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Three elephants in the room at the ADB annual meeting Posted By: The Asia File at May 5, 2009 at 07:31:42 [General] Posted in: Business Tags: View More ADB, asia, Asian Development Bank, bali, economy,Emerging markets I've come to the Asian Development Bank's annual jamboree in Bali, where today's unofficial theme was elephants in the room. In a seminar on the direction of global markets, Mark Mobius, the well regarded emerging market investor and part-time Bond villain, said that there was value in some emerging markets but that the direction of equities in the coming months would depend on the two elephants in the room: the "wall of money waiting to get back into the market" and derivatives. Mobius isn't the first market participant to argue that all the cash that's been pulled out of hedge funds, emerging markets and developed markets is likely to find its way back into equities when investors realise that a 0.1 per cent interest rate on a dollar savings account ain't that great. He pointed out that the US and many governments around the world - including our own - have been printing money like it's going out of fashion. A consequence of this was that "we're now beginning to see a shift of this money into equities". While he warned of a "jagged" recovery, interspersed with many mini-corrections, he seemed optimistic that there was value in this market for those who chose carefully. Mobius isn't the first fund manager to try to talk up the market - just look at Anthony Bolton's ongoing attempts. But, in fairness to him, he did point out that there was a large risk to this positive scenario in the shape of derivatives. He quoted a figure of $500 trillion of outstanding derivatives (you can decide for yourself which "outstanding" he meant) globally, or about 10 times the total annual economic output of the whole world. And, according to Mobius and a contact of his who works at the SEC, no-one in the financial world understands how these products really work, which means that the threat of a massive blow-up is un-measurable. He said that he'd seen mid-sized retailers in South Korea and Mexico that had gone bust after investing in complex derivatives when they should have selling rice and tins of beans. "If we want to regulate derivatives, we should use the Las Vegas or Macau gaming commissions because they understand these things," he said. In any case, he added, "I haven't heard the global regulators say that they're going to look at this". Given that you've read this far, you're probably wondering about that all important third elephant. It was Frank Bainimarama, the increasingly dictatorial prime minister of Fiji. He may just have earned his country the dubious distinction of being the first-ever nation to be kicked out of the Pacific Islands' Forum but "his excellency" was a guest of honour at the ADB meeting, along with several other Asian heavyweights including the prime ministers of Georgia and Tonga and the vice-president of Palau (the president must have been washing his hair). There was one guest of honour worth his salt though (no disrespect to the above gentlemen) and that was Indonesian President Susilo Bambang Yudhoyono, who gave a rather rousing speech about the many obstacles that his nation has overcome in the last decade - more of which tomorrow. [ 6 comments ] Comments Thanks for the great blog, Ben. I still think that the BIG elephant is the Derivative Elephant. This one can trample the others if the true/notional value is either 450 or 500 Trillion, depending on your source. One thing that concerns me is that it is still possible for banks and insurers to hide their real exposure through false accounting. We don't have mark to market so we don't have 'real' market values for these debt instruments. Banks are now using 'models' to do 'stress tests'; can you imagine if they just packaged the products with similar products in an open exchange and tried to sell them? My guess is that a lot of it is junk, worthless. How much is anyone's guess, but everyone is still saying that the paper on their balance sheet is worth X, when in reality it may never, ever, find a buyer. The real stress test might come when there is another global margin call and we see that most of the big banks are indeed still hugely under funded. The only way we will ever get out of this will be to get proper transparent exchanges to find out what the market will bid for this 'crap'. No wonder everyone says that this is the era of Trust. Or, to be more accurate, 'No Trust'. So will printing money and other extraordinary measure overcome the deflation scenario? That's the 450 Trillion dollar question. pondy May 05, 2009  11:52 AM GMT The derivative question must be put in perspective. There are $500-$1,000 trillion outstanding, the latest estimates put them at over a quadrillion. That compares with world GDP of about $50 trillion and US GDP of $14 trillion. The truly toxic stuff are the OTC unregulated CDS and others that total anywhere from $30 -60 trillion. Originally it was $60 trillion but ofsetting and close outs have reduced the amounts. The total capital of the global banking system was less than $4 trillion ( less than $2 trillion for the US system)before the troubles started. The IMF now estimates global banking losses of $4 trillion + and climbing. In other words the system is effectively broke and gasping for air. But the US and other governements have an interest in keeping the con game going since the prospects of complete collapse would be too horendous. Expect the stress tests to be fixed and give the all clear - for the time being. You were right about Citibank in Bali - it is broke but you ran into the Wall Street- Washington conspiracy of silence axis. be careful next time they could extra rendition you to Gitmo! oldasiahand May 05, 2009  03:08 PM GMT Netted off, of course the derivatives must be less than world GDP. (In fact, they might sum to zero?) Since the ones that turn out to be most toxic (CDS) were sold as insurance (hah!) perhaps we could invoke the old insurance rule that you can't carry more cover than the value of the ship- I know pondy and old asia hand are going to laugh, but perhaps Lloyds of London had it right. Time for a sort of banking Plimsoll line? james May 05, 2009  08:55 PM GMT Thanks for your support oldasiahand - did we meet at the ADB event? The day job of the censorious moderator, Marsha Vande Berg, is explaining the Asia-Pacific investment environment to pension funds. For the sake of those poor American pensioners, I hope she lets the trustees ask her tough questions. The Asia File May 06, 2009  08:24 AM GMT Ben. Yes, we met, chatted about Ambrose and exchanged cards in the Media Centre on Tuesday morning. I told you my opinion of the schmuck from Citibank, who wriggled out of answering your pointed question. As for the moderator, she was your archtypal American professional wanting to avoid controvery and substance at all costs. I used to blog on mytelegraph but found it a waste of time. Write for several other websites on gold and emerging markets from tine to time. oldasiahand May 06, 2009  10:00 AM GMT I remember our chat William. Let me know next time you're in Singapore and we can meet up for a chat. The Asia File