SFCS Insights

This article was originally published on washingtonpost.com on August 27, 2010.

The great hope a few months ago was for a “recovery summer,” with the economy responding favorably to various policy initiatives. Yet the recovery has lost momentum, and while the end of the year will not be as gut-wrenching as the final 3 1/2 months of 2008, when the global economy suffered a cardiac arrest, it will be as consequential in affecting the welfare of millions of people.

Throughout the summer, data signals have become more alarming. Despite all the rhetoric about job creation, unemployment remains stubbornly high and the problem is becoming structural in nature (and, therefore, harder to solve). Consumer credit continues to contract while small companies find it difficult to access new bank lines of credit. Housing activity is falling, and home values are poised for further declines as foreclosures increase. The trade balance has taken an ominous turn, with exports stagnating and imports surging. More Americans are falling through the large holes in the country’s safety net.

The equity markets are again under pressure while yields on Treasury bonds have collapsed, reflecting that market’s growing concerns about the weak economic outlook. With such fragility, households and companies have become even more cautious, undermining the “animal spirits” needed for economic expansion.

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The chances of a double-dip recession are now more than 40 percent and policymakers have options to stimulate the economy, Nouriel Roubini of Roubini Global Economics told CNBC Thursday.

Second-quarter gross domestic product growth will be revised down to an a annual rate of 1.2 percent from an initial reading of 2.4 percent, Roubini said, adding that any improvement recently was due to inventory adjustments.

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Narayan Naik, Professor of Finance, Director Hedge Fund Research Centre, London Business School
www.opalesque.tv
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An insightful analysis revealing the stronger performance and risk profile of the large “Blue Chip” hedge funds (our term: the Titans) compared to the rest of the hedge fund industry.

Data

Results

This article was originally published on ft.com/alphaville on August 11, 2010.

Why such a sharp sell-off in equities on Wednesday, together with a further rally in US government bonds? I suspect that three US-related drivers are part of the answer – one is obvious, and two, less so.

Tuesday’s FOMC statement confirmed what the high frequency partial data have been signaling for a few weeks now: the US economic recovery has lost momentum. And Wednesday’s export numbers amplified the message given by recent employment, housing and retail sale reports.

Analysts are now downgrading their projections for Q3 (and 2010) growth, again and rightly so. Goldman and a couple of other banks did so a few days ago; others are following. This translates into lower top revenue growth for companies, and less rosy earning expectations. Of course, equity prices do not like this. Cisco’s numbers tonight will not help.

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I believe that misconceptions play a large role in shaping history, and the euro crisis is a case in point.

Let me start my analysis with the previous crisis, the bankruptcy of Lehman Brothers. In the week following September 15, 2008, global financial markets actually broke down and by the end of the week they had to be put on artificial life support. The life support consisted of substituting sovereign credit—backed by the financial resources of the state—for the credit of financial institutions that had ceased to be acceptable to counterparties.

As Mervyn King of the Bank of England explained, the authorities had to do in the short term the exact opposite of what was needed in the long term: they had to pump in a lot of credit, to replace the credit that had disappeared, and thereby reinforce the excess credit and leverage that had caused the crisis in the first place. Only in the longer term, when the crisis had subsided, could they drain the credit and reestablish macroeconomic balance.

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