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The Fed and the ECB’s Hands Are Politically Tied... Bye Bye Market Props

Phoenix Capital Research's picture




 

 

The following is an excerpt from my latest client letter.

 

As many of you know, my primary forecast regarding Europe is that the EU will be broken up and/or collapse within the coming months.

 

The reasons for this are political, financial, and monetary in nature. In bullet form they are:

 

  1. France is about to elect a hard core Socialist. This will greatly alter political dynamics in the EU and will weaken Germany’s push for austerity.

 

  1. Spain’s stock market and banking system are on the verge of collapse. The markets are flashing major warning signs here both in terms of technical developments in the markets as well as Spanish sovereign bond market yields.

 

  1. The ECB’s interventions in the European banking system are now politically toxic (the markets punish those banks relying on the ECB for aid) as well as monetarily impotent (the positive effects of spending hundreds of billions of Euros are only lasting a month at most).

 

  1. The US Federal Reserve’s Operation Twist 2 Program ends in June. Currently there are not new monetary programs planned at the Fed and it is unlikely they will launch anything before the US Presidential election in November (unless forced to by a Crisis).

 

In simple terms, we have a confluence of negative factors hitting this month and the next. Now, nothing in the political or financial worlds is static and we could see any number of changes made to the above items (for instance, France’s soon to be President Francois Hollande might backtrack on some of his more aggressive socialist policies).

 

Having said that, while individual changes to the above items might temporarily delay the collapse I’ve forecast, said collapse is coming and will hit before the year-end.

 

The reason for this is that we have reached the End Game for Central Bank intervention: the time during which Central Bank interventions either result in negative consequences that far outweigh their positive benefits (inflation/ increases in the cost of living vs. a rise in “good” asset prices such as stocks) or have negligible impacts.

 

We’ve already assessed the first one of these items in numerous past issues of articles. The most obvious example of this was the Fed’s QE 2 program which spent $600 billion, resulted in at most three months of upturned economic data for the US, but also sent food prices to all time highs inciting revolutions and riots around the globe.

 

Indeed, as noted previously on these pages, as far back as May 2011, Fed Chairman Ben Bernanke explicitly stated that QE was less “attractive” as a monetary option:

 

Q. Since both housing and unemployment have not recovered sufficiently, why are you not instantly embarking on QE3? — Michael A. Kamperman, Waco, Tex.

 

Mr. Bernanke: “Going forward, we’ll have to continue to make judgments about whether additional steps are warranted, but as we do so, we have to keep in mind that we do have a dual mandate, that we do have to worry about both the rate of growth but also the inflation rate…

 

The trade-offs are getting — are getting less attractive at this point. Inflation has gotten higher. Inflation expectations are a bit higher. It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk. And in my view, if we’re going to have success in creating a long-run, sustainable recovery with lots of job growth, we’ve got to keep inflation under control. So we’ve got to look at both of those — both parts of the mandate as we — as we choose policy”

 

http://economix.blogs.nytimes.com/2011/04/28/how-bernanke-answered-your-questions/

 

This is critical as it indicates that the Fed, despite all of its verbal interventions and posturing, is aware that its monetary interventions are having negative consequences that outweigh their benefits.

 

The same is occurring in Europe where the relationship between Germany and the ECB is deteriorating as the former finds its push for austerity counteracted by the latter’s monetary profligacy. Indeed, Germany is now facing its most dreaded consequence of the ECB’s money printing: inflation.

 

            German unions turn up volume on pay rise demands

 

German labor leaders urged May Day demonstrators on Tuesday to fight for big pay rises after a decade of restraint that had seen wages in crisis-hit southern Euro zone nations soar.

 

The head of the powerful IG-Metall union, demanding a 6.5 percent rise, described an offer of 3 percent over 14 months as a farce...

 

"If we don't have a result (from talks) by Pentecost, then there will be a strike ballot and strike," said Berthold Huber, referring to the May 27/28 holiday…

 

IG Metall, with a membership of 3.6 million, (Graham’s note: about 4% of German population) held warning strikes at the weekend and is planning more for Wednesday in Germany's industrial heartland of North Rhine-Westphalia…

 

There are signs German policymakers are already starting to worry about inflation, although it continues anchored around two percent. Last week, Economy Minister Philipp Roesler said the European Central Bank should refocus on price stability.

