Blowing In The Wind
Via Mark J. Grant, author of Out of the Box,
The bond markets almost always rolls before the equity markets. The bond markets are much bigger, the major participants are more pessimistic and, given the sheer size of some institutions, they have to get set up earlier. The emphasis is also quite different with fixed income focused on yield and return while stocks are more concerned with appreciation. Each market has benefited dramatically from the flood of money provided by the central banks and the Fed, in particular, buying the majority now of Treasuries and mortgage backed bonds that get issued. Don’t fool yourself or search around for unimportant and trivial reasons; this is what has primarily driven all of the markets. Insatiable demand by the Fed and the other major central banks has far outdistanced supply and Economics 101 still works.
The problem with writing a commentary focused on warning people away from getting in trouble is that a great many people are only really happy when they are in trouble. This is a noticeable quality in many human beings. The second problem is that a great many people do not wish to hear it even if they very grudgingly admit that you could be right. A warning is more important than a good idea. Ideas are scored in eighths and quarters while a warning is measured in scores of points. The final problem with a well-reasoned warning is that many people hear it and think you are calling for Armageddon when all you were trying to say is, “Be careful walking; the floor ahead is slippery.”
The problems that could have been catastrophes, especially in Europe, have been quelled by ever larger amounts of money thrown at them by the ECB, by the EU loosening every directive that they have ever created and by the “Save the World” promise of Mr. Draghi. The EU recently said they may cap their ESM fund which would cap the Draghi put but no one paid much attention to the announcement as we float through our Novocain world. To leave our present condition will most likely require an event that will wake the markets from their dream walking state though there is another possibility which is that the Whale Sharks in fixed income beginning to stir and the long end of the yield curve begins to fall back significantly. These boys are determined to make their move before Mr. Bernanke makes his and they are on constant alert for any slight movement that may indicate that the Chairman’s hand is moving towards the chess board. It is just a game of chicken really but the stakes are the biggest in the world.
Besides an event then, the next Black Swan that may appear on the horizon, there is a fundamental mis-match now caused by the actions of the central banks. The money pours out like honey and must be used somewhere and so it is but the economic fundamentals are horribly out of tune with the next high notes that are being played in the markets. The numbers out of Europe this morning were dismal and even the stalwart, Germany, was hobbled and sunk to the first rung of possible recession. GDP in Europe fell -0.6% for the quarter and -0.9% from a year ago which was the worst showing since the first quarter of 2009 when the effects of the Lehman disaster first crept into the reported figures. Germany was down -0.6%, France down -0.3%, Italy down -0.9% and Greece; hailed, praised and applauded by everyone in Europe these days was down a whopping -6.0% from last year. So much for hailing, praising and applauding and pass the Ouzo please.
Getting it right is NOT as important as not getting it wrong. Please re-read the last sentence. Getting it right helps some but getting it wrong can be a disaster for your career, for your firm and for your client’s money. You may not think that every line I write is a pearl of wisdom but, unlike what Europe dishes out these days; it is not horsemeat either. Look around you; it is a small and connected world. Japan, where the median forecast was for 0.4% growth in the last quarter reported out a negative -0.4% for the quarter only exacerbating the dilemma as when Asia and Europe are in a downward spiral it is quite likely that the Red, White and Blue is about to be tarnished. The printing of money is the tout and it is a powerful force indeed but economic fundamentals will play Hell when they catch up and overtake the little blue and green pieces of paper that, to quote Mr. Dylan, are “Blowing in the Wind.”
European economies straight from script of Les Miserables. The dispensing of horsemeat on the Continent in food and otherwise. The oncoming of some sort of Asian Flu. Class warfare in America and the entire construct supported by a House of Cards relying solely on the printing presses housed in Washington, Frankfurt, London, Tokyo and Beijing. The beginnings of a small game of “Currency Wars” and the markets sit and ask the famous question; “What, me worry?”
Nothing to worry about of course. Nothing. Though I hope you do not find me impolite if I remark that the deodorant is woefully inadequate.