C.M.O. 11.21.2011

“If you haven’t thrown up yet, you’re getting ready to,” was how Erskine Bowles, former co-chair of the national fiscal responsibility commission addressed a group of CEOs in Washington DC this past week and he wasn’t talking about the upcoming Thanksgiving holiday.  The logic or lack of it in the Loop these days can best be summed up by another of Erskine’s comments.  “We have this treaty with Taiwan that we’ll protect Taiwan if they’re invaded by the Chinese.  There’s only one problem with that: We’ve got to borrow money from China to do it!”

Also weighing in this past week was Dan Akerson, CEO of General Motors Co. (GM).  Dan believes “the contagion in Europe could be worse” than the Great Recession of 2008.  Akerson believes this because the government intervention (which included the prepackaged bankruptcy of his company) helped limit the damage back then while a European action plan is less clear today.  “Standing still doesn’t work when you are in a crisis.  This could be contagious,” he said.  While that might sound like a marvelous grasp of the obvious, Dan probably has a pretty good idea of things on a global basis as GM now sells more cars in China than it does in the U.S.

Speaking of which, China, the current model for a command economy, looks well on its way to engineering a soft landing as average property prices in 70 Chinese cities posted their first monthly decline in two years as the Communist Party of China or CPC, appears to be realizing the result of its tight grip on credit and home purchases.

The coordination of the Fed and the Treasury that helped stem the outgoing tide in the U.S. that GM’s CEO was eluding to is non existent in the discombobulation that currently characterizes the rescue efforts in Europe.  With the two centers of our modern civilization, Athens and Rome in the hands of technocratic governments there is little else but hope that they can implement the changes necessary to balance their respective budgets while spurring growth.

The new president of the European Central Bank, Mario Dhaghi, summed up the situation during a speech in Frankfurt this week when he said, “We are more than one and a half years after the summit that launched the ESFS (European System of Financial Supervisors)…We are four months after the summit that decided to make the full EFSF guarantee volume available.  And we are four weeks after the summit that agreed on leveraging of the resources by a factor of up to four or five.  Where is the implementation of the long-standing decisions?  We should not be waiting any longer.”

For its part Italy, or at least its lower house of Parliament, voted 556-61 in a confidence vote to back Mario Monti’s “government of national commitment”  which has only the goal of instituting urgent economic measures aimed at restarting Italy’s struggling economy and avoiding a collapse of the Euro Zone.

Unfortunately, the other leg on which the success of any action stands, Greece, unveiled it 2012 budget on Friday with more promises of deficit-slashing while also saying that the country will miss it 2011 target with a gap between inflows and outflows of approximately 9%.

For an idea of how the markets are viewing all of this we need only to look at a few time tested indicators.  For one, the spread between French and German 10-year government bonds rose above 2% on Thursday, a level unseen since the early 1990’s.  Additionally, the cost of insuring E10MM of European bank and insurer debt for five years as measured by the Markit iTraxx Senior Financials index was E300,000 on Thursday, which is higher than the E211,000 level seen in March of 2009.  Another new post 3/09 peak was reached when the 3-month Euribor/OIS spread touched 91bps this past week according to Bank of America Merrill Lynch.  The euro-U.S. dollar cross currency swap was a negative 130bps on Friday according to RBS.  This measure broke below -200bps after Lehman Brothers imploded but quickly recovered.  This time around it has been deteriorating since April.

Niall Ferguson, a professor of history at Harvard University, wrote an entertaining, interesting and informative piece in the weekend WSJ looking back at Europe’s current malaise from a perspective ten years hence.  The euro-zone is then called the United States of Europe of which Britain is no longer a member nor is Ireland with those two having “re-united” using the slogan “Better Brits than Brussels” as their rallying cry.  This new combo is now the most favored destination of Chinese foreign direct investment according to Mr. Ferguson’s account.

Niall also recounts that the newly minted Mario Dragh, “went far beyond his mandate in the massive indirect buying of Italian and Spanish bonds that so dramatically ended the bond-market crisis just weeks after he took office.  In effect, he turned the ECB into a lender of last resort for governments.

Is all of this fantasy?  Only time will tell, but with either side of our own super-committee not willing to sacrifice their respective sacred cows it sounds like a far happier story than we are about to experience.

Mr. Bowles comments aside, enjoy your Thanksgiving holiday.

Leave a Reply

Your email address will not be published. Required fields are marked *