Volatile? It's 'knackered'
Last night I dined with a bod from a distressed asset hedge fund. He tells me that his traders are bearish and that they see a repeat of 2008 building up here. I agree with them on the former – both Howard Wheeldon of BGC Partners and I have consistently propounded the opinion that we have spent the past few years living through the mother and father of all dead cat bounces and we have duly both been castigated hither and thither for being nothing but grumpy old men who don’t have a clue – but I do fervently disagree on the latter.
In 2008 banks still had capital. As the markets fell away, fortunes were being made by traders and brokers alike through the presence of ample liquidity but the equal lack of transparency. As investors piled out of assets they didn’t understand (and in that environment no one understood any assets at all), there was always a bid to be found. It might not have been a bid that one liked but it was a bid and one had the free choice to hit it or not, as the case may have been. In 2008, the markets were still full of players who thought life was a bull market intersected by corrections.
This time it is all very different. There simply is no bid. The capital which backed trading, the leverage which drove the books, is all but gone. The desire to take assets on board has disappeared. Why, they all wonder, should they try to pick up cheap assets if they are, in all likelihood, going to be cheaper down the line. I asked rhetorically a few weeks ago what, if a market is a place where buyers and sellers meet, one calls a place where there are nothing but sellers. The best reply at the time was from a chum at Goldman’s who suggested “a shelf”. Forgetting the humour for a moment, this is no 2008 and if the world decides to go properly pear-shaped, it could be considerably more ugly. There is still a lot of cash on the sidelines and with every asset sale there is more of it but if capital preservation is the principal objective of most investors, on the sidelines it will stay (and might do so for a while yet).
One of the class examples of what happens when the bid just evaporates was on display in the European peripherals yesterday where Italy now trades at higher yields than Spain through most data point up to six years. The western industrial economies – with a few notable exceptions – are faced with a conundrum which has determined that debt and deficit financing is not sustainable but that when the public sector generates 40% plus of your GDP, slashing public spending also fillets your growth. On that basis, the PIIGS – for now the crisis pricing truly does include all of Portugal, Ireland, Italy, Greece and Spain – can do whatever they like and still be hated for it. No bottom fishers there. Well, kind of, but not quite.
While yesterday Spanish and Italian debt was going to hell in a hand-cart – Spanish 10-year yields broke above 6 3/8% – Irish debt was bid out of sight. Rumour is of a large real money buyer of the debt – the Street is agreed that this is not a speculative hedge-fund driven rally – and bonds at the longer end of the Irish curve could not be found for love or for money. It should maybe be mentioned at this point that the longest Irish bond is the 5.4% 2025 which reminds us the Irish are apart from the other peripherals – no 30-year vanity bonds from Dublin. Before the prospect of the single currency emerged, the longest Italy issued in the old Lire market was three years and I recall Spain was the same in Pesetas. I can’t speak for Greece – Drachma paper wasn’t exactly the thing one did – but I would not be surprised if they had nothing much outside of a short-term bills market. Issuing at 30 years was to these guys a huge testosterone fix. On July 18, the above mentioned 2025 Irish yielded 12.33%. It opens this morning at 9.59% yield. In price terms that is a jump from 55.25 to 68.92. Someone, somewhere either knows something we don’t or we must assume that at least he thinks he does. Very strange.
I am still perplexed by the violence in the movement of equity prices – don’t you just love it when the geeks refer to a falling market as “volatile” rather than “knackered” – and I reckon that there is value out there. However, there are no special prizes for trying to catch the falling knife.
Meanwhile, both Fitch and Moody’s have affirmed the US’s Triple A credit rating. S&P has not passed comment yet but I am sure that there is a huge amount of leaning on that particular ratings agency going on. Announce a downgrade and win a free one-way ticket to Guantanamo Bay. However, Dagong Global Credit Rating, the Chinese ratings agency, seems not to have read the script and downgraded Uncle Sam from A+ to A. With simple logic, it explained its action by stating that the debt ceiling debate has no influence on the fact that government spending is still outpacing economic growth and fiscal revenues. Who can honestly argue with that? S&P; man or mouse?