Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Morgan Stanley on UK Sovereign Debt/ Currency Potential Risks for 2010

Economics / UK Debt Dec 01, 2009 - 09:01 AM GMT

By: Trader_Mark

Economics

Best Financial Markets Analysis ArticleAs investors quickly forget about Dubai, and shield their eyes (apparently using now almost limitless US dollars or Japanese yen) from any potential sovereign road bumps ahead [Nov 27, 2009: UK Telegraph - Greece Tests the Limits of Sovereign Debt as it Grinds Toward Slump] Morgan Stanely (MS) Europe is out with an interesting report for 2010 that highlights some "fat tail" risks, one of which is:  UK becomes the first of the G10 to have a major fiscal crisis as elections lead to a hung parliament.


Effectively, very little has been "solved" in terms of fixing root causes the past 2 years; the main solution has been to transfer liabilities from the private sector to the public - we've written about this extensively. [May 19, 2009: Paper Printing Prosperity Defined]  Obviously the public balance sheet is multiple iterations higher than any private balance sheet and its ability to expand is relatively open ended, since a country can lean on its taxpayers.  But eventually there is an end game, and the currencies of said countries will reflect it.  I've often called the UK a mini US... many of the same fiscal policies and Anglo Saxon beliefs and policies, but without either the same amount of natural resources nor the massive benefit of the world's reserve currency. [Apr 23, 2009: Britain's Deficit Reaches World War 2 Levels; Very Little Room to Maneuver] Hence, while their actions have been in almost complete parallel to that of the US, the costs of said actions should be born sooner. 

But as always the question is timing... people who warned on real estate in 2005 were smirked at; those in 2006... openly mocked.  Being "early" does not mean wrong... to steal a line, markets can remain ignorant far longer than you can remain solvent.  So as we take the cancer of debt onto the back of the US taxpayer, let us watch the canary that is the UK... I expect suffocation will happen there first, but even a permabear realist such as I would not believe something dramatic would happen to our neighbors across the Atlantic until mid decade (2015) or later.  In fact, I expect rolling sovereign crisis (plural) to be the "Black Swans" of the 2010s.... all we've done as a globe is kick the can down the road.  But as with any long term warnings based on rational thought, those who worship at the alter of "now is all that matters"  will smirk... again.

Let's see what Morgan Stanley (MS) Europe thinks; while I think its premature based on economics alone, the authors are over laying politics as a potential driver to speed up the potential crisis.  Either way the UK pound seems a very flawed currency... same bad policies as ourselves but no reserve currency status. [Oct 13, 2009: UK Sterling Following US Dollar into Abyss] Keep in mind this report is co-authored by another permabear realist Teun Draaisma [Oct 26, 2009: Teun Draaisma of Morgan Stanley Europe Says Rebound Rally in Last Stage; Prepare for Fallout from Tightening]  Now the irony is.... such a crisis might be very good for equities in the UK... read on. 

Via UK Telegraph:
  • Britian risks becoming the first country in the G10 bloc of major economies to risk capital flight and a full blown debt crisis over the coming months, according to a client note by Morgan Stanley.
  • “Growing fears over a hung parliament would likely weigh on both the currency and gilt yields as it would represent something of a leap into the unknown, and would increase the probability that some of the rating agencies remove the UK's AAA status,” said the report, written by the bank’s European investment team of Ronan Carr, Teun Draaisma, and Graham Secker.
  • “In an extreme situation a fiscal crisis could lead to some domestic capital flight, severe pound weakness and a sell-off in UK government bonds. The Bank of England may feel forced to hike rates to shore up confidence in monetary policy and stabilize the currency, threatening the fragile economic recovery,” they said.
  • Morgan Stanley said that such a chain of events could drive up yields on 10-year UK gilts by 150 basis points. This would raise borrowing costs to well over 5pc - the sort of level now confronting Greece, and far higher than costs for Italy, Mexico, or Brazil.
  • High-grade debt from companies such as BP, GSK, or Tesco might command a lower risk premium than UK sovereign debt, once an unthinkable state of affairs.
  • A spike in bond yields would greatly complicate the task of funding Britain’s budget deficit, expected to be the worst of the OECD group next year at 13.3pc of GDP.
  • Investors have been fretting privately for some time that the Bank might have to raise rates before it is ready -- risking a double-dip recession, and an incipient compound-debt spiral – but this the first time a major global investment house has issued such a stark warning.
  • No G10 country has seen its ability to provide emergency stimulus seriously constrained by outside forces since the credit crisis began. It is unclear how markets would respond if they began to question the efficacy of state power.  (utter panic comes to mind)
  • Morgan Stanley said sterling may fall a further 10pc in trade-weighted terms. This would complete the steepest slide in the pound since the industrial revolution, exceeding the 30pc drop from peak to trough after Britain was driven off the Gold Standard in cataclysmic circumstances in 1931.
  • Morgan Stanley said Britain’s travails are one of three “surprises” to expect in 2010. The other two are a dollar rebound, and strong performance by pharmaceutical stocks.
Now here is the irony of such a situation...
  • UK equities would perform reasonably well. Some 65pc of earnings from FTSE companies come from overseas, so they would enjoy a currency windfall gain.
It is going to be the era of multnationals it appears.

Other comments:
  • David Buik, from BGC Partners, said Britain is in particularly bad shape because the tax-take is highly leveraged to the global economic cycle: financial services provided 27pc of revenue in the boom, but has since collapsed. (very similar to how almost all growth in the US in the past decade has been concentrated in the hands of healthcare, or our financial oligarchy; I believe I read 40% of all profit growth in the decade before this collaspe the past 2 years was from financial firms)
  • The UK failed to put aside money in the fat years to offset this time-honoured fiscal cycle. (that should sound familiar to Americans) It ran a budget deficit of 3pc of GPD at the peak of the boom when prudent countries such as Finland and even Spain were running a surplus of over 2pc.
  • “We need to raise VAT to 20pc and make seriously dramatic cuts in services that go beyond anything that Alistair Darling or David Cameron are talking about. Nobody seems to have the courage to face up to this,” said Mr Buik.  (we should expect a VAT tax in the US within 2 election cycles ... 4 to 8 years)

Full report here - as always hit "full screen" for easier reading; if you are only interesting on the UK portion go straight to page 14, but the whole report, entitled 'Tougher Times in 2010' is worth a read if time permits.

By Trader Mark

http://www.fundmymutualfund.com

Mark is a self taught private investor who operates the website Fund My Mutual Fund (http://www.fundmymutualfund.com); a daily mix of market, economic, and stock specific commentary.

See our story as told in Barron's Magazine [A New Kind of Fund Manager] (July 28, 2008)

© 2009 Copyright Fund My Mutual Fund - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in