No 1997 Asian Crisis Return as China Trembles – Bloomberg 06-27-13

Salient to Investors:

Frederic Neumann at HSBC said:

  • Asia’s growth has just downshifted to a less spectacular pace in coming years.
  • Asia’s 1997 financial crisis won’t repeat as dissimilarities outweigh the parallels. Current account positions are mostly in surplus, which should cushion the blow from an outflow of capital, and banking systems appear more robust, with better regulatory systems, higher capital buffers and lower loan-to-deposit rates.
  • There are no glaring mismatches between assets and liabilities. In the 1990s, most external borrowing was in US dollars, whereas most of the debt in recent years is in local currency, so a surge in the dollar won’t spike in debt-service costs.
  • Asia enjoys much higher foreign exchange reserves than in the 1990s and countries have more power to swap currencies at short notice, giving them firepower to fight currency attacks.
  • However, financial volatility complicates the ability to pay debts and bond markets are now bigger. In the 1990s leverage lay with businesses, but now it is households, small companies and government entities that bear the most debt.

Joseph LaVorgna at Deutsche Bank Securities said:

  • Excepting the early 1990s, when it took a year, the Fed has always lifted its benchmark within 1 year of jobless claims averaging 350,000 or less for a quarter – we are averaging 345,600 in Q2 so far.
  • Rates won’t rise until early 2015 because the Fed has to first unwind QE and see how the markets react.
  • Jobless claims is an excellent intermediate-term predictor of monetary policy, especially of higher rates. In the past, low and declining claims accurately foreshadow a noticeable pickup in hiring, and hence a sharp decline in the unemployment rate.

Mark Johnson at Warwick Business School  says a tennis ball used at Wimbledon travels 50,570 miles before landing on a racket, showing the global nature of production. Materials used to make a ball include clay from South Carolina, wool from New Zealand, silica from Greece, magnesium carbonate from Japan, rubber from Malaysia and sulfur from South Korea.

Kristopher Gerardi ar FRB of Atlanta, Lorenz Goette at the University of Lausanne and Stephan Meier at Columbia  found that those who had taken out subprime mortgages from January 2006 to August 2007 and defaulted were worse at simple math than those who had not.

Jose Ursua at Goldman Sachs said the global economy still has plenty of room to grow as the difference between actual output in 40 economies and the level at which further growth starts fanning inflation is 2.4 percent – developed economies have a 3.4 percent gap and emerging markets have 1 percent gap. Ursua says when the market turbulence abates, markets should begin to reflect the view that the world’s ‘room to grow’ is larger than perceived, and adapt to a gradual rather than abrupt return to normality.

Loukas Karabarbounis and Brent Neiman at the University of Chicago said labor’s share of global income has dropped 5 percent since the early 1980s across a majority of countries and industries. 38 of 56 countries showed downward trends in their labor shares, and 6 of 10 major industries. A decrease in the relative price of investment goods linked to advances in IT and the computer age caused the shift toward capital.

Alex Bryson at the National Institute of Economic and Social Research and George MacKerron at the University of Sussex found that people may not be happy while they work. Using information on well-being in real-time by tapping into smart phones, versus previous happiness studies which typically ask people how they feel in retrospect. Work ranked lower than any of the 39 other activities with the exception of being sick in a bed, and engaging in paid work is one of the activities that people least like doing in terms of their immediate feelings of happiness.

Ashoka Mody at Princeton and Diego Saravia at Central Bank of Chile say the IMF has become faster in responding to crises since the mid-1980s – the average time frame between crisis and program shortened from 19 months in the 1977-1986 period to 15 months in the years after 1986.

Kristjan Thorarinsson and Arman Eshraghi at the University of Edinburgh says the tone adopted by Fed chairmen has a small but significant impact on the financial markets regardless of the policy outlined in the speech – – using the price of gold and silver as proxies for the response of financial markets. Greenspan was more likely to convey activity and realism in his speeches, while Bernanke is more optimistic. A 1 percent increase in the amount of certainty in Greenspan’s tone was enough to lift the price of gold by 0.1 percent.

Read the full article at  http://www.bloomberg.com/news/2013-06-27/no-1997-asian-crisis-return-as-china-trembles.html

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Asia’s growth has just downshifted to a less spectacular pace.”