Home > Uncategorized > 2012/01/25: Quick Post: Merkel’s Jerry Maguire Moment, Obama, Apple, and Hungary & the Fed

2012/01/25: Quick Post: Merkel’s Jerry Maguire Moment, Obama, Apple, and Hungary & the Fed

© 2012 ROHR International, Inc. All International rights reserved.

Well, it seems to have finally happened… Germany’s Jerry Maguire Moment. At long last this week it is finally agreeing to “show (me) the money” to the rest of Europe hungering for greater funding for its sovereign debt bailout funds. However, that comes with significant strings attached, along the lines demanded previous on major moves toward closer integration of the European Union

…and that is along much more stringent Teutonic fiscal lines. Those are at the very least distasteful to much of Europe, and completely unacceptable to the UK. That much was clear from Mr. Cameron’s rejection of the push for such an agreement at the previous EU Summit. As such, if Frau Merkel made her assertion during her meeting last week with French president Sarkozy that everyone should relax on the sovereign debt dilemma because the entire EU treaty was going to be ready for next week’s follow-on EU Summit, it appears as specious as we suggested when they announced it.

In fact, it only reinforces our view that might’ve seemed a bit extreme when we noted it one week ago: the bombastic, bi-polar nature of the leadership in Europe right now. As noted then, the vacillations are almost as troubling as the lack of real progress. If the rest of Europe is not going to go along (and there are others who disagree as well) with the extreme strictures in the German proposals for closer integration, then the only inference that can be taken is that Germany is not going to agree to greater funding of the rescue operations.

So maybe it is not a huge surprise she has also at least partially thrown Greece under the bus this morning by noting the bailout may not be working. What is interesting about that is she allows that the combination of the requisite billions of euros along with austerity does not seem to be getting the job done. And that last bit is the most interesting part.

That is because severe austerity measures without some method for also stimulating the indebted European southern sisters was never going to work. We have noted from the beginning that it would not be possible to purely shrink their way out of the massive debt loads they were carrying; least of all for a smaller country like Greece that lacks a major manufacturing base. And as an indication for the dysfunctional process in the US, those who are calling for fiscal reform through pure cost-cutting may be misguided here as well.

Of course, we won’t know that unless and until there is enough political cooperation to actually develop a plan that will pass Congress. What we do know is that, along with many of the rest of Europe, Standard & Poors also agrees that the pure austerity approach is a poor substitute for reforms in other areas necessary for overall restoration of fiscal balance. Even ECB President Draghi made mention of one of the key factors at the last ECB press conference: job creation is a priority. That’s just the sort of de facto dual mandate indication more typical of the Fed, which would’ve been totally unacceptable to previous ECB President Jean-Claude “single needle compass” Trichet.

While it all sounds good on paper to have far more stringent fiscal restraints, the fact that the rest of Europe is not likely to agree leaves both tighter European integration and expanded German funding for bailout funds in serious doubt. Along with the breakdown of the Greek Debt Deal negotiations into an intractable confrontation between the ‘public’ holders and Private Sector Involvement (see yesterday’s post), it represents a real risk not just for Europe but the global economy.

Speaking of things which sound good on paper, President Obama’s State of the Union address yesterday evening was a highly predictable catchall of upbeat assertions that have little to do with the political or economic reality. That “let’s all get together, and we can do this for an America Built to Last” was striking in nothing quite so much as the degree to which it is a prescription for greater spending and higher deficits at a time when that isn’t going to fly with the other party.

From a completely non-partisan viewpoint, there were a lot of good ideas on training and restoring America’s manufacturing base. Kudos to him for that. On the other hand, what we all know is that the incentives for business must go beyond some new program or administration “team” (at least you and suggest there would be any new czar appointed) into the real fabric of the business environment. And would require that the various organizations which business feels are out of control at present, such as the EPA, NLRB, OSHA, etc. be significantly reined in.

However, what the recent failure to approve the Keystone pipeline has taught us is that the administration is now fully playing to its left-wing environmental and social market economy base, likely for the duration into November’s general election. Just to demonstrate the degree to which the rhetoric from Washington DC is out of touch with reality, what we have seen in the US banking system for the past couple of years is the continued stringent restraints on anything but extremely high-quality loans by the banks. That belies the Washington DC rhetoric on encouraging banks to make loans. So, much as the inference to be drawn from the German Chancellor’s recent remarks is not very positive, it is unlikely anything beyond the current painstakingly weak recovery in the US was changed by what Mr. Obama had to say yesterday evening.

Flying in the face of that weakness was the outstanding results in Apple’s fourth-quarter earnings announcement. Once again this innovative and creative firm knocked the cover off the ball, and provided atypically upbeat guidance for the future. As the details of all that are available from extensive other sources, we will demure. However, anyone looking for that to be a harbinger of greater economic strength in general might be a bit misguided.

As analyst Jason Schwarz posited recently, Apple has moved on from being a company into becoming its own ‘asset class’. Possibly a bit of a giggle there, if it were not for the fact that some other retail analyst warning that the extreme appetite for Apple products might be cannibalizing other retail spending. And lest anyone forget, prior to his tragically untimely death Steve Jobs made a great case to the Obama administration on why it just wasn’t possible to produce products as technologically advanced and innovative as the I-Phone and I-Pad in the United States. Interesting in light of the President’s assertions yesterday evening about what can be accomplished here.

And last but not least, something that is indeed no more that a bit of a gigglethe comparison between central bank powers in the US versus Hungary. Let’s allow in the first instance that these are vastly different systems in history, current context, public regard and current key individuals. That said, isn’t it interesting that beleaguered Hungarian Prime Minister Orban had managed to come closer to a deal for financial support from the EU by agreeing to NOT merge his central bank and markets regulator, because it raised issues over the independence of the central bank.

Fair enough. But isn’t accruing more regulatory oversight just the sort of thing that the US Federal Reserve insisted upon and received as a quid pro quo for the formalization of its expanded role as “lender of last resort”? Interesting juxtaposition to say the least, even with all the caveats.

General Market Observations and EXTENDED TREND IMPLICATIONS

All of these are fully the same as in yesterday’s post.

Thanks for your interest.

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