The news out of Europe today was not favorable for Greece as it was reported in the German paper DIE WELT that German Finance Minister Wolfgang Schäuble suggested Greece would need to restructure. Schäuble’s comments led the cost of interest rate on the DEBT of the peripherals to rise. By day’s end, Greek 2-year rates climbed to 16.8 percent. Portugal rose 25 basis points to 8.87 percent and Ireland increased 25 basis points to 8.20 percent. Spain’s bonds were also priced higher as rates increased 10 basis points. All in all, not a very splendid day for the European debt-stressed nations, but yet again the DOLLAR could not gain ground against the EURO as an initial DOLLAR rally faded quickly. It appears that some central banks are recalibrating reserves as even a DOLLAR rally seems to be so short-lived. The EURO has performed well even though it has the cloud of uncertainty overhanging its economic and political situation.
This weekend may see the European bailout plan be upended if the TRUE FINNS win an outright victory in Finland. If the anti-EURO PARTY were to win it would be a statement that the FINNISH CITIZENRY want no part of national bailouts by the ECB or any other mechanism. The reverberations in Berlin will be felt and Frau Merkel will be in an even more difficult political position as the anti-Europe forces within Germany will be louder and certainly stronger. If the TRUE FINNS win and the DOLLAR still fails to rally, it will be a signal that other factors are at work and the DOLLAR is suffering from some structural defects beyond the immediate radar screen.
As an example of the incomprehensibility of the rating agencies, Moritz Kraemer, head of S&P’s European debt-evaluation group stated: “Greece’s rating clearly signals that the risk of an eventual restructuring has risen over the last year or two. However, if you look at historical default rates at a BB rating level,the base case is still they would not restructure.” It never ceases to amaze me how the ratings agencies stay in business. If I could question Mr. Kraemer I would ask how much Greek debt S&P is buying for its investors. Again, a great many people talking and not many listening to what the market has to say.
Which brings me to the tonight’s headline. There is so much chatter coming from FED officials about transitory inflation and exit strategies and today we had PLOSSER speaking on the need for inflation targets. FED officials are busy telling the market what to think and do but the collective wisdom of the market is telling the key policy makers that it is very worried about the effectiveness of the FED. Goldman’s two-day assault on the commodity market was reversed as GOLD and SILVER rallied to new recent highs and even the OIL market reversed. Yesterday, I cautioned that the DOLLAR‘s failure to rally was a warning that all is not right in the world.
The coming BUDGET BATTLE is no longer a side-show but entering the main stage. Global investors are aware that the FED cannot be a passive observer for the FED‘s balance sheet holds more than $2 TRILLION DOLLARS of DEBT-based assets. If CONGRESS fails to get serious in controlling the fiscal situation, just exactly HOW IS THE FED GOING TO EXIT? There is continual discussion that the FED has many tools at hand to exit its bloated balance sheet but if the BOND VIGILANTES succeed in pushing the LONG RATES higher, exactly how is the going to dispose of its MBSs and TREASURIES? This is the problem going forward and other than monetization of the DEBT it is going to be a quagmire of uncertainty.
The markets are letting the financial world know that the FED and Congress have a serious problem. The DOLLAR and PRECIOUS METALS are sending warning signs. It seems that between all the FED speeches and the whirring fans of the computers processing the data for the FED MODELS, the warning sirens are not being heard. If tomorrow’s CPI number is a benign number–as the markets are looking at a headline of 0.5 percent and a core rate of 0.2 percent–and the DOLLAR and BOND markets get sold. The FED BETTER START LISTENING MORE AND TALKING LESS. The same goes for the FOOLS ON THE HILL.