After “muddle through”, comes the “tangled mess”

BY KEITH COLLISTER

Sunday, January 29, 2012

Twenty-eleven was a "muddle-through year" when nothing catastrophic happened and the general mood was defined by risk aversion, said Dr Carl Ross of Oppenheimer, an American investment boutique, in his address to the Jamaica Stock Exchange conference on Tuesday.

In stocks, the best performers were the DOW components, large, safe US companies that pay big dividends.

The best debt investments, after US treasuries, were the investment-grade countries with strong balance sheets in emerging markets, such as Brazil, Mexico, Peru, and Columbia, where yields are low, but stories are stable.

Although this year has started off fairly well (with the S&P 500 up over 4 per cent), international markets face headwinds, and the major economies still have balance sheet constraints.

Several European countries were facing a sovereign debt crisis (the US is also running a deficit that's too big), and the banks and households of both regions are up against constraints. In Japan, the government balance sheet is also in bad shape

In all cases, Ross argued, repairing these balance sheets will be deflationary, creating a drag on the global economy.

Repairing sovereign balance sheets will mean anything from debt restructuring, such as we have seen in Jamaica with the Jamaica Debt Exchange (JDX), to massive fiscal austerity, as in Greece.

Repairing bank balance sheets will require both cost cutting and shrinking the balance sheet. Central banks will try to fight the credit tightening by paying zero per cent interest rates on savings, "but to little avail".

Repairing household balance sheets means saving more and spending less, but "try doing this when your income is falling or you are unemployed".

Ross concludes that international policymakers are now in an impossible position. Because government balance sheets are so bad, politicians are limited in their ability to cushion the adjustment of their households and banks.

Governments are trying all sorts of ways (higher regulation, zero interest rates, quantitative easing) to ensure that another crisis doesn't happen, but this injects more (not less) uncertainty into the outlook, causing households and firms to scale back, dampening economic growth and therefore tax revenues.

"This is a tangled mess of negative feedback loops," he said. "And it is difficult to break out of such a mess."

If a shock hits "the tangled web" this year, there are three possible scenarios, Ross said:

Firstly, policymaker activism keeps the tangled web intact. "Not perfect, but not a catastrophe".

Secondly, a negative shock hits the tangled web, and "things fall apart".

Thirdly, a positive shock hits the tangled web, although he describes that as "tough to imagine".

So how does all this affect Jamaica.

Ross believes our current situation is different from some European countries, such as Greece, as our interest rates have been falling, unlike those in the PIIGS, Portugal, Ireland, Italy, Greece and Spain. Unlike much of Europe, Jamaica runs a primary surplus (fiscal surplus excluding debt interest).

Ross believes Jamaica has been doing a lot of the right things, and suspects Poria Simpson Miller's new government will continue those policies.

The success of our debt management strategy (the JDX and other liability management transactions) in lowering the debt burden, the engagement with the IMF (cheap external funding), the related issue of our China strategy (everybody needs one), fiscal consolidation, pro-growth structural reforms (energy is key), increasing economic productivity and efficiency through thoughtful infrastructure investment, and finally the use of technology, all of which, he observes, are still in place.

Finally, he argued "I don't think there is much else you can do", warning "there are no silver bullets or magic potions."

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GCT to go down, white rum prices going up

After “muddle through”, comes the “tangled mess”