Saturday, September 24, 2011

Friday Thoughts

Will Europe get its act together?

There are four rumors about what could take place:

1. The ECB will offer a one-year maturity liquidity facility to complement the short-term facilities that are in place already (three- and six-month). The odds are reasonably good that this might be done and its likely a slight positive for risk assets, though a longer-term maturity of two years (plus) would be better (but, naturally, the odds are much lower).
2. A possible rate cut of 25-50 basis points from the current rate of 1.50%. This would likely yield a much more positive impact than #1 but the odds are not high.
3. Expanding its balance sheet by more aggressive repurchases of Spanish and Italian debt (without sterilization). This (like #2) would have a salutary impact on stocks, but the odds are also low.
4. The Dollar Swap rate of 1.1% will be halved. Again, unlikely.

One consistent economic concern I, and others, have had over the last few years (since the 2008-09 financial crisis) was that the worldwide economic recovery was so fragile that it was exposed to exogenous events (like the Japanese nuclear disaster in early 2011) and/or to policy errors that could shift us into recession.

I would say the recent weakness in equities is a direct result of that rising fear of policy errors that could put the world's economies into recession.

Unfortunately, nothing emanating out of the central bankers and political leaders in the eurozone has done anything to engender the necessary confidence that policy is well directed in stopping the sovereign debt contagion.

Over here, the continued divide within Washington (and the policy inertia that has resulted) coupled with this week's Operation Twist, also holds little incremental economic benefit and severely penalizes the savers class.

The next few weeks probably hold the keys to the market direction for the next twelve months.