Equity Markets: Thank Heaven for Central Bankers

November 30, 2011 will be a day to remember for many Bourse firms.

It's never a pleasant to be wrong. But it's always a pleasure to be wrong when you called the only viable option that would have made you wrong.

Finally the Central Banks convened to lower USD swap costs and consequently ease tensions within the Euro-Area. Acknowledging that the ECB (and IMF-chuckle for those that conceived that piece of gossip) could do little on their own without frustrating donors, Mr. Draghi understood the problematic and the challenge. Europe needed help from its friends: The Fed and its allies, and the Bank of China. One signaled monetary comfort; the other signaled monetary stimulus. In both cases,  the better bankers realized that a demand for the USD could get out of hand and leave an even more fragile Euro begging for crumbs at untenable rates. That setting without improvement on the Chinese economic front, global economies were in trouble.

The best part of the staging is that China is becoming a beach-head participant in the world's financial system. Mr. Xiao's next challenge is to convince his stakeholders that assisting in the European bailout is a necessary condition to not losing out on everything else, and exercise the appropriate actions. Slowly but surely, Chinese pragmatism is waving a wand that signals a change in political directions towards western rhetoric.The only other adjustment China has to make is a concession on the yuan.

The swap arrangements agreed to (who knows when) are effective December 5, 2011 and will extend for 15 months into 2013. Is there anyone that still thinks that Europe has no problem when its own banks show appetite only for USD. Is Europe out of the woods? Not necessarily. This morning, Mr. Cameron et al, are you listening, European unemployment is on a record rise with the exception of Germany, and that will reverse. Mrs Merkel will see a reversal within three months as less and less demand go her way, and more and more constraints are put on businesses.

Well, US President Obama, Fed Chair Bernanke and Secretary of the Treasury Geithner were there again and maybe someday, some inspired filmaker will find a decent moment to direct  real drama. Europe has been saved for a second time by the United States and its credible allies. Bank of China dropped its reserve requirements by 50 basis points in order to help trigger some activity on a slowing economy. This monetary easing was the first sign that November 30, 2011 was going to be a V-Day.

At this moment, there is little left that the Central Banks and Chair Bernanke can do on the monetary front. US Republicans should analyze their own pundits' results on job creation by President's Obama spending initiatives, and improve on the solutions by fine-tuning timing and sectoral interventions rather than dismiss the spending option. Most of all, they should stop battering the US Public Service. The constituents of that sector represent the most faithful spending segment of the consumer population.

Don't knock down the walls that hold back the oceans.

To the many, stay the course.

Mellow Yellow Monday; Black the Week

Today we'll experience a cover-the-shorts rally and from all indications, we might get a 200pt lift. That's the best this week will bring. By week's end, regardless of mixed signals from the US economy, the week's cumulative should be down by 250points. The USD will gain another notch, and European malaise will continue to batter the credibility of the Euro-Area. Best to short the Euro.

What can the IMF do? What are its sources of income? Should one chuckle. Not really; it's pathetic that most of the market forget that both the ECB and the IMF are recipients from donor sovereigns.

Not a week to enjoy!

Mr. Niall Ferguson: Stick to History

I just finished reading Mr. Niall Ferguson's prediction of Europe 2021. I usually enjoy Mr. Ferguson's ideas and his craftmanship. This time around, both were wanting; the article in the Wall Street Journal was soft on craft and poor on fantasy.  Maybe his projection in 2012 on 2022 will have cleared up some of the blind spots in his vision. We should all stick to Malachi, Mother Shipton, Nostradamus and Cayce. They're more entertaining.

Leave the Future's Foundations to Isaac Asimov

Black Monday? No. A BLACK WEEK!!

A regular reader to my favorite webpage FRB or Fictional Reserve Barking commented after a polemic that a squall is coming the likes of which we had never seen. The structure of that phrase clicked a neuron and plucked a memory chord. I'm still trying to figure out where I heard or saw it, and it keeps on slipping. This morning's opening on Wall Street affects in a like manner. Deja vu! but I can't remember when or where. Was I young or was it more recent? In any case, for the pundits that ponder their stats looking for a pattern, this time around there is no precedent from the regressions. It's the Mule breaking out the maths: the coeffcient of error that can't be contained systemically. There are only two players that can restrain the overflow, contain the explosion and both are trading partners, both have their own tensions and both are in search of an author.

One snickers listening to Mr. Cameron highlighting some punctual anomaly in the economic figures just released. It's unreal to finger out the semblance of sunlight amidst a hurricane. That's it, the phrase comes from Dune-the book and the movie!!! It's a variant in a dialogue when the Fremen note a 'wormsign'...

