Speculation of link to trading pattern surrounding offer
By LYNETTE KHOO 26 November 2008
Bright World Precision Machinery said yesterday that it has received a letter from the Monetary Authority of Singapore on a possible breach of Section 203 of the Securities and Futures Act.
This section relates to a company’s disclosure obligations under the Singapore Exchange listing rules. Bright World provided no further details of this possible breach, except to say that it intends to cooperate fully with MAS and will be providing the relevant information and documents sought.
An MAS spokesperson confirmed that it has written to Bright World in connection with an inquiry but noted that ‘it is premature and inappropriate to give further details at the moment, in the interest of ensuring that the on-going inquiry is not compromised’.
Market observers are wondering whether there is a link of this inquiry to the wild share trading patterns surrounding the bid by a US-listed special purpose acquisition vehicle to take over Bright World.
China Holdings Acquisition Corp (CHAC), which is a blank cheque company formed last year to buy businesses with primary operations preferably in China, had proposed on July 21, to acquire Bright World.
It offered to issue to Bright World’s majority shareholder World Sharehold Limited a promissory note automatically convertible to at least 19.9 million shares in CHAC in exchange for World Sharehold’s 77.42 per cent stake in Bright World.
For the remaining stake of 22.58 per cent held by other shareholders, CHAC offered $0.70 in cash, and would raise it to $0.75 if more than 90 per cent of Bright World’s shares are acquired.
Just one week before the offer was announced, trading interest in Bright World shares surged. The total trading volume rose from 33 lots on July 11 to 400-1,119 lots the following week. But at odds with news of the takeover, its share price plunged by as much as 35 per cent the following week from its peak of 66.5 cents on July 22.
Some brokers say the shares fell on concerns that given the current financial crisis, some pre-conditions of the offer pertaining to the offeror’s redemption clause and Bright World’s profit targets may not be met, putting the takeover offer at risk.
The takeover offer came with a host of pre-conditions which include among other things, approval by majority of CHAC IPO shareholders; less than 33.3 per cent of CHAC’s public shareholders redeeming their shares for cash; and Bright World’s profit after tax for six, nine and 12-month ending June, September and December 2008 respectively does not fall more than 10 per cent year-on-year.
‘Judging by the share price pattern over the past week, it appears that some investors may not be confident that the deal will go through given the numerous hurdles,’ Kelive Research said in a note then.
A dealer with a European brokerage told BT yesterday that ‘there might be a good chance that it (the group) might just miss the profit target’.
For the first nine months of this year, Bright World net profit grew 19 per cent to 113.5 million yuan, after a 50 per cent jump in net profit to 78.87 million yuan in the first half. It would require a net profit of at least 16.9 million yuan for the fourth quarter to meet target.
When contacted, CIMB-GK head of corporate finance Mah Kah Loon said there is no change to the transaction at present, unless an announcement is made otherwise. CIMB-GK is the financial adviser to CHAC on the takeover deal.
RAMUNIA Holdings Bhd had a record fall in Kuala Lumpur trading after MISC Bhd, owner of the world’s biggest fleet of liquefied-natural-gas ships, dropped a planned RM3.2 billion (US$884 million) bid for the company.
The shares of the oil-rig builder, which resumed trading today after a halt yesterday for the announcement, tumbled 30 per cent to 91 sen at mid-day on the Malaysian stock exchange. MISC rose 5 sen, or 0.6 per cent, to RM8.30.
Kuala Lumpur-based MISC yesterday scrapped the proposed takeover, citing “unsatisfactory” findings of an evaluation of the bid. MISC’s decision came as BHP Billiton Ltd, the world’s largest mining company, terminated its US$66 billion offer for Rio Tinto Group, as the worst financial crisis since the Great Depression stalled credit markets and cut demand for products and services.
The move is “more negative to Ramunia,” Simone Yeoh, an analyst at JPMorgan Securities, wrote in a report today. Ramunia “would have been a much more direct beneficiary from the proposed merger,” Yeoh said.
