Global Shocks (eBook)

Nicholas P. Sargen is an international economist turned global money manager.  He has been involved in international financial markets since the early 1970s, when he began his career at the U.S. Treasury and the Federal Reserve.  He subsequently worked on Wall Street for 25 years, holding senior positions with Morgan Guaranty Trust, Salomon Brothers Inc., Prudential Insurance and J.P. Morgan Private Bank.  In 2003 he became Chief Investment Officer for the Western & Southern Financial Group and its affiliate, Fort Washington Investment Advisors Inc, where he now serves as Chief Economist.  Sargen has written extensively on international financial markets, and he currently produces a blog Real-time Financial Thoughts on his website, where his views are updated. He appeared frequently on business television programs throughout his career on Wall Street, and was a regular panelist on Louis Rukeyser’s Wall Street Week.  He was born and raised in the San Francisco Bay Area, and received a PhD in Economics from Stanford University.  He is also an adjunct professor at the University of Virginia’s Darden School of Business. 

Foreword 5
Preface 7
Note 9
Acknowledgments 10
Contents 12
List of Figures 14
List of Tables 15
1: Overview: A Framework for Investing During Currency Crises and Asset Bubbles 16
Inflation Transforms the World of Investing 17
Disinflation Alters the Equation 19
Emergence of Asset Bubbles 22
Some Guideposts for Coping with Asset Bubbles 25
Appendix: The Role of Financial Institutions in Crises 28
Increased Frequency of Financial Crises 30
Classifying Shocks in This Book 31
Notes 32
Part I: Investment Challenges in a High Inflation Era 33
2: Bretton Woods’ Collapse Alters the World of Investing 34
Origins of Bretton Woods 35
A Smooth Start 36
Balance of Payments Pressures in the 1960s 37
Negotiating a Dollar Devaluation 38
The Interregnum 39
A “Managed” System of Floating Exchange Rates 41
Fixed Versus Floating Exchange Rates: A Post-Mortem 41
Conclusions 44
Notes 45
3: Oil Shocks Generate Massive Payments Imbalances 47
Backdrop for First Oil Shock 48
Economic Fallout 49
Ameliorating Factors 49
Crisis Averted 50
The Interregnum 51
The Second Oil Shock 52
Oil Shocks: Then and Now 53
Conclusions 55
Note: Assessing the Impact of Recent Oil Price Declines 56
Notes 58
4: Anti-Inflation Policies: Intended and Unintended Consequences 59
The Volcker Shift in Monetary Policy 60
Reaganomics 62
Impact of Policy Mix on Financial Markets 63
Bank Lending to Developing Countries 64
The Developing Country Debt Crisis 66
Policy Easing 67
Managed Lending and Regulatory Forbearance 68
Unforeseen Developments 70
Conclusions 71
Notes 72
5: Policy Coordination Gives Way to Conflict and Turmoil 73
Budget Deficits and Current Account Deficits 74
Japan’s Emergence as a Financial Power 75
A Resurgent Dollar 76
The Plaza Accord 77
The Louvre Accord 78
The October 1987 Stock Market Crash 79
1988 Surprises 80
International Capital Flow Dynamics 81
Lessons Learned from Disinflation 83
Conclusions 84
Notes 85
6: Speculators Attack the Concept of European Monetary Union 87
Europe Enjoys an Investment Boom 88
Interest Rates Surge 90
A Global Capital Shortage? 91
German Monetary Unification 91
Steps Toward Monetary Union 92
Market Response to Maastricht 94
Perspective on the Launch of the EMU 96
Long-Term Prospects for the Eurozone 98
Conclusions 99
Notes 100
Part II: Easy Credit Breeds Asset Bubbles and Instability 101
7: Japan’s Bubble Culminates in Two Decades of Deflation 102
Japan’s Economic Miracle 103
Endaka (High Yen) Period 104
Monetary Tightening Bursts the Bubble 106
Deflation Sets In 108
A Balance Sheet Recession 109
Differences from the US Experience 110
Lessons for Investors and Policymakers 112
A Perspective on Japan’s Bubble 113
Conclusions 115
Notes 116
8: Asia’s Real Estate Boom Triggers Global Contagion 117
The Allure of Emerging Asia 118
Increased Reliance on Foreign Capital 119
The Onset of the Crisis 121
The Crisis Spreads 122
The Role of International Capital Flows 123
Recovery from the Crisis 124
Is the US–Asian Relationship Sustainable? 126
Perspective on the Asian Crisis 127
Conclusions 129
Notes 130
9: The Tech Bubble: Some Lessons for Rational Investors 131
Backdrop for the “New Era” Mindset 132
Stock Market Surge 1995–98 134
Market Frenzy: October 1998–March 2000 136
The Bust Sets In 139
Fed Policy Response 140
Lessons for Investors 141
Changing Perceptions of the Tech Bubble 143
Conclusions 144
Notes 145
10: The Global Financial Crisis: No Place for Investors to Hide 146
Origins of the Financial Crisis: A Bubble in US Housing 147
Problems in Housing Spread 149
Panic Sets In 151
What Made the Crisis So Severe? 153
What Can Be Done to Prevent a Recurrence?7 154
Lessons for Investors 157
Conclusions 159
Notes 160
11: China’s Economic Miracle: Will It Become the Next Bubble? 161
Origins of the Chinese Miracle 162
Agricultural Reforms 163
Industrial Reforms 163
Increased Privatization 164
Internationalization 164
Stalled Reforms 166
Current Reform Plans: A Delicate Balance 167
2015 Growth Scare 169
How Would a Chinese Bubble Unfold? 170
How to Play China 172
Conclusions 174
A Note on Currency Wars 175
Notes 177
12: Guidelines for Investing During Crises 179
The Evolving Nature of Currency Crises 180
Emerging Economies: Transition from “Old Style” to “New Style” Crises 182
Emergence of Asset Bubbles and Financial Crises 183
Perspectives on the 2008–09 Global Financial Crisis 185
Guiding Principle: The Importance of a Value Discipline 187
The Importance of Staying Flexible 187
Capitalizing on Oversold Markets 189
Conclusions 190
Notes 191
About the Author 192
Index 193