Posted By: Matthias Paul Kuhlmey
Oh people – again and again, we are receiving word that this blog is too negative. It may be that we are not clear enough, but in our last commentary, we concluded that it is OK to be cautiously optimistic on equity markets, as long as “buyers of GDP” are readily available – not bad advice, after all. With this out of the way, we will not “subdue” to leading media opinions, stating that all is rosy. There are plenty of opportunities in financial markets, and we have made our case, but, overall, we are still dealing with the consequences of a multi-year deleveraging cycle.
Today, market participants continue to be unsettled over delays to aid Greece’s Sovereign crisis. Time appears to be running out, as policymakers need to secure funding for a EUR 14.5 billion (USD 18.9 billion) bond repayment on March 20th. One of the most important aspects in order to “move things along” is related to parliamentary approvals, securing EUR 93.5bn in cash and bonds needed to execute a planned overall debt restructuring; the funding is supposed to be raised on basis of a bond swap, under which private debt holders trade in EUR 200 billion in bonds for new bonds issued, worth about half that amount. Good luck with that!
Turning back to the concept of “buying of GDP,” the issue at home is that “Benny and team” are divided over additional bond purchases to keep interest rates low. As recent meeting-minutes of the policy-making committee show, the FED would only be willing to continue with asset purchases if “the economy lost momentum.” Apparently, it has become clear to some members of the FED that the U.S. job crisis cannot be solved with low interest rates. What job crisis, you may ask, with continuously improving data? Consider that last month, about 1.2 million people left the labor force (steepest month-over-month increase in 30 years), leaving the real unemployment rate at nearly 10%, rather than the reported 8.5%. Does it matter that this year is an election year?
On a final note, what can truly help nations of the indebted developed world is growth. Here is the catch: Greece’s economy has contracted by 20% since 2007; projected growth for GDP in the U.S. is 1.8% in 2012, according to the IMF; and Europe, in our view, is already in recession.
It appears that markets need “a breather.”