From Mark Grant, autho of Out of the Box
Oh How the Mighty are Falling
While the markets look at what took place at the last Summit and rally; just wait, it won’t last long. The markets are getting mislead, one more time, by the spin that Europe places on events; by the focus that the giant European propaganda machine spits out from various sources again and again and again. You may recall, in the not too distant past, how the firewall was the thing, how the money needed to be bigger and how we were all led to believe that this giant, massive wall of Euros would protect the core nations of Europe. These nations included Spain and Italy without question and now the first mighty oak has fallen as Spain stepped up to the plate and swung the begging bat.
Firewalls, of any size, do not do one thing to stop the infection of those that are heading economically south and Europe has placed its full concentration on the totally wrong aspect of the problem which has been to ward off the evil spirits of the bond vigilantes instead of on fixing the financial problems of the nations and so the problems continue and worsen. Over the weekend Spain said their second quarter results would be worse than the first quarter and Italy said there may come a moment when she needs help and the basis of what is driving the markets heightens as the economies of a mostly recession bound Europe are getting worse. What have we learned in short, in brief, in actuality is that the concept of some mighty firewall is a failed concept and Spain has just proved the truth of that.
We also learned over the weekend that various takes on the Summit were not all the same as Ms. Merkel’s version differed significantly from the Spanish tale. She said there was no increase in the amount of Germany’s financial guarantees in the Eurozone rescue funds, and no retreat on Germany’s refusal to contemplate jointly guaranteed Eurobonds as a way to help finance the most debt-strapped member nations she told her Parliament. In the first instance Spain will get its money from the EFSF which means that the loan will reside on the balance sheet of Spain. This will not change until there is a national bank regulator, if there ever is a national bank regulator, which would not be by the rosiest of projections until the end of this year. It may be not just the markets that are in for a surprise between then and now but also Spain if other core nations reject this plan based upon national sovereignty. It turned out that the seniority issue is just a one-time exemption for Spain and just in this one case so that any new money for Spain, and I expect another $300 billion or so will be needed for its banks and regional debts, will have the seniority clause applied to them.
As a matter of fact, Oliver Wyman, the German consulting firm, that just analyzed the Spanish banks reported out AFTER the euphoria that the Spanish banks will need another $347 billion over the next three years. Ms. Merkel also said the commitment to use Eurozone rescue funds to buy sovereign bonds for countries facing market pressure would still be subject to conditions. So it might not be the Men in Black but the Men in Dark Grey Suits who will be the overlords but the green eye shades of Berlin will be overlooking all of this just the same. The Spanish say “no conditionality” and the Germans say “absolutely conditionality” and who are you going to trust? Long experience teaches that the person handing out the money is much more accurate in presenting the terms and conditions than the man receiving it who is fixated on the alms handed out. A country such as Spain would have to apply for market intervention and sign a “Memorandum of Understanding” based on the European Commission’s recommendations before bond-buying would be approved in the primary market. “There will be conditionality,” Ms. Merkel said with conviction.
In fact the new instrument to lend money directly to banks has been approved by no one. It is NOT part of the ESM agreement which also has not yet been approved. Further, bond-buying in the primary market has been approved by no one and while there are schemes, plans and artifices aplenty; none of these newly discussed measures have been voted on or approved by any nation.
“But little Mouse, you are not alone,
In proving foresight may be vain:
The best laid schemes of mice and men
Go often awry,
And leave us nothing but grief and pain,
For promised joy!”
-Robert Burns
Recession
Recession is like gangrene; it spreads outward. All of Europe is now in recession except Germany and a few northern European nations. By the third quarter Germany will also be in a recession as the demand for goods and services in other European countries, German’s largest trading partners, slows significantly. China is slowing down; there were numbers released in the last few days that points this out. By the fourth quarter or the end of the first quarter next year America will also be in a recession in my opinion. Take a look at recent corporate earnings, down significantly and missed revenues and lesser profits and you begin to see the indications of things to come.
The world is inter-connected; all talk of disconnects are tales told far from the truth. Economies vibrate; in a little out a little but everything is tied now in the financial world from the shoelaces to the leashes at the neck. Greece still jousts with default, Spain and Portugal will need more money, Italy may join the Gang of Five to make it six and the focus on having done something, which wasn’t much of a something in reality, is the wrong place to focus. Stare at the European economies, grimace at the debt taken on to pay old debts, frown at the worsening plight of Germany and France who are assuming more liabilities with each passing day as there is plenty of risk in the Great Game now. “Risk On” is but a day-to-day contrivance in a world swimming in recession and confronted with national defaults and the requirements of ever larger amount of capital needed to stem the flow of blood from debts that cannot be paid in any other fashion other than further encumbrances. It is a Fool’s Game for lesser intellects and for those not looking where they should and those not detoured by the European flights of fantasy will clearly understand the significant risks on the playing field at this point in time.
“I like nonsense, it wakes up the brain cells.”
-Dr. Seuss
Idiocy
One of the most laughable parts of the European playbook was the Prime Minister of Spain’s comment that the bailout of his country was “a great victory for Europe.” I was reminded of the rather infamous comment made years before.
“The invasion of Crete is a great victory for Europe.”
-Joseph Goebbels
Neither, in the end, was the truth!