Submitted by Mark J. Grant, author of Out of the Box,
“Caution: Cape does not enable user to fly.”
-Warning label on Batman costume
As we head into the last quarter of 2013 the markets, it seems to me, are becoming very edgy. More than one institution has asked me about the validity of the numbers coming out of Europe and Asia.
Data seems to be smoothed, averaged or, in some cases, just right out manipulated by the method of counting and not what is counted.
One of the best examples of this is in the numbers for sovereign debt and then the debt to GDP ratios in Europe. Derivatives, contingent liabilities, sovereign guaranteed debts, such as for the banks in Spain, are not included on the balance sheet. Corporate guaranteed debt, such as for the rail system in Greece, are not included in their national debt. I have heard it stated that my methodology is one way to count the debt and the European one is another manner as if they were equivalent. This is just not the case.
In the first place the European method would have the CEO and the CFO of any American corporation in serious trouble if not in jail for Fraud. Contingent liabilities and guarantees must be included on American balance sheets. In the second place these contingencies, exemplified by Belgium's guarantees for Dexia, often come home to roost and must be paid. Then there are the derivatives, many of which are hidden from public view, such as in Italy when billions had to be paid to Wall Street when the bill came due.
Then there is the methodology at the ECB where all kinds of debt have been declared "risk free" and so is carried at one hundred cents on the Dollar. Some of the Spanish Real Estate securitizations that have been pledged at the ECB surely have some value but "face value," to me, is an unbelievable stretch of the imagination. The game has been "extend and pretend" and it goes on and continues on but there will be some time when the loss of money has to be accounted for and then we will have to view the world in a different manner.
In Asia the numbers are anyone's guess. In Europe some glimmers may be found tucked away in some EU report or in the data supplied by the Bank for International Settlements. In Asia there is just no way to know though any number of firms have questioned the reality of the Chinese data more than once.
To a lesser degree we even have this issue. I point specifically at the CPI Index and how it is counted and then at our unemployment rate which magically does not include those who the government contends are no longer looking for work. With 43% of Americans, according to the U.S. Tax Policy Center, not paying taxes I wonder just what the rest of us can afford as we try to preserve the great American dream however consensus would define that.
In a sense the markets are experiencing a "Vietnam Moment" where we all believed what we were told and we all accepted the official headlines until the day came when we found out we had been flimflammed and you know the results of that fiasco. I believe that the markets are quite close to a shift in psychology where people and institutions alike no longer blindly accept the stories as told.
Then we have the upcoming "Drop Dead Day" which is how I peg the German elections. "All Quiet on the Western Front" until that day and then Greece, Italy, Spain, Portugal, Cyprus and perhaps even Ireland again will be crawling out from under the rug to be inspected once again. Even the IMF, after this date, may not be so accommodating and solutions will have to be found which may cause quite a bit of rancor in Europe. We are but weeks away now and then watch out for the buried problems because it is surely not "buried treasure." The ills of Europe have been covered up but will spring back upon the stage soon enough. The next Act of the play may not be so charming.
Then there is the Fed and the tapering and when it begins. Five minutes after the May 22 announcement I advised everyone to take money off the table. For the next few days I repeated this mantra daily. The long end of the Treasury yield curve as retreated almost 11% since then and I hope some of you paid attention to my advice. Then since the bond markets often lead the way and as valuations, revenues and profits decline for any number of corporations I wonder just how long the equity markets can plug along without their own 11% decline as higher borrowing costs have now been thrown into the mix.
Then there is the Emerging Markets. Battered would be one appropriate word. From Indonesia to India to Brazil; turmoil has set in. There have been few places to hide and "Preservation of Capital" is becoming a sparse commodity.
In my opinion "Uncertainty" is upon us and quite a lot of it. As a result of "Uncertainty" the markets are getting edgy and the swings are becoming more pronounced. I always advise caution and I am advising a good deal of it now.
“Small mistakes, the lack of care, little accidents, and somewhere a tipping point is passed and things go badly wrong. Expedition history brims with tragedies built out of incremental missteps.”
-Alan S. Kesselheim