Sometimes "No" Means Exactly That

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.

European Stocks Soar (And So Do Peripheral Bond Yields!)

It's another one of those hope-fueled days in Europe as European stock indices across evey nation close comfortably in the green as the EU Summit begins. Germany has taken all the substantive things off the table and Cyprus and Portugal threw in the towel but nevertheless, stocks are 1-2.5% higher (with Italy and Spain outperforming). We assume this is reflexive pricing of 'the crisis is now so scary that the ECB will have to do something' but it seems the FX and Sovereign bond market missed that pre-emptive hope-driven view as Portugal yields/spreads spiked, Spain pushed back up to 6.93% and saw further flattening in its yield curve (as short-dated LTRO-enthused bonds underperform dramatically) as 2s10s is almost back to six-month pre-LTRO levels. Italian spreads pulled off their worst levels to close mixed but remains over 40bps wider on the week. EURUSD closed down over 35 pips at 1.2450 and stocks were in a world of their own also relative to credit markets today.

The Summer Of Their Discontent

This Summit is likely to be the one where the masks come off the revelers at the Ball and where the faces behind the masks are unveiled for all to see. We predict this weekend will be full of many “Oh My God” moments which will go unreported in the Press but where it dawns, with a wicked thump, that the wealthy nations of Europe are unwilling to pay for the poorer ones and that all of the make nice comments of the last thirteen years were no more than polite conversation in the European parlors. This Summit will not be the end but it may well mark Churchill’s famous postulation that it is the beginning of the end. The cries of anguish are about to be met with refusal and the realization that “No” is actually “No” will produce, I fear, the exact same reaction of a six year old unruly child who throws himself on the floor in utter frustration when he does not get what he wants. It is still now, it is quiet; but it will not be soon!

Rosenberg Opens Pandora's 'Global Economic Shock' Box

In a detailed discussion with Bloomberg TV's Tom Keene, Gluskin Sheff's David Rosenberg addresses everything from Europe's "inability to grow its way out of the problem" amid its 'existential moment', Asian 'trade shock' and commodity contagion, and US housing, saving, and fiscal uncertainty. He believes we are far from a bottom in housing, despite all the rapacious calls for it from everyone, as the over-supply overhang remains far too high. "The last six quarters of US GDP growth are running below two percent" he notes that given the past sixty years of experience this is stall speed, and inevitably you slip into recession". He is back to his new normal of 'frugality' and bearishness on the possibilities of any solution for Europe but, most disconcertingly he advises Keene that "when you model fiscal uncertainty into any sort of economic scenario in the U.S., what it means is that businesses raise their liquidity ratios and households build up their savings rates. This comes out of spending growth. And that's the problem - you've got the fiscal uncertainty coupled with a US export 'trade shock'."

Reservations Please: Merkel, Party Of "Nein"

There are those that wait and hope and pray that there will be Divine Intervention. They cling to the belief that Germany, in the end, will back down and retreat and agree to bail everyone out. Germany’s GDP is only $3.2 trillion and this expectation, believed in by more than a few, is not only ridiculous in my opinion but a mathematical impossibility. If you consider the current EFSF program and that $300 billion has already been used for Greece, Ireland and Portugal and that this new assistance program for Spain will take it up to $425 billion you begin to get some sense of the enormity of the problem. The U.S. equivalent then for the total EFSF would be $4.318 trillion or 30.4% of America’s total GDP which would swamp our nation.  This is why when I listen to Frau Merkel say “Nein;” I believe her! It is the twentieth Summit. I predict it will be the twentieth time that almost nothing is accomplished. The beggars want to be the choosers and Germany and the richer nations will hardly allow for that.

The Two Scariest Charts In Europe (Got Scarier)

It seems, as JPMorgan's CIO Michael Cembalest notes, that ahead of yet another EU Summit; everyone understands now why Europe matters (even the once-bloviating decoupling diehards). The summit is likely to focus on bank recapitalization, easier repayment timetables for Greece, bank deposit guarantees and an alleged “roadmap” for EU integration. The challenge, Cembalest confirms, is that Germany cannot afford a blank check given debt levels already over 80% of GDP. However, if policymakers don’t do something about growth in the Periphery (bailouts primarily designed to aid German and French banks don’t count), the North-South divide will continue to widen, putting pressure on the ECB and EU taxpayers. Sometimes there are no easy answers. Italy, Spain, Greece and Portugal are contracting at a 2%-5% annualized pace, and unemployment in Spain and Greece is sky-rocketing (1st chart). These levels are notable from an historical perspective. As shown in the 2nd chart, 20%+ unemployment was the level at which National Socialists in Germany began to take seats away from liberal democratic parties during the 1930’s. If the jobs picture does not improve, other EU policy decisions may not matter much (as we noted six months ago)!

