Notes From Underground: Going to the European prom; Merkel tells Sarkozy she has to wash her hair

A previously planned meeting between Frau Merkel and President Sarkozy has been canceled as Merkel claimed to be too busy pushing through an €80 billion cut in the German budget that will take place during the next four years. The meeting between the European powerhouses was meant to resolve some ill will that had resulted from the Greek bailout and were undoubtedly the result of Sarkozy’s preening like a Peacock in thinking that he had bested the German political establishment. We will hear more about this as we approach the European summit scheduled for June 17-18. The Sarkozy-Merkel meeting has reportedly been moved back to June 14–we await further developments. It is of more than passing interest that it is Germany pushing hard for budget cuts as it is setting the bar ever higher for the profligate nations. The German banks, and now government, are on the hook for a lot of money so they are going to push for greater European austerity–this will not amuse U.S. Treasury Secretary Tim Geithner. Also, Europe has now determined that the €750 billion package to buy stressed debt is officially set up as a special purpose vehicle (SPV), so all that bond buying will be carried off the balance sheet of the ECB and this phrase reminds us of Enron. We will look into the plumbing the more info that becomes available.

In a Q+A session tonight, Ben Bernanke said the FED will raise rates before the U.S. economy returns to full employment. We have no idea what this statement means. What is full employment ? Is it 5.5 percent, 6.5 percent, 7.5 percent? We have no idea so at what rate does the FED decide to move. The world’s pundits will grab onto to this to create some noise but again this is a totally meaningless and irrelevant statement. Bernanke is an admitted output gapper so we need him to define his terms before we have any idea of what he is using to measure anything close to full employment. Now that Geithner has voiced his concern about European austerity before global growth has taken hold, we doubt the FED will be in any kind of hurry to raise rates.

Lastly, there was a statement from one of Japan’s top business leaders, who voiced concern about euro weakness, or inversely, the EURO/YE cross. Hiromasa Yonekura, the head of the influential Keidanren business lobby, warned that the weak EURO was placing pressure on Japanese corporations’ ability to export to Europe. Also, the Japanes and Germans compete in  high-end manufactured capital goods and China is the target of many of those exports. German manufacturers are attaining a significant pricing advantage against the Japanese because of the weak euro. Yes, input prices in Japanese goods will be cheaper in the manufacturing process but not enough to offset the weakness in the euro. Going forward, we will also watch to see if Japan auto exports to the U.S. begin to lose market share to German based manufacturers. Japanese corporates are beginning to raise their voices so we will certainly pay attention. Check Eur/Yen charts to determine long term support levels for the cross that is the mainstay of the global carry trade.

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