Wednesday, August 10, 2011
Mon Dieu!
Concerns about French bank exposure to Italy and rumors over a French sovereign downgrade (effectively denied by the rating agencies) have pushed French government spreads above Lehman crisis levels today (10 year spreads of Spain and Italy below for comparison purpose. The drop is due to ECB purchases).
Meanwhile, the U.S. Treasury market again in risk off mode – we’re close to Lehman lows.
I'm not bullish...
Tuesday, August 9, 2011
A re-run of 2008?
A friend argues out there's no reason for a re-run of a 2008-style crisis:
I’m not sure how helpful forward looking P/E ratios are, since they depend to some extent on economic growth forecasts. Those forecasts are still relatively optimistic. Separately, I don’t see consumer demand returning anytime soon. After over two years into the recovery, the number of people out of the labor force (per capita) is still at record highs and economic growth barely over 1% (to keep up just with population growth requires 2.5% GDP). Consumers aren’t spending b/c of the economic uncertainty and household debt. Businesses aren’t spending because a lack of demand (Lack of demand ranked by far as the most important business issue in the NFIB survey released today).
Government is tightening its belt – and already showed up as a drag in last quarters GDP numbers. JPM forecasts that fiscal “consolidation” will subtract 1.75% from economic growth next year. Where does that leave us? C + G + I + NX…. net exports… not much of a consolation. Without the government pursuing counter-cyclical policies (unlikely with the Tea Party controlling the House) I don’t see what the demand drivers are.
"There is no fundamental reason for a 2008-style collapse. There has been no change in the credit markets overnight, and the [U.S. ratings] downgrade merely reminded people that macro conditions remain weak. Buyers are still pouring into treasuries in a flight to safety and mutual funds/banks have not been forced to sell. 100% a crisis of confidence. Markets remain cheap on a PE basis and remain cheap even if you bring down projected earnings modestly." --friendThe fundamental reason for a 2008-style collapse would be Europe’s sovereign crisis continuing to spiral out of control. Jitters about the Italian banking system was one reason for the stock market’s slide last week. The Spanish, Irish, Portuguese and Greek banks are completely dependent on ECB for overnight financing. Without the Germans agreeing to a fiscal transfer union and a common Eurobond issue I have little confidence the Euro will be around in a year or two. The disruptions from a Euro breakup could well bring about a 2008-style collapse.
I’m not sure how helpful forward looking P/E ratios are, since they depend to some extent on economic growth forecasts. Those forecasts are still relatively optimistic. Separately, I don’t see consumer demand returning anytime soon. After over two years into the recovery, the number of people out of the labor force (per capita) is still at record highs and economic growth barely over 1% (to keep up just with population growth requires 2.5% GDP). Consumers aren’t spending b/c of the economic uncertainty and household debt. Businesses aren’t spending because a lack of demand (Lack of demand ranked by far as the most important business issue in the NFIB survey released today).
Government is tightening its belt – and already showed up as a drag in last quarters GDP numbers. JPM forecasts that fiscal “consolidation” will subtract 1.75% from economic growth next year. Where does that leave us? C + G + I + NX…. net exports… not much of a consolation. Without the government pursuing counter-cyclical policies (unlikely with the Tea Party controlling the House) I don’t see what the demand drivers are.
Monday, August 8, 2011
The massive equity sell-off
The wsj, nyt and ft all attributing the stock markt sell off to the U.S. debt downgrade. The narrative is compelling but incorrect - and is diverting us from the real issue.
Investors began to realize early last week - days before Standard Poors' downgrade - that the economic fundamentals were much weaker than expected. At that point stocks started their slide.
The markets massively rejected Stabdard & Poors' concerns: Investors are piling into US debt - not out of it - pushing the 10 year interest rate below 2.4% (and the price, which is inversely related to the interest rate, up). We would have seen both debt and equities collapse if this selloff was about debt concerns. Falling stocks and rising bond prices are the hallmarks of concerns about a weak economy and deflation.
S&P's action may well have further increased selling pressure on equities today (Monday). But let’s not permit the wrong narrative to divert us from the fundamental issues: creating jobs, reducing household debt and revive consumer spending.
Investors began to realize early last week - days before Standard Poors' downgrade - that the economic fundamentals were much weaker than expected. At that point stocks started their slide.
The markets massively rejected Stabdard & Poors' concerns: Investors are piling into US debt - not out of it - pushing the 10 year interest rate below 2.4% (and the price, which is inversely related to the interest rate, up). We would have seen both debt and equities collapse if this selloff was about debt concerns. Falling stocks and rising bond prices are the hallmarks of concerns about a weak economy and deflation.
S&P's action may well have further increased selling pressure on equities today (Monday). But let’s not permit the wrong narrative to divert us from the fundamental issues: creating jobs, reducing household debt and revive consumer spending.
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