Earlier I was rereading a blog post from almost three years ago. I believe it still has great relevancy and gives us all perspective from where we have been to what the next three years may bring. Perspective for a global macro trader is very important for without it traders rush in where investors dare to tread.
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.
- Are North America and Europe turning into the new Japan,bringing the prospect of a lost decade?
- Are the U.S., U.K. and Germany safe or unsafe havens?
- 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. The EURO 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 ON have been the YEN and YEN CROSSES.
Also, there I have LINKED the John Dizard piece from the Financial Times that pays tribute to Bernard Connolly and his vision. When Churchill was told that a person he was introduced to had great humility, Churchill quipped that the person had much to be humble about, but the opposite applies to Sir Bernard Connolly (I knighted him to the kingdom of truth seekers). Bernard has much to crow about but is indeed a very humble man. READ THE BOOK, “The Rotten Heart of Europe.”