C.M.O. 6.04.2009
Credit Market Overview
June 4, 2009
The purpose of this note each day is to look at the relationship between the credit and equity markets to examine what is moving and why. At times it is necessary to step back and take a look at the forces that are simultaneously affecting both of these markets.
Timothy Geithner returned from China recently and from all accounts it seems to have gone better, with regard to economic détente, or “nations relations” if you prefer the more colloquial term, than the round of mini-bashing poor Tim had to instigate to get Dodd and Frank to believe he was the right man for the job around the time of his confirmation hearing.
The love fest can best be described by the quips and quotes published afterwards. “They have a very sophisticated, very accurate understanding of the basic strategy of economic policy in the U.S.”, Tim Geithner said. My question here is; when you combine sophisticated and accurate in the same sentence as basic, what are you really saying? If we re-write that sentence my point might become a little clearer. “They have a very sophisticated, very accurate understanding of the basic strategy of how a hammer works.” Does that really require accuracy and sophistication? The hammer in the case of the U.S. is money to throw at the economy (or away, if you prefer) and the Chinese have it; so you say what you must to get it. I get it.
Cooperation between the U.S. and China “is of great significance to promoting global financial stability and the recovery of the world economy” was the reply from Vice Premier Wang Qishan. This can be readily translated into: “We have so much of your debt the last thing we need is for you to go south so we’ll hold on to what we have and buy more if necessary.
The whole visit was summed up perfectly by Chinese President Hu Jintao who told Tim, “You have established good working relationships with your Chinese colleagues”. Which is a nice way of saying: You were selling, we were buying and now we’re both in a bit of a fix. If everyone stays cool i.e. no more China bashing on your side, I think we’ll get through this thing. Note too HJ used the term “colleague” and not “comrade”.
Zachary Karabell, president of River Twice Research, wrote a piece in the WSJ on 5/28/2009 analyzing the situation in more depth but the cliff notes focus on a few things. China cannot simply “dump its [U.S.] bonds” and torpedo the U.S. economy or even threaten to do so because there is no one to sell them to. As Zach asks; whose got an extra Trillion laying around these days?
Secondly, what is the purpose of destroying 20 years of work trying to bind the political and economic forces of both countries together when, given the power of the two nations, it is clearly best to build on what has been accomplished?
The third major point raised by Mr. Karabell is that “To see China’s holdings as a threat is to misjudge the goals of the Chinese government. China believes that its affluence is best guaranteed by economic interdependence with the world’s most dynamic economy”.
Given the logic here it is no wonder that German Chancellor Angela Merkel said in a speech on Tuesday in Berlin; “I view with great skepticism the powers of the Fed, for example, and also how, within Europe, the Bank of England has carved out its own small line”.
Could it be that someone is jealous of just how well the meeting in China went for Mr. Geithner? Or is it just like that sign in the Macy’s window that says: “Hey! We’ve got stuff for you to buy too!”
Enjoy the week.
Jim Delaney
