08-06-2013, 07:57 PM
Note that there remains a time lag of 3 years before the penultimate bull run in equities came crashing down. Moreover with the experience of the past, human beings can safely assumed to be smarter in avoiding the repeat of previous mistakes - lightning never strike twice at the same location
'Ghost of 1994' looms over Asia
Bank of Korea chief fears a repeat of the Great Bond Market Massacre of 1994
Published on Jun 08, 2013
Bank of Korea governor Kim Chong Soo fears a repeat of the chaos if the Fed scraps the quantitative easing experiment or curtails its US$85 billion purchases of debt each month. -- PHOTO: BLOOMBERG
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•
By William Pesek
MR KIM Choong Soo is seeing ghosts, and that should scare you.
No, the Bank of Korea governor is not seeing ghouls or hearing things that go bump in the night. The nightmare preoccupying him involves Mr Alan Greenspan and what traders call the Great Bond Market Massacre of 1994. Mr Kim worries that history is about to repeat itself, potentially devastating Asian growth rates.
Back in the 1990s, when he was United States Federal Reserve chairman, Mr Greenspan doubled benchmark lending rates over 12 months, causing, according to Fortune magazine, more than US$600 billion in losses on US Treasuries. The chaos drove Orange County, California, into bankruptcy; sank Kidder Peabody & Co; pushed Mexico into crisis; and precipitated Asia's 1997 meltdown as a surging dollar strained currency pegs.
Now, Mr Greenspan's successor, Mr Ben Bernanke, is under pressure to unwind the US central bank's unprecedented US$3.3 trillion (S$4.1 trillion) balance sheet. A growing number of staff members want to scrap the Fed's quantitative easing (QE) experiment or at least curtail its US$85 billion purchases of debt each month. Once the "tapering" process begins, debt yields from Seoul to Sao Paulo will probably jump in sudden and destabilising ways.
Fed officials insist they will tread carefully, but Mr Kim cannot help but fear that the "ghost of 1994" will again wreak havoc on bond markets.
And he is not alone. Bank of America Merrill Lynch strategist Michael Hartnett warns of a "repeat of the 1994 moment" and Goldman Sachs Group Inc chief executive officer Lloyd Blankfein admits: "I worry now (as) I look out of the corner of my eye to the 1994 period."
"We all experienced that and we all know what happened, and I hope not to experience that again," Mr Kim told The Wall Street Journal last week. He wants policymakers to "find a compromise solution so that all things will happen in an orderly fashion. If not, then we are likely to face another series of difficulties".
That could be a huge understatement in Asia, where last time around, Indonesia, South Korea and Thailand were forced to seek International Monetary Fund bailouts.
There are three big risks if Bernanke & Co withdraw liquidity: higher borrowing costs, huge swings in financial markets and lower economic growth. And that is if the Fed restores normalcy to monetary policy in an orderly, gradual and transparent way. If the process is handled clumsily, as it was in 1994, then next year could be a disastrous year for the world's most dynamic region.
"The markets that are particularly volatile are high-yield and emerging-market debt," said Mr Dan Fuss, who manages the US$23.3 billion Loomis Sayles Bond Fund in Boston and is a veteran of many bond-market crashes dating back to the 1960s. "The scenario isn't pretty."
The Fed may not move for some time. US unemployment is more than 7 per cent and the risks of deflation are at least as high as those of accelerating inflation. Also, Mr Bernanke's Fed is far more open and communicative than Mr Greenspan's Kremlin-like organisation. The odds favour Mr Bernanke telegraphing policy shifts well in advance.
Yet any missteps could quickly panic markets. Sovereign-debt levels have more than quadrupled to US$23 trillion since 1994.
Concerns about too much debt chasing too few buyers could amplify market swings. The world economy was a far healthier thing 19 years ago; before the euro existed, China's economy mattered and high-frequency trading dominated the world's bourses. Asia now holds trillions of dollars of currency reserves.
For all the problems that ultra-low rates cause, they also boosted gross domestic product. Asia must find ways to fill the void with looser fiscal and monetary policies of their own. The real worry, though, is full-blown financial contagion. South Korea is better positioned than many peers, thanks to a sizeable current-account surplus. The same goes for the Philippines, Taiwan and, to a lesser extent, Singapore. The region's fiscal weak links, notably Indonesia and India, would not fare as well.
South-east Asian economies that did not use the rapid growth of recent years to re-tool economies - think Malaysia, Thailand and Vietnam - are vulnerable. Export-addicted China could be in for a rough ride.
Policymakers must act now and in concert to prepare for the worst.
