James Saft

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

(Reuters) – The interaction of financial markets and debt standoff shows how by worshipping markets, we’ve crippled them.

Stan Collender, who knows Washington politics, sees a 25 percent chance the debt ceiling is not raised in time which implies a slightly lower chance of default or partial default. (here)

This is not mild stuff: a U.S. sovereign default is the market equivalent of frogs raining out of the sky and zombies cruising the malls.

“In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth,” the U.S. Treasury said in a report.

“Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

(Reuters) – Don’t kid yourself: if you hold equities you ought not to welcome political gridlock.

If you hold stocks, history shows you’ll do worse. If you are strictly a bond investor, or fear inflation above all else, perhaps you’ll be happier with finger pointing and inactivity in Washington.

Markets have been mildly spooked by the government shutdown and budget impasse, though not nearly as much as they would be if they came to believe that a debt default was on tap for later this month.

By James Saft

(Reuters) – Get used to it: in today’s dysfunctional investment landscape, most risk is, at bottom, government risk.

Two stories illustrate this neatly: the threatened shutdown of or default by the U.S. government and the Keystone Cops-style slow-motion disintegration (or not) of Italy’s governing coalition.

Taking a step deeper, the amazing thing about both situations is that the principal counter-weight to terror in the markets is also government, namely the Federal Reserve and the European Central Bank, both of which are busily writing investors insurance against government malpractice.

By James Saft

(Reuters) – It is hard to imagine, much less find, a better exemplar of how capital gets misallocated in a bubble than British property agent Foxtons, whose stock was publicly listed last week.

London-based Foxtons, which only three short years ago was taken over by its lenders, went public on Friday and by the end of its first trading day was worth $1.2 billion. That’s a bit more than double what it sold for in 2007, just before the crash, when its founder Jon Hunt sold out to private equity firm BC Partners in a deal which was at the time widely derided as marking a market top.

To put it in perspective, Foxtons is now trading for a bit more than 20 times what investors expect it to earn next year. That implies investors believe that either it will gain market share rapidly or, as real estate agent fees are a percentage of sales and rental prices, they think London real estate will continue its stratospheric rise.

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

(Reuters) – Sometimes it is better not to over-think things.

The Fed’s non-taper is one of those times.

The U.S. central bank is encouraging you as an investor to sit back, enjoy the warm water and take on some risk.

For now, maybe not for long, but for now, that is probably what you should do.

The Federal Reserve’s decision not to begin to cut back on its purchases of bonds caught investors unawares on Wednesday. Economists and Fed watchers had been in virtually unanimous agreement that the bank would shave back, or taper, bond purchases, with most of the debate centered on how they might sugar the pill by providing guidance indicating that interest rates might stay low for longer than anticipated.

Instead the Fed put off the taper and left investors remarkably unsure about why or when they might begin.

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

(Reuters) – The Federal Reserve did the right thing in the wrong way and very likely for the wrong reasons.

The Fed said on Wednesday it would continue buying bonds at an $85 billion monthly pace for now, citing concerns about a sharp rise in borrowing costs in recent months and the upcoming budget battle in Washington. This came as a huge surprise to most people, well anyone who listened to and believed what Fed Chairman Ben Bernanke has been saying for the past three months or so, when he did a masterful job of setting the market up for a tapering of bond purchases.

“The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market,” the U.S. central bank said in a statement explaining its decision.

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

(Reuters) – With the withdrawal of Larry Summers from consideration to run the Fed we have that rare thing: an alignment between what the market wants and the economy needs.

Markets celebrated on Monday after Summers, facing strong opposition to his confirmation should he be appointed to succeed Ben Bernanke as Federal Reserve chairman, wrote to President Obama saying he no longer wished to be in the running. Equities jumped and bond yields fell because investors see Summers’ exit as opening the way for Fed Vice Chair Janet Yellen, who in turn they expect to hew closely to the policies followed by Bernanke.

Yellen is seen as a gradualist who would only very slowly taper bond buying, a process that may well begin this week, and who is less likely to rapidly withdraw other support from the economy.

Sept 12 (Reuters) – Of the many regrettable aspects of the
failure of Lehman Brothers, perhaps the worst is that it led to
policies which expanded and reinforced economic inequality in
the U.S., often through unfair means.

When Lehman went down five years ago it set in train forces
which could easily have led to the failure of many financial
institutions. Faced with the possibility of taking large swaths
of the banking system into effective government control, first
the Bush and later the Obama administrations chose instead to
shelter institutions and executives from the consequences of
their actions.

That involved creating a variety of policies which
subsidized large banks and helped to dig a moat around their
businesses. This went hand in hand with monetary policy which
both supported banks and kept artificially high the value of
financial assets and real estate.

(James Saft is a Reuters columnist. The opinions expressed are his own.)

By James Saft

(Reuters) – Peak population is coming, sooner than you think, and bringing with it enormous investment challenges.

Birthrates are falling, and will continue to do so, especially in fast-urbanizing emerging markets, according to Sanjeev Sanyal, an economist and demographer who is also global strategist at Deutsche Bank.

“We feel that the world’s overall fertility rate will fall to replacement rate by 2025. Population will continue to rise for a couple of decades, in large part because of increasing lifespan, but this is a major global turning point, and one with profound investment implications,” Sanyal wrote in a note to clients released on Monday.

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

(Reuters) – Someone at the Federal Reserve finally figured out that we are not Vulcans but humans.

Rather than pointy-eared aliens constantly performing discounted cash flow calculations, we are actually, as investors, often chumps, prone to irrational enthusiasms leading to bubbles, San Francisco Fed President John Williams acknowledged in a speech on Monday. (here)

The implication is that many of us are about to feel that very human emotion of chagrin as we watch the value of our houses and stocks go down.