Notes From Underground: May Day! May Day! May Day!

The international distress call is going out from Europe as the overall eurozone unemployment rate reached 12.1%. Germany had a low rate of 5.4% while Spain was more than 27%. So how is the ECB to do deal with the huge discrepancy between the economic performance of its 17 members? If the austerians are being relegated to economic purgatory then the pressure on the ECB to act will be diminished. Cutting rates for the sake of a show of action will be a detraction from the bigger political issue. Why irritate the Bundesbank and Chancellor Merkel by moving the ECB lending rate by a measly 25 basis points?

Yesterday, I pointed out how low two-year notes in the peripherals have fallen and today I show the charts of Ireland (top left), Italy (top right), Spain (bottom left) and France (bottom right) so as to graphically depict the fall in rates since July 24. While the EU economy is in distress no reason to rile the Bundesbank.

Ireland-gif

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spain-gif

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On July 2, I wrote a blog post after a key summit in Brussels in which German Chancellor Merkel was bested by Italy’s Monti and Spain’s PM Rajoy. Merkel was forced to swallow hard and accept the European Stability Mechanism, which provided a European-wide bailout of the Spanish banks. This political defeat was not well received in Berlin. Germany is again under attack by the anti-austerity coalition and the “hornet’s nest is being kicked” so the ECB OUGHT not add to assault.

The present state in Europe is not solely about economics for the German election in September pollutes the landscape. Those who opine from a solely economic or financial perspective fail to understand the significance of MAY DAY. It is of no small matter that MAYDAY derives from the French, venez m’ aider, or “come help me.”

***The FOMC announces its interest rate decision tomorrow at 1:00 p.m. CST. There will be no change in the FED policy as the economic data has been mixed since sequestration has impacted economic growth. Until the U.S. clarifies its budget policy the FED will be cautious. A problem though for the Fed is that as the Treasury has less debt to sell, the impact of the large-scale bond buying is having a greater market impact so many the FED members will be forced to acknowledge that it may have to alter the amount of treasuries it buys versus mortgage-backed securities. Otherwise this will be a non-event and there is no Bernanke press conference scheduled.

***In a piece in Tuesday’s Guardian, “Eurobonds or Euro-exit:The Choice is Germany’s,” George Soros presses the Germans even further. “There is no escaping the conclusion that current policies are ill-conceived. They do not even serve Germany’s narrow national self-interest because the results are politically and humanly intolerable; eventually,they will not be tolerated. There is a real danger that the euro will destroy the EU and leave Europe seething with resentments and unsettled claims. The danger may not be imminent; but the later it happens, the worse the consequences. That is not in Germany’s interest.” How much pressure will Germany accept before it hardens its positions. No German backing of the ESM will result in a shattered EU. Proceed with caution!

 

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14 Responses to “Notes From Underground: May Day! May Day! May Day!”

  1. CarlHT Says:

    With rising unemployment comes a tide of radical nationalism, it’s the will of the people against the will of the champagne socialists. The truth is indeed stranger than fiction: the neo-nazis, the Golen Dawn in Greece, are the third biggest party, and the comedian Grillo commanded a quarter of the vote in Italy. It’s just a matter of time before democracy refuses to pull the punches.

    George may be a socialist, but alas he is correct… The Euro will break apart the EU without a joint treasury and a Eurobond. And the means by which the project will break apart – the project which was designed to help the unique tribes of Europe coalesce and contend their tribal nationalistic propensities – will be in fact, destroyed by what it attempted to prevent.

    What irony!

  2. yra Says:

    Carl HT–are you sure your nom de plume is not Bernard Connolly?

    • Carl HT Says:

      I haven’t read his tome yet Yra, but I am sure I am more or less parroting the words of some smarter men who came before me… As well as some modern commentators who have hit the nail on the head!

  3. Breakfast Links | Points and Figures Says:

    […] the ECB cut rates?  Rallies against austerity in […]

  4. Mark Says:

    The Grillo phenomenon is interesting. Calling him a comedian by the media is a denigration for political purposes. Sure he was a comedian in the past, but one from the mold of political commentators. He was banned from Italian TV for telling too many truths about what was going on, and his party is anything but comedy at this point. Members of Grillo’s party in Parliament are instructed to not to mingle with other members of Parliament. It is actually quite a serious movement in Italy – a country also suffering badly. Austerity is failing.

    • Carl HT Says:

      I don’t agree that being called a comedian is denigrating. Comedy, in particular the satirical form; is the best method to bring to light societies flaws, through ridicule.

      Who better to challenge the status quo, than a former comedian.

      Maybe Al Murray should join Farage in UKIP?

  5. yra Says:

    Carl HT–time to order a 100 books and give them away to those who need a good dose of European contemporary economic and political thought

  6. Jeff Z Says:

    hi Yra, have a question.sequestration will reduce growth. is sequestration the reason treasury will issue less debt ? so fed money allocated to treasury purchases, could go to agency debt. if this is correct ? how will that affect bond yields and prices ?
    thanks jeff

  7. Mark Says:

    Car HT,

    I don’t see “comedian” as denigrating either. My comment was that the media attempts to undermine the credibility of Grillo by calling him a comedian.

    George Carlin was another amazing political commentator, though he would never have entered politics. Often, comedians are the most effective voices in revealing the BS of the times.

  8. yra Says:

    Mark:very good reply a nd I feel you and Carl agree but both of you offered very constructive responses.

  9. Chicken Says:

    Germanic humanity is a story in itself.

  10. yra Says:

    Jeff Z–that is th epoint I was making about the FED changing the make up of its bond/mbs buying ratio.If th eFED starts buying more MBS I would conjecture that some bond market paticipants are going to have convexity problems as lower mortgage rates will result in more refis

  11. Chicken Says:

    Okay, I thought maybe you were joking about Treasury having less debt to sell, I’ve never heard such a concept, I better go back and do some research.

  12. yra Says:

    Chicken–not joking .I know it is a strange concept but I only reference it in the context of the FED QE program.Remember,the amount that the FED buys is dependent on the amount for sale.

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