It has been the best of times. It has been the worst of times. President Sarkozy began the year with such high hopes and aspirations as he desired to raise his stature on the world stage. He won his early skirmishes against Chancellor Angela Merkel by first defeating Germany’s desire for Axel Weber to attain the ECB Presidency and then forcing the German Chancellor’s hand for a larger pool of capital for the European Financial Stability Facility. But the taste of victory has now faded as the FRENCH BOND MARKET is suffering under the weight of its deeply troubled banks and the GERMAN/FRENCH 10-YEAR BOND SPREAD CONTINUES TO WIDEN. France is deemed to be very vulnerable for its banks own so much EURO SOVEREIGN DEBT that of course is deemed to be riskless and require no haircut or capital to support it.
During the summer, Sarkozy had tried to get the EFSF to buy sovereign debt on a Euro-wide basis but MERKEL squashed the idea and said each individual country would have to deal with its banks–and so began the worst of times. Chancellor Merkel had suffered several electoral defeats and suddenly awoke to the need to take care of her political career by waking up to the anger of the BAVARIAN BURGHERS. German democracy seemed to be a problem for Sarkozy’s plan of a German-financed EU-wide bailout. Sarkozy thought he held the upper hand by utilizing the dire situation of the PIIGS to set the agenda for Germany to be the fiscal agent for Europe.
This will probably be written in history as the worst decision by a French leader since Napoleon the THIRD was lulled into the WAR of 1871 that resulted in German unification. The markets are finally reacting to the difficult situation that France and others are in while waiting for Germany to decide what the price of backstopping the whole European edifice will be. To make matters worse, Luxembourg Prime Minister Jean-Claude Juncker is reported to have raised the issue of German debt being a “cause for concern.” Juncker, why not just yell FIRE in a crowded theatre. Yes, German Banks are also plagued with issues of credit sustainability because of large holdings of sovereign bonds,but was this really the time to raise the issue?
It is no wonder that Bill Gross has an article in Wednesday’s Financial Times basically throwing his hands up in disgust with the entire European charade. All the mistakes made by EUROCRATS have added up to a giant mess and at the end of the day there will be plenty of blame to go around. As a result, deleveraging, fiscal tightening and potential defaults are on the economic and investment horizon. Investors should be in a ‘risk-off ‘ mode. When it is finally over, a lot of parties will owe the world an enormous ‘SCUSI’. The result of French hubris and German intransigence has the potential to bring the global economy to a grinding halt. The EURO is their currency. The DEBT is their SOVEREIGN PAPER. The failure to act is the WORLD’s PROBLEM.
This afternoon, Boston Fed President Eric Rosengren raised the possibility of coordinated intervention by the ECB and the FED. This statement from a regional FED President reflects the great concern about a credit default from Europe. Let’s see: When SOCGEN was in trouble because of Jerome Kerviel in January 2008, the FED cut interest rates on a U.S. holiday (Martin Luther King’s birthday) to calm the markets. Now Europe is facing an existential threat and the ECB cannot muster a significant rate cut … PATHETIC. Hey Mario, it is time for leadeship and the slaying of the “legend” of the UBERMENSCH Trichet. These are not the best of times for indecision.
***The GOLD has been struggling to rally during this turmoil. Why? It could because of the deleveraging to which Bill Gross alludes, as commodity traders remember the fallout from the Bear Stearns debacle when all assets got crushed. It is too early to make that call. Another reason may be the huge liquidation of some of John Paulson’s GOLD as his fund is moving to raise cash to meet redemptions. Paulson has been a long-term GOLD BULL and he built up an enormous position using the ETF market. The movement out of the position means that some trader/investor bought a large amount of GOLD and may well be using every rally to lighten up. Not sure and only CONJECTURE, but the recent bout of selling means someone has GOLD to GO up at the $1800 an ounce level. Paulson, coupled with the demise of MF GLOBAL, means that there is ongoing liquidation of positions.
It will be interesting to see if the GOLD can take out its recent highs on an ECB/FED coordinated intervention. Get your support and resistance levels in order and be prepared for any major financial package. If nothing gets done, any hope of a decent Christmas season will be dashed by European indecision. Also bothering the GOLD is its inability to make new highs against the EURO throughout this chaos. Just something to watch.
Tags: Axel Weber, Bill Gross, ECB, EFSF, Eric Rosengren, Euro, euro sovereign debt, Fed, Financial Times, France, French bond market, Germany, Gold, Jean-Claude Trichet, Mario Draghi, Merkel, MF Global, Napoleon, OAT/Bund spread, PIIGS, PIMCO, Sarkozy