The Fed tapered again today in unanimous fashion, another $10 million in total. It had been telegraphed for a while so it really wasn't much of a shock according to the Street but the DOW closed down 189+. Now you can tell me all day long that the tapering had nothing to do with it and I wouldn't believe it. It surely has contributed to the emerging market disruptions where investors have associated the Fed actions with higher interest rates on the long end and a lessening of liquidity globally. reaction? Sell the local currency and flee to safety. This is certainly the reading put on the situation by emerging market pols charging that there is a concerted effort to crush asset prices in order to create fire sale conditions. Then again, whilst the central bank heads were certainly aware of what the future would probably hold, the Christinas of the world were very happy to use hot money to fund self-created deficits. But the underlying is true; the expectation of a lowering of liquidity, whether real or not, has spooked equities coupled with lackluster earnings and the suspicion that the great asset bubble of stock prices may just be poised for a puncture.
From the standpoint of politics, the stock market was the only thing going right for The Leader and a major correction in this, an election year, would not be a good thing for either himself or his party. Which is why I still need to be convinced that Janet is going to follow up with a continuation of the new policy unless there is an improvement or reversal of the conditions we see today. In case you missed it, The Leader didn't really help his own cause or remove market jitters with what could only be call an uninspired and uninteresting campaign speech dubbing for the State of the Union address last night. Not quite dreadful but entirely forgettable.
The question I guess is how long is the emerging markets run going to continue and is there a chance of contagion? Too soon to tell I think but while the damage of which the Argies or the Zulus are capable may not be much at this stage, Turkey is a real country and India is not insignificant. If one remembers, all the bad stuff in 1987 started in Thailand for pity sakes and none of the present countries involved or those on the periphery have anything resembling the Fed or the Bank of England as a central bank.
So it looks as though we are going to have to adopt a "wait and see" attitude as to where this goes if anywhere. One would think there is a better way to run the world but I guess not. I'm not sure this is the best time (if there ever is one) to have multiple currency crises which might lead to global liquidity issues because this mob in D.C. is a long way from being the First Team and are anyway far more concerned with domestic politics than with might be collapsing Over There or Anywhere. The good news is it got up to +14F in the Fly-Over Zone today. Gotta work on my sun tan.
Showing posts with label contagion. Show all posts
Showing posts with label contagion. Show all posts
Wednesday, January 29, 2014
Tuesday, May 15, 2012
CONTAGION
Greece is gone as the reelections that will occur in about a month's time will produce a clear winner or a coalition that will have to promise to renegotiate the agreement with the Troika. That will not occur, Greece will default and declare itself free of all agreements and of Euroland.
If things go true to form, a bank holiday will be declared, a new Greek currency will be--or have been-- printed and there will be a rate at which Euros will be exchanged which will quickly lead to a black market, to currency controls, to shock on the part of the general populace and, if the most dire predictions come true, something not much better than a barter society coming into existence for a considerablly long period of time. Will any one care? No, not really because no one has ever really believed that Greece is a serious country...a beautiful county, yes, but not a serious one.
Problem is, Greece was once part of Euroland and if this can happen in Greece, the question will be where else can it happen? The usual suspects are there for all to see and the issue of contagion is becoming front page stuff. I have a slightly different take on the situation because, you see, I think the horse is already out of the barn. Tell you why.
We Yanks really don't think in terms of currency risk. Take the low tax paying Warren Buffett. Ol' Warred thinks that gold is a stupid investment; he would much rather own stocks and bonds and dollars. I don't think that Mr. Buffett has ever realized that in India, the nation with the largest population in the world, peoples' 401Ks are worn openly on the arms of the populace. Gold. For over a billion people. That's real value, not to us. People think differently than we do--not necessarily better--just differently.
The European experience has been far different from ours. The differing value of currencies is well-understood by all Europeans. They have experienced it first hand. In Greece as in many other countries in the Eurozone the smart money is already gone. It hasn't gone into Citibank Athens either. It's gone to Germany, to Switzerland and yes, to the United States. When the time comes for the introduction of the Drachma there will be plenty of Euros about, emerging from Germany and Switzerland and from under the mattress. And as always happens those in possession will make an enormous amout of money adding to the arguments between the haves and the have nots. Assets for hard currencies will be dirt cheap leading to substantial foreign investment and of course transfer of local ownership. Not a pretty picture. And it has substantially begun.
In the other weak economic countries the flight of the Euros, of course meaning bank deposits, continues apace. It's just the "smart" money now but soon the average Juan or Mario or perhaps even Henri begins to figure this out the process will accelerate. Oddly, one effect might be the oft-called-for growth in the money supply through the actions of the ECB may become a reality as the deposit drain from the banking system will require it. And then what? It is the answer to that question on which politicians and bankers should focus. Stop worrying about what you call contagion; that is already occuring. Focus on what happens when Greece is truly, de jurie, gone or it will be more than Greece.
The Bold Experiment will be no more.
If things go true to form, a bank holiday will be declared, a new Greek currency will be--or have been-- printed and there will be a rate at which Euros will be exchanged which will quickly lead to a black market, to currency controls, to shock on the part of the general populace and, if the most dire predictions come true, something not much better than a barter society coming into existence for a considerablly long period of time. Will any one care? No, not really because no one has ever really believed that Greece is a serious country...a beautiful county, yes, but not a serious one.
Problem is, Greece was once part of Euroland and if this can happen in Greece, the question will be where else can it happen? The usual suspects are there for all to see and the issue of contagion is becoming front page stuff. I have a slightly different take on the situation because, you see, I think the horse is already out of the barn. Tell you why.
We Yanks really don't think in terms of currency risk. Take the low tax paying Warren Buffett. Ol' Warred thinks that gold is a stupid investment; he would much rather own stocks and bonds and dollars. I don't think that Mr. Buffett has ever realized that in India, the nation with the largest population in the world, peoples' 401Ks are worn openly on the arms of the populace. Gold. For over a billion people. That's real value, not to us. People think differently than we do--not necessarily better--just differently.
The European experience has been far different from ours. The differing value of currencies is well-understood by all Europeans. They have experienced it first hand. In Greece as in many other countries in the Eurozone the smart money is already gone. It hasn't gone into Citibank Athens either. It's gone to Germany, to Switzerland and yes, to the United States. When the time comes for the introduction of the Drachma there will be plenty of Euros about, emerging from Germany and Switzerland and from under the mattress. And as always happens those in possession will make an enormous amout of money adding to the arguments between the haves and the have nots. Assets for hard currencies will be dirt cheap leading to substantial foreign investment and of course transfer of local ownership. Not a pretty picture. And it has substantially begun.
In the other weak economic countries the flight of the Euros, of course meaning bank deposits, continues apace. It's just the "smart" money now but soon the average Juan or Mario or perhaps even Henri begins to figure this out the process will accelerate. Oddly, one effect might be the oft-called-for growth in the money supply through the actions of the ECB may become a reality as the deposit drain from the banking system will require it. And then what? It is the answer to that question on which politicians and bankers should focus. Stop worrying about what you call contagion; that is already occuring. Focus on what happens when Greece is truly, de jurie, gone or it will be more than Greece.
The Bold Experiment will be no more.
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