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Two Small Undone Things Can Instantly Save the Global Markets

Why the Obama’s job support speech aka the American Jobs Act highly matters to global investors? Among the most disturbing recent US stats, percentage change of the US consumer spending for the first time since 2008 posted a surprising decline in June. Bearing in mind, that composition of the US GDP is still heavily tilted by roughly 70% towards the public spending, the question of sustainability of the US economy growth, let alone prevention of the evil-looking "double dip”, is highly contingent on success of the US labor market drastic revival. This is more or less similar to Russia’s inability to jump over its head and swiftly overcome its excessive dependence on energy export – the US economy, as far as resumption of its economic recovery is concerned, cannot afford to play down its domestic consumption patterns that walk hand in hand with the job market health.

"Unusual uncertainties” do really impact global markets in increasingly painful manner. Deteriorating sovereign debt woes along with erratic behavior of major world currencies make the task of the market trend prediction more and more a kind of mission impossible. Ripping the fruit of increasing public demand for prophecy (exacerbated by helplessness of classic types of the market analyses), celebrity experts boosted their public appearances lately: Jim Rogers and Mark Faber become more and more recognizable and wanted guests on the GEM TV channels and other "not-your-next-door” mass media resources, so we wonder if one day Josef Stiglitz or Nouriel Roubini would end up hosting one of the numerous Xinhua business news programs. Without referring to any particular famous doomspeaker, one thing becomes alarmingly evident: Europe’s debt troubles along with cooling down of the US economy are more and more brutally used to speculate about imminence of the "ultimate fatality”, and making parallels with ill-fated summer 2008 look more convincing. This all sounds particularly crazy given the fact that global economy keeps growing at above normal speed of 4.2….4.4% (according to recent World Bank and IMF estimates; historically average global growth used to be a bit slower at 3.4…3.6% annually). A lot of market doldrums and nervousness, therefore, owe a great deal to ubiquitous Blind Fear slowly but surely taking over cool minds and common sense.

Our principal non-admittance of irreversible global catastrophe makes us not only restlessly searching for exotic investment ideas (still, certain sound independent stories can be found on the soft commodities markets), but for ways to repair badly damaged public (i.e. our existing and prospective clients’) confidence.

We, purely intuitively and, possibly, somewhat naively, narrowed down the entire wide spectrum of the well-known contemporary economic and market problems to just two wish-list items.

Statement #1. Sovereign debt markets no longer serve as benchmarks nor bellwethers of broad debt markets, and for this purpose corresponding securities must be delisted/transferred (along with their underlying CDS) to entitlement and qualification-enhanced OTC markets.

Figure yourself: on the C-bond markets the optimal Debt/EBITDA ratio should be less than 6, whereas in the AAA….A-category sovereign bond markets nowadays these ratios swing wildly from triple digits to hopelessly negative numbers (for comparison purpose and simplicity we assume EBITDA as a total government revenue). The old paradigm gave unjustified advantage to the sovereigns, erroneously supposing that any AAA….A government had much greater credibility and solvency than B-class corporate debt issuers. Currently unfolding events prove exactly the opposite. European sovereign debt market still enjoys substantial "free commercial interest”, however, due to dramatically falling investor confidence, even lowered credit ratings no longer reflect implied riskiness of owning these securities. Everyone understands that, but no real action. Conversely, in the US the Treasurys market seems to offer much greater steadiness, however, with rapidly evaporating share of commercial participants (about 85% of today’s T-bills and bonds are owned by "passive holders” – sovereign government wealth funds, including US Fed itself) this trading venue no longer can be viewed as genuine "public market”. We see that in both cases preserving access of general public to these papers and these markets puts rotten apples and peeled oranges in the same basket, boosting wrong-benchmark-associated risks and, hence, wild volatility. Many highly respected investors keep telling that C-bonds look much healthier than the sovereigns (let alone the munis) and are often inadequately rated. As far as removal of wild volatility is concerned for sake of market stabilization, these instruments must be explicitly separated.

Statement #2. USA should drastically liberalize its mortgage market. The sooner the better. This proposition at first may seem a bit overboard, since it contradicts the concept of the US national security, but, hey, many countries – particularly Mediterranean and Arab (including well-known Dubai) continuously grant mortgage loans to non-residents, without inflicting any palpable damage to the local banks. After all, the loan collateral, i.e. property, remains within their reach distance, and the borrower’s good-standing (credit history, income value and stability, etc.) can be almost as easily verified as by means of your standard credit check. Not only many US banks have been enjoying global presence, but the Experian and TransUnion have been feeling live and kicking there as well.

Indeed, apart from the classic US heavyweights, financial and legal sectors, real estate has been playing utterly important role in terms of both its input to the US GDP and the sought job creation capacity (construction workers, attorneys, agents, landscape and interior designers, etc. etc.) for decades. "Building bridges and roads” or trying to repatriate primitive manual labor from Southeast Asia back to the States – don’t really look like promising path to follow. Many US States (particularly, California, Florida, Nevada etc.) has multiple excess property supply due to years of overbuilding, and without actively looking for matching solvent demand, their market price will inevitably keep rolling downhill, up to a point when one day these luxury homes and offices stuffed by state-of-the-art electronic gadgets, modern smart energy systems and art-deco elements will be ruthlessly disassembled and sold "for parts” as a result of the underlying materials and communication devices’ prices exceeding the market value of the homes themselves. Era of the "realty reverse buyouts”, whether leveraged or non-leveraged, would be a sheer disaster for the US economy.