Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. But I can't by law give you advice, and I do make mistakes. Remember: the unexpected sometimes happens. Oddly enough, the expected does too, but all too often it takes longer than you thought it would, or on the other hand happens more quickly than you expected. The Goddess of Markets punishes (eventually) greed, folly, laziness and arrogance. No matter how many years you've served Her. Take care. Be humble. And don't blame me.

BTW, clicking on most charts will produce the original-sized, i.e., bigger version.

Sunday, November 27, 2011

Method in her madness

What is the matter, my lord?
Between who?
I mean, the matter that you read, my lord.
Slanders, sir; for the satirical rogue says here that old men
have grey beards, that their faces are wrinkled, their eyes purging
thick amber and plum-tree gum, and that they have a plentiful
lack of wit, together with most weak hams; all which, sir, though
I most powerfully and potently believe, yet I hold it not honesty
to have it thus set down, for yourself, sir, shall grow old as I am, if
like a crab you could go backward.
[Aside] Though this be madness, yet there is method in't.
Hamlet Act 2, scene 2, 193–206

[Quote via this site]

All along I (and most commentators) have been assuming that Angela Merkel's and the ECB's intransigence is because of a purblind stupidity.  But what if, as The Age/Sydney Morning Herald journo Michael Pascoe plausibly argues,  it's part of a plan.

As Niccolo Machiavelli once more-or-less advised, you don’t want to waste a good crisis. Angela Merkel isn’t. And if that means a highly dangerous game of brinkmanship for months to come, sobeit if Germany achieves control of Europe.

There is nothing necessarily sinister about that. If Merkel’s plan to force European fiscal union – the necessary missing ingredient to sustain Europe’s half-baked monetary union – happens to result in Germany effectively dominating proceedings, well, who better? Or perhaps: who else?

Germany already dominates the thinking and actions of the European Central Bank. When it’s suited German needs in the past, the ECB has been compliant in easing money supply. Right now it suits Germany for the ECB to hang very tough indeed, threatening economic Armageddon, and that’s what the ECB is doing. There’s no point in being virtuous if it results in having no economy left to be virtuous about.

Perhaps, after all, there is method in their madness.

Friday, November 18, 2011

The European Crisis

Everybody except the Germans can see that to stop the European and Euro crisis, the European Central Bank must stand behind the government bond markets in Europe.  A Central Bank has unlimited capacity to create money. In the old old days it was printing presses, these days it's electronic funds transfer.  The CB buys government stock in the open market and settles by drawing funds on itself.  Only the Central Bank can do this.  Everybody else in the system has to have the money first.  The CB creates the funds it uses to buy the government stock.  It can add to its assets (in this case, government stock) and its liabilities (bank at-sight deposits with it) to an unlimited extent.  This is what Central Banks have been doing for well over 200 years.  In a financial crisis they intervene in the bond and money markets to prevent a temporary panic becoming a major economic disaster.

 But Germany refuses to allow the ECB to do this.  The Germans are still fighting the last war, so to speak.  After the first World War and the second, Germany suffered hyperinflation because of excessive use of the printing presses to finance government spending.  The problem now, though, is the risk of deflation.  You do not want to have falling prices in heavily indebted economies.  You do not.

And Germany (rightly) maintains that the Greeks and Italians got themselves into this mess and must now do the hard yards to get themselves out of it.  Well, yes.  But if you live in the top storey of a a block of flats and a flat on the first floor starts burning, you don't refuse to help because its their own stupid fault.  You provide unlimited water, because if the fire spreads your flat will burn too.  Already fiscal tightening (raising taxes and cutting government spending) will cut 1 to 2% off Euro GDP next year.  And the banks are contracting their balance sheets, to try and get their equity up to a "safe" percentage -- i.e., they're contracting lending.

The chart says it all.  It shows Euro IP (Industrial production) and the PMI (Purchasing managers survey).  The PMI leads by a couple of months.  It's heading south fast.

The ECB should cut the discount rate, now, to 0%.  It should announce that it will buy Italian government bonds to whatever extent necessary to keep yields at 6% or below.  Of course, the ECB will eventually act.  But will it move before Europe's "Lehman moment" or after?

Crunch time.

Wednesday, November 16, 2011

Will the ECB save the Eurozone?

Laurence Knight, BBC finance blogger, says:

100,000 Mark note: hyperinflation

From the beginning, the obvious solution to the crisis - as many economist have been loudly shouting - is for the ECB to weigh in. 
As the central bank, it is the gatekeeper of the eurozone's money supply. So it can simply create out of thin air the cash that is needed to rescue Italy. 
If the ECB stood unambiguously behind Italy, by making an unlimited commitment to buy up the country's debts, then investors' worries about whether those debts can be repaid should evaporate. 
Of course, printing money does not solve the longer-term problems that got Italy (and other southern Europeans) into their current pickle in the first place. 
It does not cut Italian wages to more competitive levels. It does not make Italy's debts or overspending disappear. And it does not break the albatross-like stranglehold of vested business interests on much of the Italian economy. 
But it will help. Because the longer the crisis goes on, the more that business confidence, consumer confidence and confidence in Europe's banks collapses, and therefore the more collateral damage is done to Europe's economy. 
And a recession right now will make Italy's economic problems even harder to solve.

Exactly.  Precisely.  When are they going to get it?
Read the whole article here.  It's good.

Friday, November 4, 2011

The Domino Effect

An excellent summary of the way the interconnections in Europe make it far more than just a Greek problem.

But finally the ECB starts behaving like a real central bank, and cuts rates.  Not be enough, and too slow, but better late than never.

Thursday, November 3, 2011

The Greek end-game

An insightful article by Ambrose Evans-Pritchard.

He's right.

So why should we buy shares?

The only argument I can think of is that this will force the ECB to behave like a proper central bank and force it to act as a lender of last resort and supply unlimited funds to European banks.   But what if they don't?

Looks to me like the technicals suggest the market's going higher.  For now I'd be reasonably fully invested. But if the 30 day moving average turns down and the 150 day moving average at that point is still falling, I'll sell.