The authors of Dresdner Kleinwort's "The Great Unwind" appear to have hit the nail on the head in their warning of the eventual end game of the leveraged bets made by hedge funds.
As they put it in their report, as published in the FT: It looks like the process of building up leveraged spread bets has already run quite far. Risk premia in many markets are very low, making it increasingly difficult to find spread bets for new money. Market volatility has been driven to record lows (remember: selling a put is like shorting volatility). The process may not have much more room to run and may start to be more sensitive to factors that could threaten its delicate balance (such as a deterioration of corporate credit risk).”"The virtuous cycle on the slow way up (the supply and demand from building spread bets leads to tightening spreads, which in turn raises confidence to build new positions) turns into a vicious cycle on the fast way down.”So how vicious is this great unwind going to be? Well, the Dresdner pair estimate that investment banks sucked roughly $40-50bn in revenue out of hedge funds last year, mainly through sales/trading and services other than prime brokerage. That is about 15-20% of all industry revenues in investment banking.
Yet, while today's losses in global equity markets could be the start of a more general risk unwinding, it seems to me that we have seen false starts of this sort over the past decade. One sign I look for to signal "the great unwind" rather than what may in hindsight be seen as just a correction (albeit one which likely catches some of the more leveraged and least nimble funds off sides) is the reaction of the Central Banks. The now deeply ingrained habit of running to US Bonds for safety, which was evident today, suggests that the funds at least are betting that Central Banks will continue to support US Treasuries.
That is, to my mind, the difference between a correction and a real unwinding lies in the US bond market's reaction. So long as yields stay low and continue to drop on further equity market declines, this unwind will not be the great one.
Ultimately, it seems to me that the great unwind, when it does arrive, will lead prices in a direction which support a resolution of the international imbalances, most notably the US current account deficit. Thus, instead of cheaper commodities, commodity prices in $ terms will rise, and instead of lower yields for US Treasuries, US rates will rise.
In the event Central Bankers respond to today's equity market decline as they have over the past decade, by increasing liquidity, today may yet prove to be a watershed event in that the monetary authorities' ability to fight inflation will be seen to be quite limited. That change, if it comes to pass, should, once the dust settles, make the mad scramble for real assets, particularly the precious metals, even more vigorous than it has been of late.
Tuesday, February 27, 2007
If we want a Pax Americana....
Not to know what happened before one was born is always to be a child - Cicero
Over the past few weeks, while I have been, as a frequent reader of this blog put it in an email to me, "keeping a low profile," I've been wrestling with my prejudicial anti-Empire sensibility. My paleo-Conservative, in contrast to Neo-Conservative sense was that American Empire was an oxymoron.
Yet, upon further reflection, America, by virtue of its ideological, rather than tribal foundation could become the new Rome, but only, I believe, if its proponents remember the lessons of the past, specifically the growing pains and discovered remedies of successful multi-cultural Empires of the past.
The two examples which spring to mind from the ancient world are the Hellenistic Empire of Alexander and the Roman Empire. In both cases, one key feature of the expansion was the granting of citizenship in the Empire to provincials, although the Romans initially fought this, to my mind, necessary change.
The granting of citizenship to provincials was key to keeping the peace as it blurred the line between conqueror and conquered. Unlike, say, the European colonial adventures which forced provincials into a lesser legal status, non-Roman Latins, Spaniards and Syrians (eventually) found themselves on equal legal footing with the Romans. Admittedly, old tribally Roman families did enjoy extra-legal advantages, but these diminished over time.
That is, especially in the Roman example, the term "Roman", which originally referred to one of the many Latin tribes on the Italian peninsula, lost its tribal meaning and, over the course of centuries gained an ideological one. To be a "Roman Citizen" during what Gibbon et. al. termed the Golden Age of the Roman Empire in the time of the Antonines, no longer meant one was a descendant of the settlers of the seven hills around the Tiber, but rather that one was a proponent of a type of civilization, regardless of tribal affiliation.
As Gibbon put it: The narrow policy of preserving, without any foreign mixture, the pure blood of the ancient citizens, had checked the fortune, and hastened the ruin, of Athens and Sparta. The aspiring genius of Rome sacrificed vanity to ambition, and deemed it more prudent, as well as honourable, to adopt virtue and merit for her own wheresoever they were found, among slaves or strangers, enemies or barbarians.
He continues: The right of Latium, as it was called, conferred on the cities to which it had been granted a more partial favour. The magistrates only, at the expiration of their office, assumed the quality of Roman citizens; but as those offices were annual, in a few years they circulated round the principal families..... The bulk of the people acquired, with that title [of Roman Citizen], the benefit of the Roman laws, particularly in the interesting articles of marriage, testaments, and inheritances; and the road of fortune was open to those whose pretensions were seconded by favour or merit. The grandsons of the Gauls, who had besieged Julius Caesar in Alesia, commanded legions, governed provinces, and were admitted into the senate of Rome. Their ambition, instead of disturbing the tranquillity of the state, was intimately connected with its safety and greatness.
All of which is to argue that if America wishes to be a successful empire it too will need to dispense with its xenophobia. The oft evoked, army exhorting tool of an "us vs. them" mentality, which leads to terms like "gook" or "towel head" must quickly give way to a "we are all us" mentality. Are we Americans willing to have, recalling the Gibbon passage above, the grandsons of the Iraqis, who had harried our troops in Mesopotamia, commanding legions, governing provinces, and being admitted into the senate of America?
Moreover, are we Americans willing to allow the provinces to keep their old religions and customs as the Romans, for the most part, did? The "melting pot" metaphor, which worked so well when new citizens were mainly European Christians, and coming to live in country, may not work in an expanded Empire. Given the military might of America, throwing nations into the "melting pot" is relatively easy. Cooking the varied ingredients into a palatable soup is the tricky part. The Canadian metaphor of a mosaic would likely prove far more effective.
