maverick
08-03-2009, 09:50 PM
More than a decade ago, at the height of the Asian currency crises Russell Napier wrote, "Depending upon the scale of the problem, different degrees of government intervention may be necessary. These range from no government assistance to extensive fiscal management of poor quality assets. However, every brand of assistance has one commonality- the equity goes to zero and the shareholders lose 100 per cent."
The commonalities between 1996-1998 and today are substantial. We have a US financial system that is essentially insolvent, an auto industry with no hope of survival. But with millions of jobless Americans and the Eurozone area in no better shape national Governments are throwing trillions in easy money, sometimes fetching as little as 50 bps per annum to douse a fire that refuses to die down.
Commentators on CNBC US have hit hard at the big-mouthed but theatrical Black US President Barak Obama of veering towards a "Left of Centre idiology in a nation known for Right of Centre idiologue".
It is apparent that inspite of the TARP, TALF and BARF, the Obama administration has not figured out the best way forward on the banks. This even as the biggest banks in the World-Citi and BOA head towards the $ 1 per share mark on the NYSE.
The American administration is now looking ever more Japanese in its continuing failure to face upto the painful consequences of what is a massive systemic crisis. This is evident from the continuing talk about and evident desire to resort to politically convenient backstops and guarantees.
The sweetheart non-recourse financing being extended to Hedge Funds and the like to buy asset-backed securities is doomed to fail. It is also a shocking misuse of tax payer funding. Yet, unbelievably, the case for recognising reality and nationalising the worst banks is still deemed as way too radical.
Honeymoon Over
Fears about the dysfunctional nature of Obama's economics team look at this juncture ever more justified. Clearly the President's political honeymoon is over. And yet he continues with the misguided effort to create an economic policy via committee consensus when what is needed is firm leadership at the top.
CLSA wonders if Obama understands at all, conceptually what is at stake with the banking system. It is hard to imagine that policies based upon backstops, guarantees and non-recourse loans to hedge funds and the like would find wholehearted supported from the old but functional warhorse Paul Volcker.
Volcker understands what needs to be done. That is to get rid of the zombie banks, whatever be the cost to bank shareholders and bank bondholders. This is a problem of solvency not liquidity. So if Citi, BOA, AIG and GM have to fail, they must be allowed to fail, irrespective of the political and economic consequences.
There are an estimated $ 64 trillion worth of CDS contracts outstanding most issued or under-written by financial institutions. It is dumb to expect that these trades will expire on a counter-party basis without an incidence whose magnitude would be substantially larger than the collapse of a Citibank.
Still, from a market standpoint, the damp squib that is so far the Obama admin's response to the financial crises increases the risk of a further dramatic equity market sell-off in the US which the Rest of the World risks being correlated to.
CLSA has long espoused the view that S&P 500s target remains 500 and this when S&P 500 is trading at 12 times estimated CY09 consensus earnings estimates and 10 times CY10 consensus earnings estimates which project an earnings growth of 25 per cent in CY10 over a 9 per cent estimated fall in CY09 earnings.
What can change is a response that under-scores the US Governments power to get ahead of the problems in the Housing and Banking sectors. If the current admin cannot accomplish this, the deflationary forces at work and which are getting powerful by the day will reassert with a vengeance.
This deflationary response might be the only hope that politicians get focused in their policy response and precipitate a response of such insurmountable magnitude that reverses the inevitable downward cycle we are currently in.
The commonalities between 1996-1998 and today are substantial. We have a US financial system that is essentially insolvent, an auto industry with no hope of survival. But with millions of jobless Americans and the Eurozone area in no better shape national Governments are throwing trillions in easy money, sometimes fetching as little as 50 bps per annum to douse a fire that refuses to die down.
Commentators on CNBC US have hit hard at the big-mouthed but theatrical Black US President Barak Obama of veering towards a "Left of Centre idiology in a nation known for Right of Centre idiologue".
It is apparent that inspite of the TARP, TALF and BARF, the Obama administration has not figured out the best way forward on the banks. This even as the biggest banks in the World-Citi and BOA head towards the $ 1 per share mark on the NYSE.
The American administration is now looking ever more Japanese in its continuing failure to face upto the painful consequences of what is a massive systemic crisis. This is evident from the continuing talk about and evident desire to resort to politically convenient backstops and guarantees.
The sweetheart non-recourse financing being extended to Hedge Funds and the like to buy asset-backed securities is doomed to fail. It is also a shocking misuse of tax payer funding. Yet, unbelievably, the case for recognising reality and nationalising the worst banks is still deemed as way too radical.
Honeymoon Over
Fears about the dysfunctional nature of Obama's economics team look at this juncture ever more justified. Clearly the President's political honeymoon is over. And yet he continues with the misguided effort to create an economic policy via committee consensus when what is needed is firm leadership at the top.
CLSA wonders if Obama understands at all, conceptually what is at stake with the banking system. It is hard to imagine that policies based upon backstops, guarantees and non-recourse loans to hedge funds and the like would find wholehearted supported from the old but functional warhorse Paul Volcker.
Volcker understands what needs to be done. That is to get rid of the zombie banks, whatever be the cost to bank shareholders and bank bondholders. This is a problem of solvency not liquidity. So if Citi, BOA, AIG and GM have to fail, they must be allowed to fail, irrespective of the political and economic consequences.
There are an estimated $ 64 trillion worth of CDS contracts outstanding most issued or under-written by financial institutions. It is dumb to expect that these trades will expire on a counter-party basis without an incidence whose magnitude would be substantially larger than the collapse of a Citibank.
Still, from a market standpoint, the damp squib that is so far the Obama admin's response to the financial crises increases the risk of a further dramatic equity market sell-off in the US which the Rest of the World risks being correlated to.
CLSA has long espoused the view that S&P 500s target remains 500 and this when S&P 500 is trading at 12 times estimated CY09 consensus earnings estimates and 10 times CY10 consensus earnings estimates which project an earnings growth of 25 per cent in CY10 over a 9 per cent estimated fall in CY09 earnings.
What can change is a response that under-scores the US Governments power to get ahead of the problems in the Housing and Banking sectors. If the current admin cannot accomplish this, the deflationary forces at work and which are getting powerful by the day will reassert with a vengeance.
This deflationary response might be the only hope that politicians get focused in their policy response and precipitate a response of such insurmountable magnitude that reverses the inevitable downward cycle we are currently in.