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麻省理工学院经济学博士

个性介绍: 1960年出生于上海,1983年毕业于上海同济大学路桥系,1987年获麻省理工学院土木工程学硕士,1990年获麻省理工学院经济学博士。同年加入世界银行,担任经济分析员。在世行的五年时间,谢国忠所参与的项目涉及拉美、南亚及东亚地区,并负责处理该银行于印尼的工商业发展项目,以及其他亚太地区国家的电讯及电力发展项目。1995年,加入新加坡的Macquarie Bank,担任企业财务部的联席董事。1997年加入摩根士丹利,任亚太区经济学家,2006年9月辞去该职务。

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谢国忠:对2010年的再思考  

2009-04-13 14:22:30|  分类: 言论 |  标签: |举报 |字号 订阅

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对2010年的再思考(点击查看译文


Double dipping in 2010

Andy Xie

April 11, 2009



At the beginning of 2009, I wrote that the global economy would stabilize in the second half and a bear market rally could start in the second quarter of 2009. I thought that stagflation would be the dominant characteristic for the next few years. I am still sticking to the story. The bear market rally began earlier than I expected. The reason was that major governments have been introducing subsidies for speculation. They believe that the main problems are liquidity and confidence. Hence, if investors or speculators are brought back in the game, the world economy could be back to a virtuous cycle again. I think that this type of approach would lead to a second dip in 2010



Subsidizing risk taking does inflate asset prices, mainly stocks for now. However, the hope that rising stock prices will lead to economic revival will not be fulfilled. We are in the middle of a debt bubble bursting. Rising asset prices lift economy through boosting borrowing for investment and consumption. As the current levels of indebtedness are already too high, we won’t see rising debt demand for consumption or investment. When the dream of a quick economic recovery is dashed, stock prices will slump again, which could expose more problems in the financial system and trigger a second dip in the global economy.



The world is amidst a burst after a speculative boom. Boom-burst cycle is quite frequent in history (see ‘Manias, Panics, and Crashes: A History of Financial Crises’ by Charles Kindleburger). A synchronized global one is rare. The last one comparable to the current one was the boom-burst of 1920s and 30s. A synchronized global cycle requires trade and cross-border capital flow to be large. A synchronized global burst is difficult to overcome, because devaluation and export promotion no longer work. If one country has a burst, it can devalue, boost exports, and make money from foreigners to reflate its financial system. East Asia came back this way from its banking crisis ten years ago.



Policymakers are frustrated that their stimuli are not working so far. The US government and the Federal Reserve have spent or committed $12 trillion to bail out its financial system. Its budgeted fiscal deficit for 2009 is $1.75 trillion (12% 0f GDP) but will probably surpass $2 trillion. ECB, Bank of England, and Bank of Japan have all cut interest rates to historical lows. Their governments are already running high fiscal deficits. But, employment, business confidence, and consumer confidence continue to deteriorate around the world. Major economies probably suffered similar contraction in the first quarter of 2009 as in the last quarter of 2008. For the whole year of 2009, euro zone, the UK, and the US may contract by 4-5%. Germany and Japan could contract by 7-8%.



This sort of global economic collapse is unprecedented. Moreover, it is difficult to see how the world would grow again when the collapse is over. If history is guidance, political crisis tends to follow such an economic collapse. When an economic crisis triggers a political one, it makes a quick economic recovery virtually impossible. Out of desperation, governments are trying to support asset prices either directly or incentivizing reluctant speculators to play. Without understanding what governments are doing, most people think that things are either getting better or well soon. After all, shouldn’t stock prices tell us about the future, according to theory (Unfortunately not true in practice when you really need it)? The positive thinking is leading many to chase this market. This is a bear rally that will swallow many smart investors.



This phase of government policy-targeting asset prices began with the Fed’s announcement for buying up to $1.15 trillion of treasuries, commercial and mortgage papers. It was targeting mortgage interest rate in order to stabilize property price. However, this sort of policy meant that the Fed knew what property price should be. The US property price was 100% overvalued relative to income. After the bubble burst, it should go back. What the Fed is doing is to slow the adjustment and shift a big chunk of the adjustment through general inflation rather than property price decline. What the Fed is doing will impact the dollar for years to come.



