James Saft

Europe, cooperation and train wrecks

Aug 30, 2011 20:04 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

HUNTSVILLE, Ala., Aug 30 – In an unintended irony for a continent with a great public transport infrastructure Europe’s debt rescue plans are turning into a train wreck. Consider that as Greek two-year interest rates stood at 45 percent on Monday, officials and interests in the euro zone descended into an unseemly mix of squabbling over assets, denying the undeniable and disagreeing about first principles. Even as weak as recent U.S. economic data has been, these fractures, which imply heightened risk of a bank-centered market crisis, are surely the main source of the recent extreme financial volatility.

Most interesting was the intervention by newly minted International Monetary Fund Managing Director Christine Lagarde on Saturday who warned “developments this summer have indicated we are in a dangerous new phase.”

Lagarde went on to say that Europe’s banks need “urgent recapitalization,” using public funds if necessary, and advised that one option would be to use the European Financial Stability Fund (EFSF), or some other vehicle, to inject capital into banks directly.

Here we have the head of the IMF, a woman who was until recently the finance minister of France, more or less asserting that the bank stress tests are best disregarded and that people should have real doubts about the banks they do business with, invest in and lend to.

This is nothing that cannot be seen in market prices, of course, but it’s a bit as if U.S. Treasury Secretary Tim Geithner were to leave government service, set up as an equity analyst and come out with a “sell” rating on Bank of America.

Jackson Hole and the Great Risk-off

Aug 26, 2011 17:18 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

HUNTSVILLE — The best reason to sell risk assets is perhaps that the best reason to buy them in are hopes for what one man will say on Friday in a mountain resort.

Federal Reserve Chairman Ben Bernanke’s much anticipated speech at the Jackson Hole economics conference is the subject of fervent wish-casting by investors hoping for another dose of central bank adrenaline, either in the form of more asset purchases, a move to entice banks to lend, or possibly a change in the composition of the bonds the central bank already owns.

Relief measures may be offered, and a rally of risky assets will ensue, but even if they do, Bernanke faces one really powerful opposing force: a wall of money coming the other direction in the aftermath of the credit downgrade of the U.S.

Libya gives world economy needed break

Aug 23, 2011 18:57 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

For Libyans the fall of Muammar Gaddafi comes about 40 years too late, but from the point of view of the global economy it is not a moment too soon.

The apparent end of the reign of Gaddafi, whose whereabouts were unknown on Monday after rebels took Tripoli, will take pressure off of the price of energy, especially in hard-hit parts of southern Europe, and thus ultimately may remove roadblocks to further easing by either the European Central Bank or Federal Reserve.

Brent crude futures, the key European measure, fell by as much as 3 percent on Monday following the taking of Tripoli by Libyan rebels before settling about 1 percent down, while the U.S. measure rose about a third of a percent.

As politics fails, will central banks step back

Aug 18, 2011 21:50 UTC
James Saft is a Reuters columnist. The opinions expressed are his own.

HUNTSVILLE, Ala,  – We’ve grown accustomed to central banks swooping to the rescue when events overtake governments’ ability to address economic and market fractures.

There are good reasons to wonder if that era may be coming to an end.

In the past week both the Federal Reserve and European Central Bank have come under intense pressure to act; the Fed from a slowing economy and steep market sell-off and the ECB from a buyers strike on Italian and other euro zone bonds.

Both chose to intervene. The Fed moved to keep interest rates at virtually zero until 2013, while the ECB, in a change in its recent tactics, once again waded into bond markets to buy up and support peripheral euro zone government debt.

US medicine could be bitter for dollar

Aug 16, 2011 20:50 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

HUNTSVILLE, Ala – The U.S. economy is in trouble, and most of the ways it may get help will be bad for the dollar.

While a weak dollar may help to revive manufacturing and bring inflation to eat away at the mountain of U.S. debt, it will also kill returns for foreign investors and just might be the beginning of a self-reinforcing pattern of weakness and dollar selling.

With the odd exception, the run of economic data out of the United States has been very poor. Monday’s Empire State factory index, put out by the New York Federal Reserve, fell to a negative 7.7 reading, confounding analysts’ predictions that it would claw its way back up to zero and marking the third straight negative month. The survey has only been around since 2001, but successive negative months have since then only happened when the United States has been in recession.

The coming U.S. profits drought

Aug 11, 2011 20:33 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

HUNTSVILLE, Ala. – It’s not just that the U.S. economy is ebbing; the stock market has finally woken up to the harsh impact that government austerity will have on corporate profits.

Shares fell again on Wednesday, with the S&P 500 now nearly 15 percent below its late-July peaks. There are plenty of triggers for the fall — the downgrade of the U.S. by Standard & Poor’s and a worsening debt crisis in the euro zone

    but the truth is that the slow-motion small crash is best understood as a reading on what diminishing demand, caused by falling government spending, will do for profits.

Shares rose on Tuesday after the Federal Reserve nailed short-term interest rates to the floor for a promised two years, but that brief bout of euphoria quickly ebbed. It’s not surprising that the Pavlovian response to Fed stimulus is a rally, after all for the past 20 years every market crisis has been met by easier money. What is striking is that the half-life effectiveness of Fed action has diminished so greatly. Perhaps QE3, when it comes, will only buy the market four hours.

Nightmare is a sweet dream for bonds

Aug 9, 2011 19:17 UTC
James Saft is a Reuters columnist. The opinions expressed are his own.

HUNTSVILLE, Ala. – To understand why the U.S. lost its AAA rating yet its bonds rallied you need only consider that recent events are bad for growth but good for creditors.

The downgrade by Standard & Poor’s, the first ever for the U.S., helped to cement the view that the U.S. will be rescinding various guarantees and pledges it has made to those to whom it does not owe money.

The downgrade doesn’t make the U.S. a worse credit; it recognizes, too late and by not enough, that the U.S. has a mismatch between its obligations and its will to meet them. Congress has demonstrated that not only will there be no meaningful stimulus, there will likely be substantial cuts in government spending.

Four bullish tales in search of dupes

Aug 2, 2011 15:44 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

HUNTSVILLE, Ala. — With a U.S. debt deal hopefully past, we can look forward to the ritual trotting out of explanations for why investors should be bullish despite a broken political system and a AAA rating on the edge.

We got a hint of this Monday morning, as shares in the U.S. rallied on news of an expected compromise deal to raise the debt ceiling, but sadly the fun lasted all of 30 minutes before data showing manufacturing was sputtering towards contraction sent shares lower.

Never fear, though, there is no situation bleak enough to make the sellers of hope take flight, so, for the perplexed, here is a handy guide to the four bullish arguments that you should simply ignore in the coming days.