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The school holidays are over, and
parents are returning to work – if they have any. In the finance
industry, this means taking life seriously again, and giving proper
consideration to the issues of the day. For those fortunate enough to have
been able to switch off totally, there is little that is new but much has
been put on hold. Here is a short list of topics to consider:
1.
In Euroland, the Greeks have still not
come up with details of how much government debt as been concealed through
swap deals, having lied about them to Eurostat (the EU’s statistics
agency). The spread over German bunds for Greek government debt is back at
record levels. Time is catching up with debt roll-overs for all the PIIGS,
with record government debt issuance due in September. This raises the
possibility of bond market dislocation unless there is a helping hand from
the ECB. Ireland is being stretched by continuing bail-out demands from its
banks, notably Anglo-Irish Bank which is asking for a further €25bn
injection.
2.
Leading
indicators for the US economy are deteriorating again, with the Weekly
Leading Index negative for the last three months and beginning to deteriorate
further. Problems in the housing market are increasing, with $750bn HELOCs
(Home Equity Lines of Credit) more or less worthless. Expect revised
estimates for budget deficits in the coming weeks as America approaches the
end of its fiscal year. They will be grim, with some economists revising
their expectations to over $2 trillion. We will see if this pops the Treasury
bubble.
3.
In the UK the coalition is still
trying to work out where and what government expenditure to cut. Vince Cable
floated the idea of cutting funding for non-essential scientific research,
and as a born-again capitalist was not convincing. If this is all they can
do, the cuts are unlikely to be as meaningful as touted, and will be swamped
by the economic downturn. The gilt market is wildly over-valued and is
an accident waiting to happen.
4.
Gold and
silver are
chipping away at new highs – hardly an endorsement of official
confidence. The number of US financial stocks hitting new lows is at a 52
week record, and the number of gold stocks hitting new highs is at 52 week
highs.
5.
An increasing
number of commentators are becoming aware of difficulties ahead, including
economists of all stripes. The balance of opinion is that deflation is a
greater risk than it was three months ago, and that the central banks must
print money to stop it.
6.
BASEL III, which will lay down
revised rules for banks’ balance sheets, is due to report on or about
12 September. These will further encourage banks to lend to governments at
the expense of the private sector. This is because no haircut will be
required on valuations of government debt, and the haircut for government
sponsored entities will be a preferred rate of 15%. As well as discriminating
against the private sector, this amounts to a huge subsidy for Fannie and
Freddie, encouraging banks to take on more of this toxic debt and ensuring
that the government guarantees for them cannot be removed without
precipitating a banking crisis.
It
looks like we have a rough autumn ahead.
Alasdair McLeod
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