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Wednesday, February 21, 2024

Singing “Davos Done and We Need Another Loan”

Debt-O, debt-uh-oh
Interest come and we need another loan
Debt-O, debt-uh-oh
Interest come and we need another loan

Work our lives just to lose our homes
Interest come and we need another loan
Stack default swaps till they come undone
Interest come and we need another loan

Come on Economists, tell us some more BS
Interest come and we need another loan
Come on Economists, tell us some more BS
Interest come and we need another loan

6%, 7% – it's a credit crunch
Interest come and we need another loan
6%, 7% – it's a credit crunch
Interest come and we need another loan

Debt-O, debt-uh-oh
Interest come and we need another loan
Debt-O, debt-uh-oh
When interest comes we'll need another loan


It was the best of times (with the IMF predicting 3.9% Global growth) and the worst of times (with Roubini saying we're all doomed) at Davos this week as the men who rule the world gathered to divide the spoils over card games while vying with each other for podium and TV time so they could talk their various books from the safety of the Swiss mountains.  Davos, a tiny village perched on a mountain with just two main streets, lacks the protests of other Global gatherings.  During the annual meeting, the town is taken hostage by thousands of police.  “Anyone who looks like a protester can be thrown off the train,” says Marco Leutholz, head of the local Socialist party (and that train often overlooks steep cliffs!).  Sir Howard Davies (director of the LSE) writes:

The mood is certainly better than last year, when the world was ending, but it is worse than at the beginning of last week. Alessandro Profumo of Unicredit acutely observed that Davos is likely to accentuate whatever mood you arrived in, rather as alcohol does, I guess. So those who arrived nervous about the economic prospects are leaving even more jittery. If you arrived feeling pessimistic, you will leave somewhere between suicidal and homicidal.

The market background has not helped. Anxiety about Greece has grown over the past three days. In the circumstances, it was strange to see both the Greek prime minister and his finance minister here. Maybe the subtext was to show that there can be no crisis if they are munching muesli in the mountains, but though some may have been reassured, more people asked who was at home minding the taverna.

Hey I like that guy – let's sign him up as a regular writer!  Let's NOT sign up Bill Gates, as Captain Obvious posted on his blog: "One of the big topics of conversation here in Davos is the economy."  They say retirement makes your brain get all squishy and I guess that's true, but maybe Bill was just all talked out after finishing his much more inspiring 2010 Foundation Report.  Sir Martin Sorrell takes his blogging very seriously and gives us an excellent rundown of events (must be something about knighthood):

Focus on the first day, amongst other things, is on the high levels of unemployment and consequent risk of more protectionism. As unemployment is already at a very high level – an average of 10 per cent in most western economies and youth unemployment at least double that rate – social stability and long-term social damage are major issues.

Bankers continue to be bashed. There’s a growing feeling, epitomised by last Thursday’s measures announced by the White House, that the banks are just conducting business as usual and are not resetting their approach. It seems that the industry will have to do much more than has been done already.  The man or woman in the street can’t understand why his or her money (through taxation and government intervention) was used to bail the banks out and now, only a year later, we are business as usual. Politicians who are there to be re-elected can’t afford to ignore such populist passions.

By the way, if you wish you could "kill all the bankers," there's now an App for that.  As the conference wound down, Sorrell noted that there were few signs of the Obama Administration in Davos, nor Russia, Japan or the UK as the general impression was that our leaders, unlike the Greeks, were at home trying to keep their fingers in their economic dykes.  Sorrell's closing comments:

The media star, so far, seems to be ‘Dr Doom’, Nouriel Roubini, with his pronouncements on economic performance. His consulting practice must be going gangbusters. The biggest concern seems to be the direction of the US. Last Thursday’s announcements and policy changes seemed to be un-coordinated and tactical. And who was in control – Volcker, Geithner or Summers? Everyone is looking for coherence in this evening’s State of the Union speech – which is a long way away from Davos! We’re in the wrong place!  The unexpected story, so far? Why did the head of security for Davos allegedly commit suicide?

Why indeed?  At least a little murder didn't stop the mayhem at the Google party, where wet-suited, snorkel-clad waiters served sushi and colored pure oxygen tanks for those in need of a blast while media moguls, politicos, all the young global leaders and even some royalty hit the dance floor.  According to Jasmine Whitbread, "the biz card ritual is like nothing I’ve ever seen outside Japan.  I swear some measure success of their participation by how many inches of cards they collect and give out."


Clearly the man of the moment this year at the World Economic Forum was Nick Sarkozy of France, who blew people away with his opening day speech but you wouldn't know it from reading Uncle Rupert's Journal, where his keynote address (22 mins in on this video) didn't even make the top of the fold in their entire Davos section with all his "Socialist rhetoric" that I guess didn't seem worth repeating to American readers (don't say censored, that's China's trademark!).  Sarkozy told the attendees at Davos that "globalization skidded out of control" and that the risks are simply too great if "we do not change the regulation of our banking system."

