The markets were suffering from fatigue as they struggled to digest the liquidity driven rally of global assets last week. This week will not provide respite as the financial world awaits the outcome of three potentially major market-moving events. The first mover will be the ruling by the German Constitutional Court (GCC) in Karlsruhe as the HIGH COURT will determine if the ESM established by the EU as a bond buying mechanism is in breach of Germany’s basic law, in that the ESM undermines the fabric of German politics by consigning the BAVARIAN BURGHERS to the credit responsibility of the EU profligate states. It seems that the COURT must deal with the concept of “TAXATION WITHOUT REPRESENTATION” as the transferring of German wealth to the European treasury needs to be done by the Bundestag and not by mere cabinet decision or by the complicity and complacency of the central bank.
The last decision in regards to this issue placed heavy responsibility upon the German parliament and its voting on the acceptance of the financial obligation for the EU. The language of the COURT in reference to the Maastricht Treaty and it’s progeny, The Lisbon treaty, needs to meet a standard of the “community of stability” rather than an idea of a bagholder for bailing out the EUROPEAN DEBTORS. I am not a lawyer versed in EU nuance so I have no conjecture on how the GCC will decide this time. The smart money seems to believe a QUALIFIED YES will be the result. The question is, how QUALIFIED.
Second, the Dutch electorate heads to the polls on Wednesday, the same day of the German court decision, and the election is now a close battle between the Labour Party and its leader DIEDERIK SAMSOM and the present ruling party coalition, THE LIBERALS, led by MARK RUTTE. If LABOUR wins, the new Dutch government will lean toward an easing in the AUSTERITY BUDGETS, thus lessening the impact of the Germans and other CORE EU STATES. The result of the softening in the pro-austerity coalition will lead the markets to believe that Germany is further isolated within the EU and the hand of Mario Draghi will be strengthened in his quest to favor growth versus austerity. Short-term perceptions may not be extrapolated to mean future success.
Third, the FOMC begins a two-day meeting on Wednesday and the world will wait for the release of the FOMC statement on Thursday followed by a Bernanke press conference. The media is heightening expectations of a QE III but I am of the view that Bernanke and company will present something more creative as I laid out in yesterday’s BLOG.
***The biggest story in the European press was the interview with George Soros on REUTERS TV in which he generates a headline: “EITHER GERMANY LEADS OR LEAVES,” meaning that either Germany makes the “correct” decision and leads the European entity into a true fiscal and political union or Germany decides to abandon the entire EU PROJECT and leave the DEBTORS to pursue their own solutions to the problem of overindebtedness. As George Soros opines, “In my judgment, the best course of action is to persuade Germany to choose between either leading the creation of a political union with genuine burden-sharing, or leave the union.” Soros explains that either way Germany will suffer severe economic stress, but by staying in the EU the longer term outcome would be better as a united EUROPE, and, of course, what the world’s self anointed philosopher king deems to be the ideal OPEN SOCIETY.
Long-time readers of NOTES know that I have many problems with the wishes of SOROS and believe that his analysis lacks the reality of POLITICAL ECONOMY for Mr. Soros has long suggested that the Germans needed to stand tall and be the creditor to the poorer EU nations and lead. This is what George refers to as Germany being the “BENEVOLENT HEGEMON.” The problem is that the world has never experienced the VELVET GLOVE of a benevolent hegemon, the closest being the United States, a nation that Mr. Soros continually challenges and denigrate for its imperial designs–must be IRONY.
The Soros piece cannot be read alone but must be accompanied by the article in the GUARDIAN by Gunnar Beck, titled, “Germans Could Be Consigned to Serfdom to Save the Euro.” This article reflects the thinking of many Germans in that, “Today’s Germany political establishment seems committed to consigning German taxpayers to economic serfdom and stagflation for at least a generation–not for gold, to be fair, but for the EURO, to assuage the markets and to appease international opinion.” The issue is far more complicated than GERMANY MUST LEAD OR LEAVE.
****Today CNBC had two stories that proved how could the financial media can be. The morning interview with David Stockman should be mandatory watching for the entire American Republic. Watch it and draw your own insights. The second CNBC piece was presented by Gary Kaminsky that has set my heart aflutter. Gary Kaminsky showed a chart compiled by some private family group that showed 140 years of financial U.S. history through the graphic depiction of TREASURY YIELDS AND DIVIDENDS. This chart makes the relationship look simple but there is so much economic and financial history embedded that it will take time to understand. Kaminsky wanted viewers to see that the CHART was showing a “CROSS OVER” of dividend yields rising above TREASURY YIELDS, which can be seen to be a rare event indeed … and it is happening now.
What does it mean as Kaminsky asks: Either a great rally in dividend stocks or the beginning of something more ominous. The previous time this cross appeared was 1928. Another period of interest is the action of Treasury yields versus DIVIDENDS in 1951, the year of the famous TREASURY/FED ACCORD, when the FED regained its “INDEPENDENCE” after being laid low by the Treasury’s needs during the WAR YEARS. Take a good look at the chart and let’s study its impact together. GARY KAMINSKY–a great piece of work and for those who ask me–NO, WE ARE NOT RELATED.