European Union

Summit full life: One week. Literally. Last Friday morning speculation that Germany had "caved" to Mario Monti, somehow allowing beggars to be choosers, and would allow an unconditional and IMF-free rescue of Spain and Italy while the seniority of the ESM was eliminated, sending the Spanish 10 Year yield to under 6.2%. The same security is now back over 7%, where it was just before the summit, as Finland and Holland (or half of Europe's AAA-rated countries), and even Germany, made it quite clear, as we said all along, that stripping seniority of a piece of debt is far more complex than saying one wants to do it in a Memorandum of Understanding. The other thing pushing Spanish spreads wider was German FinMin spokesman Kotthaus saying that no decision on Spain can be taken on Monday as there is no Troika report on Spain bank aid yet, and that the European bailout activation, which was supposed to begin on July 9th, may be delayed until July 20. At that point it will likely be delayed again, only this time GSPGs may be trading wider than their lifetime highs of 7.285%. Finally, adding insult to Mario Monti "victory" is that Merkel's popularity rating just hit a multi-year high. So: who was last week's summit "winner" again?

Seven out of the seventeen economies that belong to the European Union that need to be bailed out. This is 41% of the Euro-17 that is in trouble. The second indication of decline is the recessions in Europe. In fact virtually all of Europe is in a recession and while Germany has held its head above the water I think by the third or fourth quarter that she is also mired in an economic decline. Europe is 25% of the global economy and this is beginning to affect the United States as exemplified by the declining revenues and profits of many American corporations that have so far reported out this quarter. The axes of the financial markets are America, Europe and China and with Europe in serious decline and China also contracting the strings are vibrating so that all of the markets are likely to go down. Even without some cataclysmic shock, realization is coming. The debts of Europe are being paid off with ever more debt and the can kicking will find its walls and as the European recession deepens it will be felt in America and then adjustments will have to be made - as fact overbears fantasy.

I understand the dream of the common socialist.  I was, after all, once a Democrat.  I understand the disparity created in our society by corporatism (not capitalism, though some foolish socialists see them as exactly the same).  I understand the drive and the desire to help other human beings, especially those in dire need, and the tendency to see government as the ultimate solution to all our problems.  That said, let’s be honest; government is in the end just a tool used by one group or another to implement a particular methodology or set of principles.  Unfortunately, what most socialists today don’t seem to understand is that no matter what strategies they devise, they will NEVER have control.  And, those they wish to help will be led to suffer, because the establishment does not care about them, or you.  The establishment does not think of what it can give, it thinks about what it can take.  Socialism, in the minds of the elites, is a con-game which allows them to quarry the favor of the serfs, and nothing more. There are other powers at work in this world; powers that have the ability to play both sides of the political spectrum.  The money elite have been wielding the false left/right paradigm for centuries, and to great effect.  Whether socialism or corporatism prevails, they are the final victors, and the game continues onward… Knowing this fact, I find that my reactions to the entire Obamacare debate rather muddled.  Really, I see the whole event as a kind of circus, a mirage, a distraction.  Perhaps it is because I am first and foremost an economic analyst, and when looking at Obamacare and socialization in general, I see no tangibility.  I see no threat beyond what we as Americans already face.  Let me explain…

Germany will leave the Euro the moment that the EU Crisis spreads to France.  At that point any discussion of EU bailouts is pointless, as the very countries needing aid (France, Italy, Spain, and Greece) account for 53% of the ESM’s funding. 

Local Governments Which Entered Into Interest Rate Swaps Got Scalped

US military "surge" is back in the Persian Gulf + Iran fires medium-range missiles + Turkey scrambles jets for third day in a row = $100+ Brent

I don’t know, in my rather straight down the middle Kansas City mind I prefer a reality where one plus one is two and not where some European auditor, when asked about the sum of one plus one says, “What number would you like?” This was the way of it in “Alice in Wonderland” of course as the meaning of the word was determined by the speaker but this is not a wise path to be followed by an investor. Recently I wrote about Firewalls and the hocus pocus of their being touted as the cure-all for Europe. Europe missed the train on this one altogether as no amount of money, either pledged or funded, will do one thing to help the worsening financial crisis of the countries in Europe. You may think of the nations of Europe as horses in a corral. What is the value of a bigger and bigger fence that surrounds them if the horses are full of cancer? The fence, of whatever size, does nothing and I mean nothing to help the sickness of the horses. Europe is battling with windmills when they should be addressing the financial health of each country. “The horses are sick,” I say, “forget fiddling with the fence.”

