Five Questions for Paul Kedrosky (courtesy Content Matters)
Barry Graubart, a good friend and sometime contributor to Research Recap, offers an interesting short interview at his own blog Content Matters with one of our favorite financial bloggers. Paul Kedrosky’s views at Infectious Greed may sometimes be bombastic but they are invariably cogently argued and always entertaining.
Barry posed five questions to Paul as one of a series of interviews. Paul’s answers make for some chilling reading. The idea that the UK could default on its sovereign debt may seem far-fetched, but then again the idea that Bear, Stearns, Lehman Brothers and Merrill Lynch would effectively evaporate within a few weeks of other seemed far-fetched a year ago too.
Content Matters: What shoes have yet to drop? Which less obvious companies or sectors might be facing troubles in 2009?
Paul Kedrosky: Sovereign defaults. Ecuador doesn’t count, as it was largely a recreational default. Now, however, we’re onto the biggies, with countries like Ireland, Greece, Turkey, Italy, Ukraine, and even the U.K., to some extent under immense pressure. While they won’t all default, many will require bailouts, and there is a high likelihood that the U.K. ends up adopting the Euro.
CM: We’ve privatized large parts of the economy with little discussion or oversight. What do you think has been the most underreported aspects of the events of the past year?
PK: How bank lending was never the right measure to judge the success of these programs. We were trying to prevent the system from seizing up, not trying to turn the go-go easy-money clock back to 2:25pm on June 25, 2005. Confusing people on this point has made life much tougher for Treasury, the Fed, etc.
Second worst-reported story is the idea of the “new normal”. What does a post-leverage world look like? How much are stocks worth? How fast does GDP grow? How big are corporate profits? What percentage of GDP is profits? These things will all change, and yet we act as if we will just return to trend at some point.
CM: Historically, as the economy comes out of recession, it creates transformation and change. Which industries/segments might see an earlier recovery than the economy as a whole?
PK: Banking, strangely enough. Judging from the Depression, banking saw the most wrenching dislocations, but became productive sooner than many thought. Not necessarily the same names, but the sector did come back in unexpected ways. Following that, I expect energy, agriculture, and some selected commodities to ride the reflation wave that is breaking on pretty much every shore in the world.
CM: With the end of the trading culture that dominated the past 20+ years, what do you think Wall Street will look like when the dust settles?
PK: It will blow up into a million shiny pieces — or at least three. We will see proprietary trading shops, which are really just hedge funds. We will see pure agency traders, which are really just providers of liquidity for specialized trades. And we will see deposit-taking consumer-centric banks with business accounts. The days of banking hypermarts are over, as are the days of being a hedge fund with a loss-leader brokerage operation (read: Goldman Sachs).
CM: Finally, some predictions. Where do you think the Dow Jones Industrial Average will close on 12/31/2009? What might the unemployment rate be? What will the price be for a barrel of oil?
PK:
DJIA: 6700
Oil: $30
Unemployment: 10%
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