Saturday November 28, 2009 - 16:13:16 GMT
Share This Story
Black Swan Capital - www.blackswantrading.com
Oh the nasty "tail" risk and lending "reflexivity"...
The central bank of the United Arab Emirates is closely watching events stemming from the Dubai debt crisis to ensure no harm results for the national economy. (Reuters)
â€śCredit is a system whereby a person who can't pay gets another person who can't pay to guarantee that he can payâ€ť
FX Trading â€“ Oh the nasty â€śtailâ€ť risk and lending â€śreflexivityâ€ťâ€¦
Gosh, it was looking so good. All those buildings, fancy shaped islands, money, and oil wealth. Who wouldâ€™ve thunk it? Well, not the credit analysts, we know that now.
Nov. 27 (Bloomberg): â€śOne cannot rule out -- as a tail risk -- a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s,â€ť Bank of America strategists Benoit Anne and Daniel Tenengauzer wrote in a report.
Weâ€™ve seen this all before. Since the day credit through the art of lending was created, many years ago.
â€śThere seems to be a special affinity between reflexivity and credit. That is hardly surprising: credit depends on expectations; expectations involve bias; hence credit is one of the main avenues that permit bias to play a causal role in the course of events. But there is more to it. Credit seems to be associated with a particular kind of reflexive pattern that is known as boom and bust,â€ť Mr. George Soros tells us, in his masterpiece on investing, The Alchemy of Finance.
â€śThe pattern is asymmetrical: the boom is drawn out and accelerates gradually; the bust is sudden and often catastrophic.â€ť
This Dubai situation would seem to have two major implications for the broader global economy:
1) It shows that lending is still flowing from the center to the periphery despite all those reserves and savings we are told reside in emerging markets i.e. the center, being Western banks and capital markets, provide credit to the periphery, being emerging markets of the world. This is why the word â€ścontagionâ€ť and â€śtailâ€ť risk are used in association for this type of boom-bust event.
2) It is a lesson that goes beyond emerging markets and to the â€śat the marginâ€ť declining stimulative impact of additional lending by governments of the world. Increasingly the players are realizing all that so-called lending hasnâ€™t created all that much stimulus.
Back to Mr. Soros for help, â€śThe act of lending usually stimulates economic activity. It enables the borrower to consume more than he would otherwise, or to invest in productive assets. There are exceptions, to be sure: if the assets in question are not physical but financial ones, the effect is not necessarily stimulative. By the same token, debt service has a depressing impact. Resources that would otherwise be devoted to consumption or the creation of a future stream of income are withdrawn. As the total amount of debt outstanding accumulates, the portion that has to be utilized for debt service increases. It is only net new lending that stimulates, and total lending has to keep rising in order to keep net new lending stable.â€ť
Problem number one in this current precarious process: Right now governments are playing that role of lender of last resort. Yet they are running out of our money (Mr. Taxpayerâ€™s hard earned bounty so legally confiscated).
Problem number two is this: Private lenders (banks) are not playing the role intermediary i.e. lending the money received from government (our money) to the people from which it came, who live and work in the real economy. Key question: Wouldnâ€™t massive tax cuts have been a much simpler and more effective way to create real spending power for the people you wish to spend it? Sorry, we canâ€™t mention the word tax cuts to liberalsâ€”those are class-warfare fighting wordsâ€”how dare we utter such nonsense!!! Three deep bows of apology to our current â€śgoverningâ€ť regime.
Problem number three: Financial assets (stocks, bonds, risky assets, emerging market anything) has been sucking up all the lending flow that has not gone into the real economy, and held on said intermediaries balance sheet i.e. resources have been diverted for financial speculation instead of building futures streams of income, for the most part. Thus, the growing disconnect between reality and perception. Any wonder why the Government of Goldman Sachs is embarrassed about its bonuses. [Chart not available in text format.]
Can you say Dubai? Sure, I knew you could! Have a nice weekend boys and girls.
Black Swan Capital LLC
Long-term trends, major global economic issues, interviews with top traders, book reviewsâ€¦
We do it all in our Currency Investor newsletter thatâ€™s geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market.
In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations.
Our analysis is comprehensible and our recommendations consist of ETFs, so donâ€™t get turned off by buzz words like â€śexchange ratesâ€ť or â€śforeign exchangeâ€ť â€“ this investing strategy is as easy to implement as buying and selling stocks.
Plus, at $39 per year itâ€™s a deal youâ€™d be hard-pressed to find anywhere else. Thorough global analysis plus complete investment guidance ... and all for only $39 per year? You canâ€™t beat that with a stick. Click here to read more ...
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."