After roller-coaster in late February – early March markets returned to business as usual. Yen falls, dollar weakens the way it should to help solve global imbalances problem and not create too much harm which could be done in more abrupt changes scenario. Aussie and pound strenthen as carry trade continues and markets price in future central banks diversifications across currencies and assets. And yet, I keep reading more and more papers which clearly suggest that there is something out there, which should not let sleep central bankers well at night. Imagine putting a metal ball on the saddle of the racing horse. It can stay there only in exceptional cirmumstances, most likely it will fall on the one side or the other. Am I mumbling or what?
Tags that remain after reading last week papers: housing bubble, subprime loans trouble, credit derivatives downgrades, correlation crisis, private equity and hedge funds regulatory crunch, ugly protectionist beast wakes up, oil prices rise eating into consumer optimism already knocked by upcoming higher mortgage payments and falling house prices in some places. You may look at my resources and browse papers that I added in recent days to verify that something is in the owen, as recent papers on global imbalances seem to reach consensus on the likely outcome.
Below are interesting articles also worth reading:
- Brad Setser blog on US income deficit now adding to global imbalances problem;
- Bloomberg post on New Century going belly up, a quote:
“New Century plans to sell most of its assets within 45 days, said the Chapter 11 filing in federal court in Wilmington, Delaware. About 3,200 people, more than half the workforce at the Irvine, California-based company, will be fired. New Century said it already agreed to sell its mortgage billing and collections unit to Carrington Capital Management LLC for $139 million.The company rode the U.S. housing boom to become the largest independent mortgage lender to subprime borrowers, only to collapse as interest rates rose and home prices fell. New Century’s market value soared to more than $3.5 billion in December 2004, and last year it made about $60 billion in loans. Like rival firms, the company lowered its lending standards to keep business flowing after demand slumped.”New Century Financial Corp., overwhelmed by rising defaults from borrowers with poor credit records, became the largest subprime mortgage lender ever to fail as it filed for bankruptcy today. […] The Wall Street firms that backed New Century probably will have limited losses, Miller said, because their loans were secured by the company’s loans and other assets.“The major institutional holders have said they’re over- collateralized,” he said. Stockholders and junior creditors may be wiped out, he said.”
- IMF First Deputy MD John Lipsky speech on reducing risks of global imbalances, quote:
“Looking ahead, there are clearly many risks to the global outlook that bear close watching. Spillovers from ongoing corrections in the U.S. housing market and in financial markets are of course the most prominent of these risks. But the IMF expects that, while risks to the outlook remain tilted to the downside, global growth in 2007 will again be strong—close to 5 percent.”
“First, in industrialized countries, assets under management of institutional investors—pension funds, insurance companies and mutual funds—have surged, rising from $21 trillion in 1995 to $53 trillion in 2005.
Second, the home bias of the investor base has declined markedly. The globalization of asset allocation has gained traction with declines in informational and other barriers and advances in financial innovation that allow unbundling and reallocation of risk.
Third, emerging market central banks and sovereign wealth funds have become key global players in cross-border asset allocation.”
In short, it is likely that global imbalances will unwind gradually, through a further rebalancing of domestic demand across countries, with supportive market-driven movements in real exchange rates.
At the IMF, we’ve been helping this process along not only through our bilateral discussions with countries but through a new process of multilateral consultations. These first of these consultations have brought together participants from China, the Euro area, Japan, Saudi Arabia and the United States. The discussion has resulted in a better understanding of the policy agenda of each participant. And we hope that this will be reflected in policy choices that are in each country’s interests but also contribute to the reduction of global imbalances.”
- Societe Generale reserach note of risks assesment, quote:
“Despite all the gloom and doom talk, the market is still treating the current episode as
a mid-cycle slowdown. Investors are assuming that the economy will overcome the risks, perhaps with a little assistance from the Federal Reserve. Investors are looking beyond the current soft patch and are still anticipating healthy economic performance outside of a few select sectors. There is always the possibility that the markets may be wrong, but the investor confidence in the economy – manifested in narrow credit spreads – will help support growth by providing relatively cheap capital.”
- President of Iran writes his own blog in three languages.
- Obama raises as much as Clinton in presidential election fundrasing race, big chunk comes from internet, IHT article.
- India outsourcing edge goes beyond cheap jobs, NYT article. Quote:
“Boeing and Airbus now employ hundreds of Indians in challenging tasks like writing software for next-generation cockpits and building systems to prevent airborne collisions. Investment banks like Morgan Stanley are hiring Indians to analyze American stocks, jobs that commonly pay six-figure salaries on Wall Street.
The drug maker Eli Lilly recently handed over a molecule it discovered to an Indian company, which will be paid $500,000 to $1.5 million a year per scientist to ready the drug for commercial use — work that would be significantly more costly if carried out by Americans.
With multinationals employing tens of thousands of Indians, some are beginning to treat the country like a second headquarters, sending senior executives with global responsibilities to work there. For example, Cisco Systems, the leading maker of communications equipment, has decided that 20 percent of its top talent should be in India within five years; it recently moved one of its highest-ranking executives, Wim Elfrink, to Bangalore, the center of the Indian industry, as chief globalization officer.
Accenture, the global consulting giant, has its worldwide head of business-process outsourcing in Bangalore; by December it expects to have more employees in India than in the United States.”