The global financial crisis “would have diluted any benefits from” the merger for MISC, said Yeoh, who has an “underweight” call on MISC stock.
The takeover of Ramunia would have more than doubled MISC’s construction capacity at shipyards in Johor. MISC, which first announced the plan in January, decided to terminate the proposed bid “due to unsatisfactory due diligence findings,” according to a filing to the Malaysian stock exchange yesterday. No other details were given in the statement.
MISC’s decision also came after Ramunia unexpectedly reported a loss in its fiscal third quarter ended July 31 because of higher costs and foreign exchange losses, Yeoh said. The loss, reported in September, “was already a red flag earlier that the deal was at risk.” - Bloomberg
Renowned economic pessimist Nouriel Roubini approves of Obama's picks, but they face grave challenges ahead.
By Daniel Stone Nov 24, 2008
President-elect Barack Obama's administration's reaction to the current economy would have to be, in his words, "swift and bold." At a press conference Monday in Chicago, he unveiled his economic team, which will be led by Tim Geithner as secretary of the Treasury and Larry Summers as director of the National Economic Council. The two come with unique experience: The former is the president of the New York Federal Reserve, and the latter was secretary of the Treasury in the Clinton administration, before sitting in the president's office at Harvard.
Markets rallied upon word of the appointments, which also included two other senior advisers, Christina Romer (to be chair of the Council of Economic Advisers) and Melody Barnes (to be director of the Domestic Policy Council). But with the extreme fluctuations global markets are currently seeing—Obama and his new appointees will be looking for solutions to both the short-term rockiness and the longer-term economic problems—the president-elect continues to describe the crisis as "historic." Infamously pessimistic economist Nouriel Roubini, a professor at New York University, spoke to NEWSWEEK's Daniel Stone about what wise decisions must be made early on, his thoughts on Obama's economic team, and how they can they stop the bleeding. Excerpts:
NEWSWEEK: What are your thoughts on the team Obama assembled?
Nouriel Roubini: The choices are excellent. Tim Geithner is going to be a pragmatic, thoughtful and great leader for the Treasury. He has experience at the Treasury and the IMF [International Monetary Fund], then the New York Fed. I have great respect for both Geithner as well as Larry Summers. I think both of them in top roles in economics in the administration were good moves. I think very highly of them both.
What are the first things they need to tackle?
First one is the fiscal stimulus, because the troubled economy is in a freefall, so we really need to boost aggregate demand, and the sooner and larger the better. The second thing they should do is recapitalize the financial system. Most of the $700 billion is going to be used to recapitalize banks, broker dealers, finance companies and insurance companies. To do it aggressively and fast is going to be important.
The plan Obama has talked about includes spending on infrastructure and energy development to create jobs. How likely is that to produce long-term aid to the economy?
We need to do it because demand and spending and housing are literally collapsing. That will get a boost from public-sector spending: [spending on] infrastructure, unemployment benefits, state and local government aid, more food stamps. We're going to have to think larger, but I don't think you can pass most of it until January when [Obama] comes to power. We're going to have to wait, because nothing seems possible for the time being. But I expect most of his plans will pass once the new administration is in power.
Obama is largely powerless for the next two months. What's your outlook from now through January?
The lame-duck session of Congress really needs to spend on unemployment benefits, aid to save the local governments and on food stamps. Those things are very short-run and are very important. It's really the most we can do for now.
Your view of the economic future is often a bit less than optimistic. What does Obama's team signal about what could be coming?
Look, he wants to get things done, so he's choosing a really terrific team. To me, it says that he's choosing people who have great experience. He's choosing people who are pragmatic and who realize the severity of the national problem we're facing. They're knowledgeable about markets, about the economy and the political process in Washington. These are the very best people he could have chosen. I can't look too far, but it's a very good signal of what he wants to do.
A discredited dollar is a likely outcome of the current crisis.
