Tuesday November 30, 2010 - 16:14:07 GMT
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Black Swan Capital - www.blackswantrading.com
The tail risk of two eurozones that wags the dog ...
We have been saying for years now that Germany is sucking the
wind out of Europe. But, then again that should be a
surprise to exactly no one who ever bothered to consider the initial
structure of the so-called common monetary union. It
wasnâ€™t so common and it sure wasnâ€™t structured for a lasting union.
Germany is absorbing most of the growth opportunitiesâ€”they
always have since this so-called union was formed. It was
to be this way. Otherwise why would anyone actually think
the powers that be inside the German industrial machine would ever give
up their Deutsche mark?
But it is only recently the tale of two eurozones and the tail
risk it has created has found its way onto the radar screens of high-IQ
bank analysts far and wide. â€śOh gee, the spreads are
blowing out. How can it be?â€ť The wine-sipping and
croissant-eating big government socialists in Brussels have labored so
diligently to foist this perfect union onto the people so their lives
could be controlled improved.
Remember people: the EU is a kind and gentle place where a no
vote only means you will vote again until you get it â€śright.â€ť In
fact, once you do get it â€śrightâ€ť we will then decide when you shall be
voting again. After all, that sovereignty thing can be so
messy when one is doing Godâ€™s socialistsâ€™ work in building a more
perfect union. Dare we say itâ€”a workerâ€™s paradise.
[If you havenâ€™t seen this video of the proverbial
terd-in-the-punchbowl of the socialist love-fest called the EU, you will
enjoy thisâ€¦ Nigel
Farage harangues EUâ€¦ ]
Workerâ€™s paradise indeed, if you live in Germanyâ€¦
Letâ€™s see. Which one of these countries is doing
its own thing ... which one of these countries is only kind of the same?
Did you say Germany, boys and girls? If so, you
Is it Germanyâ€™s fault that their labor efficiency has improved
while those of its eurozone competitors have deteriorated? Is
it Germanyâ€™s fault that all that virtual â€śfreeâ€ť credit created by years
of below market interest rates for â€śmemberâ€ť countries that never should
have been able to borrow at German interest rates was used to buy
German goods and boost property markets instead of increasing
efficiencies of local labor markets?
No. None of this was Germanyâ€™s fault. But
if I were a betting man, I would bet the Germans knew precisely what
would happen when southern Europe was presented with massive amounts of
credit. It would create that captive market and allow
Germany to expand its economic dominance over the zone in many ways.
But so what? Arenâ€™t countries supposed to exert
their own interests? Of course they are.
And when you look at German performance, at a time when the
rest of the eurozone is sucking wind, you have to wonder about what we
have been harping on for at least a year now: Germanyâ€™s incentives for
remaining in this union are fading fast.
Just â€śgood economicsâ€ť was it when Germany announced itâ€™s about
time bond-holders take a haircut, instead of all the taxpayers, in the
midst of the crisis? Or is there more Machiavelli there
than meets the eye?
The Cold War was the last clear-cut confrontation, pitting
Russia against a Western Europe backed â€” and to a great extent dominated
â€” by the United States. This belt of countries was firmly if informally
within the Soviet empire. Now they are sovereign again. My interest in
the region is to understand more clearly how the next iteration of
regional geopolitics will play out. Russia is far more powerful than it
was 10 years ago. The European Union is undergoing internal stress and
Germany is recalculating its position. The United States is playing an
uncertain and complex game. I want to understand how the semicircle of
powers, from Turkey to Poland, are thinking about and positioning
themselves for the next iteration of the regional game.
â€¦In many ways, Germany is the mystery. The 2008 and Greek
crises shocked the Germans. They had seen the European Union as the
solution to European nationalism and an instrument of prosperity. When
the crisis struck, the Germans found that nationalism had reared its
head in Germany as much as it had in other countries. The Germans didnâ€™t
want to bail out the Greeks, and the entire question of the price and
value of the European Union became a central issue in Germany. Germany
has not thought of itself as a freestanding power since 1945. It is
beginning to think that way again, and that could change everything,
depending on where it goes.
One of the things it could change is German-Russian relations.
At various times since 1871 and German re-unification, the Germans and
Russians have been allies as well as mortal enemies. Right now, there is
logic in closer German-Russian ties. Economically they complement and
need each other. Russia exports raw materials; Germany exports
technology. Neither cares to be pressured by the United States. Together
they might be able to resist that pressure. There is a quiet romance
under way between them.
George Friedman, Stratfor.com, â€śBorderlandsâ€ť
Itâ€™s a cold power calculationâ€”something Germany is quite good
at. Does Germany enhance its global influence by being
tied to the eurozone countries ... or by leaving and moving on to more
dangerous, but powerful, alliances? Leaving the eurozone
doesnâ€™t mean Germany has to say itâ€™s sorry. It means its
taxpayers will be happy and they will still be the dominant export to
the European continent.
Spain-German 10-yr bond spreads: Wholly
rocket-launch Batman!! Zoom!!
I remember a very smart man. An economist, in
fact, he was. But he seemed very different than most
economists in that he could actually communicate very complicated ideas
in language even the serfs could understand. This is
likely why socialist governments near and far found him a bit dangerous.
He once uttered this famous phrase: â€śThere is
no such thing as a free lunch.â€ť Of
course I am speaking of the late Great Milton Friedman. We
miss him so!
Can there be any more drastic attempt at a free lunch than
suppressing the market interest rate for 10-years in order to build a
more â€śperfect unionâ€ť? *
Spain 10-year bond yield (black) versus Germany 10-yr bond
yield (red): Notice how the market priced
in the risk, i.e. Spanish above German spreads, before the common
currency was launched? Do you think these risks just
magically disappeared? Of course not! But
all the free credit (free lunch) has disappeared and now Mr. Market is
simply pricing the proper risks back into the equation.
[*When it comes to suppression of market interest rates, the US
Fed is guilty as charged. But the best example today of
total disregard for the market rate and pricing system is China. They
take the prize. And if you donâ€™t think all those years of
capital misallocation in China will not end badly, I have an Irish
bridge or two to sell you. That is a story for another
day, but a day that we think comes sooner rather than later.]
So boys and girls, I have another question: how
will the other countries ever pay back rising debt levels while the cost
of that debt rises while Germany sucks up most wealth creation across
the zone? Short answer: They wonâ€™t!
Thus, despite all the continued band aids and patches and brave
speeches by EU â€śleadersâ€ť and local politicos about their
strict adherence to new austerity plans, blah, blah, blah ... this game
is about over!
Itâ€™s like a US country song (yes, philistines like me enjoy
country music). But in this case, instead of a redneck
like me getting my dog, truck and gun rack back, the European people are
going to get their D-marks, lira, francs, guilders, pesetas, escudos,
and punts back. And maybe along with that, they will get
their sovereignty back. In the end, itâ€™s all good. That
dog will hunt!
Black Swan Capital LLC
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