Thursday, October 27, 2011

Thoughts On Europe & Magical Thinking

As I read the news flow coming out of Europe this morning I see GREEN. Futures are up a whopping 34 handles from yesterdays Globex Session close. The markets tend to trade to the path of least resistance and of course we all know that resistance is futile when markets are dominated by government policy intervention.

Screw Diamonds! Socialism and tax payer flush funds are a traders/speculators/bankers best friend.

Look for this market to trade to at least 1280-1300 level  on the futures before reality sets in. What is that reality you may ask? Like my old man always says reality is not what you see in the mirror but how the next guy sees you looking in the mirror. Its really circular farcical logic, but that's what investors want and that is what they will get. Its Western Culture at its finest. The avoidance of pain is paramount to living in a Western Culture.

Kick the can down the road.
Buy some more time.
Extend and Pretend.


A few days ago European Policymakers couldn't even schedule a meeting to discuss the crisis. They actually were kicking the meeting down the road. Markets reacted violently by sending the SPX down by 2%. Silly Rabbits - Tricks/Bad Debts are for Kids but Socialism/Bailouts are for the elites.

Back on the subject of Rabbits. Did the Europeans pull one out of the hat? One would think they have when looking at the DAX which is flying up 5.35%. Like the CARS singing oh oh It's Magic, one would think by looking at the sea of green on the screen that all has been magically fixed. Maybe Joan Didion was right after all when she wrote the "The Year Of Magical Thinking." Magical thinking works until reality sets in. Steve Jobs thought he can beat Cancer by magically thinking it doesn't exist. I am pretty sure the Europeans have the same thinking pattern as the Apple founder.

Lets review.
The only agreement that was reached was what we were all aware of. 50% haircuts for Greek Debt was already figured. Bank Recapitalization was already needed. The agreement basically buys time for the banks to posture their governments for continued bailouts.

My questions are:

-Does Austerity continue for the weaker periphery nations?
-Are the inherent flaws within the single currency Euro still intact?
-Will trade deficit nations continue to consolidate their budgets?
-Will growth worsen for trade deficit nations?

As Marv Albert  says.....The answers are all a resounding YES!

What European policy makers achieved was an offering to the German Banks and citizens. They wanted bailouts and austerity and that is what was delivered.

Bottomline. THE ECB will use the EFSF to put a bid and floor under sovereign debt until it cant any longer. What was averted I must admit was a system wide bank panic - Lehman 2.0 doesn't look like its in the cards.
Substantial capital (Tax Payer Funds) has been set aside (Bonus Pool) in the case of widespread bank failures or recapitalization needs.

Markets are reacting for good reason as the short term looks good. The Europeans were able to remove the absolute worst case debt crisis scenario, but what we have is just a muddle through scenario. This is not as plan. Markets need to grow out of this debt mess. My thinking is that austerity will continue to put pressure on budgets which will lead to massive protest movements across Europe.

If budgets worsen on the periphery we should expect to revisit this issue in the coming quarters and the crisis will once again ripple through the market forcing Euro leaders into greater action.

Magical thinking helped Joan Didion out of her deep depression. Good for her. It didn't work for Steve Jobs and it won't work for Europe.

1 comment:

  1. As the world holds it's collective breath and waits for a light (or messiah)to guide us, all the while ignoring the sound economic policies that created the great economies; you have to wonder just why the solutions are so out of reach. It's as if we can't stomach admitting we were wrong, and reverting to old practices and policies - it's a uniquely human reaction. Merry Christmas and Happy New Year.