Friday :: Aug 27, 2004

Wall Street and Bush

by soccerdad

Wall street has been a big supporter of Bush and his campaign in 2000 and this year. However, according to the Financial Times there appear to be some grumblings and possibly even some have slowed or stopped their fundraising activities.

Again the problem is with the deficits and their long term consequences combined with an unhappiness with foreign policy. Making the world mad at you is not good for business.

But one senior Wall Street figure, once talked of as a possible Bush cabinet member, said that he and other prominent Republicans had been raising money with increasing reluctance. “Many are doing so with a heavy heart and some not at all.” He cited foreign policy and the ballooning federal deficit as Wall Street Republicans' main concerns

One New York dinner in June 2003 raised more than $4m, partly thanks to the efforts of Stan O'Neal, chief executive of Merrill Lynch. Yet Mr O'Neal has done no fundraising for the campaign at all since then and friends say he is not supporting Mr Bush.

There appears to be a consensus forming concerning the health of the economy. People are starting to worry.

Steven Roach of Morgan Stanley has really been beating this drum over the last month or so. His latest two memos are here and here. His perspective is global. What concerns him are the deficits and how they are being funded. In the past the deficits have been funded by both individual and institutional foreign investors who buy treasury bonds and such. Presently, most foreign investors are institutional, and many are the central banks of their respective countries. The motivation for such purchases are profits and self interest, i.e. control the value of their currency and the dollar. Roach notes that the last time this happened was in the months leading up to the stock market crash of 1987. What had happen in 1987 was individual investors greatly slowed their purchase of US bonds, etc. The foreign governments stepped in to take up the slack in order to delay/prevent the market adjustments that usually accompany a current account adjustment.

Roach lays out some of the factors that could cause a major market change. Saturation of foreign institutional investors, just can't buy anymore. Its also important to understand who is buying. It is Asian central banks. So what could cause Asian banks to stop their open ended financing of the American deficit. A narrowing of the trade surplus, such as is happening currently with China. Also, an increase in domestic demand such as is happening in Japan. Third, politics, if the US politicans imposed protectionist levys against say India and China they could retaliate by simply not showing up at the next Treasury auction.

The bottom line in all this is that the external funding of a saving-short US economy is on exceedingly shaky ground. While foreign demand for dollar-based securities moved back to its recent trend in June, that hardly eases the burden of America’s massive financing imperatives. Meanwhile, with the US trade deficit exploding and the current account gap likely to keep widening, there is nothing stable about America’s dependence on the “kindness of strangers.” The day will inevitably come when foreign investors -- already heavily exposed to dollars -- will reassess risk-adjusted return expectations of US securities. That’s what happened in the fall of 1987, and there are increasingly worrisome signs of a replay of that same ominous chain of events.

soccerdad :: 11:40 AM :: Comments (8) :: Digg It!