Capital Markets Update

by Louis S. Barnes Friday, November 4th, 2011

US markets have begun to fibrillate, pumping wildly and pointlessly, unable to measure prospects for slow-slide recession here, and Europe confounding everyone. In the last five weeks, the S&P 500 has traded from 1097 to 1292, caving to 1244 now; the 10-year T-note in that time 1.75% to 2.37%, today back to 2.04%. The mortgage centerline is 4.25%, a huge spread to 10s which may soon draw the Fed’s attention.

The ISM surveys (old “purchasing managers”) arrived at 50.8 for manufacturing in October, teetering at breakeven and down from 52.1; the service sector 52.9 unchanged. Rather more ominous, the European equivalent dumped to 43, clear recession, and China is now below 50. August and September US payroll gains were revised up by about half, but far below levels necessary to absorb the unemployed. October’s 80,000 gain is statistically undetectable.

Europe. No blue-sky, just the facts, Jacque. Try not to get lost in individual-nation details (Greece is a sideshow). Hopes of external salvation are done, and even if Germany were willing, it alone does not have the strength for a pan-European fix. The euro zone now has three options. One: to stop a run in progress, the European Central Bank begins a massive and sustained buy of Italian, Spanish, and French debt. Two: Club Med plus France embark on brutal IMF-enforced Teutonic transformation. Three: give it up, back to francs, lira, and pesetas.

Option One is a can-kick, Lucy holding for Charlie. Might buy some time, but Germany will not stand for it, and there is no way to allocate whose bonds get bought and how much. Option Two might make it down the field a ways, months, but the enforced austerity will leave these economies in worse budget shape than now.

These Europeans do not merely distrust each other, they do not like each other; not just the leaders, but the peoples. Sarkozy refers to Merkel as “la Boche,” and last week told UK PM Cameron said that he had “missed an opportunity to shut up.” Berlusconi uses unprintable terms to describe the Merkel physique. The Germans and French regard the Greeks as subhuman (in the last go-round, “untermenschen”). This grotesque, inept show reads like the 1930s, or 1905-14, mercifully now just about money.

And right there lies link and lesson here. Not about financial foolishness, but about the social contract.

The link: Jon Corzine, late chairman of Goldman, United States Senator, Governor of New Jersey, fabulously wealthy, has in one year destroyed a 200-year-old commodity trading house, MF Global, by betting on leverage 40:1 that Europe would not allow sovereign debt to default. He will soon be the arch-villain exemplar of corporate excess, disgusting compensation, and runaway inequality in American income and outcome. The perfect 1% man to burn in effigy at Occupy demonstrations.

Yet… our greatest risk as a nation is to hear that music and rise to bi-lateral class anger. There was a time here, not long ago, when the 1% (or 10% or 20%) oppressed the rest, held them down: brutal Rockefeller, Gould, Carnegie… Robber Barons. Eighty years ago soldiers still turned out to shoot union strikers. Here. In this country.

Today, frustrated and fearful people accuse corporations of hoarding cash and refusing to hire here, unable to understand that they made the money elsewhere, not here, a couple of billion people in only 20 years willing to do the same work as Americans for less pay. The wounded feel justified to take the fruits of the successful, those who can compete in a global economy, but these are not “oppressors.”

The Left offers infrastructure work, telling college grads, “Your shovel is in the mail.” The Right like Germany thinks only to guard its own, telling all others to reform themselves, tell those without jobs to be more productive.

The deadly hazard here is not financial excess. The danger is fracturing into self-justified groups like Europe. Cross that line, and the others’ bad behavior and suspicious motive frees us from responsibility for our own. The desire to get even and to punish, slathered with contempt, excuses us from thought for the whole.