The Teeter Taught Her

by: Mark J. Grant

Down over a point in the long bond. Up almost a point in the long bond. Equities down more than 100 points. Equities up almost 100 points. All of this in the span of two days. Nothing was particularly new; no event popped up on the radar screen, no black swan swopped in from the horizon to startle the markets and anyone observing the markets may well ask, reasonably ask, just what the heck is going on. First, in my mind, we are getting a pretty good signal that the markets are running out of steam and that the collective vision of the way forward is murky. We are in a fragile state; near a tipping point. Now almost forty years of watching the world has taught me that when we are in this position that we are much more likely to go down than up because up is a tougher road to hoe. Up often rests upon promises while down is more centered on fundamentals and, economically, the fundamentals are worsening.

"Gods are fragile things; they may be killed by a whiff of science or a dose of common sense."
-Chapman Cohen

In the United States we are in the "bump and grind" mode where we are ekeing forward but just ekeing. While it is fragile enough here in Europe the condition is much poorer. This is not signified by the currency, but then the manipulation that goes on of the euro is a game that continues without restraint. There is no use arguing about it or pointing to the actions not just of the ECB but the various central banks in Europe so believer or non-believer; this game goes on regardless. We have had a lull in Europe comprised of the Draghi Promise, the European attitude where money is thrown at each thing, everything, all things as the end-all, cure-all and holy salve to keep Europe intact and of the loosening of each and every deficit target so that they have lost any meaning or force. While the U.S. bumbles the actual economies in Greece, Spain, Portugal, Italy, Cyprus and even Ireland continue to weaken. In these countries unemployment is rising again, the financial conditions are deteriorating and the fall in interest rates rested upon not just Draghi's gambit but also upon the flood of newly printed money by the central banks which, like orphans, had to be placed.

Please remember, however, that there are two components to additional debt and the markets have only focused on one side of the equation which is the interest rate variable. The other side of this coin is the total amount of debt which has been added to significantly by the weaker nations in Europe during our latest lull so that yield multiplied by amount reveals what no one likes to discuss and that is that the debt burden now in the troubled countries is larger, and in some specific cases such as Spain, far larger than it was last year. It is likely then that the markets will soon brush up against their old enemy, reality, once again and react in-line with economic conditions and not to promises of nirvana to come.

"Well," said Pooh, "what I like best," and then he had to stop and think. Because although Eating Honey was a very good thing to do, there was a moment just before you began to eat it which was better than when you were, but he didn't know what it was called.
-A.A. Milne

Never discount the wisdom of The Bear. Many wander about on Wall Street trying to make things very complex and very grown-up in a misguided attempt to show just how big their brain is compared to yours. I always smile when I observe this, which is daily, as all they are doing is digging a hole for their ass or some other phrase relatively close to this one. The best and the brightest can make the complex easily understandable but somehow many people in our business have missed this point in their upbringing. Their mothers should have read "Winnie the Pooh" more often to them and they are intellectually poorer from the lack of this experience.

Now the Italian elections are but weeks away and Berlusconi is gaining in the pasta patch and his group will control a significant part of the Italian Parliament if not something more important. The Germans are swooning and close to cardiac arrest at this prospect. Any day we could see Merkel swathed in black in Sardinia promising Spaghetti for all and promising that the Germans will change their eating habits if Monti is retained in power. It could be a new German book, "Monti Christo" (Monti Christ) or Stuttgart promising olive oil's use in each and every new Mercedes; only Faust knows. Gag reflexes are reported to be up 100% in Berlin and there are rumors that the Germans are trying to talk the Pope into proclaiming Monti a "living saint."

In Spain we have a Prime Minister denying graft and corruption charges like some American kid denying he stole a cookie. Bravado and tears and running back to Ms. Merkel for comforting will not stop the truth from eventually coming out I fear. This is not the sixteenth century and fingerprints can be identified, money can be counted, books can be audited and windmills can be identified for what they are. I predict plenty of "Rain in Spain" where teary eyes pour out rain that ends reign and plenty of Don Quixote's vying for power as Rajoy asks for absolution.

Europe is becoming fractionalized once again. That much can be said with some certainty and so I say to the German Prime Minister, "Remember, five out of every four people have trouble with politics!"