By Christopher Wood November 24, 2008
With an estimated $4 trillion in housing wealth and $9 trillion in stock-market wealth destroyed so far in the United States, there is little doubt that we are witnessing a classic debt-deflation bust at work, characterized by falling prices, frozen credit markets and plummeting asset values.
Those who want to understand the mechanism might ponder Irving Fisher's comment in 1933: When it comes to booms gone bust, "over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money."
The growing risk of falling prices raises a challenge for one of the conventional wisdoms of the modern economics profession, and indeed modern central banking: the belief that it is impossible to have deflation in a fiat paper-money system. Yet U.S. core CPI fell by 0.1% month-on-month in October, the first such decline since December 1982.
The origins of the modern conventional wisdom lies in the simplistic monetarist interpretation of the Great Depression popularized by Milton Friedman and taught to generations of economics students ever since. This argued that the Great Depression could have been avoided if the Federal Reserve had been more proactive about printing money. Yet the Japanese experience of the 1990s -- persistent deflationary malaise unresponsive to near zero-percent interest rates -- shows that it is not so easy to inflate one's way out of a debt bust.
In the U.S., the Fed can only control the supply of money; it cannot control the velocity of money or the rate at which it turns over. The dramatic collapse in securitization over the past 18 months reflects the continuing collapse in velocity as financial engineering goes into reverse.
True, this will change one day. But for now, the issuance of nonagency mortgage-backed securities (MBS) in America has plunged by 98% year-on-year to a monthly average of $0.82 billion in the past four months, down from a peak of $136 billion in June 2006. There has been no new issuance in commercial MBS since July. This collapse in securitization is intensely deflationary.
It is also true that under Chairman Ben Bernanke, the Federal Reserve balance sheet continues to expand at a frantic rate, as do commercial-bank total reserves in an effort to counter credit contraction. Thus, the Federal Reserve banks' total assets have increased by $1.28 trillion since early September to $2.19 trillion on Nov. 19. Likewise, the aggregate reserves of U.S. depository institutions have surged nearly 14-fold in the past two months to $653 billion in the week ended Nov. 19 from $47 billion at the beginning of September.
But the growth of excess reserves also reflects bank disinterest in lending the money. This suggests the banks only want to finance existing positions, such as where they have already made credit-line commitments.
Monetarist Bernanke and others blame Japan's postbubble deflationary downturn on policy errors by the Bank of Japan. But he and others are about to find out that monetary gymnastics are not as effective as they would like to think. So too will the Keynesians who view an aggressive fiscal policy as the best way to counter a deflationary slump. While public-works spending can blunt the downside and provide jobs, it remains the case that FDR's New Deal did not end the Great Depression.
There are no easy policy answers to the current credit convulsion and intensifying financial panic -- not as long as politicians and central bankers are determined not to let financial institutions fail, and so prevent the market from correcting the excesses. This is why this writer has a certain sympathy for Treasury Secretary Henry Paulson, even if nobody else seems to. The securitized nature of this credit cycle, combined with the nightmare levels of leverage embedded in the products dreamt up by the quantitative geeks, means this is a horribly difficult issue to solve.
Virtually everybody blames Mr. Paulson for the decision to let Lehman Brothers go. But this decision should be applauded for precipitating the deflationary unwind that was going to come sooner or later anyway.
The Japanese precedent also remains important because the efforts in the West to prevent the market from disciplining excesses will have, as in Japan, unintended, adverse, long-term consequences. In Japan, one legacy is the continuing existence of a large number of uncompetitive companies which have caused profit margins to fall for their more productive competitors. Another consequence has been a long-term deflationary malaise, which has kept yen interest rates ridiculously low to the detriment of savers.
Meanwhile, the most recent Fed survey of loan officers provides hard evidence of the intensifying credit crunch in America. A net 83.6% of domestic banks reported having tightened lending standards on commercial and industrial loans to large and midsize firms over the past three months, the highest since the data series began in 1990. A net 47% of banks also indicated that they had become less willing to make consumer installment loans over the past three months.
