EURO ZONE CRISIS
Former Wall Street trader prefers Namibia’s bonds to Italy’s
Globe and Mail Update
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In the latest episode of Blundering Heights, the long-running European soap opera, Greek Prime Minister George Papandreou was about to lose his job, which he really didn’t want any more. His Finance Minister was recuperating from a severe stomach ache, probably at the thought he might have to replace Mr. Papandreou.
The G-20 leaders meeting on the French Riviera couldn’t agree on how to bolster the International Monetary Fund, so it could dispense more cash to the Europeans. Embattled Italian Prime Minister Silvio Berlusconi insisted his debt-laden country didn’t need any help, thanks: Just look at our full restaurants.
Meanwhile, the short-lived Greek referendum idea evaporated after the democratically elected leaders of Germany and France explained that you just can’t let people vote on how much misery they should bear.
Not surprisingly, already jittery markets did not enjoy the week’s twists, turns and sudden reversals. Stocks slid, the euro took a hit and yields on Italian and Spanish bonds climbed yet again. The yield on two-year Greek debt actually fell more than four percentage points, but still stands at 98 per cent.
It was in these difficult market conditions that Namibia chose to launch its first euro bond issue. The $500-million (U.S.) worth of 10-year bonds with an annual coupon of 5.5 per cent were quickly snapped up by institutional investors, particularly in Britain and the U.S. The price in the secondary market rose 3 cents on the first day.
So it has come to this: An African country where half the population of just over two million lives below the poverty line and an equal number is unemployed is regarded as a safer bet than Italy (with a 10-year yield of 6.4 per cent) or Spain (5.58 per cent) or even the European Financial Stability Facility, the fund set up to funnel capital to troubled euro zone governments. The EFSF last week postponed a planned €3-billion debt offering earmarked for Ireland’s treasury.
“That makes absolute sense,” says Jared Dillian, a former Wall Street trader who publishes a daily market commentary. “I would rather own Namibia at 5.5 per cent than Italy at 6. Namibia has debt to GDP of only 20 per cent.”
The euro zone crisis is not going away any time soon. “The only time government interventions work anywhere is if they are unlimited,” Mr. Dillian says. The EFSF, however, has finite resources. “Even if you leverage it, it’s still finite. The point is, whether it’s one year from now, two years or three years, the insolvency problem is going to be too big for that to handle.”
The Europeans had two options to deal with Greece and keep the contagion in check: restructure the debt or monetize it by creating money and risking higher inflation. Instead they chose a third option, “which is to postpone it. That’s what the EFSF does.”
But at some point, they have to choose one of the other options. “And if they want to keep the euro together, they’re going to have to monetize it.”
As for the EFSF, “you should be short anything that has the word stability in it,” Mr. Dillian says with a laugh.
Mr. Dillian, 37, was the chief trader of exchange-traded funds at Lehman Brothers when the venerable Wall Street investment bank collapsed in 2008 under the weight of massively wrong bets on commercial real estate, triggering a global credit freeze. His new memoir about his Lehman years,Street Freak, provides a terrific insider’s view of the bank’s hyper-aggressive culture in its dying days.
But even when he was raking in millions of dollars for Lehman trading index futures and just about every other asset class apart from mortgages, Mr. Dillian was at heart a relatively cautious gambler (he never spent his fat bonuses) who was better at coming up with investment ideas than figuring out how much to bet on them.
Today, ideas are his stock in trade at The Daily Dirtnap, the subscription-based market commentary he publishes from his home in Myrtle Beach, S.C. The name comes from the surfing types with whom he once worked on the trading floor of the Pacific Coast Options Exchange in San Francisco. Dirtnap was their preferred way of describing something going down, as in: “Hey, dude, the [fill in favourite index] is taking a hell of a dirtnap.” He brought the popular term to Wall Street.
In the current global environment, his ideas run the gamut from the obvious to the deeply contrarian.
“Basically, you have most of the developed countries printing money, so there are some very easy long-term trades. You can buy and hold gold [which he does, in various forms]. You can buy and hold precious metals. You can buy and hold basic materials.”
But for those looking for more unusual plays, he recommends loading up on U.S. banks, even though he is no fan of the sector. The reason, strangely enough, has everything to do with the flurry of street protests and growing criticism of the Wall Street banks and their practices.
“This is a great time to be long financials. It is a contrarian trade. Most people don’t understand this. They look at the people in lower Manhattan and say you have got to be short banks. Everybody hates banks.”
That means buying opportunities, he says, citing a rally in oil stocks in the midst of the BP oil spill disaster as another example. “I don’t like being contrarian just for the sake of being contrarian. It’s really a sentiment game. When there is widespread negative sentiment against a stock or a sector, it’s usually the time to be long.”
Read an excerpt from Jared Dillian’s Street Freak: Money and Madness at Lehman Brothers online at tgam.ca/taking-stock
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