Notes From Underground: CEBS and the ECB roll the dice and it comes up seven

The “results” of the European bank stress tests were released Friday afternoon and we learned that seven European banks failed and need to raise about €3.5 billion to meet the needed tier one capital ratios.

We were laughing that the number seven came up and we wondered if this was on the first roll of the proverbial dice or the second. All seasoned dice players will know that this is an important question because if it was the first roll, the seven represents a very positive outcome. However, if it was the second roll or more then the result is craps and all players lose their pass and other non-house bets.

The initial reaction to the stress tests was that it was a positive result as the EURO and equities rallied into the close. The weekend’s news brought forth arguments saying that the tests were too soft for they did not entertain the impact of sovereign default and, thus were more than flawed, which produced the pre-determined outcome. Many firms kept their analysyts working through the weekend to look at the details of individual banks’ holdings that the Committee of European Banking Supervisors (CEBS) released. Monday’s markets will reflect if the analysts deem that the analysis was badly flawed or merely watered down. We at NOTES believe that by watering down the sovereign debt risk and lowering the needed capital haircuts, the seven will turn up craps whenever the shooters deem to roll again. We have no time line on this but the dice appear to be in Trichet’s hands and Merkel is next at the table–Faites Vos Jeux!

The debate over the austerity/increased stimulus continues to boil and Friday brought a terse exchange in the Financial Times between Jean-Claude Trichet and Professor Brad DeLong. ECB President Trichet fired off a terse warning on why the developed nations had to undertake fiscal austerity and DeLong called out Trichet  for lacking a real historical perspective and calling an austerity program at the present time “calling the fire department when there is no smoke.” DeLong’s analysis says there needs to be three clear and present dangers “to justify retrenchment and austerity. Interest crowding out; rising inflationary pressures on consumer prices; and national borrowing in foreign currencies.”

As none of these are present in the developed nations, it is too early for retrenchment. This debate will go on but, of course, the only ones that will have the real market impact will be central bank presidents and at present the Obama administration.

Today, Secretary Geithner continues his open disagreement with Bernanke about the expiration of the Bush tax cuts. The Obama administration wants the cuts on those making $250,000 or more to expire and for those making less to be sustained as is. Bernanke testified last week that he is in favor of maintaining the Bush cuts for longer because the country needs as much fiscal stimulus as possible.

Why does Bernanke insist on this?

It seems that the FED would like to place more of the burden for growth on the White House and Congress. The failure of zero interest rates to boost the economy is worrying Bernanke and others, so there is a desire to shift some of the burdens to the other policy arenas. We find it intersting that Geithner was furious at the Europeans for their G-20 stance on austerity but yet he has the temerity to call for the expiration of some of the Bush tax cuts.

The S&Ps and other growth-based investments performed well last week, especially the industrial metals. Tin and copper put in nice rallies and the oil market has found some new strength. Are these genuine signs of increased global demand or merely global capital seeking riskier investments? German economic releases showed a new sense of exuberance but the data from the U.S. and Japan has been tepid at best. The markets are getting mixed signals so we believe that the hot money is in search of some risk to counter the effects of continued historically low interest rates. For now, the game is on!

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2 Responses to “Notes From Underground: CEBS and the ECB roll the dice and it comes up seven”

  1. Fred E. Says:

    For a guy who evaded taxes that were due by making “careless mistakes,” and not paying them after he was “informed” of his wayward ways because the statute of limitations had passed, Timmy boy should not be the one to pronounce the expiration of the Bush tax cuts on the “rich” making over $250,000. The hypocrisy is matched by the former chairman of the House Ways and Means Committee who writes the tax laws and will get his comeuppance this week. The wonder of the revulsion of the electorate for those who are “representing” them in D.C.

  2. yra Says:

    Fred—that is correct but nothing new.Interesting as to why Geithner is quietly blocking Elizabeth Warren who I believe is a very credible public servant and is trustworthy.And as you point out a guy who owes his political appointment to Obama who for whatever reason stood up for him and now appears to be bucking his guardian angel–hmmmm

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