Home > Uncategorized > 2012/01/27: It’s a wrap: Risk Fizzle, Euro-hope, WEF ‘Global Risks 2012’, Smartest Guy in the Room

2012/01/27: It’s a wrap: Risk Fizzle, Euro-hope, WEF ‘Global Risks 2012’, Smartest Guy in the Room

© 2012 ROHR International, Inc. All International rights reserved.

Looks like Helicopter Ben morphing into Gusher Ben didn’t help much… except to exacerbate what we all knew was going to be a disjointed week from the time we walked in. And the markets certainly did not disappoint in that regard. Pops and flops (equities and to a lesser degree risk assets like commodities), solid extensions of up trends (those strange bedfellows govvies and Gold), and significant reversals (back to the ‘risk-on’ US dollar “carry trade” in foreign exchange) were all apparent. And substantially due to the FOMC opting-in to a consensus the Federal Funds rate should remain effectively at zero for much longer than the middle of next year projected at their last meeting.

That summary view is all the reasonable response we anticipated in yesterday’s post on Gusher Ben attempting to push psychology upward from underneath hoping that the enthusiasm will pop like an oil ‘gusher’. This is nothing less than a mind game version of quantitative easing (i.e. de facto Q3.) All of the specific asset class analysis and the intermarket implications that came home to roost by yesterday’s Close spilled over into today were noted in yesterday’s analysis.

That said, the resilient equities have found a new/old cause for hope: fresh upbeat assessment of the potential for a Greek debt deal. EU Finance Minister Olli Rehn said this morning at Davos, “A Private Sector Involvement deal is imminent; if not today then likely over the weekend.” We shall see. Certainly everyone hopes he is right.  Yet there are several grounds for skepticism which even go beyond whether a deal can be crafted. There is now some concern whether the Greeks will sign on to something as modest as “reform” (forget “austerity”), and other issues remain.

There is all of the still convoluted conditionality surrounding Germany’s drive to complete the insanely austere new European Union fiscal pact into next Tuesday’s EU Summit. The rest of Europe has signaled it finds this at the very least distasteful, and the UK’s Cameron will certainly refuse to sign on to anything including a financial services transaction tax (which he just reasserted today is “madness”). And all of that does not even include the degree to which part of the basis for Standard & Poors’ recent downgrades of various European sovereign debt is that austerity alone does not seem to be working.

Even Chancellor Merkel herself allowed on Wednesday prior to her opening remarks at the World Economic Forum annual meeting in Davos that the combined massive monetary infusions and sheer austerity did not seem to be working in Greece. This is something we (among many others of course) were already warning of when the initial results from the Greek austerity measures were apparent back in late 2010. But the Germans are stuck on a concept here that somehow the Teutonic parsimony that worked so well in their own country must surely be the formula that will ‘help’ everyone else. Or they just haven’t been willing to discuss a more nuanced solution, like the labor market changes that have also been a part of their renewed success.

Speaking of Davos, no annual meeting would be complete without World Economic Forum’s annual Global Risks assessment. We refer to this one as the ‘LOW’ report, for Litany of Woes. It makes interesting reading with its online PDF, and especially the interactive ‘Data Explorer’ graphics. For those of you who have never played around with the latter, it’s actually quite an amusing little shop of horrors that displays the interconnections between all the problems.

Enjoy. Or whatever it is you call looking at how infrastructure collapse, disease, extreme currency volatility, food shortages, major technology failure and sovereign debt defaults might interact with each other. Of course, it’s necessary to allow that the WEF neither predicts any of this will actually occur, nor that any of the major failures will occur in conjunction with each other. It is probably better fodder for someone scripting a doomsday movie than any particular market strategy. That said, it’s good to take a thorough look at what’s out there from time to time.

And part of that most certainly includes the seemingly improved US economic landscape. On a short-term view there is no doubt that the Fed action-related drubbing of the dollar plays well for the equities on two fronts: the economic bump from more export competitiveness, which works hand in glove with the higher corporate profits in US dollar terms that can be repatriated from overseas sales. Yet there are also no small number of problems which are not going away soon.

That much was highlighted by the weaker than expected first look at fourth quarter US Gross Domestic Product.While the actual downside miss was only 0.2%, the weakness of both consumer activity and especially business investment supports our basic views. Regardless of what Washington DC would have anyone believe about their commitment to assisting business, the landscape remains daunting.  Aside from the impact of the ‘Taxulationism’ (combined negative effect of high taxes, regulation and at least a modicum of protectionism) we have explored extensively in the past, there is also the less than constructive bank financing aspect.

And that was highlighted during a CNBC interview of JP Morgan chief Jamie Dimon. He is still one of the very smartest guys in the room. And that is not just sheer intelligence, but also on his broad awareness of the overall context and balanced view that he tends to take on both his industry and the economy at large. All of which was rolled into his comments (which we will attempt to concisely and accurately summarize) on the problems facing the banks and the economy.

He reaffirmed once again that all of the happy talk out of Washington about encouraging banks to make loans flies in the face of what is still significantly stringent regulator oversight, which makes only the most very solid borrowers candidates for loans. That all fits in with the very disjointed macro-prudential regulatory regime run amok, which includes Basel III, Dodd-Frank, and multiple consumer protection regimes (including Washington DC’s latest creation.)

These multiple efforts are all focused on “more” regulation, rather than the cumulative impact. As an aside, that is a key point which Mr. Dimon pointedly raised with the Fed Chairman at one of his previous press conferences. The good Chairman had no answer to whether anyone was able to assess that combined impact of all the new rules and regulations. And this morning Mr. Dimon made very clear that someone should take a consolidated view and ask, “What’s smarter, better, more efficient?

President Obama’s reference in the State of the Union address to elimination of confusing or contradictory regulation was pure politics, and bordered upon a significant dose of fantasy. While Mr. Dimon did not mention it today, this is something which has been plaguing America, and specifically its business competitiveness, for some time. Elected representatives who are interested in populist prescriptions to prevent the last problem have been in a “crisis” legislation mode for many years now. And the patchwork which has flowed from that is making it harder and harder for businesses to deal with overlapping and often contradictory regulations.

That is aside from the fact many of the governmental “protection” organizations like the EPA, NLRB, OSHA, and the banking and securities regulators (at least of late in the case of the latter) have been given the ‘green light’ by the current administration to implement more aggressive enforcement. And as the final note that relates back to the financial services industry and the systemic and consumer protections which have been put in place, any overkill in the oversight of financial businesses will cause many of them to (in Mr. Dimon’s words) “un-bank”.

And by creating incentives which encourage financial services firms to abandon their banking charters, the politicians and regulators are once again encouraging the creation of a large, unregulated financial services arena.And rather than reduce risk, that will exacerbate it. While it certainly applies amply to all of the official encouragement that was given to financial services, housing and other areas prior to the 2007-2008 combined US Credit and Housing Crises, the full about-face on financial oversight by various governments also deserves the cautionary cliché that Mr. Dimon cited again this morning:

The path to hell is paved with good intentions.” Kind of scary when one of the smartest guys in the room has to remind the government regulators about the risks of extremes; whether lassitude or excessive vigilance.

General Market Observations and EXTENDED TREND IMPLICATIONS

All of these are fully the same as in yesterday’s post.

Thanks for your interest.

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