Via Mark J. Grant, Author of Out of the Box,
“There is a tide in the affairs of men, which, taken at the flood, leads on to fortune. We must take the current when it serves, or lose our ventures.”
There are two forthcoming dates which will set the direction and strength of the tide and certainly have a marked affect upon the ventures. They are this Sunday, May 6, when both the French and Greek populace will decide on who is running their government and then on May 31 when the Irish have their referendum. At the least one must be thankful that there are Democracies that are working and that no group of Generals or some thug is making the decisions. I did watch the one French Presidential debate this morning. It seemed rather like something out of Harry Potter where Professor Dumbeldore was ranting and raving with the Minister of Magic. If events go the way as predicted by the polls then we will have a Socialist President in France that will be followed in June by some right wing members of Parliament also being elected. Vive la France at the national level but a major thunderstorm coming for the European Union as Germany finds herself ever isolated from the demands of France, Spain, Portugal, Italy et al. Germany, in my view, is about to lose her position as the Dictator of the EU and there will be consequences which, I am certain, will cause moments of great angst in Berlin. Forthcoming I visualize many Socialist demands such as Eurobonds being made and Germany standing alone in the corner and refusing to fund which will make for all kinds of volatile markets.
“The Charges to the accused are as follows: that he did willingly, and in the full knowledge of the illegality of his actions, perform a Patronus Charm in the presence of a Muggle.”
-The Minister of Magic
The elections in Greece are of a different sort. You may as well throw up the cards into the wind and see which way it is blowing. In the end, though, I think it all comes down to money. The Greeks will bumble along while the EU foots the bill and the moment the spigot is turned off; Bye Bye Birdie. I can almost hear the screams and cries in Paris and Berlin as the Greeks return to the Drachma and default on their debts but it is either a continuing flow of cash or the end of Greece’s tenure I am afraid. The bigger crisis though, I fear, will be when Germany says no to funding some grand Socialist idea. The problem is the size of the economy. The German economy is 25% of the American economy and it is going to get down to a matter of capital and what Germany can afford without being downgraded and a European Union without a AAA rated Germany is a very different affair both for the EU’s debt structure and for the Euro. Therefore it will get down to push/shove, hide/seek and various other games of our childhood which will mark the Eurozone for the balance of the year. The tipping point may well be Spain as there just is not enough capital to rescue her and there is just no escaping the fact that Spain will need help.
There are those institutions that stick up their noses at this segment of Capital Markets. I am not in this camp however and remind each of you that bonds that float off of LIBOR or bonds that float off of Inflation are certainly part of this group. There is a significant place in anyone’s portfolios for bonds that provide reliable options to fixed-coupon securities depending upon market conditions. I have long believed that legitimate “concerns” are what drives Structured Finance and that identifying those “concerns” and providing products to address them is the purpose of a healthy Structured Finance department. Recently, at a conference sponsored by MTN-I, I chided my colleagues for non-performance and a lack of innovation and every lead bank has had a positive response. There will be a meeting in New York, on June 7, of almost all of the lead banks, which I will moderate, to deal with a number of issues and to try to provide some innovation to institutional clients. Consequently it would be useful if those of you that run portfolios would communicate with me and let me know what kinds of new products that you may find helpful. In my mind whatever could enhance yield would be one option and whatever could provide some protection as credit/risk yields rise while Treasuries may go in the opposite direction would be another. I encourage any of you to share your thoughts with me and I will communicate them to the entire group when we meet.
A Bumpy Ride
In June the Fed’s Operation Twist comes to an end. There is no new stimulus plan on the table in either America or in Europe now. In my opinion, there is none that is likely on either Continent. This means that the last four years of monetary easing and living off of that which has been printed is coming to an end. The consequences of this, historically, have been declines in the equity markets and declines in the value of risk/credit assets. I strongly advise you to take some profits now before the markets take them from you. Compression will give way to widening and there is no reward for being left holding the bag!