Well, Monday won't be Black, it'll be bleak. Losses will range between 250-325pts. Treasuries will gain and most commodities will fall. Gold, it should fall (except for those that see a backstop international standard on the horizon). Tuesday, some profit at the beginning of the day and then for another 'swerve...towards the bend of bay'. Wednesday figures will be mixed and by the end of this week, Wall Street will be flattening out with losses between 750-800 points, unless the FOMC minutes reveal some silver lining. There will be no Thanksgiving for most investors; there will be one for those holding CASH.

CASH is King!! and whether you like the sound or not, the USD is the only currency worth its logo. I guess there's something providential underscoring the dictum.

The Week will be Black!!!

Is the Euro-Area Collapsing?

Over the last week, there are three significant Euro-Area activity figures that merit the market's consideration.

September's Eurozone's industrial production dropped from a previous August +1.3% to -1.9%
September's construction production dropped from a previous months -0.4% to -1.3%;
New Industrial Orders for the four largest populated economies-Germany, France, Italy and Spain all dropped significantly to -4.4%, -6.2%.-9.2% and -5.3% respectively. For the reverent, the United Kingdom NIO's dropped to -1.9%.

Well, shuttered factories are not privy only to the UK; they seem to be the prospect of industrial Europe, especially if one considers that levels of capacity utilization in manufacturing is slipping everywhere with the exception of an anomalous month in United Kingdom.

Evidently, once investors realize that the longer term confidence required to justify purchasing Eurobond securities is not justified by output figures from the region's business sector, then even if your brand name is Germany, and even if the rating agencies mark you tops,  it won't help keep yields down. Germany is as susceptible to being dumped as is Italy and its next candidate France which witnessed its yields increase, and its yield gaps widen against the German counterparts. There is no Immune Boutique in this Shopping Mall. There isn't any vote of confidence for Germany; rather it signals that investor concern is becoming pandemic within the Euro-Area and no sovereign, especially a non-sovereign issuer, is immune. But the contagion on the financial front is not as great a deterrent in our opinion as the rapid weakening and dampening of economic activity within the area. Germany can certainly pull out, or welcome the unstable members' exit, but it can't deter the oncoming economic slowdown that will devastate its own regional economies.

The ECB is a lame-duck if Mr. Draghi continues to endorse without challenge its constitutional mandate. Signor Draghi deve sospendere 'Price Stability',  which is a moot predicament at the moment, and with the help from two oversea friends, act to stabilize the yield curves. The New Normal advocated by financial and portfolio managers should not be higher unemployment and softer growth, it should be lower Returns on Investment. The structural adjustment required by the global economy in order to survive the extending contagion of below-quality investments is to realign investor expectations in view of  de-stabilized and riskier investment scenarios.

Obviously, this goes contrary to the grain of conventional investment lore: the riskier the target, the higher the yield! Unfortunately, when available resources are numbered, and quality contaminated, there's not much choice. You buy into the mess,praying for a cure, or seek quarantined shelters. Are there any? You run to gold? Does anyone care? To SF, Yen or some other resource-constrained sovereign? Price those economies out of the market and over time, the original predicament only changed hands.

What is becoming clearer is that there are only a few viable Backstops in this Global economy, and the Classic is the United States Treasury, with a little help from a friend.

To the United States Treasuries-of course, and at most probably quasi-zeros, or cash the portfolio. If the latter is the soundest judgement  of the wise and enlightened investors, then why wait for the storm; shelter yourselves now.

How will the markets end? Not with a tumble but a crumble. The EU will fall apart unless Draghi and some confreres show their stuff...change the discourse from financial narratives about controlling deficits and imposing guarantees to a discourse with fiscal narratives about job creation, stabilizing growth engines and stimulating aggregate demand. Mr. Draghi will need support from Mr. Bernanke and gang. He knows it and the United States know it.

Thanks, but Sorry, your way won't work, so let's...

The past two weeks have witnessed major changes in the political and financial landscape of the European Union and the Euro area.  Two of the European region's most economically and politically unstable members have endorsed visions for new governments. An Italian  lawmakers' consensus has accorded Mr. Mario Monti the opportunity to form a transitional government that will empower Mr. Monti to negotiate and manage Italy's financial portfolio through turbulent waters; a Greek lawmakers' consensus has accorded Mr. Lucas Papademos the opportunity to form a transitional government that will empower Mr. Papademos to negotiate and manage Greece's financial portfolio through even more turbulent waters.

In the same European theatre during this year's summer and fall,  a new optic is also focusing the people and market's perspective on the political savoir-faire and competence of the region's traditional leadership.  According to many, Mrs. Merkel and Messrs Sarkozy and Cameron are demonstrating a lack of courage to make things happen. The situation is simply too overwhelming for that threesome.  To the boisterous three is the stage, but not History! History confirms that some leaders are made for good times and others, in the mold of Roosevelt and Churchill are made of a 'stuff' that captains the worst of storms.

