The Independent Market Observer

Super Mario to the Rescue

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Jul 27, 2012 11:52:43 AM

and tagged Yesterday's News

Leave a comment

Two lead financial and economic stories yesterday. First, the markets melted up on the announcement by Mario Draghi, head of the European Central Bank, that policy makers would do whatever was necessary to save the euro. The news hit the front page of the Financial Times (FT) with “Draghi triggers rally with bonds talk,” the front page of the Wall Street Journal (WSJ) with “A Pledge to Save the Euro,” and the front page of the New York Times (NYT) business section with “Stocks Soar After Pledge to Support the Euro Zone.” All good, except that we have seen this movie before:

Scene 1: European official pledges support, assures markets that everything is under control.
Scene 2: Markets react positively.
Scene 3: Everyone thinks about it some more.
Scene 4: Markets drop.

Nothing in Mr. Draghi’s announcement provided any specifics as to how the problems will actually, you know, be solved.

The mechanism discussed in the articles is the mass buying of euro government debt by the central bank. Although this may solve the immediate problem of unsustainable interest rates, it does not solve the underlying problem of too much spending and too much debt. It also creates massive additional problems going forward, in the forms of inflation and moral hazard. We are now watching scene 2 and, barring some new specifics that I do not expect, we should be moving to scenes 3 and 4 pretty quickly.

Not all of the news on the euro front is bad, though. A little-noted but important story in the WSJ is “Return to the Bond Markets Marks Ireland Turning Point” on page A7. Ireland was one of the first eurozone economies to fail and need assistance, and it was about the only one to really embrace austerity as a solution. The fact that Ireland can now raise debt on its own again is truly a big deal, as it is the first sign that the austerity plans backed by Germany can actually work. If Ireland’s situation continues to improve, we should expect even less flexibility from the northern nations in dealing with the southern ones, as the northerners see Ireland as a vindication of real austerity as a workable strategy.

The second big story is the resignation of the CEO and COO of Nomura, a major Japanese bank, and the expected retrenchment of the firm back to Japan. This made the front page of the FT (“Nomura axe falls on top staff”), the front business page of the NYT (“Chief’s Fall Ends Japanese Bank’s Bold Run”), and page C1 of the WSJ (“Nomura Scandal Dents Global Aim”). What this means to most of us is minimal, except that it is another sign of the decay of the global financial industry. Just as Goldman is looking to have an actual bank as part of its company and other banks are downsizing, Nomura is cashiering its expansion-minded management and going back to its home market. The banking retreat continues.

An emerging meta-story is the restructuring of the energy industry. I have spoken before, and included in the presentation we recently posted, about how shale gas is driving change in the U.S. energy structure. This is starting to hit in a big way. Both the FT (page 14, “Shale gas glut dents oil major earnings”) and the WSJ (page B1, “For Exxon, Natural Gas Becomes a Costly Burden”) weigh in. Of course, no story can be reported from only one side, and on page A3 of the WSJ we see the downside with “Drilling Strains Rural Roads” and “Court Backs Towns in Gas Law Fight.”

There are a few other stories that I expect to trend: “Libor Suits Weighed by Mutual Fund Firms” on page C3 of the WSJ—I said this was coming and here we go; the FT series on youth unemployment titled “Left Behind,” which we will be seeing and hearing much more about; and “Scandals May Cost the Banks Their Clout” on page B1 of the NYT, a good summary of just how much the banks’ political position is eroding.

Have a great day!


Subscribe via Email

Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®