Monday, 15 September 2008

Risks and The Macro-economy

So here is what I think is a very important and interesting speech given by the European Central Bank - ECB - president, Jean-Claude Trichet .

"A long phase of heightened risk tolerance in our economies has come to an end. To the extent that the more recent turns in the markets correct past excesses, this is a welcome – if painful – process that we had anticipated and asked market participants to prepare for in past interventions."

Market participants have been warned, and I do hope that they don't forget to warn the locomotive of the economy - the citizen. It is true by having high interest rates, it gives the message that now borrowing is not a good idea, but if you do, so you will pay a high price for it.

"To the extent that this interpretation has some merit, a less fortunate string of shocks could always bring more ample swings in economic conditions – looking forward – than we have grown accustomed to from past experience. And this could entail repercussions for the valuation of investment risk in various financial markets. In this case a return to historical valuations for risk would imply large negative returns for a possibly extended period of time"

He makes very interesting point, saying that "we have grown accustomed to from past experience" i.e stock and housing just go one direction: UP. Ask that to the japanese, they grew accustomed that housing go only one direction: DOWN. Although it's unfair to compare Europe or the US to the Japan experience....

What could be seen as worrying is what he says after, "In this case a return to historical valuations for risk would imply large negative returns for a possibly extended period of time"

I'm not sure about what he means that an "Extended period of time", is that 2 years or two decades?

What about the view of the CEO of Royal Bank of Canada?

"Gordon Nixon, CEO at Royal Bank of Canada, the nation's biggest bank by assets, called conditions the worst since the Great Depression and said lack of liquidity, rather than credit quality, is a bigger issue.

Bank of Nova Scotia CEO Richard Waugh said the global credit crunch is 'the worst we've ever seen' and that liquidity had been mispriced for years without enough regard for risk.

A multi-decade era of relatively easy credit is 'over' and borrowing will be tougher, Nixon said, forcing lenders and companies that borrow to adjust their business models accordingly

Indeed Stocks and Housing hase been growing steadely, even if bumps were on the road. In the past 3 years it seems that this environment has changed. As usual, the U.S. is ahead in term of business cycle and adjustement - they saw their housing and stock readjusting.

The process of delevering, how can it be better said by the bigger Bond investor and GURU, PIMCO's Bill Gross.

"PIMCO's Bill Gross explains why the markets for houses, stocks, and bonds are all crashing at once--and why they all have much farther to go. In a sentence? The global economy is in the process of delevering (reducing debt by selling assets)"

How about Mr Greenspan (ex- 18 years - Fed Chairman of the American Federal reserve) view about the current situation - come on try to be positive - ...

"Let's recognize that this is a once-in- a-half-century, probably once-in-a-century type of event" — the worst "by far" in his career, Greenspan said.

"There's no question that this is in the process of outstripping anything I've seen, and it is still not resolved," Greenspan said in an interview today on ABC's

I don't even talk or mention Lehman brothers, should they fall, like a domino, it's the whole shadow banking system that will collapse (Merril Lynch, Morgan Stanley, Goldman Sachs etc...). Unstable? you said...not sure where is the floor...I just hope that the American fed will use the American public money (socialize the losses) in order to rescue the rest - the world.

Update: Well, lehman this morning has gone bust. World wide stock market are slumping. In fact, it looks like we are slowly seeing the end of the current crisis as the weakest player are disapearing while the stronger will manage to survive: it's a painful but healthy happening.

-ECB by Jean-Claude Trichet: "Risk and the Macro-economy" , quite big article worth to read (put in comments some other points which I could have missed (the positive one ;->))


andrew said...

Housing Finland,

I dont think anything can be done to stop rates going up. As i have said for some time now, real rates are negative or very very low. The ECB has announced it intends to tighten lending to banks via the emergency measures in Feb 2009 but the Fed just announced they are relaxing emergency lending to Banks.

Rates obviously want to find a natural place much higher than where they are now.

If the Fed goes thru with forcing banks to delever and forcing transparancy of the books - even while they protect the market with even lower lending standards - then in time the inflationary effects will be controlled.

And this is not just a USA thing. Even Deutsch have bad loans into the housing market. The Central banks priority is to protect the banks primarily before it protects the citizen.

(Just like any banks priority is to protect itself before it protects the home owners.)

*Nothing* that is currently happening is giving any indication at all that I would owe you some beers if you had taken up that bet:-(

I agree we need some posative news.

Lehmans filing BK is actually a posative because it shows that although easier money is being supplied to the banks there *is* an expectation that these are only loans that must be repaid one day.

HousingFinland said...

Hi Andrew,

-Inflation? no but deflation... -

"As i have said for some time now, real rates are negative or very very low."

How do you come up with that? nowdays you can open a 1-2 year fixed account for around 5.3%, which cover against (a falling) inflation.

Current inflation is only the reflection of what had happenned in the past 5 years - too much lending and euphoria. This has come to an end. One has to look forward.

Now, all I see coming is deflation, could even be a big one.

Remember, the only objectif of the central bank is to bring back inflation to target, that is around 2%.

Obviously, there is room for mistakes in Finland if union are foolish enough to request, at the ext round of wage negotiation, about or above current inflation (~5%) wage increase.

-Black Monday-

Indeed it will remembered as a black monday which saw the collapse of Lehman and the disappearance of Merryl Lynch and maybe the same faith is awaiting AIG.

-My Pinch on housing-

In Finland, we are clearly seeing an overheated real estate market, especially commercial one...this is going to bust as banks will have start deleveraging.

The situation won't be as bad as in 1990 where you had a 50% correction but maybe a 25% correction bring back the real estate market to average trend after a surrealistic boom.

-Being Positive-

Believe it or not, but I start to become slightly positif - not about the Finnish housing - but about the current financial crisis, which I think we are slowly seeing the end... although it could be premature but I think in about 3-6 month time it will be worth looking into buying into stock market -not the emerging one- but in the US, German, France and UK.

andrew said...

I wonder if anybody here has an links to how the crisis is impacting Nordic banks? And any expert discussion of that?

For example Handlesbank was specfically mentioned on the chapter 11 filing.

andrew said...

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