Spain became the second Euro-zone country in less than a week to suffer a downgrade of its government debt, as the bloc's deepening recession eats into tax revenues and threatens the health of public finances.
Oh yes, I remember something about Obama today but forget that as a headline. I have long preached here that there are 3 ways that our market can drop 20%: A major bank failure, a failure by one of the Big 3 car companies or a failure by a major country. Any one of those things can send us back to 7,000 and two can indeed take us to 5,500 but we've put off the official collapse of the Auto Industry until March and, as I pointed out last week, there is no limit to how far we will go to bail out our banks but a country is a different story entirely.
I pointed to Spain as my top concern way back on October 9th, when we discussed this issue in member chat, on the same day that Iceland's last remaining major bank collapsed and I noted that Spanish banks were loaded up with emerging market loans in Latin America and that the collapsing commodity market, which we were long expecting, was going to put that nation's banking industry in dire straits. We are not at a collapse yet – Standard & Poor's cut its credit rating for Spanish government debt Monday by one notch to AA-plus from AAA. A default is unlikely for Spain, but the end of a decade-long housing boom will slow growth and end up straining public coffers in the euro-zone's fourth-largest economy. S&P put both Ireland and Portugal on credit watch this month. Ireland's rating is thought to be vulnerable because of its slowing economy and the cost of an expensive bank-guarantee plan, which is about twice the size of its gross domestic product.
While we have been looking for a tidal wave of good feelings to lift all market ships as Obama takes the oath of office today, I discussed the unfolding hyper-inflation nightmare in Zimbabwe this weekend right along with Obama's poll numbers because these issues carry equal rate. There is a harsh economic reality in global finance as money acts in a purely self-interested fashion and everything is about confidence – once a country loses that, it's very hard to get back. Let's keep a close eye on this as gold is already flying pre-market (even as oil falls further) as a worsening global situation can derail anything Obama hopes to accomplish over here.
In other struggling European nations: The UK is committing another $100Bn or so to it's banking sector and that is rocking the financials pre-market as RBS warned of "massive losses" of about $41Bn, but 75% of that is a "goodwill impairment charge," something our own financials may be taking down the road. Like BAC with MER, RBS's acquisition of ABN Amro is killing them. Fortis, who was their partner in this deal, already collapsed and took down the Dutch government last month. Now the British government will end up owning about 70% of RBS and their stock dropped 67% in that news this morning.
For U.K. regulators, it is becoming increasingly clear that the preservation of banks could require billions of pounds more over a number of years. More extreme measures could be needed, including the outright nationalization of RBS. Both the government and RBS weighed that option in recent weeks The U.K. government "is gambling that the global economy improves and they don't have to go all the way to nationalize, but that is the direction in which they are heading," said Simon Johnson, a professor at MIT Sloan School of Management and a former chief economist of the International Monetary Fund. "But nobody is quite ready for that on either side of the Atlantic. So you've got to go through these intermediate steps."
Banks took the Hang Seng down 2.8% for the day with a wild finish in which an afternoon rally of 300 points was crushed into the bell, dropping the close below 13,000 for the first time since the Thanksgiving collapse. The Nikkei dropped 2.3% as a stronger Yen sent exporters back towards their lows while the Shanghai bucked the wider trend and gained a point on continued hopes of massive government intervention. Aside from the fact of the RBS nightmare (and HBC led Asia down), comments by George Soros that the US stimulus package isn't enough (it isn't) and that the original TARP program had been "carried out in a haphazard and capricious way, without proper planning." Gee George, we knew that but… Shhhhh! Soros also warned: "Unfortunately it was misused and the way it it was done has poisoned the well. It has created tremendous ill will toward putting up more money."
Consider this President Obama's first Economic Daily Briefing as he needs to hit the ground running this afternoon and, as the economic commentator on Saturday Night Live often says – "Fix it!" As I mentioned in the weekend post, we are going to need some pretty stunning oration to overcome the extreme gravity that is keeping our stock market roller coaster at the bottom of the hill this week and we can just consider the above issues to be more weight added to our cart. Ordinary rhetoric will not cut it – we need something spectacular, something visionary, something that resonates with the people in order to give us the boost we need to allow Obama to get the momentum he needs to get through the next 100 days.
I wanted Obama to have this job and clearly Obama wanted the job but now is the time he needs to step up to the plate and deliver. Like a super-star athlete, the crowd is in no mood to see him swing and miss in his first trip to the plate so there is going to be a tremendous amount of pressure on Obama, more so than perhaps on any President in memory. When Roosevelt took office, the country was already deep in a depression, things could hardly get worse. Today we are only a mistake or two away from things getting much, much worse.
Soros is right, I said quite some time ago that what Obama needs to do is stand up on that podium today and whip out an ovesized checkbook and start writing out about $2Tn worth of checks. It does not look like that is going to happen. The stimulus plan that has been presented comes to a "mere" $825Bn and I will paraphrase what the IMF guy said about England's nationalization of the banks with respect to the $2,000,000,000,0000 that Obama needs to spend: "Nobody is quite ready for that on either side of Congress, so you've got to go through these intermediate steps." It's ridiculous to pretend that $825Bn over two years is going to solve our problems.
I'm not even sure $2Tn will help but let's not start off a new administration by being less than honest with the American people. Franklin Roosevelt said at his inauguration in 1934: "This is preeminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today." He also said "I shall ask the Congress for the one remaining instrument to meet the crisis—broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe." This is not a war that will be won by compromise and half-measures – this country needs leadership as much as we have ever needed it before and I hope Obama is up to the task!