Monday, 20 August 2018

Politicians need reminding there is no easy way out

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Plus ça change, plus c’est la même chose. I’ve been out and about for a few days and although the papers and the newscasts have been full of the summits at Camp David and in Chicago, I can’t see that any formal decisions have been taken one way or the other and the only informal one seems to be to try to bully Mutti Merkel into ceding the moral high ground to collective denial.

Anthony Peters, SwissInvest Strategist

I wrote last week that I would thump anybody who talked again about kicking the can down the road and I am happy to report that British Prime Minister David “Call me Dave” Cameron is now first in line, not having been able to think up a better or more original sound bite.

The weekend summit concluded that until the Greek elections were out of the way no decisions could be taken, but it is looking more and more likely that an exit from the eurozone is ahead of us although I still tend to believe that there is another act to be played out first.

A number of studies has been undertaken which sketch out the probable impact of a Greek exit from the euro which then, not unreasonably, try to assess the potential follow-through of a collapse of the other endangered peripherals and ultimately the whole of the single currency project.

Consensus seems to be that the full shilling could selectively cost as much as 20% of GDP within parts of the eurozone with concomitant impact in the UK and, to a lower but still significant extent in the US. Let me just add here that the margin of error is probably +/–3% which is pretty big seeing as how sensitively markets tend to trade when countries report GDP and diverge from consensus by just 0.1% or 0.2%. In other words, we still don’t have a clue what awaits us around the corner.

President O’Bama gave a press conference in Chicago last night in which he quite sensibly concluded that the eurozone problem was not one which would be resolved in the next 60 or 90 days, but that it would be with us for three of five years. I sell those for until the leaders and the people grasp that we are facing an issue which will take at least one or maybe even two generations to bring back into equilibrium, we are going nowhere.

Of course it is true that even the longest journey begins with but a single step; however, there is little sense in taking that first step until we have at least a vague idea of which direction we should be taking it in. Do we need to start saving or do we need to start spending? Merkel favours the former and Obama the latter, but in that new and shiny school of Hollandian Economics we seem to be able to do both at the same time.

There is no pain-free outcome and as we drift further and further into the fifth year or even the sixth of the crisis, depending on where you measure the beginning from – I favour July 2006 as the real turning point when the Case-Shiller Index peaked at 206.52 (it’s now at 134.20) rather than September 2008 when Lehman Brothers failed, followed by the VIX Index peaking at 80.86 in November of the same year – and still the political leaders are busily seeking a cheap and easy way out.

’Do the math…’

I reminded in a recent column that the UK and the US governments respectively are themselves still borrowing one out of three dollars or pounds that they are spending and that deficit/GDP means little as the government cannot spend GDP but only tax take. If tax take is only two-thirds of spending … well, as the Americans love to say “Do the math….”

For the past 20 years they were able to crank up deficit spending year after year and lenders were happy to leverage their portfolios and balance sheets and to provide cash to the supposedly risk-free borrowers. That genie is out of the bottle and the lead rider in the posse which still believes that he can be caught, bottled up and corked again is none other than one President Francois Hollande. I don’t care how many mount up and follow him for he is, if you permit me to mix my metaphors, undoubtedly on a wild goose chase.

Facebook IPO

Enough of greedy politicians. How about greedy equity capital market syndicate managers? Yes, the headlines might be full of how investors have “unfriended” Facebook – the stock dropped 11% yesterday, but the truly red faces are with the syndicate group at Morgan Stanley who evidently decided that this would be the one chance of the year to make budget and bonus and who squeezed the living daylights out of the IPO.

It priced at US$38, traded a high of US$45 and closed last night at US$34.03 – not bad for two days’ trading in what was going to be the deal of the year.

Mind you, I must add one point in their defence. Some 85% of the stock went to institutional investors who saw the upsizing and repricing of the offer and who had all the chances in the world not to subscribe. I can already hear the crowing: “Yes, we own stock in FB but we are underweight and hence can show have nice outperformance.”

From the moment we saw the price range increased from US$28–$35/share to US$34–$38 we were sceptical and once they had declared the upsizing of the offering from 337m shares to 421m shares, most professionals with more than two brain cells to rub together knew that the bar had been set too high.

And yet, they all piled in. I have little or no sympathy with those who stagged the issue and are getting buried. I was recently told by one of the equity geeks that as a bond beast I knew nothing about stocks and how they work. I’m only mildly gratified to observe that they obviously don’t either.                          

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