Last week, Secretary Geithner was in Europe prior to the SUMMIT in an effort to influence European policy makers. The Obama administration has been trying to impress upon Europe’s key planners that it was of the utmost importance to get ahead of the CREDIT CRISIS and stop solely reacting. It seems that the U.S. Treasury Secretary failed miserably to convince Merkel and the others that the BIG BAZOOKA needed to be fired. As usual, the EUROCRATS tried to FOOL the financial markets they disdain. Chancellor Merkel has openly stated that she will not be coerced by an UNELECTED FORCE CALLED THE MARKET.
As the markets digested the outcome of the SUMMIT, it appears that INVESTORS have decided that the LIQUIDATIONISTS HAVE PREVAILED IN EUROPE AND THE EFFORT TO SUPPORT EUROPE’S BANKS WAS WOEFULLY INADEQUATE. It now seems that the battle in Europe is between those who wish for the profligate to suffer for its SINS OF WAGES TOO HIGH TO COMPETE. The LIQUIDATORS WISH FOR THE SO CALLED PIIGS TO SUFFER A SELF-IMPOSED DEFLATION AS A CLEANSING AGENT. The resurgence of the DEFLATORS could be readily seen in today’s price action. The less forthcoming the ECB and others,the greater the downward pressure on prices.
Tonight, the Chinese have been rumored to have told the Europeans that they would withhold investment until there was some clarity about the genuine intentions of Brussels. So, will investors wish to see a mass liquidation of bank assets in Europe or will they favor a policy of massive injection of LIQUIDITY so as to provide “A FIREWALL” to the financial system? If Europe moves to let the BANKS FAIL then even Germany must realize that Europe’s financial infrastructure will be on the market to those with the money to buy them. Otherwise, eurocrats will have to close off the zone to all others as it works out its problems.
The market is no longer merely RISK ON/RISK OFF BUT A BATTLE BETWEEN THE INFLATIONISTS VERSUS THE DEFLATIONISTS. The politics of this will continue to play out in Europe as it will become evident that President Sarkozy is caught between the two schools of thought. However, for Sarkozy the dire predicament of the highly leveraged FRENCH BANKS ARE GOING TO FORCE HIM INTO A DIFFICULT CHOICE AS THE 2012 ELECTION LOOMS.
***Tomorrow, the FED is meeting and the market is expecting the FED to remain in its present very accommodative position. THE FED CERTAINLY HAS TO PURSUE AN ULTRA INFLATIONIST STANCE ESPECIALLY AS EUROPE WAVERS. THE FED HAS MADE A VERY LARGE COMMITMENT TO A EUROPEAN SUCCESS AS IT HAS LENT MASSIVE AMOUNTS OF MONEY TO THE CENTRAL BANKS.
A massive bank failure in Europe with a liquidationist ECB would leave the FED with a highly stressed balance sheet. Mr. BERNANKE is being placed in a fragile position that he will have to explain to a RON PAUL-led investigative HOUSE COMMITTEE. Why is it that the FED is trying to do that which the EUROPEANS HAVE FAILED TO PREVENT? THE FED STATEMENT WILL BE INTERESTING IN HOW IT MENTIONS EUROPE. Hey BEN, DUST OFF THE PLAYBOOK ON HOW TO PREVENT 1937 AND SEE IF THERE IS A GERMAN EDITION.
Tags: Bernanke, China, credit crisis, ECB, EU Summit, Eurocrats, Fed, Merkel, PIIGS, Sarkozy
December 12, 2011 at 8:38 pm |
Let’s start with a simple question: will the Euro zone crisis be with us through the end of 2012? It seems likely to me. I personally find myself thinking that while in the context of politics the euro crises is a huge pain in the ass for Germany and France…but from the vantage point of the German industrial base…the longer the Euro crises persists (albeit not weaken too much further) the German manufacturing base will stave off what is probably inevitable at some point in the future – a substantial reduction of industrial competitiveness in Germany.
An excerpt from Drobny’s post that Arthur was kind enough to post on the last Notes blog:
“Germany is cheap within the Euro area, so if they save the system, the Bund could be dogs’ meat.”
“The Euro system didn’t start that way. Germany started expensive in the euro area; Greece and the other peripherals started cheaply. They lost competitiveness over time, presumably because underlying German productivity was higher. Unless Germany accepts higher inflation, the peripherals have to experience deflation — falling wages and prices — to keep up. That’s what the Euro area problems are all about.”
But for the Euro’s creation…the DM surely would have appreciated substantially on a global basis allowing the macro economy to re-balance itself (at least to some extent). Now Germany is faced with the situation in which any outcome that isolates their own economic fundamentals from that of the periphery will impact the German competitive edge. Perhaps I am overstating this case or potentially even wrong in my logic…but it at least seems logical enough to ask the following question, “is ending the pain of the Euro crises really in Germany’s best interest vs. letting it linger and linger and linger so long as it remains relatively contained?” I actually had the opportunity to pose this question to a couple of Goldman Sachs energy research guys giving a market outlook talk at the company I work for (in TX) to see if they find this line of reasoning compelling…and their response was “that is actually the first time I have heard that argument…”.
The conclusion I am tempted to draw from this is that either the argument is flat out incorrect or the outlook by this particular group (and likely others since they tend to move in crowds) is that stability in the markets will return and risk assets with catch a bid is likely premature and fails to take into account just how long the Euro crises could be doomed to stay in the headlines.
Thoughts? Is this view nuts? Thanks for your time.
Danny
December 13, 2011 at 6:37 am |
Danny–there is so much here.Will stability return to the markets?Yes.When,I certainly don’t know but if you are of the school that credit debacles take time to work off[reinhart and rogoff] then some facet of this liquidation cycle will be with us for awhile–risk on will rise with any positive news and then the deleveraging will reassert and it will be risk off.If we take the liquidationist model the time cycle will be shorter but the pain more telescoped and greater—this is the dilemma that the investing world is facing.The U.S. guided by bernanke and Paulson have taken the route of non-liquidation and thus will have to take time to work off the excesses of the housing and investement excesses of the last 20 years.