Capital Markets Update

By Louis S. Barnes Friday, July 8, 2011

The most important economic news each month, by far, is the early-month count of jobs created or lost in the prior month. All markets were poised for better figures in this morning's report for June, but the actual was jaw-dropping: only 18,000 jobs gained, April-May revised down 44,000, and hourly earnings fell .1%. The one surprising reaction: the Dow is off only 110 points. Stunned, drunk, or both.
Enough of that. Find some entertainment in deals cooking all over the place.
We're going to get an NFL deal, maybe this weekend. Which is a great thing for those of us stuck with the Colorado Rockies. Even if the Broncos are just as bad, we won't have to face it until September. Sorta like the stock market.
We're going to get a budget deal before the August 2 deadline -- messy, half-baked, but a deal and real progress toward repaired US finances.
There's no deal -- yet -- but the first sensible Fannie-Freddie legislation is in Congress, to preserve and combine them as a public utility like Ginnie, no more "public-private partnership" with stockholders and management running off with the store.
Iceland sold $2 billion in bonds in the open market this week at low interest rates. Back in business less than three years after its banks defaulted on $85 billion in debt, and only three months after telling the UK and Holland to go fish with their claim for $5.8 billion in their citizen's losses on deposits in failed offshore Icelandic banks.
There is life after default and devaluation!
A good thing, because Europe's latest deal to kick the can ahead another year has in one week clunked to a standstill, now leaning precariously against the row of dominoes.
Forgive my schadenfreude (the enjoyment of someone else's misfortune) but it is a German concept. The Greeks saw the inevitable collapse of hubris into nemesis as tragedy. I don't recommend enjoying the European endgame, but I do confess some eager anticipation: a European run to local currencies would slow the global economy, but the flight to the US for safety would drop rates here, a huge help, and would demolish the notion that the Germans have economics figured out and we don't.
The newly failed deal there began as a French proposal to conceal Greek default. Bankers holding Greek debt would agree -- voluntarily -- that instead of being repaid in cash euros, they would accept new 30-year Greek bonds paying 5.6% (10s today yield 17%). It is handy to have banks around that will do what government says, an oubliette into which all sorts of embarrassments can be dropped and forgotten. German banks scurried to agree with their French colleagues.
There is no market for these pretend 30-year Greek bonds, worth perhaps 20 or 30 centimes on the euro, yet French and German banks would carry them at face value. Anything to protect politicians from taxpayer rage, although taxpayers are the depositors and stockholders in these same bag-holding banks.
Then the European Central Bank said no sovereign-debt restructuring of any kind. The ECB holds about $140 billion in Greek debt as collateral for loans to Greek banks, and any loss at the ECB must be borne by Euro-wide taxpayers. If they’ll pay.
This week, in a sequence worthy of Clouseau, S&P and Moody's said the bond swap would still be a default. Then Moody's downrated Portugal to junk. The ECB, holding a wad of Portuguese bonds as collateral from those banks, too, then waived its rules against accepting junk. The best part, that could not be made up: the German finance minister, Wolfgang Schauble, for years lecturing lesser Europeans on the merits of discipline, threatened action against the rating agencies for down-rating Portugal.
German 10s pay 2.83%. Too-big-to-save Italy's 10s blew out of trading range to 5.20%. Irish and Portuguese 10s sold off to a pre-default 13.0% yield.
Before the end of summer, either Europe will join in true union, the taxpayers of the rich picking up at least $600 billion (before Spain and Italy) or the dominoes will go. We'll have some warning, maybe a week or two, like the run-in to Lehman and a Sunday announcement. And I still maintain, beneficial for us, and ultimately for Europe.