Friday, August 05, 2011
Where do we start? It's like returning home after your teenage kids accidently had a few friends round. Do we scream at the politicians for being totally unable to maintain control? Or tell them to get out of their daze and tidy up the complete devastation they were responsible for? Or just be resigned to the fact that they are like the teenagers, completely clueless as to how the real world works and roll up our sleeves and start doing something about it ourselves. OR - Just put a torch to the property, move in with friends and call the insurance company?
Equities are the obvious expression of the underlying stresses visable to the media and the public, but the pain that really hurts the world is in the bond markets. Equities matter squat by comparison and are only a response.. This weekend better see some serious policy response as the markets are in cardiac arrest and in our eyes well beyond responding to any NFP sticking plaster.
We could put up reams of charts and graphs that show that these sort of moves haven't occurred since [insert last time] but that's pretty pointless unless you are a 12yr old quant trying to justify your losses to your boss.
Yesterday's FX jousting became a side show in the scheme of things, both BoJ and SNB were dismounted by Mr Mkt by sundown and we are now in the main arena ready for the big fight. Markets vs Politicians, or in Europe the final showdown between European Socialist ideals and capitalist business practices. The European dream of equality has always been based on assumptions - the first that treating everyone as equals and ignoring differences meant they did not exist (the Eurostrich syndrome we have seen echoed throughout the last 2 years of crisis management). The second assumption was that if barriers were removed to trade, funding and nationality then geographical mobility would iron out local hot spot differences. The third was that the dream was perfect, unassailable and defendable by regulation so there would never be the need for safety nets.
In 2008 we had the attack on capitalism and now with Euro 2011 we have an attack on Euro-socialism. We think this will end up with both socialism and capitalism left wanting but with no clear alternative. Sadly, on the way we have to endure the Politicos chucking everything they can legislatively at stemming the attack, which will most likely lead to an acceleration of socialist policies with central control and an acceleration of federalism. To the purist Eurocrat this could be seen as a short-cut to the dream but the cost of the gamble is going up. The key point that the great European assumptions missed is that someone has to fund the dream and that lender is effectively Europe's client. Whilst the Eurocrats have always felt that they are running their shop along the lines of a Moscow store in the 1970s, where supply side control dictates what the customer gets, the modern investor has choice and Europe now has to compete for global capital. Unfortunately instead of improving the quality of their product we expect the European response to be to lock the doors to prevent the customer leaving and to threaten extortion on those that don't buy. Which may work short term but doesn't encourage repeat business.
If we look at the very big picture and look at history (well we do like looking at what happened "last time" in markets) we normally need a revolution or uprising to sort these sorts of things out, where a super-critical political state has phase transition triggered by an event. Traditionally a stretch in wealth differentials is needed to catalyse such an event. The serfs have a greater tendency to chuck bricks at their overlords as they have little to lose. But with an abundance of middle classes with too much vested interest to upset their own boat it harder to see a trigger. In Europe the brick chucking is probably going to be triggered by a disaffected youth as they spill out of their higher education to find no jobs available. As an aside TMM wonder if the next UK misselling scandal will be led by said young demanding to know why they were told to borrow huge amounts in order to pay for degrees that don't lead to the promised jobs. But the middle class uprising model could be the Arab uprisings, where the Egyptian middle class revolution has resulted in a sort of stalemate of democracy, where swiss style referendums are instead effected by racing down to the town square shouting a lot until the overlords act.
We are sorry if we have gone into a bit of a ramble but hey, is that not allowed once in a while? As for the short term .. do we buy here? .. does it bounce?.. TMM would like to think that the politicians around the world may have finally got the message form the market and will respond in some way and that by Monday "something" will have been announced, but are fast losing faith. If nothing is forthcoming we might as well take up farming.