Part uber-networking event a la Davos and part platform for serious policy discussion, like the Federal Reserve's annual event in Jackson Hole, Wyo. , this gathering offers financial, political and economic leaders the chance to mingle behind closed doors (sessions are off the record) and exchange ideas.
Or should I say "idea"? As top central bankers such as Jean-Claude Trichet rubbed shoulders with economists like Nouriel Roubini while being brushed aside by the bodyguards of heads of state such as Israel's Shimon Peres , there was really only one thought making the rounds: Major Western economies and their capital markets are in deep trouble.
The contrast couldn't have been starker. Outside, the stunning beauty of verdant hills plunging into the lake. Inside, a bunch of powerful people getting gloomier and gloomier about the economic environment in the U.S. and Europe .
Events didn't help the mood. Friday's news that the U.S. had added precisely zero jobs in August landed with a thud on Villa d'. I saw superstar economists like Mr. Roubini and Martin Feldstein , the Harvard professor who has advised numerous U.S. presidents, revise their chances for another recession (upward) live, while the nonfarm payroll numbers were rolling in.
As for Europe , the sight of Mr. Trichet, the president of the European Central Bank , imploring the Italian government to stop squabbling and finally approve much-needed austerity measures didn't fill investors with confidence about the troubled euro zone. As the manager of a big hedge fund said while listening to the ECB chief's impassioned plea, "this screams 'short the euro' to me."
After four days of asking questions, nodding and eating pasta, I came away with three distinct impressions.
First, we are living a "Mrs. Robinson moment." I am referring to the line in the Simon & Garfunkel song that goes: "Where have you gone, Joe DiMaggio ? Our nation turns its lonely eyes to you."
Markets, bankers and companies are all turning their lonely eyes to the monetary and political authorities. In recent weeks, the U.S. stock market has developed a perverse tendency to rise after bad economic data on the hope lackluster numbers would bring the Fed closer to another round of monetary easing. The market tumbled Friday after the dismal job report, but the wishful thinking endures.
Most company leaders and hedge-fund managers I met in Villa d'Este called for immediate fiscal and monetary stimulus in the U.S. and serious structural reforms in Europe . And many talked about the inevitability of more fiscal, and even political, integration to save the euro.
The problem with those hopes is that, to stay with the Simon & Garfunkel tune, "Joltin' Joe has left and gone away." Listening to Mr. Trichet's words and watching his body language, it was obvious that the ECB, for one, is extremely reluctant to bail out the euro zone. "What we do cannot be used to circumvent the fundamental principle of budgetary discipline," he told the gathered luminaries on Saturday.
The gap between investors' desires and political reality is, if anything, even more pronounced in the U.S., where Ben Bernanke has made it abundantly clear that the Fed's toolkit is small.
Secondly, the corporate and financial sectors are probably suffering more than they let on. Received wisdom has it large corporations, especially in the U.S., are doing just fine because of ample cash reserves and healthy sales to emerging markets. But, talking at Villa d'Este to CEOs from sectors ranging from insurance to metals, the story was different. The head of a large industrial conglomerate said the uncertainty over the economic and political situation is paralyzing his long-term planning. "I don't know whether to cut or invest, and I hate it. Businesses cannot stall. They either go up or down," he said.
Stefan Lippe , head of the reinsurance giant Swiss Re, shared a telling statistic. His company has seen a 20% year-on-year jump in the volume of policies, effectively insurance for insurers', even though it is charging on average 5% more than last year--a sign even insurers are getting more risk- averse. "With low bond yields and difficult capital markets, we are here to help to take on risks and free up capital for insurers," Mr. Lippe told me. That's a true statement but not one that augurs well for the return of "animal spirits" to the markets and economy.
The final, and perhaps more-worrying, thought is about emerging markets. Leading economists, such as Zhu Min , the former Chinese central banker who is deputy managing director of the International Monetary Fund , maintain that the developing world can withstand, and even cushion, the current economic malaise.
The view from the boardroom and the trading floor, at least when transplanted to Lake Como , was less sanguine. Captains of industry worry that, with sluggish markets in the West, export-heavy economies such as China and Brazil will struggle to keep up their breakneck growth. Financiers talk darkly of the rising threat of currency wars between developed and emerging countries, as the falls in the euro and dollar put huge strains on the rest of the world.
As a snapshot of the financial health of the globe, the picture taken in Lake Como is well short of postcard-perfect.
(END) Dow Jones Newswires
09-05-11 2057ET
Copyright (c) 2011 Dow Jones & Company, Inc.
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