Guest Macro Commentary: Is Germany Playing Chicken With Ben Bernanke?

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From Brian Rogers of Fator Securities

Macro Commentary: Is Germany Playing Chicken With Ben Bernanke?

"The few who understand the system, will either be so interested from its profits or so dependent on its favors, that there will be no opposition from that class." — Rothschild Brothers of London, 1863.

US markets are down at the open but there is a bit of optimism working its way through traders on a release out of Europe from EU Economic and Monetary Affairs Commissioner Olli Rehn that the European Commission may present draft legislation on euro bonds once they have completed a feasibility study on common debt sales.  Germany’s Merkel has continued to say that this solution is not something that  Germany supports.  And why would they?  To “save the system” might be the answer that some would give.  But this would mean that Germany would have to be willing to accept higher interest rates as it ties itself to the PIIGS and further put them on the hook fiscally should any of the PIIGS be unable to make their timely pro-rata share of the interest payment.  Given the political losses Merkel and her party has already suffered regionally, this solution to me seems like a non-starter.  Besides, if I was Germany I would simply play chicken with Ben Bernanke and wait for the Fed to eventually turn on the QE pumps to bail out the PIIGS.  Won’t happen you say?  I think it’s more likely than most think.  China has already stepped up to the plate for their own self-serving reasons and the Fed will likely reach the same conclusion eventually.  Probably will take another 15-20% in losses on the S&P but does anyone really think the Fed will simply stand by and watch as Europe implodes and takes our banking system down with it?  Especially when we can print to infinity and drop said printing from a helicopter.

Speaking of printing, how about the action in gold lately.  Let’s be clear, technically speaking gold is very over-bought here and if things temporarily calm down, it’s easy to imagine a decent pullback.  However, with all the concerns about European banks, double-dipping recessions and gold repatriating South American dictators, the technicals are meaningless.  Have we started the parabolic phase of the gold move a la December 1979?  We shall see soon.  The confusing news out of the Swiss National Bank has even believers in the CHF looking for a better flight-to-quality.

So how bad will this current round of hand-wringing be?  The problems in Europe have an endgame of essentially 2 things: monetary printing or default/restructuring.  Printing is not an option as the Bundesbank, I mean ECB, given their disastrous history with (hyper)inflation, will be loathe to go the helicopter money drop route.  Any defaults/haircuts will likely topple the big banks in Europe as their leverage levels are simply unsustainable.  US seems destined to double-dip which will pressure our own banks and real estate and muni spreads, etc, etc, etc…  And some people think QE3 will never happen, PUH-LEASE!  

Note to the future participants of Bretton Woods III – fiat currencies can only be floated with extremely tight and transparent banking laws, nothing like what we have today and this includes central banks.  And if you decide to go down the gold standard path, same thing applies, transparency and low leverage are keys to long-term stability.  Banks should operate like utilities with tremendous amounts of transparency, low levels of leverage and huge limitations on market size; read: granularity.  How we are stumbling around today with the same banks that almost crashed in 2008 with even greater market shares and low-visibility accounting is beyond my understanding.  Read the quote above to understand why the status quo is so eager to defeat anything that would reign in these black holes.  It was as true then as it is today.  -Brian

* Fator Securities LLC, Member FINRA/SIPC, is a U.S. entity and a member of the Fator group of companies in Brazil. The comments below are from Brian Rogers, who is employed by Fator Securities (Brian’s opinions are his own and do not constitute the opinions of Fator Securities or the Fator group of companies).

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