Is the stock market rising on strong fundamentals, or strong liquidity? We get into that debate today, and we were lucky enough to have best-selling author John Mauldin on to help us get to the heart of it.
I sat in a room with these three guys – John Mauldin, Marc Chandler and Christian Menagatti — for an hour yesterday along with a handful of other reporters, and it was completely fascinating, so the 35 minutes you might invest in this video is well worth your time.
Incidentally, we’ll have Mauldin on tomorrow’s Markets Hub, live at WSJ.com at 10:30 a.m.
Hey, you know what’s rare? Home prices doubling in five years while wages are flat. A housing bubble and credit bubble exploding one after the other. An unregulated, opaque market in derivatives growing to $600 trillion. The U.S. government guaranteeing the private debts of the banking sector to prevent a total collapse of the entire financial system. A continent’s worth of sovereign debt crises, all at the same time.
I’m not as depressed as Paul Krugman seems to be, but let’s at least be realistic. Sure, a double-dip recession is “rare,” but so is everything that’s happened the past three years. Rare is not a synonym for never. Just because the brain surgeons who didn’t see the first recession coming, from Ben Bernanke to Larry Kudlow, are telling you there won’t be a relapse doesn’t make it so. If you ignored the biggest tornado in 80 years until it rode up behind you and swept your sorry self into Oz, why should anybody assume you have suddenly, inexplicably turned into The Amazing Kreskin?
I don’t know where the economy’s going. If I did, I’d be running a hedge fund in Connecticut and collecting 2 and 20. But nobody else does either, and to just blithely ignore a very real risk just because it’s “rare,” after all the awful rarities that have befallen us these past few years, well, you’re either an ostrich, an ideologue, or a central banker trying to jawbone the nation into a recovery that you can’t engineer.
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I feel like I’ve just spent three weeks jetsetting through Europe on one of those tours, trying to see every historical site, city and field on the continent, and now I’m worn out. I’m sitting here, trying to come up with something to write, and — total blank. Like sensory overload. I think I’m getting Europed-out.
The stock market may be, too. U.S. stocks are bouncing around but not really going anywhere (editor’s note: that’s changed, keep reading); maybe investors are in that same overwhelmed state I am. Earnings season is over. There isn’t any job or GDP report coming out, no big first-tier stuff. Europe isn’t melting down, although the eurobail’s ultimate success is still a hotly contested issue.
Lowe’s earnings were fine and well, but the outlook was cautious. Lowe’s, as well as Home Depot, which also reports this week, has benefited immensely from all the public money and effort that’s been spent on behalf of the housing market. But that’s all winding down, and soon we’re going to see just how strong that market really is. So there’s good reason to be cautious.
Like the song says, Clowns to the left of me, jokers to the right, here I am, stuck in the middle with you.
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Yesterday morning, I sent an email to Barry Ritholtz over at The Big Picture, and author of “Bailout Nation.”
“Looks like you’ll have to rename your book for the second edition,” I wrote. “Bailout Planet, or Planet Bailout.”
We’ve gone from bailing out individual home owners, to corporations, now to entire nations. And I do mean “we,” Mr. and Mrs. America and all the ships at sea. The U.S. taxpayer is on the hook for this one, again, through our contributions to the International Monetary Fund, of which the U.S. is the biggest contributor, and also through the Fed’s reopened “swap” lines with foreign central banks, which are essentially short-term loans.
So, as you sit there drinking your Pasbt or Coor’s, or sipping your California chardonney, stop thinking that this European thing doesn’t touch you. It does.
Why can’t anybody just take a loss anymore? Why are we so desperate to bail out everybody? Is anybody else bothered by the fact that it seems like absolutely nobody is made accountable for their actions, except, like, you know, you? Oh, no I’m not. John Mauldin of Millennium Wave Advisors got the flyer too:
Was it only last week I was expressing outrage that US taxpayers would have to pick up the check for Greek profligacy in the form of IMF guarantees? This morning we wake to up the sound of $250 billion in IMF guarantees for a European rescue fund, most of which will go to countries that are eventually (in my opinion) going to default. That is $50 billion in US taxpayer guarantees.
The eurozone leaders assume that this is a liquidity problem. It is not. It is a solvency and balance sheet problem. You do not solve a debt problem with more debt. This only shoves the football a few yards (or maybe I should say meters) down the field. And it is going to cause a massive misallocation of capital once again which will create more imbalances that will have to be dealt with. Ugh.
You can say the Europeans had no choice, I get it. The same argument was made in the United States after the government hatched the TARP, and hundred other bailouts I can’t even remember right now. But the debts weren’t extinguished, they were only passed from one balance sheet to another. Now the same thing’s happening in Europe. Meanwhile, the credit crisis is moving up the food chain.
What did we learn about the Greeks this week?
- They didn’t formally, officially, actually “ask” their European neighbors for help.
- Their European neighbors are extremely, completely, firmly “supportive” of their neighbor on the Aegean.
- They make feta cheese from sheep’s milk. (Really, I had to look it up.)
We didn’t learn anything new about Greece last week; heck, we also already knew they’ll strike at the drop of a hat. They were in trouble a week ago Monday, and they’ll be in the same state tomorrow, regardless of that weak attempt at bolstering confidence from the EU. But what we are starting to glean is just what it is that the Europeans fear most: that a Greek default could indeed have disastrous ripple effects for the continent, and who knows where else. And that a bailout would have other ripple effects, perhaps in the long run just as disastrous.
The proverbial sword of Damocles really is hanging over Greece and the EU. But they may not be able to avoid its sting. The Greeks have spent a decade trying to live as part of the Eurozone, but they squandered the benefits it brought and now the masquerade’s about over. Something is going to give, one way or another. The Greeks know it. The Germans know it. It’s quite possible even Tim Geithner knows it (although I wouldn’t wager that last one.)
The path is not exactly clear, but as Simon Johnson lays it out in yesterday’s Journal, there are only a few outcomes, none of which are particularly pleasant. “It’s not just about Greece any more,” he writes. “If these problems are not addressed quickly and effectively, Europe’s economy will be derailed—with serious, if hard to quantify, implications for the rest of the world.”
The Europeans have not been careful so far. The issues for troubled euro zone countries are straightforward: Portugal, Ireland, Italy, Greece and Spain (known to the financial markets, and not in a polite way, as the PIIGS) had varying degrees of foreign- and bank credit-financed rapid expansions over the past decade. In fall 2008, these bubbles collapsed.
As custodian of their shared currency, the European Central Bank responded by quietly opening lifelines to all these countries, effectively buying government bonds through special credit windows. Europe’s periphery was fragile but surviving on this intravenous line of credit from the ECB until a few weeks ago, when it suddenly became apparent that Jean-Claude Trichet, president of the ECB, and his German backers were finally lining up to cut Greece off from that implicit subsidy. The Germans have become tired of supporting countries that do not, to their minds, try hard enough.
Make no mistake, the Germans don’t want to help the Greeks, for the same reasons American citizens didn’t want to bail out their own banks. People can live among the profligate, but nobody wants to reward it. But, much like Joe Six-Pack, the Germans ultimately may not have a choice. Because remember that in this brave new world of international banking, cross-border trading, hedge funds, derivatives and credit swaps, no man, bank or nation is an island. “Ask not for whom the bell tolls,” John Donne wrote nearly four hundred years ago, “It tolls for thee.”
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It’s hardly reassuring when the best the country that basically invented western civilization can say for itself is “we’ve got enough money to get through January.”
Greece is back in the headlines again, after saying it’s looking at any and all options to finance its deficit, but concerns that it won’t be able to are hammering its bond market. The Greek finance minister said the country’s borrowing needs through January are covered. He didn’t get very detailed after that.
The fears are also leading to an exodus out of the euro, which is driving up the dollar. When people were warning about sovereign debt in 2010, this is what they were talking about.
The problem for Greece is it’s got to figure out some way to finance itself, be it new debt or what would likely be very painful cuts to its budget and services (watch carefully, America; this could be you some day, reserve currency or no reserve currency.)
The problem for the rest of the world is this: Greece will not be the only ailing nation to hit the debt markets this year. In fact, it’s going to be a rather crowded marketplace.
Wednesday’s report on initial jobless claims was fairly jolting: claims slid by 35,000 to 466,000, when the Street was expecting a much smaller 10,000 decline. What struck me as odd, and which I highlighted at the time, was the wide discrepancy between the seasonally adjusted figure, that 35,000 drop, and the unadjusted number, which showed claims rising by 68,000 to 544,000.
That’s a more than 100,000 swing. Why such a wide divergence? This weekend, via John Mauldin’s “Thoughts From the Frontline” newsletter, we get an answer:
What is happening is that we are coming off of wickedly high numbers in 2008 and a seasonal number that was much lower in the preceding years. It is another part of the Statistical Recovery. And this trend is likely to keep on for the rest of the quarter. My friend John Vogel, who analyzes the unemployment numbers for me each week, shows pretty convincingly that the average for this current quarter will be over 500,000 per week on a non-seasonally adjusted basis. This is less than a 10% drop from last year for the same quarter. Job losses are continuing to mount, and we are on our way to an 11%-plus unemployment number by next summer. Statistical Recovery, indeed.
So, again, I ask you, which number feels more like reality? The drop by 35,000, or the rise of 68,000?