 

http://www.reuters.com/article/2012/05/01/us-germany-mayday-idUSBRE8400VU20120501

 

Remember, the core driving force in European policy-making is politics. Angela Merkel faces re-election in 2013. If inflation is already becoming a political issue in Germany now (though data shows that inflation actually slowed in April) Merkel is going to be highly incentivized to get it under control by appearing even more pro-austerity/ anti-monetization (more on this later). And if things get truly ugly she could even publicly threaten to pull out the Euro.

 

On that note, I fully believe the EU in its current form is in its final chapters. Whether it’s through Spain imploding or Germany ultimately pulling out of the Euro, we’ve now reached the point of no return: the problems facing the EU (Spain and Italy) are too large to be bailed out. There simply aren’t any funds or entities large enough to handle these issues.

 

So if you’re not already taking steps to prepare for the coming collapse, you need to do so now. I recently published a report showing investors how to prepare for this. It’s called How to Play the Collapse of the European Banking System and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.

 

This report is 100% FREE. You can pick up a copy today at: http://www.gainspainscapital.com

 

Good Investing!

 

Graham Summers

 

PS. We also feature numerous other reports ALL devoted to helping you protect yourself, your portfolio, and your loved ones from the Second Round of the Great Crisis. Whether it’s a US Debt Default, runaway inflation, or even food shortages and bank holidays, our reports cover how to get through these situations safely and profitably.

 

 

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Fri, 05/04/2012 - 11:52 | 2397123 JuicyGrabs
JuicyGrabs's picture

Give the guy some slack. He`s one of the few having the balls to make actual predictions.

Rest are a bunch of wise owls hedging both sides when it comes to predictions.

Marc Faber: "Yes, there will be a crash but they can kick the can, maybe tomorrow but maybe not but I feel a crash coming etc". He was wrong also number of times on his crash calls.

Peter Shiff: "Dollar will be wiped dunno when, but soon and can`t give a date. I have a Euro-Pacific company investing in anything but US as US sucks. I buy gold, Europe, Asia." Schiff did lose a lot of money with his calls. He believed in decoupling which obviously didn`t work. Asia and Europe was actually hit the hardest in many sectors.

Jim Rogers: "I own dollars, I own yen, I own fucking everything. I have gold, I have silver. I love everything that moves. Dollar will weaken but I own dollars. Commodities are good, stock suck. I won`t make any predictions beause I`ve sucked on them in the past". He won`t risk a prediction either.

Btw, these are all people I appreciate but wouldn`t follow them blindly anywhere.

Fri, 05/04/2012 - 11:38 | 2397064 gangland
gangland's picture

ask Mélenchon if he thinks Hollande is a "hard core socialist". ignorant.

" [Hollande] was the Parti Socialiste (PS) leader for 11 years and during that time he managed to preserve the unity of this most fractious party.

He comes from the right-wing of the PS.

In his younger days, he was close to Jacques Delors and other “social Christians”.

This is hardly synonymous with left radicalism....

Hollande studied at HEC – a well-known business school in Paris, then ENA, the Grande Ecole which trains the country’s political elite.

He is not an old-fashioned intellectual in the Mitterrand mould, but a sharp technocrat.

Like most politicians today, he is ideologically adaptable and ambiguous.

He is not interested in political ideas and reads few books. Hollande is above all a pragmatist

When attending PS executive meetings, Hollande used to infuriate Jean-Luc Mélenchon, the radical left candidate, perhaps the true socialist.

Mélenchon complained that every time Hollande was put in an awkward position, he would stop debating seriously and start making light-hearted comments or even cracking jokes to diffuse the tension."

http://www.counterpunch.org/2012/05/01/francoise-hollande-frances-tony-b...

 

"...Sarkozy and Hollande have both supported the same European treaties, from Maastricht to Lisbon.

They have both endorsed the targets set for reducing the national deficit.

They are both against protectionism. They both think growth will cure all ills.

They support the same foreign and defence policies.

