Monthly Archives: May 2012

Limbo

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Posted By: Matthias Paul Kuhlmey

 

It may appear self-serving, but with U.S. 10yr-yields marking yet another historic low (we currently show 1.62%), we wish to remind our regular readers that, against many leading opinions, we went on record recently, conveying our belief that bonds should have a place in every thoughtfully constructed portfolio. While we agree that parts of the fixed income market are very expensive and, consequently unattractive, so are equities, when considering the volatility an investor has to “accept.” 

 

Until recently, all seemed dandy, with the talking heads estimating that the S&P 500 would trade (soon) near 1500 or even exceed 1700 by year end. With resurfaced macro concerns related to the European crisis, capital flows have been redirected into U.S. Treasuries (hence the low yield) and the U.S.-Dollar (USD); as one may expect, both assets have performed well over the past week.

 

What is truly concerning is not related to the political dysfunction of European policymakers, but the fact that, slowly and steadily, capital has been leaving the European financial system; for this reason alone, banks in Europe could face a payment crisis in the weeks to come (think of the lines forming in front of branches of the U.K. Bank, Northern Rock, when things became dicey in September of 2007, and multiply the effect … also keep in mind that the share price fell nearly 60% over two days, prior to a guarantee of deposits being announced). 

 

The European financial system could simply “implode,” and, at this point, the design flaw of the European Monetary Union, specifically the lack of a fiscal transfer mechanism, will have to be addressed – no going back unless the “game is over.” The final rescue may come in the form of Eurobond issuance or simply the ECB and policymakers allowing for a “blanket guarantee” of European bank deposits. All considered, it “smells” like a nationalization of the banking system is on the horizon. We shall see. 

 

In the shorter-term, before any major decisions emerge from Europe, we likely have to wait for the outcome of the Greek election on June 17th, and the pending visit to Greece “by the ‘troika’ of EU, International Monetary Fund and European Central Bank officials, which will decide on unlocking more bailout funds”; thus, if it is left up to Greece (i.e., if other catastrophic/euphoric news is somehow avoided), we could find ourselves in a continuation of the range-bound limbo we have experienced over the last two weeks.

 

Overall, we continue to expect the risk of heightened volatility in financial markets, and suggest a cautious approach to investing. For our detailed opinion on Europe and macro-related issues, please listen to our recently broadcast radio interview.

 

MCCC

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Posted By: Matthias Paul Kuhlmey

 

1300 appears to be a magic number, as the U.S. equity market (or, more precisely, the S&P 500), has “bounced-off” several times from this important technical (and psychological) mark over the past days. For the constant optimist, this has served as a confirmation that times are not so bad, equities are cheap, and we are “set” for a massive rally from oversold levels. In the meantime, Europe appears to be falling apart, with policymakers preparing for the so-jokingly-called “Grexit” (Greece exiting the Euro).

 

With market participants expecting answers, European leaders had dinner on Wednesday night in Brussels to debate next steps to “heal their economic malaise.” As romantic as this may appear (it’s dinner in Europe, people!), it, unfortunately, won’t “cut the mustard” (an expression I have learned in NYC). The fundamental design flaw of the European Union is still not being addressed:  There is a Monetary Union without a Fiscal Transfer Union or, in other words, lack of a true federalist system of Europe.

 

Newly elected French President Hollande thinks he can create “true federalism,” with his push for establishing a real “common currency” (transfer mechanism included), in the form of Eurobonds issued jointly by the 17 Euromoney nations. On the other side of this “trade,” however, is German Chancellor, Angela Merkel, also known as the Iron Lady of Europe. Ms. Merkel fully understands that the issuance of Eurobonds would most likely “strip” Germany of her valuable Triple-A rating, resulting in significantly increased borrowing costs on German Sovereign Debt. It is estimated that if Germany’s borrowing costs were to rise to Euroland’s  average, its additional spend on repayments would rise by about EUR 50 billion or USD 64.7 billion per year (you sure can buy a lot of Bratwurst for this!).  