Consumers are also more reluctant to borrow. A net 48% of respondents indicated that they had experienced weaker demand for consumer loans of all types over the past quarter, up from 30% in the July survey. This hints at the Japanese outcome of "pushing on a string" -- i.e., the banks can make credit available but cannot force people to borrow.
What happens next? With a fed-funds rate at 0.5% or lower in coming months, it is fast becoming time for investors to read again Mr. Bernanke's speeches in 2002 and 2003 on the subject of combating falling inflation. In these speeches, the Fed chairman outlined how policy could evolve once short-term interest rates get to near zero. A key focus in such an environment will be to bring down long-term interest rates, which help determine the rates of mortgages and other debt instruments. This would likely involve in practice the Fed buying longer-term Treasury bonds.
It would seem fair to conclude that a Bernanke-led Fed will follow through on such policies in coming months if, as is likely, the U.S. economy continues to suffer and if inflationary pressures continue to collapse. Such actions will not solve the problem but will merely compound it, by adding debt to debt.
In this respect the present crisis in the West will ultimately end up discrediting mechanical monetarism -- and with it the fiat paper-money system in general -- as the U.S. paper-dollar standard, in place since Richard Nixon broke the link with gold in 1971, finally disintegrates.
The catalyst will be foreign creditors fleeing the dollar for gold. That will in turn lead to global recognition of the need for a vastly more disciplined global financial system and one where gold, the "barbarous relic" scorned by most modern central bankers, may well play a part.
Mr. Wood, equity strategist for CLSA Ltd. in Hong Kong, is the author of "The Bubble Economy: Japan's Extraordinary Speculative Boom of the '80s and the Dramatic Bust of the '90s" (Solstice Publishing, 2005).
4 comments:
MAS Tells Bright World of Possible Rule Breach
Speculation of link to trading pattern surrounding offer
By LYNETTE KHOO
26 November 2008
Bright World Precision Machinery said yesterday that it has received a letter from the Monetary Authority of Singapore on a possible breach of Section 203 of the Securities and Futures Act.
This section relates to a company’s disclosure obligations under the Singapore Exchange listing rules. Bright World provided no further details of this possible breach, except to say that it intends to cooperate fully with MAS and will be providing the relevant information and documents sought.
An MAS spokesperson confirmed that it has written to Bright World in connection with an inquiry but noted that ‘it is premature and inappropriate to give further details at the moment, in the interest of ensuring that the on-going inquiry is not compromised’.
Market observers are wondering whether there is a link of this inquiry to the wild share trading patterns surrounding the bid by a US-listed special purpose acquisition vehicle to take over Bright World.
China Holdings Acquisition Corp (CHAC), which is a blank cheque company formed last year to buy businesses with primary operations preferably in China, had proposed on July 21, to acquire Bright World.
It offered to issue to Bright World’s majority shareholder World Sharehold Limited a promissory note automatically convertible to at least 19.9 million shares in CHAC in exchange for World Sharehold’s 77.42 per cent stake in Bright World.
For the remaining stake of 22.58 per cent held by other shareholders, CHAC offered $0.70 in cash, and would raise it to $0.75 if more than 90 per cent of Bright World’s shares are acquired.
Just one week before the offer was announced, trading interest in Bright World shares surged. The total trading volume rose from 33 lots on July 11 to 400-1,119 lots the following week. But at odds with news of the takeover, its share price plunged by as much as 35 per cent the following week from its peak of 66.5 cents on July 22.
Some brokers say the shares fell on concerns that given the current financial crisis, some pre-conditions of the offer pertaining to the offeror’s redemption clause and Bright World’s profit targets may not be met, putting the takeover offer at risk.
