About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Tuesday, October 18, 2011

EU -- How Big The Jitters?

I have long believed that the development of a Euoropean Union was worth a tremendous effort.
I have long been aware that Milton Friedman argued strongly that simple monetary union could
be fatally flawed in very stressful economic and financial times without a powerful fiscal union
as a bedrock. My experience with humanity has taught me not hold politicians to a high standard
as the political ego is vulnerable to an array of outsized venalities. So, I have not been troubled
by the struggles within the EU to try and manage their financial problems without pushing the
reduction of sovereignty envelope too far. My hope is that sovereignty can be kept as strong
and vivid as possible even as the EU confronts its difficulties.

The US stock market has suffered a strong erosion of the p/e ratio over the past 18 months, an
erosion that has taken the multiple well below the fair value level of 16.5x suitable for an
economy with moderate inflation and nicely rising earnings. Because I think that the multiple
contraction primarily reflects the erosion of investor confidence in the self sustainability of
economic recovery, I have not tried to hang any of the blame on the EU's financial problems.

But now that major EU bank deposits have been subject to periodic run off as market players
worry over bank soundness owing to PIGS sovereign debt exposure, and further, knowing that
this game can become an emotional and contagious issue, I think it now falls to the EU to
protect its financial system from further damage without delay.

In looking at the situation and on the reasonable assumption that the EU cannot immediately
indemnify all the suspect sovereign credit, the issue turns on a reasoned guess of how much
extra backing may be required to assuage worried, prickly credit markets. At this point, it
appears that additional large provision of tier 1 equity capital or a reasonable facsimile of
same for the union's banks may also be required.

Given the limitations of inter-country politics, I am hopeful the EU can muster another $1 tril.
of funding and that the non - EU members of the IMF can pony up several hundred $bil. to
be augmented by a large infusion of capital from China, with the latter to benefit handily from
a stable Europe going forward.

So, I am eager to see what the EU and G-20 can pull together over the next two odd weeks to
keep the trains running on time. I do not know what it will take in $ to settle the foreign credit
markets and I do not know whether the EU will double down on its commitments, but the
situation has deteriorated to a point where larger, major segments of the financial and
capital markets could be seriously jostled if the EU with assistance from the IMF and G-20
do not produce a workable salvage plan.

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