Through excessive deregulation, we have let dumping and unfair competition set in. We have let globalisation be based on external growth, with everybody trying to grow by taking the businesses, the jobs, the market shares of others, instead of by working harder, investing more, increasing productivity and capacity for innovation…  It gave rise to a world in which everything was given to financial capital and almost nothing to labour, in which the entrepreneur gave way to the speculator, in which those who lived on unearned income left the workers far behind, in which the use of leverage, to an unreasonably disproportionate extent, created a form of capitalism in which taking risks with other people’s money was the norm, allowing quick and easy profits but all too often without creating either prosperity or jobs.

One of the most striking characteristics of this type of economy is that, within it, the present was all that mattered and the future counted for nothing. The steady depreciation of the future could be inferred from the exorbitant demand for high yields in the present. Those yields, inflated by leverage and speculation, were the discount rate applied to future revenues: the higher they rose, the lower the value of the future fell.

The same depreciation of the future could be seen in accounting practices which valued assets at the prices set by a marketplace fluctuating constantly to keep up with the ups and downs in share values. When the markets were on a high, balance sheets were reassessed, and the very same artificially boosted figures would feed a new high. When confidence fell, the balance sheets would suffer as a result and bring share prices down. During the financial crisis we saw, up close, the damage done by that kind of accounting, when the collapse of the markets led to a collapse in the banks’ capital reserves and further tightened the credit crunch.

Our entire system of representation had been falsified: the economic value of a company does not change from one second to another, nor every minute, nor every hour… To gain a clear idea of just how absurd that kind of accounting can be, we need only think of the fact that, in a market value system, a company in trouble can report a profit simply because its diminished credit rating has reduced the market value of its debts!


Each of us must hold the conviction that the world of tomorrow cannot be the same as the world of yesterday. There are indecent behaviours that will no longer be tolerated by public opinion in any country in the world.  There are excessive profits that will no longer be accepted because they are without common measure to the capacity to create wealth and jobs.

There are remuneration packages that will no longer be tolerated because they bear no relationship to merit. That those who create jobs and wealth may earn a lot of money is not shocking. But that those who contribute to destroying jobs and wealth also earn a lot of money is morally indefensible. In the future, there will be a much greater demand for income to better reflect social utility and merit. There will a much greater demand for justice. There will be a much greater demand for protection.  And no-one can escape this.

The full text of Sarkozy's speech is HERE.  He is essentially building on the study by Stiglitz and Sen that we discussed last September, which gave poor Jim Cramer such conniptions as he called it: "So stupid, wrong and anti-empirical that it’s just downright silly that it doesn’t even dignify the use of video-tape or digital or whatever they do now."  And now it's the Keynote at Davos with the Dow back at 10,000, just 276 points higher than where Cramer said "sentiment is so negative right now, it's all out of synch with reality."

Oddly enough, Jimbo's quote from Thursday's show, with the Dow just 276 points higher than it was on Sept 16th, is: "This is not a dip to be bought; the sellers are too powerful and too willing to embrace any pretext like Greece, which in any other moment would have barely been a sideshow."  So, I will attempt to summarize:  It's BUYBUYBUY at 9,791 and SELLSELLSELL at 10,067 – talk about a tight trading range!  I'm not sure which reality Cramer will be embracing next week but Stiglitz was right in September and Sarkozy is right now – we cannot afford to go back to business as usual and if the markets want to have a little temper tantrum over a few speeches, that's fine with us but we're happy for a chance to do a little bottom fishing as we revisit these levels, not on any fundmental changes, but on changes in sentiment that we've been expecting for some time. 

The aforementioned Greece took vows of austerity in Davos and we'll see if that's enough to stop the Euro from sliding this weekend (we hit $1.3861 to the Euro on Friday's close, now down 8.5% since Thanksgiving.  The dollar is only up 7% over the same period and, amazingly, oil is down just 6.5% while gold is down 10% so we'll be watching that $72.50 line in oil very closely next week.  Copper is only down 3.5% at $3.05 and holding that $3 line will be critical with no health until they get back over $3.20.

So now that I've caught up on my Davos reading I have to conclude that I'm still not sure which way we'll go.  That means we'll continue to build a mix of bullish and bearish trades into next week but, as we discussed in the Weekly Wrap-Up, we'll also be looking at putting on a new set of disaster hedges, watching our 10,058 line closely, as we contniue to do some bullish bottom-fishing (see updated Buy List) so we can once again raise our hands and yell "wheeee" on the dips. 


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