I remember when I worked at Arthur Andersen (Business Consulting) I had asked my boss to explain to me how something like the “Enron mess could take down the entire firm, particularly units that had no connection to Enron (e.g. mine). I’ll never forget the reply I got, “Lisa, it’s like green gooÂ¦.you can’t just cut away the bad parts because the goo starts sliding everywhere. The theme of interconnectedness appears pervasive when trying to read economic tealeaves. In a poignant piece in Sunday’s New York Times, author Gretchen Morgenson in a piece entitled, “This Crisis Won’t Stop Moving, discusses how the economic problems of Greece, Portugal and Spain, despite the assurances that “those countries problems will stay contained, appears laughable when juxtaposed to the same assurances given when Both Ben S. Bernanke, the chairman of the Federal Reserve Board, and Henry M. Paulson Jr. then the Treasury Secretary, rolled out to reassure concerned investors that troubles in mortgage land wouldn’t permeate the rest of the economy. Well, we now have the advantage of hindsight to know how that last reassurance turned out to be a little less than hoped for.
That interconnectedness will continue to play a role in terms of what happens next. The article quotes Mr. David A. Rosenberg, chief economist and strategist at Gluskin Sheff & Associates in Toronto, a wealth management firm (Mr. Rosenberg formally worked as the Chief Economist for Merrill Lynch) as saying, “the flight to the dollar will continue. He also believes the housing market will remain “very fragile and decline by a further 10-15% in the coming years. He goes on to say “fully half of the mortgage-holding population in the country could be underwater by 2011. Although Mr. Rosenberg believes we are “further along the road to price discovery and full disclosure than Japan was at the same stage of their credit contraction we’ll face a turbulent “post bubble collapse with ups and downs coming more rapidly than they used to. He believes the next recession will come “more quickly than people think. And as we reported yesterday, a pair of economists suggested 2013-2014 for the next downturn.
How does this all connect to metals markets? Right now, the situation in Greece, Portugal and Spain has caused the investment community to return to the dollar and to move away from commodities such as metals. With the exception of palladium, the precious metals have fallen back as have the base metals. How long will the dollar bid up as the global safe haven currency? Nobody knows for sure but the Dubai situation provides a recent case study example. Let’s hope the green goo stays confined!