With tomorrow's election looming and continuing signs of an immanent global recession, the world's leaders are moving forward on their plans to rearrange the worlds financial infrastructure. The meeting of 20 industrialized and developing nations outside of Washington DC on Nov. 15 will be the beginning of a process, known as Bretton Woods II, that will determine the future international finance law and regulation. While participating nations agree on the need to forge a united response to the crisis, tensions exist regarding the nature of said response. Some participating countries, led by France, would like to see an effective convergence of regulatory law to prevent competition between financial centers. This proposal is likely to be contested. The reason this proposal is likely to meet resistance is that it would limit the ability of states and municipalities to enact policies that minimize regulation thus attracting oversight-averse financial institutions. The theory behind demanding a unified regulatory system that would eliminate the ability for financial centers to develop exceptional policy structures is that the lack of universal legal norms would lead to financial centers being forced to out-do each other in the race to deregulate and attract financial businesses. In other words, if left the option, national and regional governments will, following their self interest, undermine any progress made in the way of new regulatory norms. (Here we can see yet another example of how entities, guided by self interest can undermine the collective good.)
In IMF (International Monetary Fund, a Bretton Woods I institution) news, the UK is pressuring Saudi Arabia to contribute more to the fund's coffers in order deal with threats to sovereign financial stability. Saudi Arabia accumulated over $500 bn in foreign assets during the boom in oil prices. It is unlikely the Saudis will give into the pressure without an agreement that would redefine Saudi Arabia's role in new financial order (in this case, their role within the decision making structure of the IMF).
Strikes are expected in Europe's largest economy, Germany. Over 130,000 trade unionists have voted to strike over the rejection of a wage increase that was proposed in August. IG Metall is the trade union leading the strike. It is an important union in Germany because many other unions look to IG Metall as benchmark for wages.
Portugal is set to nationalize a small bank that has become insolvent. The Socialist Party government rejected pleas from the bank for a bail-out (capital injection). Instead the government determined that it was in the interest of the people of Portugal that the bank be nationalized.
This is what Bloomberg columnist, Mark Gilbert has to say about the macroeconomic outlook:
"The Shipping News Suggests World Economy Is Toast:
In the third quarter of 2007, Volvo AB booked 41,970 European orders for new trucks. Guess how many prospective purchases Volvo, the world's second-biggest maker of heavy rigs, received in the third quarter of this year?
Here's a clue. Picture a highway gridlocked by 41,815 abandoned trucks -- because Volvo's order book got destroyed to the tune of 99.63 percent, with customers signing up for just 155 vehicles in the three-month period, the Gothenburg, Sweden-based company said last week.
The pathogen that has fatally infected swathes of the banking industry is now contaminating non-financial companies. ``We're heading toward the sharpest downturn I've ever seen in Europe,'' said Chief Executive Officer Leif Johansson.
Volvo has company. Daimler AG, the world's biggest truckmaker, said earlier this month that its U.S. deliveries slumped by a third in the first half of the year.
After months of money-market madness, slumping stock markets, collapsing currencies and bank bailouts, the headlines from the broader economy are starting to roll in -- and the news is all bad and getting worse, fast.
Let's begin with the shipping news. If nobody is buying your trucks, you don't need to rent a vessel to carry that shiny new 18-wheeler to its new owner. Hence the Baltic Dry Index, which tracks the cost of shipping goods and commodities, fell below 1,000 this week for the first time in six years.
Slow Boats From China
Put another way, it is now almost 90 percent cheaper to ship goods over the oceans than it was at the beginning of the year. And because the huge vessels known as capesize ships can't currently charge much more than their daily operating cost of about $6,000 per day, their captains have slowed down to economize on fuel and save money, to about 8.68 knots from 10.33 knots in July, according to data compiled by Bloomberg.
It isn't just the oceans that are emptying. Air freight traffic dropped 7.7 percent in September, according to the latest figures from the International Air Transport Association. That's the steepest decline since the trade group began compiling the data in January 2003.
Figures this week showed U.S. consumer confidence collapsed to a record low in October; retail therapy probably isn't the cure. With Christmas looking like it might be canceled, why bother fighting with your bankers for the letters of credit you need to export the stocking-stuffers you make in the factory?
``The October reading signals the deepening concern about the marked deterioration in the overall economy as well as the growing anxiety arising from the continued travails in the financial markets,'' David Resler, chief economist at Nomura Securities in New York, wrote in a research report. ``Confidence declined across all regions, all age groups and all income categories.''
One way in which the current recession/depression/meltdown (take your pick) will differ from previous economic collapses is the granularity of information now available. The world is awash with more data than ever before, generating a plethora of ways to scare yourself silly.
The Bank of England, for example, produces what it calls a Financial Market Liquidity Index, a global measure of stress that gauges how far a basket of nine indicators strays from its historical mean. The index gets updated twice a year; this week's bulletin, which recalculates the level up to Oct. 17, showed liquidity at its lowest level in at least 17 years.
The next wave of headlines to scare shoppers out of the mall is likely to come when companies find they can't pay their debts. Credit-rating company Moody's Investors Service predicts that the default rate among sub-investment grade borrowers will surge to 7.9 percent in a year, from 2.8 percent at the end of the second quarter of 2008 and from just 1.3 percent 12 months ago.
``With the global credit crisis intensifying and credit spreads widening, it is increasingly likely that corporate default rates will spike sharply in the next 12 months,'' Kenneth Emery, the director of default research at Moody's, said in a research report published earlier this month.
The Markit iTraxx Crossover index of credit-default swaps on mostly speculative-grade companies traded as high as 920 basis points this week. That level suggests investors and traders are anticipating more than half of the companies in the index will default, based on bondholders recouping 40 percent of their money from companies that fail to keep up their debt payments.
At a recovery rate of 20 percent, the implied default level is about 45 percent. At a salvage percentage of just 10 percent, the index is still suggesting about 40 percent of its members will renege on their commitments. It is hard to see how consumer confidence will recover when companies start going bust.
``Worries about defaults are mounting as liquidity is strained,'' Guy Stear and Claudia Panseri, analysts at Societe Generale SA, wrote in a research note this week. ``Earnings expectations still look optimistic, with analysts projecting 2009 earnings for the S&P 500 rising by 19 percent.''
There's a great scene in the film version of Annie Proulx's Pulitzer Prize-winning novel ``The Shipping News.'' A grizzled journalist explains to rookie hack Kevin Spacey how dark clouds on the horizon justify the hyperbolic headline ``Imminent Storm Threatens Village.''
``But what if no storm comes?'' Spacey asks. The veteran replies with a second-day headline: ``Village Spared From Deadly Storm.'' Unfortunately, the global village we live in is unlikely to survive unscathed"