Tuesday, November 22, 2011
What a week. We apologise for scant posts but it's been one of those "oh jeez, we are wrong, it really is falling apart" moments. Introspectively it leaves one sort of crushed with that feeling that you have been "had" in a card game. Why did we believe all their sweet talk? What's more even defend them? Oh well. You live and learn (then die and forget it all). Hence yesterday's lament, a sort of TMM towel-chuck and we lay ourselves on the altar to Toldjaso .. yeah yeah yeah ..This morning is seing more dominoes fall.
Spanish T bills at 5.11% for 84 day as we write. When the T-Bills go, thats it. Kaboom. "Bring me a new periphery waiter, this one is broken!" Ironic that the company that built its reputation on ferrying Brits to these now broken Peripheries is also going down. Thomas Cooke. Looks like the end to an era and an end to fx-dealing room cries of "Aaah much? Tell 'im to go darn Thomas Cooke's". While there are plenty of reasons to see Thomas Cooke getting in trouble as being simply the inevitable decline of a busted business model it is also a telling sign of what happens to people with funding issues or even plain old short term debt maturities in a credit crisis. Just ask Washington Mutual. We were going "yours" at the end of last week leaving us pretty flat in most respects and to be honest with Thanksgiving ahead perhaps we should just take a break and take a look around at what's going on as Marvin Gaye once said.
TMM think a few things are happening here. Firstly, there are some things that might be best described as "Paying the Bill" and a somewhat inevitable end to a massive developed world credit binge. Weak consumer credit, continued deleveraging in markets that are otherwise doing well like Australia and higher saving rates are par for the course of a post-bubble world. Sure it slows growth and is painful but that is life after a period of credit fueled growth - much like a big night on the town, you take your Berocca and aspirin and make the most of a bad situation. To that end it is still a weak market for growth whichever way you cut it even when politicians are behaving themselves. Equities are something you buy cheap and delevered - buyouts and leverage are more dead than contrast collar shirts in a recession.
Which of course, they are not. TMM like most people have low expectations of politicians that is informed by extensive periods of observation. That being said when faced with the eminently insane and the unpalatable but sensible politicians tend to have an ability to step up. Think of Jimmy Carter and mileage standards: Detroit was not exactly gagging for it but it had to be done. Or, for example, the Bush administration's war on everything and the Patriot Act: TMM have serious doubts about this period but ultimately when the chips were down stuff got done - whether aforementioned stuff was a good idea or not. In this regard the last few weeks have been an abysmal failure. The failure of the Supercommittee is just an embarasment. The last thing the world needs is fiscal drag right now especially of the kind that hits those with a high marginal propensity to consume. To that end the Tea Party solution of hitting benefits and not doing anything about payroll tax is stupid. TMM can only think that this is a cynical ploy to get Romney up because there is no way any sensible person would do this on its own merits.
In Europe, TMM continue to be boggled by the idiocy of Eurocrats and Merkel. What they fail to realize is that Euribor going bananas and financial conditions tightening is a little like holding your breath under water: a short burst is fine to instill policy discipline, a minute is pushing it, 2 mins you are likely brain damaged and 3 minutes you are likely dead. TMM won't hazard a guess as to where we are here but we are pretty sure the subject is not meant to turn blue and have its eyes roll back in its head. Ultimately its put up or shut up time because the longer the funding and bond run goes on the harder it is to reverse. TMM are unsure what would trigger a change - a bad IFO, a major German or French corporate bankruptcy (Holcim? Peugeot?) but lines in the sand have been crossed before and we have no reason to be optimistic here. Any resolution is better than the status quo at this point.
Which brings us to emerging markets which Jim O'Neill and the BRIC layers would like us to think can carry the day. While TMM are not part of Team Chanos we are not at all convinced: these countries have had their own credit binge over the last few years and have spent money on a lot of deeply pointless and stupid stuff. We also doubt they are going to selflessly inflate and repeat the West's mistake for the West's benefit - China's glide path is rehab, not a big night out with Charlie Sheen. Good for China long term but no short term bang for the West there.
It appears that the world does need a new deal of some sort, something that involves less imbalances and more progressive taxation though we doubt we will see it until the interest groups opposing it are facing the Gaddafi treatment. To that end TMM remain pretty cautious. There are rays of hope out there but they aren't macro: the EIA energy forecasts use solar power at $6 per Watt, well, market is $1 per Watt so cheap power for all and goodbye inflationistas (we hope). Similarly, agflation has come back and at least in the US gas is silly cheap - at $3 per GJ its ~20 per bbl on an energy content basis.
If there was more political cohesion, TMM could be pretty bullish but for the meantime risk premia in corporate debt is preferable to equities and USD is preferable to well, just about everything. If politicians continue to screw up loan to own might be the way to get long corporates because if financial conditions get much more messed up there will be a lot more accidents.