Prometheus

Over the last couple of weeks we have seen news coming thick and fast, which should have been ideal for the new blog format, but such has been the import of the news flow that time has been dedicated to our key responsibility of thinking about how this may impact our client’s investments. One thing seems clear, the horizon grows darker.

Storm clouds gather

If you take nothing else from this note it is that we should see navigating financial markets as being akin to sailing the oceans in the days of sail. We can use our experience to read the winds, the waves and the sky but the horizon limits how much we can see. We went through a truly horrendous storm following Lehman Brothers collapse, but worryingly in the calm that followed many seemed so relieved they stopped looking at the signs, only being able to see hope in the odd single ray of sunshine that occasionally breaks through.

Well from our point of view the sea has started to get choppy and dark clouds are massing in several places ahead. The weather may blow past us and we may again bathe in sunshine but it seems increasingly unlikely, it is perhaps more a question of how rough things get. Anyone of a bearish disposition really should be battening down the hatches. Even those natural bulls should make sure they know where all the hatches are, just in case.

These menacing signs include:

• Monetary tightening in China
• A spike in volatility as risk markets fell
• The dollar breaking up out of its trading range (remember the carry trade we discussed a few weeks ago)
• US growth apparently came in strong but this was based mainly inventory rebuild, while other indicators are now pointing to a further dip in output and confidence
• The UK regained growth: by 0.1% (or a rounding error)
• The eurozone disappointed with the same anaemic figure, while a number of nations returned to recession and the allegedly mighty Germany surprised some losing its recent upward momentum (which we suspect is likely to remain lost)
• QE was put on hold, even though global money supply remains week and we have seen a record decline of 8.1% in bank lending to UK businesses
• Inflation has just come in above 3% for both CPI and RPI
• Withdrawal of a number of new debt and equity issues as market appetite wanes, removing lifelines for many struggling companies
• The UK running its first January budget deficit since records began (1993), undershooting market expectations by a whopping £5.3 Bln
• The US Federal Reserve has raised its discount rate even though US money supply figures are cratering (as they are across much of the globe)

We could go on and there is still plenty of fodder for future missives; however for the moment let us look at one potential game changer:

Beware Greeks bearing gilts

Let’s be honest Greek government bonds aren’t called gilts (and frankly should never have been considered gilt edged as their past pricing inferred) but you get the point. This story has garnered quite a few headlines, column inches and tube time recently but few have really grasped that we are witnessing an irrevocable interruption in the narrative of European Union.   

Greece already had a dreadful fiscal position when it was “discovered” that the previous government had fudged the books (or committed fraud on an international scale) to gain euro entry. Worse still most of Greece’s debt is relatively short term which means in addition to new issuance it is having to role over billions in existing loans (incidentally the fact that UK debt has the longest date to maturity among major economies, 14 years instead of 6 to 7 years, is why our position, although dreadful is not yet calamitous).

Now the Greek government could collect more tax. This is a country where apparently only 6 people declare an income of over €1 Mln and where many self employed doctors, accountants and lawyers declare an income under the tax threshold of €12,000. However correcting this problem will take time, which is in short supply.

The EU has talked about a bail-out, but few concrete steps have been taken, other than stripping Greece of its EU voting rights. Furthermore any support can only be short term as the ongoing expense would be ruinous and increasingly divisive. IMF support (a route favoured by the UK and US) will not be countenanced as this would be seen to undermine the euro’s credibility. If either of these routes is taken it can only be temporary and in the end Greece will still have to make swinging cuts that may lead to years of depression.

According to Otmar Issing (a German economist and former ECB Board member) writing in the FT this week “financial aid from other EU countries or institutions that amounted, directly or indirectly, to a bail-out would violate EU treaties and undermine the foundations of the euro.” In Otmar’s world Greece is forced (by the Germans, that would go down well) to do what it’s told and take the pain, not apparently worrying that without control over its currency or monetary policy this may lead to a deflationary death spiral. Without the EU being allowed to override Greek domestic policy then this is unlikely to work.

As a result one or two Europhiles are seeing this as an opportunity to push forward their European dream. In today’s FT another former ECB board member writes: those who argued….”there can be no monetary union without political union” are precisely those who should welcome political union now that it finally knocks at the door claiming its rights. No, no and thrice again NO.

What this honorable muppe….sorry, gentleman is suggesting is that when an inappropriate single currency is foisted on a populous who are not equipped to understand the consequences (past it makes going on holiday easier) and things become shaped like a pear (which always was and for the foreseeable will remain inevitable) it is used as an excuse to create a supra-national super state. This will not stand.

Sorry, rant over but really, how did people not see that something like this was bound to happen. It makes me want to weep. Anyway whether there is a short-term fudge or not, without being able to devalue the outlook is bleak for Greece and default may become inevitable and its Euro position untenable so it may simply leave before this occurs. The impact would be severe on financial markets, as a new drachma would devalue sharply, reducing the value of sovereign debt even if default was avoided. But at least if this happens Greece could rebuild and start again. Is this likely or will Greece toe the line and suffer the consequences?

Prometheus is prepared to stick his neck out here. Whether there is a short term fudge that lasts a month or three years the Euro will not look the same at the end of this decade. The problem is in the meantime the risks attached to the European and global financial systems by any kind of failure within the Eurozone are deeply worrying. However this missive has gone on long enough and we will look at some of the hard figures another day.

And finally……

The Sensitive Man

A woman meets a man in a bar. 
They talk; they connect; they end up leaving together.

They get back to his place and as he shows her around his apartment.
She notices that one wall of his bedroom is completely filled with soft, sweet, cuddly teddy bears.

There are three shelves in the bedroom, with hundreds and hundreds of cute, cuddly teddy bears carefully placed in rows, covering the entire wall!

It was obvious that he had taken quite some time to lovingly arrange them and she was immediately touched by the amount of thought he had put into organizing the display.  

There were small bears all along the bottom shelf, medium-sized bears covering the length of the middle shelf, and huge, enormous bears running all the way along the top shelf.  

She found it strange for an obviously masculine guy to have such a large collection of Teddy Bears,

She is quite impressed by his sensitive side but doesn't mention this to him.

They share a bottle of wine and continue talking and, after awhile, she finds herself thinking, 'Oh my God! Maybe, this guy could be the one!

Maybe he could be the future father of my children?'

She turns to him and kisses him lightly on the lips
 He responds warmly.

They continue to kiss, the passion builds, and he romantically lifts her in his arms and carries her into his bedroom where they rip off each other's clothes and make hot, steamy love.

After an intense, explosive night of raw passion with this sensitive guy, they are lying there together in the afterglow.
The woman rolls over, gently strokes his chest and asks coyly,

'Well, how was it?'

The guy gently smiles at her, strokes her cheek, looks deeply into her eyes, and says:

“Help yourself to any prize from the middle shelf “