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.

Debt-Limit Impasse and US Credit Rating: Nonsense per Beckett


The high probability that a political stalemate between a trying President Obama and a headless GOP would unleash an economic nightmare in the global financial system was unprecedented in American politics. To observe this staging with its original cast, from showmanship through the intrigues of gamesmanship only to end in a display of outright irresponsible brinkmanship was more like unraveling Kahn's absurd than thinking the unthinkable.  There was nothing tolerable being rehearsed on the stage in Washington.

For some, the Republican House had little to lose: they may have shattered the image once and for all of an already tarnished and staggering President Obama, if not out of the White House, most probably out of some future Majority. There is now, in hindsight, a conversation within the GOP depicting the emergence of a ‘Republican moment’ that will define the party and establish its future credentials. For others,  this supposedly tactical moment may have sealed the coffin to the GOP's own demise for the upcoming election.

Yet, the debt-limit impasse between a Presidential vision and the GOP counterproposal  led most pundits to rethink public ethos and try to figure out which of the parties was more irresponsible: President Obama in failing to appreciate the tactical whims of a political adversary  or the Republicans failing to appreciate the gravity of the demise bearing on the American economy , and the unwarranted burden of malaise and suffering being wrought on seniors, children, the sparsely employed and the unemployed.

The actors lost themselves in their mimes. Both parties-the White House and the House have forgotten the nature of their primary obligations.

Who stands to lose?

There are over 14M unemployed in the land, disposable personal income has decreased since 2007 with the exception of the 2009 anomaly, household wealth although rising, is slowing down, is also largely mitigated by a rise in values of financial assets that could as easily reverse their course and plummet family balance sheets overnight, and finally poverty thresholds are being surpassed daily with over 45.8M, or about 15%, of Americans on food stamps. To further taint this cautionary tale, there is no clearing in that bleak vision that signals an abetting storm; quite to the contrary, a piebald horizon of weak data and weakening indicators omens more the fury of a squall than a desired calm.

One daresay that the world was witnessing a burlesque rendition of Waiting for Godot. Certainly, Samuel Beckett could not have construed better and original script for a more consequential tragicomedy in two acts, than the Washingtonians did with such a routine episode of American Domestic Politics as the Debt-Limit debate. Note Beckett's Vladimir underscoring Washington's lack of public accountability

"Let us not waste our time in idle discourse! (Pause. Vehemently.) Let us do something, while we have the chance! It is not every day that we are needed. But at this place, at this moment of time, all mankind is us, whether we like it or not. Let us make the most of it, before it is too late!"

and with the same breath, note again Vladimir underscoring Washington's lack of political responsibility

"But that is not the question. Why are we here, that is the question. And we are blessed in this, that we happen to know the answer. Yes, in this immense confusion one thing alone is clear. We are waiting for God [ot to come]"

Classic Drama, with all the classical elements, written for Washington!

Yet, Beckett's characters in waiting resonate within the absurd; Washington's characters await generational inspirations for having lacked the day's resolve- again Vladimir

"To-morrow, when I wake, or think I do, what shall I say of to-day?"

It seems that, if anything is to be recognized, it is that the debt-limit dateline should have been a moot issue; the grotesque impact will and could come from the evaluation of US Treasuries by the Credit Rating Agencies, in particular the Big Three,whose own records during the last three years have been less than commendable. The same process that lacked discernment with  an infinitely less complex file back in 2007 will now determine the demise of a AAA sovereign. If the fate of future generations rests with the hubris of a community of analysts whose only consequent is a pricing label - that influences the cost of capital that should be ultimately tagged to the sovereign’s Treasury, then we are inviting a systemic disarray.

Yet, the US is still the most secure investment haven in the world and the latter feature will not be justly embedded in the credit rating evaluation.

The embarrassment cannot be undermined; the economic and financial costs to the US Government and the American people must not be underestimated.  The Rating Agencies should defer their assessments in order to fine-tune their methodologies, to refine their presumptions of what constitutes default risk, and to review the values that constitute and embed appropriate fiscal and monetary management of public finances in the 21st century.