Although premature and echoing the sound of fluttering feathers, we are nevertheless inspired by both Monti and Papademos, firstly because the respective country's lawmakers agreed to the appointment and secondly, because the national sentiment appears to be overall favorable. The fundamental criteria for success in bleak times is the support of the people-which, while it lasts tacitly transforms the leadership of a technocrat to leadership by charisma. The 'je ne sais quoi' that makes Monti and Papademos viable is exactly the opposite of 'je sais tres bien que' Mrs. Merkel and M. Sarkozy  are no longer comfortable to lead the EU nor the Eurozone out of this maelstrom. Mrs. Merkel whose economy is cruising through the turbulence seems confused about her directions and reads signals with great difficulty, she should possibly review her entourage for more capable resources. Mr Sarkozy should leave aside his political ambitions and rise to the European Region's challenge-it would probably guarantee him the undecided electorate. Finally, Mr. Cameron should abandon his economic platform and slowly steer towards fiscal accommodation before the country reaches the crevice.The economic indicators for the UK are in a sharp decline, and although inflation is for all intents and purposes non-problematic, unemployment is on the rise and capacity is in decline. The latter do not project good times.

In this maze of political ambiguity, Monti and Papademos, seconded by a  known entity Mr. Mario Draghi stand out quite remarkably. In fact, the rise of Monti may have been spurred by Mr. Draghi's reluctance to fully engage the ECB in support of the Italian auction sponsored under the last Berlusconi government. The politicization of the European Central Bank in this context is not acceptable-it mirrors the rise of a political elite beyond the legitimacy of elected representation. If the analysis of the ECB's undemocratic behavior is correct, then Mr. Draghi must explain the actions of his office towards the Italian electorate.

On the other hand, regardless of the origins of their rise, Messrs Monti and Papademos were well-trained to deal with the one concrete challenge of any political economy - to spur employment and extend economic growth. Mr. Monti, as a student of the keynesian Mr. James Tobin has the baggage and opportunity to challenge the austerity measures that are being imposed on the Italian economy. The discourse is not to settle on the terms for a refinancing but to convince markets that the conventional wisdom is not operative and will fail dramatically in the longer run. If markets do not want to be disrupted, then they must entertain the possibility that social unrest will certainly ensue a market's intransigence towards the plight of the unemployed. The matter does not involve a change in narratives, it requires a change in the essence of the discourse.

For Mr. Papademos, the measure of success lies in convincing the Greek electorate that unless there is some accommodation by the people, then there will be no accommodation by the markets. But this tradeoff is quite out-of-line with Mr. Papademos own dispositions. As a young economist, Mr. Papademos studied the accommodation of anti-inflation policy  in promoting employment.  If one considers that the whole segment of the public service is discontented about the market behavior towards Greece's dilemma, then Mr. Papademos must re-engage the early flirtations of his intellectual odyssey and abandon the ECB temple's aphorism of 'Price Stability'. One also hopes that he will challenge the skew towards privatization of public assets that seems to be permeating the ideological baggage of most European leaders in structuring refinancing.

Certainly, one of the critical errors of the ECB financial managers has been the concession to promote 'price stability' at the expense of employment. During two consecutive sessions in April and July, Mr. Trichet decided to boost interest rates when every economic indicator in Europe signaled that there was no inflationary threat imminent on the horizon. If anything, the rate increases intensified an already fragile economic landscape, tempering business investment, and disappointing any consumer initiative to spend. The initiatives certainly cast doubt on the sound judgement of European financial leadership.  One can forgive Mr. Papademos for the latter case in point,because obviously, Mr Papademos although a former member of ECB's executive directorship, and Vice-President to Mr. Trichet, had  left the ECB in 2010. What does that imply for Mr. Draghi who inherits the sequitor of that deepening crisis. On the one hand, Mr. Draghi has signaled his intentions to support any reasonable auctions in the market. If there is anything for Mr. Draghi to recall it is one of  his former teacher's Robert Solow's insight that persistent levels of unemployment adversely affect long term growth in productivity and a second caution that accelerating unemployment can have a disinflationary effect which, in our opinion, given the European context of the day translates into a tendency to affect adversely real wages more than prices, hence disposable income and consumer spending rather than corporate revenues.

Although both Messrs Monti and Papademos are highly capable and well-intentioned, the leap from technocracy to polity is not a matter of degrees. It involves a qualitative leap that resembles more a Kierkegaardian leap of faith that marks the end of innocence.  Although the scenario both men confront at the moment in their respective nations is reminiscent of  the High-Noon sheriff's duel with destiny, both men are certainly more equipped and better supported than the solitary Gary Cooper with his lone gun.

Nevertheless, we have faith that both men will succeed by cautiously pulling back from endorsing further austerity and inviting the markets to the table in order to embed the common sense of loosening up their exigencies. We also trust that Mr. Draghi will endorse a more accommodating stance towards national governments that confront onerous economic and financial challenges. There is no easy formula for success, but there are options that are more beneficial than tightening the coffers of an economy- put people back to work.