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Transcript
Signalling Cycles & Present
Financial Crisis
Perspectives on a Financial Crisis
Patrick McNutt
www.patrickmcnutt.com
The storybook……
• The world economy is now enduring a signalling cycle
that probably began in the US on March 12th 2007 and it
will continue to oscillate until either a market
equilibrium (= continued recession) or a co-ordinated
equilibrium is reached. The latter could be achieved
initially at the G-20 Summits if a managed exchange rate
regime was on the agenda and a loud unambiguous
signal transmitted to the international investment and
financial community, with escape clauses, of a managed
regime 2009 to 2011. It’s the best we can do given the
uncertainty in the world markets.
Why signalling?
• Financial and economic variables create
cyclical patterns (CTL)
• Government policy is necessary but not
sufficient
• Economic policy depends on
policymaker’s commitment (PLT)
• Signalling recognises that our economic
system is dynamic
Nasdaq Crash
2001
Post 2003
China
Surplus $
US$, ¥en, YUAN, EURO
Japan
Middle East
Banks Serving
Global Products
Sub-Prime and
Ninja Loans
Invest in US
T-Bills
US Interest
Rates Low
Property Boom
Asset Bubble
2001 -2007
March 12th 2007
April 2nd 2007
New Century Financial
Corp: Shares Suspended
New Century file for
bankruptcy
Panic
Actions Observed Only
Financial Crisis
Old view……….
National markets
Other
economies
C+G
National growth
National
companies
Signals in 2009/2010
• World of transient economies
• EMs and ASLEEP v Anglo-Saxon
• Moving from non-technology to technology
sectors
Signals to observe:
• Corporate: Output ►demand ►income
• China and Inflation
• Correlation Shanghai Composite and S&P 500
Paradigm Shift occuring……….
Global markets
ASLEEP
economies
X
Global growth
Global
companies
Less emphasis on a national market
(crowding-out): More emphasis on a
global market (crowding-in):
GDP = C + X + Corporate Investment
=>
Focus on global growth
Emphasis products & services
with global reach
=>
Focus on global companies: geography
and industry
Emphasis on Emerging markets in Asia,
Latin America and Eastern Europe &
Pacific Rim (ASLEEP)
ASLEEP economies to account for at
least 50% of global growth, 30% of
world exports by 2010
Belief and Actions:More signals
• All price variables are
signals..interest rates,
exchange rates,
inflation
• Biology of signals..
belief…action
• Noise: Think x but do
y
Belief
x
Action
y
‘Shoe-shine’ boy dilemma
• Rational ignorance as investors react to
noise and not to information
• Paper wealth effect
US$50trillion loss may reduce
global GDP by 4%
• Idiosyncratic noise: shoe-shine boy gives
share tips
• surplus nations ►nations in debt
‘Credible threat’ signalling language used……..
a) Debt-deflation trade-off
Credible
threats
Beggar-my-neighbour deflation, devaluing
currency to increase export
competitiveness
b) ‘Credible threat’ policy formulation
Trichet at Jackson Hole, Wyoming, August
2005 uses ‘credible alertness’ to signal
inflation concerns in the EU
Debt & Financial
Complexity
Convoluted
debt
Deflation
It’s ‘a safe banking system, a sound
system’ Paulson July 20 2008
Reluctance to use D-word, R-word or is it
a cycle?
’
Solutions
Opportunities
Critical Timeline: US and China
23 Mar 2009
1. China CB Governor
raises the issue of the
role of US $.
Diplomatic language
‘lost in translation’
22 June 2009
7 July 2009
3. BW theme
of ‘new
protectionism’
; FT theme of
‘currency
misalignment’
.
5. Italy and
France no to
‘normal’
17 August 2009
28 July 2009
15 July 2009
7 Signals that
China biggest X
than Germany
8. China US
Strategic Econ
Summit
11. IMF on
Asian need to
M. China
signals
‘inflation’
12. G20 Pittsburg
Summit
2. G20 London Summit
4 China signal on
‘normal’ Agenda
with exchange
rates
22 Sept 2009
6. G20 Italy
Summit
8 July 2009
9. Signals on WS
‘bull’ market
2 April 2009
5 July 2009
31 July 2009
10. Iron ore
reaches $100
tonne spot
2 August 2009
Commitment to exchange rate targets 2009-2011
with escape clauses ….why?
• Global growth will depend on world exports as
domestic demand falls
• Corporate earnings declining in Q1:3 2009
• EMs and ASLEEP economies will substitute
export-led growth for more G
• Beggar-my-neighbour policies emerge
• China limited on interest rates moves due to
capital inflows
2009
Policy A
2009
Policy B
2009
Policy A
Solution 2011
Managed Exchange
rates: US$ and RMB
X and M world
rebalance
China signals
inflation
Deflation
Debt
Socialising losses
2009
Policy B
Deflation
Debt
Socialising losses
Solution 2015
Reflate
Taxes,
protectionism
devaluation
Managed exchange rates
• Managed exchange rates to assist
corporate earnings, Chinese
inflation,international trade
• Defines the degree of uncertainty
• Export-led growth v Domestic demand
• China, Japan, ASLEEP surpluses v US
indebtedness
Thank you for
participating………
Sapere aude
‘That which one can know, one should
dare to know’