Schäuble On German Endgame Plans: Can't Let A European Crisis Go To Waste

That the most important man in Europe is actually a woman is now understood by everyone. Yet behind even Merkel, sits another man: German finance minister Wolfgang Schäuble, who is truly the devious mastermind behind the European endspiel, in charge of playing it in a way that benefits Germany uber alles. Which is why what Schäuble says, unlike anything uttered by Europe's "beggar" states, is actually important. Today, he speaks with Spiegel magazine and discusses, among many other things, the topic that is the most sensitive for the rest of Europe, and which must be overcome if a united Europe is to work: the abdication of national sovereignty, and implicitly the accession of Germany to the head of the European pyramid. That this will never happen is precisely why the European experiment is ultimately doomed, but of course they can keep trying, and in the process transfer as much wealth as possible to the only beneficiary from an imploding EUR. Wild guess who that is... Because at the end of the day, it appears that Schäuble is just as wily as America's own Rahm Emanuel: "SPIEGEL: With all due respect to your vision, is there truly more willingness today among EU member states to give up sovereignty than there was in the 1990s? Schäuble: The recognition that this is necessary, and the willingness to do so, has certainly grown due to the crisis, and not just in Germany. I would much prefer that we not have so many crises, and particularly not such severe ones. But every crisis also includes the opportunity to recognize what is necessary [regarding European sovereignty]. That's what led to the fiscal pact, in which 25 EU countries pledged to improve their fiscal discipline. And that's also how the new Europe will come about." Is it finally becoming clear to even the most inept financial journalists what the German endgame is?

The ECB Is Delighted That Three Of Its Sponsored Teams Have Made It To The Euro2012 Semi-Finals

They may not be doing much of anything else lately (except for now proudly accepting Spiderman towels are collateral of course), but the European Central Bank sure is a fan of football, and the fact that three of the four teams in the Semi-finals come from countries officially funded by the ECB. We do have the feeling that letting Germany slip into the congratulatory tweet below was a mistake that will cost someone their taxpayer funded job.

Europe 1-2-3

There are two significant events that will be decided in the forthcoming days. Each will change the face of the European Union. The first is Greece; a little country with a total debt of $1.3 trillion and likely to default. The calculations in Athens are how to get more money out of Germany and the calculations in Berlin is whether a default is less costly, both politically and economically, than giving Greece more money. Debt forgiveness has never even been mentioned so I think we can rule out this possibility as it would have been floated by the German public for review and reaction. The Troika shows up Monday in Athens, they will find all targets missed, all promises unkempt and all hopes for salvation dashed upon the Greek floor along with the plates. The Greeks will beg and plead and threaten and the Germans will decide. In the end I think Greece will be allowed to stay in the EU to preserve the dream, that they will default, that they will return to the Drachma and that they will receive some kind of debtor in possession financing so that the country does not collapse. That is my best guess. Cheaper tourism and cheaper ships will help with their competiveness but it will be years before Greece is allowed back into the Eurozone as a voting member. The second item on the docket is Spain. They need a total of around $350-400 billion dollars to straighten out their banking system and their regional debt. Money lent to the banks in some fashion, not currently allowable under the various policies but you never know, or money lent to the sovereign to be lent to the banks will be just the first tranche of funding. It will be followed by more money lent to the regions of Spain which may take another novel approach but no matter. Spain is about to be run out of Germany no matter how all of the trivialities play out and so the impositions of the Men in Black are about to be put in place. So long to the importance of Madrid and thanks for all of the entertainment. You have been caught and are about to be hung out to dry and enjoy the ice wine that Germany will provide for your congratulatory dinner. Rajoy was right, a “Great Victory for Europe;” serving ice wine in Madrid.

Eric Sprott Presents The Ministry of [Un]Truth

We have no doubt that everyone is tired of bad news, but we are compelled to review the facts: Europe is currently experiencing severe bank runs, budgets in virtually every western country on the planet are out of control, the banking system is running excessive leverage and risk, the costs of servicing the ever-increasing amounts of government debt are rising rapidly, and the economies of Europe, Asia and the United States are slowing down or are in full contraction. There's no sugar coating it and we have to stop listening to politicians and central planners who continue to downplay, obfuscate and flat out lie about the current economic reality. Stop listening to them.

Waiting For Godot

In the next days Greece will present her magic tricks at court and while the Dukes and Barons cheer in the wings it will be up to the Red Queen, this would be the bearer of the Holstein emblem, to decide if the tricks performed are worth the cost. There is a very good chance of the hand wave of dismissal here and then the theatrical event of the season, “Off with their Heads,” will begin. Then the savant of Madrid will be allowed in to show his wares claiming they are all of silk but coarse wool is closer to the truth. The money, if it comes, will be provided by the EFSF by the way because the ESM is not yet in existence. Then the plan is to transfer the loan to the ESM which will be senior to the holders of the Spanish sovereign debt. So this morning you must rush out and by the debt of Spain. You love to be subjugated; you delight in the masochism of the whip. Losing money is what you live for and why you breathe. Oh no; this is not you? Well then; maybe better not.

Austerians Versus Keynesians

The battle between the 'Austerians' and the 'Keynesians' remains front-and-center in Europe (and elsewhere for that matter). As Sean Corrigan noted recently Frau Merkel is sticking to the only strategy that she can - of insisting that future aid is tied to the construction of budgetary oversight, reduced national sovereignty, and the implementation of labor market reforms - paying lip-service to her nation's unwillingness to pay for what they view as their counterparts' indolence or improvidence. How long this can last is an open guess. Stratfor's Kristen Cooper provides a succinct clip of the state of European Austerity (seeing little progress in reality and in fact a pull-back by Italy and France at the realization that their electorate won't be happy!!). Perhaps, as Corrigan notes, the real lesson is to be had from the Baltics, where 'drastic devaluation' has accompanied genuine 'austerity' - and as a result of this bitter medicine, they are now growing private GDP. As Corrigan sums up, [Austerity as it is being implemented in Europe] is aimed not so much at reinvigorating individual endeavour as at minimizing the reduction in the reach and importance of the state (satisfying neither the Keynesians nor the Austrians) and that is what is self-defeating about such measures.