CARNAGE
by ilene - November 16th, 2010 9:51 pm
CARNAGE
Courtesy of The Pragmatic Capitalist
The QE trade is unwinding in dramatic fashion as the market slowly realizes that QE is not in any way inflationary. As I mentioned last week the smart money markets (fixed income and FX) were foreshadowing this as early as last week. The air pocket created by Ben Bernanke created an incredible trading opportunity for investors who weren’t blinded by confidence in the Federal Reserve. Just two weeks ago I said:
“Would add (to shorts) into any move over 1200. Would LOVE to see 1220″
My position is that the market is misinterpreting the economic impact of QE in the long-term. My market position has always been that we could rally to these levels and that at these levels the market has become overly optimistic. If I am wrong I will lose some money and move on. It’s part of the business.
Like clockwork the market touched 1220, bounced and sold-off. The carnage across markets is broad. The only things rallying are volatility, USD and US treasuries. In essence, the leveraged QE inflation trade is collapsing. You can thank Ben Bernanke for this. When you create distortions in the market you get volatility, uncertainty and ultimately a collapse in prices. Keeping market prices “higher than they otherwise would be” is not a recipe for economic growth.
The most worrisome development is dissension inside the EMU. Austria is now threatening to withhold their contribution to the Greek bailout unless Greece can prove that they have fulfilled their requirements for aid:
“The cost of insuring against default by Greece and the premium investors demand to hold the country’ bonds rather than lower-risk German Bunds jumped on Tuesday after Austria said Athens had not met aid commitments.
Five-year credit default swaps were 100 bps wider on the day at 950 bps, according to monitor Markit, while the 10-year yield spread between Greek and German government bonds was 15 bps wider at 923 bps.
Greece has not fulfilled commitments for its European Union-backed aid package, Austrian finance minister Josef Proell said on Tuesday, adding that Vienna had not yet submitted its contribution for December.”
That’s not the only concern in the markets. Municipal bonds in the US continue to crash as a market that was priced for perfection now begins to price in some risk. Commodity markets are…
EURO EXPERIMENT: German Steel or Schmucks?
by ilene - May 25th, 2010 7:15 pm
EURO EXPERIMENT: German Steel or Schmucks?
Courtesy of Gordon T. Long
The European Crisis is proving to be more of an unraveling than a contagion.
I have long written that the European Monetary Union (EMU) constitution and Euro currency should be viewed in the context of a risky bet versus a sound regional monetary strategy. The odds of the EMU’s survival are presently reflected in a plunging Euro, despite a historic and unprecedented intervention. This indicates that the EMU’s existence in its current form is now a bad bet.
The good news is that this is becoming obvious and it suggests that the serious governance flaws of the 17 year Euro Experiment may finally be addressed. It took a crisis to see its first test which has been the generally accepted view of when the euro experiment would prove its viability. The established momentum of the EU since its inception and its broad acceptance prove that its survival is presently a matter of European preference with most Eurozone members feeling it an absolute necessity. We would therefore expect to see the EU constitution reformed. What should concern investors the most however is how the mechanics of what will be a ‘forced reform’ unfold. The highly visible process will have profound implications to the stability of global financial markets and to a very tenuous global economic recovery.
I see the long standing philosophical difference between Germany and France to be at the core of this potentially very public resolution. During the recent behind closed door emergency bailout negotiations, these differences are reported to have come to the fore. Additionally, Frau Merkel and Monsieur Sarkozy are very different personalities. Will Frau Merkel show German Steel or as the German tabloid Bild proclaimed on news of the Euro bailout, become ‘schmucks’? Will Sarkozy the ever populist media hound prove to be a true diplomat or display what Germans perceive as insulting French arrogance? Unfortunately, the world must wait and watch while financial markets will no doubt fluctuate wildly on the uncertainty of the outcome.
What financial markets are oblivious to is just how crafty these two politicians are. There is more going on regarding a European strategy than the media once again fails to recognize and which I will speculate on later.
For the full unabridged version of this article with slide presentation see: Tipping Points – Commentary