Welcome to the Monday after...
Whatever is going on out there at the moment, it isn’t pretty. Standard and Poor’s downgrade of Uncle Sam over the weekend – they timed it so that every market in the world was closed at the time when they broke the news – is probably not the cause of further volatility this morning. With all probability things would have been ugly today, irrespective, and it is fair to suspect that, market-wise, the downgrade was knocking at an open door.
There has so far been no sign whatsoever of US Treasuries suddenly become pariahs as the sharp decline in Asian equities reinforces the flight to quality and so far no one seems to have been able to think of anything of much better quality than Treasuries. I have made it abundantly clear during the past months that I don’t see a downgrade of US debt as the end of the world as we see it and the nonsense which President O’Bama was spouting about interest rates rising on credit cards and car loans for hardworking American families was always to be taken with a pinch of salt.
Had the regulators not been sleeping on the job and had the Greenspan Fed not mistaken imported disinflation for the result of his magical inflation controlling touch, we would never have gone into the debt bubble and consumption overdrive which got us where we are now. Those very hardworking American families would be paying several percentage points higher rates for their wheels and roofs.
The problem lies not with the hardworking families but with the families who would love nothing more than to have the opportunity to work hard. Payroll numbers on Friday were not the worst thing in the world but from there to actually being able to make a significant and sustainable impact on unemployment is a long way off. I tend to think that many of us knew that winning the Presidency in 2008 was something of a hospital pass; however, O’Bama has used it to move from the Accident and Emergency Unit to Intensive Care. Those who are behaving as though – and trade as though – Palliative Care is next, hugely underestimate America.
Nevertheless, the response by China to what is going on not only in Washington but across large parts of the country is quite understandable. America remains in denial that it has to play by the same fiscal rules as any other sovereign borrower and it is interesting, in listening to what we are hearing from the Chinese, to ask ourselves why none of our people over here ever had the courage to say the same things. Now, of course, there is little room for European pots to call American kettles black.
I was very struck by an article in the Australian newspaper WA Today which takes a bone dry view of the situation facing the States and concludes the days when Australia depended on the US economy are over, that the country is no longer a part of the American sphere of influence and that whatever happens (or not, as the case may be) in Washington is of only minor importance to Antipodeans. It wonders why we are all still so US-centric in our thinking.
Easy for the Australians. For Europeans with more than enough problems of their own, America is a huge source of light relief – at least we aren’t the only ones in the poo – but as the old joke with the little birdie reminds us, when you are up to your neck in it, it is best to shut up. The ECB has now backed down and will be purchasing Italian and Spanish bonds although it is too proud to admit in as many words that it is just about to cross the thirty-eighth self-imposed line it has drawn in the sand. I find it progressively more difficult to use the words “ECB” and “credibility” in the same sentence. The only thing which the ECB has done consistently in the past twelve months is to be inconsistent.
Alas, we enter the new week with a well proportioned palette of unknowns and uncertainties with markets which have clearly disconnected from the authorities which are trying to control them. Some dumb journos have been digging in grandpa’s box of summer one-liners and are telling us that all the senior and important people are on holiday, that the trading floors are in the hands of juniors who are panicking and that come September when the bosses are back all will be in order again. I guess they haven’t heard of mobile phones, Bloomberg Anywhere apps and flights back home. With that kind of junk in the popular press, how do we ever expect Joe Sixpack to ever appreciate how severe the problems are. Anyhow, now the football season has begun so he probably doesn’t care anyhow.