Won't Get Fooled Again...
Via Peter Tchir of TF Market Advisors
Today feels just like it did in 2008. We had almost as many manic up days back then as crazy down days. Remember how we were saved when Fannie and Freddie got put into conservatorship? Remember how all was good when AIG was taken over by the government? Then we sold off the day that TARP failed, but rallied when it passed? Though by the time it was signed into law, the market was already selling off again? Or that weekend when the TARP infusions were made? That suddenly TARP was available to shore up the capital of banks? And the FDIC put in the Temporary Loan Guaranty Program so that banks could issue bonds guaranteed by the FDIC and that the depositor insurance amount was increased?
How many other "announcements" and programs saved the world? GS and MS were given bank holding company status. Insurance was provided for money market funds. CP backstop facilities were put in place. Yet the only thing that seemed to work, was time. Lehman was not the problem - Lehman was just a small part of the problem. Pretending that stocks weren't relatively stable for a couple of weeks after Lehman is just fooling yourself. Pretending that the stock market responded to all the government programs is really fooling yourself. TARP came in October and stocks were above 1100. They bottomed below 700 in March the following year.
I didn't include the QE1 dates. They are more interesting. QE1 was announced on November 25th and increased the size on March 18th, 2009. It was for GSE and Mortgage debt. Now those programs seemed to be able to stop the slide and drive the market as a whole up. QE1 made sense to me. Everyone around the desk was talking about how cheap credit looked, but everyone was still being forced to de-lever. Very few investors thought corporate bonds were expensive back then, most people though they were cheap, but couldn't take the risk.
QE1 alleviated pressure in the market and investors were able to take some risk. QE2 had less of an impact. The ECB has already been buying bonds, but at this stage I cannot find any investor who wants to buy PIIGS bonds but can't. Not everyone thinks they are CHEAP but don't have the capacity to buy them. That was the situation when QE1 was launched, and that is why it worked. Europe can add to their purchase programs, but it won't have the impact people want it to, because this isn't a liquidity crisis. There is plenty of liquidity out there. This is a crisis of rational, intelligent, greed oriented investors who just can't get comfortable that the problems in the PIIGS are resolvable. Buying some debt won't change that, all it will do is shift the risk further into the core making the crisis worse rather than better.
I have had about 50 people tell me how positive the events of the weekend are. How positive talk about using EIB and levering the EFSF funds are. The main point they make is that "Europe is finally getting it" or something to that extent. Ugh, I say. Europe has missed the point and had the market as ready as possible to deal with a Greek default, and is now setting itself up to be hurt much more by failure. I have had about 5 serious credit guys argue that these plans won't solve much if anything, are difficult to implement for a variety of reasons, and that it would result in downgrades if it did.
HYG is up just over 0.5% this week. The Italian 5 year bond closed on Friday at a yield of 4.96%, today it is at 4.95%. The 3 month EUR/USD basis swap is better, down from 104.75 to 100.25. This had been 82 back on the day the globally co-ordinated swap lines had been put in place. Greek 2 year bonds closed at 48.96 and are up to 49.15. CDS indices have moved more in line with stocks, but that is where the shorts are. One very smart trader pointed out that near the end of the day, MAIN went from a tight of 186.5 to close the day at 191. Still 5 tighter on the day, but well off the tights. During that time, European stocks such as the DAX went from 5580 to close at 5630, so there was no equity driven reason for the weakness in MAIN. Maybe credit just started to realize that the backdoor tricks to increase the size of EFSF are unlikely to work, and that the guy with the credit card (Germany) seems reluctant to let everyone use it. Maybe they actually like being AAA!
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