Prieur’s readings (March 8, 2010)
This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.
• Steven Sears (Barron’s): Controverting complacency, March 8, 2010.
It is now quite fashionable for anyone active in the markets to remark that investors are too complacent. As evidence, the Chicago Board Options Exchange’s Market Volatility Index is trotted out like some trick pony that talks and predicts the future. Yes, it is true that implied volatility, which is the true animating force of the options market, is markedly lower than, say, toward the end of 2008 when the world’s financial markets were crumbling. But options volatility declines for many reasons, like a lack of volatility in the stock market, or because many investors already bought puts to hedge portfolios.
• Rainer Buergin and Philipp Encz (Bloomberg): Volcker says too soon to cut US monetary, fiscal stimulus, March 8, 2010.
White House adviser Paul Volcker said it’s too soon for U.S. policy makers to withdraw the stimulus measures and interest-rate cuts used to fight the worst slump since the Great Depression. “This is not the time to take aggressive tightening action, either fiscally or monetary-wise,” said Volcker in an interview in Berlin March 6, pointing to “high” unemployment. “So I think we have to, as best as we can, maintain the expectation that it will be taken care of in a timely way.”
• Daniel Indiviglio (The Atlantic): Is credit growing? March 5, 2010.
On Friday the Federal Reserve released consumer credit data for January. Credit grew at an annualized pace of 2.4% during the month. The nonrevolving portion grew at a more rapid pace – 5.0% annualized. Revolving credit, however, declined further, an annualized 2.3%. Yet, this data appears to indicate that overall credit conditions may be improving somewhat – or is it just a blip?
• Spyros Andreopoulos, Joachim Fels and Manoj Pradhan (Morgan Stanley): Debating debtflation, March 5, 2010.
The Greek crisis has brought sovereign debt to the forefront, capturing markets’ attention. We think another dimension of the sovereign issue, the inflation risks inherent in high levels of public debt for economies that can print their own currency, is being overlooked by the markets. High levels of public debt in many advanced economies raise the spectre of inflation, in our view: if high debt is deemed undesirable, but the political will for higher taxes and lower spending is lacking, then ‘soft default’ through inflation becomes a possibility.
• Robert Shiller (The New York Times): Mom, apple pie and mortgages, March 5, 2010.
For decades, the federal government has subsidized housing – particularly owner-occupied housing. This has been especially true during the continuing financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration propping up the housing market by issuing guarantees for investors on most new mortgages. But what is the long-term justification for putting taxpayers on the line to subsidize homeownership? Is this nothing more than a sacred cow in American society – a political necessity because so many voters own homes and are mindful of their resale value?
• Shahien Nasiripour (Huffington Post): Stiglitz, Nobel prize-winning economist, says Federal Reserve system “corrupt”, March 3, 2010.
One of the world’s leading economists said Wednesday that the very structure of the Federal Reserve system is so fraught with conflicts that it’s “corrupt”. Nobel laureate Joseph Stiglitz, a former chief economist at the World Bank, said that if a country had applied for World Bank aid during his tenure, with a financial regulatory system similar to the Federal Reserve’s – in which regional Feds are partly governed by the very banks they’re supposed to police – it would have raised alarms.
• David Livingstone (Llinlithgow Associates): Skirting the abyss – from economic downturn to financial crisis to long-term malaise, March 2010.
We came right up to the edge of the economic abyss after a year of an accelerating economic downturn and have managed to avoid it, but are not out of the woods yet. The risks of a double-dip are growing and the likelihood of a weak recovery and poor job creation is high. A key problem is and was the financial crisis and credit market collapse which has created major lingering problems that will be with us for years. Beyond that a two-decade over-accumulation of debt, drastic declines in savings and under-investment have created long-term problems for getting back to sustainable long-term growth.
• Bruce Bartlett (Forbes): How much does the national debt matter? March 5, 2010.
Before we can take meaningful steps to control the debt – or even understand its true cost and effect on the economy – we first have to understand what it is.
• Jeremy Warner (Telegraph): Greece is a harbinger of austerity for all, March 5, 2010.
The economic crisis reached a turning point this week. What I am referring to is the sense of resignation, or surrender, that has crept into the economic argument – a collective global realisation that public policy, fiscal and monetary, has reached the limits of its ability to fight the downturn. Two events this week have highlighted that, despite a stimulus of unprecedented proportions and scope, they cannot. The first was the additional austerity package announced by Greece under pressure from its European masters. And the second was the spectacle of Jean-Claude Trichet, president of the European Central Bank, asserting his determination to “normalise” monetary conditions – while tacitly acknowledging the impossibility of even trying to do so, as long as the eurozone economy remains as stagnant as it is.
• Michael Wines (The New York Times): China’s bank chief says currency is unlikely to rise, March 6, 2010.
China’s central bank governor indicated Saturday that the government was unlikely to detach the value of China’s currency from that of the dollar anytime soon, echoing Prime Minister Wen Jiabao’s statement on Friday that exchange rates would remain “basically stable” for now.
• Michael Pettis (China Financial Markets): Stuck in neutral – what Japan’s rebalancing can teach us, March 2, 2010.
Japan’s experience suggests one of the risks China faces. It is easy to talk about rebalancing as a solution to the underlying problem China faces, but rebalancing can be “tricky”, and it does not lead automatically to growth – that depends to a significant extent on how quickly consumption grows, and can take many years before that happens.
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