Global asset re-pricing

It’s about 7:45 AM ET as I write this and the overseas stock markets are getting hammered. I can’t say I don’t fear what is going to happen today because I do. We are witnessing a meltdown of unimaginable proportions that is not just limited to one asset class or one sector of the economy or one country. This is a global asset re-pricing.

Think back a year ago to before all of this began. Everyone was fat and happy. The markets were doing well. We had a double top on the S&P 500 in July and October to an all-time high even as the underlying fundamentals were deteriorating.

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Back in May of 2007, Yves Smith at naked capitalism gave the following warning regarding some comments made by Jeremy Grantham, a well-known money manager in the Boston area:

[Jeremy Grantham] first quarter letter to shareholders declared everything to be overvalued, save managed timber, high quality US stocks, and bonds. He sees an ugly, protracted decline across asset classes. But he also expects there to be one last explosive run up before the fall begins. In other words, bears who are early will look like morons for a bit.

naked capitalism, 2 May 2007

His comments were dead on. Every asset class was high in May from equities to bonds to high yield to sovereign debt to art to house prices to oil. We were going through the final blow-off in a credit-fueled asset bubble the likes of which we had never witnessed before. Those of us who were concerned about the underlying fundamentals in the US like debt to GDP, or mortgage debt, or household debt and savings, the unsustainable rise in house prices, the federal government deficit, or the huge current account deficit, saw this asset price inflation in very worrying terms. After all, American workers had seen 35 years of stagnant to negative real wage earnings. How was the U.S. economy doing it?

My answer has been and still is debt. The United States has gone through an almost 25 year period of asymmetrically easy monetary policy under Alan Greenspan and Ben Bernanke where any downturn in the economy was met with low, low interest rates. This has fostered a sense that we could pile on debt without any real economy consequences.

But, there are consequences. And as the markets worldwide deflate, the finger-pointing will ensue. The Germans will say poor Anglo-American (and that includes Australia) macro-economic and finance policies were exported globally. The West will claim the excess savings of Asia was responsible. Asians will claim it was a over-consumption in the west that caused it. Some might even say it is comeuppance for a period of sloth and degradation — the proverbial Sodom and Gomorrah thesis.

Just as there exists a debate over 75 years later, as to what triggered the Great Depression, there will be a debate for years as to what caused this market and real economy collapse.

But, let’s be clear, this is a global asset re-pricing. The cause: excessive debt, credit, and leverage. The true lesson for America and Britain should certainly be that debt, credit and leverage are weapons of mass destruction, if not controlled, they explode and we all feel the results.


Originally published at Credit Writedowns on Oct 10, 2008 and reproduced here with the author’s permission.