Objective analysis, or media spin to gauge popular reaction to Plan Z? Whatever it is, today's staff lead article in the English section of Spiegel has a piece that will likely raise more than a few eyebrows: "The common currency union was supposed to benefit the economy of the entire European Union. Now that the euro is struggling, however, it is bringing growth down with it. Germany's economy, once seemingly immune to the crisis, is now facing mounting difficulties."

Let’s face it – Europe is a cool place. In addition to being cool, Europe is also without a doubt the most creative and imaginative place outside of Middle Earth. Its ability to  consistently baffle itself certainly warrants valuable space in IceCap’s global market outlooks. Financially speaking, Europe is broke - it no longer works. Figuratively speaking, Europe has entered its golden age. Unworkable solutions dreamt by an unworkable political system is consuming all real and electronic ink known to mankind. A day doesn’t go bye where local newspapers are not bursting with news on Greece, Spain and their Euro-cousins. This sudden love-in with Europe has surely removed America from the global spotlight. But, be patient as this will change later during the year. To demonstrate the absurdity of this place called Europe, one has to understand nothing else except the legalities behind Europe’s rules for selling cabbage to each other.

Consequently, the real question is: “when does Germany and the rest of the EU stop picking up the tab for Greece?” Judging from the above survey in which even the French and Italians now think Greece should leave the EU if it doesn’t start paying its bills, it won’t be long: Greece will need another €16 billion in financing if the EU accepts its request for another extension (yes, this would be the third bailout).

I’ll be the first to admit the incredible aggravation I feel whenever liberty is trampled upon by the state’s obedient minions.  Everywhere you look, government has its gun cocked back and ready to fire at any deviation from its violently imposed rules of order.  A four year old can’t even open a lemonade stand without first bowing down and receiving a permit from bureaucrats obsessed with micromanaging private life.  The state’s stranglehold on freedom is as horrendous as it is disheartening. The worst part is that the trend shows no signs of slowing down, let alone reversing.  Politicians are always developing some harebrained scheme to mold society in such a way to circumvent the individual in favor of total dictation.  If it isn’t politicians, then it’s an army of unelected bureaucrats acting as mini-dictators.

Stocks just surged over 1% off their lows on absolutely no news whatsoever. The Merkel news was minutes ago (and how is that in any way positive) and the JPM news is old and irrelevant... This is simply ridiculous... they are on their own from a cross-asset perspective and just touched yesterday's closing VWAP which feels very algo-exit-driven...

The strawmen are coming thick and fast from the EU Summit as they break for an evening snack. Between banking union 'plans' by year-end and ESM credit seniority exemptions for Spain, the Finnish Minister for European Union Affairs, Alexander Stubb, just suggested that EU rescue funds (ESM/EFSF) could potentially partly guarantee Italy's and Spain's bonds if the two countries provide collateral. Such 'covered bonds' reduced his country's borrowing costs during an economic crisis in the 1990s, and now "could be a solution which would bring down the interest rates of Spain and Italy." As Bloomberg notes, the proposal was "a halfway house" between no help at all for weaker eurozone members and full debt mutualization, and a response to those "trying to say that governments such as Finland, Germany and the Netherlands keep on (only) saying no." Unfortunately, as we are all too well aware, despite this being a "constructive proposal from the Finnish government", there is no quality collateral (and certainly trusting earmarks on tax revenue is unlikely to spur demand) leaving the only government asset worth thinking about - Gold - which leads us back to Germany's uber-solution the whole time. "At the end of the day, EU Summits are always some kind of compromise" Stubb added, by which we assume the periphery compromises its sovereignty (and gold) and the Core compromises its taxpayers.

As it dawns upon the world that Ms. Merkel means exactly what she says and is not going to back down you may expect a quite negative reaction in the equity markets and a widening of spreads for some risk assets along with a strengthening of the Dollar. I am talking about the “Trend” here and not some trading strategy for today’s business. Germany is not going to flinch and cannot both due to local politics and to the now obvious fact that Germany has just about reached the limits of what she is financially able to do with a $3.2 trillion economy. To put it quite simply; they have run out of excess cash and more European contributions are only going to weaken the balance sheet of the nation and seriously imperil Germany’s financial condition. I say, one more time, Germany is not going to roll over and all of the pan European schemes brought forward by the bureaucrats and the poorer nations are not going to go anywhere. There is one novel possibility here and that is that the Germans, like the British, may opt out. Germany, Austria, the Netherlands, Finland et al may just say, “Fine, go ahead if you wish to have Eurobonds and the like but we will not guarantee them.” All plans do not need to have an either/or solution and this may well be Germany’s position in the end which would place the periphery nations and France in quite an interesting, if unenviable, place.

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