 

Chancellor Merkel, as elegant as one can be, had no hard feelings during a phone conversation with Greek President, Karolos Papoulias, and suggested a referendum for the Greeks to vote on the Euro during the upcoming elections (to be held June 17). Brilliant! Don’t tell the Greeks they are out, but rather let them reach the conclusion “on their own,” while their “backs are against the wall” – true Europen friendship and federalism portrayed here. 

 

Back to MCCC: While there are no fixed or universally agreed upon dates for the beginning or the end of Classical Antiquity, an era of global influence that was largely cultivated by the civilization of Ancient Greece (and the Romans), it is commonly accepted to have lasted from the 8th century BC until the 6th century AD, or for about 1,300 years! Time is up, once again.

 

Δέστε τη ζώνη ασφαλείας (Greek for “Fasten Your Seatbelt”)! – we may see some rough days in markets …

 

Eur Out!

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Posted By: Matthias Paul Kuhlmey

 

En route to Berlin for a meeting with German Chancellor Angela Merkel, newly sworn-in French president Francois Hollande had to change his travel plans, as his Presidential Aircraft was struck by lightning (strike 1). This could have been a somewhat “elegant” way to delay a meeting, but not to be stuck with a false image of laissez-faire right from the “get-go,” a second Presidential Plane (Austerity a la France!) took Mr. President safely to Germany. 

 

The new Franco-German Duo, Hollande/Merkel (nickname pending, but perhaps someone could suggest “HolMerk” and get into the political greeting card business?), most likely had a grim first official meeting – and not so much for reasons of Angela Merkel “picking-on” Brother Francois, prior to his election; rather, the two were pressured with breaking news that Greek politicians were unable to form an orderly Government after a 9-day meeting “marathon” (pretty Greek to begin with), leaving the country with the prospect of new elections to be held (strike 2). The timing is absolutely off, as the nation needs to secure a future financial lifeline (with or without the Euro).

 

To our frequent readers, the recent events in Europe should not come as a surprise; we advised months ago of Greece’s “going bust” and of Spain’s socio-economic malaise (strike 3). Events in the next 24 hours will show if the Europeans are committed to really “throw money” at the issue and solve the matter “Anglo-Saxon-style.” Bond market participants certainly have made-up their minds, already, with Spanish 10-year yields above +6.2%, Italian equivalents at +5.9%, and EMU bank stocks trading at the lowest level since 1987!

 

We do hope that our critics finally open their minds and “clear” us of false accusations of negativity. It is essential to continuously monitor all facts. Whereas markets may stay volatile over a short period of time, investors should not “throw-in the towel.” For background on our views, please see our recent Economic Update, ‘Seen the Future.

 

‘Seen the Future

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Posted By: Matthias Paul Kuhlmey
 

© Matthias Paul Kuhlmey, 2012

 

I. Status-Quo

 

It was quite the fascinating spectacle, not only for little boys, when about two weeks ago, the final journey of the Space Shuttle Enterprise took course over New York skies. The “retired” shuttle will be installed at the Intrepid Sea, Air and Space Museum on the Hudson River and will go on display July 19, 2012.

 

“Nice,” one may think, as something “quite distant,” at least under previously normal circumstances, will become closer to the eye of an observer. On the other hand, this is a somewhat “tragic retirement,” as nothing comparable, at least so far, has replaced the Shuttle or the entire related Space Mission. The same is true for the once fastest passenger plane, the Concorde, which was taken out of service in 2003 and not yet replaced with an equivalent. No longer being able to fly between London and New York in about 3.5 hours, or to lift-off to space in a manned spacecraft, makes us wonder whether we are truly creating a technological evolution, or if we may be moving backwards (hopefully to prepare for the next “wave forward”).

