Archive - Nov 15, 2011

The ever increasing un-invisible hand of intervention, manipulation, and disintermediation by central planning regimes around the world is an oft-quoted topic among our discussions. UBS's Global Macro Team published a thoughtful piece late last week on global political issues and the rise of the state. Governments are encroaching into more and more areas of the world economy. This is not just through political drama (as we have seen in the Euro area), nor even through the conventional mechanisms of foreign exchange intervention. Regulation (and regulatory uncertainty), sovereign wealth funds, bond market manipulation and default risks all play a role in financial markets, and all are intensely political in their nature. A more politically nuanced world raises an interesting unintended consequence for global financial markets. Directly, as a result of increased regulation, or indirectly, as a result of increased costs associated with assessing foreign political risk, investors may feel that the rise of the state will increase the home country bias of capital flows - exactly as leaders look for global burden sharing.

For the first time since 1949, when the Communist Party took power, China will open the regional authority debt markets (muni markets) to the public. Much is being made of the fact that this first issuance - for Shanghai no less - enabled it to dramatically cut its interest expense - as investors were clearly comforted by the increasingly transparent documentation. However, we worry that that this will cause a multi-tier market to evolve very rapidly between the haves and have-nots as we suspect the more than 6000 companies set up by local governments will bifurcate just as the Chinese IPO market did in the US. Color us even more skeptical but when we read the Wall Street Journal's story on Wenzhou's Annus Horribilis this evening, even vibrant thriving (over-stretched and over-levered) city-states are feeling the recoupling pain of a European recession, US residential construction depression, and European bank deleveraging impacting credit conditions in Asia. The bottom-line is more openness is better, more transparency is better, and meeting the demands of yield hungry money managers is reasonable but we hope they go in with eyes wide open as we suspect this move is much more about $1.7tn risk transfer from the public central planner's balance sheet and on to the private capital markets of the world.