Notes From Underground

Today’s NOTE‘s headline wrote itself as the history of the IMF and its relationship to stressed emerging markets is replete with acts of “nation violation” in its efforts to ensure that creditors were/are always satisfied–most recent example is Greece. All levity aside, the accusations against DSK have important implications for FRENCH domestic politics as well as the role of the IMF in the current SOVEREIGN DEBT CRISIS plaguing the EU. Last week, the ASSISTANT MANAGING DIRECTOR of the IMF, John Lipsky, announced that he was leaving, thus the leadership of IMF is really  going to be in turmoil.

President Sarkozy is probably breathing easy as Mr. Strauss-Kahn was considered his foremost adversary for the 2012 presidential election. The French socialists were relying on the  international stature of DSK to help propel the party forward after its previous dismal election results. Recent polls in France reflect that the French citizenry is growing uncomfortable with the dominant political elite as the EU crisis deepens and France absorbs more of the bailout costs. The FRENCH right,under Ms. La Pen, has been making gains with its anti-Brussels rhetoric. If the rise in nationalism continues, the problems in the EU will grow considerably worse.

The new crisis in the IMF will make this week’s discussion on Greece even more difficult. Just when you think it can’t get any more difficult, human frailty gives “rise” to a deepening crisis. As I write, we are trying to sort through rumors that the alleged victim of DSK‘s unwanted overtures–a maid at the Sofitel Hotel–had a striking resemblance to Carla Bruni.

In the weekend edition of the Wall Street Journal, there is an interview with Stanley Druckenmiller, a global macro trader/analyst of the first order. Mr. Druckenmiller has made some outstanding calls and trades during the last 20 years, so when he opines I think it is important to pay attention. The centerpiece of the interview is the issue of not extending the DEBT LIMITS of the U.S. government. There is a great deal of “hysteria” coming from the political elite in Washington about the costs to the U.S. of failing to extend the DEBT CEILING. Secretary Geithner and others have warned that failing to extend the LIMIT will cause drastic results for the U.S. government as well as the rise in costs to private borrowers.

Druckenmiller argues that all the hysteria is hype as a failure to rise the ceiling will result not in a DEFAULT but rather a TECHNICAL DEFAULT, which means creditors will still be paid but just at a later date than the coupon may have mandated. As the WSJ interview indicates, Druckenmiller is long BONDS as he believes that CONGRESS and OBAMA will actually get serious and begin to deal with the DEFICIT.

Mr. Druckenmiller is aware that the FED has badly perverted the price of BONDS by its huge buying programs and this has prevented a rise in long rates that would have brought pressure on the U.S. to begin a real process of dealing with its years of fiscal profligacy. Again, this interview is really an intelligent analysis by one of the best in the realm of global-macro.

Friday’s trading activity was initially a classic case of risk off and a rush to safety. The DOLLAR was bid as markets were unnerved by fears of another weekend GREEK DEFAULT. A rising DOLLAR gave impetus to the selloff in commodities, which spilled into a sharp decline in GLOBAL EQUITIES. The DOLLAR stayed bid against most currencies but the GOLD and SILVER regained some of their losses by the end of the day and the U.S. EQUITIES also rallied off the lows set early in the day.

As I warned on Wednesday, the long end of the CURVE would be an indicator of market angst, even as Friday’s CPI data and retail sales were as expected yet the NOTES/BONDS continued to rally. More importantly, the German BUNDS put in a very strong week even as the German economic data continued to outperform market expectations. It is important to watch resistance levels on the world’s DEBT instruments for it seems that “quality” global DEBT INSTRUMENTS are in demand from a COLLATERAL PERSPECTIVE, hence the rally in BUNDS and BONDS. As a reminder, the 2/10 curves in Ireland and Portugal continue to invert indicating greater economic stress in those two countries.

The GREEK 2/10 curve seems to have settled in at around 850 BASIS POINTS but that reflects an economy under severe stress. Europe’s problems are ongoing and are worsened by the half-truths and outright LIES of the Brussels EUROCRATS. There will be a day of reckoning as the domestic political situations of all the European nations collide with the POLITICAL ELITE ENSCONCED IN THE TOWERS OF BRUSSELS. Any wonder as to why 2+2=5 in the world of global finance?

Tags: bonds, Bunds, Commodities, Congress, debt ceiling, Dollar, Dominique Strauss-Kahn, Equities, Eurocrats, Fed, France, Geithner, Gold, Greece, Greek default, IMF, Obama, Sarkozy, silver, Stanley Druckenmiller, Wall Street Journal

This entry was posted on May 15, 2011 at 3:06 pm and is filed under Debt Market, France. 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.