Now everyone is agreed.
Now everyone understands the complexities.
It's time to re-assess.
And today - the German press, opposition, Monti appearance, Sarkozy's 'favorable compromise' - gave me much to contemplate.
For non-Europeans, particularly US-centric investors/traders, this has been already been a difficult journey. But, as an Irishman and long(ish) time market participant, I'd advise you not expect a simplistic outcome. In fact I suspect this 'crisis' could be about to get even more convoluted.
German policy makers might be doctrinaire but they are not naive. They know the consequences of a disorderly Euro break-up but they are constrained by (German) public opinion & their assertive Constitutional Court. However, this does not mean they cannot utilize increasing tensions (& yesterday's Bund auction might be pivotal) to coerce popular opinion towards some fiscal concession.
I've consistently dismissed the illusion the ECB would 'do a Fed' &/or there could be some ready made Eurobond solution. The belief in either solution was born of hope &/or a poor appreciation of European (Germanic) history &/or treaties.
In my humble, I was also highly skeptical of the notion the EFSF could be 'leveraged' into an effective firewall. Without increased (hard cash) commitments from the core that was never plausible.
All this is now well understood, but that by no means assures the mutual assured destruction of the Euro.
Far from it.
The Germans (& the the more mercurial French) are not going to walk blindly into the night. I believe there is yet another 'solution' in the making.
I admit the following is pure conjunction - my own opinions - but please consider the probabilities & the implications for your trading/investing.
The 'solution' won't be a TARP-like 'big bazooka.' It won't involve splashy $trillion-type numbers. It will be fiendishly complex - even for nerdy Europeans. And it might even work.
It will seep out, but in short, the Germans are looking for cover. And the cover will be:
(1) A legalistic agreement to implement 'treaty changes' that impose penalties, constraints, and the appearance of 'Fiscal Union';
(2) A <done> deal that irrevocably taking the ECB out of the money printing business - unless your a commercial bank of course.
This will supposedly restore the 'trust' Merkel says has be missing, provide the political spin, and pave the way for some type of 'Stability Bond' - a second tier of government bond issuance (promoted by several economists) &/or additional backing for the EFSF &/or some derivative of a derivate of ......
For the record - I remain deeply skeptical the Euro can survive with or without serious damage to the European economy.
But I don't under-estimate their ability to 'kick this down the road.'
Watch the bearishness. And stay tuned.
Thursday, 24 November 2011
Caution Horses
I'm uncomfortably out of the bearish (European-centric) trade.
Technically & sentiment-wise (when everyone gets it?) I feel a bounce is probable.
But more accurately I don't like the risk-reward right here/right now.
Yesterday's SPX weakness made for a tough day, but ironically the 'reason de jour' - the 'failed' Bund auction - may provide the catalyst for a little hopepium.
I'm not sure the auction represented anything other than investors recoiling @ sub-2% yields (six of the last eight 10 year auctions have technically failed) but it was probably poor enough to spook the fiscally conservative horses.
In the coming days I suspect we'll see more Bild-like stories supposedly 'softening' the German resistance to the EuroBond solution.
This is a long-term aspiration, but hope is all the markets have.
Enough to re-test the recent neckline breaks in European equities?
Technically & sentiment-wise (when everyone gets it?) I feel a bounce is probable.
But more accurately I don't like the risk-reward right here/right now.
Yesterday's SPX weakness made for a tough day, but ironically the 'reason de jour' - the 'failed' Bund auction - may provide the catalyst for a little hopepium.
I'm not sure the auction represented anything other than investors recoiling @ sub-2% yields (six of the last eight 10 year auctions have technically failed) but it was probably poor enough to spook the fiscally conservative horses.
In the coming days I suspect we'll see more Bild-like stories supposedly 'softening' the German resistance to the EuroBond solution.
This is a long-term aspiration, but hope is all the markets have.
Enough to re-test the recent neckline breaks in European equities?
Tuesday, 22 November 2011
Full Disclosure
For the first time in weeks 'hopepium' has been replaced by cold truth.
Even the most contrarian thinker/tailor/trader has had to accept the ECB will not be doing a Gandalf - suddenly appearing on the ridge and riding to the Euro's rescue.
The Germans have drawn some type of inverted Maignot line and believe it will hold.
The pragmatism is almost admirable.
They might be even be right.
But it won't work.
I believe the probability of a full-blown existential 'will the Euro survive' &/or 'who will be left inside' crisis is now very high.
The opportunity to leverage the EFSF is diminishing by the day & France has already effectively lost its precious 'AAA' rating.
The economic & political pressures will continue to build in the peripheries and they will seep dangerously into the core.
Greece might pre-empt everything if Samaras continues to play dare with the 'troika' but I suspect the final installment of the first bail-out will be paid to buy a little more time.
Be patient - respect the fact that now everyone 'gets it' the bounces could be nasty - but time is limited.
As Martin Wolf (FT) observed - the only question is if and when the Merkel & the ECB blinks.
Even the most contrarian thinker/tailor/trader has had to accept the ECB will not be doing a Gandalf - suddenly appearing on the ridge and riding to the Euro's rescue.
The Germans have drawn some type of inverted Maignot line and believe it will hold.
The pragmatism is almost admirable.
They might be even be right.
But it won't work.
I believe the probability of a full-blown existential 'will the Euro survive' &/or 'who will be left inside' crisis is now very high.
The opportunity to leverage the EFSF is diminishing by the day & France has already effectively lost its precious 'AAA' rating.
The economic & political pressures will continue to build in the peripheries and they will seep dangerously into the core.