 

When observing today’s state of global financial markets, especially when ignoring the “noise” of intraday trading of financial instruments and their price movements/valuations, one may wonder if we are moving backwards in this area, as well. If the situation is evaluated on a purely nominal basis (for most onlookers, a relevant indicator is the level of stock markets), the anticipated economic recovery since the onset of the Credit Crisis of 2008/2009 may well be underway. If, however, this aspect is judged from a broader perspective, the global economy and related financial markets may have become a place with increased levels of imbedded systemic risk – with expansive credit creation being only one of the contributors to this issue.

 

‘Seen the Future is most certainly a daring title for this Quarterly Outlook, but as a mounting number of our respected clients and friends continue asking about “how the entire dilemma could play out,” we will attempt to bring some answers, or at least raise questions that should be asked when prudently allocating money.

 

One of the most important things to explore is whether we have indeed been moving backwards and if this may continue for some time to come or, alternatively, if the “move forward” has already started.

 

We realize that we must accept a certain degree of personal and/or professional risk, since our messaging may appear overly concerned, or even negative, at times. In applying an elevated standard of care, as a fiduciary to our clients, we have no choice but to “tell it like it is.” Thus, a broad investment framework on how investors should be positioned will be part of this update.

 

Please follow this hyperlink  for the full report.

 

 

Waiting for Godot

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Posted By: Matthias Paul Kuhlmey

 

Samuel Beckett was a great-grandmaster of absurdist fiction – “a genre of literature … that focuses on the experiences of characters in a situation where they cannot find any inherent purpose in life, most often represented by ultimately meaningless actions and events.” One of Beckett’s most recognized works (a play, to be specific) is entitled, Waiting for Godot. 

 

The play portrays two men, Vladimir and Estragon, “who divert themselves while waiting expectantly, vainly for someone named Godot to arrive. They claim he’s an acquaintance but in fact hardly know him, admitting that they would not recognize him were they to see him. To occupy the time they eat, sleep, converse, argue, sing, play games, exercise, swap hats, and contemplate suicide – anything to hold the terrible silence at bay.”

 

In early conclusion, this is how we feel about, or better yet, how we think of others and their way of perceiving the(ir) so-defined economic recovery and the related investment environment. It is still puzzling to us how things change by the hour:  Markets are up, as revised earnings are beat; markets are down, as Mr. (ECB) Draghi does not want to “play the liquidity game”; then markets are up, again, on the basis of questionable “shortcuts of the collective mind,” with poor economic data (and we had some) being the catalyst for more FED-provided stimulus, consequently driving up markets – a somewhat schizophrenic notion, or absurdist fiction, to stay with the plot.

 

All in mind, and similar to Vladimir and Estragon, most of us have never experienced a true economic recovery, and yet we believe it is right around the corner. The highly acclaimed David Rosenberg, of GluskinSheff, wrote earlier this week that “during this statistical recovery from the 2009 bottom, real U.S. GDP growth averaged 2.4% at an annual rate, and of that, 0.7 percentage points came from inventories. Excluding inventories, otherwise known as ‘real final sales,’ average annual real GDP growth was 1.7%, on average — is the weakest post-recession recovery on record. This despite a 10% deficit-to-GDP ratio, a government debt-to-GDP ratio rapidly heading to 100%, a near zero Fed funds rate, record low mortgage rates, and an unprecedented tripling in the size of the Fed balance sheet.” Not to brag, but those could be our words, except for the fact that Rosenberg is considered a brilliant mind, in contrast to us absurdist fictionists.

 

It is not surprising that “over the years, Beckett clearly realized that the greater part of Godot’s success came down to the fact that it was open to a variety of readings and that this was not necessarily a bad thing.” This is precisely the reason why markets may continue to trade higher; among the reasons cited are “the advantage of election years,” “the FED’s willingness to provide liquidity,” “attractively valued stocks,” etc. To capture the benefits, investors may want to keep an open mind and consider applying a tactical approach to their asset allocation, while maintaining a primary focus on risk mitigation …

 

P.S. Does anyone find it ironic that for the celebration of Samuel Beckett’s 100th Birthday (1906-1989), his portrait was depicted on an Irish commemorative coin that very much looks like a Euro?