Trick or Treat

Trick or TreatThe past twenty plus trading days have witnessed the equity markets rise twenty plus percent while twenty plus trans-European meetings have been held in an attempt to determine how yet another bailout of Europe may be constructed. It is speculated that it was this later point that led the market to be in a continuous ‘buy the rumor’ footing. ‘Selling the news’ has probably not yet occurred mostly because there has not really been news of significant substance.

The outcome of the twenty something meetings is the so called European Financial Stability Fund (EFSF). It is neither a solution nor news. Put bluntly, the EFSF is an unfunded box of €440 billion with unfunded 2.5 times leverage that is intended to bailout unfunded liabilities in Greece, Portugal, Ireland, Italy, and Spain of more than €3 trillion. If the reader follows the math it can be calculated that the leveraged fund at about €1 trillion is clearly less than the more than €3 trillion in exposure. Thus this is really not a solution, but a rumor of a partial solution.

On the USA front, we find that on the rather spooky day of Halloween, debt is set to exceed GDP when using annual numbers through the second quarter of 2011. Notably, exceeding the 100% debt to GDP ratio was last seen when the USA was battling the likes of Adolf Hitler and trying to free the planet. This time around the USA is seen battling the laws of economics and trying to free banks from obligations that they freely assumed.

This brings us to the Occupy Wall Street (OWS) sit-ins. While to those that lived through and/or are actually able to recall the 1960s, OWS may be familiar. To these folks as well as those who are unsuccessfully trying to make sense of the unending stream of OWS analysis I postulate the following: Banks have essentially been bestowed the attributes of utilities since the 1980s – which is to say that they are worthy of being bailed out so that core functions of society, such as access to our money, can proceed. When Warren Buffett (please excuse my picking on him a second time in a few months) and several other prominent financiers testified for, and received, the repeal of Glass-Steagall in 1999 they were essentially lobbying for the creation of banks that are now ‘too big to fail.’ This repeal also allowed these same banks to derive incredible profits from nontraditional banking activities that additionally exposed them to debilitating downside risks. Unfortunately, the banks have continued to be treated as utilities with little actual downside exposure but with the upside bonuses derived from the new businesses. Admittedly, this is unfair in a true capitalistic system. If bankers desire to be treated to upside profits then they should do so at an institution that is capable of failing. Unfortunately, the message emanating from the OWS crowd seems to emulate Karl Marx in that the current struggle is between employers and the working class. It is not – OWS should realize that the struggle is between the state (with its protectorate such as the ‘too big to fail’ banks enabled by a minority of financiers) and the people.

Finally, we noticed this week that the initial estimates for third quarter GDP came in at a very healthy 2.5%! Woo-hoo! Well, woo-hoo until the numbers are examined a bit more closely. Most of the so called growth came from consumption that was not supported by wage growth. Instead it was supported by dipping into savings. Worse still, wage growth actually contracted during the period. Notably we also learned that consumer confidence sank to levels never seen outside of the worst recessions. Consumption like this is not sustainable for more than a few quarters until savings is drawn down to zero.

In closing it is becoming difficult to see how the news flow is anything other than tricks in place of hoped for treats. With the equity markets levitating at levels commensurate with a healthy global economy – in the face of very unhealthy news – or a coming wave of inflationary money printing, it is reasonable to be very spooked indeed.