The Greeks have a word for it. Unfortunately, it can't be printed in a family magazine. Suffice to it say, the word in question is not complimentary. But then, how could it be, directed as it is at Moody's?
What occasioned the distinctly earthy expression of disapproval by the heirs of Socrates, Plato and Aristotle was that Moody's, ignoring the country's historic repute as the cradle of democracy, had the effrontery to slash Greece's credit rating three whole notches, thus casting its sovereign debt ever deeper into the Hades of junk bondage, and, adding insult to injury, warned a further cut was not outside the realm of possibility.
Not content with muttering imprecations, the powers-that-be in Greece also blamed the credit agencies with causing undue financial distress for their country and fired off a letter to the European Union demanding it induce Moody's, Standard & Poor's and Fitch to stop being so mean. Actually, we found the complaints by the finance minister and prime minister quite revelatory, since we were under the misimpression that feckless government borrowing and spending has something to do with the financial woes that the likes of Ireland, Portugal, Spain and Greece find themselves wallowing in. Live and learn, we guess.
Nothing daunted, and while it had its scalpel out, Moody's decided to demonstrate its sober impartiality when rendering judgment on the creditworthiness of nations by following its unkind cut to Greece with a downgrade of Spain three days later. No doubt, now that they've gotten into the swing of it, the lads and lassies at the credit-rating services will be paring ratings with some abandon, as it becomes increasingly apparent that the clutch of euro-zone members whose banks and economies are in deep doo-doo are not, as widely assumed, yesterday's worry.
As Harald Malmgren—boss man of the eponymous Malmgren Group, whose insightful observations on global markets we've had the pleasure of quoting on more than one occasion—puts it, "The Euro crisis is not over." Rather, he says, "European politicians have become practiced and effective in postponing problems and diverting market attention from underlying weaknesses."
Early on, it struck us that the insistence to impose austerity on euro-zone economies that were wobbly in the extreme and even nudging them to raise interest rates was like forcing a guy with a fractured leg to compete in a marathon—a sure-fire way to stifle any chance of incipient recovery. Comes now Michael Darda, chief economist of MKM Partners, with a piece titled, "Can the Euro Periphery Handle High Rates?" And his answer is as definitive as it is succinct: "Nope."
If occasionally given to an overly rosy view of domestic economic data, Michael has been pretty much on the money on the overall trend and, to his great credit, he has been right as rain on the stock market during its stunning two-year bull romp. He explains his negative take on the financial weak sisters in the euro zone this way:
"Bond yields have shot up to new highs as European debt markets have priced in a succession of European Central Bank rate hikes. With debt spreads wide (and widening), the generic euro-zone yield curve collapsing and broad-based weakness in the euro-area monetary aggregates, we believe the signal from these financial indicators is that an already-too-tight ECB monetary policy is about to get even tighter, with potentially devastating consequences. We do not believe the periphery [Greece, Italy, Spain, Portugal, Ireland] can withstand what appears to be an imminent series of ECB rate hikes."
Michael points out that the leading indicators of the Organization for Economic Cooperation and Development (tongue get tired saying that? Try OECD) for Spain peaked in April of last year, and for Italy in January 2010. Since Spain and Italy together are some five times the combined size of Greece, Portugal and Ireland, a credit-based shock via higher interest rates to Italy and Spain, he fears, "may be the match that lights the fuse."
Michael warns that money growth remains sluggish across the board in the euro zone, carrying it with the threat of enfeebled nominal GDP growth. The European Central Bank, he posits, ought to be more concerned about the rising risk of a Japanese-style "lost decade" than the "backward-looking inflation data" that has it all aflutter.
But, come on, Michael, central bankers—whether in Europe or Asia or the good old U.S.A. or Mars—wouldn't be central bankers if they knew what to worry about. Remember how surpluses in the federal budget kept Alan Greenspan tossing and turning all night long and how Ben Bernanke pooh-poohed the idea that a housing bubble might explode and take the economy with it?
