Notes From Underground: IF … In a World Of Great Uncertainty

The travails of the financial markets continue even as the EURO ELITE believe that their holiday time is sacrosanct. Greece is in the headlines as financial pundits with time to fill conjecture about how long it is before the lifeline to the Greeks is cut and its economy and society set adrift outside the “safe” harbor of the EUROZONE.

The issue with Greece will be decided on two MAJOR CRITERIA. WHAT WILL BE THE COST OF OFFICIALLY CUTTING GREECE LOOSE? WILL THE GERMANS, ESPECIALLY CHANCELLOR MERKEL, GAIN CREDIBILITY BY TELLING THE GREEKS THEY ARE NO LONGER WELCOME TO FEED AT THE TROUGH OF TRANSFER PAYMENTS FROM BERLIN? The Greeks are asking for another two years of debt relief before undertaking the further austerity measures demanded by the TROIKA.

If the cost of further relief is a mere 15 BILLION EUROS, what is that amongst friends versus the potential costs to the creditors. Is MERKEL willing to absorb the financial hit to German institutions in an effort to prove to the BAVARIAN BURGHERS that she is serious about enforcing the precepts of  the NO BAILOUT/BAILOUT PLAN OF THE EFSF/ESM/ECB?

Again, the media is bored and busy speculating about Greece in or out and further about whether SPAIN/RAJOY will officially ask for SOVEREIGN AID. If the Greeks are not granted any reprieve on its austerity agreement, PM RAJOY MAY BECOME MORE RETICENT ABOUT AN OFFICIAL REQUEST. IF GREECE GETS ITS DEMANDS MET THEN RAJOY WILL HAVE THE FOCUS UPON OFFICIAL SPAIN.

****A must read piece is in today’s FT by John Plender, “Eurozone Issues are Cultivating a Broader Identity Crisis.” Mr.Plender is always a good read,but today he poses three important IFs.

  1. Are North America and Europe turning into the new Japan,bringing the prospect of a lost decade?
  2. Are the U.S., U.K. and Germany safe or unsafe havens?
  3. And is France a member of the core or the periphery of the eurozone?
These are topics that I have covered over the almost three-year history of this blog.readers know that I have continually believed that the U.S. cannot be Japan for the political fabric of America cannot absorb the impact of a 20-year period of ECONOMIC ENNUI. Japan entered its downturn with a vast pool of savings, thus Japanese citizens were able to draw upon savings to help weather the severe economic impact of a burst bubble.
Also, the Japanese “lost decade “as Plender notes, was cushioned by a period of great global growth in the peripheries and the U.S. Plender also notes Japanese interest rates were always offering a real yield while U.S. and U.K. yields have gone negative. This is critical for it represents the idea that U.S. officials would wildly appreciate a BOUT OF INFLATION TO HELP RELIEVE THE MASSIVE AMOUNT OF DEBT OVERHANGING THE PRIVATE SECTOR. Remember that the highly quoted work of ROGOFF/REINHART calls for a period of inflation of 4-6% to help alleviate the pains of debt deleveraging.
The issue of the haven status of the U.S. , U.K. and Germany will be continued variables of analysis, but as the crisis continues the policy proposals of the supposed HAVENS LEAVE MUCH OPEN TO FURTHER ANALYSIS. The U.S. FISCAL CLIFF LOOMS, Cameron’s England is not its Olympic effort,and Merkel’s Germany has created more questions than answers. The issue of question three, France, may be the most significant of all.
WHERE DOES FRANCE FIND ITSELF IF SPAIN AND ITALY WERE FORCED TO ABDICATE THE EURO? If the Italians were to leave the EURO, the devaluation of the LIRA would crush the French economy as the huge price advantage would gravitate to the well-respected industries of LOMBARDY. When the LIRA was devalued in the early 1990s, the fashion houses of Milan were displacing Paris as the center of fashion. France will fight to keep Spain and Italy within the present structure of the EU for the INTERNAL DEVALUATION THAT FRANCE WOULD HAVE TO UNDERGO TO REMAIN TIED TO GERMANY IN SUCH A SITUATION WOULD BE POLITICAL SUICIDE.
Now that France has elected an avowed Socialist, the politics become very complicated for Hollande’s France. German austerity is a non-starter for the political promises that the Hollande government has promised French voters. The problems within the French republic will increase as the EU demands that France curtails its massive public sector, which is 55% of its overall economy. The headlines are replete with problems  of Spain and Italy but for me the next year will reward those who are long ITALIAN DEBT WHILE SHORT FRANCE. THIS IS A TRADE WE WILL CONTINUOUSLY MONITOR.
***The old ditty of SELL IN MAY AND GO AWAY: Well, at this moment the S&Ps are just about where they were on May 1. The more interesting result is that many of the RISK-ON TRADES HAVE NOT KEPT PACE WITH AN UNCHANGED STOCK MARKET. TheEURO was at 132.37 on that date, thus as risk has returned markets remain very cautious about Europe. The barometer of U.S. angst, the 10-YEAR NOTE, closed at 132.09 on April 30,so there we sit basically unchanged. The other barometers of RISK OFF/RISK ONhave been the YEN and YEN CROSSES.
All the world’s major currencies are trading LOWER versus the YEN, an indication the world is being very careful in its desire for RISK. This is just a reminder as to the distance we have traveled in these turbulent times and to provide perspective to investors and traders. The following levels are the April 30 rates versus the present market:
         APRIL 30                          NOW
                                                                            NZD/YEN                65.32                                  63.72
                                                                            EUR/YEN                105.68                                96.93
                                                                            CAD/YEN                80.85                                  79.78
                                                                            AUD/YEN               83.25                                   82.91
                                                                            GBP/YEN                129.58                                 123.82
                                                                            MXN/YEN              6.1343                                 6.0012
And, just for laughs, the EUR/CHF is at 1.2014  versus 1.2011. The SNB has held the cross at exactly the same rate as the Swiss have accumulated massive amounts of foreign reserves. The question going forward is and will be what impact the Swiss policy has had on global finances and other nations currencies.

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8 Responses to “Notes From Underground: IF … In a World Of Great Uncertainty”

  1. kevinwaspi Says:

    “Eurozone policymakers are hell bent on a mindless austerity which will make Japan’s recent stagnation look wonderfully benign.”
    Classic, an excellent piece. Thank you for pointing it out.
    Kevin

  2. Dustin L. Says:

    Great piece as always Yra, thanks for sharing your insights with us! The significant sell-off’s in the 10Y bond markets in Japan, Germany, and the U.S. appear to carry a clear message with it from my perspective, money is flowing back to Europe and “risk”. This is further supported by rising equity markets and what appears to be a major low being made in the Euro. Could this be the start of a change in focus for world markets? Is the focus starting to turn towards Japan? Not that we are out of the EU crisis, as we all know we are not, but, markets lead the underlying economy anyway. As shorts continue to cover we may just be witnessing a major change in perceptions of risk and the flow of money accordingly. I would add that I think the sell-off in the long bonds mentioned above are a little overextended and could likely rally, but, time will tell if this is an important change of trend or not. I am certainly on high alert.

  3. yra harris Says:

    Dustin L.: Thanks for the kind words and I agree with you that something is up in Japan–not sure what but the nikkei is trying to tell us something is up and we will look at this going.As last night’s piece tried to show there is a breakdown in some of the risk on/risk off correlations.Yes we must be on alert for a sea change.

  4. arthur Says:

    France may be the land of ‘tax and spend’ but they have lots to show for it and look better than the US in many ways, according expert Marvin Zonis, Professor Emeritus Booth School of Business
    University of Chicago

    http://www.marvinzonis.com/publications/webpub

  5. yra harris Says:

    Arthur–as I would expect Marvin Zonis to say–let us see what takes place over the next 18 months and the french view towards a DeGaulle shaped Europe—the public sector being over 50% of GDP with 10+% unemployment—not something I would place too much confidence in—-how many French auto imports on the streets of America or any othe rcountry

  6. yra harris Says:

    Arthur:Just read a Der Spiegel Online article–“Attraction and Repulsion Define French-German Relations” by Romain Leick.All the readers of NOTES should read it.

  7. Arthur Says:

    Thanks! Nice article, “there are only two opposing strategies to overcome the crisis: Either Europe’s core countries, led by France and Germany, pull themselves together and form a true federation, or there will no longer be a euro in a few years.”

    The Economist says: “François Hollande has, on paper, more power than any other president in the Fifth Republic’s history. His Socialist Party now controls both houses of the legislature, all but one French region and most of the country’s departments, big towns and communes. The question is: what will this studiously modest man do with such dominance?”

    Let us see what takes place over the next 18 months…

  8. Yra Says:

    Reblogged this on Notes From Underground and commented:

    originally posted on august 15,2012

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