We have been Europe-focused for more than five months and while important, and yes, even market shaking, we must remember that there are many other areas of concern and interest on the global stage. The Eurocrats have bought themselves a few nights of sleep with the robust package cobbled together during the weekend, but as the acrimony and ill will continue to ferment we will always have Paris. There are reports that Sarkozy is feeling the victor as he believes he vanquished the ECB and allowed the inflationists to gain the advantage over the German liquidators. Many in Germany and other Northern European countries fervently believe that the profligate nations should suffer the pain of balance sheet reduction.
At first glance it does appear that the inflationists have prevailed, but we would suggest to Sarkozy that the crown on the king’s head doth rest uneasy. This bailout and ECB capitulation is merely the end of the beginning of the European saga. There is an uneasiness in Frankfurt and Berlin, and we suggest that Herr Weber be named the next ECB President soon. There is talk of Sarkozy pushing now for Mario Draghi to replace Trichet but that would be a huge mistake. Merkel has shown herself to be a poor negotiator but she badly needs to salvage some victory within Europe. Sarkozy had better not allow his ego to rule or he will be replaying the role of Napoleon III. For a good summation of the last six days we would recommend reading a piece by Mark Weisbrot in the New York Times. (Mark is a long time friend going back to our teenage and college years. He is a first rate thinker as is his partner, Dean Baker.)
Before we leave Europe, we have to admit to our uneasiness on news emanating from the U.K. We have been a bull on the British Pound relative to other currencies because the severe depreciation of the POUND during the last two years has put it in a better position than many of its European counterparties. Today, the strongest bond market was the GILTS as the Tory/Lib coalition seemed to be very acceptable to the DEBT markets. The GILT rally failed to provide strength to the POUND and to say the least we found that perplexing.
As we read the speech by Chancellor of the Exchequer to-be, we would be remiss in not softening our views about the British currency. George Osborne laid out the views of the incoming government and from a currency viewpoint it raises more questions than answers. The speech laid out the three facets of their economic program: 1. MONETARY ACTIVISM–to keep interest rates low so as to stimulate the economy; 2. FISCAL RESPONSIBILITY–to restore confidence in public finance and stem the problems plaguing others by reining in the government deficit (AUSTERITY) will be the watch word; and 3. SUPPLY SIDE REFORM–help to facilitate more investment in long term productive assets. We read many pieces criticizing this as being currency negative as loose money and fiscal austerity are the opposite of the model that propelled America out of its malaise. Notes From Underground is written to provoke thought about possible trading ideas and with all the feedback we received on the British currency today, we have succeeded. Now that our view has been tempered, we have more to think about on this subject.
We will be watching the news play out on Frannie, Freddie and most probably Sallie Mae. The U.S. Treasury has created the world’s largest slush fund and the amount of money needed to stem the bleeding is endless. Last week $10 billion for Freddie and this week $8 billion for Fannie. It is interesting that the financial regulation before the Senate is devoid of discussion about the GSE’s. It is this government quagmire that makes it so difficult to believe in the DOLLAR. Also, the fact that the FED is on hold makes the DOLLAR even more problematic. The U.S. will be slow to raise rates now that they have pushed Europe into TARP-like action–Obama even called Zapatero today to encourage more action on Spain’s fiscal problems–so removing the monetary stimulus has now been delayed for an extended period. The only central bank that we believe is ahead of the curve is the RBA and yet the AUSSIE has been weak of late as global investors were shaken by Canberra’s announced tax on mining profits. Tonight the unemployment numbers out of Australia were stronger than expected so it will be interesting to see if the AUSSIE gets bids and investors can look beyond the punitive mining taxes. Will interest rates regain the prominent role or will the risk off prevail? We’re waiting for the smoke to clear.
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