Home > Uncategorized > 2011/11/18: Quick Post: Perverse Trend Logic on Bund Down with Equities Thursday Actually Reasonable

2011/11/18: Quick Post: Perverse Trend Logic on Bund Down with Equities Thursday Actually Reasonable

© 2011 ROHR International, Inc. All International rights reserved.

Good old PTL. Just when everyone thinks they have it all sorted out because certain intermarket relationships have become sacrosanct, the market hands everyone a surprise. Except it’s not really a surprise, because one of the first things our mentors taught us more years ago than we care to mention is, “Just when you think you have it all sorted out, the market will hand you a surprise.” And that was certainly the case yesterday for a lot of folks on US equities continuing with the second day of a pretty good drubbing, yet the previously obvious ‘haven’ German Bund also sagged for the second day running.

And now, even though the equities have not recovered much from the past couple of sessions’ sharp selloff, the December Bund future has actually broken down below short-term support in the 137.00 area. And right along with that the US T-note kept its bid yesterday (even allowing it had lagged the Bund on the way up), the Gold market took its own major drubbing, and the euro and the US dollar have done a good job of keeping the bid together while commodity currencies suffer of late.

As bizarre as all of that may seem, it fits in with a particularly narrative that points to the European Sovereign Debt Crisis reaching a critical inflection point…

…which means the Germans are going to have to get their head out of the sand (or will be forced to do so by the rest of Europe and the world) in order to rationalize their current dysfunctional position.

The bottom line is that they can not continue to have it both ways. Demanding the ECB respect the legal restrictions on monetizing individual European countries’ debt may well be a reasonable stance. What is not reasonable is both failing to provide an alternative to support the weaker sovereign debt markets (i.e. allowing yields to escalate to unsustainable levels), and pushing austerity onto all of those weaker economies during a global macro-cyclical phase where it will not produce the desired fiscal rebalancing.

Obsessed with the success it achieved while all of the profligates were borrowing and spending, Germany is prescribing bad medicine for the rest of Europe, and likely the global economy as well. Interesting, isn’t it, that Greek sovereign debt yields backed off today after the Greeks rejected the more extreme form of austerity that the rest of Europe and the IMF were attempting to impose?

As we have noted on quite a few previous occasions, the extreme fiscal imbalance in Greece and the attempted austerity remedies have been a learning lab. Evidently the Germans have failed to go to school on the fact that austerity will not work in a pro-cyclical environment for the rest of Europe in a downturn. The weak economies can NOT shrink their way out of Brobdingnagian debt loads!

Time pressures and the extensive nature of the current shifts in the intermarket relationships and individual markets within asset classes make it most effective for us to simply provide courtesy access today to our institutional TrendView BRIEF UPDATE from this morning. It reviews both the shift in the narrative if the current dysfunctional German position is bringing the European Sovereign Debt Crisis to a head, and how that actually makes a lot of sense for the various market swings yesterday.

The bottom line is that the world is still most likely headed into a weaker economy than most people expect into early next year, yet the worst exaggeration from the European debt crisis may well be avoided.

Enjoy the read and thanks for your interest.

  1. usikpa
    November 19, 2011 at 2:32 PM

    There is an article in Spiegel, I think, that simply states: what ECB is asked to do is impossible as 1) there are no Eurobonds in Eurozone for the bazooka to work and 2) anyway, if forced to scoop up every country’s bonds now, by doing so the ECB would liken itself to the FED buying up, let’s say, California debt obligations BEFORE that state has sorted out its state pension scheme (or some other) deficit. This is NOT the monetary policy.

    2010 Eurovision song contest clearly showed – the Europe is now under the heel of Germany. They need some time to enjoy their victory and to envision “die neue ordnung” for continental Europe. This is the high time – the historical chance – for them to build the Europe they want. Print now? Nein.

    There ‘s got to be something else in offer on their part to stop the pain, no? Perhaps, something on country-to-country basis?

    • November 21, 2011 at 5:32 PM

      It would seem they are smart enough to know the dissolution (or decimation of the members) of the euro would be very bad for their mercantilist trading regime, but the passions over national differences may have already spuin out of control. Their vision has already failed, as they choose to forget that the steps to stem Weimar inflation led to among the worst depressions. Yet, the idea of indiviual country support is unpalatable to them.

      It reminds me of hedge fund manager Kyle Bass’ observation in the degree of European disarray: “They’ve got an Italian Finance Minister and a German Pope.” Not necessarily relevant to the specific financial disconnect, but a good metaphor for a region turned upside-down.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: