Don’t expect the bond markets to cheer the G20 results
Maybe they shouldn’t have issued a joint statement at all.
Certainly the meaningless promise that the leaders of the world’s 20 largest economies cobbled together after this weekend’s meeting of the G20 isn’t going to increase anyone’s confidence in the direction of the global economy.
Finally the differences between the United States, which remains worried about the health of the global economic recovery, and the European Union, which is trying to restore global confidence in the euro, were just too wide to bridge.
The best world leaders could come up with was an agreement that the G20 expected that governments would cut their budget deficits in half by 2013 and stabilize their debt to GDP ratios by 2016.
Couple of important points about that agreement. Read more
International regulators are getting trounced by the banks too
The lesson is clear: Never, never underestimate the ability of banks to beat back the regulators when it really counts.
You might have thought that the international regulators in charge of formulating a new set of rules called Basel III would have had the upper hand after the global financial crisis. You might have thought that putting rules in place to require banks to increase the liquid funds they hold so that they’d don’t go belly up in a crisis would be an easy win for the regulators.
You would have been wrong.
Could we be looking at (another) global credit crunch as central banks step back from the markets?
The world is starved for credit.
I know it doesn’t seem that way what with huge stimulus packages in 2009, massive expansion of the money supply in the United States, China, and Europe, and hand-over-fist expansion of the balance sheets at the U.S. Federal Reserve and the European Central Bank.
But all that may not be enough to make up for the trillions in credit that the market for securitized debt supplied every year—until the 2007 financial crisis. That’s what Gillian Tett argues in a must-read column in today’s (June 24) Financial Times.
Here are the numbers behind Tett’s argument. Read more
Want to know how painful it will be to get the U.S. budget deficit under control? Take a look at the new austerity budget in the UK
Maybe it’s their weather. But for whatever reason the Brits are really good at creating dystopias, those worst of all possible worlds.
1984. A Clockwork Orange. And now finance minister George Osborne’s austerity budget.
The plan announced yesterday projects roughly $170 billion a year in budget cuts and new taxes that are projected to reducethe United Kingdom’s budget deficit from 10% of GDP this year to roughly 2% of GDP by 2015.
The cuts and taxes–$60 billion from the new Conservative-Liberal coalition government plus $110 billion from the Labor government defeated in May elections—amount to roughly 6% of the country’s GDP. (That’s roughly equal to cuts and taxes of $840 billion in the much bigger U.S. economy.)
Wall Street projections suggest that the U.S. needs budget cuts and taxes that range from 3% to 6% of GDP to get its financial house back into something like order.
If you want to know what that would feel like, take a look at Osborne’s budget. That’s what dystopias are for, after all.
Some of the highlights: Read more
Three bombs that could still wreck the recovery from the global financial crisis
I’d love to believe that the global financial crisis is over.
But I can’t.
I just see too many unexploded bombs in the road ahead for me to believe the danger is past.
And I’m not talking about the big bombs ticking away and set to explode in decades. You know the ones I’m talking about: the demographic ones built out of all the promises governments and companies have made to an aging workforce that no one will be able to keep.
No, the bombs that I’m talking about now have much shorter fuses than that. If they go off—and I don’t know which ones or how many will—it will be a matter of quarters not decades, until explosion.
Knowing that they’re out there creates quite a quandary for an investor.
There’s no guarantee that these bombs will go off. If they don’t, you can be on the sidelines when the big gains arrive as many investors were in 2009. And as I was to a degree that left Jubak’s Picks trailing the index by almost half. For the 12 months that ended on March 31, 2010 my portfolio was up 26.6% while the Standard & Poor’s 500 Stock Index was up 49.8%.
But if they do go off, any of them, we could get the kind of downturn that will make the 12.5% drop from the April 23 closing high of 1217 to the June 4 close at 1065 feel like the good old days.
I don’t think any one of these time bombs is big enough to blow a hole in the global economy comparable to that of 2007. I don’t think these bombs are leveraged into the global financial system in a way that would inflict that kind of It’s-the-end-of-the-world’s-financial-system possibility again.
I’m not talking Great Depression here. Or even a replay of the 1929 stock market crash.
But these bombs are big enough to lead to a give-back of a major portion of the huge stock market gains from the March 2009 bottom. Investors and traders really haven’t put fear behind them and it wouldn’t take much to let fear run wild again. What worries me most about that possibility is that I don’t see the kind of growth in the world’s developed economies that would power a stock market rally big enough to make up for those losses.
My take on the market in the 12 to 18 month time period I follow in the Jubak’s Picks portfolio and that I call the middle term—that’s not the short term of a four week summer rally (see my post http://jubakpicks.com/2010/06/15/did-the-summer-rally-begin-today-and-will-it-be-more-than-just-the-return-of-son-of-bounce-ii/) or the long-term of five to ten years (http://jubakpicks.com/2010/05/25/get-used-to-it-the-global-debt-crisis-will-play-out-over-and-over-again-in-the-next-decades/ ) –is to avoid risk when the payoff isn’t sufficient, to play the big relief rallies after massive sell offs with caution when you can, and to try to make your bread and butter, steady money in the stocks of the world’s developing economies. (For some suggestions on picks in those markets when the time is right see my posts http://jubakpicks.com/2010/06/11/the-next-rally-wont-be-like-the-last-one-heres-how-to-make-sure-you-find-the-next-leaders/ and http://jubakpicks.com/2010/06/15/faster-growth-and-cheaper-too-whats-not-to-like-in-emerging-market-stocks/ )
You don’t have to follow that strategy. Maybe you’ve got a better one.
And you don’t have to buy into my talk of time bombs and major stock market routs.
But you should at least make sure you’re familiar with the downside case before you decide on your strategy for the next 12 to 18 months.
Here are the three bombs I’m most worried about in that time period. Read more
