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.

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’s] first quarter letter to shareholders declared everything to be overvalued, save managed timber, high quality U.S. 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 U.S. 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.

Related posts
Credit deflation and the Japanese problem

  1. Wag the Dog says

    the finger-pointing will ensue

    Some are already blaming Obama. Are these really the swingiest of the swing voters?

    The cause: excessive debt, credit, and leverage.

    …facilitated by ingenious use of securitization to hide both the debts and, more importantly the risks, and keep them off balance sheets, but in reality it was just an elaborate horizon effect — given an intricate enough tangle of derivative products you can keep the most powerful supercomputer in the world busy for years working out all the hidden risks.

  2. Edward Harrison says

    that’s an amazing link on the Obama-as-cause theory. My take is that people are basically irrational and fear-driven at times like these.

    A month ago I suggested that WaMu might fail:

    And the reaction on Seeking Alpha to this post was over-the-top angry. It was a shoot-the-messenger kind of fury that comes from fear.

    That is why I would like to avoid this type of carnage because fear drives people to unpredictable behavior, both citizens and leaders and this can have unpredictable and potentially violent results.

    Witness the crash and the rise of Hitler as a case in point. The personal toll is going to be tragic. But, I also worry about the geopolitical consequences too.

  3. Wag the Dog says

    That is why I would like to avoid this type of carnage because fear drives people to unpredictable behavior, both citizens and leaders and this can have unpredictable and potentially violent results.

    Your concerns are consistent with the following observations/ideas:

    Naomi Klein’s “The Shock Doctrine” as applied to the credit crunch,

    Last week’s publication in Science showing that the loss of control leads to a belief in conspiracy theories and superstition,


    Historical parallels with the the ideas propagated in the wake of the Dutch tulip bubble: Many of the sources telling of the woes of tulip mania, such as the anti-speculative pamphlets which were later reported by Beckmann and Mackay, have been cited as evidence of the extent of the economic damage. These pamphlets, however, were not written by victims of a bubble, but were primarily religiously motivated. The upheaval was viewed as a perversion of the moral order—proof that “concentration on the earthly, rather than the heavenly flower could have dire consequences”

  4. Edward Harrison says

    A friend of mine suggested I read “The Shock Doctrine.” I own it but have not yet read it.

    As to where things are headed, my post “Random musing: 25 Aug 2008 – confirmation bias gives a good synopsis. My bias has been to the downside and this fall is confirming that unfortunately.

    Quite frankly, things are unraveling with such speed, I am astonished. The problem with that is that my downside bias is not shared by policy makers and they have been caught flat-footed. This has meant a lag in their reaction time making a negative psychological spiral that much more likely.

    I would like to see whether the Lehman CDS auction today removes some of the negative psychology depressing the market.

  5. Nick von Mises says

    Shock Doctrine is interesting but mainly for what it reveals about the author and her incredible desire to smear Friedman.

    Regarding asset re-pricing, it’s just people deciding cash is more valuable relative to stocks. Bad news if you hold stocks. Good news if you hold cash.

    What worries me is the credit markets. That’s what can cause an economy to seize up. Equities has only ever been about numbers on a mutual fund statement

    BTW, I notice now central banks are not making it clear that putting a floor under the stock market is their new mandate. Funny how they are so anti-cash. If you’d argued the toss a year ago people would’ve seriously argued “inflation-this” “price-stability that”

  6. Nick von Mises says


    Yeah I picked that up this morning and emailed it to everyone I care about. I’m quite literally buying tins of food this weekend because I thinks there’s a low probability/high impact chance of a food shortage for a couple of weeks till the authorities mobilise.

    My friends think I’m preparing for the zombie apocalypse but I think there’s real trouble brewing there, if only for a short period

  7. Edward Harrison says

    nick, Yves has a great post on what type of lunacy is happening in the credit markets today. The real economy effects are there as this post reveals.

    “Not only are banks now leery of lending to each other for much longer than overnight, they are also starting to refuse to honor letters of credit from other banks.”

    I feel the policy response needs to be much more roust from the Europeans and the Americans in particular. This is the making of depression.

  8. Edward Harrison says

    I was just corresponding with some big name finance bloggers on the back channel va email and I said that a great response would be a 3PM halt to trading (to avoid a selloff in the last hour before a weekend) followed by a coordinated massive response. The response would include preferred shares in all major financial institutions, backstopping all deposits and interbank lending, and setting up a swedish style framework to deal with bankruptcies.

    As your canned food comment “I’m quite literally buying tins of food this weekend” suggests, psychology is running very negatively right now. If you’re buying canned food, 100 others are pulling their money out of the market.

    I just sold my investment in the TIPS market because deflation is likely. So….

  9. Wag the Dog says

    Some on the extreme right are already capitalising on this psychology to trot out that old chestnut of a conspiracy, The New World Order. It made front page on Digg.

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