Although one can find many faults, unless you currently work in the executive branch, in the implementation of the Iraq Conquest, the not-unjustified sense among the conquered that they will be second class citizens in the new Iraq is one key error which has made success so difficult to achieve. When right-wing spinmeisters like Glen Beck ask a duly elected Muslim Congressman Keith Ellison to prove to me that you are not working with our enemies, while new legal distinctions like non-enemy combatant are invented to avoid granting the protections of the Geneva Conventions to the conquered, what conclusion are non-American Muslims expected to draw?
The idea of terminating inter-state wars, which killed 10s of millions during the 20th Century, through the imposition of an Empire is as seductive as it has ever been. Yet, the ability to achieve this goal remains elusive. It seems to me that only through great toleration of diversity could such a goal be reached- toleration which seems sorely lacking at the moment. Lacking such toleration, we will likely find the inter cultural friction generated by our conquests too great to overcome.
Ironically enough, the principles of toleration so ably expressed in our Bill of Rights provide a possible path to success in the Empire venture. How sad that it seems those freedoms are being eroded en route.
Over the past few weeks, while I have been, as a frequent reader of this blog put it in an email to me, "keeping a low profile," I've been wrestling with my prejudicial anti-Empire sensibility. My paleo-Conservative, in contrast to Neo-Conservative sense was that American Empire was an oxymoron.
Yet, upon further reflection, America, by virtue of its ideological, rather than tribal foundation could become the new Rome, but only, I believe, if its proponents remember the lessons of the past, specifically the growing pains and discovered remedies of successful multi-cultural Empires of the past.
The two examples which spring to mind from the ancient world are the Hellenistic Empire of Alexander and the Roman Empire. In both cases, one key feature of the expansion was the granting of citizenship in the Empire to provincials, although the Romans initially fought this, to my mind, necessary change.
The granting of citizenship to provincials was key to keeping the peace as it blurred the line between conqueror and conquered. Unlike, say, the European colonial adventures which forced provincials into a lesser legal status, non-Roman Latins, Spaniards and Syrians (eventually) found themselves on equal legal footing with the Romans. Admittedly, old tribally Roman families did enjoy extra-legal advantages, but these diminished over time.
That is, especially in the Roman example, the term "Roman", which originally referred to one of the many Latin tribes on the Italian peninsula, lost its tribal meaning and, over the course of centuries gained an ideological one. To be a "Roman Citizen" during what Gibbon et. al. termed the Golden Age of the Roman Empire in the time of the Antonines, no longer meant one was a descendant of the settlers of the seven hills around the Tiber, but rather that one was a proponent of a type of civilization, regardless of tribal affiliation.
As Gibbon put it: The narrow policy of preserving, without any foreign mixture, the pure blood of the ancient citizens, had checked the fortune, and hastened the ruin, of Athens and Sparta. The aspiring genius of Rome sacrificed vanity to ambition, and deemed it more prudent, as well as honourable, to adopt virtue and merit for her own wheresoever they were found, among slaves or strangers, enemies or barbarians.
He continues: The right of Latium, as it was called, conferred on the cities to which it had been granted a more partial favour. The magistrates only, at the expiration of their office, assumed the quality of Roman citizens; but as those offices were annual, in a few years they circulated round the principal families..... The bulk of the people acquired, with that title [of Roman Citizen], the benefit of the Roman laws, particularly in the interesting articles of marriage, testaments, and inheritances; and the road of fortune was open to those whose pretensions were seconded by favour or merit. The grandsons of the Gauls, who had besieged Julius Caesar in Alesia, commanded legions, governed provinces, and were admitted into the senate of Rome. Their ambition, instead of disturbing the tranquillity of the state, was intimately connected with its safety and greatness.
All of which is to argue that if America wishes to be a successful empire it too will need to dispense with its xenophobia. The oft evoked, army exhorting tool of an "us vs. them" mentality, which leads to terms like "gook" or "towel head" must quickly give way to a "we are all us" mentality. Are we Americans willing to have, recalling the Gibbon passage above, the grandsons of the Iraqis, who had harried our troops in Mesopotamia, commanding legions, governing provinces, and being admitted into the senate of America?
Moreover, are we Americans willing to allow the provinces to keep their old religions and customs as the Romans, for the most part, did? The "melting pot" metaphor, which worked so well when new citizens were mainly European Christians, and coming to live in country, may not work in an expanded Empire. Given the military might of America, throwing nations into the "melting pot" is relatively easy. Cooking the varied ingredients into a palatable soup is the tricky part. The Canadian metaphor of a mosaic would likely prove far more effective.
Although one can find many faults, unless you currently work in the executive branch, in the implementation of the Iraq Conquest, the not-unjustified sense among the conquered that they will be second class citizens in the new Iraq is one key error which has made success so difficult to achieve. When right-wing spinmeisters like Glen Beck ask a duly elected Muslim Congressman Keith Ellison to prove to me that you are not working with our enemies, while new legal distinctions like non-enemy combatant are invented to avoid granting the protections of the Geneva Conventions to the conquered, what conclusion are non-American Muslims expected to draw?
The idea of terminating inter-state wars, which killed 10s of millions during the 20th Century, through the imposition of an Empire is as seductive as it has ever been. Yet, the ability to achieve this goal remains elusive. It seems to me that only through great toleration of diversity could such a goal be reached- toleration which seems sorely lacking at the moment. Lacking such toleration, we will likely find the inter cultural friction generated by our conquests too great to overcome.
Ironically enough, the principles of toleration so ably expressed in our Bill of Rights provide a possible path to success in the Empire venture. How sad that it seems those freedoms are being eroded en route.
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