Home > Uncategorized > 2011/08/30: How We Got Here-III: The ‘Mad Monger’ Highlighted the Competing Agendas in Europe

2011/08/30: How We Got Here-III: The ‘Mad Monger’ Highlighted the Competing Agendas in Europe

While it is natural for outsiders to write off the problems in Europe as an intractable mess, that is only compounded by Europeans penchant for snatching defeat from the jaws of victory. The first bit of perspective we are going to share on that theme goes back a little while, yet is still one of the best indications of the attitude on the part of the European fiscal ‘haves’ and ‘have-nots’.

Also as this is being presented in the wake of part IV, yes, it is a reverse chronology. We don’t like that in the Arts, but it is instructive to move back from the last FOMC meeting statement to the core problems. Back on August 10th we welcomed everyone to Survivor Island, as whatever happens from here is likely to be a struggle.

And that was directly in the wake of tumultuous market activity that culminated with the wild swings after the August 9 FOMC announcement. Now that the minutes from that predictably deadlocked meeting are out of the way, facts-on-the-ground  are likely to rotate back around to the more contentious situation in Europe.

In addition to all of the other factors that dictate Europe is a more critical near-term economic and equity market influence, there is next week’s ECB meeting to consider. And as it was the events surrounding its last meeting (August 4th, remember that?) which confirmed the major 1,265-50 area S&P 500 DOWN Break, let’s allow that what transpires in Europe into next Thursday is going to be a lot more critical than most of the economic data or US influence… even Friday’s Employment report.

And the same sort of contentious mentality that burdens the US legislature is even more apparent in Europe’s North-South divide. So let’s consider for a moment the clear expression of dissention that made Europe such an economic and equity market stressor back then.

In case anyone fails to recall, it was the ECB refusal to buy Italian government bonds that morning which sent the equities into such a spin.  The September S&P 500 future Closed well below last year’s 1,253 Close (lead contract) for the first time this year, and ended over $50 lower on the day… and below 1,200.

What could have precipitated such a major drop?  Some will say it was the refusal of ECB president Trichet to purchase bonds that he knew were in trouble.   However, that was only a reasonable response to Italian President Berlusconi disappointing everyone the previous day when a major speech did not even touch on any address of Italy’s obvious fiscal black hole.

While we felt the ECB would need to be more forthcoming at some point, a friend of ours summed it up rather pointedly, “Why would be rest of Europe give even one euro that ‘half-mad whore-monger’?” Just to confirm the strength of his view, we inquired, “So, not a big Berlusconi fan then?”  As we have also noted regarding quite a bit of official action during the various recent crises, he pointed out that the communication vacuum could not have been more blindingly benighted… yet quickly added, “Besides, I never received an invitation to any of the Bunga-Bunga parties.”

Okay, so maybe just a bit of sour grapes there. Yet the basic politico-economic thought is right on target: how can any central bank extend support to a political class that seems more than willing to ignore its fiscal problems?  It seems that is the tack Mr. Bernanke is now willing to take with the US Congress; and rightfully so.

However, where the US is a house divided once again in a fiscal Civil War, the fact that Europe is a series of independent nations in a cacophonous, disjointed negotiation significantly heightens the risk factors.  Especially so in consideration of the divergent interests of the individual countries and the banks that hold so much of their debt.

What is apparent is that the basic Euro-zone problem is it is a minimalist marriage of convenience at best. While the obvious advantages were readily accepted by all of the parties, the heavy lifting to stabilize the relationship was never pursued… neither by lenders nor borrowers. The basic compact between its ‘haves’ and ‘have-nots’ reminds us of some sage perspective we once received on employment relations: workers are only interested in working hard enough to not get fired, and employers only want to pay them as little as necessary so they don’t quit.

General Market Observations

Sounds quite a bit like the relationship right now between the successful northern tier Europeans and their profligate southern brethren. However, in this case the weaker southern sisters to hold one bit of leverage that no one wants to admit exists: Germany in particular does not even want to think about life outside the  Euro-zone. Imagine where a ‘new’ deutschemark would need to be priced versus the rest of the world, and how that would affect their mercantilist program with a fractured Europe strewn all around them.

Too bad there is an entire corps of German politicians who haven’t been able to figure that out as yet.  Aside from the sheer amounts that the southern sisters owe, unreasonable terms by the ‘haves’ of the northern tier is where the real risk lies. Finland wants collateral?  Maybe it is looking to run Greece as a wholly-owned resort… otherwise there isn’t enough collateral in the place to even come near securing the amount of euros it needs.


Equities: As we noted prior to the big wind from Jackson Hole, it was thoroughly possible equities had already discounted the impact of a lack of explicit QE2 commitment by Mr. Bernanke. That is likely at least in part the driver behind the significant recovery in equities once the September S&P 500 future  did not remain below interim 1,155-45 support from shortly after Mr. Bernanke spoke on Friday. Yet, even after crossing back above 1,200, it is still only part of the way back to the top of the key 1,216-24 February and November (respectively) 2010 lead contract highs of the trading range it has slipped back into. And that resistance has a natural buffer up to the 1,230 area Fibonacci 0.50 retracement of the entire May-August slide.

Long Dated Government Bonds: The recent surge in govvies reached some important resistances, such as when September T-note future surged above the upper-129 resistance to the 130-20 extreme panic high from back at the end of 2008. Yet, after overrunning it by a full point, it was unable to Close much above that all-time futures high. Of note on any downside correction, the key near-term support appears to be the 129-00 area late week pullback low from three weeks ago. And that sort of psychology becomes that much more important in the near term for all of the govvies as the daily MACDs have turned DOWN in spite of weekly MACDs remaining obviously UP.

Foreign Exchange: As noted previous, the classical relationships seem to not apply. The US dollar has shown weakness near recent .7340 congestion lows with equities sharply lower, yet has also held very well into that area on the recent equities recovery. However, after failure to remain above the .7450 area, that mid-.7300 area congestion is also now very important as the broadest up channel support from the very significant .7270 May low. US Dollar Index has obviously been heavily impacted by commodity currency strength, even as EUR/USD continues to stall on all tests of the 1.4500-1.4620 area. However, on any near-term slippage the interim support remains 1.4300-1.4250.

Energy: October Crude Oil’s early July recovery back above 95.50-94.50 was a reflection of equities strength, and predictably failed on the sharp equities weakness. It was the case that the extended break back below that area did not occur when equities rescued themselves from the  late June lows, but did so later; with 83.85 violated as well. That is important because it was the last late-February pullback low prior to the extensive rally to the 115.00 area which ensued. We now expect Crude Oil to underperform. That likely means stalling at no better than its 89.50-90.00 resistance or the more prominent congestion in the 92.00 area at best.

Thanks for your interest.

  1. christopher maytum
    September 1, 2011 at 5:33 AM

    As ever, insightful stuff but from wherever the source, it’s comforting to know that there are pockets over here, learned from extremes we cannot contemplate, still committed to sound money, which are nowhere to be found within financial zeitgeist – quite the opposite. The sooner we in the West return to sound money, having shed our casino mentality, whatever the cost to our current standard of living, the better off we and our children will be.

    • September 2, 2011 at 4:47 PM

      Always good to hear from you, and the comment is well taken. Of course, as you know, the problem now is that the weak links in the finance business (present company and our kindred spirits excluded) so ravaged it that the political class has gained ascendancy… and what are the chances any of the politicians will try to get elected by telling the masses to “take the pain, you’ll feel better later”? Obviously rhetorical.

  2. September 2, 2011 at 4:46 PM
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