HSBC economist Stephen King says "Goodbye to all that"

The world that we took for granted is gone. No more rapid global growth. No more easy investment opportunities. No more excess liquidity.

That was the starting point for "Goodbye to all that," a Feb. 25 presentation to the Boston Security Analysts Society by Stephen King, chief economist and global head of economics for HSBC Group.

King, who's based in the U.K., brought a global perspective to the current housing and credit crunch in the U.S. "The U.S. housing crisis has become a transatlantic lenders' problem," he said. Why? Because in their quest for higher yields, institutional investors in the U.K and the eurozone became heavy investors in U.S. corporate bonds. By corporate bonds, he meant asset-backed securities, especially mortgage-backed securities. U.K. banks that have gotten burned are tightening their lending standards just like their U.S. counterparts.

King predicted that 2008's biggest negative surprise for financial markets might come from outside the U.S.: the sudden loss of momentum in the U.K. and elsewhere. In fact, he suggested that the U.S. dollar may appreciate in 2008 because economic risks are priced into the U.S. market, but not in Europe.

On the emerging market front, King said that those economies have decoupled from the U.S. "Slower G7 domestic demand growth may not be an emerging market disaster," according to him. But while some strategists stress the upside of emerging market demand for the U.S., King emphasized the downside. A slowly growing U.S. that's cutting interest rates will boost capital flows into emerging markets, where too much domestic demand will fuel inflation in fuel and food costs. That inflation will deliver another blow to the economies of developed nations.

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Susan B. Weiner, CFA
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