Markets too exuberant about German vote

Today's vote in Germany's parliament on strengthening the European stability fund will almost certainly succeed. Yet, the Bundestag is voting on too little too late. If this past weekend's IMF/Worldbank meetings are any guide where little was achieved but Gaithner managed to talk up the markets, a supportive Bundestag vote will lead to a short lived rally.

None of the underlying issues are being resolved or discussed. European and U.S. policies likely continue to be medium-term supportive for US government bonds (particularly on the long end), and supportive for ETFs / mutual funds short the Euro, oil, and emerging market currencies. Gold is likely to resume its upward trajectory.

The Euro Breakup now my base case

The past few months have left me disillusioned. European politicians fail to grasp the severity of the crisis at their hands, much less comprehend basic economics. German politicians have made it abundantly clear that they are against Eurobonds, the last best hope of saving the Euro. What’s under way right now is a full-scale market run on the much larger economies of Spain and Italy. 


My base case is a Eurozone breakup. I continue rotating out of long stock positions. Trade ideas I have implemented in the last few weeks (ETF ticker in parenthesis):


Key conviction ideas:

• Long the long end of the Treasury curve (TLO; LBND for a more aggressive posture)
• Short financial stocks (SEF)
• Short Euro currency (EUO for leveraged short)
  
  

Conviction ideas:

• Short oil (SCO) on slowing global economic growth
• Long gold (IAU)
• Minimal overweight in emerging market bonds (EMB)

Austerity - on the way to the purgatory

Germany's finance minister is leaving Krugman and me disillusioned. The German government continues to insist, in the teeth of the evidence, that that the crisis was brought about by excessive public borrowing.  This stance has become an article of faith . The "solution" - more austerity now - further weakens the Eurozone without getting at the underlying problem. It's the ECB and the German finance ministry that have pushed for the austerity-for-all agenda that is pushing the euro system to the edge as we speak.

Where are the German economists to rise to the occasion? Oh wait, some did speak out... sigh

Krugman: The Beatings must continue: "Oh, my — at first I missed this op-ed by Wolfgang Schaeuble. If you had any doubts about where key figures in Europe are going, this should clear them up:

Governments in and beyond the eurozone need not just to commit to fiscal consolidation and improved competitiveness – they need to start delivering on these now.
…
There is some concern that fiscal consolidation, a smaller public sector and more flexible labour markets could undermine demand in these countries in the short term. I am not convinced that this is a foregone conclusion, but even if it were, there is a trade-off between short-term pain and long-term gain. An increase in consumer and investor confidence and a shortening of unemployment lines will in the medium term cancel out any short-term dip in consumption.

So, austerity now now now — none of this waiting until recovery is well underway. And never mind concerns about deepening the slump – the confidence fairy will come to our rescue, and anyway, pain is good for the soul.

What’s so striking about all this, from an economist’s point of view, is the absence of anything that sounds like a model. It’s all about virtue and vice, with just the assumption that virtue will be rewarded.
And when the finance minister of Europe’s largest economy thinks and talks like this, at a time when the core euro economies are in a liquidity trap while the peripheral economies are desperately in need of strong external demand to make their austerity programs workable, it’s hard to see what hope there is for the euro project." Krugman