"I know up on the top you are seeing great sights, but down at the bottom we, too, should have rights."
-- Dr. Seuss, Yertle the Turtle
The bottom's in. My belief in a bottom for the balance of the year does not mean that the investment terrain will be easily navigable over the last half of the year; it will not be. We are not necessarily off to the races, as events and action will continue to be volatile, but the conditions for a bottom could be in place, since many of my most profound concerns have now been recognized and, arguably, have begun to be discounted.
From my perch, the biggest market and economic risk lies in the instability of the European sovereigns and the financial institutions in the eurozone that hold sovereign debt. In context, this level of systemic risk is every bit as reflective of the threat that our domestic financial intermediaries faced three years ago. As a friend mentioned to me in an email, "The whole mess is on the verge of a reflexive moment, where the market loses confidence in the European welfare states. It feels like a knife edge: confidence restored, we rally; confidence lost, we have depression. Heads or tails?"
The Fed's announcement yesterday is no panacea nor is it a guarantee of improving economic growth or a carte blanche to buy stocks without acknowledgement of risk. Holding interest rates at zero, which seems to have been inspired from this Bernanke paper back in 2004, for at least two years is a novel tactic because Bernanke accomplishes some of his goals without buying even one Treasury bond, but it serves to put a lot of pressure on the fiscal front.
What I believe is needed is for the Obama Administration and leading Congressional members to caucus and (immediately) make a statement that they mean business:
1. on the jobs front;
2. in terms of getting our country's fiscal house in order; and
3. in addressing the impact of super-leveraged ETFs and algorithmic trading (among other items).
Bernstein defended French banks, citing that their large liquidity buffers will reduce the effect of short-term funding issues.
* SocGen has a liquidity buffer of 105 billion euros vs. 92 billion euros of short-term debt;
* BNP Paribas has liquidity buffer of 150 billion euros, with short-term borrowing estimated at 160 billion euros.
Currently, interbank borrowing costs are in line with Libor fix or below.
Bernstein does not expect Standard & Poor's to downgrade France's AAA rating.
Maybe Dimon of JPM should be our next President.....
Either the market mechanism is broken or there is something adverse occurring in bank funding that no one knows about yet.
It is my view that the problem does not likely reside in the domestic economy, but one has to be aware, as mentioned in today's opening missive, that confidence is fragile and the real economy is entwined and exposed to any further erosion in business and consumer sentiment.
