Mark Grant On The Dangerous Road Ahead
Mark J. Grant, author of Out of the Box
“The last time Quantitative Easing was stopped the equity markets dropped precipitously. There is no reason to think that will not occur again though the severity may be less. Today’s FOMC minutes are quite significant in my view. They also said, for the first time, that the pledge to hold short rates at near zero was “conditional.” This is another very meaningful statement. I would be taking money off the table now in both equities and bonds as the stock market will probably head lower and yields will begin to rise in fixed coupon securities.”
-MJG, April 3, 2012, 2:16 pm
This was the note that I put out to the readers of “Out of the Box” sixteen minutes after the Fed released their monthly report. That was as fast as my fingers could type what was going on in my mind. I thought it was good advice to the 5,000+ institutions that receive my commentary and I have become more positive about it as the days have rolled along as the Dow Jones Index has dropped 350 points since I typed my musings. In fact, we are just at the beginning of a great divergence where credit assets, risk assets, decline in value and where Treasuries head in a quite separate direction as driven by U.S. data in part but, more significantly, by the travails in Europe. The CDS for Spain reached an all-time high on Friday reflecting the financial issues in Spain as the Spanish bond yields creep higher held back, in part, by the threat of intervention from one of Europe’s stabilization funds.
We have just been presented with one very red flag signaling the seriousness of the issues in both Italy and Spain. Spain just announced that its banks borrowed $415 billion from the LTRO funding while net borrowing stood at almost $300 billion and accounted for 63% of the net borrowing at the ECB. For Italy the number is $354 billion in LTRO borrowing and they are not that far behind Spain in needing aid. The actual debt to GDP ratio, which I detailed on March 29, is 133.8% for Spain, not the official 79% number, and is getting worse as their economy shrinks and as the country guarantees ever more bank debt to be used as collateral. It is not much better in Italy as the combined national debt and their share of the debts at the ECB and the EU peg Italy’s actual debt to GDP ratio right at 200% and while Italy’s ability to self-fund is appreciably better than Spain; their funding needs are becoming appreciably larger as the country sinks into recession.