Sunday, August 14, 2011

A Wild Week and What Comes Next

This last week was a wild one; volatility skyrocketed mostly because of the concerns in Europe, with French banks and the possibility of a French downgrade the big concerns-- and rightly so. But the week ended with no downgrade and no French bank failures, and by Friday the markets had calmed down and were in a nifty little upswing pattern.

But are the problems that caused this mess solved ? No they are not, with the problems of Italy and Spain still in the forefront. Most European banks are massively over leveraged; most European governments are hopelessly indebted. There has been several of these little mini crises, with each one getting worse-- rather like a series of mini strokes-- and each one attacking a bigger country. I myself was surprised that Italy and France had been attacked when Spain was in most ways much worse off. There is calm again for now; there is an important meeting later this month about fine tuning the EFSF or doing something more. Those poor EUrocrats have gotta be getting bailout fatigue by now. The problem with the EFSF is that the number of nations becoming part of the problem instead of part of the solution is growing; at this point, it's likely that both Spain and Italy cannot reasonably be expected to help in any more bailouts, leaving France, Germany and a handful of small Nordic nations-- and after this week even France is looking a little shaky. And this is how the Euro will end.. when France becomes unable to bail out other nations, Germany will be left alone and would be unable to bailout everyone by itself.. and so Germany would likely leave the Euro along with their Nordic neighbors and return to the Deutche Mark. This week's crisis has passed.. but each of these mini strokes gets worse and worse. My guess is this implosion happens in 2013 at the latest, with a strong possibility next year. As I looked at Mish's site {probably my favorite site} this morning, he's detailing some of Spain's problems-- their Defense Dept can't pay for the new weapons systems they've acquired amongst them:

I actually expect the stock markets to have a nice run for the next few weeks from here. Not that it matters for those of us serfs toiling in the fields... for us, the Depression-lite continues unabated. Very often a company returns to profitability by slashing employees and/or their benefits. It's set to get worse for a large number of people as over the next couple of months their unemployment benefits are set to run out and for many of them, the only places hiring are fast food joints and Walmart. Barack Obama and his re-election will be the one of their targets of anger. One of the next things coming up on the calender is that at the end of September, the US Government, which cannot pass a budget, will have to pass what's called a "continuing resolution" to fund itself. After the debt ceiling debacle, lets hope we can all come to some sort of solution beforehand.

Update Monday 7pm:
I'm now having doubts as to whether the Germans leaving will be the final outcome. IMHO, Europe's financial system is having a series of mini strokes: first the Greek crisis of last year, then Ireland, then Portugal, and this month comes Italy. Yet the E-Bond has not been introduced in any Parliament. At some point in the near future, Italy and Spain will become unable to hold up their end of the EFSF. Even France looked a little shaky last week. When the number of countries needing a bailout exceeds the number of countries doing the bailing, the markets will demand an answer TODAY. It's at this point that---

1. The French and Germans can begin a bailout so big it would likely threaten France's solvency.

2. The ECB {with an assist from The Fed, the PBoC and with Germany's backing} vastly expands the SMP and begins purchasing failing sovereign bonds and bank stock, and waive the rule on "sterilization".. this is flat out monetization, and since The Fed and PBoC also participate, the Euro does'nt crash too badly in relation to most other fiat currencies... with the Swissy and Yen soaring. Germany, who has been resisting this, finally agrees when faced with financial Armageddon. As the Yen appreciates, Japan is strangled by deflation and a new phase begins.

3. Germany and it's Nordic cousins bolt the Euro.

My bet--- The Catastrophe behind Door #2

Update Tuesday 6pm: The Merkel/Sarkozy meeting produced something even worse than hot air.. there will be no EuroBond. No expansion of the EFSF. They went on to suggest other member states enact a balanced budget amendment. In effect, Merkel just gave troubled countries the middle finger.  Either the Euro somehow survives (probably through some sort of ECB QE program - see its recent purchase of Italy/Spain bonds) or we will see a return of the old nation-state currencies, with a European-wide policy of 'beggar-thy-neighbour'. 

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