). My own hunch is that that tipping point is going to come when the "appetite for risk" shifts from the currently absurdly low levels to something more in touch with reality.
So, welcome to Pete's Saturday "we are all doomed" mode. First we can take the view of Morgan Stanley's chief economist Stephen Roach, perfectly summarised by the excellent columnist Stephen Schurr in today's FT. Mr Roach is saying, in blunt terms, that the US can't go on like this. Alan Greenspan and Warren Buffett and Bill Gates say the same. The only real difference between any of them is that Greenspan thinks the situation can be managed down, while Roach thinks we will reach a "tipping point". Whatever, it still seems like no-one in politics or in the public household is listening. Do you know what the personal savings rate was in the US in July (and I will admit that this number shocked even the normally unshockable me when it comes to observing the fiscal irresponsibility of Joe US PUblic)? It was minus 0.6%. Man, they must have good advertisers and marketers out there (or very stupid consumers). I'm not sure what the savings rate is in Germany and Japan is at the moment, but I can tell you for sure that it isn't negative (probably somewhere between 10% and 15% would be my guess).
The current account deficit in the US will climb above 7% as money is spent rebuilding New Orleans (wherever it is rebuilt) as expensive condos and "San Franciso on the Gulf", but no-one realizes that this also means that there should be a concomitant cut in personal consumption. All these numbers aren't just mad -- they are irredeemably nuts. The US overspend is funding about three-quarters of the rest of the world's current account surpluses. If and when the US stops being able to borrow against its future, there will be either a massive economic upheaval or a massive political upheaval, or both.
However, another obscure number slipped through this week which did not get the same kind of attention as is rightly being paid to the "spend on the never-never" economy which is keeping the rest of the world's economy moving. That number was the spread that investors in fixed income bonds were prepared to accept compared to T-Bills. In July it shrank to 44bps. Now, I can see why that might not make the headlines, especially since it only shrank something like .01bp from the month before. But let's put this in terms of simple numbers.
It basically means that investors are prepared to invest in a company that might go bust, rather than in US bonds, for just an extra 0.44% return. People in the market euphemize this as "an increased appetite for risk". We in the land of common sense prefer the slightly less technical term "insane beyond belief". If you ignore the tulip economics argument (that being, "yes, I know this bond is mispriced, but someone will pay more for it next week") then you are, as far as I am concerned, in a land where real risk has walked miles away from the price of risk. And you know what I blame? Yes, my old favourite, collateralised debt obligations. I think that, because investors tell themselves that they are investing in mathematically sophisticated relatively non-correlated "baskets" of 125 companies, they can afford a greater appetite for risk. But, it seems to me, this is Alice in Wonderland mathematics. If you get 125 companies all investing in CDOs consisting of 125-company baskets, no risk has disappeared. All that happens is that 125 companies suffer a bit of damage rather than all the damage lumping onto a single investor. In a sense this is like insurance -- everyone suffers a bit rather than one investor suffering a lot — but it doesn't eliminate the total amount of pain felt. The big worry is where the non-correlated turns out not to be non-correlated at all. The other worry is that if all the investors suffer "a bit", that means they will all shift in the same direction when there is a bad hit (say, for example, Ford and General Motors going broke). This could lead to a tipping point where the liquidity that Greenspan believes will keep us out of the shit will just vanish in a puff of smoke.
Of course, as this prophesier of doom, I desperately hope Greenspan is right and I am wrong, because the implication for the global economy is so horrifying that one has to see political upheaval following on.
How do these two topics tie together? Well, if Roach is right and there is no way to soft-land the current imbalance in global economies, then the only way to get things back in sync is to have a discrete event (or, in less technical terms, one hell of an economic and political shock). My own hunch is that that tipping point is going to come when the "appetite for risk" shifts from the currently absurdly low levels to something more in touch with reality.
