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TMFAleph1 (95.09)

Macro Roundup, Feb 22

Recs

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February 22, 2012 – Comments (0) | RELATED TICKERS: FXE , COP , XOM

Let me begin by stating that Energy isn't my specialty. I've heard many people assert that natural gas prices have simply been too low for too long and that they must, therefore, rise. Perhaps, but if "fracking" is the quantum leap that the FT's Martin Wolf (and the IEA) describe, it is certainly possible or even possibly certain that this new extraction process has altered/ is altering old equilibrium points. In that scenario, it's not that clear that a mean reversion bet on natural gas prices is advisable (Prepare for a golden age of gas, FT.) Meanwhile, the world's largest independent, Vitol, said oil prices could break $150/ barrel this year on the back of geopolitical risk, although that is not their baseline scenario -- the CEO was clear when he said "it is unlikely, but it is possible" (Vitol warns crude could pass $150, FT.)

Sushil Wadhwani, hedge fund boss and ex-member of the Bank of England's MPC, does a terrific job of describing three scenarios for Greece and the Eurozone and the implications for relative performance of European equities vs. bonds (Investors should prepare for a Greek 'bail-out III', FT.)

On a related note, it is mind-boggling that the new "rescue" package aims to achieve a 2020 debt-to-GDP of… 120%. What a result! That figure gives the measure of Greece's current predicament. I think it extraordinarily unlikely that the second package will be the last if Greece is to remain in the Eurozone. As the FT reports, the program is based on "assumptions that even its architects acknowledge are suspect" (Arithmetic gymnastics cannot hide the urgency for growth, FT.) In particular, it assumes that the Greek economy will cease contracting next year and resume growing at 2.3% in 2014 -- that's the baseline scenario. For reference, Greece is in the midst of a Depression – this is its fifth recessionary year. In the third quarter of 2011, the economy shrank by 5.0% year-on-year on an annualized basis.

To add icing to the cake, lenders will be seeking additional austerity measures as part of the program; in that context, their growth assumptions look suspiciously like a pure political fiction, or as one witty analyst put it: “If one bends the rules of arithmetic, stretches economic logic and disregards social and political realities then the assumptions all add up. Otherwise Greece will almost surely need another bail-out.”

In fact, even more likely than a third bailout, my guess is that Greece will have exited the Eurozone long before 2020.  It's little wonder that pension funds and other investors have already begun asking investment banks for products that would provide a hedge against a partial breakup of the euro (Investors seek hedge against euro split, FT.) Or that "some central banks have all but abandoned holdings of eurozone government bonds, except those issued by Germany, France and the Netherlands," according to State Street Global Advisors ('Drastic asset moves by central banks, FT)

 ***Should investors count on a 10%-11% average return on stocks? The answer is 'no'. To understand why, read my commentary in the latest issue of The Real Returns Report.***

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