¶
By: Riccardo Ronco on Venerdì 21 Giugno 2002 14:24
x Umberto - penso che questo articolo (un po' lungo...) di Prudent Bear ti possa interessare e, forse, dare una parziale risposta a quello che cerchi.
--------------------------------------------
International Perspective, by Marshall Auerback
Managing the expectations game
June 18, 2002
"For secondary markets to be an effective determinant of system stability, they must transform an asset into a reliable source of cash whenever needed...the secondary market must be a dealer market...there needs to be a set of position takers who will buy significant amounts for their own account...Such position takers must be financed...The only source of refinancing that can be truly independent of any epidemics of confidence or lack of confidence in financial markets is the central bank...It might be highly desirable to have the normal functioning of the system encompass dealer intermediaries who finance a portion of their position directly at the Federal Reserve discount window." – Hy Minsky (“Financial Instability Revisited”, 1970)
Last week pessimistic business representatives in Britain’s CBI were given an inspirational lesson on how to overcome real disaster by the man who lost most of his firm (as well as his brother and best friend) in the September 11th attack on the World Trade Center. Howard Lutnick, chairman and chief executive of Cantor Fitzgerald, gave a moving account of how he rebuilt the firm, literally from the ashes. All in all, an illuminating tale indicating the importance of keeping a positive outlook; the sort of thing that Messrs. Greenspan, O’Neill, et al have sought to promote with their incessant cheerleading of the US economy and stock market. Policy making by Tony Robbins, if you will.
But to judge from the sombre mood of the conference, it is unclear as to whether Mr. Lutnick’s message was successful in getting through to the CBI members assembled. Indeed, another featured speaker, the former head of President Clinton’s national counsel of economic advisors Laura D’Andrea Tyson (now dean of the London Business School), went as far to suggest that economic recovery could be put at risk by businessmen’s continued mood of caution.
Ms. Tyson’s complaints appear analogous to a doctor admonishing the patient for fretting about the symptoms of a serious illness, rather than offering a genuine cure for the underlying disease itself. While noting that “there is more optimism among the economics profession than there is among the business community”, she conspicuously failed to mention her own profession’s dismal failure to anticipate the serious downturn experienced by many of these businessmen over the last 18 months. But her speech does highlight the importance that policy makers continue to place on expectations management, which appears to be the overarching operational framework in which the Greenspan Fed operates these days.
So is the current malaise justified? And are negative expectations in danger of helping to perpetuate a renewed period of economic weakness, the so-called “double dip” recession that Morgan Stanley economist Stephen Roach, amongst others, forecast earlier this year?
Not according to the US Treasury Secretary, Paul O’Neill, who stated at last weekend’s meeting of G7 Finance Ministers in Halifax that recent falls in share prices were inexplicable: “I don’t know why markets are where they are today…There is an unbelievable movement in the market without what I believe to be substantive information.” Mr. O’Neill generously conceded that there were “a couple of clouds” over the US confidence – the minor matter of Sept. 11, and the fallout from Enron – but argued that this should be outweighed by “the strong fundamentals of the US economy”.
But the recent data both at home and abroad has not been as comforting as the Panglossian Treasury Secretary implies. Amongst other things, the University of Michigan’s preliminary report on June consumer confidence was much weaker than expected. The reading of 90.8 was down from May’s 96.9 and the lowest level since February. The Economic Outlook component dropped from 92.7 to 86.2, the lowest reading since December. In Europe, Western European new car sales fell 8% in May, with demand for General Motors Corp. and Fiat SpA vehicles declining the most. Sales dropped to 1.29 million vehicles from 1.4 million in the corresponding period a year earlier.
Yet, despite these snippets pointing to renewed economic weakness globally, the presumption of a double dip is not as obvious as it first appears. For one thing, the phenomenon of double dip recessions has not been as common a historical occurrence as one might presuppose. In the past, these double dips have tended to be either statistical aberrations or downturns largely created by the Fed, rather than an extension of cumulative excesses being naturally, albeit sporadically, being worked off in stages, creating alternate periods of growth and then recession again.
The 1969-70 double dip was due to a strike in the auto sector and was not a reassertion of the cumulative contraction dynamics of a recession. In 1973- 75 the first dip resulted from a transitory fuel shortage stemming from the first OPEC oil embargo; the second dip was engineered by the Fed as it tightened money to contain inflationary pressures. In 1980 -82 there were two real dips - the early 1980 recession and the 1981-82 recessions. The first was created by the Fed with 20% interest rates. It ended because the Fed eased dramatically in mid 1980. The second dip was created by a second Fed tightening which raised interest rates to 20% again. In these last three cycles double dips were either statistical in nature or engineered by a restrictive Fed. Fed funds have fallen dramatically over the past 18 months and interest rate policy remains easy. Fiscal policy has been simulative. Therefore, one should not expect a double dip on the face of it.
