People are not accepting enough compensation for the risk they are taking. If they wake up from their state of low-risk euphoria, asset prices will fall.
Greenspan has articulated the issue but I guess will leave it to his successor to deal with the "aftermath of protracted periods of low risk premiums."
I don't think lenders expect a return on their money these days; they just want to keep it as safe as they can, a store of wealth rather than an investment. Some losses may occur, but as long as they can keep them to a minimum, they will be happy.
So when Risk Premiums go up, the various asset classes which he mentioned fall in price: Stocks, Bonds, Real estate. When this happens, where can one hide financially? During the emerging markets currency devaluations of the late 1990s and during the recent stock market deflation, long term US bonds were the best place to hide one's money.
But if there is now a bubble in the bond market, where does one put one money to preserve purchasing power? Two year Treasury Bills at 4%? Since the US seems to be the epicenter of the asset inflation, perhaps non-US short term government securities?
I have recently sold my home and moved to a lower cost area of the country (near my daughters) so that much is accomplished.
"The optimism of global investors towards Asia is not supported by fundamentals, in my opinion. When the sentiment shifts, it could lead to a sharp reversal in the funds flow and cause another Asian financial crisis. As the Fed funds rate rises, this risk also increases."
"The trade boom since 2002 is finally turning due to high base and the demand weakness induced by high oil prices. The combined exports of Japan, Korea, and Taiwan have decelerated to 5-6% growth rate from over 20% in the first half of 2004. The decelerating trend is not over yet. Trade is the growth engine for these economies. This would be a serious headwind for their growth in the coming months.
Chinas exports have been unusually resilient in this cycle. Its exports have been rising at 30% annual rate since late 2002. Chinas exports have tripled since 2001. The export boom is the source of liquidity for Chinas investment boom. Even the hot money inflow was chasing the boom due to exports."
This could have potentially two implications if Andy's prognosis is correct. One, the hot money outflows from China come to the US, two, Chinese subsidy of long rates in the US get removed at the margin.
But one has to acknowledge the audacity of the guy -- first encouraging moral hazard, then warning of its consequences. Both with a straight face.
But then, while he and his team are certainly very influential, they are not exactly sitting in the driver seat. Much of what they can do is just pushing the gas pedal.
What?
The increase in the market value of my house is not permanent?
That's going to mess up my retirement big time!
Kasriel has some good stuff in this week's Weekly Commentary. Talk about messing up your retirement . . .
http://www.ntrs.com/library/econ_research/weekly/us/pc082505.pdf
Greenspeak translation:
People are not accepting enough compensation for the risk they are taking. If they wake up from their state of low-risk euphoria, asset prices will fall.
Greenspan has articulated the issue but I guess will leave it to his successor to deal with the "aftermath of protracted periods of low risk premiums."
Are the buyers of MBS paying any attention?
I don't think lenders expect a return on their money these days; they just want to keep it as safe as they can, a store of wealth rather than an investment. Some losses may occur, but as long as they can keep them to a minimum, they will be happy.
So when Risk Premiums go up, the various asset classes which he mentioned fall in price: Stocks, Bonds, Real estate. When this happens, where can one hide financially? During the emerging markets currency devaluations of the late 1990s and during the recent stock market deflation, long term US bonds were the best place to hide one's money.
But if there is now a bubble in the bond market, where does one put one money to preserve purchasing power? Two year Treasury Bills at 4%? Since the US seems to be the epicenter of the asset inflation, perhaps non-US short term government securities?
I have recently sold my home and moved to a lower cost area of the country (near my daughters) so that much is accomplished.
Andy Xie at Morgan Stanley
Morgan Stanley
"The optimism of global investors towards Asia is not supported by fundamentals, in my opinion. When the sentiment shifts, it could lead to a sharp reversal in the funds flow and cause another Asian financial crisis. As the Fed funds rate rises, this risk also increases."
"The trade boom since 2002 is finally turning due to high base and the demand weakness induced by high oil prices. The combined exports of Japan, Korea, and Taiwan have decelerated to 5-6% growth rate from over 20% in the first half of 2004. The decelerating trend is not over yet. Trade is the growth engine for these economies. This would be a serious headwind for their growth in the coming months.
Chinas exports have been unusually resilient in this cycle. Its exports have been rising at 30% annual rate since late 2002. Chinas exports have tripled since 2001. The export boom is the source of liquidity for Chinas investment boom. Even the hot money inflow was chasing the boom due to exports."
This could have potentially two implications if Andy's prognosis is correct. One, the hot money outflows from China come to the US, two, Chinese subsidy of long rates in the US get removed at the margin.
Sounds a little like Doug Noland's '03 talk on the unintended consequences of setting monetary policy in a service-based economy:
(I hope the link works)
http://www.prudentbear.com/Bear%20Case%20Library/bear_case_library_images/Contemplating_the_Evolution.pdf
But one has to acknowledge the audacity of the guy -- first encouraging moral hazard, then warning of its consequences. Both with a straight face.
But then, while he and his team are certainly very influential, they are not exactly sitting in the driver seat. Much of what they can do is just pushing the gas pedal.
Agree, Paul Williamson.