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Capitalism Succumbs to Opera Seria

10/19/2011 10:50 am EST


Marilyn Cohen

President and CEO, Envision Capital Management, Inc.

It’s a tough place to be when the rational markets become more irrational than the most contrived stage pieces, writes Marilyn Cohen of Bond Smart Investor.

I am not an opera fan. It’s too contrived…too engineered…too staid for my taste.

But what is going on in the market and in global politics is akin to Opera Seria, an opera that is both tragic and serious. The structure of Opera Seria usually has violent passion, and often ends in a jubilant climax.

The picture of a bloated opera singer reminds me of the bloated sovereign debt load engulfing the Eurozone. Her ironclad breast plates remind me of the Greeks, whose greed and nanny-state mentality cannot be penetrated.

There are moments in this ongoing opera when an insignificant character, Greece, takes over the stage and leads the rest of Europe with a noose around its neck. Greece has admitted it will come up short of every projection, every target, and every goal it has vowed to meet since the beginning of this mess.

This whole ear-piercing aria is affecting the global markets in a big way: Stocks, bonds, commodities, spreads, and credit-default swaps.

The European banking sector’s interconnections and holdings of one another’ debt (which isn’t priced accurately at today’s prices) is the reason for the high-pitched shouts to recapitalize Europe’s banks. The tragic fear and foreboding the regulators worry about is in the derivatives markets—should there be a failure or default, will the counterparties be there to honor their contracts?

Or will this Lehman 2.0 type of situation create another violent event? Will there be just a few bodies, or a pile of them left on stage?

If you think the jubilant climax will end with Big Ben to the rescue—think again. Our angry electorate wouldn’t tolerate it. With our weakling economy, 9.1% unemployment, deficit spending, and loss of stature as the global juggernaut, we can’t yet come up with the solution to our own economic woes, let alone solve Europe’s.

The ratings-downgrade machine is at full throttle. Fitch downgraded Spain two notches from AA+ to AA- with a negative outlook. Italy was cut from AA- to A+.

And European countries aren’t the only bloated, debt-laden balance sheets on stage. New Zealand was downgraded by both Fitch and Standard & Poor’s from AA+ to AA. The audience is murmuring for more debt to solve these massive debt problems—intuitively you know that’s no long term answer.

Bringing this tragic opera to our own center stage, we see our own problems as structural, not cyclical. Lower rates and more borrowing are not the solution—the Fed has done all it can.

More borrowing for “shovel-ready jobs”? My two Labrador retrievers have created more shovel-ready jobs than this administration. More temporary tax cuts? More temporary tax incentives? More new government agencies? More government intervention in business? No!

The US as well as Europe need permanent solutions—temporary isn’t working. They haven’t since the depths of 2008. What we need is leadership, action, less debt, less spending, and less acrimony among our politicians.

That’s the only way this Opera Seria will have a jubilant ending.

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