Clearly, 911 has had a severe impact on all participants, including the demonstrators. The private sector banker guests were down from pre-911 days of around 15,000 to about 4,000. The security obsession made access to the official sector guests considerably more difficult than in previous years.
The mood this year was completely different from any of the other World Bank/IMF meetings we have attended over the past twenty-five years. There was a sharp dichotomy between what the official sector, particularly the G7, was saying ' basically, it's all gonna be alright', with US growth predicted at 3 percent next year and a muted global recovery. It could be characterised as evangelical, happy clappy economics!
However, those conclusions are more politically tainted than normal being driven by the US Administration and its looming elections and an assumption of no disruption from the war.
The official sector seemed still to be in denial and, in that respect, it was reminiscent of the ADB Annual Meeting in Fukuoka in May 1997 just before the onset of the Asian crisis. At that point the Thais were still denying they had a real problem and elements of the private sector were running scared.
The private sector in Washington was another matter entirely. Gone was the brassy over-confidence of earlier years. Confidence seems to be coincident with bonuses and portfolio valuations. A lot of the bankers were looking for new employment. The International Institute of Finance gave its global economic outlook briefings and, on the surface, they echoed the official line. However, the official presenting was downbeat and could barely conceal his scepticism about his own presentation. He characterised the projections as a best (and unlikely) outcome. The dangers to the projections were:- Doubts about the length of the war and the possible spike in oil prices (they are expected to plunge if the war is an easy victory) - Doubts about the durability of the American consumption boom (housing is not seen as having too many legs here for continued equity extraction). In any case, the policy was characterised as a weak reed to build a recovery upon. - The prospects of recovery in Japan were deemed negligible by Ken Courtis (although the authorities are threatening to take tentative steps in the right direction) and Europe would continue its sclerotic, unreformed ways with the Growth and Stability pact the wrong policy at the wrong time.
Bob Hormats and Fred Bergsten were particularly bearish. Bergsten talked about the two remaining bubbles (the dollar and housing). Some fears were expressed that the US was following the Japan route. A double dip is certainly possible.
Considerable concern was expressed about derivatives and the problems of counter party failures and the impact on the banking system. An official from the Office of Comptroller of the Currency was very circumspect when the issues were first broached the issues with him - he utilised the Werner von Braun 'not my department' defence - but, when pressed, admitted to the OCC's considerable concerns about counter-party risk. He refused to be drawn on the J.P. Morgan Chase risk but was clearly worried about how the European re-insurers would fare.
Sovereign Debt Restructuring
A major brouhaha is shaping up on G7 plans to establish sovereign debt restructuring mechanisms. If effected as planned, there will be a major contraction of the market in emerging markets sovereign debt issues which the official sector would be unable to fill. The private sector is up in arms at the proposals. The US may be playing a double game here, hoping that the private sector can eventually derail the proposal - at least its worst aspects.
Comments on the stock markets were limited. Several people talked about hoping for a rally next year when they could lighten up. Not exactly a good sign.
It seems possible that a rally could start in November or December from lower prices, based on an oversold condition and possibly some lifting of the war uncertainties. It could be as good or better as the post 911 rallies. It could even seem like a new bull market and could certainly be tradable. If the US is following the Japan scenario to any degree then it is very doubtful that it would be the final low for the still over-priced US markets. There appears to be better value elsewhere, in the UK, for instance.
People are more optimistic on non-Japan Asia than elsewhere, although it will be virtually impossible for the region to escape the downdrafts from elsewhere. But relative value resides there.
The fact that the consensus seems to be shifting in the direction we have been pointing for the last three years does not necessarily make for greater comfort. On the contrary, it makes for discomfort and encourages the thought that a rally could arise shortly - although not the final low if the Asian model since the late 1980s is anything to go by.
The threat of war seems to have effectively pushed the issue of the economy to the back burner. It seems as if the Republicans could hold on to the House with a narrowed and therefore razor-thin majority. However, this would go completely against the trend of history when the President normally loses a fair number of seats at the mid term.
The Senate is also an imponderable. Until Tuesday the Republicans had a good chance to gain control but Torricelli's withdrawal in NJ puts that in doubt. NJ is normally rock solid blue-collar Democrat territory. The Republican challenger had looked unbeatable against the Mafia don-like figure of Torricelli - who became untouchable in the post-Enron environment. The Republican has run a campaign focussed solely on being clean and not Torricelli. Whether the 78 years old Lautenburg will have the energy to overturn the Republican lead is unclear. Net, this result is now a toss up.
It seems as if everything politically is grid locked. There is little reason to expect much to happen on the domestic front as the perpetual US election machine rolls on. Even if the Republicans controlled both Houses of Congress, the atmosphere is unlikely to allow them to attempt radical domestic policies. The consensus is simply not there. On the foreign front, however, radicalism will persist so long as it is successful.
It is highly unlikely that the war will start before the elections, but could happen as soon as they are over. That is earlier than the consensus.
Gold remains the four-letter word of the financial world. That is good news for those who are long since they are not part of the consensus. Interestingly, one official delegate did inquire about it, rationalising correctly that it is the only thing moving up in price. So it is not completely off the radar screen. We suspect that more people will be talking about it next year.
William R. Thomson
7 October 2002
Bill Thomson is Chairman of Momentum Asia, a distributor of Momentum's conservative (non-leveraged) alternative investment funds. He is also Chairman of the Siam Recovery Fund and advises governments and institutions in Asia. He was formerly Vice President of a major international bank in Asia and is a former US Treasury official.