Sunday, October 2, 2011
I couldn’t be more delighted than to see the DAX get tagged for 2.5%. This is a consequence of the “Successful” vote in the German Parliament to throw more good money after bad. The hit (so far) to German investors comes to $40b. That should make them happy this weekend.
It’s not just investors that a giving the raspberry. According to this WSJ article, 75% of the folks in German are fed up with more bailouts.
How can this happen? Politicians are doing what the voters don’t want. It can only mean that new politicians are coming and the bailouts will be curtailed.
Keep in mind that the expanded EFSF is still woefully inadequate to address the debt problem in the EU. There has to be a much bigger effort. In my view, anything less than Euro $2 Trillion is not going to work. A big bazooka is required, a popgun is being offered.
This brings us to the speculation this week about a Euro SPV. There was the “Leisman Plan,” and the EURECA Plan. These are confusing to most people. Let me make it easy. What is being proposed are Euro Bonds in disguise. This is just financial engineering to cosmetically create a joint and several EU debt obligation.
This won’t work. The ratings agencies and investors will see through this. If something silly like this is going to come I would anticipate that Moody’s and S&P will downgrade both France and Germany within weeks. Everything that is being offered is just a half-assed effort to deal with a very big problem.
The conclusion for me is that the Euro has to continue to suffer on the crosses as a result.
I see the dollar as the backbone for the markets in general. In a “perfect” world an orderly depreciation of the dollar (5% a year) is a “good thing”. It supports US inflation (that makes debt look smaller). A weak dollar is beneficial for tourism, and encourages foreigners to buy real assets like real estate. It gives US manufacturers of big-ticket items (planes/construction equipment) a pricing advantage. It also provides a big boost to translated earnings for the S&P multinationals.
The very worst thing that could happen to the US economy in the 4th quarter is that the dollar gains 10% against the Euro. That looks like what is coming to me. Don’t buy the dips, sell the rallies.
BLATANT BREACHES
On the subject of the EU and the banks, an interesting speech by Hans Hoogervorst, Chair of the International Accounting Standards Board (IASB). He spoke at an investors conference in Boston (PDF) on Sept. 29. I wasn’t there, but he was quoted as saying:
"European banks carried out "blatant breaches" of IFRS in valuing their holdings of Greek debt." Read more>>
