world financial system in crisis; Romney, who made his fortune in the equity sector, has nothing to say

“Former US Treasury Secretary Larry Summers warned that the United States may be heading into recession as the biggest victim to date of the sub-prime mortgage debacle was humiliatingly sold for a token sum in Germany,” writes Ambrose Evans-Pritchard in a telegraph.co.uk story titled US could be heading for recession. (Duh.)

Former US Treasury Secretary Larry Summers warned that the United States may be heading into recession as the biggest victim to date of the sub-prime mortgage debacle was humiliatingly sold for a token sum in Germany.

Traders are braced for another week of turmoil after the near breakdown of America’s $2,200bn (£1,100bn) market for commercial paper.

“It would be far too premature to judge this crisis over,” Mr Summers said. “I would say the risks of recession are now greater than they’ve been any time since the period in the aftermath of 9/11” … more

So what is Summers’ argument?

He doesn’t offer one.

He just says what he thinks, and what he thinks is that the the US may be heading into a recession; further:

  • “It would be far too premature to judge this crisis over,”

-and-

  • “I would say the risks of recession are now greater than they’ve been any time since the period in the aftermath of 9/11.”

Summers may have offered evidence and reasoning to ground his claims. But if he did, Ambrose-Pritchard never reports it. Ambrose-Pritchard seems to have asked for a comment from Summers, and he got one. Summers himself is an authority figure; his words carry weight. So you could say that an argument is implicit.

In another Ambrose-Pritchard article titled, accurately, Brace yourself for the insolvency crunch, Ambrose-Prichard describes some as trading as if the world has not changed, and he provides proofs in the form of examples (e.g. speculators renewing their leveraged bets etc.).

But the world has changed, Ambrose-Pritchard would like to say.

Regard what he offers as his evidence:

  • Interest rates in Europe and Asia are that much higher now, with delayed effects starting to bite hard. Japan’s economy has stalled to 0.1pc growth in Q2;
  • the euro-zone has slowed to 0.3pc;
  • China’s refusal to import (by currency manipulation) makes it a drain on world demand.
  • Above all, the credit bubble that perpetuated the rally of the last eighteen months beyond its natural life has definitively burst.
  • Credit spreads on the iTraxx Crossover (a good barometer of corporate bonds) have ballooned 180 basis points since February.
  • The cost of borrowing for most firms in Europe and North America has jumped from circa 6.5pc to 8.3pc, if they can get it. Many cannot.
  • Germany’s Chamber of Industry told me yesterday that it had been flooded with distress calls from family Mittlestand firms unable to roll over credit lines.
  • In Canada and Australia, junior mining finance has dried up almost entirely.
  • Global junk bond issuance has been frozen for two months.
  • Fresh sales of collateralized debt obligations – the CDOs of subprime notoriety: a $1 trillion sold last year – have all but stopped.
  • Banks have yet to off-load $300bn of debt from leveraged buy-out deals, forcing them to keep the liabilities on their books. They are all snake-bitten now.
  • The private equity buy-out premium – which pushed up the price/earnings ratio on the MSCI-600 of “median” stocks to a record high of 20 in May – has vanished.
  • The P/E ratios on the DOW 30 big stocks are much lower – because they are too big even for the big cat predators, KKR and Carlysle – but they are not low, given the late stage of the cycle.
  • In reality, an earnings bubble and ultra-cheap credit have flattered profits.

What does Evans-Pritchard conclude from all this? Contrary to any indications of normalcy, “the world has changed, dramatically.” What has left to be decided:

“Whether this means a protracted global downturn and a “profits recession” depends on how quickly the central banks choose to respond, and how far they are willing to go.”

So what does the one US presidential candidate with any expertise on this issue have to say?

Nothing.

Yet another instance of Romney non-leadership, Romney non-competence. Another Romney-opportunity squandered.

yours &c.
dr. g.d.

P.S. Please see:

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