A Quick Little Thought on Markets and the S&P Downgrade
Most of what we witnessed this week in global markets – across all asset classes – was the rather orderly reshuffling of risk. This reshuffling has been in the card for some time and if you click through to older posts you will notice that we have been identifying themes as to what they might be and why. The move into long duration US treasuries the week ahead of a potential ratings agency downgrade always makes for curious story telling and will, no doubt, offer some very interesting historical reading in a few years time. That said, the risk people were fleeing from was two fold:
1) Global slow down
and
2) Serious possibility of liquidity crisis in Europe “a la Lehman.”
The global slow down has been in full view for anyone who cared to peel back the onion on various macro reports since January. My colleague at Economoinitor and other ventures (Astor Janssen Partners) Dan Alpert, has been very helpful to reader highlighting the lack of wage growth in the US and how dangerous that would ultimately be to the consumption numbers as we worked our way through 2011.
Well last week’s GDP numbers (AND REVISIONS) brought that to light. Consumption numbers were awful. Then manufacturing was faltering, not only in the US but in Asia as well.
Here is the UN-virtious circle:
If we slow our consumption Asia slows its production and if Asia slows its production, Germany can’t export its high tech to them either…
On the second point, the issues gripping Europe are real. We have heard of banks cutting credit to their European counter parts, wire transfers not getting through third party routing institutions… these are all things that happened prior to our own 2008 crisis. The good news is that the Europeans have already constructed half of their TARP plan ahead of time..
However, the time is now for them to get everyone in line with the nuclear option and wipe out the bond vigilantes and commit to recapitalizing the Spanish and Italian financial institutions. Don’t and Europe collapses another 20% on top of the 15% they lost this week alone. Should this happen you can kiss all your earnings for any company on the planet good bye.
Finally on the downgrade… I suspect markets will have the reaction of “meh!” If they don’t they should have. This has been so well telegraphed and so clearly off the mark that its odd that anyone really pays attention. There are structural and legal covenants that will be effected but other than creating a bunch of billable hours for attorneys this weekend who are re-writing investment policy statement so that they can still hold on to the worlds safest security, I don’t see much here.
Here is the video from my talk with LArry Kudlow and the gang Friday night:
War Zone – Enjoy…
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