A friend sent me the following presentation earlier in the week when I was feeling a bit ill. So I neglected to post it. But, I want to return to it because it is in keeping with my recovery/depression theme. These are the issues that were complicit in the latest financial crisis and almost none of them have disappeared. They will most certainly rear their heads again precipitating or worsening the next downturn.
We’re talking about:
- Duration mismatches (borrowing short and lending long)
- Accounting (Mark-to-market, deferred tax assets and a lot more)
- Conflicts of interest (no Chinese walls, ratings agencies)
- Regulation (especially given poor risk controls)
- Risk management (is Meriwether a leading indicator?)
- Investment Banking vs. Utility Banking
- Too big to fail (they must be downsized)
- Heads I win, tails you lose (socialization of losses is crony capitalism)
- Quantitative easing (QE has costs)
- Hedges instead of capital
My baseline thinking at the moment is that we are seeing the beginnings of a cyclical recovery built on the back of asset relation more than anything else. The underpinnings of this uptrend are tenuous. So, when this latest burst of reflation hits the wall, all of the aforementioned issues will re-appear and policy makers will again do the who-could-have-known routine we saw in 2001 and again in 2008/ But the broader public is increasingly wise to this song and dance. Hat tip Scott.