This is not to say that the forebodings of pessimistic businessmen in and of themselves have been irrational. If anything, one can understand the continuing cautiousness of business leaders, given that Alan Greenspan's Federal Reserve has, in effect, restricted the post-bubble adjustment almost entirely to the corporate sector. Policy has sought to cushion the impact of declining corporate investment in the aftermath of the high tech bubble collapse. Instead it has moved to prop up asset prices and support household borrowing and spending, in effect “transferring” the bubble from one sector to another. This has created a strangely bifurcated economy consisting of continued corporate malaise juxtaposed with the ongoing “animal spirits” of the consumer sector, where ongoing strength has been buttressed by a real estate bubble.
Consequently, the concerns of businessmen notwithstanding, the post bubble adjustment in the US has been remarkably limited thus far. The US has managed to avoid a more serious downturn that might have otherwise been associated with the collapse of the high tech bubble because credit continues to be aggressively intermediated to the consumer via the GSEs and money market funds. In the typical post-war cycle, bank, money, and credit were the most important source of credit to the private sector. By contrast, in this cycle there has been an unprecedented expansion of credit through the debt securities markets. To a great degree this has occurred through new channels of finance with limited historical antecedents.
On the macro side, the Fed has cut interest rates earlier and more rapidly than in past cycles despite economic weakness that was so mild that many economists refuse to classify the recent downturn as a recession. At the same time fiscal policy has been highly stimulatory, swinging a federal balance from a surplus of $97.4bn to a deficit of -$89.2bn, in a mere six months. In addition, Fed policy has been aggressively aimed at maintaining stability in U.S. financial markets to a degree unprecedented historically. Examples are the bailout of LTCM, the extremely aggressive purchase of household mortgages by the GSEs and an atypical “cheerleading” about a U.S. productivity miracle and a U.S. economic recovery.
Notwithstanding these historically unprecedented efforts to avert a more wrenching adjustment, there are still grounds to be concerned. There are more than a “couple of clouds” on the horizon, even if Mr. O’Neill himself can only spot two. However unpredictable its timing and speed, it is highly implausible that a more serious adjustment can be averted for much longer. To do so, would imply a continuation of extraordinarily low household saving. It would also mean an explosive rise in the current account deficit. If the US were to continue to grow faster than most of the rest of the world, the deficit could reach 5 per cent of GDP next year. Under plausible assumptions, Brian Reading of Lombard Associates makes the case that net claims by foreigners on the US would also rise from 20 per cent of GDP to 50 per cent of GDP, or more, five years from now.
There are signs that this danger is gradually being recognised by investors. For one thing, the stock market is now showing unusual weakness for an economy supposedly in the midst of “recovery”. In past cycles, once the Fed has eased dramatically and the economy has entered on a stable or above trend growth path, the stock market has rallied about 30% to 50% off cyclical lows, with equity investors anticipating that powerful economic stimulus of the magnitude unleashed would kick-start a robust recovery.
In this instance, not only is the US market not rallying, but last week’s action saw many important technical levels reached in the post-September 11th period breached for the first time. One has to go back to the 1930s, to see such poor stock market performance in the context of such aggressive monetary ease. The falls sustained recently appear to be implying that stocks are beginning a final phase of decline to valuation mean reversion. If one uses the pre bubble average P/E on S&P core earnings of 14 times, valuation mean reversion on normalized earnings may be at 30% to 40% below prevailing S&P levels, suggesting that the entire head and shoulders formation in the above chart could be a giant top.
Short of a further US spending spree that will simply create an even more unsustainable current account deficit, increase private indebtedness, and threaten an even bigger bust down the road, there is little more the US consumer can do. And, as Ms. Tyson noted to the CBI, the corporate sector seems unable or unwilling to take up the baton of growth through further investment. This is unsurprising, given that last year, business fixed investment in the US was only 3.2 per cent below its level in 2000, the year in which the capital expenditure bubble was at its peak. This year, it is forecast by Goldman Sachs to be down only another 7 per cent, so there is ample scope for further future declines, as the experience of Japan demonstrates. In high tech especially, there is still vast overcapacity and a lack of any significant new technology drivers. In the unlikely event that corporate capital expenditure did pick up, however, it would have a short term benefit to the economy (on the face of it, vindicating Ms. Tyson’s analysis), but such investment risks creating further pressure on profits and corporate cash flow.
What then is the most likely medium term outlook? Martin Wolf of the Financial Times sketches out three possible alternatives:
“First, there may be no significant further adjustment in the behaviour of the US consumer or in US asset prices. In that case, the US would generate strong additional demand for the rest of the world and even more un- balanced household and national balance sheets. This would be a Gadarene rush for the cliff. But that cliff may only be reached years from now.
Second, there may be smooth adjustment in US household behaviour and the dollar. The latter would help offset weak demand at home by forcing adjustment on the rest of the world. This scenario would be most beneficial for the US but decidedly problematic for the rest of the world.
Third, there may be brutal adjustment in the near future, with a vicious downward spiral in US and world equity prices, higher long-term interest rates, an exodus of capital and dollar weakness. This would force a strong reduction in investment and consumption in the US and an unpleasant adjustment on the rest of the world. This would be the world of the double dip.”
Wolf refuses to rule out any one of the three possible scenarios, but the logic of his analysis points to the third as being the most likely in the medium term. The key variable is the foreign investor, who is no longer seduced by the miracle of the new economy. Further blows to external confidence have been sustained by President Bush’s blatant resort to protectionism in steel, lumber and agriculture, all of which have already reduced overseas’ investors proclivity to hold dollars.
In a May 1 piece by Morgan Stanley’s Amanda Bennet, she noted that the Treasury’s record of portfolio investment inflows into the US was $26.7b for the first two months of 2002, versus the $100b recorded over the same period in 2001. In particular, the Treasury noted foreign inflows into the corporate debt market dropped to $7.2b, the lowest since early 1999. Rob Parenteau of Dresdner RCM makes the observation that since foreign investors have been the ultimate savers financing US private sector deficit spending (as government surpluses are not used to acquire private financial assets, but rather to swap government bonds for bank deposits), and were especially aggressive buyers of US equities near the top of the bubble in late 1999 and early 2000, two years of severe equity market losses on top of rising corporate bond defaults and capital losses have been a shock to foreign expectations. Once currency losses are coupled with many quarters of capital losses, he argues that the proclivity of foreign investors to maintain their existing holdings of US financial assets, (never mind increase the share of US assets in their portfolios), is likely to decay rapidly. US assets will need to get cheap enough or offer high enough yields to keep foreigners willing holders and accumulators of US assets.
Thus, a painful process of adjustment might be forced on the US by an increasingly sceptical world, in effect creating the tightening conditions of credit so long avoided by US policy makers – the world of the “double dip” recession. Last week’s conviction by a 12 member jury of Arthur Andersen LLP of a single felony count of obstructing an official government proceeding will simply add to a general and growing perception of corporate sleaze that has already catalysed a de-rating of US dollar assets. It’s no longer just Americans who believe that the boom of the 1990s was more to do with accounting trickery than hard economics.
An international “buyers’ strike” of US assets, however, substantially complicates the job of Fed policy makers, given that any such withdrawal of capital (or, at the very least, a decline in the rate of ex ante inflows) might well offset any new cuts by the central bank by raising long term rates. Mr. Greenspan himself is also hoisted on his own petard of adaptive expectations, as the New York Times columnist, Louis Uchitelle (often used as a Fed mouthpiece to the markets), made clear in last Sunday’s New York Times:
“The Fed has tied its own hands. Mr. Greenspan and his fellow policy makers have signed onto the proposition that the economy is expanding. That was the message in their statement after their last meeting, in early May. And nothing they have said in public since then has substantially amended that view. Some have also said that over the long run, interest rates cannot stay as low as they are.
Taking their cues from the Fed, and from their own optimism, Wall Street forecasters have been trying to predict when the policy makers will begin to raise rates in anticipation of rising inflation. Three months ago, many expected the first increase to come at the policy makers' meeting on June 25 and 26; now they expect it in the late fall.
Virtually no one publicly imagines a rate cut as the Fed's next step. Mr. Greenspan himself steers people away from that option, and in doing so has shelved it, although signals of economic deterioration — falling stock prices, weakening retail and auto sales and signs of deflation — might in fact justify more stimulus from the Fed as protection against a dip back into recession.
Unanticipated stimulus, however, would be no stimulus at all. An abrupt rate cut after so much happy talk about recovery would be viewed as an announcement that Mr. Greenspan and his colleagues had lost faith in the recovery. ‘Lowering rates would scare the living daylights out of everyone,’ said Albert Wojnilower, an economic consultant and forecaster. Whatever relief consumers would receive from lower rates would be offset by their fright. Adding to the damage, the weakening stock market would undoubtedly take another dive.”
But clearly raising rates is not an option either, given prevailing debt levels in the economy and the corresponding reliance on the interest rate sensitive housing market to keep the consumer alive.
Ms. Tyson is clearly not as simplistic as most of the foregoing analysis has implied; there is a kernel of truth in her observation that businessmen’s perceptions and confidence levels do play some vital role, albeit not in the manner implied by her speech. The Uchitelle article better explains how and why the whole expectations game has become so vital to America’s monetary and financial officials.
A recent International Perspective noted that the Fed had revamped its discount window operations in order to remove the stigma of accessing this facility. Borrowing institutions will no longer need to prove their inability to access reserves outside the discount window - something that forced a de facto signaling of liquidity problems in a financial institution to the larger investment community. The Fed explicitly cited financial instability for the rationale behind the changes in the discount window procedures. One must also consider this action in the context of repeated references in a variety of publications to the adoption of “unconventional measures” (including the purchase of equities) should a zero interest rate policy fail to work.
It remains our view that the Fed is gearing up to play the final moral hazard card. All of these recent articles and apparently innocuous “technical” changes in Fed operating procedures are attempts to make the unconventional appear conventional and help to contribute to the perception that such measures are part of the normal economic policy arsenal available to economic policy makers. Ms. Tyson is right: perceptions and confidence to matter. There’s probably a little angel at Mr. Greenspan’s shoulder warning him: “For heaven’s sake, don’t frighten the children.”