The takeover offer came with a host of pre-conditions which include among other things, approval by majority of CHAC IPO shareholders; less than 33.3 per cent of CHAC’s public shareholders redeeming their shares for cash; and Bright World’s profit after tax for six, nine and 12-month ending June, September and December 2008 respectively does not fall more than 10 per cent year-on-year.
‘Judging by the share price pattern over the past week, it appears that some investors may not be confident that the deal will go through given the numerous hurdles,’ Kelive Research said in a note then.
A dealer with a European brokerage told BT yesterday that ‘there might be a good chance that it (the group) might just miss the profit target’.
For the first nine months of this year, Bright World net profit grew 19 per cent to 113.5 million yuan, after a 50 per cent jump in net profit to 78.87 million yuan in the first half. It would require a net profit of at least 16.9 million yuan for the fourth quarter to meet target.
When contacted, CIMB-GK head of corporate finance Mah Kah Loon said there is no change to the transaction at present, unless an announcement is made otherwise. CIMB-GK is the financial adviser to CHAC on the takeover deal.
Ramunia stock plummets 30pc
2008/11/26
RAMUNIA Holdings Bhd had a record fall in Kuala Lumpur trading after MISC Bhd, owner of the world’s biggest fleet of liquefied-natural-gas ships, dropped a planned RM3.2 billion (US$884 million) bid for the company.
The shares of the oil-rig builder, which resumed trading today after a halt yesterday for the announcement, tumbled 30 per cent to 91 sen at mid-day on the Malaysian stock exchange. MISC rose 5 sen, or 0.6 per cent, to RM8.30.
Kuala Lumpur-based MISC yesterday scrapped the proposed takeover, citing “unsatisfactory” findings of an evaluation of the bid. MISC’s decision came as BHP Billiton Ltd, the world’s largest mining company, terminated its US$66 billion offer for Rio Tinto Group, as the worst financial crisis since the Great Depression stalled credit markets and cut demand for products and services.
The move is “more negative to Ramunia,” Simone Yeoh, an analyst at JPMorgan Securities, wrote in a report today. Ramunia “would have been a much more direct beneficiary from the proposed merger,” Yeoh said.
The global financial crisis “would have diluted any benefits from” the merger for MISC, said Yeoh, who has an “underweight” call on MISC stock.
The takeover of Ramunia would have more than doubled MISC’s construction capacity at shipyards in Johor. MISC, which first announced the plan in January, decided to terminate the proposed bid “due to unsatisfactory due diligence findings,” according to a filing to the Malaysian stock exchange yesterday. No other details were given in the statement.
MISC’s decision also came after Ramunia unexpectedly reported a loss in its fiscal third quarter ended July 31 because of higher costs and foreign exchange losses, Yeoh said. The loss, reported in September, “was already a red flag earlier that the deal was at risk.” - Bloomberg
THE TRANSITION
Even Dr. Doom Likes Them
Renowned economic pessimist Nouriel Roubini approves of Obama's picks, but they face grave challenges ahead.
By Daniel Stone
Nov 24, 2008
President-elect Barack Obama's administration's reaction to the current economy would have to be, in his words, "swift and bold." At a press conference Monday in Chicago, he unveiled his economic team, which will be led by Tim Geithner as secretary of the Treasury and Larry Summers as director of the National Economic Council. The two come with unique experience: The former is the president of the New York Federal Reserve, and the latter was secretary of the Treasury in the Clinton administration, before sitting in the president's office at Harvard.
Markets rallied upon word of the appointments, which also included two other senior advisers, Christina Romer (to be chair of the Council of Economic Advisers) and Melody Barnes (to be director of the Domestic Policy Council). But with the extreme fluctuations global markets are currently seeing—Obama and his new appointees will be looking for solutions to both the short-term rockiness and the longer-term economic problems—the president-elect continues to describe the crisis as "historic." Infamously pessimistic economist Nouriel Roubini, a professor at New York University, spoke to NEWSWEEK's Daniel Stone about what wise decisions must be made early on, his thoughts on Obama's economic team, and how they can they stop the bleeding. Excerpts:
NEWSWEEK: What are your thoughts on the team Obama assembled?