...you have to wonder what will happen if Hollande wins in May."

http://mondediplo.com/2012/04/01frenchelections

 

Fri, 05/04/2012 - 11:37 | 2397057 TheCanimal
TheCanimal's picture

I'm more convinced than ever that the market will get better or it will get worse unless it treads water here.  I just don't know the timing.

Fri, 05/04/2012 - 11:01 | 2396943 the grateful un...
the grateful unemployed's picture

jimmy rogers has been calling for the end of the Euro now for years. hes recently calling for riots in america and europe. maybe he has that special otherly view of american politics you get from outside the country. spain may elect a socialist, it doesn't mean he'll govern like one. america elected a progressive, on a platform of hope and change? never underestimate the power of the status quo, built on the basis of regional currency. let me make my predicition, there will be some tension, and maybe even some instances of dual currencies, but the path to a single global economy has been laid down, and it won't finish its course until workers in china and workers in the us are on parity. (talk about socialism, the EU is socialism on steroids). rather than the demise of the euro the return of the amero as competing currency, but again no reason currencies cannot coexist, as america really needs a hard dollar, or gold dollar if you will that floats against the phony banker dollars which the fed (and the private sector) creates. remember the private sector also creates currency demand. UST merely prints the dollars to fulfill the obligation. 

so as peak world population takes hold, dual currencies will be necessary to curb monetary growth. so we all know how much funny money is being made, and what its really worth. until we get to the world dollar. (that's their plan by the way not mine)

Fri, 05/04/2012 - 10:27 | 2396826 Jack Sheet
Jack Sheet's picture

Graham how much are you paying ZH to get this mediocre blurb publshed? Do us a favor and remove yourself permanently like the mad hedge fund trader.

Fri, 05/04/2012 - 09:05 | 2396410 JohnKing
JohnKing's picture

If the banks need more casino markers from the FED they should consider flooding the muppets with moolah.

Fri, 05/04/2012 - 06:18 | 2396073 Zero Govt
Zero Govt's picture

"France is about to elect a hard core Socialist."

You mean Marxist

This will greatly alter political dynamics in the EU and will weaken Germany’s push for austerity.

There is no "austerity" ...it is a complete media myth from germany to the Uk to the US. Austerity is 100% BS and even the Germans have opened the spiggots on the mass orgy of money printing at the ECB

"Remember, the core driving force in European policy-making is politics."

The core issue driving politics is economics (pleasing creditors/bankers) so that debt spending Govt may continue

Fri, 05/04/2012 - 03:39 | 2396002 RECISION
RECISION's picture

France is about to elect a hard core Socialist. This will greatly alter(change) political dynamics in the EU and will weaken Germany’s push for austerity.

How does electing a politician change anything? - regardless of whatever colour he paints his face and arse.

Would that also be - Change we can believe in...?

Fri, 05/04/2012 - 11:41 | 2397080 donsluck
donsluck's picture

You must be an American. We Americans have become bored with democracy, we want bread and circuses!

Fri, 05/04/2012 - 03:27 | 2395993 Hobbleknee
Hobbleknee's picture

"France is about to elect a hard core Socialist."

Isn't that kind of like saying Obama and Bush are different? I'm pretty sure TPTB have installed puppets everywhere in the West.

 


____________________________

Compare gold prices

Fri, 05/04/2012 - 04:42 | 2396044 autonomos
autonomos's picture

French socialism is full-blown NWO compliant (voted for treaty of Lisbon, voted for ESM)

Fri, 05/04/2012 - 02:46 | 2395973 Mr. Noatak
Mr. Noatak's picture

My opinions only:

The real shame is that the US gov has been obsessed with keeping stock prices up for decades, through an endless variety of machinations and tricks. The stock market is useful and necessary. But the gov should view it as an independent capitalist operation, that must rise and fall of its own accord. NOT ONE CENT OF TAXPAYER MONEY TO PROP IT UP! Only then, will we have true price discovery and find out who is right and who is broke.

And then when we return to the boring stock market of the 50's and 60's, it will once again be a fairly reliable long-term investment bet. We won't have to make a zillion trades a second to survive anymore.

