It’s not like we didn’t have enough to worry about, after all – tepid economic growth, budding asset bubbles in debt and commodities, and sundry debt crises are more than enough thank you very much – so why did the head of the IMF have to go and wind up on suicide watch in Rikers Island jail? Dominique Strauss-Kahn may not have much in the way of judgment-exercising capabilities in his personal life, but by all accounts he has been a linchpin figure in the protracted financial problems in the Eurozone, reputed to be just about the only financial policymaker to whom German Chancellor Angela Merkel will listen. This is not a good time for yet another X-factor to suddenly emerge from its quantum superposition into our observed reality – but here we are.
It is a measure of Strauss-Kahn’s success in managing the process of dealing with the Eurozone debt crisis that it has largely stayed off the front pages of the financial media and has failed to spook equities markets unduly. But the lack of visibility does not by any means indicate an imminent resolution. The fixes applied to keep Greece and Portugal from going over the edge are wobbly, and the kind of organic economic robustness that would improve the competitive positions of second tier European countries is not visible to the naked eye. Tough decisions will have to be made in the near term, and Strauss-Kahn has shown himself to be that rather rare specimen of technical bureaucrat with the force of personality to make the tough decisions. All the more pity that the “force of personality” was so completely and inappropriately directed as pertains to his off-duty adventures.
What are the immediate implications for market performance? Well, as we noted above, anything that adds to the already potent cocktail of volatility is most unwelcome. Assuming that regardless of how his legal predicament works out, Strauss-Kahn has put himself beyond the pale as a viable ongoing leader of the IMF, it may be some time before we fully appreciate the practical implications of his stage exit for the Eurozone. But turning up the volatility dial can accelerate what we see as in high probability the biggest concern in markets today – the expanding bubble in debt and commodities prices. Energy, metals and agriculture prices have tumbled in recent days but continue to spike up and down by large leaps on a daily basis. Yields on the 10-year Treasury note are down about 12% from their levels three months ago, leaving one to wonder what pixie dust can continue to sprinkle over government debt markets to keep their prices from going into a severe nosedive. Curiously, when you look at market performance in the year to date the most stable returns trends seem to be in equities. That could of course change on a dime if the froth in other asset markets continues to build up. The probability of a very bumpy second half of the year appears to be gaining ground. It is indeed a shame that one of the better financial policymakers out there had to take himself out of the action in such an ungainly manner.