From Mark Grant, author of Out of the Box
Facing Up To 2012
“Its not the years but the mileage.”
-Indiana Jones
This is a year of uncertainty. Corporations are full of cash, issuance is down based upon lack of need at a time when interest rates are bouncing off of zero. We have had four years of Quantative Easing that has injected a tremendous amount of capital into the markets while liquidity is diminshed as the major dealers cut back on their risk exposure. The availability of decent options to place new money is becoming scarce and political considerations are more significant than economic considerations at present. The forthcoming elections in France and Greece, just days away now, will help shape the financial marketplace not just in Europe but also in the United States. The equity markets in America, typically myopic, lurch from risk-on to risk-off trades with any new significant headline issued out of the Continent. Compression in the bond markets continues as Corporate yields are at all-time lows. The largest “concerns” are yield/return and how to position yourself if Europe self-destructs and the possibility of credit/risk assets widening against Treasuries. There is a distinct difference now between U.S. securities and European securities as specifically I note “home law,” bonds denoinated in Euros, the political risk in Europe, more PSI’s and the “innovative” solutions offered by Europe for their sovereigns and for their banks. I also point to the lack of accurate data offered by Eurostat as a continuing difficulty so that many of the numbers that we are provided do not reflect the reality of the pablum that they are trying to force-feed to the world.
“Say it ain’t so.”
-Marlon Brando, On the Waterfront
We are also facing a whole series of downgrades by Moodys which is likely to separate the international banks into two distinct camps where the highly rated will be able to perform functions that will no longer be available to the weaker credits. It will not just be a matter of funding in my opinion but counterparty risk and cash/clearing functions that will become impaired after the ratings announcements. I suggest that the large banks in America and in Europe will be decisively divided btween those perceived as safe and unsafe and that the weaker will find themselves in an ever increasing difficult position.
The recent LTRO by the ECB provided lquidity; but at a cost. It is apparent that the banks in Europe pushed up the prices for European sovereigns in the short term but also increased their own risks by doing so. Recent data suggests that almost 10% of foreign buyers exited many of the weaker sovereign credits in Europe while their domiciled banks picked up the slack but, in doing so, increased their own risk and as yields have gapped back out in Italy, Spain et al the banks are facing significant losses on their balance sheets. It is quite possible now that with this weekend’s elections in Europe that Germany will find itself backed into a corner and nationalism could become a self-centered affair in Berlin with surprising consequences that could result from finding itself backed up against the wall. As much of Europe now finds itself in recession I note the continuing possibility of social unrest that could burst at any time as the unemployment numbers for much of the youth in Europe are abysmal and idleness can ignite in the most controlled of societies.
Watch the rear view mirror. Watch the side mirrors. The streets are alive and its not with the “Sound of Music.”