Rubin?s Cue : Window of market stability prompts Robert Rubin?s departure from the US Treasury
A short while ago, Time magazine featured caricatures of Alan Greenspan, Robert Rubin and Larry Summers
alongside a caption ?Masters of the Universe?, or something similar. Following a longstanding tradition, appearance
on the front cover of the magazine is the kiss of death to themes as well as individuals? circumstances. It is well-known
in the markets that Rubin, the Treasury Secretary, has been keen to leave the post for up to a year. There is nothing too
sinister in his reasons. He is 60 years old; he is very wealthy and he has not enjoyed the Clinton scandal, bearing in mind
that the President is his boss. Furthermore, he is said to dislike the frantic travel that his post requires, he is frustrated by Congress?s stalling on funding for the IMF and - probably the clinching factor - his wife dislikes the Washington clique and wants to return to their home in New York.
On the face of it, replacing Rubin with Larry Summers, his well-groomed deputy, is unlikely to cause too much fuss in the markets.
Larry Summers is a very bright guy and can handle himself in the top flight. However, there are two important snags. One is
that Summers, 44, doesn?t get on so well with politicians and gets frustrated when lesser mortals can?t follow his arguments.
In other words, he doesn?t sound like a man of the people. The other, more serious, problem is that Summers dosn?t have
Rubin?s address book or calling card in the capital markets. Rubin?s 28 years in investment banking at Goldman Sachs & Co
have been a valuable asset to Alan Greenspan during the past 4 years or so.
Rubin knows the big-wigs at all the Wall Street investment and commercial banks, and has wined and dined with them
for many years. He knows who to speak to get a message across to the markets, or a favour done. While the Chairman of the Federal Reserve can only speak with forked tongue, the Treasury Secretary can be brutally frank to those he trusts- in private,
at least. This combination of market savvy and strong personal relationships in the financial community is what the US loses when
Rubin retires on 4 July.
Both Rubin and Summers are identified with free trade policies and a strong
dollar. Only Rubin can provide the behind-the-scenes
reassurances that prevent capital flight from Brazil or staunch a run on the dollar. To find out how much Summers understands about his role as a soother of the markets? furrowed brows, we will have to wait for the next tricky moment. Hopefully, Rubin will at least leave
his address book behind.
P.S.
There is much written about the reasons for the rise in US bond yields since last October.
The rise in oil and some commodity prices coupled with strong economic growth is certainly reviving the market?s fears of an inflationary
upturn. However, consider another interpretation: that it is currency risk that has driven up US bond yields not inflation risk. Whereas inflation
risk must ultimately trigger a Fed funds rate increase, currency risk need
not. The widening US current account deficit is a much bigger threat to the currency than to the US CPI. My judgment is that next week?s FOMC will not see a Fed rate increase, nor will the following meeting. The
next move may well be much later - and in the opposite direction.
Peter Warburton 13 May 1999
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