The Unacceptable Behavior Of The Market
Michael Pettis | Jul 17, 2012 08:21AM ET
Last night I arrived at my family’s home in Spain just in time to catch Spain play Italy. The whole family and lots of friends watched it, while feeding on great seafood and lots of wine, at a neighboring chiringuito on the beach, and I guess if you weren’t there you can only imagine the excitement. I suppose this spectacular win by Spain means that Spain will be able to stay in the euro a little longer than I otherwise expected, although I am not so sure about Italy.
It would make sense for me to start off with some football related comments, but instead most of the this issue of the newsletter will attempt to describe the way pro-cyclical behavior can be embedded into balance sheets, and how this can create significant risk for developing countries especially. Because most analysts do not seem to understand balance sheet dynamics, it is worth pointing out that the more pro-cyclical the balance sheet, the much more widely off-the-mark projections are going to be – both on the way up and on the way down.
To start off, in mid-June, just a couple of days before the Spanish treasury raised 2.2 billion in an auction – one in which the cost of borrowing surged, with 10-year bonds breaking 7% – France’s new president complained about the unfairness of the financial markets. According to an task for some recent upbeat “myth-busting”. In their piece CLSA argue that China’s debt position is quite healthy. Chen and Wang will have none of it.
This is an abbreviated version of the newsletter that went out two weeks ago. Academics, journalists, and government and NGO officials who want to subscribe to the newsletter should write to me at chinfinpettis@yahoo.com, stating your affiliation, please. Investors who want to buy a subscription should write to me, also at that address.
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