TO BE FAIR, CENTRAL BANKERS aren't the only species with the knack of intuitively focusing on the wrong concern. European politicians, as Harald Malmgren noted, are masters at it and, lest we be accused of xenophobia, our own pols are no slouches in treating mountains as if they were molehills and molehills as if they were mountains.
For example, with the Middle East erupting, much of Europe experiencing financial distress and a still sorry-looking job picture here, Harry Reid of Nevada, the Senate majority leader, unexpectedly fixed his full attention on the brothels in his state. More specifically, he wants to change their status from legal to illegal, a worthy notion, perhaps, but we must be missing something since we can't quite grasp it as one of the burning issues of the day. Of course, his motivation could be more personal: Perhaps the dwelling next to his suddenly has been transformed into a house of ill repute, which obviously would create a terrible traffic nuisance.
In like vein (or is it in like vain?), the inimitable Newt Gingrich has resurfaced as a candidate for the presidency in 2012. Always eager for an interview, even more so now that he's in the running for the top job, Newt seized the recent opportunity to jabber away on the radio. But instead of pontificating on the uprisings in the Middle East or the ballooning deficit, he found himself ruminating on his extramarital romantic adventures. He served his first wife with divorce papers while she was in the hospital recovering from cancer surgery. He shed his second wife after 18 years and a diagnosis that she had multiple sclerosis and married No. 3, with whom he had been having an affair. His explanation was that he felt so passionate about the country that he worked too hard and did some things that were not "appropriate." That's what passion for your country will do to you every time, by golly.
In truth, we're not sure that either Harry or Newt, if their concerns weren't directed toward brothels and brides, would throw much light on the revolutionary wave rolling through the Middle East and North Africa, or the fierce earthquake and tsunami roiling Japan, or the financial fix Europe is in, or runaway prices at the pump, or the decline in consumer confidence or the spotty employment scene. All of which provided a panoply of reasons for the market to take a dive, as it dutifully did.
As share prices tumbled, market sages by and large stroked their chins and declared that stocks, after the sensational two-year run they've enjoyed, were looking for an excuse to go down. It'd be nice if just once those same sages told us that before the market took a header. Instead, they kept pointing to how corporate profits were booming and cash hoards mounting—brilliant discoveries, to be sure—which were supposed to be proof against stocks taking a real hit.
You have to say that the market showed considerable gumption in the face of all the negative news by winding up Friday with a nice bounce. Resilience has been its long suit in its march upward from the wintery depths of March '09. Trouble is, the bad stuff that put a dent in portfolios last week for the most part isn't likely to vanish anytime soon. Nobody can say for sure what happens in Libya or Yemen or even Saudi Arabia. But the region has unleashed a remarkable tide that can't be reversed. Which suggests to us that what seem like punishingly high oil prices and political turmoil in the region are here to stay as well. Reason enough, as we've said before, to buy gold, oil and, perhaps, if it suffers a further drop, natural gas.
Europe is not going down the tubes, but it'll take awhile to straighten itself out, maybe quite awhile, and our market remains vulnerable to any sudden bad vibes from the Old World. We wouldn't make too much of China's disappointing trade numbers, if only because we don't trust the numbers or believe it's all the fault of the Chinese New Year. We suspect it's Beijing's sleight of hand at work, hoping to ease the pressure to revalue the yuan.
What continues to bother us, with the implications for the economy and the stock market, are jobs—or, more precisely, the lack of them. While last month's employment gains might deserve a muted cheer, a close look at the latest weekly unemployment-insurance claims didn't rate much of a hurrah. On a seasonally adjusted basis, they totaled 397,000, an increase of 26,000 over the previous week. However, ex the seasonal adjustment, new claims weighed in at 406,096, a pretty hefty number this late in the upturn.
Moreover, as our pals at the Liscio Report, Philippa Dunne and Doug Henwood, report, the Job Openings and Labor Turnover Survey (JOLTS) for January "showed a distinct lack of dynamism." Net hiring—hires less separations—was a measly 0.1% of employment; openings dipped to 2.1% of employment, which just matches the 2010 average. January, Doug and Philippa sigh, "was not a sizzling month for employment." They can say that again.
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