“It took a lost weekend in a hotel in Amsterdam
And double pneumonia in a single room
And the sickest joke was the price of the medicine
Are you laughing at me now?
May I please laugh along with you?” – Lloyd Cole
At times when the troika, IMF, the EU, the G7, or G20 would meet over recent months the song “Lost Weekend” by Lloyd Cole kept repeating in my head..No need to worry readers, I wasn’t at the stage were I was tearing at my face whilst pleading, “please make it stop”.
The globe’s financial elite have found themselves in an impossible and insoluble matrix. To assume that having meeting after meeting in various five star hotels over Europe, would soothe “the markets” whilst finding no solution for the ailment would serve as a financial homeopathic ‘cure’ for the disease was never a sustainable ‘plan’. Looking busy, looking like you’re “trying hard”, waving to the assembled media may fool some of the people some of the time, it will fool the markets most of the time, but to what end, where’s the ‘end game’?
The markets ‘enjoyed’ a secular bear market rally from 2009-2010 due to being dramatically oversold in late 2008 early 2009. As a consequence of zirp and massive liquidity (courtesy of QE) money flew into equities and commodities whilst currency investors received a huge tail wind in the form of what appeared to be mathematically pure trends. To spin the plates continually over the past two years, with only one or two potentially crashing to the floor, has been a tremendous achievement. It’s not the fiscal or monetary policy that’s been admirable, it’s the public relations that’s kept the plates from smashing.
Barclays has issued a statement this morning suggesting what this column has alluded to for weeks; Italy is finished due to its insoluble debt. Not withstanding that bombshell dropped on the toes of the mainstream media Ms. Christine Lagarde, the head of the IMF, has suggested that Europe and the globe will be facing “a lost decade”. This has been another theme often re-affirmed in this column, although to be fair I’ve gone further suggesting that the ‘best’ we can hope for is two to three decades of Japanese style stagnation/stagflation with debt versus GDP ratios of 220% being accepted as the new normal.
Cristina Lagarde has been trying her new charm offensive on tour to Russia and China whilst pitching for sponsorship for the EFSF. It’s a form of blackmail that they’ll (Russia and China) no doubt chuckle at. Russia has offered ten billion euros, with implicit paternal instructions and a pat on the head not ‘to spend it all at once” and only on the right ‘stuff’, whilst China has refused it’s help so many times it’s become embarrassing, still Ms. Lagarde has more chance than Berlusconi, assuming she doesn’t use his “the Chinese eat their babies gaff”..
“Advanced economies have a special responsibility to restore confidence and lift growth, while China should boost consumption and allow its currency to rise. In our increasingly interconnected world, no country or region can go it alone. There are dark clouds gathering in the global economy. If we do not act, and act together, we could enter a downward spiral of uncertainty, financial instability, and a collapse in global demand. Ultimately, we could face a lost decade of low growth and high unemployment. In Asia, countries need to prepare for any storm that might reach their shores. At the same time, a balancing act is required, because some face continued overheating pressures and risks to financial stability from prolonged easy financial conditions.”
Cutting through the sophist code the rough translation is the same as previous; “look, here’s the thing, Europe’s debt is mind boggling, mathematically it’s out with Pluto, but they are (we are) your single biggest market, they die you die, capiche?” But here’s the rub, the BRICS may look at the situation and seek a generational advantage, a one off lever that must be pulled whatever the short term implications, perhaps they consider Europe and the USA finished, the next phase of growth could in fact be insular and a lot closer to home. Perhaps India, China, Russia could grow their own markets to replace those that have arguably reached saturation point..
Moving onto the Barclays ‘wikileak’ style note, it requires no added commentary or embellishment from me, given its self explanatory condemnation..
- At this point, it seems Italy is now mathematically beyond point of no return
- While reforms are necessary, in and of itself not be enough to prevent crisis
- Reason? Simple math–growth and austerity not enough to offset cost of debt
- On our estimates, yields above 5.5% is inflection point where game is over
- The danger: high rates reinforce stability concerns, leading to higher rates and deeper conviction of a self sustaining credit event and eventual default
- We think decisions at eurozone summit is step forward but EFSF not adequate
- Time has run out–policy reforms not sufficient to break neg. market dynamics
- Investors do not have the patience to wait for austerity, growth to work
- And rate of change in negatives not enough to offset slow drip of positives
- Conclusion: We think ECB needs to step up to the plate, print and buy bonds
- At the moment ECB remains unwilling to be lender last resort on scale needed
- But frankly will have hand forced by market given massive systemic risk
Market snapshot at 10:25 am GMT (UK time)
Asia/Pacific markets enjoyed a rally in overnight early morning trade, the Nikkei closed up 1.15%, the Hang Seng closed up 1.71% and the CSI closed up 0.88%. the ASX 200 closed up 1.22%. the Thai exchange bucked the trend down 1.59%.
European bourses have dramatically reversed their earlier gains. The STOXX is down 2.41% the UK FTSE is down 1.34% the CAC is down 1.94% the DAX is down 1.73% the Athens main index is down 2.6% and the main Italian index, the MIB, is down 3.03%, 30% down year on year. Gold has not shone as a safe haven and is down $6 an ounce. The SPX equity index future is currently down 1.5%, the DOW equity future is down circa 200 pips.
Economic calendar releases that may affect the afternoon’s market sentiment
12:00 US – MBA Mortgage Applications 04 November
15:00 US – Wholesale Inventories September
A Bloomberg survey of 40 economists gives a median forecast of a month on month increase of +0.50% for wholesale inventories, as compared with the last figure of +0.40%.