Notes from the IMF meeting

This weekend as the IMF met in their yearly gathering in Washington DC, what I saw was a scary picture. Investors and bankers kept on painting doomsday scenarios, while central bankers and politicians struggled to keep up with the pace of change.
A couple of presentations marked my memory.
Mohamed El Erian, from Pimco, centered all of his speeches on one major theme: there is a fundamental change of paradigm taking place. As he put it - and forgive me if I do not have the exact quote -, never in history has there been such a massive deleveraging process on every level.
What he meant to say is that everyone, from Joe the Plumber - as McCain would put it - to El Erian himself, is reducing debt and amassing cash. The size, the pace and the consequences of this process are daunting and unkonwn.
Therefore, as El Erian indicated and George Soros echoed, we still have not seen the bottom. As people take their money out of their funds because they now pay higher mortgages and credit card rates, funds sell assets to meet redemptions and margin calls. The whole thing keeps on going into a spiral until the last penny is stashed into the mattress.
With no money to invest, there is no credit. Without credit, companies cannot grow and some cannot even function. The rest, you know.
Then there was Robert Schiller's presentation at Deutsche Bank's event. At one point he showed a graph with the prior two Black Mondays - both in October, by the way -, 1987 and 1929. Comparing those to this year's watered-down version makes it clear that we have not, yet, had a Black Monday this time around.
The behavioral economist pointed out that the two prior times happened after a week of high volatility which saw investors come home on Friday mulling if they should or not keep their money in stocks. The decision was made clear the following trading session.
Let's hope this time we can skip it. But, after what I saw and heard this weekend, I doubt it. Fasten your seatbelts.
Photo: El Erian pictured by Barron's

The battle against fear

I cannot let last night's debate go without quickly commenting on it. I saw a desperate John McCain, fear-mongering to try and catch-up with Obama's quickly widening lead.
Barack Obama took the (too) cautious position of avoiding excessive confrontation. McCain's tack was expected and was just a watered-down version of what he has been doing on the campaign trail. I wish I had seen Obama a bit more combative, though. There were some very clear moments in which he could have stood-up to McCain with more vehemence.
But in the end, one thing was clear: McCain managed to explain very little about what he wants to do and how. Obama was as clear as it gets in the time assigned.
The division between the two also was made clearer. McCain is obviously a free-market guy, who believes nothing beats private intiative.
In some ways I agree with the Republican candidate on that one. I do think that government is usually a bad manager and more government intervention often translates into more bureaucracy and higher costs for everyone.
However, unlike McCain, I think the government has to exert strong oversight on the market. I think regulatory agencies need more power and funding to make sure the market is functioning as it should.
Anyway, theories apart, what also became clear is that Obama does really hold a very strong chance to win this election by now. The reason for that is a sad one: the economy is going down the drain fast.
And with his job on the line and collectors knocking on his door all day, the average American does not want to hear about how Obama was on the same board as a former American revolutionary who thought he could make his point get across by bombing public buidlings. He wants to know how on Earth the next president is going to get him out of this bind. And McCain simply did not answer that question. Besides, at this point it is clear that leaving it all completely in the hands of free-market does not work.
In fact, I believe McCain is hitting the wrong note. As Americans see the economy crumbling after decades of laissez-faire policies, they do not want to be given the choice on everything. For the first time since World War II, I daresay, Americans want a strong hand on the helm. They want the government to be there for them, and not the opposite as McCain suggests and assumes.
The problem is that Obama is likely to swing the pendulum too far and overshoot the government clout in his first term. And, as I said before, that is not good.
Finally, there is one thing in all this that makes me sad. I wish we were electing our first black president just because of his merits - which he has now proven -, not because we are desperate.