Diary of a Financier

Bookshelf Update: The Post Crisis Economy

In Bookshelf on Thu 13 Jan 2011 at 14:26

In 2010, Thought Economics interviewed hedge fund manager John Brunjolfsson about his macro outlook. His thoughts were surprisingly prescient in retrospect, and I find them in tidy coordination with the opinions I’ve communicated here under The Buttonwood Tree. Therefore, I’m adding the interview to the bottom my Bookshelf.

I recommend the read, but as it’s lengthy, I’ve included a summary of the highlights:

  1. Post crisis economy– “I believe that the best policy makers can do is to provide lubrication and a temporary balm to some of the challenges faced by the U.S. and the U.K. However, the policies they prescribe are a continuation or exaggeration of the previous policies that created the structural problems in the first place. I am therefore relatively pessimistic on the intermediate and longer term outlook for the U.K., the U.S., Spain and other countries where credit was readily available and where real estate was built up and the net worth of financial institutions frankly is suspect.”
  2. Soverign credit– “The developed world actually has worse demographics when looking at competitiveness and systemic issues, and has a lot of work to do in order to shore up financial systems. Separately, some of the government guarantees and accounting generosity that was allowed to get us through the crisis has not yet matured, which means that the future holds headwinds. As much as I have to acknowledge that policies were needed to navigate through the implosion, these policies are, in the long term, very dangerous.”
  3. Inflation & Interest Rates– “…the Fed must keep rates at zero for an extended period of time [which is my expectation]. However, even if they raise it from zero, the Fed will keep the front-end shorter-term rates much lower than you would typically expect. The longer term bond will certainly reflect inflation and interest rates will go up. Some of this can be managed or manipulated with Fed purchases of longer term treasuries rather than monetary policy (money-market). Absent that kind of artificial cap on interest rates (which ultimately can only be temporary) the general effect would be a very steep yield curve with low short-term, and much higher long-term rates.”
  4. Next bubble– “…the Fed can continue to engineer low short-term interest rates and affect artificial value by buying open market instruments. I would call that a bubble in 2- 3-year Treasuries. However, I am not sure that the global markets realize the risk embedded here. If they do not, the dollar would, in effect, be in a bubble because it would be debased by this process continuously, and the debasing could get masked by the Fed’s purchase of Treasuries and maintenance of the steep yield curve (low interest rates). The scenario I am describing would involve a relatively sharp collapse of the dollar, which I would qualify by stating that if the same policies are undertaken in U.K., Japan and continental Europe, the collapse of the dollar may not be reflected in exchange rates between these currencies, as all would collapse at same time. The collapse would more likely be reflected against more robust currencies such as the RMB.”
  5. Country/Sector favorites- “I see the emerging market countries as having transformed over the past 50 years or more, and in particular during the past 10 years… These nations had lower debt-to-GDP levels on a central government basis, and lower private debt, lower cost of living and a greater ability to compete on export. This means that the lubrication needed by the U.S. and U.K. to get through the crisis will overheat these emerging markets. [He loses me here…] these markets are volatile, and have relatively high prices, they are not nearly as high as the fundamentals that justify them.”

–Romeo (hat-tip Business Insider)

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