The New World Order Of Global Markets
10.08.10, 6:10 PM ET
The best minds in finance--George Soros, Mohammed El-Erian, Larry Summers, Joseph Stiglitz and Robert Rubin--were not exactly raving bulls at the Financial Times conference on "The Future of Finance" this week. They were not the force driving the Dow Jones industrial average through 11,000 Friday, rather they were arguing convincingly of the constraints evident in the global economy that are bound to make investing anywhere more difficult and different than ever before.
Martin Wolf and Gillian Tett, FT editors, did a superb job of drawing out the puzzling tensions acutely active in the global economy. Food for thought: Wolf pointed out that China (20%) and India (8%) were both still only small fractions of the GDP of the U.S. In other words, the emerging economies are fast growing midgets versus the slow growing giant. "The potential is unimaginable and vast," said Wolf, "We have never had a low per capita income country with such responsibility and power."
One conclusion was crystal clear: Expect realignments in financial power both globally and nationally. The financial services industry worldwide will never be the same. Asian and Latin American banks survived the storm better than U.S. and European banks. Therefore, the global pecking order among financial institutions is shifting.
This is the private sector institutional backdrop to the evolving currency wars. I disagree with the notion that emerging markets banks won't expand into the developed world. The Chinese will want to bind American investors to their largest public concerns and can facilitate that goal by acquiring troubled banks in the U.S. Are you listening,
Former Treasury Secretary Rubin vaguely warned that China's ascendance may backfire in the not-too-distant future. "China faces a difficult position either financially or politically."
Columbia University's Stiglitz entered his brutal epitaph on the bailout of Wall Street: "We saved the system, but we didn't reform it." So, we are left with "too big to fail that are too connected to fail ... too correlated to fail." His radical and unavailable solution is to break up the dominant institutions before we have to bail them out again.
It won't happen, because as Summers brilliantly explained, the Obama administration policy toward Wall Street was "sensationally effective," according to the FT's Wolf. Summers claimed the cost of TARP would be only one-third of one percent of GDP, or a measly $4.5 billion. More incredibly, he boasted that Uncle Sam would make a profit on the bailout of
The bearish view from El-Erian of Pimco was that expectations of returns must be reduced on all classes of assets, whether stocks, bonds, commodities, real estate, what have you. Why? Because the politics of austerity are in control, and the lack of investment is low, while regulations are high. The Pimco boss is adamant that neither fiscal stimulus nor quantitative easing will help alter what he disparagingly calls "the new normal." Sounds awful, doesn't it?
Do not expect that the $2 trillion in cash on corporate balance sheets is about to be invested in plant and equipment that will create new jobs. El-Erian piercingly dubbed the $2 trillion "a form of self insurance in an uncertain world," insurance against a double-dip that El-Erian put at a 30% likelihood. The odds-on status quo is for sluggish growth, high unemployment and continued deleveraging.
Soros reckons that quantitative easing will not produce any dynamics for the economy, and that fiscal stimulus is required. In any case, the brilliant hedge fund operator predicts "earnings are likely to have peaked and will decline from current levels." Both Soros and Stiglitz surmise that the 2,400-page Dodd-Frank regulatory bill constrains our banks who will need to raise capital for nine more years and that restraint will reinforce caution in our financial sector.
Want to worry about another arithmetic possibility figured out by White House economic adviser Summers? There is an enormous risk we will continue to have another crisis in the financial system every three years. That would make the next one due in 2011. So hunker down and get prepared and listen to the best brains telling it like it is.