While we spend a lot of our time pointing out critical factors driving the reality of our markets and economies, today's note from David Rosenberg, of Gluskin Sheff, provides a spot-on and unarguable description of what every one of your favorite long-only strategist, sell-side economist, and hope-heavy CNBC anchor told you would happen - and hasn't!
- Hedge funds have not piled into the equity market to play catch-up.
- The Super Committee did not come to a compromise (and remember Moody's has the U.S. debt rating on "credit watch" and Standard & Poor's still with a "negative outlook".., shades of August).
- The Europeans have not managed to resolve let alone contain their credit crisis.
- Germany has not acquiesced and agreed to having poor sovereign credits ride off its AAA rating via a "Eurobond".
- The ECB has not moved towards QE. Nor will it — have a look at today's WSJ editorial on the matter. Brilliant.
- Mr. Market saw through the Q3 earnings season and recognized the lack of visibility in the guidance provided.
- China did not start to ease policy just because inflation rolled off the 6%-plus peak.
- U.S. recession risks, as per the San Francisco Fed, did not recede and actually stayed above 50% even with the better statistical tone to Q3 and Q4 GDP.
Hardly reassuring and perhaps once and for all, we will see the average talking-head for what they are - a self-aggrandizing marketing toy with the only goal of raising AUM at investor expense - as opposed to providing balanced research, investment advice, and occasionally contrarian perspectives.
And totally tangential, yet extremely topical, here is Rosie's take on an Italy-Lehman compare-and-contrast:
It's not exactly the same but it sure is similar.
In both cases we had entities that were wholly reliant on capital markets for their funding needs. Capital markets are a fickle bunch. Once confidence is lost, it can be difficult to restore it. In the case of Italy, it has over $500 billion of maturing debt to roll over in the next two years and $800 billion through 2014. Doing so at current near-7% yield levels will deal a punishing blow to debt- service costs and make it next to impossible to meet the fiscal targets the markets demand, rendering this a classic Catch-22 situation.
The difference is Lehman had $150 billion in bonds outstanding while Italy has $2.5 trillion. Italy may be the Eurozone's third largest economy but it is the region's largest bond market by a wide margin. This is where size matters — unlike Greece, Italy is just too big to rescue. And it can't print money to cover its debts and has no ability to devalue its currency to bolster competitiveness and export receipts. The magnitude of the financing requirement is such that Italy is going to have to hold bond auctions just about every week for as long as the eye can see, and the odds of having them fail are not trivial.
For all the talk of having the ECB do more than it has, the laws forbid the central bank from buying sovereign debt in the primary market. It is hard to believe that Italy will ultimately escape a restructuring of its own. In contrast to the Lehman story where ultimately the fiscal and monetary authorities found a way to contain the crisis, global policy makers this time around have far fewer bullets in the chamber to deal with the situation as they did in late-2008/early-2009.
Moreover, the ECB has now made it clear that it will not bend to the demands of others and begin the process of quantitative easing and endless buying of peripheral government bonds — putting the onus right back on the shoulders of Eurozone fiscal policy-makers where it belongs. Wasn't the EFSF at its origin and then with all the bells and whistles since supposed to be the saviour? Charles Kindleberger never envisioned the 'lender of last resort' function to be anything but about the banking system, which is why there was no chapter in the masterpiece he wrote titled Manias, Panics and Crashes on any monetary authority bailing out sovereign governments.
The Germans are calling the shots, to be sure, and have good reason to recall 1923 and everything that followed. This is something that people outside of Germany simply do not understand — the scars are felt more deeply there and they will not choose to monetize the debts. The ECB knows better than that too!