predictions

While I'm on vacation at an undisclosed location, feel free to peruse my latest non-blog publication, Alphabet Soup: The Political Economy of the Great Recession (.pdf), commissioned by the Glasshouse Forum.  As they put it: 

The current global economic crisis, which began as a subprime crisis and developed into a general credit crisis, is the deepest since the Depression of the 1930’s. There are many signs that we are now facing the beginning of a structural sea change. But what will it be like?

To get a better understanding of the medium-term effects of the crisis, Glasshouse Forum asked Daniel W. Drezner, Professor of International Politics at The Fletcher School, Tufts University, and author of the Glasshouse Forum report White Whale or Red Herring? Assessing Sovereign Wealth Funds, to draft scenarios and make qualified estimates based on as much objective data and historical parallels as possible.

I'd like to stress the word "qualified." 

Read it and weep. 

 

Apparently the foreign exchange markets got taken for a ride earlier today in response to Tim Geithner's chat at the Council on Foreign Relations.  This makes me wonder if anyone working in forex markets actually listened to the words that came out of Geithner's mouth. 

Here's Kathy Lien at FX360 explaining what Geithner said that caused markets to go into a tizzy: 

In a blink of an eye, the U.S. dollar has collapsed against the Euro, Japanese Yen and other major currencies. The trigger was comments from Tim Geithner who said that the U.S. is "quite open" to China's suggestion of moving towards a Special Drawing Right (SDR) linked currency system. If the world adopts the SDR, which was created by the IMF as an international reserve asset, it would mean that countries around the world would need to hold less U.S. dollars. (emphasis added)

Except that this is not what Geithner actually said.  To be more specific, he did say "quite open," but that's not all he said in his first response.  This is from the CFR transcript:   

[A]s I understand his proposal, it's a proposal designed to increase the use of the IMF's special drawing rights.  And we're actually quite open to that suggestion.  But you should think of it as rather evolutionary, building on the current architectures, than -- rather than -- rather than moving us to global monetary union.

Here was my contemporaneous read of what Geithner said: 

Geithner is asked about China (not my question) and the IMF's new proposals for expanded lending.  He responds by praising Zhou Xiaochuan, China's central bank governor, but claims that he hasn't read his proposal in detail.  Geithner makes it clear that he is quite open to expanding the IMF's Special Drawing Rights for less developed countries.  Still, he wants it to evolve and be integrated within the current international monetary system -- as opposed to the de novo creation of a new global currency. 

I've read the report (Tim, it's not that long, take a look!) and Zhou is not proposing anything so radical so soon, so this is a bit of a red herring.  Still, Geithner's statement here carries the same kind of firm pushback that Obama gave yesterday about any move ending the dollar as the global reserve currency. 

SDRs are intended for least developed countries, so expanding that program would not profoundly affect the distribution of currency reserves among the world's principal players.

And yet, after Geithner reaffirms this point later in the talk, Lien interprets it as follows:

A few minutes after saying the U.S. is open to an SDR linked currency, Geithner clarified his comments by saying that there is "no change in dollar as world's reserve currency and likely to remain so for long time." In our alert, we said that the dollar would rebound if he attempts to clarify his comments. These contradictory statements are clearly the act of an amateur Treasury Secretary that has been thrust onto the public forum and is struggling with the need to be very particular in his choice of words.

Okaaaaaay..... except there was no contradiction between his statements, and anyone who's been following this stuff for the past week should have understood Geithner's point the first time.

Question to readers:  shouldn't the forex markets have interpreted these statements better than your humble blogger?  What does this say about the wisdom of crowds? 

UPDATE:  The Financial Times' Krishna Guha, Tom Braithwaite and Peter Garnham provide more precise reporting on this point: 

The dollar fell 1.3 per cent against the euro as headlines saying “Geithner open to SDR currency” flashed across traders’ screens. With the currency falling, Mr Geithner’s interviewer – Roger Altman, a deputy Treasury secretary in the Clinton administration – gave Mr Geithner the chance to clarify.

The Treasury secretary said: “I think the dollar remains the world’s dominant reserve currency.” The dollar subsequently recovered much of its losses.

One fuzzy headline, and you get majoy gyrations in the forex markets. 

James Carville once said, "I want to come back as the bond market. You can intimidate everybody."  I want to be reincarnated as a headline editor. 

Consider this an open thread for predictions of what will happen in 2009.... which movie will win Best Picture?  Which team will win the World Series?  Who will win the Nobel Peace Prize?  Which Obama cabinet member, if any, will step aside before the end of the year?  Looking back on my 2008 predictions, I only batted .500.  Therefore, I'm not making any predictions for next year, except that this blog will cease to exist -- which is as predictable as saying that Gazprom will, like clockwork, cut off gas to a former Soviet republic in early January. 

Following up on my last post, a good source of comedy reading this holiday season will be the various prognostications and predictions made in the past year that now seem foolish.  One could blame the prognosticators for being fools, and in some cases that's true.  In other instances, however, it's just what people see as rational extrapolation from the past.  Just to pick an example out of a hat, here's what the McKinsey Global Institute wrote in June of this year: 

Four new power brokers—Asian sovereign investors, petrodollars, hedge funds, and private equity firms—are having a growing impact on global capital markets. In this update to a 2007 report, MGI examines how the new power brokers have fared since then, during the turmoil of skyrocketing oil prices, evaporating liquidity, and disappearing leverage.

MGI finds that the financial and economic events since mid-2007 have, if anything, accelerated the trends identified earlier: The power brokers' wealth and clout have grown. They have adapted by expanding their investment strategies. And they have increased the use of private financing as an alternative to public markets. Their actions have brought clear benefits in containing the financial market crisis but also have highlighted the risks associated with their rise....

Despite the financial crisis, MGI projects that the power brokers will continue to grow in wealth and clout. Under a conservative, base–case scenario, their combined assets will grow to $21 trillion (excluding overlap between them) by 2013. If, instead, they grow more briskly, at their 2000 to 2007 pace, their wealth would rise to $31 trillion, equivalent to roughly 60 percent the expected size of global pension funds or mutual funds in 2013.

The rapid rise of the new power brokers also poses potential risks. The report examines four main concerns: that the additional liquidity might foster asset price inflation; that state investors might use their wealth for political purposes; that hedge fund failures might destabilize the financial system; and that private equity firms' heavy leverage might increase credit defaults. MGI concludes these concerns remain on the table and justify careful consideration and monitoring. But overall, the rise of these new power brokers has been largely beneficial to global capital markets.

The possibility of hedge funds destabilizing the system certainly remains in play, but most of the rest of this looks pretty silly.  Of MGI's four new power brokers, only Asian sovereign investors still look like their power will be growing. 

I really don't mean to pick on McKinsey.  In fact, readers are strongly encouraged to comb through the archives of danieldrezner.com to see what I got wrong.  Here's my prediction post from the end of last year -- I only batted .500, but I do think I got the big things right.