Investor Alert; Here are the major problems you will face in the next ten years of ticklish transition from crisis to attempted normalcy. Call it the WALL OF WORRIES! Excerpted from The Economist Conference on Fixing Finance. And remember; not all problems have quick solutions, like all of the ones below.
1. Economic growth in the US unlikely to pass 2% for the next 3 to 5 years -- and maybe even up to 10 years. There can be no stimulus program in light of the expected Republican victory in November. "This is going to be a period of pain," said Joseph Stiglitz, Columbia University professor. The bottom line: unemployment will plague as because there is a 1% annual growth in labor force- but only 2% economic growth.
2. QE2 or Quantitative Easing, the expectation of pouring another trillion dollars into the banking system is seen likely to only trigger inflation, but create no new jobs. Proof positive; yesterday, the Treasury sold inflation protection bonds at negative interest rates -- a major sign that investors expect treasuries to drop in price as inflation rises.
3. Expect a new bubble in sovereign debt. The sign; Mexico is ready to sell a 100 year duration bond at 6%. A very risky investment in a nation rent by a civil war with the drug lords, in the opinion of Wilbur Ross, Jr., chairman of W L Ross & Co., one of the nation's most successful investors.
4. Large corporations are only part of private sector benefiting from cutting overhead(reducing employee count) and bringing more revenues to bottom line.
5. The Fed will be sitting on its $2 trillion in cash for a long time without any practical use for it. There is very little demand for bank loans from the private sector. Adding reserves to the banks wont accomplish any more economic activity.
6. The economics profession let the world down because it had the tools that were politically acceptable.
7. No solution in sight for the housing market. Wilbur Ross suggested a plan to reduce the amount of principal owed on homes to below the mortgage debt still owed, and then let the parties share in whatever upside can be earned on the homes. But, no plausible mechanism to get this accomplished.
8. The shadow banking system trying to escape from the regulators. Hedge fund industry official pleaded with Deputy Treasury Secretary Neil Wolin to allow hedge funds to regulate themselves. Wolin was far too polite and non-0commital. Since hedge funds gobbling up all the proprietary traders from big Wall St. investment banks.
9. China and India are graduating 7 times more engineers a year than the U.S.
10. We are papering over the structural problems in finance with bubbles. There is still great uncertainty about the efficacy of regulation by Dodd-Frank and Basel 3.
Final note; at yesterday's session, Vikram Pandit, CEO of Citigroup, gave what many believe was a most bizarre performance. For several minutes he went on at length about how worried Citi was about the ability of poor Americans to be able to borrow money in light of Dodd-Frank, the finance reform bill. Yet, he went overboard in his adamant support of the Consumer Finance part of the bill, seeming to separate himself and Citi from the opposition to the bill from other large banks, namely JP Morgan.