Contributor: Raj Mahajan
Global, international, emerging markets… these are words that I hear and use often throughout the day. It was interesting and enlightening to listen to analyst, Meredith Whitney’s keynote presentation at SunGard’s New York City Day as she made the case that there were states in the US that have such clean balance sheets and manifold resources that they should be viewed in a new light.
Instead of relegating them to “fly-over” or “rust belt” status, Whitney suggests that these sections of the US—mostly the central states, the northeast and Texas—be seen as “emerging markets,” ripe for investors and entrepreneurs. Whitney makes a strong argument that these states escaped the long-term ravages of the Great Recession and are ready for an influx of investors and entrepreneurs. They are the breeding grounds of great potential for commodities, agri-business and manufacturing, which she argues are the new “growth engines of the US economy.” These engines will eclipse our rapidly fading mix of home ownership and leverage, undercut by receding mortgage and consumer debt.
From 1990 to 2010, consumer debt grew by 277% and mortgage debt grew by 305%, Whitney said. The states that benefitted greatly from this debt spree California, Florida, Arizona and Nevada represented 21% of US GDP in 2010 and 20% of employment. Interestingly, while consumer spending grew by 48% from 1999 to 2009, state and local government spending went up at a higher rate—64%—during the same period. As defaults, delinquencies and unemployment increase, however, the coastal states have become a burden on GDP.
Late last year, Whitney went so far as to predict that many troubled states and municipalities in the US would suffer defaults and, ultimately, cause dire consequences for the municipal bond markets. Many of her critics point out that the sky hasn’t fallen and that her scenario is full of overkill. Municipal bond calamities aside, I’m glad Whitney compels us to look beyond the comfort zone of conventional wisdom.
It might be a stretch but like Whitney rediscovering emerging markets out of frequently ignored US states, it’s possible that trading firms could do something similar for their trading strategies.
For instance, a serious review of the transaction processes for trading equities, debt, foreign exchange and other key instruments could help a firm boost P/L by uncovering operational efficiencies. The review could also spur new thinking about additional sources of revenue previously overlooked. Have all cross-asset possibilities been investigated? Are there low-latency and direct market links that could facilitate new opportunities? Have trading algorithms evolved to the point where it makes sense to use them to extract more from current markets or as important tools for breaking into new markets? Do the markets once relegated to the “rust belt” and “fly-over” categories for trading now represent much better opportunities than the flashier markets that are dangerously overleveraged? In our current climate, the accepted rules of thumb may actually obscure capital markets opportunities.
Whitney’s presentation and her vision make a persuasive case that firms can no longer blindly rely on conventional wisdom. So, while it’s essential to explore all global opportunities, it’s also a good idea to step back and see if there are prospects hiding in plain sight that would be foolish to pass up.