20_20_newsize08 21/11/07 22:37 Page 35
Your Questions
ANSWERED
Where’s it all
going to end?
by OLIVER STONES,
‘Rampant inflation’, ‘Credit crunch’,
VICE PRESIDENT, HEAD OF FIXED INCOME,
Citi Quilter
‘Liquidity crisis’, ‘Chinese economic bubble’
Despite bleak news filling the newspapers, we believe the mistrust in the banking system, which has raised the cost of
universe is not about to implode in an economic reversal of interest rates at which banks are willing to lend money to
the big bang and there are many signs that the economic lie each other, and so from the credit crunch there evolved
of the land is neither as bad nor the future as bleak as some another phenomenon, the liquidity crisis.
would lead us to believe.
Short interest rates remain historically high and funding for
Over the last few months we have seen oil appreciate to highly leveraged companies is still causing a major
almost $100 per barrel as a result of a number of economic headache. Further, the central banks are still being
factors (Middle East tensions), natural (storms in the Gulf of pressured to help markets function efficiently and
Mexico) and just plain arithmetical (miscalculating the US competitively and avoid ‘disorderly’ markets. Banks have
lack of inventory) and it is feared, for good reason, that this been forced to look at their on and off balance sheet assets
rise in energy prices (up 12% in the past month) will spill and price them at realistic levels; surely this must be a good
over as a major inflation contributor. It must be remembered for the future? A problem recognised is a problem already
that oil is an inelastic commodity, and a rise in price does half solved and the write downs in earnings and increases in
not immediately result in a rise in production, and demand loan loss provisions can only be a very healthy exercise.
is also inelastic because the need for oil is constant Despite the problems in credit and liquidity, this year will
regardless of cost. This could soon change in the new still be a profitable one for Wall Street firms.
greener world of ethanol and alternative energy. Further,
central banks very often determine the direct impact of an The explosive growth in the Chinese economy which started
‘oil shock’ by increasing interest rates and thereby shutting around 2003 has impressed everyone although not pleased
down its inflationary impact. We believe that the effect of everyone as global trading balances are upset and currencies
high oil prices on global inflation will be a temporary sway to extremes. There is nothing to suggest a collapse is
phenomenon and that we are actually in a cyclical stage of imminent in China and therefore to suggest there is a
lower inflation without being in deflation, with the exception ’bubble’ may be completely inappropriate as the Chinese
of Japan. themselves seek a ‘soft landing’ of their economy by raising
interest rates and curbing the high 6.5% inflation rate.
So what consolation can we find in the ‘credit crunch’? At
the moment, not very much, but hopefully once normality The financial world is facing some significant problems, but
has returned to the markets, we will witness a new world most are not unprecedented. What we have seen in credit
where risk has been repriced. and liquidity markets was unforeseen (by most) but the
rectification of the problem has been a healthy event from
Central banks and economists have been warning for a both the investor and issuer’s point of view, whilst costly.
number of years that markets were mis-pricing risk, Whilst the economies are cyclically cooling we expect sub-
particularly where returns were not compensating investors’ trend growth and not recession and expect inflation to
appetite for risk. The scale of disintermediation, or the moderate. The Chinese stock market could still present itself
efficient spreading of risk, has meant that there are very few as the ‘banana skin’ to upset global markets one day but
countries or financial institutions entirely immune to the this does not appear imminent and the People’s Bank of
credit crunch, with the scale of that exposure being China are proactively seeking to ensure long-term
unknown. This uncertainty has led to a general feeling of sustainable economic growth.
20/20 thirty four
Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66  |  Page 67  |  Page 68