The T Report: What, Me Worry?
The Importance of the Bund Auction
Markets are mixed overnight. They had steadily declined as concerns about Asia influenced markets. As the day has gone on in London, markets have bounced off the lows, as hopes of ECB action increase.
There was a weak German bund auction. They only sold €3.61 billion out of a maximum of €5 billion. I actually take this as a positive. I have long argued that negative rates in the short end were a sign that currency redenomination risk is high. The weakness of this auction signals that some of that risk has been taken off the table. The difference between German and Italian yields is still high, but I believe the ECB has succeeded in talking down the conversion risk. They still have to deliver, but taking this fear out of the market would be a big step.
If the EU is going to aggressively try to protect Spain and Italy, the “core” countries are going to have to come up with some money. Either directly (unlikely) or through the issuance of EFSF and eventually ESM debt. That is another reason for German yields to tick up and re-couple with those of the periphery. Long EFSF versus short the best components looks like an interesting trade.
Bickering vs Destruction
Maybe the world isn’t so binary, but that is how I currently see the world to a large degree. The ECB can engage in policies that make some parties uncomfortable, or downright angry. They can stretch their mandate, annoy Germany, face complaints about moral hazard, but just possibly negotiate a successful intervention that last long enough for real changes to be implemented in the economy. Often we get bogged down in the minutiae of these arguments and miss the other possible outcome.
Doing nothing likely results in a major sell-off in the markets, break-up of the Eurozone, and a complete standstill of the global economy as companies and individuals try and figure out what any of this means. In the past I have preferred taking immediate pain. I thought we should have had more Lehman’s or nationalizations. I thought Greece should have been allowed to default. My view has changed because over the past 2 years in Europe, policies have made the entire system more connected. Rather than creating firewalls, the policies have encouraged connectivity and linkages at an unprecedented rate. That coupled with dissolution of the euro is too much for the system to take. The weakness in China and the problems in the U.S. economy make it especially hard to take the risk of a euro break-up right now.
So, if the real choice is risking destruction or depression, versus some bickering, I would take bickering any day. I think the ECB and many leaders see that same outcome at the end of the day.
Markets vs Economies
The markets seem happy to be teased by central bankers. We seem to have hit a period where any disappoint from the central banks is instantly reversed with hopes that they will deliver at the next opportunity.
The economies have failed to see it that way. There is noticeable deterioration across most economies, including, Germany. While the politicians squabble and the central bankers dawdle, the economies have been getting worse.
The actions have to be taken for the economy not the markets. Hopefully the central bankers and politicians can see that their delays are causing problems for the real world. Economies are getting worse because no plan is being put in place, which only increases the final cost.
It is time to act now as the delays are just too costly.
Apple vs The World
The U.S. now has a record number of people on food stamps. China is looking at stimulus because they are in the midst of a hard landing. Europe is considering entering the money printing phase in a big way because their economies are a mess. Even at home, the Fed is considering more stimulus because the economy is showing signs of weakness.
Yet, in the midst of that turmoil, a product announcement can spark a rally in the biggest company in the world? That doesn’t seem right. I wouldn’t normally care, except that Apple has become so big that its influence on U.S. equity indices can’t be ignored.
My main reason for disliking Apple at these levels is that so many bears seem to have piled into it, as a last refuge. As the one stock they could get comfortable holding. But yesterday’s movement struck me as more bizarre than that. I have read many of the arguments about why Apple is cheap, but even then it looks to me like profits for I-phone 6, I-phone 7, I-phone 8, I-pad 3, I-pad 4, I-TV, etc have to be built in at least a little. Moving so much on an invitation for a product launch everyone is already expecting seems to have signs of a bubble.
It
is certainly one of the reasons I am biased to being long outside of the U.S., though right now, I’m looking at getting long across the globe, for what I expect to be another big round of policy induced rallies.