The volatility on world stock markets this week fuelled more uncertainty about the prospect of another global recession. The markets were already jittery after Standard and Poor's ratings agency recently took the unprecedented step of downgrading the US credit rating. With politicians there squabbling over how to reduce debt, plus ongoing concerns over Europe's financial mess, the mood in the markets is decidedly edgy. So who would be an investor these days? Aaron Lewis ventured into Wall Street this week to try and make sense of the market rollercoaster.
REPORTER: Aaron Lewis
Last week, New York once again became the centre of a global financial threat. The big players of the money again began to worry that America may never be able to pay back its crushing 13 trillion dollars debt. The New York Stock Exchange was hit hard.
NEW YORK STOCK EXCHANGE TRADER: It has been a roller-coaster ride this year, it really has. We had great gains at the beginning of the year – this Spring and they started to roll into the Summer, and your right - the gains had been wiped out over the last two weeks. Actually as a matter of fact, on paper, the market has lost 2.9 trillion dollars within the last three weeks.
The Stock Exchange is becoming more erratic by the day, leading to unprecedented unpredictability.
NEW YORK STOCK EXCHANGE TRADER: When I first started here, we had three minutes to execute an order. Now we will do 10,000 orders in less than a second.
That means a market driven less by action, and more by reaction. Even the big players like Blackrock, the world's largest money manager are now in uncharted territory. Reguida controls almost a quarter of their more than three trillion dollar portfolio.
BLACKROCK TRADER: I think we live in a world now where data and information is so transparent and so fluid, that you get reactions that are pretty extreme. We have never seen movements like this before. I’ll give you one good example - it took from the middle of 2003 to the middle of 2007 – 1380 days – almost four years – the equity market never went down more than 2% - in any day – for four years and we are going up and down 4%’s – another day 6% - have never seen anything like this.
So what caused such instability? First, Congress could not agree on whether or not to raise the nation's debt ceiling. Republicans accused Democrats of letting the debt get out of control. Democrats accused Republicans of the dangers political hijacking.
POLITICIAN: It is time for the administration and time for our colleagues across the aisle to put something on the table. Tell us where you are.
PETER SCHIFF, CEO, EURO PACIFIC CAPITAL: They were saying, if we do not raise the debt ceiling, we are going to default. What does that mean? That means, if we cannot borrow more money, we are not going to pay back any of the money we have borrowed. What is that telling how creditors? It is a scam.
Peter Schiff is the CEO of Euro Pacific Capital and he was furious at what he saw.
PETER SCHIFF: This is about a self-imposed borrowing ceiling, but what we are telling our creditors is, hey! China, Japan - if one day you get to the point where you do not want to lend us any more money because you think you have loaned us enough, we are not going to pay you back. That is what we told the world. We told the world we will only pay back the money we have already borrowed, if we can borrow more to do it.
Congress eventually agree to increase the debt limit, but with provisions - those included two trillion dollars in spending cuts, including from social spending programs but no raises in taxes on the wealthy. Many saw this as Congress coddling the rich at the expense of everyone else. Economist and author Moshe Adler agrees.
MOSHE ADLER, AUTHOR: People are debating how to give the Bankers what they want or how to revive the financial markets. We are not about the financial markets - the financial markets are a part of the equation, but a small part of the equation. We need to start talking about ourselves and what are the roles of the game that the Government can institute, so that we can work and make a living and pay taxes. We want to pay taxes - we do not want the rich to pay for us. The only way to do that to begin with is to make the rich less rich.
All sides agree that the debt ceiling negotiations were bungled. And then, off the back of the deal came the historic decision by Standard and Poor's ratings agency to downgrade America’s credit rating from the highest grade of AAA – investor speak for risk free - to the lower AA Plus – bumping US bonds a rung down from the few remaining AAA countries.
PETER SCHIFF: I think it is significant in that you finally have an established, respectable ratings agency basically saying what should be obvious to everybody - that the US government is not AAA, in fact I do not think they downgraded them far enough, I don’t think that we are AA Plus.
Then, immediately after the Standard and Poor's downgrade, just when the world was expecting the US Treasury to take a beating, there was a sudden rush on buying United States Treasury bonds and Blackrock led the way.
