This commentary originally appeared on Real Money Pro on Sept. 16 at 8:45 a.m. EDT.
This decision by the Fed to lend ill-collateralized loans to European banks will be fodder for the Tea Party and those on the far-right here in the U.S., and quite honestly, we think the right's antipathy toward this lending is correct. Does the Fed have an obligation to defend the banks of France or Germany or Austria or Italy et al.? Or should the Fed's aegis only extend to the coasts here in the U.S.? We think the latter, and we suspect that the repo-lending operation had better be very short-term in nature and be unwound at the first opportunity or there shall be fiscal "hell to pay" from the right.-- Dennis Gartman, The Gartman Letter (Sept. 16, 2011)
Late yesterday I questioned whether the involvement of our Fed with other central banks around the world to
would result in an adverse reaction from both U.S. politicians and from our citizenry.
I reached out to Dennis Gartman, Dan Greenhaus (BTIG) and others about my concern yesterday and most agreed with me that the political fallout could be meaningful enough to discourage more intervention and involvement by the U.S. in the eurozone mess.
There is a precedent for outrage from when the Fed lent to foreign banks during the 2008-2009 crisis, but, in 2011, the idea that the Fed feels as though it has the right to lend U.S. taxpayer money to foreign banks (against what is likely mismarked collateral) will likely ignite Rick Perry and Ron Paul and the Tea Party in general. Moreover, the U.S. middle class, already victimized by
, will not likely be happy with the notion that the U.S. is bailing out Irish, Portuguese, Spanish, French and Greek banks. (As a subscriber put it to me yesterday, "so to simplify things, we are loaning money to the European banks that don't have enough money to loan to Greece who has no money?")
Essentially the Fed, Bank of England, Bank of Japan and Swiss National Bank are lending money to the ECB, which is under pressure because it is funded by 17 countries, many of which are under funding pressure themselves -- pressure that is being alleviated by funding from the ECB, which itself is funded by the stressed countries to which it is lending that in turn fund the ECB and so on and so forth.
And, as Dan Greenhaus reminded me in an email late yesterday: Don't forget the IMF is part of the bailout, too, which means that the U.S. is on the hook for a substantial amount of the IMF funds. If U.S. taxpayers were angered when they bailed out the Ferrari-driving Wall Street elite, how will U.S. voters react to bailing out the profligate Greeks?
To me, the banking and sovereign debt problems in the eurozone are far more structurally complicated than was the case in recapitalizing the U.S. banks three years ago, and with 17 countries in the ECB, represent a huge challenge ahead. Remember, the central banks are providing liquidity not capital to the European banks. We still appear far from the necessary solution of raising permanent capital, which puts the European banking crisis closer to the U.S.'s crisis in mid-2008 than late 2009.
Importantly, nothing in yesterday's move reduces the possibility of a worldwide recession in 2012. The clock is ticking in Greece, and it appears inevitable that Greece faces bankruptcy sooner than later, raising a further risk of more contagion in the eurozone.
In terms of the investment take from all this, I remain of the view that after the recent sharp advance, stocks have become less attractive, and I share some of Dan Greenhaus's market observations this morning that there are plenty of outsized investment risks ahead:
We have to say, though, the action today feels remarkably similar to 2008. If you recall, the equity market put together numerous rallies of 7% to 15%, following any announcement that suggested policy support for the economy or markets. Remarkably, the rally from late October until early November was 18.5% in force (following a 33% drop). From November 2008 until early January 2009, the S&P 500 rallied nearly 25% (following a 25% drop). Each of these rallies was preceded/caused by some central bank or policy announcement that suggested "all as well." But none of us will forget that it wasn't then -- and it isn't now.-- Dan Greenhaus, BTIG
Reflecting these observations and the ambiguous economic news and outlook in the U.S., I am currently in a slightly net short position.
I plan to raise my short exposure in any further market rise.
Doug Kass writes daily for
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Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.