Its not ABOUT the markets

I keep hearing from investment managers and dealer desks that Merkel and other politicians should just shut up; that their constant verbal commentary just creates more volatility and worsens the situation.

For instance, Merkel was quoted as saying "We need the financial industry to be honest with us. If we don't get honesty, then we might not do the right thing technically, but we will do the right thing politically."

I don't see anything wrong with those comments of hers. And any criticisms seem based on the premise that politicians should be worried about the markets. Or about banks. American politicians (as long as Geithner & co. are around) may still be inclined to cover-up the problems on TBTF banks' balance sheets and to safeguard those banks' self-interests, but that's been part of the problem for all too long. Its a very good thing that Europeans have a different perspective.

This is a good, constructive process that Europe is going through now; its necessary for their economies.... and its not about the markets.

And anyone who thinks this is just a European problem and shouldn't affect North American valuations likely have another thing coming. This is and always has been about too many people (& too many countries) living beyone their means, borrowing from the future, wracking up too much debt. When you keep borrowing from the future, ultimately the debt has to be paid. Time's up. The global economy has been too Ponzi-like for too long. And the fix won't be short, nor will it be isolated: the problems are systemic, so the solutions will have to be systemic too. And that means not isolated to Europe. Nor China. And that means N.Am. economies are not immune.

In fact, a case could be made that the Canadian economy is more bubblicious than any but China (and probably Australia) right now. Too many consumers living off their "home equity". Why is it we didn't learn anything from the experience of U.S. and European housing markets?! Why are Canadians so inclined to get further into debt to buy bigger houses at bigger prices?! (Did they not read U.S. newspapers/magazines in 2009?)


Despite the sell-off in recent weeks, stock markets remain overvalued. I continue to look for a sub-1000 S&P before reducing some of my hedges; will reduce more at 950 and again at 900 if we get there. Still think fair value is 850 or so, but willing to go to neutral from net short at the 900-level --- but will not go long stocks until at or under 850.

As for the economy, well, headline CPI may be at 2.2%, but core is under 1%, and the Cleveland Fed median CPI is at 0.5%; though the housing market had a nice winter (existing home sales are up about 16%YoY through March), we'll have to see how that evolves now that government inducements have wound up; meanwhile, jobless claims remain resolutely north of that key 400k level (latest at 471k); and delinquencies keep rising (and theres a whole lot of foreclosures in the pipeline and shadow inventory to deal with). As Rosenberg points out, there's some "Scary Math" involved here:

1 in every 10 American homeowners missed a mortgage payment in Q1 (a record)
1 in 6 Americans are either unemployed or underemployed
Over 4 in 10 unemployed Americans have been out of work for at least six months.
1 in 4 Americans with a mortgage have negative equity in their homes.
1 in 10 Americans believe their income will rise in the next six months.
1 in 5 Americans see business conditions improving in the next six months.
1 in 50 Americans plan to buy a home in the next six months.
1 in 8 Americans believe that current government policy is actually helping the economy.
1 in 10 American small businesses have a job opening.
1 in 10 American’s credit card usage is being written off (a record).
There are 5 unemployed workers competing for every job opening (hence downward pressure on wage growth).

Not a pretty list. Despite short-term (sub 1 year) cyclical movements, the mid-term and long-term prospects for the economy and therefore the markets remains down. Down for stock prices and down for government bond yields.


postscript (added May 21)

One of Merkel's other most notable recent comments was "First the banks failed, forcing states to carry out rescue operations. They plunged the global economy over the precipice and we had to launch recovery packages, which increased our debts, and now they are speculating against these debts. That is very treacherous. Governments must regain supremacy. It is a fight against the markets and I am determined to win this fight."

Jesse, from Jesse's Cafe Americain, like me, also approves:

I would that Obama and the Congress had half the courage of Merkel. And that commentators and the middle class would realize the sorry state that their economy is in, held hostage by a bunch of spoiled brats and well heeled thugs, and a government by and for the highest bidder.

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the Bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst yourselves, and when you lost, you charged it to the Bank... Beyond question this great and powerful institution has been actively engaged in attempting to influence the elections of the public officers by means of its money...You tell me that if I take the deposits from the Bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin. Should I let you go on, you will ruin fifty thousand families, and that would be my sin. You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, I will rout you out."

Andrew Jackson on The Second Bank of the United States which was the Central Bank of his day. A dangerously simplistic view? More like common sense, and the plain spoken truth, at last.