The second part came with the Geithner plan for stripping toxic assets from the US’s troubled banks. Hank Paulson, Tim Geithner’s predecessor, wanted to focus on stripping the bad assets off the banks too. His plan didn’t fly because the market prices for the bad assets were too low for the banks to survive. Most banks have questionable assets more than twice their equity capital. As these assets are trading at 30 cents on the dollar, if the toxic assets are sold at market price, most banks are bankrupt. This is why Hank Paulson shifted to injecting money directly into the banks first. The hope was that it would stabilize the financial system and the toxic asset prices would rise sufficiently for the banks to survive. This hasn’t happened.



The Geithner Plan tries to boost the prices of toxic assets by subsidizing speculation. The centerpiece of the plan was offering government-guaranteed 6-1 leverage. If an investor risks one dollar, the plan caps his loss at one 1 but offers the reward equivalent to risking 7. The current toxic asset price is 30 cents on the dollar. The price reflects the expected return on the bad asset. It is equivalent to 70% chance of bankruptcy and total wipeout for creditors and 30% chance of survival for the borrowers that support the assets. Under the Geithner Plan, an investor that puts down one dollar can buy $7 worth of toxic assets. At the current price of 30 cents on the dollar, he could buy $23.3 of toxic assets. There is 30% chance that the investor gets $23.3 and, after paying off $6 of debt, and has $16.3 in income. There is 70% that he loses everything. Hence, his expected income for his $1 investment is $16.3*0.3=$4.9.



This plan should have boosted demand for toxic assets tremendously. Indeed, based on the simple example above, investors should be willing to pay more than twice the current price. This would save the banks. For the investors in toxic assets, they reap rewards from the 30% of the performing asset bundles that they have bought and leave the 70% non performing ones to the taxpayers. This ‘beautiful plan’ works by robbing taxpayers. But, the prices for toxic assets have not risen that much. Why? I think that the market doesn’t think that the plan could work. The public opinions may torpedo it before it goes into implementation. If it goes ahead, the US Congress may pass retroactive laws to confiscate the profits from the investors who participate in this scheme. Essentially, the Geithner Plan is giving speculators free money. But they are not taking it because they are terrified of the consequences.



The third piece is changing the mark-to-market rule. The Financial Accounting Standards Board of the US has changed its rule for accounting asset value. It now allows financial institutions to value their assets according to their ‘judgment’ rather than market price if they think that the market isn’t working. Market may not value asset prices perfectly. But, who could do better? This rule change is to allow the banks in trouble to stop reporting losses from asset quality deterioration.



When this change happened, the share prices of the troubled banks rose sharply. The market was not just reacting to a superficial change. The change is meaningful for the share prices. If the banks can name their prices for the assets on their books, they don’t have to raise capital to stay in business. This means that they might make enough money over time to recapitalize. Hence, the risk of their bankruptcy has declined. The increased survival chance has boosted their share prices.



Shouldn’t this be a good thing that banks don’t go burst? Not necessarily so. Look at what happened in Japan. Its banks essentially didn’t report their losses and tried to make money to recapitalize. It kept the economy down for ten years without succeeding in their getting out of capital shortfall. The reality won’t change with a change in the accounting rule. These banks know they don’t have enough capital. Hence, they won’t increase lending and will try to milk their existing assets for profits to recapitalize. They will be a drag on the economy for years to come. The US seems to be copying from Japan.



In addition to the US’s policies for targeting asset prices, most other major economies are encouraging their banks to lend. What does ‘encouraging’ mean? Banks normally lend to maximize profits by balancing between risk and reward. When governments encourage them to lend, it really means pressuring banks to lower standards, i.e., taking on more risk for the same or less reward. This sort of policy is really to exchange non-performing loans in future for boosting demand today. The argument in favor such an approach is that, if every bank lends, the economy improves, which would decrease non-performing assets. This sort of ‘free lunch’ thinking works temporarily by inflating another bubble. Of course, it will create a bigger mess in future.



Reflating an asset bubble to support the economy is widely hoped for by distressed investors around the world. Policymakers, in addition to their concerns for economic weakness and political stability, are responding to investors’ cry for help. This is why we are seeing so many policies that are pumping air into a deflating bubble. It seems the air-pumping is working now. But, it won’t last. As governments throw everything at it, more air is going in than coming out. But, government actions can’t put in air on a sustainable basis. The air leakage will last with rising unemployment, falling corporate profits, and collapsing trade.



