Considering what's happening in bond markets equities are holding up pretty well. Down just 2.8% since Fridays close . In the debt markets things are grimmer - spreads have widened and Italys north of 7% again, Spain at 6.32% and France at a € era premium over German bunds . The belief is that the ECB isn't going to press the button on unsterilized intervention - the big bazooka or silver bullet - until we're at one minute to midnight . We're not there yet .
Anyone hoping that this will all be resolved by Thanksgiving will be disappointed . Christmas ditto .
Tuesday, November 15, 2011
Friday, November 11, 2011
Framany .
A long, grinding, period of low or zero growth beckons - probably through to 2016. It should have been so easy. Recapitalize the banks, provide the ECB with a trillion € 'silver bullet ' and wait for the storm to pass by. It was not to be . Europes institutions were unable to act in a timely and decisive manner. Instead this crisis will rumble on for the next year while the politicians look for a solution .
Venal and incompetent. Two words that best describe Europes current crop of political leaders . Sarkozy and Merkels giggling press conference treatment of Berlusconi ( no matter what you think of him as an individual ) a shameful and immature way to treat another head of state. Scoundrel turned into scapegoat .After the non-event of the G-20 summit it can be seen that financial discipline has now begun to dissolve . The inability to resolve the Greek problem has caused the contagion to spread and the size of the problem to snowball. Plans call for Greece to grow at 2% p.a. to service it's debt but the country is actually shrinking at a rate of 5.9% annually .Iran is now its major supplier of oil .Next it's Italy's turn to be in the bond market spotlight. Soon it will be France. Spain , despite creditable attempts to reform , remains fragile. Spanish growth his disappeared in the latest quarter .Markets are hoping ( and on Friday surging ) that the possible confirmation of Mario Monti as Italian PM might yet enable order to be restored and provide time for the ECB to intervene decisively . President Napolitano a beacon of stability in this turbulent world..
For too long the € enabled credit to be mispriced . Germany and the Netherlands provided financing at artificially low interest rates to poorer southern European governments, corporates and individuals. The consequence of this has been massive debt and overspending in the ClubMed states , including France . A Greek, Portugese and Irish default becomes more probable with each passing day. Merkel and Sarkozy have publicly allowed that countries might leave the Euro. They are now discussing ring fencing the core - France and Germany - Framany - from contamination . What the Italians and Spanish will think of this remains to be seen. Britain as ever remains willing to criticize while offering nothing positive. No wonder the 26 other members of the EU sigh at Londons behaviour. It is however clear that the British electorate will never stomach the ' compulsion ' that is being imposed on the Greeks, Italians, Portugese and French . What happens to the Uk and the 50% of its output that goes to the continent if it decides to quit the EU ? What happens to Greek olive farmer subsidies if / when the UK, the Eu's #2 net contributor, leaves ?
The consequences fo all this ? After a decade of huge, seemingly interest free loans , the party is over. A wave of corporate, sovereign and personal defaults will eventually follow . A recession in Euroland is now probable in 2012 . France is asking the ECB to intervene more aggressively in bond markets but the stark reality of the numbers say that many countries are at the extreme limits of what they can pay . Unemployment is rising across the EU, export orders are falling and consumer confidence has evaporated . The UK mortgage market has effectively frozen up . Metro Bank extended only 100 mortgages in the last 15 months !
Three things stand out :
1) History teaches that after financial crises , credit growth remains feeble for years. Businesses that depend on credit, banks , consumer credit houses and property developers, suffer .
2) Emerging markets owe €3 trillion to EU banks. Much of this will not be rolled over. Asia and LatAm will slow down as the funds are repatriated in order to safeguard the core Euro area and the Euro .
3) Corporate forecasts for 2012 are blatantly optimistic. Bank balance sheets are contracting at an unprecedented post-1945 rate so working capital will be in ever shorter supply . In the US banks have written off only a quarter of the $326 billion of 2007 era subprime property losses. More deleveraging is to come .
History will note that we were so close to avoiding this downturn . It's not Armageddon but this half decade of zero growth will be a painful period fro Europe. The good news is that by 2015 90% of golobal growth will be outside the EU. Great news for the US, Australia and others. . For Europeans though ' a lost decade ' is as good a description as any of what's in store for them as they battle to save a functioning common currency .
