A badly maladjusted global economy is slowing rapidly – which ensures unpleasant revelations. “Developing” economic and Credit systems are demonstrating fragility. The gigantic “global leveraged speculating community” is impaired and highly susceptible to faltering risk markets and the specter of illiquidity. And, importantly, there is the distinct possibility that global policymakers are losing control of the situation. ..
There is increasing evidence of a dramatic tightening of financial conditions throughout the emerging markets, a harbinger of buffeting economic headwinds. It will take some time for performance numbers to begin trickling in. There will undoubtedly be major carnage reported throughout the hedge fund and leveraged speculator community. Global stock prices have been hammered; emerging debt, equities and currencies have been under pressure; global Credit spreads have widened dramatically; crude and many commodities prices have tanked; and risk markets in general have faltered in unison. For players with a portfolio of diversified bets among various asset classes, recent performance has been a stark reminder of how quickly disparate markets can all turn highly correlated. Those positioned for “risk on” have been bloodied. I’ll assume virtually everyone has been compelled to begin reducing risk exposures, as de-risking/de-leveraging dynamics take full control.
I have always feared the day when reflationary policy measures finally wouldn’t suffice. I’ve worried that the leveraged speculators would eventually blow up – a dynamic I expect to occur concurrently with policy measure impotence. I’ve feared derivative and counterparty problems that, yes, would occur concurrently with hedge fund and market illiquidity issues. In short, I’ve always worried about a global crisis of confidence with respect to the contemporary “global financial infrastructure.” I don’t claim to have a good feel for how far we might be from such a critical juncture. I do know that extremely serious issues have been met with incredible complacency. I see no reason for confidence in the capacity for policymakers’ to grasp what is developing. There are reasons to question the efficacy of policy measures. I fear there are latent global financial and economic fragilities of an extraordinary nature. And I am confident that what is unfolding has the potential to be more problematic than 2008.