Climbing The Wall

By |2014-09-05T18:59:59+00:00May 13th, 2010|Global Market Update|

What do the gloom crew most get wrong? You know them when you hear them. “The latest European bail-out isn’t enough. Or it doesn’t deal with structural problems. The US is just like Greece: we’re in hock up to our ears. And what about moral hazard: aren’t you just rewarding budget indiscipline? I love questions like these. They serve mainly to illustrate the biases of the questioner. For example, what is enough? The proposed EU rescue fund is two-and-a-half times the entire Greek debt [...]

The Other Bailout

By |2014-09-05T18:58:55+00:00May 11th, 2010|Global Market Update|

In the US, we usually have some discussion before lending billions to a money-losing bank. Unless it’s Freddie or Fannie. Amid all the hoopla over Greece and the European debt crisis, Freddie Mac announced that they lost money in the first quarter and they’ll need another $10 billion in senior preferred stock from the government. Fannie Mae noted that they’ll need another $8 billion. As Everett Dirksen reputedly said, a billion here, a billion there, pretty soon it adds up to real money. Last [...]

Surprise Party

By |2014-09-05T18:53:16+00:00May 10th, 2010|Global Market Update|

Shock and awe. That’s what the European central bankers hoped to produce with their trillion dollar plan. On the face of it, they did just that. Global markets recovered about 5%, or half of the $3.7 trillion decline they’ve seen since the debt crisis hit the markets late last month. Some say the bailout doesn’t have enough teeth to force fiscal restructuring; some say they’ve come too late in the process. But no one has said it isn’t enough. The Euro-zone has an economy [...]

“Not In Our Stars”

By |2014-09-05T18:52:41+00:00May 8th, 2010|Global Market Update|

“The fault lies not in our stars, but in ourselves.” Shakespeare wrote this some 400 years ago, where one of his characters proposes taking responsibility for his place in the world. That’s not bad advice today. It’s easy to blame others. Some say the world economy is unbalanced because China exports too much. But China exports so much because the US doesn’t save enough. We need the Chinese to buy our bonds because we don’t have enough savings domestically. Should we blame the world’s [...]

Anatomy of a Crash

By |2014-09-05T18:52:04+00:00May 7th, 2010|Global Market Update|

A funny thing happened on the way to the market. Around 2:45, Boring old Proctor and Gamble--maker of toothpaste and shampoo--fell off a cliff. The stock suddenly dropped 25%, from $60 to $45/share. Since the Dow is an average, that triggered a 100-point drop in the index, and programs all over the world started buying the Dow and selling other indices. Chaos followed. Excelon, the 30 billion dollar utility company, traded for less than a penny. Perhaps because of an errant trade, the market [...]

A More Perfect Euro-Union

By |2014-09-05T18:50:49+00:00May 5th, 2010|Global Market Update|

At first the Euro seemed so logical. The southern European countries got sound money and low interest rates. The northern European countries got expanded markets and cheap labor. What could go wrong? The low interest rates encouraged a housing bubble in Spain and overconsumption in Greece and Portugal. Expanded markets fed a Teutonic sense of destiny, and German shipments to the rest of Europe grew from 45% to 65% of all exports. But overproduction and overconsumption have run their course, and the adjustment will [...]

Quis Custodiet ipsos Custodes?

By |2014-09-05T18:49:19+00:00May 4th, 2010|Global Market Update|

Who will rate the raters? Of all the actors in the financial crisis, the ratings agencies have seen little pain from their abysmal miscalculations. While they collected hundreds of millions in fees rating thousands of deals, 92% of the AAA-rated sub-prime bonds from ’06 and ’07 have been downgraded to junk status. Who pays for these kinds of errors? We all do, really. The overconfidence of the issuer banks in their own AAA deals helped sink Bear, Lehman, Merrill, and Citi. These failures were [...]

Repetition is NOT Flattery

By |2014-09-05T18:48:47+00:00May 3rd, 2010|Global Market Update|

History has a nasty way of repeating itself, just when it’s least convenient. Corporate profits have been strong. So strong, in fact, that they’ve attracted a lot of interest. Marginally profitable companies have been expanding, borrowing money and building out their businesses to capture these margins. With unemployment high, labor costs have been low. And with interest rates down, lots of companies have been able to borrow and quite reasonable rates. In the past, it might have cost 13% for a large speculative bond [...]