BLACKROCK TRADER: When there is a disruption on the markets, there's no batting an eye – AAA or AA Plus – there’s no batting an eye, we’re going after Treasuries and that’s not changing. And we fundamentally believe the US is a AAA country.
PETER SCHIFF: That shows you how absurd it is. You're talking about going from the sublime to the ridiculous. What is going on is that the dollar and the US Treasuries have been the safe haven, so now all of sudden the world is panicking because it is worried about Treasuries and so they buy Treasuries as a safe haven from Treasuries. That is how absurd it is. I think it is almost like Wiley Coyote - walking off the side of a cliff. Eventually we will look down and realise we are not standing on anything. And people who are buying treasuries because they are afraid of it - the absurdity of that is going to dawn on some people.
With the frantic ups, downs and mixed signals, what is really going on? Sahm Adrangi is one of the most up and coming fund managers in New York and because his career got started only a few years before the crash of 2008, he is right at home with his chaotic new order.
SAHM ADRANGI, KERRISDALE CAPITAL: One of the benefits that younger investors like me have is that, we have seen both the great liquidity of 2004 to 2007 time frame, as well as the great recession. We have seen what it’s like when the markets are calm and we had seen what it’s like when the markets are in turmoil. It gives us a bit of perspective that you don’t really know what will happen next - all you can really depend on is how your given investments are performing.
Sahm founded and runs Kerrisdale Capital, a small $20 million fund that has consistently been beating the market since the crash. He does not believe the S & P downgrade caused the panic. He says - larger forces are at work.
SAHM ADRANGI: It is a little meaningless for Standards and Poor’s to give its opinion on whether the US can pay back its debt because the US dollar is the world's reserve currency. Usually, when you see governments default like in the case of Argentina where it has a lot of foreign currency denominated, it has a lot of US denominated and the country does not have enough dollars to pay back its debts. That cannot happen with theUS. The dollar is always going to be accepted, until the US becomes such a minor player in the world markets that people do not value the dollar.
Kerrisdale Capital specialises at the bebunking fraudulent Chinese businesses that are preying on American investors. It keeps a watchful eye on China. Sham is concerned that Wall Street is being blown about by a strong easterly wind.
SAHM ADRANGI: Our perspective is that, it is a troubling time to be in the market right now but I do not think it is because of the US debt issue. I think it is because of what is going on in Europe and potential bubbles inChina.
It does seem that only when you look abroad, does what is happening on Wall Street, start to make some sense. With a number of European countries on the verge of bankruptcy, with Japan's recent disasters and with a massive housing bubble developing in China - there may be no other safer place for the big money to go.
BLACKROCK TRADER: With a rating move from AAA to AA Plus, Treasuries are still the most liquid form of payment in the world, the most easy form of collateral in the world. They are readily acceptable, they are in every document as transactionable collateral and you can liquidate it immediately and that’s not changing.
PETER SCHIFF: The real problem with a global economy is that the world's biggest debtor is issuing the world's reserve currency and that can’t be. All of the global economic imbalances have to do with the overvalued dollar.
So, when a Republican-controlled Congress threatened to stop payment on America's debts if the deficit was not slashed, it threw the status of the US dollar as the world's reserve currency into question. That angered America's creditors, especially the Chinese government, who holds more than 1.5 trillion dollars in US Treasuries.
MOSHE ADLER: What happens is that everybody in the world, in particularly the Chinese government for instance, is holding on to dollars for one reason and one reason only and that is to make the dollar strong. When that makes the dollar strong, it makes that imports to the US are high and exports from the US are low. The Chinese government is doing what is good for the Chinese people and that is making sure that jobs remain or expand in China but they remain in China at somebody's expense and this is the workers expense in the United States.
Wall Street has already recovered much of its losses from the last few wild weeks though the costs had been high. Tarnished credentials, job still scarce and the effects of the spending cuts yet to be felt, meanwhile, America's leaders seem unable to stand up, look out to the horizon and make ready for what may be coming next.
Reporter/Camera/Editor
AARON LEWIS
Producer
DONALD CAMERON
Research
GEORGE LERNER
Original Music composed by Vicki Hansen