Posted By: Matthias Paul Kuhlmey
It continues to be a grand scam. Yesterday, just in time to save financial markets from more misery, a news story surfaced that indicated Germany and France had decided on a 2 trillion Euro expansion (leveraging) of the European Financial Stability Facility (EFSF). Markets, struggling to hold meager gains for the day, took a turn towards the stars. Surprisingly (or not anymore), 3 minutes after market close (!), the financial media reported: “DJ REPORT EFSF FIREPOWER TO REACH EUR2T “TOTALLY WRONG” – SOURCE.”
It is fascinating how the world of investing is constantly being turned into a happy place, and everyone is helping (but us?). Apparently, Europe is now repaired, and the U.S. consumer was resurrected last week, as everyone obsessed over the recently reported growth in U.S. retail sales (the most significant increase in 7 months, blah, blah), adding significant gains in markets. It is, however, a somewhat moot point, with unemployment structurally high and consumers cautiously moving into an environment of great uncertainty. Since income creation has likely not met the cost of the retail shopping binge, we must wonder what happened. Are we living on credit again? As the legendary David Rosenberg, with GluskinSheff, put it: “Dude, U.S. retail sales also “popped” 0.9% in November of 2007, and a recession began the very next month.” We gladly stick with Mr. Rosenberg’s assessment and continue to expect the global consumer to “roll over,” potentially putting a dent in stock prices in the months to come.
Euroland, not even considering yesterday’s confusion, continues to be a complicated matter, with too many voices commenting on its complex web of challenges. German Chancellor, Angela Merkel, somewhat retreating from her recent “don’t dream… it’s over” remark, is now stating that over the coming weekend (EU Summit), recapitalization plans for European banks will be the point of discussions. On this basis, Europe could finally clear the way for a necessary “haircut” of Greek debt. Regardless, it remains our conviction that European leaders are merely attempting to buy time, and that a painful restructuring of the Eurozone cannot be avoided. The extremes, in this respect, are challenging: from the creation of a new Core Europe to the “one for all” concept, with Germany being the main bearer of the economic fallout and realignment.
It is almost ironic to understand that the Europeans, when compared to the U.S., have far more options left to stabilize their financial system – e.g., lowering rates, monetizing debt, etc. However, nationally driven big egos and politics are simply in the way of reaching such outcomes; this is, quite possibly, for the best, as near-term fixes would not repair the system to begin with… which leads us to another view we continue to hold: the global financial framework has to be reset, potentially involving the restructuring of Sovereign debt, currency markets, etc. Another Plaza Accord or Bretton Woods, anyone? …anyone?
FADE IN. BEDROOM. It is very early in the morning. Dawn. Blue-greyish light is falling through the sides of thick chocolate-brown curtains.
FOCUS ON NIGHTSTAND (European-made) WITH ALARM CLOCK BEEPING (annoyingly loud).
VOICE in the background, “…it’s time to wake up…, Angela, please wake up”
VOICE from the bed, “…mmh, ‘was dreaming… dancing… on two trillion stars”