In this environment investable corporate debt and high yielding, under leveraged, blue chips seem as good a place as any to be. Markets are buoyant in the expectiation that the ECB will prime the pumps with a € 2 trillion backstop announcment . If so , and the Bundestag will have to give its approval , Germany will have to pay . Then it's time to buy gold on inflation fears. The Euro will survive this crisis , the Eurozone and the EU as we know it won't .
Venal and incompetent. Two words that best describe Europes current crop of political leaders . Sarkozy and Merkels giggling press conference treatment of Berlusconi ( no matter what you think of him as an individual ) a shameful and immature way to treat another head of state. Scoundrel turned into scapegoat .After the non-event of the G-20 summit it can be seen that financial discipline has now begun to dissolve . The inability to resolve the Greek problem has caused the contagion to spread and the size of the problem to snowball. Plans call for Greece to grow at 2% p.a. to service it's debt but the country is actually shrinking at a rate of 5.9% annually .Iran is now its major supplier of oil .Next it's Italy's turn to be in the bond market spotlight. Soon it will be France. Spain , despite creditable attempts to reform , remains fragile. Spanish growth his disappeared in the latest quarter .Markets are hoping ( and on Friday surging ) that the possible confirmation of Mario Monti as Italian PM might yet enable order to be restored and provide time for the ECB to intervene decisively . President Napolitano a beacon of stability in this turbulent world..
For too long the € enabled credit to be mispriced . Germany and the Netherlands provided financing at artificially low interest rates to poorer southern European governments, corporates and individuals. The consequence of this has been massive debt and overspending in the ClubMed states , including France . A Greek, Portugese and Irish default becomes more probable with each passing day. Merkel and Sarkozy have publicly allowed that countries might leave the Euro. They are now discussing ring fencing the core - France and Germany - Framany - from contamination . What the Italians and Spanish will think of this remains to be seen. Britain as ever remains willing to criticize while offering nothing positive. No wonder the 26 other members of the EU sigh at Londons behaviour. It is however clear that the British electorate will never stomach the ' compulsion ' that is being imposed on the Greeks, Italians, Portugese and French . What happens to the Uk and the 50% of its output that goes to the continent if it decides to quit the EU ? What happens to Greek olive farmer subsidies if / when the UK, the Eu's #2 net contributor, leaves ?
The consequences fo all this ? After a decade of huge, seemingly interest free loans , the party is over. A wave of corporate, sovereign and personal defaults will eventually follow . A recession in Euroland is now probable in 2012 . France is asking the ECB to intervene more aggressively in bond markets but the stark reality of the numbers say that many countries are at the extreme limits of what they can pay . Unemployment is rising across the EU, export orders are falling and consumer confidence has evaporated . The UK mortgage market has effectively frozen up . Metro Bank extended only 100 mortgages in the last 15 months !
Three things stand out :
1) History teaches that after financial crises , credit growth remains feeble for years. Businesses that depend on credit, banks , consumer credit houses and property developers, suffer .
2) Emerging markets owe €3 trillion to EU banks. Much of this will not be rolled over. Asia and LatAm will slow down as the funds are repatriated in order to safeguard the core Euro area and the Euro .
3) Corporate forecasts for 2012 are blatantly optimistic. Bank balance sheets are contracting at an unprecedented post-1945 rate so working capital will be in ever shorter supply . In the US banks have written off only a quarter of the $326 billion of 2007 era subprime property losses. More deleveraging is to come .
History will note that we were so close to avoiding this downturn . It's not Armageddon but this half decade of zero growth will be a painful period fro Europe. The good news is that by 2015 90% of golobal growth will be outside the EU. Great news for the US, Australia and others. . For Europeans though ' a lost decade ' is as good a description as any of what's in store for them as they battle to save a functioning common currency .
In this environment investable corporate debt and high yielding, under leveraged, blue chips seem as good a place as any to be. Markets are buoyant in the expectiation that the ECB will prime the pumps with a € 2 trillion backstop announcment . If so , and the Bundestag will have to give its approval , Germany will have to pay . Then it's time to buy gold on inflation fears. The Euro will survive this crisis , the Eurozone and the EU as we know it won't .
Saturday, October 15, 2011
Signs of life .
