The non-believers kept tweeting their ‘fade the rally‘ call. They went silent in the afternoon as the stock indices closed on their highs of the day. Art Cashin reminded them that the rally in October 2011 lasted for a couple of weeks. Scott Redler of T3Live tweeted in the morning:
- “After holding 1306-1309, S&P inverse head & shoulders pattern still intact. Measured move to 1390-1400.”
But that is just another day like Friday.
The real story of this week’s Euro Summit is that the Europeans beat the market expectations for the first time. Now if ECB’s Signor Draghi does so next week, if he comes through with a larger than expected rate cut, then we could see more fireworks.
2. Commodities & Currencies – An Incendiary Summer Surge?
The really notable action on Friday was in the commodities complex. If the stock rally was a bonfire of the shorts, the Oil rally was an inferno for those who were short Oil. USO was 8.10% and BNO, the Brent ETF, was up 6.17%. Copper was over 6%, Silver was up 4% and Gold up 3%.
Kudos to Dennis Gartman & Mark Newton (of Greywolf) who called for (at least) a short term bottom in Oil last week.
Markets and Currencies had big moves proportional to their beta. EM rallied hard and so did most currencies. The Euro, primed to fall with another disappointing summit, rallied almost 2%. The “market was caught with its pants down” was the vivid description of Andy Busch, the BMO strategist and the CNBC Money in Motion trader. He issued a call to buy the Euro because he thinks the currency market is still caught short.
If Andy Busch was a bull (he thinks the 1.24-1.28 range will hold), then Richard Ross of Auerback Grayson sounded like a stampeding herd:
- “We love the Euro here, we think today’s bold action is just the beginning of an incendiary summer surge. We are not waiting for a pullback, we are buying right here… It also starts with a double bottom,…, it tells us the bulls are starting take control for the first time in 2012…We do think we break out above 1.27, that breakout should clear the way to resistance at about 1.30…previous support is now resistance…we are looking at 1.30 in a very short term..”
He not only likes the Euro, he likes the Kiwi and all EM currencies & Commodities
- “If you like the Euro, you love the Kiwi here and we do. This is one of the quintessential macro proxies, as such this strength has bullish implications for a myriad of assets including commodities, EM currencies..”
His final trade:
- “You want to be a buyer of commodity driven currencies, currencies in those Emerging Markets. Nothing has been hit as hard as those emerging markets along with the decline in commodities. We love the Canadian Dollar for one, it is a high beta play on the US, a high beta play on Crude Oil & Metals. We like all of the above.”
That is what a stampeding herd sounds like, right? Mr. Ross is himself a high beta technician. For his previous comments, simply do an advanced search for ‘Richard Ross’ under Title & Content for the ALL timeframe.
Tom McClellan is a more sedate technician, though his calls are bold. Recall that he called for a powerful rally into the election on June 7 (see clip 1 in our June 4 – June 8 Videoclips article). His interest rate models call for a lower dollar. He explains his views in his Chart in Focus on June 29.
If he is right about the lower Dollar, then the case for Commodities & EM becomes stronger.
3. “Decoupling vs. Lag” – The Global Economy & US Treasuries
On February 24, 2012, David Rosenberg said to BTV’s Tom Keene – “Everybody confused Decoupling with Lag.” That was a time when the US Economy was viewed as decoupling from Europe and China. The “lag” case is now asserting itself with
a vengeance. On Thursday, Ford warned that its international loss will triple in Q2 due to weakness in Europe. Citi downgraded the industrial sector on weakness in Europe.
Something is wrong in the Middle Kingdom. Just look at Nike’s report which shocked investors. As HedgeEye’s Keith McCullough tweeted on Friday:
- “Bulldozer sales in China are down -30% y/y and NKE China sales just went from +25% to 2%.”
We assume the double negative “down -30%” was for emphasis and not for accuracy of arithmetical syntax. This week reminded us of the comment of Jim Chanos way back in that wonderful bullish environment of April 2012:
- “But the reality is in all things we are looking at, the property sales, cement prices, steel crisis, power consumption – it appears its [China] slowing faster.”
The differing viewpoints of Jim Chanos and Mark Mobius about China (expressed during the week of April 9 – April 14, 2012) make interesting reading today.
The best antidote to an attack of bullishness is reading the comments of Nouriel Roubini. We provide this antidote in clip 2 below:
- “The recession will become a depression…It’s getting worse, there’s already a sovereign debt crisis, a banking crisis, a balance of payment crisis, an economic crisis and all of those things together are getting worse.”
- “The problem is that every part of the world is kicking down the road to 2013. At this time we’re reaching a point in which by next year, you could be in a scenario in which we hit a brick wall, and then euro zone breaks up, in the U.S. you have a fiscal cliff, in China the landing could be hard and in the Middle East you could have a war. That is a perfect storm.”
But how does one square this with bullish market action? For that we turn to John Burbank of Passport Capital who is up 20% ytd, according to Adam Johnson of BTV (see clip 1 below).
- “We are in a secularly deflating world where interest rates are expected to stay lower and longer than anyone expects. Bernanke cannot raise rates, will not raise rates and growth will continue to disappoint.”
- “So the battle in the equity market is between lower prices because of lower growth & lower earnings and government attempts to intervene which provoke short covering rallies like today.”
Government attempts to intervene can lead to rallies that last awhile as we found out from October 2011 to April 2012. But the span of such rallies is getting shorter.
John Rutledge, a veteran China hand, told CNBC Fast Money Halftime that he had sold his China-related equities in April and he is not going back in right now despite the decline. He made an important point about other emerging markets in Asia:
- “European banks are withdrawing loans to EM,…the reason that is important for Emerging Asia is because the former colonial countries in Asia actually have very very large loans from European banks…countries like Malaysia are greatly at risk in terms of banks withdrawing capital……Vietnam has also a lot of loans from European banks.”
CNBC’s Gary Kaminsky came back from a trip to Europe with a decidedly bearish mindset about Europe. He translated this into a prediction for the 10-Year Treasury yield:
- This is a very very serious slowdown..a dramatic slowdown across the continent..
- first – the euro is not going to survive…there will not be a euro 5 years from today, as it exists what we see now, the euro currency as a stand-alone single currency is not going to survive..
- this idea that Germany supporting euro-bonds not going to happen – you will not see a euro bond,,
- 3rd conclusion — you see will the US 10-year at 1% by the end of the year…and possibly below it.. because the
excess cash reserves the European financial institutions continue to generate are going into one thing and one thing only – the US 10 year Treasury…they don’t care what the yield is, they want to put the money there and they want it to be safe and liquid when they want it….
We were surprised at the rather tepid sell off in Treasuries on Friday. The 30-Year Treasury Bond should have cratered by 2-3% in the face of Friday’s explosive high beta, risk-on rally. May be, it is looking forward to next week’s data, especially next Friday’s Non-Farm Payroll report .
We confess we are rooting for a decent sell-off in Treasuries, say to 1.90%-2% in the 10-Year and to 3%+ in the 30-year. That might happen just as the equity rally begins to be considered as a real rally than a mere short-covering. That sell-off would then provide another opportunity for deflationistas to load up.
We heard on CNBC that the strongest sectors in the US Economy are Auto Sales and Housing. Ford and GM sort of took care of the first. For the second, we present below the views of two people who have been far more right than wrong.
Robert Shiller appeared on Fox Business News on Tuesday, June 26 to discuss this week’s Case-Shiller report:
“…it is good news, about half of it is seasonal…good news for sellers.. home prices will continue to go up for at least the summer months….don’t really know how to predict it beyond that.”
“Carl Case and I have been doing surveys of home buyers in the US..and our finding has been consistently that every year goes by in this crisis – people’s long term expectations go down..
long term expectations for what home prices will do over the next 10 years ..are what home buyers care about the most…and that has not been improving…”
“I think affordability is good right now…but what will home prices do — that is a big unknown I think…there is no one who knows how to forecast that..I think this sounds evasive but it’s not….they could go up, they could go down…we have been declining for 6 years now…it is not obvious to me that is over…”
(in answer to – Is the worst over?) – “I am concerned, it may be over…our expectations are not getting more optimistic…we can’t predict where it is going to go with any reliability, it can go either way…”
“…the one impediment could be the labor market…the jobs and the housing market are really joined at the hip…housing creates jobs; it is a multiplier effect at the same time…employment also drives housing demand because employment drives income, income drives housing….we start getting jobless claims over 400K, …we continue to see erosion on terms of labor market activity, it is going to hold back this nascent recovery in housing market…”
“we carved out a bottom, I would say the housing market is healing, it hasn’t healed ..these are sill anemic levels … we are still at levels that are below the levels prevailing in all the other recessions..to talk about a recovery is a bit of a joke when you look at the long term charts…the biggest impediment over the next few months is what is going to happen in the job market side….”
“….housing is going to be an overhang for consumer spending ..it is the biggest… I think we are gonna see a wave of foreclosures hitting the system…that the inventories are going to be coming into the market pretty aggressively…housing indicators might stall out in these next several quarters”
We received very positive feedback from readers about our section on Sikkim and the photographs. So we though it might be interesting to post a couple of very short videos about Tsomgo Lake and the road that takes you there.
