It’s too easy, typing this blog 25 minutes after the market closed today, to fall into the obvious market commentary. So, let’s just say it’s been a rough couple of weeks for stocks around the world and leave it at that.
Trying to be more constructive, we’ve been looking at all financial assets for indications of pricing dislocation that might provide tail opportunities when the “unpleasantness” subsides. Some interesting movements today:
- Oil declined 5.6%, wiping out its entire 2011 gains
- VIX (the fear index) rose 36% today
- The 1-month T-bill traded with a negative yield of -0.0102% today. That’s the third time in a month that investors paid for the right to own T-Bills
- Natural gas dropped below $4
There are plenty of other examples I could cite, but the general observation is this: If an asset could be defined as risky, it was being liquidated.
So much money has been moving to cash, in fact, that BONY/Mellon is now assessing a 0.13% fee on cash balances over $50 million. So, you have to pay to hold Treasuries, you have to pay to hold money market funds, and there is an absence of a bid for risk assets. Does this pattern look familiar to anyone?
The problem, as we see it, is that the European banking system is on very thin ice. The stocks are being sold at an incredible rate, while the bonds they hold continue to fall to the point where new debt issuance is nearly impossible. Both Spain and Italy have postponed future bond auctions, fearing a failed offering. What makes this so serious (and what the market may FINALLY be coming to grips with) is that there may be no non-convulsive way to fix it this time — even temporarily. Keynesian solutions are like antibiotics. The more you use them, the less effective they are. And boy… we sure took our share of Keynesbiotics over the last few years.
The markets want to see the ECB buying up European bonds, ala’ the FOMC’s Permanent Open Market Operations. Move the balance sheet problems from the private sector to the public sector and viola’! Problem solved. But without fiscal unity among the Euro-carrying countries, this strategy will not work. The political will likely won’t exist in countries like Germany to buy into this plan.
And with austerity programs sweeping southern Europe, growing their way out of this crisis is extremely unlikely.
Until Europe gets serious about real solutions to these problems, I’d have a hard time getting very bullish. And their time is running out. A quick glance at the bond spreads and CDS pricing confirms that point.
The next potential catalyst for market fun… tomorrow’s jobs report. The whisper is that the number will come in a little light, but not enough to be a market mover. So says Mr. Beeks.