I think that the air leakage will overwhelm government air pumping in 2010. Another major dip in asset prices is likely. Further, I think that inflation will become a problem, which would cause treasuries and other government bonds to drop. Government bonds are the last bubble to burst. Other asset prices will bottom when this bubble deflates. This force will reverse all the air that governments are putting in now. The global economy would have a second dip then.



The debate over inflation or deflation has been raging on. The low bond yield suggests that the consensus is for deflation. In September 2006 at the IMF-World Bank annual meeting in Singapore I predicted a financial crisis in 2007, economic crisis in 2008, and stagflation beyond. The last prediction has not happened yet. What governments and central banks are doing have strengthened my conviction that stagflation will haunt the global economy for years to come.



Historically, the burst following a speculative boom is deflationary for two reasons. First, a speculative boom is investment biased. Hence, there is overcapacity during the burst, as the demand during the boom was exaggerated. Second, bankruptcies of banks and production businesses drive up unemployment, which decreases demand and pushes more businesses into bankruptcies. This vicious cycle prolongs price decline.



The current burst won’t lead to sustained deflation for two reasons. First, the speculation was centered on unproductive assets like property and financial product. Automobile and electronics are two global industries with considerable overcapacity. The automobile industry has had overcapacity for a long time. The problem was covered up by the credit bubble that exaggerated demand, as buyers were incentivized to change cars more frequently with zero down-and-zero interest rate financing. The deflationary pressure would end with the bankruptcy of one or two major producers. The deflation would last if governments prop up their auto companies with taxpayers’ money. At least the Obama government has shown unwillingness to do so.



The electronics industry is used to deflation. It is usually good deflation-rising productivity supporting declining price from that industry. What’s going on now is not good deflation. The drastic cuts of capital expenditure by global companies have caused a demand collapse for IT products. The pressure is causing the industry to cut back quickly. This industry is shrinking without government prodding. The bad deflation in this industry will end quickly with capacity reduction.



China’s manufacturing expansion is also a source of overcapacity. When the Asian Financial Crisis depressed demand one decade ago, I thought China’s overcapacity was deflationary, because manufacturers in other countries would have match Chinese prices. Now is different. Manufacturing prices are Chinese. Manufacturing value added has shrunk dramatically relative to the costs of raw materials. The manufacturing capacity in China is unlikely to sustain deflation. For example, three quarters of the cost for steel production are raw materials like iron ore and coking coal. The overcapacity in steel production can’t sustain price decline of steel product.



Second, the vicious cycle between bankruptcy, especially banks, and demand contraction is unlikely now. Governments and central banks are propping up virtually every bank in the world. They are lending to industries to keep them afloat. The current dynamic suggests that a bottom for the global economy would be reached soon. As mentioned above, I thought it would be the first half of 2009. Now, with a second a second dip forecast, it would be likely in 2010.



Despite demand weakness, inflation could emerge through commodity inflation and labor unions pushing wage increase, the same factors in the 1970s. Commodity inflation is already visible as investors who are frightened of monetary expansion seek safe haven. Oil is back above $50/barrel despite demand collapse because so much money has flowed into exchange traded funds that buy oil. As central banks keep printing money, more and more money will flow into commodities.



I always believe that labor union is mostly demand driven. During prosperity labor unions are weak as a rising tide lifts everyone’s living standard. When hard time hits, more people support union activism. During economic stagnation, especially stagflation, without union power, average workers will see declining living standard. The national strikes in France and other European countries are a harbinger for what could come.



I have argued above for a second dip in 2010 and stagflation beyond. I want to add some comments on the nature of bear market rallies. In a structural bear market that lasts for years stock markets can have big bounces from time to time. These bounces can be as big as 40% from bottom to top. Obviously, rallies of such size are mouthwatering. It is difficult for investors to stay on the side line. I am not against playing such bear rallies. But, one must remember that bear rallies are at best zero-sum games and often negative-sum games, i.e., making new lows after each bounce. One’s profit is someone else’s loss. Timing is everything in playing bear bounces. Getting in and out early are the basic principles. The most harmful behavior is chasing. After a rally of 30% has happened, it is very bad for your financial health to chase.



The last structural bear market happened in the 1970s and lasted for ten years. It is obviously difficult for investors to stay on the sideline for a decade. After all, how long does one live? This is why a structural bear market swallows more and more people through such rallies. The ones that jump in later tend to be more patient and probably smarter. The last ones that perish in a structural bear market may have IQ over 200. I am afraid that the current bear market won’t end until it brings down Warren Buffett.


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