Nouriel Roubini: The choices are excellent. Tim Geithner is going to be a pragmatic, thoughtful and great leader for the Treasury. He has experience at the Treasury and the IMF [International Monetary Fund], then the New York Fed. I have great respect for both Geithner as well as Larry Summers. I think both of them in top roles in economics in the administration were good moves. I think very highly of them both.
What are the first things they need to tackle?
First one is the fiscal stimulus, because the troubled economy is in a freefall, so we really need to boost aggregate demand, and the sooner and larger the better. The second thing they should do is recapitalize the financial system. Most of the $700 billion is going to be used to recapitalize banks, broker dealers, finance companies and insurance companies. To do it aggressively and fast is going to be important.
The plan Obama has talked about includes spending on infrastructure and energy development to create jobs. How likely is that to produce long-term aid to the economy?
We need to do it because demand and spending and housing are literally collapsing. That will get a boost from public-sector spending: [spending on] infrastructure, unemployment benefits, state and local government aid, more food stamps. We're going to have to think larger, but I don't think you can pass most of it until January when [Obama] comes to power. We're going to have to wait, because nothing seems possible for the time being. But I expect most of his plans will pass once the new administration is in power.
Obama is largely powerless for the next two months. What's your outlook from now through January?
The lame-duck session of Congress really needs to spend on unemployment benefits, aid to save the local governments and on food stamps. Those things are very short-run and are very important. It's really the most we can do for now.
Your view of the economic future is often a bit less than optimistic. What does Obama's team signal about what could be coming?
Look, he wants to get things done, so he's choosing a really terrific team. To me, it says that he's choosing people who have great experience. He's choosing people who are pragmatic and who realize the severity of the national problem we're facing. They're knowledgeable about markets, about the economy and the political process in Washington. These are the very best people he could have chosen. I can't look too far, but it's a very good signal of what he wants to do.
The Fed Is Out of Ammunition
A discredited dollar is a likely outcome of the current crisis.
By Christopher Wood
November 24, 2008
With an estimated $4 trillion in housing wealth and $9 trillion in stock-market wealth destroyed so far in the United States, there is little doubt that we are witnessing a classic debt-deflation bust at work, characterized by falling prices, frozen credit markets and plummeting asset values.
Those who want to understand the mechanism might ponder Irving Fisher's comment in 1933: When it comes to booms gone bust, "over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money."
The growing risk of falling prices raises a challenge for one of the conventional wisdoms of the modern economics profession, and indeed modern central banking: the belief that it is impossible to have deflation in a fiat paper-money system. Yet U.S. core CPI fell by 0.1% month-on-month in October, the first such decline since December 1982.
The origins of the modern conventional wisdom lies in the simplistic monetarist interpretation of the Great Depression popularized by Milton Friedman and taught to generations of economics students ever since. This argued that the Great Depression could have been avoided if the Federal Reserve had been more proactive about printing money. Yet the Japanese experience of the 1990s -- persistent deflationary malaise unresponsive to near zero-percent interest rates -- shows that it is not so easy to inflate one's way out of a debt bust.
In the U.S., the Fed can only control the supply of money; it cannot control the velocity of money or the rate at which it turns over. The dramatic collapse in securitization over the past 18 months reflects the continuing collapse in velocity as financial engineering goes into reverse.
True, this will change one day. But for now, the issuance of nonagency mortgage-backed securities (MBS) in America has plunged by 98% year-on-year to a monthly average of $0.82 billion in the past four months, down from a peak of $136 billion in June 2006. There has been no new issuance in commercial MBS since July. This collapse in securitization is intensely deflationary.
