Monday, 6 February 2012

Risk-on. Greek default. US Jobs

Risk-on vs Risk Rally
Since November I have claimed that we were in a risk-on situation in the markets and at the turn of the year I believed that it could turn into a market rally. The distinction is crucial. A risk-on situation prevails when the markets are getting less fearful and the asset prices adjust accordingly. A risk-on situation may turn into a rally if the price adjustment leads to increasing volumes and that in turn leads to added asset price momentum. It certainly looks like we are there now. Last week’s raft of Market Strategists turning positive is just another proof that consensus is now following the markets (and not the other way round!).

Observing a risk rally is quite obvious and does not require a lot of rocket science. Defining the beginning of a risk-on situation is a bit more complicated, as the signs are often weak at the beginning. Looking back, we believe that the risk-on situation began in late September and accelerated in late November (even if the stock markets actually fell a bit) and again in December. The market rally only kicked in later.

At Origo we devote considerable energy to time these turning points. Now, in the fifth month of the risk-on situation, we are becoming a bit concerned. The market optimism may still developing further. But there are some not-so-healthy factors in the European economy, including credit. We still need decisive action to recapitalise banks.

The good news is that when a risk-off situation begins, it is usually clearly visible in advance and the signs are unmistakable once it hits the markets. If you have forgotten what it feels like, think back to 2 August.

A Greek default is increasingly likely
The Greek drama continues to develop, but now with a quite different twist. Over the weekend, Euro-group Chairman Jean-Claude Juncker piled the pressure on the Greek government to be serious about implementing reform as a condition for the disbursement of further help. Some days ago I sent a couple of links to documents that amply demonstrate the point: The Greek government faces a serious job in reforming the public sector and that goes way beyond just reducing costs. OECD has pointed out that the public administration is largely dysfunctional, that there is no follow-up on policies and their effects, that public collection and use of data is disastrous. I quote from OECD:

“For now, it is not clear how existing and new entities of the Centre of Government will work together in order to secure the leadership needed for reform, including the necessary strategic vision, accountability, strategic planning, policy coherence and collective commitment, and communication. Fundamentally, there is no obvious ownership of the reform agenda either with specific entities at the Centre of Government, or shared by these entities.  The capacity to co-ordinate with key ministries is also weak.” (OECD’s emphasis)

And so on. Again it appears that the conservative Nea Demokratia party at the same time tries to present themselves as defenders of the country and an even stronger defender of vested interests that are dead against any kind of meaningful reform.

Meanwhile, the negotiations with the private bondholders appear to have taken a back seat, at least in the newspaper headline space. But we certainly are on the final straight: On Wednesday the EU Council meets, and the Greek negotiations are on the agenda. On 13 February a formal offer for the “voluntary” debt swap must be presented in order for the Greece’s large coupon payment on 20 March to actually be paid.

But at this moment, any losses ought to be fully discounted by the markets. I guess it is only the distribution of the losses that remains to be seen.

US Jobs report
The US labour market data released on Friday gave the stock markets a good boost. The headline unemployment number fell from 8.3 to 8.1 per cent in January. That number is one of the most suspicious numbers in the entire cycle of US monthly data releases. Since Reagan’s days, this number is an estimation, based on panel data, and not on any kind of national records. In particular the number of job seekers is dodgy and fluctuates significantly. As a result the unemployment rate can fall if unemployed persons drop out of the labour force. In the US definition you can fall out of the job-seeking category if a job offered is turned down, eg. because of a too low pay.

There is more substance in the data for actual jobs creation. And those data showed that job creation is getting broader and more dispersed. Anyway, it is a lagging indicator. US data have exceeded expectations since October of last year.

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