Thursday, May 14, 2009

No animal spirits, no recovery

TO BE NOTED: From Inner Workings:

"
No Risk, No Volatility, No Economy May 14th, 2009
By
David Goldman

LIBOR fell today to 85 basis points, the lowest level since the crisis began. All other risk parameters look benign. My favorite is the failsafe risk measure, the cost of protection against sovereign defaults by the major industrial nations. Here are the last numbers from Markit:

G7 Industrialised Countries CDS
Ticker CLIP Name 5Y Today Daily Chg (bp) Weekly Chg (bp) 28 Day Chg (bp)
USGB 9A3AAA Utd Sts Amer 23 1 -14 -22
JAPAN 4B818G Japan 50 1 -17 -23
DBR 3AB549 Fed Rep Germany 25 1 -11 -17
UKIN 9A17DE Utd Kdom Gt Britn & Nthn Irlnd 61 0 -29 -28
FRTR 3I68EE French Rep 29 2 -9 -15
ITALY 4AB951 Rep Italy 75 0 -22 -37

The US sovereign had traded at 75 basis ponts above LIBOR; it is now down to +23 basis points. Notably, the UK sovereign has tightened nearly 30 basis points over the past week. That is the one to watch, given that a systemic banking crisis threatened to overflow the banks of the Thames in emulation of Iceland only a few months ago.

This is worth taking note of. There’s no sense of systemic risk in the midst of a worldwide reversal of sentiment and retreat of stock markets. That’s because the financial system is in the zombie embrace of the governments. VIX picked up a bit yesterday, but per my expectation remains on a downward trend.

No risk, but no economy. There is no sign of improvement in world trade, and China’s export numbers yesterday were terrible. There is no real sign of life from the American consumer, as yesterday’s retail numbers suggested in the United States.

The only way to get an economy moving out of a stall of this magnitude is animal spirits. Greed has to flicker in the cowardly hearts of investors and get them out of their holes. But that is not going to happen, for greed is a bad thing. Greedy speculators who want to squeeze what they are entitled to by law out of the exploited auto workers of the Midwest will be denounced by the White House, subject to public humiliation, and given private death threats. Greedy Wall Street bankers will have their bonuses reduced by law. And those greedy capitalists who earn too much will pay a great deal more in taxes.

No animal spirits, no recovery. Send out for sandwiches. This is going to be a long, long adminstration."

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