Monday, October 6, 2008

Fine tuning our pessimism

As we argued they would, markets are now paying attention to the economy. Boy are they. The prevalent question has become, 'how far is down?" And that's not an Expedia question about the location of Australia.

Europe in Spotlight's glare
Markets fell very sharply in the wake of a weaker-than-expected job report on Friday despite the US bailout package passing. But Monday was not so much 'US news day' or even 'react to Friday's US news day', as it was a day of chaos spreading to Asia but mostly to Europe.

The Europeans are trying a minimalist strategy since they can't agree on a real plan. It's a start but it may not be a good one. The EMU countries do have one currency. And EU countries have a lot rules harmonized. But when it comes to spending money, it's: to each his own. That's the problem in trying to put up a a safety net. They don't seem to be able to agree who will hold it or pay for it.

Ire for Ireland
Ireland put a specific deposit guarantees schemes in place and has been criticized for taking a stand that could commit it to expenditures that might widen its deficit and bust the Maastricht criteria. SOORRRY! But protecting people against loss...isn't that the point of it?

Coordinated rate cuts?
But Germany, France the UK and Italy have other issues. They can't agree what to do. Merkel made a statement about protecting depositors, then after seeing how the EC commission treated Ireland and after some anxious talks with UK officials that did not want to have to launch a formal plan of their own, Merkel declared her promise to be a political statement rather than a formal guarantee.

Tricks or Treats?
In the US when Paulson tried that TRICK with Fannie and Freddie he wound up having to seize them both. Verbal assurances when in a crisis mode usually do not work.

Leaderless Europe
Europe seems adrift. Policymakers want to do something but their structure is not conducive to it. There is talk of a coordinated rate cut, and given the global stress it is quite possible they will find a way to accomplish it. But it would be a hard thing for the ECB to do. At 3.6% headline inflation is just too far above its ceiling rate of 2%. The credit crisis is a clear and present world problem but a coordinated rate cut, that was the rumor that helped bring the US stock market back from the abyss on Monday is a bit of a stretch. But then at -800 points in one day the DJIA was a bit of a stretch, too. One thing we learned is that while the mood is poor and investors are selling they have an appreciation that value nonetheless lurks and with the right program in place...and they are right. The fight over Wachovia also cements that notion.

So while pessimism is stalking the markets so is opportunity.

Price your pessimism carefully.

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