A number of you think I have been transformed into a raging bull. I certainly have not. It is just that I remember the lessons of 2009, when the FED and other Central Banks flooded the system with liquidity. Markets rose, irrespective of the fundamental data.
The same is happening in Europe at present, following the ECB’s LTRO – a REAL GAME CHANGER, as I keep banging on and on and………. I expect the next LTRO to be taken up even more so than previously. The key is that there is little, if any, stigma attached for banks to participate. Indeed, if I was a shareholder of a bank that did not take up as much as possible, I would be thoroughly annoyed, to put it mildly. The other issue that Ulick – my very clued up friend from Credit Suisse – points out that confidence is rising – BULLISH and funds are SERIOUSLY UNDER INVESTED, particularly in the FINANCIALS.
The Euro Zone remains a basket case. It will be in recession this year (including Italy and Spain). France halved its GDP forecast to just +0.5% and whilst German GDP has held up, a recent slowdown in domestic consumption (OK, just 1 months numbers) suggest that German forecasts of +0.75% for the current year seem optimistic, given declining exports. Belgium, thought to be representative of the Euro Zone, is in recession, for example.
Germany does want to be responsible for the profligate members of the Euro Zone – I totally both understand and, indeed, agree. However, to impose the tough fiscal measures at this time is pure madness. To (solely) pander to their electorate, whilst ignoring the consequences (including to themselves – which is exactly what Merkel is doing) is suicidal. It would be far better for Germany’s leaders to educate their population, rather than indulge in these suicidal policies. Martin Wolf of the FT wrote an excellent article on this point yesterday – a must read.
The good news is that countries and the IMF (Lagarde) are (openly) beginning to question the Germany policy/prescription. By the way, Euro Zone political leaders are (openly) ridiculing the recent fiscal compact that the Euro Zone signed up to. I suspect that we all agree that we have had more than enough of the Greeks – they will never comply and just want more and more handouts. Personally, the sooner they exit the Euro, the better. Providing additional funding is a complete waste of money. The argument goes that unless Greece is bailed out, contagion will spread to other countries. Yes, but, I am increasingly of the view that this may not necessarily be the case for any length of time.
We all know that Portugal cannot survive with their current debt load. A 40%+ haircut is INEVITABLE. Better to deal with this and to stop contagion spreading to Italy and Spain, rather than throwing good money after bad (especially as resources are limited) by propping up Greece, which will inevitably default. Are there the tools to do this. Well, the impact of the LTRO has been far, far greater than virtually everyone (including myself) expected – the ECB could lengthen the maturity of the loans to say 5 years, from the current 3 years and cut interest rates further. In addition, it looks (at present) as if the IMF will raise more funds for bail outs and Germany (Schaeuble) has hinted that a larger ESM may be possible – hopefully with the funds going to others ex Greece.
To date the EU/Germany have used the stick approach. A carrot is also very much needed. For example, why not reduce the debt of the peripherals, if they comply with some SENSIBLE fiscal targets and, in addition, introduce much needed structural reforms. The ECB could, for example, transfer its holdings of bonds to the EFSF/ESM at their purchase price, who could then “sell” them back to the respective peripheral countries at the same price,(if they comply with their fiscal targets and introduce much needed structural reforms – the real key) – effectively reducing the debt of the relevant country. I understand why the ECB would not be willing to do this themselves, as it could be argued that it will embroil itself in fiscal policy. Furthermore, a reduction in the overall level of debt of the peripheral Euro Zone countries will clearly reduce the yields on their debt even further – a significant benefit.
Yesterday’s Chinese PMI data was greeted by euphoria by many. However, I would advise that you really analyse this number. Chinese watchers advise me that the numbers were “adjusted” to reflect the early Chinese New Year – I’m in a happy mood following the recent wedding I attended, so I will stick to “adjusted” when describing Chinese data.
Personally, ex geo political issues (of which there are many and, unfortunately, continue to increase), I believe this rally has legs.
The rally in the financials continue – I added Man Group (Ticker EMG) and Bank of Ireland (small – Ticker BKIR) yesterday, in addition to BARC, LLOY, RBS, PRU, AV, for full disclosure purposes. I suspect a number of you will question (I’m being polite) the wisdom of buying Bank of Ireland. Well, I can understand, but for the reasons mentioned above, personally, I believe it’s worth a small investment.
As a number of you will think I’m totally crazy, insane, lost it completely etc, etc,so I wont talk about possibly buying medium/longer term Portuguese debt !!!! However (I cant resist), let me just say that even a 50% haircut (reducing debt to GDP to 50%) would imply a 7.5%+ yield on the 10 year Portuguese bonds.
The BoE may well announce additional QE shortly – at least Sterling 50bn, but more likely Sterling 75bn+. We know that the FED will introduce QE3, if there is any weakness and that it intends to hold interest rates low into 2014.
If you look at the actual data, its just awful. However, in 2009, I discovered that markets look at things differently.
I still expect markets to decline following a Greek default in the 1stQ (2nd Q at the latest). However, I believe that markets will RECOVER faster than most think.
Kung Hei Fat Choi, by the way.
Back to the normal blog format next week – have not fully caught up with all the data.
Starting to seriously research Japan – looking TOTALLY, ABSOLUTELY, FUNDAMENTALLY, AWFUL – and I’m being polite. Why the Yen remains at these levels remains a complete mystery to me. More rhetoric from the Japanese re the Yen – will they intervene – most suggest not, but………
The A$ at US$1.07+. Totally amazing – looking to short at some stage + the miners, though “risk on” means that the miners react positively. Glencore/Xstrata merger could well help the sector – Glencore up over 5.0% in Hong Kong trading.
Gold at US$1750 !!!! – I really wish I could understand.
Spot Brent around US$111.50 – once again, I don’t understand.
Euro climbing up to near US$1.32 – again, amazing.
Just heard that the Spanish bank BBVA has reported the 1st ever loss – whilst a loss was expected, the actual number was larger than forecast.
I will bang on yet again – SPAIN IS IN FAR, FAR, FAR…. WORSE SHAPE THAN ITALY.
Deutsche bank has also disappointed – a big miss – profits declined 77%.
Asian markets are over 1.0% higher in the main and European futures suggest a higher opening.
Thanks for all your very kind comments – will respond over the weekend.