Notes From Underground

Just when it looked like the risk-on paradigm was gaining some traction, Chancellor Merkel, through her spokesman, Steffen Seibert, said, “…dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled.” The global equity markets were experiencing a continued rally from Friday when the Merkel statement was released and the market immediately went into sell mode and risk off. The U.S. equity markets tried to maintain Friday’s sizable rally as the news of CITI and WELLS FARGO earnings provided a momentary boost. Overnight the U.S., markets were supported by the news that KINDER MORGAN was buying the pipeline and energy producer, EL PASO.

As the day continued on, Merkel’s comment sobered the “animal spirits” and risk off became the dominant theme. Treasury Secretary Tim Geithner left Europe on Sunday believing that the Europeans had decided to walk in the footsteps of BAZOOKA HANK PAULSON and ramp up the bailout plan on two fronts: Shoring up the capital up its banks and enhancing the EFSF so as to be able to protect the borrowing costs of the debt-stressed PIIGS. It seems that Merkel didn’t learn to believe that the Paulson method was the best alternative and let the U.S. Secretary down gently and left him to DREAM ON about what might have been. Defending the U.S. position was the Canadian Finance Minister, Jim Flaherty, who said, “time is running out” and “Quite frankly, Europe’s response over the past year has been disappointing,” (Bloomberg).

It is beginning to seem that the Euro politicians are having a great deal of fun by playing with the emotions of international investors. Merkel and the German policy makers must be aware that the market turns on every statement. As discussed previously in NOTES FROM UNDERGROUND, the Europeans do not look upon the gyrations of the equity markets in the same way as the U.S. The Europeans on the CONTINENT are not enamored with the impact of stock valuations on political outcomes. When the U.S. markets were racked by the initial failure of TARP to pass in the HOUSE, U.S. politicians got in step with the BUSH ADMINISTRATION and passed the “NEEDED” bailout package.

In Europe, the linkage to equity markets is not a dominant feature. However, the BANKS are a much more important element in the European capital structure. Continued pressure on the LARGE EUROPEAN BANKS will be the dominant motivator … at least the FRENCH hope so. When will SCHADENFREUDE give way to self-immolation? Mr. Geithner hopes that Europe begins to “WALK THIS WAY,” for the White House cannot afford for the world’s second largest economy to go missing in such an economically uncertain environment. If the script plays to form, Chancellor Merkel will claim that she was misunderstood and that Germany is behind a very comprehensive bailout plan. Sleep well Tim Geithner, perchance to dream?

Quick Hitter #1: EXPANSIONARY FISCAL CONTRACTION, or, the idea that growth is enhanced by restraining fiscal deficits. This is the battle cry of the global liquidationists.The belief that government deficits are holding back growth is a nice intellectual stance and one for which I would normally find a great deal of affinity. The problem is that the fiscal contraction argument is questionable in the midst of a massive global deleveraging. When credit is being cut in the private sector, the governments of the world cannot also go into austerity.

Yes, that is a very Keynesian notion but unfortunately the idea of governments leaning against the wind during strong growth periods has long since passed for this cycle. All of the Keynesians out in the economic and political world are Keynesian only in regards to spending. (The other side of the equation was mislaid during the economic booms by the WHORES on Capitol HILL for the mantra is spend if you got it and spend even more when you don’t have it.) Those speaking of expansionary fiscal contraction merely wish for the liquidation of all leveraged assets. It seems that they are truly MELLON HEADS.

Quick Hitter #2: European BOND markets were under pressure today after the Merkel comment as the German bund became the haven as European investors sought comfort in the “safety” of the EU‘s most stable economy and the its major creditor. The problem is that the FRENCH BOND MARKET continues to lose its luster as Germany gains in the hearts of investors. The 10-year GERMAN/FRENCH spread widened again as it made highs at 95 basis points. The 2-year spread also widened by 7 basis points to 57. The more time erodes, the wider the spread gets, an indication that the market is awakening to problems underlying the French economy. Sarkozy certainly hopes that Europe begins to move at a faster pace to come to some resolution. The longer the uncertainty exists the greater the probability that some political entity is going to make a grave mistake.

Tags: banks, Citi, El Paso, EU, Europeans, French, French bond market, German/French spread, Germany, Hank Paulson, Jim Flaherty, Kinder Morgan, Merkel, PIIGS, schadenfreude, TARP, Tim Geithner, Wells Fargo

This entry was posted on October 17, 2011 at 7:15 pm and is filed under Europe, France, Germany. 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.