With This Global Mess, Who Can Blame Investors for Seeking Cover?

The incredible financial market free-fall of recent days reminds us so much of the terrifying moments of 2008 (as well as of 1987), so there is no point in going into the prognostics. Any attempt at judging whether or not the plunge warrants a return to risky asset exposure amounts to trying the gauge the state of "animal spirits," and god only knows they can be vicious little beasts.

We can talk all we want about speculators or investors acting like Panurge's sheep, but the sad truth is that, with a very few exceptions, this new crisis is the fault of both governmental and monetary authorities. just consider the decisions made in the world's major economic centres:

United States

The use of debt ceiling approval by the Republican Party, which brought the country to the brink of voluntary debt default, is one of the most shameful acts in modern economic history.

They essentially held the entire country (and world!) hostage to their demand for an austerity plan when the employment market is at its worst since the Great Depression of the 1930s, with all the human consequences that entails for the country's social and democratic fabric! We can only hope that all the aficionados of smoking cigarettes near gas pumps will return to their roles in Deliverance, from which they would have never been allowed to escape, if monetary authorities had earlier had the courage to assume their responsibilities.

Europe

What else can we say about the consequences of the constant playing of the morality card, as leaders insist that banks "pay" for the new Greek bailout tranche payment? These same banks who were told to maintain their debt exposure to the economies based on the promise that no eurozone country would ever be allowed to default!

And all that to save a few billion euros on a plan that now totals over €220 billion? The devastating debt contagion, which is gradually spreading to countries outside the PIGS zone, is now measured in hundreds of billions of euros, presents a deplorable image to international investors.

And what can say about the ECB's worst press conference ever yesterday?

What was going through the collective minds of the Frankfurt governors board when they decided to announce a reactivation of their SMP in the middle of the afternoon press conference? Why not in the morning? Did the ECB chief think that his little play on words would gain him a standing ovation from reporters in attendance? And why was it limited to just Ireland and Portugal, two countries already operating under aid programmes, and whose debt costs are no longer important?

Perhaps because our beloved Mr. Trichet would have then had to explain his refusal to intervene on the more significant debt markets, Spain and Italy. He might have also had to explain what he means by "repair of the monetary policy transmission channel," the absurd sock-puppet that he uses to justify what would otherwise be so easy to justify.

His repeated use of "no comment" to questions raised on this matter by a female reporter bordered on rudeness. It is also instructive in that it shows that he still does not understand the importance, for the central bank, to explain its own actions. But maybe Trichet should start asking if he, himself, really understands his actions.

Japan

Yesterday's latest currency intervention constitutes a new outrage, demonstrating the advanced degree of cynicism of the world's mercantilists.

How can the country have the audacity to unilaterally intervene on forex markets to depreciate the yen against the dollar, given its annual average trade surplus with the United States of $80 billion? Despite the Tsunami and Fukushima, this surplus is still estimated at $50 billion for this year. After all, its only real problem is deflation and the budget deficit, which the Bank of Japan could resolve immediately by crediting one year's amount of GDP to the Japanese treasury.

China

And what can we say about China, which continues to closely manipulate its currency, thereby preventing an real adjustment in worldwide trade imbalances?

Remember when it devalued its currency 50% against the dollar in one fell swoop in 1994?

Thanks to their currency move, their trade surplus with the United States surged from $20 billion at the time to over $220 billion in the second half of 2005 on an annual basis, after which (11 months) it finally decided to let its currency appreciate, but at a mere 4% to 5% per annum, as they put a break on this appreciation whenever it suits them. In 2011, the trade surplus is expected to total over $250 billion.

In such a demoralising and uncertain world context, how can we criticise investors for seeking shelter, regardless of the entry cost?

Yesterday we therefore did some major book cleaning in our positions, as we took advantage of the slow hike in implied volatility on option indices, with PIS representing less than a third of the change in the Eurostoxx yesterday.

Disclosure: Long 18 years OAT and 28 years BTP Zero Coupons, EDF Corp 3 Years 4.5%, Greece 1 Y and 8 Y bonds, Thaler's Corner.