"Panic Now! And Beat the Rush" and Other Investmentisms....2

By now, we know that the latest Greek bailout has changed nothing. We can assume that the "plan" is for the politicians to slowly and gradually steer European peripheral public and private institutions through rounds of debt restructurings, recapitalizations, liquidity provisions, austerity, and wealth transfers, while maintaining political solidarity and economic stability.

Admittedly, the announced bailout was more dramatic than the markets expected, but 180bn buyout doesn't buy you much of a rally these days.

Lets revert to the beginnings of this crisis: weak growth. It appears that most market participants are desperately hanging onto the view that the credit crisis has not meaningfully impacted growth in the developed and emerging markets. As of today, the evidence is in. The only way the developed world (and emergininvest) policymakers have been able to deliver barely acceptable growth has been through unsustainable policies which put short term gains first but which also create huge long term risks to sovereign credit quality and which leave a deeply negative scar in the memories of the private sector which is attempting to delver and knows they are facing the mother of all tax liabilities going forward. The reality is, assuming a private sector debt binge and assuming we are coming to the end of the line with respect to policy, then trend growth in the developed world in the next five years is likely be be somewhere around 1-2%. Once the market sees through the policy and "excuses" (soft patches), then it is inevitable that we see a re-pricing income, earnings expectations, consumption and asset prices.

"Panic Now! And Beat the Rush" and Other Investmentisms...1

The end of QE2 removed a powerful support for asset prices in general (Equities, Houses, Commods) while bonds rallied. Wrapping up QE2 also coincided with a cyclical weak period driven by numerous factors (the weather, Japan, Europe's fiscal issues).

Perhaps the most important take away from QE2 ending is that the problem in the U.S., like the problem in peripheral Europe, is structural. The current cycle of debt growth and debt restructuring is driven by central bank management of interest rates and asset prices. Households and Financials are in the (still) early stages of de-leveraging, after 30 years of debt accumulation. But, the effect of household/financial de-leveraging is offset by central bank "re-leveraging": since 2008 household debt is down by $600bn, financial sector debt is down by $3tr, and the balance sheet of the Federal Reserve has increased by $2tr.

No wonder that the end of QE2 marks the end of cyclical economic and asset strength. The Fed will eventually have to de-lever, at which point the next phase of this economic cycle will emerge: the re-privatization of risk. This will occur in an environment of positive real interest rates and little support of asset prices. We expect that the eventual (necessary and certain) restructuring of household debt in the U.S., and European peripherals, Brazilians, and local Chinese municipalities and State owned enterprises will occur with significant pain.