David A. RosenbergMay 11, 2010
Chief Economist & Strategist Economic Commentarydrosenberg@gluskinsheff.com+ 1 416 681 8919
MARKET MUSINGS & DATA DECIPHERING
Breakfast with Dave
ACROSS THE POND – STILL A SEA OF REDIN THIS ISSUE
Across the pond — still asea of red
Making PIIGS squeal: wedid some indepth analysison how the economies of the PIIGS would fare if thedeficit-to-GDP ratios were to revert back to thecriteria of 3.0%
Redefining a treaty: theEMU political elite and theECB bypassed theircharters in order to take the easy road and ensure that bad credits getrewarded
Canadian housing: arehomebuilders building inventory?Well, I think the turbulent global events of the past few weeks underscore thereason why I have maintained a cautious investment approach for the past year,notwithstanding the massive recovery in risk assets we saw from the March2009 lows, which from my lens bore a huge resemblance to the bungee jump in the market back in 1930. In fact, at one point two weeks ago, at the highs, thestock market had already achieved, in barely more than a year, what took fiveyears to accomplish in the 2002 to 2007 bull market, and at least that marketwasn’t being fuelled by unprecedented government intervention in the economyand incursion into the capital markets.The dramatic government stimulus was global in nature, and this was theprimary prop behind the rally in equities over the past year and change, and themessage coming out of Greece, and not just Greece but many othergovernments in the European Union and across the globe, is that governmentsare probing the outer limits of their deficit finance capacities. History doesindeed show that it is quite common to see sovereign default risks follow on theheels of a global banking crisis, which was the story for 2007 and 2008; it tooka respite in 2009 and we are now in a new chapter of this prolonged debtdeleveraging story. These cycles of balance sheet repair, alternating between the private and public sector, typically lasts 6 to 7 years. We are barely into year three, and what is extremely important in this roller coaster ride is to focus oncapital preservation strategies that minimize the volatility in the portfolio, whichis one reason why I have favoured long-short income and equity strategies.In my opinion, Greece is the same canary in the coal mine that Thailand was foremerging Asia in 1997, which ultimately led to the Russian debt default anddemise of LTCM; the same canary in the coal mine that New Century Financial inearly 2007 proved to be in terms of being a leading indicator for the likes of Bear Stearns and Lehman. So, the most dangerous thing to do now is to viewGreece as a one-off crisis that will be contained. Even with this new andaggressive EU-IMF financing arrangement that has managed to trigger a wildshort covering rally yesterday, the risks are still high that the contagion spreads to countries like Portugal, Spain, Italy and even the U.K., which has alreadyreceived some warnings from the major rating agencies and is gripped withpolitical gridlock in the aftermath of last week’s uncertain election results.
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