It is also true that under Chairman Ben Bernanke, the Federal Reserve balance sheet continues to expand at a frantic rate, as do commercial-bank total reserves in an effort to counter credit contraction. Thus, the Federal Reserve banks' total assets have increased by $1.28 trillion since early September to $2.19 trillion on Nov. 19. Likewise, the aggregate reserves of U.S. depository institutions have surged nearly 14-fold in the past two months to $653 billion in the week ended Nov. 19 from $47 billion at the beginning of September.
But the growth of excess reserves also reflects bank disinterest in lending the money. This suggests the banks only want to finance existing positions, such as where they have already made credit-line commitments.
Monetarist Bernanke and others blame Japan's postbubble deflationary downturn on policy errors by the Bank of Japan. But he and others are about to find out that monetary gymnastics are not as effective as they would like to think. So too will the Keynesians who view an aggressive fiscal policy as the best way to counter a deflationary slump. While public-works spending can blunt the downside and provide jobs, it remains the case that FDR's New Deal did not end the Great Depression.
There are no easy policy answers to the current credit convulsion and intensifying financial panic -- not as long as politicians and central bankers are determined not to let financial institutions fail, and so prevent the market from correcting the excesses. This is why this writer has a certain sympathy for Treasury Secretary Henry Paulson, even if nobody else seems to. The securitized nature of this credit cycle, combined with the nightmare levels of leverage embedded in the products dreamt up by the quantitative geeks, means this is a horribly difficult issue to solve.
Virtually everybody blames Mr. Paulson for the decision to let Lehman Brothers go. But this decision should be applauded for precipitating the deflationary unwind that was going to come sooner or later anyway.
The Japanese precedent also remains important because the efforts in the West to prevent the market from disciplining excesses will have, as in Japan, unintended, adverse, long-term consequences. In Japan, one legacy is the continuing existence of a large number of uncompetitive companies which have caused profit margins to fall for their more productive competitors. Another consequence has been a long-term deflationary malaise, which has kept yen interest rates ridiculously low to the detriment of savers.
Meanwhile, the most recent Fed survey of loan officers provides hard evidence of the intensifying credit crunch in America. A net 83.6% of domestic banks reported having tightened lending standards on commercial and industrial loans to large and midsize firms over the past three months, the highest since the data series began in 1990. A net 47% of banks also indicated that they had become less willing to make consumer installment loans over the past three months.
Consumers are also more reluctant to borrow. A net 48% of respondents indicated that they had experienced weaker demand for consumer loans of all types over the past quarter, up from 30% in the July survey. This hints at the Japanese outcome of "pushing on a string" -- i.e., the banks can make credit available but cannot force people to borrow.
What happens next? With a fed-funds rate at 0.5% or lower in coming months, it is fast becoming time for investors to read again Mr. Bernanke's speeches in 2002 and 2003 on the subject of combating falling inflation. In these speeches, the Fed chairman outlined how policy could evolve once short-term interest rates get to near zero. A key focus in such an environment will be to bring down long-term interest rates, which help determine the rates of mortgages and other debt instruments. This would likely involve in practice the Fed buying longer-term Treasury bonds.
It would seem fair to conclude that a Bernanke-led Fed will follow through on such policies in coming months if, as is likely, the U.S. economy continues to suffer and if inflationary pressures continue to collapse. Such actions will not solve the problem but will merely compound it, by adding debt to debt.
In this respect the present crisis in the West will ultimately end up discrediting mechanical monetarism -- and with it the fiat paper-money system in general -- as the U.S. paper-dollar standard, in place since Richard Nixon broke the link with gold in 1971, finally disintegrates.
The catalyst will be foreign creditors fleeing the dollar for gold. That will in turn lead to global recognition of the need for a vastly more disciplined global financial system and one where gold, the "barbarous relic" scorned by most modern central bankers, may well play a part.
Mr. Wood, equity strategist for CLSA Ltd. in Hong Kong, is the author of "The Bubble Economy: Japan's Extraordinary Speculative Boom of the '80s and the Dramatic Bust of the '90s" (Solstice Publishing, 2005).
Post a Comment