bryan rich
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Just Half-Way Through the Global Economic Crisis
Bryan Rich | Wednesday, October 5, 2011 at 11:00 am
Just months ago, the U.S. was in the crosshairs of global scrutiny. The government was being criticized for its unsustainable debt load. Politicians were bashed for their handling of the debt ceiling. And the Fed was being blamed for allegedly stoking global food prices, from what was being described as its "reckless" QE programs.
Because the U.S. economy is the largest economy in the world, and was at the center of the global financial crisis, engaging in a U.S. centric bashing campaign became a popular platform for global politicians.
It was a perfect tool for building favor among their domestic constituents, by publicly lecturing the biggest, most powerful country in the world. And it was the perfect opportunity to make a global power-grab, by taking shots at the U.S. in a time of economic weakness and while it was showing its political fractures.
With no shortage of media coverage on the topic, every charlatan that could get his face in front of a TV camera was soon trashing the U.S. and its policymakers. They claimed that it was the incompetence of leadership that was standing in the way of recovery, not the economy itself. They said the Fed had its head in the sand, maintaining its easy money policies, even while growth had returned. As a result, they promised a dire wave of inflation was coming.
All together, there was a growing sentiment that the dollar was in collapse, hyper-inflation was imminent and that America's dominance was over.
But it didn't happen.
The dollar hasn't crashed, rather it has screamed higher against nearly every currency in the world. U.S. Treasuries, instead of being shunned by global investors, have been bought with both hands by any and every investor around the globe, sending yields - not soaring, as was suggested - but conversely, to all-time record lows.
And while the U.S. economy is in for more hard times, so is the rest of the world ... i.e. elevated debt and sluggish growth isn't a U.S. centric problem - it's global.
What they all failed to realize (or chose to ignore) was, the increasing U.S. debt load and QE programs were symptoms of the virus, not the virus.
And the climb in commodity prices had little to do with U.S. monetary policy, rather it had more to do with China's massive fiscal stimulus of 2009, which subsequently translated into its commodities hoarding binge.
These policies, and the ramifications of these policies, are symptoms of, not only the fallout from a synchronized global recession and financial crisis, but of the bigger virus: A structurally flawed global economy, which continues to thwart any chance at sustainable recovery.
The Delusional Recovery
While the evidence of the recent unraveling in global markets and economies has been right under our noses throughout this global economic crisis, most experts, market practitioners and politicians have done their best to ignore it.
It takes a plunging U.S. stock market for most to recognize that the "recovery" was delusional.
As I've outlined many times here on Globalinvestorweekly.com, the most thorough analysis of global financial crisis was done by Carmen Reinhart and Kenneth Rogoff. Though many ignored it, they revealed in 2008 the expected fallout from this ongoing economic crisis.
Their study showed that global financial crises typically lead to sovereign debt crisis. Sovereign debt crises typically follow a progression of rising deficits, rising debt, an onslaught of downgrades and finally defaults.
And their study showed that the 10-year global credit buildup would likely take as long to unwind (10 years).
So the deleveraging process tends to take around a decade. And for the extent of the deleveraging period, the study suggests:
•Economic growth trends at lower levels than pre-crisis growth,
Economic growth trends at lower levels than pre-crisis growth,•Unemployment hovers around 5 percent higher than pre-crisis levels,
Unemployment hovers around 5 percent higher than pre-crisis levels,•And housing prices remain anywhere from 20 percent to 50 percent below peak levels.
And housing prices remain anywhere from 20 percent to 50 percent below peak levels.This has been nothing less than the script for the way economies have been behaving, particularly in the United States. If you mark the meltdown in subprime mortgages in early 2007 as the beginning of the global economic crisis, then we stand less than five years in.
With that said, we should expect ...
More Shocks Ahead, More Crisis
Just as all of the pontifications were piling up about the demise of the U.S. and the dollar, Europe's implosion became so dangerous that it could no longer be ignored. And since stocks have finally begun to crumble, under the weight of fallout in Europe, the blame game has turned toward Europe.
Now, people are blaming Europe, not for printing money (which they have) ... not for running up unsustainable debts (which they have) ... not for violating their constitution (the Maastricht Treaty, which they have) ... not for its political debacle (which has been a disaster) ... not for having a structurally flawed monetary union (which has been clear since its inception) ... but for causing stock markets to decline and global confidence to sour.
And even though the evidence points to defaults in Europe, another round of bank failures, credit freeze, global recession and a demise or restructuring of the euro, the mainstream media continues to wait with bated breath for a message that all has been resolved in Europe - so then, as they believe, the stock market can resume its climb and, in turn, the global economy can resume its perceived recovery.
So still, the consensus view is focused on the symptoms, not the virus. And still, most continue to underestimate the scale of this four-year old global economic crisis, and its ultimate path. To be sure, it won't end in Europe.
Regards,
Bryan
Bryan Rich began his currency trading career with a $600 million family office hedge fund in London. Later, he was a senior trader for a $750 million leading global hedge fund in South Florida. There, he helped manage and trade a multi-billion dollar foreign exchange options portfolio. Today, Bryan runs Logic Fund Management, a currency research, advisory, consulting and money management firm.
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READER COMMENTS
"I’ve read various economic analysis and commentary for some 30+ years. Every once in a long while someone comes along that has good insights, who has educated themselves well from a broad perspective rather than letting prejudiced opinions on what “should be” get in the way of facts of what “is happening”. Thank you Bryan.." —V.J.
"This is a wonderful piece of inteligent work on what has been happening in the realm of socioeconmics in the Midle East and Europe." —Dan
"An excellent piece and simply put." —Howard
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"I am glad someone has the balls to tell it like it is happening before our eyes." —L.D.
"Hats off to Bryan for telling it like it is regarding the pseudo inflation caused by your future taxes being used to run up the markets." —V.J.
"Great article. Can’t get this kind of thinking anywhere else." —T.B.
"For as long as I’ve been reading, Bryan has an unconfused consistent clear view of reality. " —V.J.
"This article finally analyzes the economic reality in a rational manner. I have heard the doom and gloom predictions and noticed that not very many of them are coming to pass. This article appears to posit a reasoned explanation to the current situation in a lucid and studied fashion. Well written." —M.H.
Bryan Rich always writes an excellent column. He is always calm rational and analytic. I thoroughly enjoy reading his pieces. —R.G.
The readers comments are specifically in reference to Bryan's contribution to Money and Markets e-letter published by Weiss Research, Inc.
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"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." - George Soros
Bryan Rich began his trading career with a $600 million family office hedge fund in London. Later, he was a partner in a New York based currency hedge fund and then a senior trader for a $750 million leading global hedge fund in South Florida. He consults, manages, writes and advises on the subjects of currencies, global markets and macroeconomic issues.
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