From Mark Grant, author of Out of the box, and onto Wall Street
“The entire world is falling to ruins and poor Cheshire's off his tea.”
-The Mad Hatter
“Out of the Box” follows a different course. It is written expressly for large financial institutions and is not distributed to the public. The main concern of my commentary is to help you avoid those places of danger where points or scores of points may be lost with a single mis-step. I do not suggest specific securities and while there may be an asset class, such as bonds linked to Inflation, where I think there is opportunity; my commentary is not trying to sell you anything. Further my group works with our clients, we trade bonds ourselves so that we follow the very old school principle that we work with people and we do not trade against them. I have no idea what my firm owns in their inventory and whatever we are long or short in our trading positions makes not one whit of difference to me. It has been said to me often enough that my commentary often sounds negative or full of gloom but this is not the case. I am trying to warn you, to provide an outside view of “Watch Out” so that Alice’s rabbit hole is a place that you may avoid visiting and be healthier as the result of not holding any meetings with the Mad Hatter. I can tell you that he is a distinctly unpleasant fellow and possible interactions with him can result in the infamous pronouncement of the Red Queen and one doesn’t want to lose one’s head afterall.
"Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"
-The Red Queen
I am the keynote speaker later today at The American Bankers Association Conference for Bank Directors. The topic is Europe and how Europe will affect the American Banks. Now some of the effects are fairly straightforward such as counterparty risk with larger banks and their exposure to Europe and then exposure to the American divisions of the large international banks. The identification of further crises in Europe will be part of my presentation but then I will discuss the divergence between Treasuries and credit assets and the widening in spreads that I see forthcoming as Quantitative Easing has ended for the moment and as the solvency issues in Europe worsen as the Continent heads into a protracted recession. The flood of money from the Fed drove every asset class higher in price and then when the Fed stopped their gift giving we had seen a marked decline in equities and a widening of spreads in every other asset class and while the Fed might do one more QE as a bid to help him that cannot be named get re-elected; that will not take place for months if it happens at all. What we have witnessed in Europe is a time horizon of about three months where liquidity drove up prices and then a serious back-up as the funds were placed and the river began to run dry. You may recall that I was out 15 minutes after the Fed announced no new monetary easing suggesting that you may wish to take some profits because I know how this game gets played out and the markets have been on the dole with the Fed for four years and when the hand-out ends; Jack Sprat is no longer the recipient of any fat. As a matter of fact old Jack Sprat is now on the lean and the lack of dietary supplements always has a pronounced effect.
The Wizard predicts it will be Greece, Portugal and Ireland all back at the trough in 2012 and Spain lining up for its first feeding. Italy remains a question mark but with a real debt to GDP ratio of 200% the structural issues will not be overcome by anything that Mr. Monti has proposed to date. As we all focus on the sovereigns in the last few days I point out that the European banks are down around 2%-4.5% in Germany, Italy and Spain today while the largest bank in Portugal has seen its share price drop 15% this morning. You may ignore the ugliness and the markets may ignore it for this or that day but the European ugliness is not going away and I would be a seller on any pop in equities or risk assets because the European landscape is a quite Bleak House.
“The only relevant test of the validity of a hypothesis is comparison of prediction with experience.”