It was two months ago when I “received” a letter from my international friend in this column entitled “My American Friend.” This week, I deliver my response. My dearest international friend, thank you for your concern and support regarding our failing institutions, economy, job base, and forthcoming Bretton Woods redefinition. You are correct; the financial environment that we devised and operated for decades has been decimated. The lemmings have leapt into a recessionary chasm taking the global economy and our “foundational” truisms with them. However, among all the turmoil, I have witnessed new innovation, a real desire for differentiation, and an acceptance of the fifth iteration of globalization. We are positively preparing for the future albeit selectively!
As a Bretton Woods II gathering is postulated and convened, I believe the innovative “winners” of this global wealth, process and rebalancing shifts will be many. Nevertheless, there are some distinctive beneficiaries that are surfacing on American soil even during a rancorous presidential election year:
As you know, we have added trillions of “support” packages to prop-up the financial institutions, peripheral industries, credit markets and marginally the consumer. I would suspect that these new programs in total will exceed the prior national debt issuance within a very short 12 month window perhaps as much as $6 trillion in new debt leading to a high-water level that might equal or exceed the annual GDP of the U.S.
Last week alone, America lost over 30,000 domestic jobs in just five business days as the consumer and credit maelstrom continues (beyond the normal job creation and destruction cycles). Architectonically it was because we failed to appreciate and prepare for the implications of complex financial engineering and the unwinding of “Vegas-like” risk positions. How many political leaders now long for the $460 billion in 2007 national deficits as this year and next may approach the trillions. Now, we wait to see how the trillions of government “investment” will work their “magic” within the financial value chains will it be about improving Tier 1 capital ratios, M&A events, or will these infusions enable the consumer to refinance and purchase once again? With the average debt to income well beyond 100% per consumer, is the latter even possible?
The economic predictions of those continually held in high regard continue to be proven inaccurate. After all, until last week it was an accepted axiom and economic and mathematical improbably that long-term treasury rates would be inferring that select private debt is more risk free than U.S. government debt (Financial Times , “Swap spreads turn negative”).
In closing, our operations will survive and we will again prosper but not using the same formulas of the past that made many association and leadership careers. The fabled state-driven economic decouplings have proven to be fanciful economist’s dreams. The advice of the old school perhaps has 12 to 24 months of usefulness and that is being generous.
While my hope and belief in the future of American innovation coupled with the fifth iteration of globalization is very strong, I must confess my disappointment when I attended a recent mortgage conference. The old school still had the stage and agenda as they tried to make themselves and their old practices innovatively relevant. However, the rebirth is taking place outside of these dogmatic venues and it is unlikely that they will regain their influence massive moving forward. If they don’t radically change, they will become increasingly unimportant or non-existent.
As you know, the key to our domestic future is jobs high-paying, defensible, and innovative domestic jobs. I believe the new market movers will be those organizations that balance domestic job creation with global labor arbitrage. Unknowns include the potential for a double housing bottom (again economist believe this is mathematically impossible), a lasting global recession, currency exchange rates, and deflationary commodity prices triggered by an Asian selloff (e.g., China) to name but a few. Yes, my international friend, I have many questions and like you I must ask about unpopular, interrelated topics.
Ultimately, the legal retribution will be undertaken just look at the daily media. “It wasn’t my fault the events could not have been predicted.” “It wasn’t my fault - it was the lack of regulation.” “It wasn’t my fault - it was the lender, the GSE’s, the congress, the president.” Being in the minority, I believe it was all their faults regardless of whether they had “accreditation,” education, or licenses. As the old saying goes when I hear industry leaders speak on the record, “I think you protest too much.” The fact remains, many touched the interrelated counterparty risks and instruments very few “educated” individuals did anything about it. Hollywood couldn’t have asked for a better script.
