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Tuesday, 12 December 2017

That sinking sense of déjà vu

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Anthony Peters, Swiss Invest Strategist

Anthony Peters, Swiss Invest Strategist

This morning the Hang Seng greets us, and all the fancy news out of New York, with new lows. There is no doubt all the meetings around the AGM of the World Bank are well intentioned and that the politicians have finally grasped that we are playing for money here and not for matchsticks. But markets are not entirely made up of dumbos and the sums remain tenuous – is there enough money on the planet to achieve what the leaders would like to achieve?

I was listening to Pippa Malmgren of Principalis Asset Management on the BBC World Service this morning as she neatly dissected the overall situation and concluded that Greece’s default is now more of a semantic issue than a financial one. The words coming out of the IMF are clearly directed towards further promises of jam tomorrow although they paint a prospect of no more than a 50% haircut on Greek bonds, in other words they are talking of effective default just two weeks after Mutti Merkel and Sarko swore on their grandmothers’ graves that Greece would be kept in business at all costs.

Greece’s default is now more of a semantic issue than a financial one

Markets expressed their confidence in the politicians’ ability to deliver anything meaningful in the form of the aforementioned 2% drop in the Hang Seng, a 2% drop in the Nikkei and a 1% drop in the ASX and with the two-year Greek bond yield rising to 71%. Sadly, the rhetoric of the past fifteen months has left markets not only sceptical but also rather bored and yet another and altogether new and comprehensive solution is being observed with that sinking sense of déjà vu, all over again.

There was talk of increasing the EFSF to €2trn through the good offices of the ECB’s balance sheet which is fine but if we want to read telephone numbers we best do that in a telephone book – at least we know that those numbers a) exist and b) do what they are supposed to.

Western governments are overindebted and the ECB realistically can’t just expand its balance sheet ad infinitum. My friend Steven Beck of Citigroup keeps on reminding me that whatever, the money has to come from this planet. When Pippa was quizzed about the potential role of China and India in the piece, she wondered why they should feel tempted to get involved in buying the bonds of countries which their own central banks won’t buy?

The money has to come from this planet

However, her most potent comments were directed at the banking system. Germany has already declared that it will step in to support its institutions. That, according to her, made markets focus on how France would or could face up to a recapitalisation and then went on to question whether weaker countries had the firepower to rescue their own domestic banking system, as and when push came to shove.

Alas, once again the recurrent questions arise as to why lenders are being protected as opposed to borrowers. The answer is simple – if lenders feel they are no longer the principal focus of legislative interest in the credit process, then they will either not lend and if they do will demand very different risk premiums than they already do. Lenders have the choice borrowers don’t. I remember some of the comments which came out of parliaments and governments at the beginning of the sovereign crisis which clearly showed that elected authorities had forgotten that pretty much nobody is under an obligation to buy their bonds. You might have noticed how the beer hall rhetoric on that subject has quietened down considerably.

This weekend has delivered the first co-ordinated policy intentions which we have seen in a very long time

Whether or not the latest raft of proposals leads to anything meaningful is to be seen but this weekend has delivered the first co-ordinated policy intentions which we have seen in a very long time. That in itself must be hailed as a move in the right direction. In the final analysis, however, it will be about young ambitious individuals spitting in their hands and getting down to work rather than flaking out and swanning off on gap years to Vietnam or Peru in order to return to take three year honours degrees in Beach Management or History of Finnish Art – rant over.

Away from the super-macro, this week brings quarter-end. There will be a huge amount of index adjusting going on, mainly I would suggest in the area of covering shorts and underweights so we should really find a better technical bid over the next few days. Beware of getting drawn into a sucker’s rally if the markets improve even if sentiment doesn’t.

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