Tonight the Financial Times has two stories of major impact but do not lend themselves to an immediate trade. First, China tells some of its banks to stop lending. Think about that concept for a minute. Greenspan and Bernanke have both asserted ad nauseam that a central bank cannot prick a bubble. The Chinese have a much different take on that, in that they have recent memories of a top-down command economy. It is the Chinese political situation that renders much of the economic analysis worthless. In the realm of political economy, it is the Chinese centralized decision-making apparatus that makes it tougher to compare to the American-Anglo capitalist model. A statement such as the one cited above leads to a 3 1/2% decline in the Shanghai index, which leads to a selloff of the global markets. This is what makes the year going forward so very difficult.
The Chinese news is not the most significant story. The word from Europe tonight is that Axel Weber, the most anti-inflation hawk, will become president of the ECB when Trichet retires in 2011. We have pondered what price the Germans would exact for the bailout of the PIIGS. Now it seems as if we have our answer. The ECB is an 11-year-old institution and has never been led by a German. The first president was Wim Duisenberg,a Dutchman of strict monetarist credentials, but he was in fact a compromise in effort to keep the Bundesbank from openly controlling the Bank. To appease the disappointed French, the Dutch reached a compromise so that Dusienberg would serve half a term and Trichet, in a nod to France, would serve the second half of a full term. Most Europeans were fearful of the strict monetarism of the Bundesbankers (although Germans citizenry has never wanted to turn the control of their GELT over to others). Now that the Germans have the political and economic winds at their back, they appear to be pushing for control of European monetary policy during this time of great uncertainty.
German Chancellor Angela Merkel seems to believe that by pushing Axel Weber to the fore, she will get the German populace to buy in to a bailout of the PIIGS. It appears that the French are buying into this with the vice-presidency going to Vitor Constancio of Portugal who many consider a monetary dove. We believe this is very significant and if we are right, we should see spreads in the Greek debt markets narrow in anticipation of the Germans seen as providing DEBT RELIEF. So monetary control will be handed over to the mother of all Bundesbankers.
Oh, the wheels on the European politick go round and round but they will be rotating on a new AXEL.This is why the concept of 2+2=5 is a beautiful thing!