Fri, 05/04/2012 - 01:35 | 2395914 El Oregonian
El Oregonian's picture

I think you meant Obama is from Neitherlands. (Concocted past?)

We're soon to find out...

Thu, 05/03/2012 - 23:29 | 2395809 bankruptcylawyer
bankruptcylawyer's picture

hahahhah good old gram summers the pheonix. man you must be paying tyler durden to let you write on here, or otherwise be part of his revenue stream. i accept this. every site needs a revenue source and i for one appreciate the lack of shitty ads on this site. even if you are cia or nsa backed. fuck it. still appreciate this site. thank you for your financial support and your crapp ass advertising dressed as news. much appreciated.

Fri, 05/04/2012 - 10:37 | 2396862 Jack Sheet
Jack Sheet's picture

Too right sport but there are plenty of shitty ads like the one showing Warren Fucking Buffett's crappy mug. Good luck trying to block those on an iPad

Fri, 05/04/2012 - 00:47 | 2395884 worbsid
worbsid's picture

I hope Obama doesn't go to the Netherlands. 

Thu, 05/03/2012 - 22:48 | 2395763 walküre
walküre's picture

Graham, I feel for you. Predicting the outcome will be difficult. I agree with you though that this year is the end of EU and end of Euro as we have shortly known it.

2011 seems like an eternity ago. Big speeches were made and big commitments were put on the table. By now in 2012, the economical data points are looking alot more grim across the globe. Big contributions to save a regional currency are less and less popular. Everyone is looking at their own backyard and they realize, the lifeboats have limited capacity.

I know the French. I know their socialist ideals and their love for a great national hoopla. Hollande is going all the way and will put the French back onto their Francs before Germany can reintroduce the Mark. France will leave the Euro as soon as possible because they need a cheap Franc to compete domestically and internationally. They need a cheap Franc and massive printing to support their expensive socialism. France has nuclear energy and big oil companies.

French and Spanish Socialists will work together on kicking Germany in the arse. Good 'ole compliant Germany is going to try and rescue the EU and the Euro and overextend themselves in the process rather than folding and calling it a day.

Fri, 05/04/2012 - 02:19 | 2395956 Non Passaran
Non Passaran's picture

Everyone's priority is to remain in power and the easiest way to do it is to cooperate with others. This is why I don't think the EU will have any issues in 2012.
They'll compromise and muddle through - there still is enough money to go around. If laws need to be changed (or circumvented or violated), they'll do that too.
I wish it wasn't like that and I hope for a total collapse of the EU, but I doubt it'll be that easy. I'd say it's less than 30% likely that any country will leave eurozone in 2012.

Fri, 05/04/2012 - 11:35 | 2397050 donsluck
donsluck's picture

Are you positioned to profit from this collapse you hope for? Toss us a bone!

Thu, 05/03/2012 - 22:40 | 2395750 Born-Again Bankster
Born-Again Bankster's picture

Rolling over those all of those puts will make you about even when TSHTF.

Thu, 05/03/2012 - 22:37 | 2395747 LongBalls
LongBalls's picture

Graham has cost me a lot of money via opportunity in stocks. Is a crash coming? I believe so. But for one who can spot the crash coming he sure did miss the bull run in stocks. I am now in a holding pattern when it comes to Mr. Summers.

Thu, 05/03/2012 - 22:35 | 2395745 HD
HD's picture

...but I want economic collapse now.

Markets have been ramped for six full months on fairy dust. Is a little 20% pullback really too much to ask?

Fri, 05/04/2012 - 11:32 | 2397042 donsluck
donsluck's picture

Why, so you can buy in? Got some extra cash laying around?

Thu, 05/03/2012 - 22:28 | 2395734 The Trade Group
The Trade Group's picture

End of year??? Sorry, but you said the crash would happen by the end of May - I'm not cutting you any more slack.

Fri, 05/04/2012 - 09:22 | 2396493 Treeplanter
Treeplanter's picture

He said, repeatedly, Europe crashes May-June.  Yogi Berra agrees.

Thu, 05/03/2012 - 21:36 | 2395648 max2205
max2205's picture

'within the coming months'. Way to crystal ball it. Zzzzzz

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