The over valued dollar and what the impact will be.
As far as lenders are concerned the only story worth talking about at the moment is the current and completely unjustified strength of the US dollar against practically every other currency. Of course in the UK and the Eurozone there are other complicating factors which may well be giving people sleepless nights. It is plain to me that the mainstream press don’t really know what “traders” do as is borne out be some of the inane comments which they have published. Similarly economists who tell us what they think is going on. I write as I find and the bizarre events afflicting the markets from the end of last week are strictly for the birds. Everyone seems to have gone absolutely potty. Of course these are unusual times with Putin talking about nuking everything. A complete U turn in Uk Policy, a new right wing government in Italy, turmoil in Russia, Iran, these are indeed interesting times as the Chinese curse says.
Let’s start with the UK. Last Friday UK Chancellor Kwasi Kwarteng introduced a new budget. The package included cancellation of planned increases in UK taxation and some modest cuts together with a whole raft of supply side incentives for businesses. The hope is that this will encourage economic growth. It is a gamble but not an enormous one. The other thing of note was that consumers already had wind of a support package to help consumers through the anticipated high gas prices this winter. A few weeks ago some newspapers said this could top £ 200 billion. But by last Friday gas and crude were falling fast and in any case practically every other European country was providing some kind of direct report. Nevertheless the pound took a hit on Friday 23rd.September even against the euro and this was seized on by left wingers in the UK as reckless. It was reported in some right wing newspapers that if the pound fell to parity with the dollar Tory MPs would cease to back the new PM. Needless to say this did not help by causing a sense of imminent crisis In any case when markets opened in the Far East Sterling fell like a stone. It seems that Kwasi caused this by the mere suggestion that there might be more tax cuts to come. When London opened it regained most of the ground it had lost presumably leaving some speculators with very large losses. This kind of hysterical reaction has nothing to do with economic fundamentals. Economists screamed that the markets were worried about debt levels. It needed to be pointed out that the UK had one of the lowest GDP/total debt ratios. Lower than France, Spain, Italy, Japan and the United States itself. The Eurozone improved against sterling. Can anyone tell me why? Does anyone think that the US or the eurozone is being managed well?
The hysterical over reaction is causing mayhem. The dollar is far too high and looks frothy but those leveraged countries with dollar debt on their books are going to have start tightening or face a day of reckoning. Banks holding these sovereign debts will also have enhanced risk on their books. Time for some stress testing. As if this mayhem weren’t enough to be going on with Italy elected a new right wing government. God knows what she is going to do but Italy is getting on for double the UK’s debt GDP ratio. If bondholders are worried about the UK introducing a pro growth package then what are they going to do about Italy doing roughly the same thing but without the political stability and having suffered years of stagnation. Rows with Brussels would be unwelcome and Italy might find itself unable to pay the enhanced rates of interest. The ECB has done nothing but buy Italian debt for the past three years and Germany is not going to gallop to the rescue. Looks like another Eurozone crisis is on the way and this time fine words will not cut the mustard. Big challenges are on the horizon.
I have always argued that the levels of global sovereign debt are far too high. None of these countries have enough clout to ever repay their debt and now that the days of ultra low interest rates are disappearing fast some solutions are necessary but I can’t see any. Plate spinning will be in order for the next couple of years until possibly the whole house of cards comes crashing down. The wealth funds, family offices , hedge funds, who have benefitted for the last decade from QE might find out that a massive dam is going to break transferring wealth from where it is currently to where it should be with the taxpayers. In the meantime what is left of the banking markets will need to try and requip itself with a skill set that that recognises true innovation and combines it with credit skills and common sense.