Articles like this make me feel good that I am on the right side of the trade...
Turbulence in Russia, America, and the markets spells disaster
By Ambrose Evans-Pritchard
You can't get rid of me, says Yeltsin
WHAT we have just seen in Russia is a coup d'‚tat. It is disguised. Boris Yeltsin will be allowed to complete his term in alcoholic confinement, apparently, but Weimar Russia has now given way to its successor.
In America, a worse fate may await Bill Clinton. The constitutional order will be preserved, of course. Law will prevail. But at the end of September, Judge Kenneth Starr is expected to deliver a report to Congress that outlines a pattern of criminal conduct. We will have to see whether the Democrats will stand by him. Mr Clinton's friends are already preparing a new home for him in Hollywood.
The summit of these two debauched addicts in Moscow next week is a fitting metaphor for the state of the world. The summer of 1998 has brought forth the most alarming conjunction of economic and geopolitical forces since the Great Depression and the Second World War. Nobody is in charge of the system, and it shows.
You only have to look at the collapse of US policy in the Middle East to see how dangerous this has become. Mr Clinton has simply given up trying to maintain the UN weapons inspection regime in Iraq, preferring a modus vivendi with Saddam Hussein that lets the Iraqi leader keep his nuclear, biological and chemical weapons programme. Saddam has been allowed to win the Gulf war after all. It is only a matter of time before the map of the Middle East reflects this reality. Pity poor Kuwait. . . and Saudi Arabia, for that matter.
This cannot be disguised by firing Tomahawk missiles at an unguarded aspirin factory in the Sudan. The strike was evidently ordered without the knowledge or support of the director of the FBI, Louis Freeh, who was caught off-guard on a trip to investigate the embassy bombing in Nairobi.
We are seeing a wild, erratic, flailing superpower, led by a president who exhibits symptoms of severe instability. Global investors do not like the feel of it. The US stock market had been rising to historic levels on the expectation of ever-growing corporate earnings. On Wall Street, the dividend yield reached an all-time low of 1.2 per cent at the market peak in July, making stocks roughly twice as highly valued as they were in 1929. Fresh faced brokers babbled about the "new paradigm", and discounted risk. This is what happens when the study of basic history is dropped from the curriculum of American High Schools.
Now the risk is making itself felt. The danger was obscured during the Asian crisis last year. The IMF stepped in as the guarantor of foreign investors, providing rescue packages for the American and European banks that lent too much in the Far East. The IMF was not so generous with the afflicted countries. It imposed a harsh regime of monetary and fiscal constraint, and questioned the viability of the Asian economic system - taken together, the most calamitous combination of misjudgments since the actions of the US Federal Reserve between 1930 and 1932. But the banks got off scot-free.
It was assumed that the IMF, the Group of Seven industrial countries, and the US Treasury would continue to rescue investors when Russia got into trouble. But this time the fairy godmother let them down. The IMF's $22.6 billion package agreed in July was not enough to hold the dyke. When Russia came back for more, the West balked. The rouble collapsed. Russia defaulted on $33 billion of bonds. And bank stocks finally "took a haircut".
The markets have made a shocking discovery: there is no longer a lender of last resort in the global financial system. The IMF has run out of money, and the US no longer has a fully functioning government that can take the lead. Hence the panic. Events in Russia have led to regional contagion, of course: Ukraine, Poland, Hungary; Bulgaria is looking a little bruised. But there is also the demonstration effect as investors flee risk everywhere. Venezuela has gone belly-up. Like Russia earlier this summer, Brazil is finding it hard to finance its budget deficit. The Sao Paolo stock exchange has fallen 38 per cent in the last month.
The depression is spreading. About 40 per cent of the global economy is now in severe distress. It is even touching countries that we consider part of the gentlemen's club. On Thursday, Canada had to raise interest rates after its currency plummeted to the lowest level ever against the US dollar. Even the Bank of England had to lend a hand. Canada is a commodity producer, and the commodity index has fallen in value by an average of 20 per cent in the past year. This is arguably a faster rate of commodity deflation than the experience of 1928.
The incorrigible bulls on Wall Street are still telling us that the "fundamentals" of the global economy are good, regardless of financial turbulence, so don't panic. Are we looking at the same globe, I wonder? Goldman Sachs forecasts that GDP will contract by 15 per cent in Indonesia this year, eight per cent in Thailand, and seven per cent in South Korea. The Japanese economy, provider of almost half of the world's net savings, is contracting at a rate of five per cent annually. Prices are falling so fast that even interest rates of half a per cent are too high to stimulate recovery. Adjusted for deflation, credit is expensive. This is the proverbial liquidity trap of the 1930s, when the central bank finds itself "pushing on a string". You can't cut interest rates below zero. Deflation is a killer.
Whatever the Japanese try to do, the medicine has toxic side effects. Even if they printed money with abandon - and dropped it from helicopters over Tokyo - it would only cause a run on the yen, play havoc with the reserve asset ratios of Japanese banks, and pour petrol on the currency fires of Asia. China, for one, has said it will join the beggar-my-neighbour devaluations if Tokyo lets the yen slide. Which leaves the option of a Keynesian fiscal expansion. But there is a snag here, too. The government has already borrowed so promiscuously that it has eroded the credit rating of Japanese sovereign debt. Fiscal stimulus could backfire, too.
The opposition Democratic Party of Japan is calling for the nationalisation of the Japanese banks, which have bad debts estimated at about $1,000 billion. I believe that is now the only viable way to cleanse and recapitalise the financial system. But it is not about to happen. The tired old men of the LDP, paralysed by fear and indecision, are afraid of political lynching if they are seen to bail out the banks.
What can the West do? Not much. The poison is already in the system. We just have to batten down the hatches and wait for the deflation to roll through. The British economy is a sturdy little ship, unencumbered by debt. But I cannot feel so optimistic about the United States. The US savings rate is down to zero for the first time since records began, which means that tens of millions of Americans are living beyond their means, consuming the paper profits of their investments. When the music stops, the "wealth effect" will go into reverse. A falling stock market will feed on itself as the newly rich find that they are not so rich after all.
The indicators are flashing red lights. The US trade deficit is heading towards $300 billion a year. Cheap goods from the rest of the devalued world are chipping away at the profit margins of US companies. Economic growth has suddenly fallen from an annual rate of 5.5 in the first quarter of this year to 1.6 in the second quarter. In July, factory wages fell 0.5 per cent; farmers' income fell 5.5 per cent.
The benign deflation of the last year has metastasised. It is now malignant, and shows signs of virulence. The US economy is near the edge of a cliff. This is when we need a Franklin Roosevelt in the White House. Instead, we have a spiv.
The world economy is not under the threat of deflation- -rather most of OECD countries are working at 85% capacity utilisation and industrial production is achieving levels avaeraging near highs---Japan recession is fully priced in the markets it is not 35000 it is 13000 and change so are other ASEAN markets, when serious newspapers like Telegraph write this kind of non-sense one cannot overlook the blatant lies in this article like 40% of World is in recession, a wrold in recession does not buy record number of cars that we have seen in June,, the world market captilisation is fully priced for downturn in ASEA and stocks which have no relationship to PEG are trading at a discount like Exide and Comair are two clear examples..
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