McCarthy, Drexel, Goldman and a distant 4th Greece

The 48 hours passed and some people would say nothing happened. A lot did happen:

1. Germany seems to have caved in and are now behind a much bigger IMF/EU sponsored deal which if implemented will kill Greece slowly... but at least it will take Merkel past the state-election on May 9th.

2. FED and Bernanke has by now secured themselves as even more incompetent than the mighty joke Greenspan by refusing to discontinue the easy monetary policy - one even get the idea that they will NEVER ever, whatever evidence, do anything to upset the politicians by removing the easy money. The joke being the market is on the edge of doing it for them - a FED behind the curve vs inflation and rating is not good news.

3. The Goldman Sachs saga is beginnning to look a lot like McCarthyism, is it not ironic the same committee which spend all of last week trying to take down the executives from GS, is the same committee McCarthy chaired hunting communist in the US? Further more, what few people seems to understand: The committee has ZERO legal mandate to anything but report and ask SEC or other institutions to look into the matter. In others words: It is a major exercise in GRAND STANDING. This does not make GS totally innocent- not at all, but if there is a problem with financial products and its sellability to the common public it is an industry issue, not GS specific. The risk here is GS end up like Drexel in 1990, not being able to stop the rumors and talks which is so effective as long as it has populus support.

4. Regulation is coming fast and furious. The only reason for G-20 not acting as of yet, remains in the fact Canada chairs the G-20 group- and G-20 will never enforce initiatives against the will of the G-20 chairmanship, but when South Korea takes over the leadership in July, it will become priority number one to enact bank levy and there is talk it could be up 25% of liabilities. This is the REAL DANGER now. The US will have some sort of bill in place ahead of midterm election and the G-20 will have global bank levy before we enter into 2011.


As we closed this week, there is to me few things which can derail this ridicolous "sugar high" ride higher - The FOMC is providing a put option on holding high risk - China is trying to steer the demand and growth without having to tighthen further (alhtough housing plus this week-ends PMI indicates this will be difficult)

There is now only 30% ish chance of the Greek rescue deal to fall through - but if so, it will have massive political and market costs if Greece end of the day says: 'Thank you, but no thank you' . They will take the money but inside the next six month both Greece and EU/IMF and maybe even the rating agencies will realise there is no way in hell, the austerity program can be executed in an economy which is full of subsidies, overpaid public servants.......

So, where do we end? Goldman became front-page again on Friday, closing a year-to-date low - and recently the fortunes of GS, for better or worse, has been highly correlated with the stock market.

This morning I read that the worst is over - the better times are here all is good and getting better and at the same time, this very morning, my old uncle, or let me say, experienced uncle, who started trading the markets when people did trade foreign exchange on telex' (I know several of you need to look up a telex machine!), and why CABLE is called cable (I will leave that as a cliff hangar for you) called me to discuss how nervous he has become of the future.

We are few people left who sincerely believe this is the end of the road for this type of markets, but in its bare essence my view is this:

1. Interest rates are at the very low and at the end of 30 years of lower lows. Real rates is negative in most places and the incoming inflation and commodity price rises will be shock to financing rates very soon. (when market loses faith in FIAT based sovereigns)

2. The stock markets is in its 11th or 12th of mean-reverting to lower levels. The market will probably not outright collapse looking over the next 10 years, but the return will at best be plus/minus 5% for all of the bext 10 years.

3. Commodities are in its 9/10th season of a 20/25 years bull market. We moved the whole economy to one of FIAT money, one of huge leverage and when we close 2010 the new normal will be less leverage, more capital restriction, higher trade barriers.

Trading these three themes sort of watching pain dry, and the risk is ultimately to fall by John Maynards Keynes famours words: 'The market can stay irrational longer than I can stay solvent". The irony being - mark-to-market the governments and banks are already insolvent, but for now it is more convenient to look the other way- yes indeed the Facebook generation is here. All is how it looks not how it works.

Nice week-end

Winston