The first is a short video of the peak in the photographs below:
Now compare the video below that was shot from across the lake while riding a Yak. The Yak allowed us to shoot for 40 seconds and then abruptly turned because it had reached the end of the trail. The Yak is a 1,200 lb animal that one can ride slowly or race. As first time riders on a narrow, snowy trail that bordered a cold Himalayan lake, we let the Yak go where and how it wanted.
(41 second clip)
Now a shorter video of the road that takes you to Tsomgo Lake.
( 33 second clip – watch the road and shudder)
6. 21st Century Equivalent of 19th century British Coaling Posts
The last comment in the above video is about the state of the infrastructure in India. Our escort told us that across the border in Chinese-occupied Tibet, China has built a four lane highway to the Nathula Pass.
For a different but extremely vital infrastructure China is building, watch the 7 minute Stratfor video by Robert Kaplan, the author of “Monsoon”. This video really tells the story of China’s foresight and its global ambition.
For key quotes from Mr. Kaplan and our view about China-India, read the adjacent article 21st Century Equivalent of 19th Century British….
- John Burbank on BTV Market Makers on Friday, June 29
- Nouriel Roubini & Ian Bremmer on Bloomberg Surveillance on Wednesday, June 27
- Marc Lasry on BTV Market Makers on Wednesday, June 27
- George Soros on BTV on Monday, June 25
- We are in a secularly deflating world where interest rates are expected to stay lower and longer than anyone expects. Bernanke cannot raise rates, will not raise rates and growth will continue to disappoint.
- We have been predicting a bear market here – lower prices and lower earnings for the last 6 months. Only 2 months ago, investors were oblivious to the fact that earnings were falling. I think the earnings reports that come out for Q2 are likely to be bad as will be the guidance going forward. So the battle in the equity market is between lower prices because of lower growth and lower earnings and government attempts to intervene which provoke short covering rallies like today.
- earnings misses are going to be habitual. A market well above its 200-day moving average is not discounting this. In a recessionary period, equities fall in the 30-40% range. I have been expecting a drop like we had last summer and I would say we are in like the period of June-July last year, ahead of the reckoning of lower growth and earnings.
- (in response to what to buy-sell) – look for two things in stocks,
- either large, liquid, dividend paying stocks such that the stock offers a superior investment for the long term or
- secular growth that can withstand this deflating world, such companies are very few.
- I believe large, liquid, leading companies in the US will be the best stocks to own going forward but I think there is going to be downside action in most equities.
- On the short side, you want to be short global growth dependent companies, like commodities. Also want to short smaller cap companies, illiquid co
- Most of all, you want to be long superior corporate governance where they care about shareholders, where they are paying you dividends or buying back stock. You want to short companies that do the opposite & there are many companies that do the opposite.
The guests need no introduction and neither does Tom Keene, the most of Bloomberg Surveillance.
Roubini on the European Redemption Fund proposal:
- “It is a limited proposal for e-bonds that will only be temporary for 20 years with all sorts of caveats. The Germans and Merkel have said no. Why? They worry about three things. one is about moral hazard. They say if we could agree on these things there will not be enough effort by Italy and Spain. Secondly is a time consistency problem. If you agree on that stuff and then they don’t deliver, then Germany is going to take a lot of risk. Three, there is a huge amount of credit risk the Germans will take by backstopping both the debt on one side and the deposits. The Germans say moral hazard, time inconsistency and credit risk—I don’t want to do it. They say, ‘you lost your virginity. Now you sign a contract; you say, ‘I’m a born-again virgin.’ Be abstinent for the next two years. Show me your soul and two years from now, we’re going to get married. But today, I commit to marriage today? Forget it.’ The Germans don’t believe and they don’t trust the periphery.”
Roubini on how to get decisive action in the euro zone:
- “The European leaders already had 18 summits of the leaders in the past two years. The last summit, the headline newspaper was the leaders decided to postpone key decisions. Now there are 19 summits. Now they’re supposed to come up in one summit with a political union, with a banking union, with a fiscal union, with a transfer union, with a growth compact and resolve the problems that haven’t been resolved for years. Chances are the Germans want to say no to European-wide deposit insurance.”
