The Short End of the Long View

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Color Me Orange…Christmas is the time for reds and greens, but for John Corzine, it sure likes like orange could be his new color. That is Orange, as in federal prisoner #245 from MF Global fame. Ignorance is not a good platform for a legal defense when you are the CEO of a company which basically stole customer money for a leveraged bet on European sovereign debt. Corzine was the first member of the Senate to be subpoenaed by its body in over 100 years. Ironic that the person who helped draft the Sarbanes-Oxley legislation, thus making CEO’s personally accountable for signing off on the financials, does not know where the customers money went.

It now would seem that the segregated customer accounts were stolen from customers in the eleventh hour to meet massive liquidity needs presented by the irresponsible, highly-leveraged and failed bets on European debt. Even in the most desperate hours of Lehman and Bear Stearns, while the fires burned out of control on stupid leverage bets akin to the European bets at MF Global, the customers’ accounts remained intact.


So who was robbed you asked?  Farmers attempting to hedge their livelihood in the grains market, only to find out that it was squandered on a firm bet that brought down MF Global. These people will be calling and writing their congressmen – so this will not end quietly.

In many respects, this is much worse than Madoff. There, people gave their money to an investor and gave him full discretion over their funds. Here, people had control over their own money (or they thought they had) giving no discretion to MF Global other than to trust them with executing their commodities trades. At least in the case of Madoff there is an aggressive trustee who is doing a very adept job at finding deep pockets to recover from those who actually benefited from Madoff, and others who are implied parties to the fraud. Here, the money was part of a bet made on behalf of the firm. Good luck trying to get that money back from the counterparties who took the other side of that bet and had the contractual obligation to collect on it.


Europe… It has been an interesting several weeks over in Europe. The “bazookas” were fired with tons of liquidity, not by the Europeans, but by a concerted worldwide bank intervention. At least the broader world recognized the contagion risk that the European authorities had decisively refused to address.  Rumors had it that Soc Gen was on the verge of going under — hence the massive and largely unprecedented actions by the world’s central bankers. World markets assumed that this was it and by way of a big summit (how many of those have we had here in the last two years?) surely the Euro would survive.

News from the so called “summit” is that a fiscal monitoring scheme has been agreed to in principal. So what? The real issue is: what are the penalties for cheaters and how will they be enforced?  The agreement was to work on a scheme of fiscal responsibility and penalties. All of this still needs a vote.

Greece, for years, thumbed its nose at the “rules” and built up massive debt (off balance sheet) and what were the sanctions against them? Too little too late. It seems that as long as the world financial markets buy what “Merkozy” and Co. are selling there is likely little resolve for true fiscal union. As long as there is not a real crisis (like the failure of Soc Gen) then there is a desire for the status quo…just limp along. It is hard to see how this strategy is going to help finance the massive amounts of debt maturities on the continent.

All of this, along with uneasiness with China’s growth rate, is making the much maligned dollar and the US markets look like a pretty good haven for now.


Russia…Mr. Putin had planned on being “Premier for Life”. It does not feel like the electorate agrees with that platform at present. Russia is now seeing the largest protests since the Soviet-era. Russian equity markets were reeling after election results last week. Putin did what all former oligarchs do when under pressure and promptly blamed America (Hilary Clinton) for stirring the pot. So what does this mean for the world markets?

It may not mean much at all, but with the Arab Spring freshly behind us, turmoil in Russia would not be a welcome ingredient on the world scene. Russia is large producer of oil and the transition to quasi-capitalism has been a largely pleasant one. Wealthy Russians have been bidding up real estate prices worldwide and investment in Russia from many credible worldwide institutions has been growing.

It is too early to predict how the elections will affect Russia and how much Putin is prepared to concede to the growing dissent. But global investors will now have to add another country to the growing worry list of macro-economic problems. Ah, for the good old days when P/E’s and company forecasts were all that mattered in the investing world!

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