Markets have been feeling happier since we last posted . Europes political paralysis has given way to the first signs that a number of European Banks will be recapitalised and that steps will be taken to defend the Euro. These interim measures will be followed, sooner rather than later, by steps to integrate eurozone fiscal policy and issue mutually guaranteed eurobonds. There are a host of legal and political obstacles to cross before the necessary treaties are signed but this is what will eventually happen.Smaller countries may complain but Merkel and Sarkozy recognize the obvious.
For investors these measures provide reassurance that the world will not fall into a steep recession. They do however come at a cost . Banks will have to take a 50% hit on their Greek ( and possibly Irish and Portugese ) holdings. This will mean they have less to lend which will in turn accelerate the slowdown in credit growth to the wider economy. The eurozone's banking system has $2.1 trillion worth of exposure to Portugal, Ireland, Italy, Greece and Spain. Assuming that another 30% has to be written off then $630 bn has to be found from somewhere. In short it is hard to see much GDP growth in Europe at a time when banks are having to preserve their capital base by reducing the availability of credit.
This leaves investors in a strange position . Armageddon is unlikely to happen but we are heading towards a new world in which growth remains elusive as banks deleverage. After the recent strong rlief recent rallies expect upside momentum to fade a little from here . However there is more good news out there . US growth seems to be re-emerging , albeit feebly; European survey data is likely to surprise and show that Q3 was a quarter of growth, the private bond market is creaking back into life ( Deutsche Bank issued 2 yr paper ), Asian exports have not collapsed and the Chinese government has stepped into buy bank shares on the secondary market .
Blue Chip Stocks with a good dividend yield continue to be an asset class that should be added to if there is another , Jeremiah driven , bout of indiscriminate selling.
For investors these measures provide reassurance that the world will not fall into a steep recession. They do however come at a cost . Banks will have to take a 50% hit on their Greek ( and possibly Irish and Portugese ) holdings. This will mean they have less to lend which will in turn accelerate the slowdown in credit growth to the wider economy. The eurozone's banking system has $2.1 trillion worth of exposure to Portugal, Ireland, Italy, Greece and Spain. Assuming that another 30% has to be written off then $630 bn has to be found from somewhere. In short it is hard to see much GDP growth in Europe at a time when banks are having to preserve their capital base by reducing the availability of credit.
This leaves investors in a strange position . Armageddon is unlikely to happen but we are heading towards a new world in which growth remains elusive as banks deleverage. After the recent strong rlief recent rallies expect upside momentum to fade a little from here . However there is more good news out there . US growth seems to be re-emerging , albeit feebly; European survey data is likely to surprise and show that Q3 was a quarter of growth, the private bond market is creaking back into life ( Deutsche Bank issued 2 yr paper ), Asian exports have not collapsed and the Chinese government has stepped into buy bank shares on the secondary market .
Blue Chip Stocks with a good dividend yield continue to be an asset class that should be added to if there is another , Jeremiah driven , bout of indiscriminate selling.
Sunday, September 25, 2011
A new Europe.
So after another week of dismal markets the outline of a solution for Europes woes finally becomes clear.
1) Greece will be allowed to go bankrupt in an orderly manner . In practice this means that French banks will need to be hastily recapitalised in order to absorb the losses on their investment portfolios. Expect a flurry of announcements to this effect over the coming week. Between them G20, the EU and the IMF will have to raise a firewall of around 2 trillion euros.
2) In order for France to retain its triple A rating there will need to be cuts in government spending . The rights to health and pension benefits that exist today are unaffordable and were never meant to be universal. Theses cuts are impossible to implement ahead of the Presidential election next year but implemented they will need to be. Spain has already begun the process, the UK is well advanced, Italy continues to deny the obvious . The pain there will be all the greater when it comes . Put simply, the european electorate face a decade of reductions in their 'rights' and wealth . Even supposedly virtuous Germany has government debt equal to 82% of GDP - up from 39% two decades ago . German banks share many of the weaknesses of their French counterparts.
3) Governments will accept higher inflation . This makes it appear as if economies are growing while at the same time boosting nominal tax receipts.
The questions posed by these changes are enormous :
1) Greece will be allowed to go bankrupt in an orderly manner . In practice this means that French banks will need to be hastily recapitalised in order to absorb the losses on their investment portfolios. Expect a flurry of announcements to this effect over the coming week. Between them G20, the EU and the IMF will have to raise a firewall of around 2 trillion euros.
