Via Mark J. Grant, author of Out of the Box [14],
It is one of those tenets of life that is factual and etched in the stones of our passage; everything is just fine right up until the moment when it is not. Black swans are few and far between, being bitten by a wombat is quite unlikely for most of us but financial or political surprises may be expected as a matter of course. There is a valid point here which is that “surprises” are a normal part of our lives and not something that should take us aback and not something for which we should be unprepared. If you begin to view “being surprised” as a normal part of money management and not as events that are unexpected you accomplish something new; you have changed your mind and you have changed your world and you will then manage money in a somewhat different and more accurate fashion. The unexpected should always be expected by those that wish to win at the Great Game!
We are presently caught in the “see-saw effect” where heighted concerns about Spain and Italy drive Treasury prices higher, their sovereign debt lower and risk comes off the table. The world had quit worrying about Europe, not the brightest of positions but none the less, and then Monte Paschi bumbled upon the scene with not only oversight issues implicating Mario Draghi but charges of fraud and bribery that could reach to the very top of the Italian government before it all ends. Then charges of graft and corruption in Spain not brought by the leading newspaper on the left or by the one on the right but by both of them in concert which focuses the issue. The cries are loud for the Prime Minister to resign in Spain and the evidence appears damning and a full investigation is promised and underway.
“You must pursue this investigation of Watergate even if it leads to the president. I'm innocent. You've got to believe I'm innocent. If you don't, take my job.”
-Richard Nixon
Now having been around for more than a few years let me give you a general assessment of what is going to happen to Italy and Spain and it will not be good. You see, the less enlightened will stand aside and wait for the facts to come out which will be manipulated by both governments to the extent that they can be but when one of these investigations is underway the normal political cover-ups become much more difficult or impossible with the public’s focus on the issues. In almost every case when investigations like these are underway the situation darkens because the event of the process itself uncovers all kinds of things that had been hidden or brushed under the rugs. One thread leads to another, one path open up another one and here comes Pandora with her Box of troubles. The smart move now, in my opinion, is to exit Italian and Spanish credits, the sovereigns, the banks and whatever else you might own until these investigations are concluded. There are also several avenues open for speculation here but I am speaking primarily to those of you that are investors and I see a substantial amount of real risk now in Spain and Italy and so I offer my viewpoint for your consideration. There is always a “who” and “what” to any full-scale investigation but the fact that an investigation has been launched and is underway is the catalyst many times for quite unpleasant revelations.
“You know my method. It is founded upon the observation of trifles.”
-Sherlock Holmes
Now if we shift to the other end of the see-saw we are tossed in the exactly opposite direction. Interest rates are beginning to rise as the causal effect of the central banks spewing money about with such great fervor. The action, in the first instance, buoys each and every market as demand exceeds supply and as money managers rush about trying to find places to put these little pieces of blue and green paper but that is the “first instance” and one that has been carrying on for five years. Then we run into Newton’s “every action has a reaction” principle and the Great Game shifts as the consequences of printing giant hordes of cash ensue. Please do not be naive; there are always consequences and to not understand or appreciate them is a mistake of the first order.
The financial world is used to bubbles. We like to speak about them, point to them, bet upon their comings and goings and wave facts and figures about them like wild men when we appear in the media. It is the way of the markets. We have had bubbles in Real Estate, dot.com, bonds, stock markets and all kinds of other singular spaces. What we are faced with now is also a bubble but one unlike we have ever seen before because all of the major central banks have acted in concert which pumped money in from everywhere while, at the same time, limited what could be done with our new found small bits of paper because they playing field was leveled by distortion en masse. I would say that the entire financial system, every market, every space is in a bubble as a result of what they central banks have done. It is a quite systemic bubble which inflated everything and anything but also cancelled out inflation as it took place across the entire playing field so relative values were hardly changed. This is also why it has not been pronounced or particularly noted to date. The normal effects of one central bank acting alone has been cancelled out by them all working together. A clever ploy no doubt and one that has worked magnificently! Really magnificently!
Major money managers, I can report with accuracy, are now beginning to get nervous about what is to come. The lowering of yields and the tremendous compression of credit to sovereigns and the giant increases in the world’s equity markets have probably run their course unless Spain, Italy or some other risk event or events enters the scene. Interestingly, neither course will be good for the equity markets but the bond markets, and your portfolios, could get severely whipsawed in the days to come. We are surely on the see-saw and it is teetering; of that much I am sure.
“There is nothing more to be said or to be done tonight, so hand me over my violin and let us try to forget for half an hour the miserable weather and the still more miserable ways of our fellowmen.”
-The enviable Mr. Holmes