Monday 23 January 2012

Quotes and time zones

Quotes and time zones
I have been quoted a bit in the press recently and have now joined the club of those “quoted out of context”. It comes with the territory, so I am not going to complain about it. I only want to make a couple of things clear to the readers of this column.

Most importantly, at Origo we try to work in Real Market Time (RMT). It is rather different from Economist’s Hypothetical Time (EHT) or even Newspaper Headline Time (NHT). It is also quite a risky endeavour.

Switching for a moment to EHT, I do not know where the world economy will be in 9 or 12 months from now. There are simply too many unknowns at play. I have an opinion about a lot of them, but those opinions are irrelevant when it comes to today’s practical investment decisions. Those decisions are made in RMT.

The only thing I know is that in RMT, we are right now putting the doom-and-gloom-and collapse scenario of the past four months behind us and that is enough to make the markets react. Another setback may come later, but it is not visible in any economic indicators right now,. We will jump off that bridge when we reach it, i.e. when it becomes relevant in RMT.

Europe is in a crisis, and for several reasons. In EHT, government debt, inadequate institutions, and way too weak banks are central ingredients. But in RMT, a crisis accelerates dramatically if a country or a bank cannot roll over existing debt. The European inter-bank market is pretty much dysfunctional, but ECB has taken over the role as a clearing house. It is certainly not optimal, but it works for now.

The almost weekly auctions over European government bonds is the space to watch (in RMT), when it comes to the government debt situation. As long as the euro-zone countries can refinance themselves at almost normal market conditions, the crisis is not spinning out of control. That is enough for now.

Everywhere the game is to play for time, time to stabilise the economies, and time to revive the economic growth. As opposed to financial markets myths, it is really the only way to solve the problems. There is no quick way out. The best we can hope for is that the train does not run off the track in the meantime.

It is a question of perceived probabilities. Every time the markets perceive a change in the probability that we remain on track, it is good or bad news. And that is exactly what we at Origo try to monitor.

Despite some last-ditch brinkmanship, the negotiations between the private sector bondholders and the Greek government continue, and now appear to be heading for some kind of resolution. It will mean that the official debt write down is 50% while the real haircut (once the new, longer-dated bonds are issued) will be some 68%. Let us get it in the bag so we can move on.

Speedy solution to EU crisis?
Germany and France now wants to speed up the resolution of the crisis and the final designs of the new EU institutions. It does not make the overall plan more correct. There has been an interesting change in the language. Germany’s foreign minister Westerwelle now talks about solidarity with the countries in trouble. He also talked about long-term solutions. If we could please hear some more about this solidarity, please. Westerwelle also wants to speed up the creation of a European rating agency.

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