Market Commentary

Can I suggest to the disdain of politicians
March 03, 2010

Can I suggest to the disdain of politicians the bond market might soon control fiscal policy?  In Europe it appears such an environment might be developing.  Unless one has been living in a cave, Greece must refinance some debt either in March or May depending upon the source.  As widely discussed Greece was not completely transparent regarding the amount of sovereign debt outstanding and is gross violation of fiscal covenants mandated by the European Monetary Union (EMU).

The EMU is comprised of 16 culturally diverse nations utilizing one currency…the euro.  Because of this currency structure, Greece is unable to monetize its debt (print money forcing a decline in exchange rates) to refinance its obligations hence a possible rescue by Germany to potentially preserve the EMU.

Sovereign Green debt yields as well as yields for the other PIIGS countries (Portugal, Ireland, Italy, Greece, Spain) are gapping higher out of fear that the EMU or Greece will or cannot create a politically palpable bailout.

If Greece requires an IMF bailout as opposed to an EMU bailout, I think the euro is toast.  Obviously the yield for any PIIGS debt is and would continue to gap even higher as investors will demand a huge premium given the lack of fiscal constraint.

In my view this is the first time since the era ending with the 1997 implosion of Long Term Capital Management that the bond market is dictating fiscal policy.

In Bob Woodward’s 1994 book titled The Agenda which chronicled the first year of the Clinton Administration, President Clinton expressed great anger a bunch of twenty and thirty somethings could control his Presidency. 

One of his aides [I believe it was George Stephanopoulos] reworded one of the President’s campaign slogan from “It’s the Economy Stupid” to “It’s the bond market stupid” as the greatest impediment to his then progressive agenda.

Can I suggest such an environment could again develop in the US?  The polls strongly suggest the American electorate is fearful of the current Administration’s lack of fiscal restraint.  If domestic yields begin to gap higher for no apparent reason, I think the bond market will then control domestic fiscal policy.

At this juncture the US Treasury is regarded as the primary and secondary benchmark, the strongest of all debt obligations.  However at some juncture there will be a tipping point.  Three years ago because of the structure of the EMU most thought a crisis similar to one Greece is facing today as remote.

As penned many times, the consistency of this crisis is its inconsistencies and the velocity that change occurs.  I must write I place the odds at less than 10% a southern European debt crisis could emerge domestically as I believe the American electorate will force a change in its leaders before such a situation develops.

There is little I can write about yesterday.  Stock opened strong but closed relatively unchanged.  There was also little movement in treasuries.  The countdown now commences for Friday’s all inclusive BLS employment report.

Today the private ADP Employment survey is released as is the Challenger Jobs report. Other data includes the ISM Non Manufacturing Index and the Federal Reserve Beige Book.  All releases can influence trading.

Last night the foreign markets were down. London was down 0.20%, Paris down 0.10% and Frankfurt down 0.10%.  Japan was up 0.31% and Hang Sang down 0.14%.

The Dow should open flat even as Greece’s government passed a measure to cut spending. The 10-year is off 1/32 to yield 3.61%.