Greece might pre-empt everything if Samaras continues to play dare with the 'troika' but I suspect the final installment of the first bail-out will be paid to buy a little more time.
Be patient - respect the fact that now everyone 'gets it' the bounces could be nasty - but time is limited.
As Martin Wolf (FT) observed - the only question is if and when the Merkel & the ECB blinks.
Trust the Technocrats?
Wolfgang Munchau (FT - Monday November 21st 2011):
'The consensus view that the crisis can be solved by technocratic governments imposing structural reform and austerity ......
That proposition is, in my view, INSANE (my emphasis) ......
And any case it will be tested shortly.'
Quite.
'The consensus view that the crisis can be solved by technocratic governments imposing structural reform and austerity ......
That proposition is, in my view, INSANE (my emphasis) ......
And any case it will be tested shortly.'
Quite.
Friday, 18 November 2011
Feet to the Fire
The reality?
An increasing sense the German's have enough.
No more short-term fixes. No more equivication (if there ever was?)
Its the hard way. Or ......
Guido Westerwelle's (Germany's Foreign Minister) writes in this morning's FT:
'Only when states regain trust by immediate and through reforms, can the crisis be overcome.'
And:
'Putting the ECB's printing presses to work might at best bring short-term relief. But it will have dire consequences, both raising inflation and dissipating vitally important incentives for reform.'
The Bundesbank quickly re-iterates the ECB will not underwrite any quick fix:
'The economic costs of any form of monetary financing of public debts and deficits outweigh its benefits so clearly that it will not help to stabilize the current situation in any sustainable way,' Bundesbank President Jens Weidmann, who also sits on the ECB’s Governing Council, said in Frankfurt today. 'The lack of success in containing the crisis does not justify overstretching the mandate of the central bank and making it responsible for solving the crisis.' <Bloomberg>
What does this mean?
(1) Limited ECB bond buying (= maximum Euro 20 billion a week) & continued steralization.
(2) Nothing less than severe (fiscal) austerity throughout large chunks of Euro-Zone.
The Euro may survive. It may not.
But either way the economic adjustment is going to be VERY painful.
An increasing sense the German's have enough.
No more short-term fixes. No more equivication (if there ever was?)
Its the hard way. Or ......
Guido Westerwelle's (Germany's Foreign Minister) writes in this morning's FT:
'Only when states regain trust by immediate and through reforms, can the crisis be overcome.'
And:
'Putting the ECB's printing presses to work might at best bring short-term relief. But it will have dire consequences, both raising inflation and dissipating vitally important incentives for reform.'
The Bundesbank quickly re-iterates the ECB will not underwrite any quick fix:
'The economic costs of any form of monetary financing of public debts and deficits outweigh its benefits so clearly that it will not help to stabilize the current situation in any sustainable way,' Bundesbank President Jens Weidmann, who also sits on the ECB’s Governing Council, said in Frankfurt today. 'The lack of success in containing the crisis does not justify overstretching the mandate of the central bank and making it responsible for solving the crisis.' <Bloomberg>
What does this mean?
(1) Limited ECB bond buying (= maximum Euro 20 billion a week) & continued steralization.
(2) Nothing less than severe (fiscal) austerity throughout large chunks of Euro-Zone.
The Euro may survive. It may not.
But either way the economic adjustment is going to be VERY painful.
Monday, 14 November 2011
Cause & Effect
So, in Greece and Italy the technocrats are now in charge - well sort of - but what difference does it make?
At the margins? Some.
But read Wolfgang Munchau's (Monday's FT) 'The only way to save the Eurozone from collapse' ......And face the reality.
Some sort of pseudo-ECB-backed-Eurobond has always been the only solution, but Merkel (perhaps correctly) continues to dismiss the idea and the ECB (as they told you so) is determined to demonstrate they are near their bond buying limit.
Meanwhile, the prospect of meaningfully leveraging the EFSF is diminishing by the day, the whole notion of 'expansionary austerity' is a non-sense, Europe is hurtling towards recession and bond yields are creeping ever higher.
Given Merkel's party congress rhetoric its easy to assume that the so-called 'hard core' are now planning for hard exits. That sounds politically plausible (if legally impossible) but I suspect they no not what they do.
Europe is sliding towards dangerously unintended consequences.
At the margins? Some.
But read Wolfgang Munchau's (Monday's FT) 'The only way to save the Eurozone from collapse' ......And face the reality.
Some sort of pseudo-ECB-backed-Eurobond has always been the only solution, but Merkel (perhaps correctly) continues to dismiss the idea and the ECB (as they told you so) is determined to demonstrate they are near their bond buying limit.
Meanwhile, the prospect of meaningfully leveraging the EFSF is diminishing by the day, the whole notion of 'expansionary austerity' is a non-sense, Europe is hurtling towards recession and bond yields are creeping ever higher.
Given Merkel's party congress rhetoric its easy to assume that the so-called 'hard core' are now planning for hard exits. That sounds politically plausible (if legally impossible) but I suspect they no not what they do.
Europe is sliding towards dangerously unintended consequences.
Thursday, 10 November 2011
German Economic Policy
With thanks to 'The Macro Man' .....
German economic policy essentially consists of:
1) Tight fiscal policy to crush any signs of a recovery.
2) Tight monetary policy to crush any signs of recovery.
3) Tie yourself to some profligate countries so that you have a cheap exchange rate and can sell shedloads of exports.
4) When the countries you provided vendor finance to start having trouble paying you back insist that they follow 1) and 2).
5) Wonder why everyone hates you.
http://macro-man.blogspot.com/
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