plump Larry rains on a parade

Summers, Trichet Warn Davos Party-Goers They Underestimate Risk By John Fraher

Jan. 22 (Bloomberg) — Lawrence Summers has a message for investors
heading to the Swiss mountain resort of Davos this week to toast a
year of booming returns and record bonuses.

“It’s worth remembering that markets were very upbeat in the early
summer of 1914,” the former U.S. Treasury secretary observes.

While Summers isn’t predicting the onset of another world war, he and
European Central Bank President Jean-Claude Trichet are among those
who are warning the more than 2,200 movers and shakers at the 37th
annual meeting of the World Economic Forum that they’ve become too
complacent about risks ranging from trade imbalances to terrorism.

A glut of cheap money and the strongest global economic growth in
three decades have encouraged banks, private-equity firms and hedge
funds to bet that the good times will keep rolling.

“It’s too good to be true,” says Vittorio Corbo, head of Chile’s
central bank, who will speak at a seminar in Davos about the dangers
of derivatives. “Tomorrow the mood could change. We have to be
prepared.”

Davos attendees — who are likely to include U.K. Prime Minister Tony
Blair, U.S. Senator and possible 2008 presidential candidate John
McCain, Citigroup Inc. Chief Executive Officer Charles Prince and
Carlyle Group Inc. co-founder David Rubinstein — have heard the
warnings about complacency before.

Last Year’s Warnings

In fact, they heard them last year at Davos, when Summers, the former
president of Harvard University, billionaire George Soros and
Bundesbank President Axel Weber cited the potential consequences of
trade imbalances, budget deficits and the then- surging price of oil.

Since then, the rewards have just gotten better for investors. Prices
of London’s most expensive homes surged 29 percent last year, bonuses
at the five largest U.S. investment firms rose 30 percent to $36
billion and the Dow Jones Industrial Average climbed to a record.

“We shouldn’t pour cold water on everything,” Deutsche Bank AG
Chief Executive Officer Josef Ackermann, 58, said in a Jan. 16
interview. “We, the eight or nine players in global investment
banking, have a very good future.”

Profits are soaring, the value of takeovers last year rose to a
record $3.6 trillion and the Morgan Stanley Capital International
World Index of global stocks climbed to a record on Jan. 3. Goldman
Sachs Group Inc. Chief Executive Lloyd Blankfein, another Davos
attendee, last year earned a bonus of $53.4 million.

An Appetite for Risk

With banks tapping what Trichet calls an “ample” pool of liquidity,
investor appetite for risk has never been greater.

Several measures show perception of risk is near historic lows. The
gap between the yield demanded by investors to hold emerging-market
and U.S. government bonds narrowed to a record on Jan. 17, according
to JPMorgan Chase & Co., while the amount of debt used to finance
European buyouts rose to 8.7 times earnings in the third quarter, the
most ever.

Hedge funds in the U.S. are the most leveraged since 1998, the year
that Long-Term Capital Management collapsed, according to Bridgewater
Associates Inc., a Westport, Connecticut-based fund manager.
Regulators from the U.S. Securities and Exchange Commission, the
Federal Reserve Bank of New York and the U.K.’s Financial Services
Authority, concerned that credit standards for hedge funds are too
lax, are jointly probing whether lenders set strict enough limits on
loans.

Little Concern

Meanwhile, one gauge of stock-market volatility — the Chicago Board
Options Exchange’s VIX index — shows that concern about a slump in
equity prices is at a 13-year low.

Trichet, 64, who’s scheduled to speak at a Davos seminar on the topic
along with Israel central-bank chief Stanley Fischer, People’s Bank
of China Deputy Governor Wu Xiaoling and Harvard economist Kenneth
Rogoff, said at a Jan. 11 news conference that “we continue to see,
overall, a low level of risk appreciation, and a disorderly unwinding
of this situation would be a risk that we have to be fully conscious
of.”

Willem Buiter, professor of European political economy at the London
School of Economics, is considerably more blunt.

“Current risks are ludicrously underpriced,” says Buiter, a former
member of the Bank of England’s Monetary Policy Committee. “At some
point, someone is going to get an extremely nasty surprise.”

Among things that might go wrong: a renewed surge in oil prices. Jim
Rogers, chairman of New York-based Beeland Interests Inc. and co- founder with Soros of the Quantum hedge fund, says crude is likely to
exceed $100 a barrel, almost double its current level.

$100 Oil

“Within the context of the bull market, oil will go over $100,”
Rogers, who predicted the start of the commodities rally in 1999,
said in a Jan. 18 interview in Tokyo. “It will go over $150. Whether
that is in 2009 or 2013, I don’t have a clue, but I know it’s going
to happen.”

Higher interest rates might also topple exuberant markets. The Bank
of England surprised investors this month with a quarter point
increase in its benchmark rate. Trichet’s ECB is raising borrowing
costs to try to rein in soaring asset prices and credit growth.

The ECB, unlike other major central banks, explicitly uses money
supply to gauge inflation. Growth of M3, the broadest measure of
money supply and the bank’s preferred measure, unexpectedly
accelerated to the fastest pace in more than 16 years in November,
climbing 9.3 percent.

Already Stung

Some investors have already been stung. Venezuela’s Caracas Stock
Exchange Index has lost more than a quarter of its value in the past
three weeks after President Hugo Chavez pledged to nationalize
industries. The prices of copper and other commodities have plunged
partly on concern a slowing U.S. economy will cool demand.

“We’ve seen a taste of what’s to come in the last few days,” says
Nouriel Roubini, a professor of economics at New York University who
will attend the forum’s opening seminar on the state of the global
economy with Summers. “You’ll see declines in equity prices, further
falls in commodity prices.”

Summers, 52, in an e-mail drawing his World War I parallel and
expanding on a column he wrote in the Financial Times, says that
“financial history demonstrates that the biggest liquidity problems
always follow the moments of greatest confidence.” The six months
after the Sarajevo assassination of Archduke Franz Ferdinand, heir to
the Austro-Hungarian throne, saw the Dow Jones Industrial Average
lose a third of its value — an object lesson in the perils of
failing to adequately price risk.

“Complacency can be a self-denying prophecy,” Summers says.

One Response to “plump Larry rains on a parade”

  1. Dean Hedges Says:

    wanna have some real fun ? … then play connect the dots to the “new economy” … email had an effect on the usps … epay had an influence in the banking sector … voip did away with the need for traditional telcos {bye bye at&t}{{hello nttl.ob}} … m banks are taking away the need for the central banks {{hey, we only need one clearing house right ?}} … the world centers around opec money {ever here of the gcc and now …. drum roll please … the central bank of iraq … tada ?} … … “It would be difficult to exaggerate the psychological and social impact of the anticipated replacement of the jumble of existing monetary systems–for many, the ultimate fortress of nationalist pride–by a single world currency operating largely through electronic impulses.”

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