Bremmer’s view on global problems:
- “First of all, I see that irrespective of whether you are a Democrat or a Republican in the United States, you are basically telling the Germans, “come on guys, you have to do something.” But we’re not going to play a role in that. I look at the Chinese government despite that they are awash in liquidity right now. They’re not prepared to actually provide any concrete support for the Europeans, so the Europeans must do this themselves. We’re not going to act as the lender of last resort for the euro zone. At the same time, I see plenty of other global problems banging along where everyone is kicking the can down the road. The willingness to kick the can right now for the United States, Japan, Europeans, the Chinese, has been an elite motif really since 2008.”
Roubini on the persistency of real economy slowdown:
- “It’s not just a slowdown…The recession will become a depression. Output has fallen from the peak 15% in Greece. The same thing in Spain…This could become like Japan, but worse. Japan did not have a sovereign debt crisis because it was a net creditor country. But all of these countries are net debtors. They would be lucky to end up in stagnation like Japan. It’s getting worse, there’s already a sovereign debt crisis, a banking crisis, a balance of payment crisis, an economic crisis and all of those things together are getting worse.”
Roubini on German leadership:
- “There is this gap between them saying we don’t want to take all this credit risk of backstopping of $3 trillion of Spanish and Italian debt. We don’t want to take all the credit risk of backstopping all the deposits of the euro zone. But then the other side says, unless you do something about it, in spite of our fiscal effort, the spreads are so high, the disintegration fragmentation of the banking system is becoming worse, and therefore we’re going to end up in a complete cliff. The German one side the one guarantees that these guys do enough reform and austerity, the other side says we’re doing it, but spreads are so high that it’s become unsustainable.”
Bremmer on whether Germany is removing itself from the conversation in Eur
- “I would not go that far. I do think they are engaged in a very difficult negotiation…The fact that the Germans at this point are not yet prepared to accept the kind of economic fixes that are required does not tell as much about their ultimate predisposition. They have their own domestic constituencies they have to play with. They also have very strong political constituencies across the euro zone that are acting in a very intractable way. We’ve seen some forms of German capitulation over the course of the past months…Who is to say that there will not be dramatically more capitulation when they’re actually forced to do it.”
Roubini on what matters most right now politically:
- “All of it matters in the sense that we’re kicking the can down the road. The Europeans do not want to make the decisions and there will be political elections in Germany, Italy and other parts of Europe. We have the U.S. presidential election and until then, we’re not going to do anything about our fiscal problem. In China, there is a stall right now because of the leadership transition that happens once in a decade and important decisions about their growth model has to be done. The problem is that every part of the world is kicking down the road to 2013. At this time we’re reaching a point in which by next year, you could be in a scenario in which we hit a brick wall, and then euro zone breaks up, in the U.S. you have a fiscal cliff, in China the landing could be hard and in the Middle East you could have a war. That is a perfect storm.”
Roubini on the complexity of the central banks response:
- “Everyone is going to do more monetary easing…We live in a world in which the problems of the advanced economies are not problems of liquidity. Banks have plenty of liquidity. The problems are fundamental solvency. So just throwing money at it implies that the loss will continue to collapse and banks will hold extra money in the form of excess reserves. The credit mechanism is broken and there is no creation of growth in most advanced economies. So it doesn’t affect real economic activity.”
Roubini on Merkel saying euro bonds are “the wrong way” and whether she was speaking to European leaders or voters in Germany:
- “She was talking to both of them. The trouble is if there is not going to be an agreement on some point on having e-bonds I think the situation in Europe is going to become disorderly. Italy and Spain were are doing massive fiscal adjustment, but their spreads are still very high…At some point the Germans will decide, do I take the credit risk of backstopping Spanish and Italian debt in exchange for some loss of national fiscal sovereignty by Italy and Spain in which case the euro zone has a chance to survive. Otherwise, this will become disorderly in the next few months.”
- “The great thing about Europe today is you’ve got a huge amount of supply and very little demand. So you’re not really bumping into everybody. I think that’ll change over time.”
- “I think in Europe today, you’re getting overpaid for the risk. For us, we can buy senior debt in Europe for around 50 cents, 60 cents and here in the U.S. you’re paying 70 cents or 80 cents for it. The question is, where do you want to be investing? A lot of it goes to, if you look at investing today, the risk-free rate is 20 basis points, so where are you getting paid to take the risk? For us to make 15% to 20%, we think we can do it in Europe a lot easier than here.”
- “We believe the liquidity will occur over the next two or three years, so if you’re buying something you believe you got at a great price, you’ll get paid out a much higher price two or three years from now. There’s a huge discount…people are paying a huge premium today to have liquidity. So, if you can invest in things which aren’t liquid, you’re going to get overpaid.”
