Notes From Underground

Another weekend and another emergency meeting in Europe as the EU attempts to stem potential DEFAULT in the PIIGS. The language that emanates from these meetings is difficult to analyze because it is so convoluted. The eurocrats make decisions and then the markets attack the intended recipients and drive the yields on sovereign BONDS higher, which prompts another meeting. This has been going on for a year as the markets have gained the ascendency over the politics. Frau Merkel has repeatedly said that politics must gain the upper hand but for now that is only rhetoric.

The markets keep pushing the yield differential between German DEBT and the BOND of the PIIGS wider and wider as uncertainty breeds contempt. To Chancellor Merkel’s chagrin, the only political gains being made are by the out groups in the countries under assault by the DEBT vigilantes. Again, the Irish and Greek politicians announce austerity budgets and yet all the spending restraint fails to stem the rise in yields on long-term debt. The result is that the market gives the BUDGET PROCESS no credibility as a negative feedback loop has taken hold and is causing great stress to the citizens of the stressed nations.

Irish politicians are now promising to bring the budget deficit down to 3 percent in four years by raising taxes and cutting spending. The problem is that with unemployment rising and borrowing rates surging, how are the Irish authorities possibly going to achieve this objective? The budget increase from higher borrowing costs and the lower revenues collected from a slowing economy are going to counteract whatever beneficial effects can be gained from austerity. Instead of the continued band-aid approach, the ECB and European Council are going to have to concoct a program similar to the U.S.’s and just absorb all the unwanted paper as they flood the banking system with liquidity.

The FED will probably also join in as it increases the swap lines to insure the needed DOLLARS that may have to be borrowed. We must remember that the EUROPEANS did not shirk their responsibility when the U.S. system was cracking in 2008, as they injected huge amounts of liquidity. The European problem will keep the FED on a QE path regardless of the criticism and barring a systemic meltdown this should give some underpinning strength to the EQUITY MARKETS AND PROBABLY GOLD. The Europeans met for a long time this weekend so we have to be vigilant to see if they have put other tools in place to try to give politics the upper hand over the markets. The holiday markets are upon us and liquidity is beginning to shrink so any government action to stem the trend of continued stress in the SOVEREIGN DEBT MARKETS CAN HAVE A MAGNIFIED IMPACT.

Be patient and wait for your most significant levels to enter trades. Make sure that you prepare support and resistance levels well ahead of time and be ready to use increased volatility to your advantage. If the EURO rallies off the newest Irish agreement, pay attention to the EUROPEAN DEBT spreads between the BUNDS AND PIIGS FOR THE REAL CONFIRMATION. If the spreads fail to narrow substantially, the DEBT VIGILANTES are not buying the latest bailout. Always be aware the 2+2=5 in the NOTES FROM UNDERGROUND.

Tags: Angela Merkel, bailout, Bunds, Debt, Dollar, ECB, EU, Fed, Ireland, PIIGS, QE

This entry was posted on November 28, 2010 at 3:34 pm and is filed under Europe, Ireland, Sovereign Debt. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.