Notes From Underground

It is without doubt that the HUBRIS of George Bush’s arrogant landing of a plane on an aircraft carrier and declaring “MISSION ACCOMPLISHED” has been the operative model for the political elite of Europe. The European DEBT crisis has been in full bloom for the last year and everything the immediate elements of the crisis have been dealt, the news release basically gives a tip of the hat to MISSION ACCOMPLISHED. European leaders have continued to proclaim victory over the markets only to be punished for their early exuberance. The true measure of the debt crisis is measured in BOND DIFFERENTIALS and of course the price of credit default swaps on sovereign debt. Contagion has spread to the PIIGS as speedy as most swine flu epidemics.

First there was Greece, then Ireland. Portugal, Spain and Italy are in the waiting room searching for inoculation. Ireland has done more than the markets initially asked for and yet its problems have been anything but contained. The markets trashed the Irish rescue while the EURO POLS trashed the markets. Yesterday it was Spanish and Italian long bonds that were sold hard sending those instruments to their widest versus the benchmark German BUNDS since the inception of the EURO currency. Christine Lagarde called this action “irresponsible” and “sheep-like.” Again, another statement borne of arrogance as the European elite are right in their views and the market in its collective wisdom is just wrong. Sheep-like does not define the markets reaction but rather the continued obstinacy by those policy makers in Europe who administer the “TRUTH” in measures not to resolve issues but rather to perpetuate the continuation of their exalted positions. How much pain will the populations of Europe endure to meet the austerity budgets that have been foisted upon them by financial bureaucrats in Brussels?

Markets are not always right on a day-to-day basis but the collective wisdom of markets have a far better history than the ruminations of cosseted elites. The problem of failed views is the stridency in which theory is defended. I am left to wonder how the EUROCRATS will continue to defend the EU in its present form. Will it be exchange controls, a massive QE from the ECB, or something more dire? Also, when will Bernanke and U.S. policy makers begin to openly weigh in on the European contagion? It is December and it is important to remain flexible and vigilante as uncertainty reigns.

The unease of the markets has led to investors seeking safe havens. Gold, silver and certain currencies have become the bastions of safe harbors. The SWISS FRANC has regained its luster relative to the EURO, especially so after Sunday’s referendum in Switzerland. There was a move by the Socialists to unify the tax rate for all Cantons at 22 percent so as to end the tax diffential that allows some cantons a tax advantage over another. The issue also involved a wealth tax on assets more than 2 million Swiss francs. The referendum was defeated and the result was deemed to be a boost to the Swiss as the present system of taxation is to be maintained. Many thought a change in the tax code would lead to the emigration of wealthy individuals and could be a blow to the Swiss economic model.

The maintenance of the status quo and the uncertainty of the European situation has driven the EUR/CHF cross to two month lows. Will we be hearing from the Swiss National Bank anytime soon? It will be interesting when the SNB announces how many EUROS the bank sold in the previous rally of the EURO up to 142.00. There had been large losses on the SNB‘s failed attempt to stem the collapse of the EUR/CHF crossrate but I believe the losses have been cut substantially as the SNB unloaded euros into the post-Jackson Hole DOLLAR selloff. It is important to watch the SNB to see how much SWISS appreciation it will allow during these times of UNCERTAINTY. Remember that preparation will provide opportunity as the year comes to completion and liquidity diminishes. If NOTES FROM UNDERGROUND is of value it will provide light into this period of economic and political darkness. As always I try to go where algorithmic models fear to tread.

Tags: bond differentials, Bunds, Debt, Dollar, ECB, euro pols. euro, euros, mission accomplished, PIIGS, QE, Swiss Franc, truth

This entry was posted on November 30, 2010 at 9:33 pm and is filed under Currency, 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.