A View from the Trenches, September 1st, 2009: Staying the course
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I am sure you will disagree with me, but I think that yesterday was
an uneventful day. Yes, stocks in China had a hell of a sell-off,
but….was anyone surprised? Was anyone surprised to see stocks in North
America finish less than 1% lower? Perhaps the flag was the drop in the
price of crude, below $70. But besides that, a good indication of the
mood in the markets is that in the Credit space, the IG12 index was up
by only 3bps, while the HY12 index was actually down by 1/4 of a point.
We first postulated on August 19th (www.sibileau.com/martin/2009/08/19
) the thesis that interest rates are going to stay low longer than
anticipated. Since then, the market seems to side with this notion, as
both the Bank of America’s Rates strategy team and Goldman Sachs’
Global Economics team explicitly elaborated on it (BofA’s “Global Rates
Focus” and GS’ “US Economics Analyst: 09/34 - The Outlook for Fed
Policy”, both published last Friday). In the Goldman Sachs the
document, it is interesting to note the notorious global approach to
the subject, even though it specifically deals with the Fed. Thus, in
general, I think that the global coordination of central banks is
becoming more and more evident to the investing community.
I do not blame the obscure, bearish forecasters for taking the stand
that government intervention will not work. I believe it has a lot to
do with the academic tradition of handling the analysis of financial
crisis at the single economy level. There is nothing wrong with that,
for that had always been the case until 2008 (One could, with a lot of
hindsight, make the comment that if the global financial cooperation is
avoided, the global military “cooperation” replaces it, as the case of
World War II shows). To picture this point, I thought there was no
better chart than that of the price of the gold. This chart (source:
Bloomberg) shows the evolution of the price since the start of the
crisis. It didn’t stop rising until central banks assumed a leading
role with the bankruptcy of Bear Stearns and since then, it has not
gone anywhere, trading with a very wide range. The vertical lines
signal key events: The collapse of Lehman, and the beginning of the
Obama administration. The underperformance of gold therefore is the
best witness we have, to attest that global (not local) intervention is
about to write a new chapter in economic history. But to be fair, it
won’t be a nice one, because there is still a lot of fiscal deficits to
subsidize (i.e. central banks monetizing deficits) or cross-subsidize
(central banks from some nations subsidizing the fiscal deficits of
other nations, as in the case of Canada, that issues $3BN in federal
government bonds in USD to push a bid out of the Canadian dollar,
depreciating the financial assets of Canadian taxpayers who save in
Canadian dollars, in favor of US note holders).
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