Being an investor used to be so easy. Don’t you pine for the days of studying P&L statements, creating valuation spreadsheets, assessing management and determining the likelihood of success of a cool gadget or product or marketing scheme?
Now everything has gone “macro,” with the success of virtually every sector tied to your ability to forecast political events — not economic or financial events.
Since modeling politicians is a lot harder than modeling financials, this might be one of the toughest environments ever seen. My biggest complaint is that Europe seems unwilling to act with the sense of urgency that befits the current situation, with Greek debts due and potential knock-on contagion effects very real, no matter what the optimists tell you on television.
A lot of the contagion questions remind me of the Asian crisis in 1997 or the Russian default in 1998. At every turn, people would say the troubles were contained to one country or one region, and before you knew it the misery was pooling like the tears of a Boston Red Sox fan. The Argentine economic disaster, clear across the world, was tied directly to the Russian debt and ruble default. Currency markets are a transmission channel, and they cannot be stopped.
But don’t forget that while the summer of 1998 was brutal, as you can see above, it also rebounded like a maniac after a double bottom once politicians and central bankers joined hands to ring-fence the calamity.
Here are a few notes from my scorecard after checking with analysts, including TIS Group and Satyajit Das.
- Greece will default after the German and French banks to which it owes the bulk of its debts are allowed to prepare to reduce their risk. The interesting battle to watch will be the extent to which politicians think they can control the effects versus how markets actually deal with it. If a default were to trigger a gutting of German banks, would Chancellor Angela Merkel shut down the market? She probably would, as the scientist raised under Marxism in East Germany has expressed many times that she thinks politicians should act on behalf of society at the expense of markets.
- Germany and France will protect their own banks but might leave Spanish, Italian and other countries’ banks out in the cold. Already we can see the stresses on them. The Bureau of International Settlements reports that European banks have a $4 trillion funding gap, which is the differential between deposits and long-term loans. In short, if the loans sour, their depositors could suffer. It’s possible the incredible gyrations in gold and silver during the past week might have had something to do with banks selling precious metals for cash. This is not something to be taken lightly. It might not be the Three Musketeers’ slogan, “All for one and one for all!” It might just be “God help us, and the rest of you guys, good luck!”
- If there is a bank failure and nationalization in Europe, count on the contagion flowing west to the United States. That is most likely why Treasury Secretary Tim Geithner has gotten so deeply involved in matters that normally would be sequestered to Europeans. His job is to look out for the interests of U.S. banks and the American credit system. Since he’s never taken part in these discussions directly before, we have to assume the U.S. believes it has interests directly at stake.
- A deep disagreement appears to be brewing over the idea of whether the EFSF emergency fund should be leveraged, which was the center of the Geithner plan. During the weekend, German Finance Minister Wolfgang Schauble was reported to have said that countries cannot de-leverage by throwing money at the problem. Count on the Germans for some common sense.
Bottom line: The enmity and distrust between politicians at the root of the market debate suggest a real solution won’t materialize until markets really force their hands. So, banks are making their own plans. As TIS Group said, “the race for capital and liquidity is on,” and each financial organization with narrowing reserves is going to pursue their own interests, which might be at odds with each other. Anticipate a lot of doorbell ringing at commercial and central banks in Asia.
Yet at the same time, don’t get too pessimistic, because desperate times lead to desperate measures, and sharp market rebounds have appeared out of thinner air than we are witnessing now.