I read the financial press diligently every day. Mostly I read from the Financial Times, and also from various weblogs commenting on developments in finance and the international economy.
What I have deduced from this intensive and extensive reading is that the US Federal Reserve’s withdrawal of liquidity from global financial markets 20 months ago has had an immense impact on asset prices and the viability of a number of financial institutions which, it is fair to say, made ‘bets’ on these asset prices via their lending, investing and writing of derivatives. And it appears that they didn’t hedge those bets – or at least, didn’t hedge them sufficiently.
The main consequence, now, is that the entirety of the international financial multiplex-matrix is collapsing in on itself, under the weight of obligations that the institutions cannot meet. The broad, sector-wide plunges in share prices of these institutions, following the significant falls in the prices of assets and the strongly increasing cost of insurance against collapse, indicate that something has gone very wrong ‘behind the corporate veil’, and that insiders are getting out while they can. I can’t put a time on when the truth of the situation will emerge into the news, but I’m certain that something horrible has happened and is making its way into the economy, into countries’ financial and fiscal systems, and into household balance sheets.
So imagine my surprise when, on reading this weekend’s Oz and Fin Review, I find there is next to buggerall being written about these developments. This is the biggest story of the year, if not the decade, and yet all I could find were:
- one story, in the Fin, about Deutsche, but without any details and with a calming analysis offered to readers – saying that the stupendous collapse of Deutsche’s share price is about investor overreaction to falling profitability, not to concerns about solvency;
- another story in the Fin about developments in the Italian banking system – again, light on detail and taking a calming, ‘50,000 foot elevation’ view;
- pronouncements from central bankers, including this country’s own overpaid nitwit, saying that they think the market panic is ‘overdone’;
- nothing about the strong increases in prices for credit default swaps on banks and on European sovereigns, which indicates that people are genuinely concerned and heading for the hills;
- nothing about what a meltdown in the multi-trillion dollar derivatives market might mean for interconnected financial institutions and the world economy, and how problems here might actually be the cause of the problems in the banking complex;
- lots of badinage about individual companies, and how they are coping with falling commodity prices, without analysis of how they might fare in what appears to be the disaster around the corner;
- reports and commentary about the increasing prevalence of ‘negative interest rates’ in the financial world, without any analysis of: why such a serious step would be considered if the economy was, as the talking heads say, in no trouble; the significance of this movement ‘through the looking glass’; nor of the immense deflationary and crisis-creating forces which are causing interest rates to become negative.
Following the previous crisis, in 2009, QEII had occasion to visit a group of economists and took the opportunity to ask them why nobody saw the crisis coming. Of course, there was a false premiss in this question – some economists did indeed see the crisis coming, as did some market participants.
For example, the magnificent private equiteer who wrote under the nom de plume Equity Private, and whose writings I followed religiously while studying for my Masters in a wonderfully exotic East Asian paradise, explained the situation in this August 2007 piece, summing it up with:
What are the lessons for the Going Private reader? The combination of unaligned incentives (both on the intra-institutional and inter-institutional level), overheated first order liquidity (cheap cash), fickle second order liquidity (as distinguished from true liquidity), and a time lag between liquidity supply and performance feedback for that liquidity, should present strong, structural arguments that, when carefully examined, result in legions of smug looking Going Private readers sunning themselves while floating on liquid(ity) in their new yachts.
At the time, not being a finance person, I couldn’t make head nor tail of what she was saying, nor could I connect her explanations to anything I could observe in the markets – at times like these I just relished the superb, bitchy bite of her prose. But what she was doing was warning of the impending crisis, which would finally emerge into the financial press, as well as everywhere else, just over a year later.
As she herself said, after the event:
I don’t make the case here that I am some genius investor. Merely that even a young girl with a newly minted MBA, a student of the Chicago School writing a private equity blog in her spare time could see what was happening.
Clever investors (e.g. Paulson & Co.) took the time to dig deep into the structures and made small fortunes allocating capital effectively as a result of the crisis.
It’s not rocket science. The indicators of an immense crisis are ‘out there’, all around, for those who take the time to look. But the fact is, so many don’t see it coming. And much of the blame for this can be put down to the intellectual incuriosity and laziness of the press, who don’t investigate what is actually going on, content instead to merely report recent events because seeking the strategic context for what is happening is too hard, and complacency is much more respectable.
It’s no wonder so many people were shocked by the last crisis. And it’s no wonder that so many are going to be shocked, again, at what is about to happen.