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MARKET INSIGHT REPORT
Lehman 2.0
February 16, 2012
By John R. Taylor, Jr.
Chief Investment Officer
Global investors either have extremely short memories or they
are far too concrete, as my wife thepsychologist would say. Saying
that Greece is not a bank but a country means nothing. Almost
allEuropeans argue that a default by the Greek government would now
be more straightforward and notas significant as the collapse and
bankruptcy of Lehman Brothers in September 2008, especially
sincethe Eurozone, under the influence of the surplus countries,
has effectively ring-fenced Greece from theother 16 members. Lehman
was not a very large factor in the global banking scene with less
than onequarter the capital of the biggest US banks and with assets
below those of more than 100 banksaround the world. Greece might
represent less than 3% of the GDP of the Eurozone, but when lined
up
against Lehman, Greece stands larger in its relevant market.
Anyone can read the newspapers, blogs,and Internet scribblings
before the Lehman collapse and see that the impact of its collapse
was notexpected to be significant. Tim Geithner, then head of the
New York Fed, worked to arrange theemergency liquidation of Lehmans
assets and there were expectations that the company could be soldto
Bank of America or Barclays, but the Bank of England vetoed a sale
to Barclays and the USgovernment refused to lend any support to
Bank of America in its effort to buy Lehman. Rereading thedocuments
and remembering the situation as I set out for a weekend cruise on
the Chesapeake, theworld was not worried. The market had already
seen the rescues or restructuring of WashingtonMutual, Countrywide,
Fannie Mae, and Freddie Mac, so no one was worried. This looked
like anotherBear Stearns, a manageable problem but this time the
Bush administration was not interested in gettinginvolved let the
market solve this, dont throw good money after the bad. So, what is
the differencenow? The world is as blas about a Greek default or
departure from the euro as it can be credit
spreads are dropping, the other weak Eurozone sovereigns are
financing themselves easily, andeveryone thinks the LTRO has solved
the problem for the next year or two. Why should we worry
aboutGreece? Who cares if their unemployment is 20.9% and climbing
very fast, or that it is now in its fifthyear of declining GDP?
Lets teach them a lesson!
Hubris is at the heart of this. Everyone says this cannot happen
we wont allow it. Says who? The EUsays: if it is written in an
agreement, it must be totally correct, unchangeable, and followed
at all costs.New realities cant intervene and no slippage is
allowed. Why the Germans are so sure that they knowthe future is
beyond me. They are fallible too, but they wont admit it, and the
Greeks cant make thembudge. Havent they looked around? Santorini
has a different economic and social cost structure thanWiesbaden.
Humanity (and common sense) seems totally lacking in the
negotiations with the Greeksand a violent backlash would be totally
understandable. Why the countries that have been fattening uptheir
current account surpluses selling products to Greeks, whom they
should have known werebasically broke just as they always have been
should be paid 100% on the euro is beyond me.Major losses should
apply not only to sovereign borrowings but also to accounts
receivable for cars,electronics, and other consumer goods. The
market has not opened its eyes to the impact this Greekunraveling
will have. The Eurozone will be mortally wounded and the world will
suffer a significantrecession maybe as deep as 2008. European banks
will lose much of their capital base and manyshould be bankrupt,
but just as in the Lehman aftermath, the governments will try to
save the banksand the banks bondholders, solvent or not. As the
bank appetite for Eurozone sovereign paper will bedecimated,
austerity will probably follow shortly, followed by deflation and
uncontrollable moneycreation. The European recession should be one
for the record books.
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CURRENCIES INTEREST RATES EQUITIES COMMODITIES
To contact FX CONCEPTS New York: 1 (212) 554-6830; London: +44
20 7213 9600; Singapore: (65) 67352898;
[email protected]
CURRENCY Asia Long-Term View
Does the USD/JPY Rally Have Any Legs?
By Jonathan Clark
Two weeks ago dollar/yen fell to itslowest level in 13 weeks
beforereversing direction and climbing to itshighest level in 15
weeks. Althoughvolatility is rising, trading during thepast six
months has taken place in arelatively narrow range by
historicalstandards and it is difficult to be
confident that dollar/yen is beginning asustained rally.
Japanese monetaryofficials have contributed to thesideways trading
as they entered themarket three times (red ellipses) toprevent
dollar/yen from falling. Theupmove in late January was technical
innature and resulted from breaking above the downtrend resistance
from the peak in2007, but the rally lacked persistence and gave
back its gains and more within a week ofthe peak. There is a
significant risk that the upmove that began two weeks ago isalso
technical and will falter in the next several weeks. Capital flows
dominatecurrency trading and there is very little foreign capital
in Japan so there isnt much todepart. If USD/JPY is to make a
sustained upmove then domestic capital must leaveJapan seeking
higher returns. Optimism has been rising since the fourth quarter
of lastyear, but it isnt expected to persist as the global economy
should slow in the monthsahead. In addition, the debt crisis in
Europe discourages Japanese investment. Ifinterest rates were
rising significantly in the liquid markets in Europe or the US
versusJapan this could lead to capital outflows, but they have been
stable. We are, therefore,not optimistic that dollar/yen will make
a strong and sustained upmove and thelonger-term cycles are calling
for a significant peak by early March and possiblysooner.
Dollar/yen should strengthen into Monday of next week before
forming a minor peakpulling back for a few days. The upmove should
then resume into the start of the week
of February 27 and this is the minimum timeframe for a
significant peak. Our target forthis rally is the 79.75 area and,
if seen, this should be a good place to take some profiton dollar
positions. If this level breaks on a closing basis, the upmove will
becomeextended into the week of March 5 and can reach 81.00 before
forming a significantpeak, but this appears less likely. The
longer-term cycles argue that by early Marchthe dollar/yen should
turn lower and decline into the end of April or May, andpossibly
longer. It should then fall back to its lows of several weeks ago
and ourfurther objective is the 73.25 area.
