For a financial crisis of the monumental proportions now officially acknowledged to exist, the thought that a well thought out “solution” can be cobbled together in the time period of a week or so, has more of the hallmarks of an act of desperation rather than of sound public policy. Though it may be a needed response, the probability of success is anything, if not unclear. Moreover, the ramifications of the indirect effects, let alone the direct effects would require, from a more prudent perspective, some more in depth analysis before committing a potential $700 billion to this end. It is tempting and, at least temporarily, reassuring, judging by the market’s response to such a sketchy proposal, to believe that throwing a massive amount of money at this problem will make it go away. There are many unanswered questions.
Some observations, thoughts, and questions are:
In billions of $s:
AIG Bailout $85
Fannie-Freddie Rescue $200
New Bailout Proposal $700
Next $??
It looks like we're talking some pretty big money. We already depend upon about $65 billion per month being loaned to the U.S. to continue operations from foreign sources. Essentially, the U.S. was already insolvent before this latest bailout proposal. It is difficult to see how the U.S. dollar won't be adversely affected. The actions of the Government seem to lend credence to the idea that the "ultimate" solution will be to "monetize" debt. This would be a very inflationary factor.
How long will foreign sources continue to lend to the U.S. under assumptions of high credit worthiness. The U.S. is no longer considered the best credit risk in the world by some rating agencies. This may push the cost of continuing to finance U.S. government operations with foreign capital higher. Control of the U.S. economic and financial future has been effectively transferred to foreign sources of capital.
If this new bailout entity is to purchase toxic assets from banking institutions, how are these assets to be valued if dubious models and assumptions came up with spurious results to begin with, what model and assumptions are now to be used to assure the use of public funds is not directed towards supporting fictitious valuations? Moreover, if the capital requirements of institutions holding these assets requires raising more capital now, presumably the thinking is that by taking these assets off the balances sheets if these financial institutions will allow them to more easily raise capital. Even is this were true, if would seem that with the U.S. Governments need to raise capital to fund these bailouts, and quasi-bailouts, with the entry of institutions also entering the capital markets to recapitalize, might there be some degree of competition for funds and a “crowding out” effect? If so, wouldn’t this push up the cost of capital and put a additional damper on economic growth?
The manic response of the markets to a very sketchy solution to an enormous problem defies a rational context of financial analysis. The events of the last several weeks demonstrate how greatly sentiment, and the absence of sound thinking, appears to be driving market responses.
Sunday, September 21, 2008
Tuesday, September 09, 2008
Russia
The recent episode of Russia's response to Georgia's military intervention in South Ossetia, and the response by the West just happened to occur about the time of my initial visit To Russia. Needless to say, despite having invested positions in Russia, many of my perceptions had been formed from the context of the cold war rhetoric of the past, current geopolitical rivalries, and whatever books and articles I could assimilate about the region, including an excellent one by the eminent scholar Marshall Goldman, Petrostate: Putin, Power, and the New Russia. I could not help but to have some trepidation about going to Russia during this time.
From a professional perpective, while in Russia, I had the good fortune to be able to meet and talk with people in Russia'a emerging financial planning profession; meet a well respected economist, an oil & energy analyst, an asset manager, and a managing director of Troika Dialog, a Russian investment bank; perhaps equivalent to a Russian Goldman Sachs. Additional meetings with the Lukoil State Pension Fund rounded out the opportunity to learn about, and understand better Russians, and their current political and economic environment.
From a personal perspective, I had the opportunity to have my education about Russian history deepened by at least half a dozen native guides, and visits to Russian cultural and arts venues. Looking back at approximately the past 100 years in Russia's history, I could not help being extremely impressed at the intelligence, resilience, and strength of the Russian people. Having gone through two revolutions taking it from a Tsarist empire to the communist country of the Soviet Union, two world wars during which in the Second World War estimates of up to 27 million Russian people died, including around 2 million in St. Petersburg alone, watching the communist state dissolve and re-emerge into a rudimentary democracy, and having it crumble economically around 10 years later, only to have it re-emerge as a economic, and strategic, geopolitical power on the world stage represents a remarkable testiment to the human spirit of resilience.
What also became apparent during my visit is how poorly it seems Russia and the West understand one another, as well as the fears generated by the threat of disturbing the global status quo.
As an investment advisor, my experience suggests to me that the recent decline in value in the Russian markets may be seriously undervaluing the investment potential of an emerging economic power that appears to be destined for an increasingly strong role in global affairs. This is not to imply that the risks are negligible with respect to these investments. Looking, however, at some of the fundamentals, such as Russia's extremely high literacy rate, a vast need for infrastructure development, the need to economically uplift the majority of Russia's population to an emerging middle class, and Russia's vast natural resource and energy assets, suggests a huge potential over the next 10-15 years.
Unless politicians allow themselves to become locked into a cycle of escalating adversarial rhetoric, increasing the possibility of misjudgement and miscalculation, Russia and the West will likely work out their issues into a new balance of power arrangement. This will likely not be a clearly delineated point, but rather an ongoing process with contributions from other major global players such as China. If this perpective is correct, the investment potential outcome may well warrant the assumption of some degree of the risk in these positions. At present, in particular, this period of crisis and declining Russian asset values may represent an opportunity to secure a piece of Russia's future prosperity.
From a professional perpective, while in Russia, I had the good fortune to be able to meet and talk with people in Russia'a emerging financial planning profession; meet a well respected economist, an oil & energy analyst, an asset manager, and a managing director of Troika Dialog, a Russian investment bank; perhaps equivalent to a Russian Goldman Sachs. Additional meetings with the Lukoil State Pension Fund rounded out the opportunity to learn about, and understand better Russians, and their current political and economic environment.
From a personal perspective, I had the opportunity to have my education about Russian history deepened by at least half a dozen native guides, and visits to Russian cultural and arts venues. Looking back at approximately the past 100 years in Russia's history, I could not help being extremely impressed at the intelligence, resilience, and strength of the Russian people. Having gone through two revolutions taking it from a Tsarist empire to the communist country of the Soviet Union, two world wars during which in the Second World War estimates of up to 27 million Russian people died, including around 2 million in St. Petersburg alone, watching the communist state dissolve and re-emerge into a rudimentary democracy, and having it crumble economically around 10 years later, only to have it re-emerge as a economic, and strategic, geopolitical power on the world stage represents a remarkable testiment to the human spirit of resilience.
What also became apparent during my visit is how poorly it seems Russia and the West understand one another, as well as the fears generated by the threat of disturbing the global status quo.
As an investment advisor, my experience suggests to me that the recent decline in value in the Russian markets may be seriously undervaluing the investment potential of an emerging economic power that appears to be destined for an increasingly strong role in global affairs. This is not to imply that the risks are negligible with respect to these investments. Looking, however, at some of the fundamentals, such as Russia's extremely high literacy rate, a vast need for infrastructure development, the need to economically uplift the majority of Russia's population to an emerging middle class, and Russia's vast natural resource and energy assets, suggests a huge potential over the next 10-15 years.
Unless politicians allow themselves to become locked into a cycle of escalating adversarial rhetoric, increasing the possibility of misjudgement and miscalculation, Russia and the West will likely work out their issues into a new balance of power arrangement. This will likely not be a clearly delineated point, but rather an ongoing process with contributions from other major global players such as China. If this perpective is correct, the investment potential outcome may well warrant the assumption of some degree of the risk in these positions. At present, in particular, this period of crisis and declining Russian asset values may represent an opportunity to secure a piece of Russia's future prosperity.
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