Notes From Underground

One Pill Makes You Larger

And One Pill Makes You Small

And the ones that mother gives you

Don’t do anything at all

Go ask Alice

When She’s Ten Feet Tall

                                –Jefferson Airplane

The elections in France have fallen the way it was widely projected so now all the pollsters and pundits will be busy crunching data to determine if Francois Hollande really has the votes to defeat President Sarkozy. It is interesting that Sarkozy is the first French president not to run in the primary position by attaining the most votes. Ms. Le Pen ran a very strong third as it seems that the fabric of French government is shifting right. This should benefit Sarkozy but if the rightist vote is of a very extreme nature then it might mean that the French electorate will throw the present politicians out. More importantly, Lagarde has opened her purse and received increase funding for the IMF so look for a surprise announcement in the NEXT TWO WEEKS as ALICE tries to increase her size and aid her political patron, President Sarkozy.

While the IMF talks of increased firepower, Germany and the Netherlands are seeking for ways to shrink theirs. The DUTCH GOVERNMENT fell on a no-confidence budget that was pursuing austerity as Prime Minister Mark Rutte was looking to bring the budget deficit to under the ordained 3%. The Freedom Party wants more austerity to protect Holland’s credit rating while labor and the socialists are opposed to austerity budgets that are on the  backs of the already squeezed. Again, the battle is between growth and austerity for one PILL MAKES YOU LARGER AND ONE MAKES YOU SMALL.Certainly the IMF medicine will do nothing at all as the POTION OF DEVALUING THE CURRENCY IS NOT AVAILABLE. Usually the IMF promotes budget cutting, tax increases and currency depreciation for that has been the medicine for any nation desiring IMF bailouts.

In a Bloomberg article on Lagarde’s victory of enhanced IMF FUNDS, it cites the IMF‘s advice for Europe to be lower interest rates, austerity measures to improve growth, injecting rescue funds into weak banks and selling EURO DEBT to deepen fiscal integration. Ah Mother Lagarde, you may feel 10-feet tall but your medicine is a placebo.

The SMALL PILL was also provided by BUNDESBANK PRESIDENT Jens Weidmann. In a Bloomberg article by Jeff Black and Tony Czuczka, Weidmann is purported to be at odds with Chancellor Merkel and ECB President Draghi over further efforts by the ECB to add liquidity to help the struggling Spanish and Italian sovereign debt markets. In March, Weidmann stated in a speech, “The time has come to move from containing the crisis to resolving it. If we make the right choices, we will be able to rebalance Europe and lay the foundation for a stronger, more stable monetary union.” The BUNDESBANK and its president have railed against the use of the PRINTING PRESS TO RESOLVE THE DEBT CRISIS … one pill makes you small.

***Later this week we will get the FOMC statement, the RBNZ interest rate announcement and then the BOJ will inform markets of its plans for stimulus. This is an interesting mixture coming on top of the political problems in Europe. The Japanese will be forced into an aggressive stance as the MOF will not want the YEN being the currency of choice for investors desiring a haven from RISK.

Europe at this time will render the FOMC a quiet bystander to the possible deleveraging of the entire European financial system. The fact that German TWO-YEAR NOTES CLOSED AT A LOWER YIELD THEN THE JAPANESE TWO YEAR GIVES RISE TO CONCERN ABOUT THE LARGE BANKS IN EUROPE.

The rush to safety has made the SCHATZ the instrument of choice. Jens Weidmann will not be the most popular man in Barcelona, Rome or Paris. The last thing Sarkozy needs is a strong independent voice from the Bundesbank. President Sarkozy may be wishing for Axel Weber right about now. It seems that the more strident the rhetoric from Weidmann the greater the pressure on Lagarde to spring a surprise for her old boss. CURIOUSER and CURIOUSER.