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The Euro Project: Die Hard!

February 21, 2013 Leave a comment

For some years now this blog has argued the inclination to hold the pan European unity project together would be stronger than most believed. Despite ad infinitum and ad nauseum calls for increased nationalization, the Eurozone refuses to buckle just yet. If it will one day die, and it certainly could, it’ll die hard.

Now that it’s Q1 2013, this ought to be stunning to many pundits. Just as global equity markets’ resilience and lack of European meltdown has astounded many investors, too.

Embattled Economies Cling to Euro By MARCUS WALKER and ALESSANDRA GALLONI

PIIGS Wall Street Journal graphic brought to you by Fisher Investments Investing IQ

Graphic from the Wall Street Journal.

Weak Links in the Democratic Stronghold

November 23, 2012 Leave a comment

Why be optimistic a deal can be struck on the fiscal cliff? Because there are weak links in the Congressional strongholds. Not only has the GOP shown some willingness to negotiate, but there are also a handful of Democratic senators up for re-election in two years, hailing from largely traditional GOP red zones, who will want to keep their jobs. Look for at least a few of them to show “temperance” and move to the middle on the Fiscal Cliff.

Red-State Senate Democrats May Be Hard to Corral on CliffBloomberg Businessweek

Shake the Myopia Mood

June 29, 2012 Leave a comment

Myopia is the mood of the era. (If myopia isn’t an official “mood” yet, let’s make it one. Like melancholy, amour, and that depressive vacancy we all feel in February when football is over.)

What’s the fate of the EU? Spanish yields at new euro-era highs? Is China only going to grow (gulp) 8% this year? And what about cotton prices! Oh cripes…the supreme court decision!

These are all questions for prop traders—people with a daily, monthly, quarterly, even yearly, focus. My bet is, if you’re an average investor, all this stuff feels uber important but has little or no real importance on building long-term wealth. And yet some investors occasionally get so caught up in the myopia they forget all about goals and the discipline of wealth building.

Learn to put stuff of the moment into perspective. A longer view, above the noise, shows a world of great opportunity with cheap stocks. If you think euro problems will sink the world for all-time, or middle east unrest will unravel all wealth, you simply have never studied history. Even if the euro capsizes wholesale, capital markets have withstood far tougher and rougher, and equities over the long-term have delivered. It’s the path to get there that’s often ineffable.

Myopia is generally depressing, isolating, feverish. I don’t like any of those things and neither should you. Shake the mood. Read a book like Peter Diamandis’ Abundance.

Credit Rating Agencies Forget Markets Look Forward

June 26, 2012 Leave a comment

Many of Friday’s headlines read like this:

Bank Downgrades in U.S. Prove Mistaken as Credit Risks Wane

It’s not so much (or perhaps, not only) that Moody’s, Fitch, and S&P are “mistaken” about the banks—it’s that they’re pretty much always the last to recognize reality and reflect it. That’s because, by and large, credit rating agencies pretty much do as human brains are wont: take the recent past and extrapolate it into the future.

This is one of the foremost and ultimate investing mistakes. Capital markets look forward and price in the expected future. Credit ratings agencies are reflecting today in their ratings what’s already done and past about the banks. They, like most folks, are not able to see clearly the future, and therefore use the recent past and assume trend continuation.

Oh, they’ll have their fancy models, special analysts with their special techniques, and other secret sauces to confirm and give authority to their prognostication. But in the end, credit ratings tell you more about the past than the future—making them awful forecasting tools.

How Could New BOE Liquidity Be Bullish?

June 19, 2012 Leave a comment

So. The Bank of England is offering new liquidity to British banks. My sense is much of the market will interpret this as “this just shows how weak and fragile the system is right now.”  But in my view this is an example of why the likelihood of a repeated Lehman-style panic is getting more remote. Ostensibly, the BOE’s plan is to help with things like household lending and consumption in the UK , but in reality this is probably about creating a ballast in case everything goes haywire on the continent and the euro breaks up.

One of the governing principles of this blog is: markets are pretty darn effective discounters of the widely known, believed, and feared. This isn’t just about pricing stocks into the future; it’s also how capital markets work. This event, rather than showing weakness, is instead another example of capital markets moving ahead of potential problems, ballasting them before they happen. This was not the case for Bear/Lehman/AIG, etc.—markets were not expecting those events and hadn’t braced for them. But they are bracing now. This is the nuts and bolts of the process of markets anticipating widely expected outcomes and therefore something else happening, in my view.

Note: equity markets rallied last week, with leadership in Europe.

Look the other Direction

June 1, 2012 Leave a comment

A great rule of investing thumb is to look where others aren’t looking—what’s widely focused on is already largely contemplated and priced into capital markets. A similar lesson is also often applicable when thinking through public policy and geopolitics.

With everyone talking a potential Greek exit from the euro…

A Greek Euro Exit Could Be Worse Than Expected – Michael Sivy, TIME

…look the other direction: how might the European Union move toward greater federalization?

What Exactly Is a ‘Eurobond’ Anyway? – Catherine Boyle, CNBC

I don’t have any clear view on how all this plays out either way, but don’t get caught focusing on all the same things everyone else is—in politics and in markets, the path to many outcomes is seldom explicit, and often counterintuitive. It should not surprise in the least that a potential outcome of Eurozone break-up talk is the opposite—greater federalization and less direct democracy.

Today’s Congress More Divided than Ever? Hardly.

April 27, 2012 Leave a comment

I consistently hear from US investors that today’s politics “have never been more divided.” Hardly. One of the many great benefits of studying history is to understand what is truly precedented and unprecedented. David S. Reynolds’s new book offers some insight on what’s been centuries of excoriating debate in the US Congress—often with the country’s very existence on the line. Today is not so new—what’s new is the bluster and shrill of today’s internet and cable media culture.

Statesmanship In a Divided Era – David S. Reynolds

America’s Great Debate: Henry Clay, Stephen A. Douglas, and the Compromise That Preserved the Union – Fergus M. Bordewich

Will Europe Follow Deficit Targets? Forget it.

April 19, 2012 Leave a comment

This blog has maintained Europe will be weak for the foreseeable future, but won’t catalyze a new global recession or bear market in stocks. (Though, in my view, it’s best to tread ballet-toe-lightly with sovereign bonds).

But there’s a big difference between saying Europe won’t cause a global meltdown and saying Europe will soon fix its ills. The very notion—treaty or otherwise—Eurozone countries will soon resolve all their deficit problems is laughable.

Italy puts back balanced budget goal by a year – Giuseppe Fonte, Reuters

Mario Monti: Unlikely Voice of Reason

March 8, 2012 Leave a comment

Goodness knows technocrats are not among my favorite folks, but Mario Monti, Italy ’s current PM, has been an unlikely voice of reason lately—proclaiming a pro-growth policy featuring lower spending, lower taxes, and even easing of labor laws.

Wow! There’s hope for Italy yet.

Volker’s Rule and Competitive Disadvantages

February 20, 2012 Leave a comment

EU Transaction Tax Is ‘Undesirable,’ Dutch Central Bank Says

This story is a microcosm of a growing chorus of boos and hisses about this rule globally. Whatever you think of the morality or potential buttressing of the financial system the Volker Rule would provide, the simple reality is that we live in a global world and a rule like this needs near universal uptake. Without it, all you do is create a competitive disadvantage for the country with the new, onerous, rules.

 

 

 

 

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