Minyanville Round Table: Social, Political, Economic Polarization Threatening Recovery

By Kevin Depew Jul 08, 2011 11:00 am

Kevin Depew, Peter Atwater, Conor Sen, and Professor Pinch discuss the European crisis and what it means for the coming years.

On Thursday, July 7, Peter Atwater, Conor Sen, Professor Pinch and I began an extended email back-and-forth exchange about the overall macro picture, the global economy, financial markets and what we expect going forward. Rather than sending the four of us off to write separate pieces based on these ideas -- the traditional way of generating content -- I thought, why not just publish the exchange as it originally happened? This is the Internet, after all, and we can do whatever we want.

Peter Atwater kicked it off Thursday morning:
I am gravely concerned about Europe.

From a safety and soundness perspective what the ECB is doing is horrendous. They are providing solvency at this point, not just liquidity. And the degree to which margin requirements have been stretched is very troubling. At the same time, the actions which Germany is now taking suggest that it is every man for himself. And I am afraid that from here on out the lifeguards will only provide assistance post-, not pre-default.

Conor Sen:
Over the past few weeks I have grown more and more pessimistic. I still think the economy is in much better shape than people think, and equity valuations until the past week have been compelling. But I no longer have any confidence that the people through their elected officials are going to let things continue as they are.

In the US I'm afraid that budget cuts will be far more severe than is warranted given the output gap and borrowing costs of the Treasury. In Southern Europe I don't know how much longer this level of austerity can continue. It's not clear how much longer Northern Europe will bail out the South. QE2 is over (though I don't think this matters much), the ECB is hiking (insane), and China continues to tap the brakes.

So we find ourselves in a spot where, left to their own devices, the economy and stock market should work higher over the next few years. But social mood continues to deteriorate despite the economic improvement -- the Minnesota state government has been shut down for a week now and it seems like nobody has any answers or is willing to compromise. I'm still looking to buy dislocations in the stock market, but I think we're nearing a point (could be a few weeks or a few months) where whether it's Greece, Portugal, Ireland, or the US Congress, some governing body is going to say no mas, and we'll get some level of a sovereign debt liquidity panic.

Politically the top 1% is going to get whacked. Hard. I don't see any way around that. The chart below illustrates, I believe, the economic and social polarization that must be reconciled.

Click to enlarge

Professor Pinch:
I completely understand. You have a real economy that is showing potential, but a macro construct that is just plain unhealthy. In Europe's case the situation is worse because the gang that can't shoot is playing with dynamite.

Peter, I agree. The ECB's course of action is reckless and idiotic. "Trash for cash" is not a strategy that will solve this mess. But, everyone there is afraid of letting go of the dream: both the euro & the EU. And they won't let go of it until there's no other choice. I have no feel for how long they'll try to hold on to it, but they will.

Kevin Depew:
This is interesting, and a great way to put it: "I completely understand. You have a real economy that is showing potential, but a macro construct that is just plain unhealthy." The uncertainty is terrible, but we will eventually repair the macro construct... or not. That, in my opinion, is the ultimate bull versus bear divide. Bulls believe we will inevitably repair the macro construct and emerge with something new, while bears believe we will not.

I don't know if I need to add it, based on what I've written on Minyanville, but will: I'm in the bull camp and believe that we reconstruct this and rework it into something positive and unforeseen. The white swan. There will be much noise in the meantime, and the noise will be intense, but to me, if you can find quality companies that you can imagine might be around in 2025, at compelling valuations, and I think you can (See Minyanville commentary on large cap tech stocks such as Microsoft (MSFT), Cisco (CSCO), Intel (INTC), Google (GOOG) and Apple (AAPL)), then this is one of the greatest long-term buying opportunities of individual equities in a lifetime.

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Kevin Depew has positions in CSCO; Conor Sen has positions in CSCO, MSFT;

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