Evercore Pan Asset

Markets liked the latest version of the troubled assets scheme launched by the US administration. The trillion dollar scheme seems large, it seeks to harness private capital to the task of buying up bad and dubious loans from the banks, and comes hard on the heels of attempts to talk up bank shares with more positive short-term trading news. There are investors with cash around, and they are looking for a home for their money when income on deposits has reduced to nearly nothing.

The Asian markets bounced along with the sharp rally on Wall Street. This is what we would expect, as any recovery in the US economy will help trigger improvements elsewhere. The Asian economies remain more competitive and hungrier for growth, despite the battering their export industries have taken in recent months, and despite currency gyrations which have often pushed their currencies up. We still favour buying Asian equity for any rally and for future signs of recovery.

The impact of more money from governments and the more positive news will be to take some asset prices higher. We still think better quality corporate bonds offer attractive yields and should at some stage join in the more positive mood. We need also to remember that the latest trillion dollar plan does not suddenly end all the fears and problems.  The world is dividing once again into two main blocs of countries – the large borrowers and the successful exporters. They still have different problems whilst both are experiencing recessions based on the collapse of the credit based growth model of recent years.

The heavily borrowed countries like Iceland, and  some of the eastern Europeans are having to retrench and seek international financial assistance. The major borrowers like the UK, the US, Ireland, and Spain are still able to raise the money they need but they are stretching their national balance sheets as they strain to recreate demand based this time on public sector rather than private sector credit. The US and the UK are printing money to buy bonds to get their economic machines moving again.  All these countries need to be careful not to create too big a government bond bubble, and not to so overstretch the national credit card that future financing of their deficit becomes too expensive or difficult.

Meanwhile the saving and exporting countries are experiencing painful recessions as well, mainly owing to the collapse of demand for their products from the heavily borrowed countries, adversely affected by the collapse of credit. Their problems are in some ways easier to solve. They can afford to generate more demand at home to take up surplus capacity, and they will benefit from successful reflation of the borrowing countries with their exports.

Euroland has its own special problems, caused by the creation of a single currency zone from a group of countries that had not fully converged before accepting the new currency. The Eurozone contains strong savers like Germany and big borrowers like Italy and Spain.  The zone does not have the large transfer payments to the poorer or struggling areas that are common in older currency unions within a single country. The credit spreads on differing government debt have widened, as investors realise that there are no guarantees from Germany to the weaker countries running large deficits. There are concerns about the state of the Euroland banks who have committed large sums to Eastern Europe, and active discussion about if and how much assistance is going to be given to the East and to the banks. Meanwhile the ECB has taken less action than the Anglo Saxons to reflate demand despite the large fall in output.