2) In order for France to retain its triple A rating there will need to be cuts in government spending . The rights to health and pension benefits that exist today are unaffordable and were never meant to be universal. Theses cuts are impossible to implement ahead of the Presidential election next year but implemented they will need to be. Spain has already begun the process, the UK is well advanced, Italy continues to deny the obvious . The pain there will be all the greater when it comes . Put simply, the european electorate face a decade of reductions in their 'rights' and wealth . Even supposedly virtuous Germany has government debt equal to 82% of GDP - up from 39% two decades ago . German banks share many of the weaknesses of their French counterparts.
3) Governments will accept higher inflation . This makes it appear as if economies are growing while at the same time boosting nominal tax receipts.
The questions posed by these changes are enormous :
- How do governments explain to their citizens that there is no more money left ?
- How will Britain react to a two speed Europe in which eurozone economies are increasingly centrally run ? If a referendum was held on the issue would the country really vote against staying in the EU ?
- How does Italy try to reduce debt levels from its economy destroying 120% levels ?
- How are jobs for the young to be created in a world that faces a decade of stagnation ?
- With the financial services sector due for tighter regulation and overall contraction what will replace the tax revenue this component of the economy generates ?
- What happens when everyone tries to generate lower exchange rates to to protect their domestic economies and boost exports?
- How do French politicians sell Germanys ascendancy to their own electorate ?
Saturday, July 23, 2011
And I thought I'd seen it all .
Yesterdays FT carries a report citing the Chinese Governments Foreign Exchange authority and its call on the US government not to default on its debt . Communist China calling on the capitalist US to stand by its financial obligations ! And I thought I'd seen it all .
Monday, June 27, 2011
The Monday morning fact .
America's $14 trillion debt is growing at a rate of $40,000 a second . At the time of writing there are are no plans to rein it in . The phrase ' in denial ' seems apposite .
Sunday, August 29, 2010
Summers over.
Nearly two months since I last posted. Not much has happened since. Markets have been treading water, torn between the optimists who see recovery round the corner and the pessimists who don't. The Dow and the FTSE seem to be stuck in tight trading corridors around the 10400 and 5200 levels respectively. With the jury out and the data releases contradictory, corporate bonds still seem to be as safe a place as any to overweight.
As we enter the second half the benefits of last years stimulus package will start to wear off. Inventory restocking has more than run its course and companies have done all the easy cost cutting. The growth outlook everywhere seems to be moderating. This puts policy makers in a difficult position. Do nothing and deflation may rear its ugly head. More quantitative easing and inflation becomes a near certainty. Through it all banks continue to rein in their lending book. The airline numbers are a pretty good proxy for what's happening in the real world. Premium traffic in June was up 40% over the same period a year earlier. Economy traffic was up 10%. However, compare the latest numbers with the levels of April 2008, the peak month prior to the crisis, then premium traffic is still down 13%.
Expect to see some sharp rallies and some sudden falls on low volumes as Q3 turns into Q4 and optimists and pessimists battle it out. However, unless growth picks up the financial system will find itself under growing pressure. Get set for greater, possibly extreme, turbulence. Ireland and its banks are a cause for concern and may have wider ramifications for the Eurozone and its banking sector.
As we enter the second half the benefits of last years stimulus package will start to wear off. Inventory restocking has more than run its course and companies have done all the easy cost cutting. The growth outlook everywhere seems to be moderating. This puts policy makers in a difficult position. Do nothing and deflation may rear its ugly head. More quantitative easing and inflation becomes a near certainty. Through it all banks continue to rein in their lending book. The airline numbers are a pretty good proxy for what's happening in the real world. Premium traffic in June was up 40% over the same period a year earlier. Economy traffic was up 10%. However, compare the latest numbers with the levels of April 2008, the peak month prior to the crisis, then premium traffic is still down 13%.
Expect to see some sharp rallies and some sudden falls on low volumes as Q3 turns into Q4 and optimists and pessimists battle it out. However, unless growth picks up the financial system will find itself under growing pressure. Get set for greater, possibly extreme, turbulence. Ireland and its banks are a cause for concern and may have wider ramifications for the Eurozone and its banking sector.
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