Friday, 25 November 2011

12 reasons for the markets to be paranoid

I cannot really find anything interesting in today's news. So let me instead use some space to summarise my views on why it is so difficult to operate in today's markets.

I have on earlier occasions expressed that at no other point in my career have I had to dig that deep in remote corners of my memory to find tools that can help me to understand. Yesterday one had to dig into the conditions for European government bond auctions (French primary dealers must bid at the OAT auctions, German primary dealers can abstain from Bund auctions if they like).

The day before yesterday one had to understand the unique American tradition of planning government expenditure programs over 10 years - which means that one cannot really count on anything. Last week we had to go over the ECB's charter to understand whether a modification of the charter also requires changes to the Lisbon treaty. And so on.

But we take a deep breath and list the factors that currently have conspired to ruin our night's sleep:

  1. A secular reversal of a 15-year trend where households in many countries have increased their financial leverage significantly
  2. A normal cyclical slowdown in the cyclical upturn that began in 2009
  3. Government austerity programs across Europe, beginning in 2010
  4. Additional public sector cut-backs in 2011
  5. A dramatic reassessment of the price of risk - and perhaps even a new understanding of risk
  6. Europe's central bank does not have the necessary authority to conduct a monetary policy that can effectively help us out of the pinch
  7. European banks have opposed a recapitalisation and are now zombies, are forced to reduce their balance sheets dramatically now (remember Japan!). The U.S. banks are still struggling with the aftermath of the Sub-Prime crisis
  8. Strong ideological determination in Germany to use the opportunity to shape important aspects of European political cooperation after the German model
  9. Southern European countries, which for years have opposed productivity-enhancing reforms and general budgetary discipline
  10. Maximum increase in the number of retirees (born 1945-50) putting pressure on state finances independently of the financial markets
  11. Large institutional investors are still forced to abide by the rating firms' views, even if these views are deeply compromised
  12. China's growing influence on world economy and the derived effects when even China has "slow" growth

I could probably find a few more. It is not necessary. There is already plenty.

My biggest problem is not really that the situation is complex. It is that the vast majority of communications in the financial sector has been shortened to a point that it can also be read by people with profound attention deficits.

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