In what we would call a very slow news weekend we find that the Ukranian elections have been certified and Mr.Yanukovich has been deemed the winner. Yulia Tymoshenko has vowed to fight on via the courts, although an 800,000-plus deficit will be most difficult to overcome. Complicating her situation, international observers have certified the elections as fair and noted little fraud. The Russians have sat quietly on the sidelines since they don’t wish to upset the apple cart with IMF cash waiting in the wings. China is closed for the week in celebration of their New Year so the markets will have time to digest the late-week raising of Chinese bank reserve requirements. The equity markets seemed to take them in stride by the close of the S&Ps on Friday. So yet again all trading eyes turn to Europe where the European group of economists and finance ministers are meeting Monday with a press conference scheduled after.
Saturday’s Financial Times reported that Christine Lagarde, the French Finance Minister, warned speculators against taking a stance opposing the will of the European Union over the Greek debt issue. She particularly warned those buying CDSs on sovereign debt of the credit stressed European nations. Lagarde also warned large speculators who were shorting the EURO in anticipation of a failed attempt to resolve the debt issue. When political policy makers lay down a challenge to the market, we warn Ms. Lagarde that the markets will challenge you and see how far the policy makers will go in harming their own economies in order to punish the markets.It is one thing to enact real reforms to restructure economies away from previous poor policies. It is quite another to use ad hoc attempts that do more harm than anything positive. If Lagarde plans on some restrictive action she better have the Germans on board or the market will punish the European credit and currency markets.
Presently, the German populace is vociferous in being against any type of bailout for Greek or any other other profligate nation. In a sign of European audacity, some of the weaker credit-challenged nations are protesting that it was German wage constraints in the early part of the decade that have caused the budget imbalances. The flawed reasoning of some European politicos does not sit well with the Germans as they are incredulous that they took the pain of real reform while others carried on in the ways of “drunken sailors on leave.” We will continue to believe that the German posturing is meant to create political leverage to gain control over the ECB and every time some Eurocrat opens its mouth, the political price will go up. Lagarde and others think that because German banks own so much of the PIIGS’s debt they will blink first. But we caution the French elite that the Germans feel they have paid the needed price of reform through the Hartz IV labor act. No one in Europe has been willing to take on their unions as the Germans did and are thus basking in its rewards. Also, the Germans will remind the Gaullists that they have gotten what they wanted through reunification, even at a great cost to themselves and the rest of Europe. So,maybe it is really en garde Sarkozy.
An article in Monday’s Financial Times caught our attention. Written by Edward Gottesman,”Why We Should Not Fear the Spectre of Deflation,” is an argument calling for the need to deflate as a way to resolve our long term problems. It all sounds so good that the world should purge its bad tax and investment policies by allowing for deflation to get governments and investors to behave in a rational, prudent manner. The writer cites the positive effects of the 30-year delation period following the American Civil War, but we caution against such comparisons for the U.S. was probably closer to a China in those days and had an explosion of capital investment.
Gottesman’s argument is made by many who argue that a good cleansing is needed to refocus the economy. The problem is that we have become so addicted to debt that the pain of a deflationary period would send unemployment rates to levels that could destroy the fabric of which the deflation argument is trying to save. It would not be socially or politically acceptable. The reason why we continue to believe that GOLD is the haven choice is policy makers, like Bernanke, fear a return to deflation more than anything else. It is not today’s inflation numbers that drive the GOLD, but the potential failure of all this stimulus to achieve its desired goal. As we noted on Friday, the nationalization of Fannie and Freddie means the U.S. government has set the stage for further FED stimulus if it were needed. Touché!
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