By Tiernan Ray
Regarding the market’s sudden, late drop yesterday — it was weak already but added another 200 points to the decline in the last half hour or so — Gluskin Sheff economist David Rosenberg says this morning that what he found interesting was that “the market came under pressure without there being any significant piece of news to be a catalyst.”
“I think what we have on our hands, strictly from a technical perspective, is a market that is not only fully priced but fully owned,” said Rosenberg in a phone call I had with him this morning. We’re re-testing the lows of May 6, says Rosenberg, which, despite the fact that no one knows what happened exactly, is nevertheless evidence of what can happen when “there is no bid,” as is probably the case with yesterday’s sell-off.
The current worry over European contagion — the Dow Industrials opened sharply lower but are now up 10 points — is to be expected, as the unprecedented fact of having a European Union member, Greece, having to go to the International Monetary Fund for a loan is seriously concerning, given that once a country asks the IMF for help, historically, there’s a 50-50 chance of default. “It’s a coin toss,” says Rosenberg.
“Anyone who’s studied post-bubble credit crisis scripts knows that it’s typical to have bank disarray followed by public-sector disarray, because the debt problems were brought onto the balance sheet of the government,” observes Rosenberg. “It’s just musical chairs.”
“We just switched the seats around. The reality is this: At every level of society and every country in the world there is too much debt relative to income.”
In Rosenberg’s view, there are three ways out of the current crisis: Defaults, extreme austerity, or massive money printing, in this case by the European Central Bank.
The latter two options are unlikely to solve things: “I don’t know if a government is going to be able to implement austerity when you look at the size of resource caps in these countries. It’s difficult to believe people will accept extreme austerity.”
And as for money printing, “How far will the ECB go to join in the parade of balance sheet expansion that others have all engineered over the last year,” asks Rosenberg, pretty much answering his own question.
So default seems more and more the likely prospect, and perhaps with it, some fraying of the monetary union — the “unthinkable” prospect.
“In a multi-year period of de-leveraging, you really do have to think the unthinkable,” says Rosenberg.
“There are all sorts of implications for debt default, including the counter-party risk back to the U.S. One thing we learned in recent years is that we live in an increasingly interconnected global capital market.”
Rosenberg suggests the next events to look for are the the effect on Euro dollars in Europe, because “that’s going to be giving you an impression of how these problems are transmitted to the banking sector over there.”
The Euro is mostly holding up today, currently trading at $1.2546. The FTSE 100 was able to rally back above the “psychologically” important 5,000 level, though still down 42 points, or almost 1%, at 5,031.
Regarding the market’s sudden, late drop yesterday — it was weak already but added another 200 points to the decline in the last half hour or so — Gluskin Sheff economist David Rosenberg says this morning that what he found interesting was that “the market came under pressure without there being any significant piece of news to be a catalyst.”
“I think what we have on our hands, strictly from a technical perspective, is a market that is not only fully priced but fully owned,” said Rosenberg in a phone call I had with him this morning. We’re re-testing the lows of May 6, says Rosenberg, which, despite the fact that no one knows what happened exactly, is nevertheless evidence of what can happen when “there is no bid,” as is probably the case with yesterday’s sell-off.
The current worry over European contagion — the Dow Industrials opened sharply lower but are now up 10 points — is to be expected, as the unprecedented fact of having a European Union member, Greece, having to go to the International Monetary Fund for a loan is seriously concerning, given that once a country asks the IMF for help, historically, there’s a 50-50 chance of default. “It’s a coin toss,” says Rosenberg.
“Anyone who’s studied post-bubble credit crisis scripts knows that it’s typical to have bank disarray followed by public-sector disarray, because the debt problems were brought onto the balance sheet of the government,” observes Rosenberg. “It’s just musical chairs.”
“We just switched the seats around. The reality is this: At every level of society and every country in the world there is too much debt relative to income.”
In Rosenberg’s view, there are three ways out of the current crisis: Defaults, extreme austerity, or massive money printing, in this case by the European Central Bank.
The latter two options are unlikely to solve things: “I don’t know if a government is going to be able to implement austerity when you look at the size of resource caps in these countries. It’s difficult to believe people will accept extreme austerity.”
And as for money printing, “How far will the ECB go to join in the parade of balance sheet expansion that others have all engineered over the last year,” asks Rosenberg, pretty much answering his own question.
So default seems more and more the likely prospect, and perhaps with it, some fraying of the monetary union — the “unthinkable” prospect.
“In a multi-year period of de-leveraging, you really do have to think the unthinkable,” says Rosenberg.
“There are all sorts of implications for debt default, including the counter-party risk back to the U.S. One thing we learned in recent years is that we live in an increasingly interconnected global capital market.”
Rosenberg suggests the next events to look for are the the effect on Euro dollars in Europe, because “that’s going to be giving you an impression of how these problems are transmitted to the banking sector over there.”
The Euro is mostly holding up today, currently trading at $1.2546. The FTSE 100 was able to rally back above the “psychologically” important 5,000 level, though still down 42 points, or almost 1%, at 5,031.
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