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Can the Bluff be Called?

On der Wille

There are many clichés which go around - chief among them is a game of two halves, a year of two halves and the like. Last year, was a year of two clear, distinct halves - the kind which would make a cliché happy.

Till the Bumblebee address by Mario Draghi, the year 2012 was a culmination of, not just the profligacy of the previous decade, but a failed system and a failed bailout. Spain couldn't borrow at a cost which they could afford to repay and the Greeks were perilously close to debt repudiation - an idea I put forth to a European Central Bank executive during my visit in February 2012 and it was never really answered. His answer, which I believe is the German answer, was that you have to pay back what you borrowed - a full 100 cents on the Euro to the E.C.B. if not to anyone else. When you can't control your own monetary policy, it is a tough ask - more on that later.

World equities and in particular European equities were facing a grim battle in H1'12. Companies, unlike countries, cannot spend their way out of trouble - they have accounts to maintain. China was all set for a hard landing - something which would not only put the skids on any hope of a recovery, but lead to a crash in the markets of most of its’ trading partners. China was the driving force behind the commodity boom of the previous decade and it had grown "too big to slow". The Chinese leadership made it clear that steering the world out of an economic slowdown wasn't something they were willing to do - so much for their world leading aspirations. USA, not even a year on from a downgrade by S&P, couldn't come to terms with a new debt ceiling and companies exposed to Government budgets couldn't decide whether the sectors they were exposed to would be sequestered - an automatic spending cut triggered in case of a budget impasse (happened yesterday,9/30/13). India showed itself to be an exemplar at policy inaction. A progressive Prime Minister couldn't rally the cabinet, the allies and the opposition behind some of the reforms he proposed. He wore the look of a defeated man. That an emerging economy can't accept limits of 50% FDI in, operationally and logistically, poorly run sectors like Airlines and Retail is ludicrous. The irony was that India was grappling with inflation - supply side inflation - something a Central Bank cannot control by cutting rates. Cutting rates inflames supply side inflation and ever the hawk, The Reserve Bank of India, could, at best, only hold interest rates.

Enter - Mario Draghi

"Whatever it takes" is not open to interpretation, it reads and speaks like it is written. The minutes of the meeting after which Mr. Draghi said this phrase aren't yet known, but the message was loud and clear - The Euro will live - along with all its constituent members. Period. Italian and Spanish borrowing costs came down heavily. A seemingly "Risk on" year morphed into a "Risk off" second half. Italian stocks rallied as the yields came down, the Spanish thought the best way to capture this rally would be to ban short selling. After all, it was the vulture like hedge funds which hammer down equities and it is those very same hedge funds who spike their borrowing costs and to top it all off - they never ever even own these assets, they either bought insurance against a credit event - a Credit Default Swap, or simply bought "puts" on the equities - situations wherein you profit when the underlying asset goes down in value.

Can the Bluff be Called?

On Work in Progress

There are many clichés which go around - chief among them is a game of two halves, a year of two halves and the like. Last year, was a year of two clear, distinct halves - the kind which would make a cliché happy.

Till the Bumblebee address by Mario Draghi, the year 2012 was a culmination of, not just the profligacy of the previous decade, but a failed system and a failed bailout. Spain couldn't borrow at a cost which they could afford to repay and the Greeks were perilously close to debt repudiation - an idea I put forth to a European Central Bank executive during my visit in February 2012 and it was never really answered. His answer, which I believe is the German answer, was that you have to pay back what you borrowed - a full 100 cents on the Euro to the E.C.B. if not to anyone else. When you can't control your own monetary policy, it is a tough ask - more on that later.

World equities and in particular European equities were facing a grim battle in H1'12. Companies, unlike countries, cannot spend their way out of trouble - they have accounts to maintain. China was all set for a hard landing - something which would not only put the skids on any hope of a recovery, but lead to a crash in the markets of most of its’ trading partners. China was the driving force behind the commodity boom of the previous decade and it had grown "too big to slow". The Chinese leadership made it clear that steering the world out of an economic slowdown wasn't something they were willing to do - so much for their world leading aspirations. USA, not even a year on from a downgrade by S&P, couldn't come to terms with a new debt ceiling and companies exposed to Government budgets couldn't decide whether the sectors they were exposed to would be sequestered - an automatic spending cut triggered in case of a budget impasse (happened yesterday,9/30/13). India showed itself to be an exemplar at policy inaction. A progressive Prime Minister couldn't rally the cabinet, the allies and the opposition behind some of the reforms he proposed. He wore the look of a defeated man. That an emerging economy can't accept limits of 50% FDI in, operationally and logistically, poorly run sectors like Airlines and Retail is ludicrous. The irony was that India was grappling with inflation - supply side inflation - something a Central Bank cannot control by cutting rates. Cutting rates inflames supply side inflation and ever the hawk, The Reserve Bank of India, could, at best, only hold interest rates.

Enter - Mario Draghi

"Whatever it takes" is not open to interpretation, it reads and speaks like it is written. The minutes of the meeting after which Mr. Draghi said this phrase aren't yet known, but the message was loud and clear - The Euro will live - along with all its constituent members. Period. Italian and Spanish borrowing costs came down heavily. A seemingly "Risk on" year morphed into a "Risk off" second half. Italian stocks rallied as the yields came down, the Spanish thought the best way to capture this rally would be to ban short selling. After all, it was the vulture like hedge funds which hammer down equities and it is those very same hedge funds who spike their borrowing costs and to top it all off - they never ever even own these assets, they either bought insurance against a credit event - a Credit Default Swap, or simply bought "puts" on the equities - situations wherein you profit when the underlying asset goes down in value.

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