Not yet over the worst phase of Andy Xie

 Not the worst phase of the past
: Andy Xie [2008-05-12 00:00:00]

Xie Sohu blog is by increasing the liquidity of the central bank to ease the financial crisis, but this may push up inflation . more serious potential risk of loss of anti-inflationary credibility the central bank
the past month, a strong rebound in the stock market, credit spreads narrowing, the dollar has gradually stabilize .2008 U.S. GDP growth in the first quarter than expected, reaching 0.6% . As a result, Wall Street began in unison that the worst is over, and even the Bank of England in a recent report also suggested that the worst banking crisis is over.
If you look carefully to distinguish, you can hear all the term optimists had reservations because they are also optimistic about last fall, but was proved wrong. closer to the end the game has not been a winner, it will increase, this may continue for a long time. No matter how the future, optimists when expressing their optimism has given himself plenty of room left.
mobility difficulties
Fed rescue of Bear Stearns, I published an article in this column, saying the crisis is only suspended, and will come back in June. This picture is still very possible, in time there may be one to two months error. The current calm may last longer than expected, because the Fed's direct loans to investment banks, so investors can get cash without selling assets, reducing the forced disposal of assets, and allows the investment bank's assets less book regardless of depreciation loss, even total assets held by the book proceeds.
2008 first quarter, Goldman Sachs, the appreciation of its three assets, a $ 2,070,000,000 bookkeeping net unrealized gains, the company pre-tax income equal to 96 $ 2,140,000,000 %. Morgan Stanley had $ 4,240,000,000 bookkeeping similar income, almost double the profit. Lehman Brothers bookkeeping in the last quarter of the $ 695,000,000 in non-cash income from being classified as a third of its assets in stocks , slightly higher than the pre-tax income of $ 663,000,000. If no book-keeping that is difficult to understand the three assets, the carrying amount of these financial institutions will not profit. Of course, these profits will not bring in cash. In order to maintain operations, they forced loans, the Fed interest rate of 2.5% as their first choice.
Financial Accounting Standards No. 157 provides that a security asset that can be sustained and reliable market valuation of assets, such as the S & P Index constituent stocks , or, as General Electric and Microsoft's market shares. Such assets can be observed very close to the market price distribution. two assets with some level of security based on their similarity of assets, market valuation. For example, If the ten-year bonds and can deliver a good deal, then nine and a half is not due to cash bonds will be based on the relationship between bond prices and ten years. three assets means that the value of the assets, including at least one important ; non-observable .
I'm not saying that Wall Street banks in the manufacturing figures out of thin air. But they do need to show three assets to add value. All of the banks in the first quarter of this revenue bookkeeping, suggesting that they see the appreciation of the future. Bells Gordon rebound after being redeemed and gave them some tips valuation model. This shows how much the banks rely on market trends, but also explains why some of the important people holding a huge salary is always optimistic about the market, if mm the peak in asset prices back to the past, all their troubles will disappear. Even if the Federal Reserve that the central bank, in the decision-making in asset prices into account, that is, their policy goal is to asset prices, mainly equity and credit markets .
However, asset prices are too low or too high? current assets taken by decision-makers re-inflation strategy for success or failure depends on the answer to this issue. S & P 500 Index is currently 15 times expected earnings, the city loss rate was 2.5 times. This is a normal market, the economy is not the normal low. which is about a quarter of the share of financial institutions, and its price-earnings ratio of 10 times mm we know why they look cheap, because the market not sure of its future trend. remove the financial enterprise, the company trades at 17 times the other. In addition, S & P 500 companies 45% of the profits from international, and the dollar has depreciated 30%, making them 13% revenue expansion. In short, the market continued to rebound like that in the phase of rebound from March's low of 10% may only be a 1.2% in December to the current zero. This is the first time, inflation protected bonds inflation bill. investors buy these bonds essential that, after risk adjustment, other assets, earnings will be lower than inflation rate. They This negative view on the other assets of other investors may be good news. because the stock market is pricing based on net present value of future dividends, the discount factor and interest rate and risk premium. the interest rate reduced to zero, the inevitable will lead to higher valuation of the stock market. Of course, people will ask why bond market acceptance of zero real interest rate? This means that negative factors also have a negative impact, or will the stock market.
the Federal Reserve as a Beijing duck feeding Like being forced through the auction of cash loans to banks inject liquidity, which is in fact quantitative easing type (quantitative easing) monetary policy in a form. last two weeks of auction increased 50% to 75 billion U.S. dollars. General , the central bank is waiting for the banks by setting interest rates and voluntary borrowing needs this auction is set quantitative targets, and then let the price fall to a level corresponding to demand.
pressure from financial institutions to reduce the debt relief, liquidity injection temporarily stabilize the financial markets. Most large financial institutions have become dependent on the inventory asset value gains, when the depreciation of those assets, they have to bookkeeping losses. and also the depreciation of capital they need to reduce the size of the balance sheet, which sell more assets, which will lead to further decline in asset prices. Central Bank taking into account the role of the vicious circle, so to prevent the introduction of the policy. This idea appears to be reasonable, but did not take into account the leverage of financial institutions will be a huge asset prices exaggerated . Therefore, the so-called prices unlikely to decline. so, the central bank to cut interest rates or through the quantitative easing policy control asset prices, in order to prevent the financial crisis. But the problem is so strong liquidity will lead to inflation. More and more evidence that Fed policy between commodity prices and there is a connection. liquidity injections, a further increase the price of a commodity, and commodity prices, in turn, increases the cost of living of workers, and ultimately lead to demand for wage increases.
central bank credit impact of potential crises around the
When inflation and even deflation in the Japanese CPI also rose 1.2% a year ago, the bond market has still not awakened to the fact of inflation. the United States year Treasury yield is now 3.85%, lower than the United States in 2007 4.1% inflation rate, of course, the inflation rate will be lower than in 2008. This is because the market still believe the central bank .20 years, inflation has remained low, until two years ago, so far. The different unusual circumstances, so that all central banks have been cast a halo, in particular, the Federal Reserve.
central bank to increase liquidity by easing the financial crisis, largely in the use of market confidence. In theory, this belief will be the market between money supply and inflation slow down the transfer process. However, those who are losing business to financial institutions have found that you can borrow cheap money from the central bank and then in the commodity market speculation. so between money supply and inflation on the establishment of direct contact, but once the public understand this, they will demand higher wages, monetary and inflation will be between the completion of the cycle.
Fed has realized that the market may no longer believe in its determination to curb inflation . If this happens, the result will be catastrophic, ten-year bond yields rose more than 6% at the real estate market will completely collapse. Therefore, the Fed has expressed concern about inflation and hinted will stop interest rate cuts. Currently, the federal funds rate to 2%, probably more than the 2008 inflation rate of 3 percentage points. This huge gap will stimulate the demand for money, fueling inflation. Thus, when a negative real interest rates when the situation better, Monetary policy will automatically relax.
So far, the financial market is still very serious about the Fed's policy. dollar has rebounded slightly from the low, commodity markets are somewhat lower, such as gold fell from a recent peak of 15%. But the commodity drop in prices is just an adjustment, not the commodity bull market ended; the U.S. dollar is due to economic deterioration in Europe and Japan the news, not the U.S. economy improved. As I predicted in early 2008, the euro against the U.S. dollar in 2008 deterioration of the U.S. economy during the first half reached a peak of 1.6, but in the second half will fall because of the economic downturn in Europe.
market has been small commodity market will rebound associated with the weak dollar. The dollar rebounded a little, gold and many other goods will be a short sale. But I think the future will pick up the commodity market is linked to global inflation, not the weak dollar. Globalization has brought the phenomenon of extraordinary inflation, countries that, as more non- controlling factors, they can not alone out of the dilemma of inflation. This idea that they are reluctant to implement austerity.
but is a closed world economy, global inflation and must reflect the global supply and demand balance. If countries are so considered and Click Action, inflation will not be curbed, but continue to climb. this situation, even if the dollar stabilized, all the world currencies will depreciate (eaten by inflation). As a result, commodity markets will be supported . And when all the focus from the main central banks to maintain financial stability and economic growth to curb inflation, the commodity bull market or the commodity bubble will be broken. but that would be after a year or more things.
world Central banks around the use of their credit on the anti-inflation monetary policy to maintain, regardless of the high and rising inflation. The resulting negative real interest rates to calm financial markets have become. But peace is temporary, the current policy posture can not prevent most major economies, such as the United States, Britain, Spain, Japan, Australia and other real estate prices. continued to fall in asset prices will cause demand to weaken, leading to increased unemployment. This process will make the Anglo - Saxon countries, more and more consumers fall into debt crisis.
present, the crisis is still concentrated in the secondary mortgage bonds, the next will be the home equity loans, real estate value is higher than that part of the mortgage debt, an amount over USD 1 trillion, close to the size of the U.S. subprime. When property prices fall, home equity loans will be lower than the first mortgage debt exposure of the problem. And with the increase of unemployment, credit debt will be a problem. the average American credit debt has been increased to $ 8,000 from $ 500. If, like subprime, home equity loans and credit loans have been securitized the majority, and to invest in banks and funds around the world, if the deterioration of both the debt, but also a financial crisis will be inevitable.
more serious crisis the central bank loses credibility. This may seem far away, but the result will show in the second half of 2009. In fact, the central bank did not really win the trust of most of its time gift only .20 years before the planned economies of the world turn to open market economy, this shift brings the overall decline of its economy, a drop in demand, commodity prices lower. In addition, they also accepted the export-oriented strategy to establish its own economic strength, which makes the West commodity prices. As a result, large central banks do not have trouble keeping inflation low, good luck, there is the ability to market itself. However, this situation may not last long. market volatility, may be instantly changed his mind, when it occurs, Global bond yields will soar.
20 after years of growth, the former planned economies have exhausted their resources and labor on the edge, have all entered the inflation phase. China, India and Russia rising labor and land costs, in the leading index of inflation to the West. the central bank now may laugh at this idea, but time will tell. I will be in the next column, tells the story of a cycle of inflation.
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