The Score on Europe, Debt and the U.S.

by Jon Markman | September 27, 2011 1:39 pm

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.

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.

  1. should act on behalf of society:

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