Everyone knows that sooner or later, the Fed will have to yank away the proverbial punchbowl. Asia can hope for Mr Bernanke to act soberly and with caution. But the region had better be prepared for a scare, too.
BLOOMBERG
'Ghost of 1994' looms over Asia
Bank of Korea chief fears a repeat of the Great Bond Market Massacre of 1994
Published on Jun 08, 2013
Bank of Korea governor Kim Chong Soo fears a repeat of the chaos if the Fed scraps the quantitative easing experiment or curtails its US$85 billion purchases of debt each month. -- PHOTO: BLOOMBERG
•
•
By William Pesek
MR KIM Choong Soo is seeing ghosts, and that should scare you.
No, the Bank of Korea governor is not seeing ghouls or hearing things that go bump in the night. The nightmare preoccupying him involves Mr Alan Greenspan and what traders call the Great Bond Market Massacre of 1994. Mr Kim worries that history is about to repeat itself, potentially devastating Asian growth rates.
Back in the 1990s, when he was United States Federal Reserve chairman, Mr Greenspan doubled benchmark lending rates over 12 months, causing, according to Fortune magazine, more than US$600 billion in losses on US Treasuries. The chaos drove Orange County, California, into bankruptcy; sank Kidder Peabody & Co; pushed Mexico into crisis; and precipitated Asia's 1997 meltdown as a surging dollar strained currency pegs.
Now, Mr Greenspan's successor, Mr Ben Bernanke, is under pressure to unwind the US central bank's unprecedented US$3.3 trillion (S$4.1 trillion) balance sheet. A growing number of staff members want to scrap the Fed's quantitative easing (QE) experiment or at least curtail its US$85 billion purchases of debt each month. Once the "tapering" process begins, debt yields from Seoul to Sao Paulo will probably jump in sudden and destabilising ways.
Fed officials insist they will tread carefully, but Mr Kim cannot help but fear that the "ghost of 1994" will again wreak havoc on bond markets.
And he is not alone. Bank of America Merrill Lynch strategist Michael Hartnett warns of a "repeat of the 1994 moment" and Goldman Sachs Group Inc chief executive officer Lloyd Blankfein admits: "I worry now (as) I look out of the corner of my eye to the 1994 period."
"We all experienced that and we all know what happened, and I hope not to experience that again," Mr Kim told The Wall Street Journal last week. He wants policymakers to "find a compromise solution so that all things will happen in an orderly fashion. If not, then we are likely to face another series of difficulties".
That could be a huge understatement in Asia, where last time around, Indonesia, South Korea and Thailand were forced to seek International Monetary Fund bailouts.
There are three big risks if Bernanke & Co withdraw liquidity: higher borrowing costs, huge swings in financial markets and lower economic growth. And that is if the Fed restores normalcy to monetary policy in an orderly, gradual and transparent way. If the process is handled clumsily, as it was in 1994, then next year could be a disastrous year for the world's most dynamic region.
"The markets that are particularly volatile are high-yield and emerging-market debt," said Mr Dan Fuss, who manages the US$23.3 billion Loomis Sayles Bond Fund in Boston and is a veteran of many bond-market crashes dating back to the 1960s. "The scenario isn't pretty."
The Fed may not move for some time. US unemployment is more than 7 per cent and the risks of deflation are at least as high as those of accelerating inflation. Also, Mr Bernanke's Fed is far more open and communicative than Mr Greenspan's Kremlin-like organisation. The odds favour Mr Bernanke telegraphing policy shifts well in advance.
Yet any missteps could quickly panic markets. Sovereign-debt levels have more than quadrupled to US$23 trillion since 1994.
Concerns about too much debt chasing too few buyers could amplify market swings. The world economy was a far healthier thing 19 years ago; before the euro existed, China's economy mattered and high-frequency trading dominated the world's bourses. Asia now holds trillions of dollars of currency reserves.
For all the problems that ultra-low rates cause, they also boosted gross domestic product. Asia must find ways to fill the void with looser fiscal and monetary policies of their own. The real worry, though, is full-blown financial contagion. South Korea is better positioned than many peers, thanks to a sizeable current-account surplus. The same goes for the Philippines, Taiwan and, to a lesser extent, Singapore. The region's fiscal weak links, notably Indonesia and India, would not fare as well.
South-east Asian economies that did not use the rapid growth of recent years to re-tool economies - think Malaysia, Thailand and Vietnam - are vulnerable. Export-addicted China could be in for a rough ride.
Policymakers must act now and in concert to prepare for the worst.
Everyone knows that sooner or later, the Fed will have to yank away the proverbial punchbowl. Asia can hope for Mr Bernanke to act soberly and with caution. But the region had better be prepared for a scare, too.
BLOOMBERG
