5 Weekend Thoughts: The Market Rally, European Hope, and the PFGBest Disaster

the number 5, abstract number 5, fiveBy Alex Salomon
The week’s thoughts delivered right to your internet doorstep… well, not exactly, but enjoy!!

1. The markets slowly drifted down all week before a gentler version of “Friday the 13th” seemed to reverse the trend. Although it felt heavy early in the week, and the markets have been pretty choppy, I believe the down weeks (or down feeling weeks) are an important and normal part of the financial market game. Furthermore, this latest move lower was a test of the resolve of the post-European summit pop higher and excitement. By investing terms, many would call it a gap-fill, but really, in this case, it was a matter of testing the resolve of the optimism.

However, no matter what, I think something extremely important happened during the Euro Summit that gives investors tremendous hope: I think we finally (FINALLY!!!) saw the European leaders become proactive with the markets, ending a game of pretending that the financial markets did not matter. This change of course, if continued, could be a huge for confidence going forward.

A good example of this new pro-active attitude? Italy’s Prime Minister Mario Monti is considering anticipating the markets attack on Italy by proactively asking for the protection of the EU. Mario Monti knows the road map that went from Ireland to Greece to Portugal to Spain goes to Italy next.

The old EU would have waited for the assault… the new, post-June 2012 EU appears to be more in sync with the markets. This gives me hope.

2. Talking about hope and gap-fill, July and August are going to be trying months for the market, but at the very least, we will finally know soon enough whether we need to go hide and get a hunting estate somewhere in the Dakotas or if our financial markets will withstand the assault on confidence and the debt markets. How soon? Probably by October, because in reality, by then, the EU will need to have implemented the resolutions from the summit (or run and hide). In short, we will know if the ESM worked and if this lead to a banking union (or banking license). As well, with good fortune, the Fiscal Treaty may (or may not) be on its way to being ratified by most EU countries.

And at home, we’ll be entering the final stretch of a dirty, gloomy election.

We will surely be exhausted by then, but look at it from the bright side: our leaders finally have less and less time to be flippant about the issues at hand. Enjoy the summer, brace yourself for a rough September. But, by then, we will know where we stand and likely know whether the Euro will survive past October. 

3. My rant of the week was so easy, you cannot make this stuff up. Go figure, courtesy of yet another scandal: PFGBest’s. Really? I am repeating: You cannot make this stuff up!! Every week, even during the summer lull, Wall Street gives the world yet another reason to shake your head, driving yet a bigger wedge with Main Street. This time, the chaos started with the CEO of Peregrine Financial Group trying to commit suicide on Monday. Shortly thereafter, the firm being sued by the CFTC. And finally on Wednesday, PFG filing for bankruptcy protection… PFGBest surely fell for the whole Friday the 13th bad omen.

One can only wonder about the level of incompetency from various leaders in charge of institutions in Europe and the US. What gives? Gross incompetency or blind laziness or corrupt interests or a mix of all these evils? It is difficult to tell, but as I unfortunately chime in every week, our collective world will only get better once this crisis of integrity gets resolved.

One can only be puzzled that despite Madoff, MF Global, Refco… LTCM even, authorities cannot restore integrity to the financial world. As for the “sacrosanct” protection of client funds, I hate to break it to every one, but clearly, funds are sacrosanct until they are not.

Between the ongoing LIBOR scandal (of which the ramifications have not even started) and PFGBest, I am going to have enough material to fill my summer.

4. In fairness, I have an interesting “anti-rant” of the week and it is a total surprise, especially when you consider it comes from China (not exactly a squeaky clean, scandal-free country!). This article in the Wall Street Journal brought an interesting news angle and shows that even in China, anti-corruption and reasonable spending are starting to become part of business ethics.

I think it is a healthy change when a country like China tries to adopt new policies curbing the rampant culture and attitude to mix public office and private spending. I am not naive and I don’t make more out of this piece of news than what it is, but the symbol is important and significant. It was also a surprising contrarian episode to the PFGBest debacle.

5. My last unfolding thought of the week (likely to become theme of the summer) is that once we finally cure ourselves from our current addiction to debt and credit; once we finally get out of this debt-created crisis (whether it is with solid growth and hope and bright future, yielding more tax collections and revenues and therefore a decrease in the sovereign debt-load or with a real restructuring and renegotiating of sovereign debt, destroying some along the way or with the old ways of hyper-inflation, destroying all equally and mercilessly), we, the citizens of modern economies, will also have to get ourselves rid of another addiction: to government and to our belief that governments around the world can save us from our actions.

Basically, we collectively need to fix our issues and rethink a lot of our welfare benefits. Central Banks can help with financial stress and liquidity, but eventually, it will be up to us to re-invent benefits, pensions, and collective agreements. Around the world in modern economies with pensions and benefits, demographics alone make it impossible to work for 30 years and get 30 or 40 more years of full benefits. This issue cannot be fixed by the ECB or by the Federal Reserve: constituents have to fix it. Italy’s Mario Monti, again (my hero of the week, what?) said so and promised different reforms to reflect new demographics. It is courageous. It is welcome.

As an illustration to this thought, here’s more on my understanding of Monti’s efforts toward benefit reform: Under the new rules, future retirees are likely to receive pension checks of around half their average salary after 40 years of contributions. But before the changes pushed through by decree last December, retirees stood to get 80% of their final salary and often managed to retire before age 60.

I will write longer and more about this train of thoughts but believe that our way to a more prosperous future is one step at a time: first step, bring back hope and good news; second step, rid the world of its debt addiction; and final step, get courageous and rid our addiction to unsustainable benefits.


Twitter:  @alex__salomon   @seeitmarket     Facebook:  See It Market

Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of his employer or any other person or entity.

No position in any of the securities mentioned at the time of publication.

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