Archive for January 20th, 2010

Notes From Underground: The Wheels of Politics Rotate Around Axel Weber

January 20, 2010

Tonight the Financial Times has two stories of major impact but do not lend themselves to an immediate trade. First, China tells some of its banks to stop lending. Think about that concept for a minute. Greenspan and Bernanke have both asserted ad nauseam that a central bank cannot prick a bubble. The Chinese have a much different take on that, in that they have recent memories of a top-down command economy. It is the Chinese political situation that renders much of the economic analysis worthless. In the realm of political economy, it is the Chinese centralized decision-making apparatus that makes it tougher to compare to the American-Anglo capitalist model. A statement such as the one cited above leads to a 3 1/2% decline in the Shanghai index, which leads to a selloff of the global markets. This is what makes the year going forward so very difficult.

The Chinese news is not the most significant story. The word from Europe tonight is that Axel Weber, the most anti-inflation hawk, will become president of the ECB when Trichet retires in 2011. We have pondered what price the Germans would exact for the bailout of the PIIGS. Now it seems as if we have our answer. The ECB is an 11-year-old institution and has never been led by a German. The first president was Wim Duisenberg,a Dutchman of strict monetarist credentials, but he was in fact a compromise in effort to keep the Bundesbank from openly controlling the Bank. To appease the disappointed French, the Dutch reached a compromise so that Dusienberg would serve half a term and Trichet, in a nod to France, would serve the second half of a full term. Most Europeans were fearful of the strict monetarism of the Bundesbankers (although Germans citizenry has never wanted to turn the control of their GELT over to others). Now that the Germans have the political and economic winds at their back, they appear to be pushing for control of European monetary policy during this time of great uncertainty.

German Chancellor Angela Merkel seems to believe that by pushing Axel Weber to the fore, she will get the German populace to buy in to a bailout of the PIIGS. It appears that the French are buying into this with the vice-presidency going to Vitor Constancio of Portugal who many consider a monetary dove. We believe this is very significant and if we are right, we should see spreads in the Greek debt markets narrow in anticipation of the Germans seen as providing DEBT RELIEF. So monetary control will be handed over to the mother of all Bundesbankers.

Oh, the wheels on the European politick go round and round but they will be rotating on a new AXEL.This is why the concept of 2+2=5 is a beautiful thing!

Notes From Underground: 1992 again?

January 20, 2010

The Greek credit markets got hammered today, as at one point the 2-year note had risen 88 basis points in yield. We are concluding that the markets are going to question just how serious the Greek government might default on their debt. At the same time, the market is going to test the hypothesis of the European Union all for one or one for all concept. The goal and result of the Soros challenge to the European Monetary Union was to find out how far the Brits and others would go to defend the philosophical construct of the EMU. After bringing the Bank of England to its knees, the OLD Lady surrendered. It realized the cost to Britain was too great.

It appears that market participants wish to find out how far the Greeks will go to meet the strictures of the EU. The question we pose: Will the Germans allow a massive”loan” to the Greeks, or will the IMF interfere to aid the profligate PIIGS? This is the challenge that awaits the markets, but it seems that the entire global financial system is beginning to understand the ramifications of a debt default.