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Courtesy of Daniel Sckolnik, ETF Periscope
A Concerted Effort to Stick A Fast Thumb in the Dike
“Not everything that can be counted counts, and not everything that counts can be counted.”–Albert Einstein
Most of us are familiar with the story of the boy who sticks his thumb in a dike to save a town from flooding. It is somewhat apropos that the story originated from out of one of the euro-zone Member States, as the fear of a deluge resulting from the EU credit crisis permeates the thoughts of global investors.
While it is pretty much a forgone conclusion that the euro-zone is unlikely to continue in its current form, the question remains: What will the new configuration look like?
Look to this week’s EU summit, the final one for 2011, for some hints.
But don’t hold your breath waiting for a definitive answer.
While investors would certainly like to see at least some degree of uncertainty removed from the whole European Union sovereign debt equation, the fact is that the problem runs too deep, both politically and economically, for simple resolutions. The euro-zone, those members of the EU that have adopted the euro as its currency, simply has too wide a swath of problems to be effectively tackled by short-term solutions.
True, last week’s concerted effort by a six-nation consortium, led by the Fed and followed by the central banks of the EU, Japan, Canada, Switzerland and the U.K., gave Wall Street a strong jolt, bolstering investor confidence, allowing buyers to see equities through the prism of an undervalued and oversold perspective.
Investors responded to that perspective by letting their inner Bull out, and the Dow Jones Industrial Average (DJIA) shot up about 800 points over the course of three days. In fact, the benchmark S&P 500 Index (SPX), the tech-heavy Nasdaq Composite Index (COMP) and the Dow all gained over 7% for the week. The Dow ended the week above where it began the year, and while the same couldn’t quite be said about the SPX, it did hold that distinction for a part of last Friday’s session, at least for a tantalizingly brief intra-day period.
While the economic numbers on the domestic front were solid, though unspectacular, there can be no doubt that the upward move came courtesy of the news that the central banks had agreed to an increase in liquidity, accomplished via the vehicle of lowered overseas lending rates. This type of “swap arrangement” seemed primarily designed to ease the pressure on the PIIGS (Portugal, Ireland, Italy, Spain and Greece).
Will this increased liquidity address the systematic problems that led up to ridiculously high yields on Italian and Spanish bonds last week? Will this swap arrangement help dissuade Moody’s from lowering France’s AAA rating? Does it really do anything beyond sending a message, no matter how strong, that the EU is not really alone in finding its way out of the debt mess it’s in?
In an effort to ascertain answers to these questions and more, this week’s EU summit will be followed by international investors as closely as a cat follows the moves of a cornered mouse.
Sure, Germany and France likely will once again proclaim unity in front of the cameras, but behind the scenes, who will win the battle as Sarkozy seeks a stronger core of euro-zone countries, while Merkel seeks greater integration of the entire 27 EU member states?
There is a fundamental difference here, and one that might prove unsolvable, certainly by any short-term actions.
Obviously, the EU’s survival affects the global economy, as evidenced by last week’s concerted effort of the leading industrial nations. If anyone doubts that the stakes are sky high, the announcement that China would be starting its own round of monetary loosening, orchestrated to hit the news in conjunction with the one made last week by the Fed and the other five central banks, should reveal the depth of concern by all the major players.
These actions are a premeditated strike, pure and simple. Will it be enough to stem the flood waters from rising above the dam?
One can hope, certainly a reasonable thing to do around the holiday season.
ETF Periscope
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
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