THE WAY WE ARE
Barron's is a must-read proposition for any financial industry professional every Saturday, and has been for a very long time.
But given the global market and financial events in recent weeks, it may be need to be a must-read for more mainstream readers every now and then.
This weekend's Barron's may be a good place to start, if one's looking for a snap-shot of where we are in the markets and the global economy and where we may yet have to go.
Word of warning, most of the paper is doom-and-gloom.
And while that may be good news for most wanna-be contrarians like yours truly, there are more than enough disparate data points to give pause to even the most sanguine of long-term optimists.
So in no particular order or priority, here's a sampling of some pieces, complete with their headlines and choice excerpts:
- "Rockier than 1929:
"Today's stock market is poised to surpass 1929's as the most volatile ever.
Goldman Sachs derivatives strategists told clients on Friday that Standard & Poor's 500 three-month realized volatility is now 66%, surpassing levels of the 1987 crash and the economic malaise of the 1930s. Volatility now rests within striking distance of a moment in stock-market history that has defined financial crisis for almost 100 years."
- Does Extreme Stress signal an Economic snapback?: "...Another encouraging sign is the shrinking value of U.S. stocks relative to nominal U.S. gross domestic product. At the market peak in 2000, stocks were valued at twice the size of the economy, but the relationship has adjusted this year to an estimated 59%, well below the long-term average of 79%. To get back to 79%, the S&P 500 would have to rise 36%, to 1,090. The relationship got as low as 40% in the late 1940s, when investors feared another depression, and in the inflationary 1970s."
- Looking for the last refuge: "
"The new asset bubble is Treasury Bonds and T-Bills...
All the world, however, is still eager to lend to one impecunious borrower: The U.S. Treasury has to beat away would-be lenders at every auction of U.S. debt.
There are so many eager investors that last week the Treasury could pay less than a tenth of a percent per annum to borrow money for terms of one month and two months. The rate was a hair above 2% for five years' borrowing and a hair under 4% for 30 years'.
We -- the world's investors and speculators -- are the clowns who create bubbles, and we are at it again. This time, cheap money is both the cause and the effect.
If Treasury securities are assets at all, then Treasury bills and Treasury bonds are the new asset bubble. The U.S. Treasury is selling security -- return of capital -- and the world is as hungry for that product as it was hungry for energy a few months ago."
- Has the Fed Mortgaged it's own future?:
"IF THE FEDERAL RESERVE BANK WERE A COMMERCIAL LENDER, it would be a candidate for receivership, based on its capital ratios. Bank examiners generally view any lender with a ratio below 2% to be dangerously undercapitalized. The Fed's current capital ratio, or capital as a percentage of assets, is 1.9%.
The Fed has provided so many loans and emergency credits -- to banks, brokers, money funds and foreign countries -- that its balance sheet, viewed one way, is as leveraged as any hedge fund's: Its consolidated assets amount to 53 times capital. Only 11 months ago, its leverage on this basis was a more modest 25 times, and its capital ratio 4%. A caveat: Many of the loans are self-liquidating facilities that will disappear in a few months if the financial crisis eases.
Although the Fed's role as a central bank is much different from the role of a private-sector operation, the drastic changes in the size and shape of its balance sheet worry even some long-time Fed officials. Its consolidated assets have swelled to $2.2 trillion from $915 billion in about 11 months, and contain at least a half-dozen items that weren't there before. Some, like a loan to backstop the purchase of a brokerage, Bear Stearns, are unprecedented. (See table for highlights.)"
- A Credit Default Solution: "Banks are very weak today mostly because they can't measure with any confidence the value of their assets and the extent of their liabilities associated with credit-default swaps, or CDS. Earlier this year, the total notional value of such unregulated derivatives exceeded $50 trillion, far more than even the central banks could guarantee. Until clarity emerges with regard to the value of banks' CDS holdings, the Fed's fix is unlikely to work, and lending won't resume."
- China makes a mark in trade: "Chinese President Hu Jintao. One can
only hope the Democrats in Congress and President-elect Barack Obama
understand the significance of his trip, which served to remind his
hosts that the U.S. isn't the only trading partner in town. It might
well become a lesser partner if it insists on forcing U.S. labor and
environmental standards on other countries as part of any trade deals."
"Hu initially touched down in San José, Costa Rica, on Nov. 16 for talks on free trade with President Oscar Arias Sanchez. Consider the contrasts: China has 1.3 billion citizens and gross domestic output of $7 trillion. Costa Rica has 4.2 million citizens and GDP of $46 billion. This was a meeting of Goliath and Tom Thumb, with Goliath making every effort to look Tom in the eye. In part, the gesture was Hu's way of thanking Costa Rica for establishing diplomatic ties with China in 2007, a blow to Taiwan. Mostly, it was salesmanship. Hu wants a larger share of trade with Costa Rica, whose No. 1 trading partner is the U.S."
These are just a handful of the pieces that gave me food for thought.
As the cascade of devastatingly awful economic news grows in volume, it’s worth reminding yourself that negative news flow is a lagging indicator. We are hearing about what has happened, in other words, not what will happen in the coming weeks and months -- and that has been awful (to the tenth or so power)..."
does that mean that the market has discounted all the badness out
there? Of course not. But things will improve on the economic ground,
or least stabilize, long before it shows up in the headlines..."
Back to the subject at hand, the whole edition of Barron's this weekend is worth reading cover to cover. Not for any one specific piece necessarily, but to get a broad snap-shot on where we are and how far we have to go...in both directions.