- “I think things are not as bad. It’s exactly as you said. But the problem you have today, is everybody’s worried about the European risk. Switch it around. What do you believe the risk of Europe blowing up is? Do you believe it’s 10%, 20%, 30%, 40%? Do you believe that Greece will pull out of the euro and do you believe that if that happens, the euro itself falls apart? What’s that risk?”
- “If you believe [Europe will blow up], you shouldn’t be an investor there. That’s really it. Because if you really believe that is going to happen, your ability to invest in Europe, you will be able to buy at much lower prices a year or two years from now. We don’t believe that Europe will blow up. I think there’ll be a number of issues but we think over time things will work themselves out, and because of that you’re able to buy that debt – because everybody is worried about it – so you’re able to buy it at a much lower price.”
Avenue Capital has been investing:
- “We have been investing the capital about 5% a month. The reason for that if we think over the next year or year and a half, there’s a huge amount of opportunities and the question is, is the better time to invest three months ago or three months from now? Our view is to invest over time. And we think we’ll just average in the prices.“
- “I think there’s phenomenal opportunities, more than enough – that’s not the issue. The issue is, is now the right time? That was the same question three months ago, the same question a year ago and it’s going to be the same question six months from now. What you have in Europe today, over and over, is just headline risk. Constantly every week, every month there’s a new headline.”
- “Time will take care of everything. We try not to invest on what’s happening today but over what will occur over the next couple of years. So, that’s why we keep investing about 5% a month.”
- “We have a fund where investors give us time to invest and in Europe, you need that. In Europe, everybody understands you do need time because it’s over time you’ll end up making money. I think Europe today, exceptionally hard to make money on a daily basis or weekly basis. You can’t trade on what’s going on.“
- “I think it’s very hard for the small guys today, because really what you can invest if you’re small is equities, and there you have a lot of volatility and a lot of risk. What we’re investing in is senior debt so we think we’re able to invest in companies at three or four times, so we think we’ve got our downside protected and a lot of upside.”
- “We have 25 investment professionals on our team…I think you need to have folks who are there and who are able to do it and you need to have access to different debt. For us, the ability to buy senior secured debt at a huge discount, that is an extreme positive. Very few people are able to do that.”
- “It’s extremely important. We want to be a senior creditor. Today in Europe, it’s very hard to be an equity player. Because in Europe if everything works out, it’s great and you bought cheap equity but if things don’t work out you’re going to lose quite a bit of money. But if you are a senior creditor, you’ve got your downside protector.”
- “It matters but our long-term view is over the course of the next two or three years, everything is going to work itself out, and whether it’s George Soros or it’s somebody else, which you constantly keep hearing every week and every month that Europe has problems. We all know that. I think it’ll work out. If you believe that and you invest, you’ll do well.”
- “I don’t know if [the big banks] should be broken up….I think at the end of the day, the shareholders will end up making the decisions. If that stock stays flat for five or 10 years, you’ll find the banks will have to do something to bring up the value. Right now everybody believes that the problems have been much more because of what’s happening in the economy. So everybody’s giving the CEOs the benefit of the doubt.”
- “I think they are running it for shareholders, but the difference is they just have more time. So their shareholders will give them a lot more time….Because in the environment that we’re in, the larger you are, the more everybody believes it’s more complicated.”
- “The bank stocks are trading down, but you still have other people coming in and buying those stocks every day. The more the stock goes down, the more pressure on the CEO and the more pressure the board will have, so I think over time you’ll find some of this happening but it may take five years or and little bit longer.”
- “I think for banks it’s very hard. For the next five years they’re going to have a very difficult time. If you look back, the reasons banks made a lot of money is they used a lot of leverage and now that they can’t use the leverage, they’re not going to be able to make as much money. So it’s very hard.”
- “I think [the boutique banks] are going to have an easier time because it used to be that you needed to have capital to own the product…today, that’s less and less. So, I think if you are a boutique firm you’re going to have an easier time getting started and an easier time competing against the big banks.”
- there is then a serious threat of the euro breaking down or
- even if you manage to avoid, let’s say an ‘accident’ similar to what you had in 2008 with the bankruptcy of Lehman Brothers, the euro system that would emerge would actually perpetuate the divergence between creditors and debtors,…it would transform [Europe] in to a hierarchical system.
Soros on Europe’s crisis:
- “Basically there is an interrelated problem of the banking system and the excessive risk premium on sovereign debt – they are Siamese twins, tied together and you have to tackle both. It’s recognized that you have to do that and there is no widespread agreement on what to do on the banking side. It’s the beginning of a banking union and there is a disagreement on the fiscal side and unless that is resolved in the next 3 days then I am afraid that the summit could turn out to be a fiasco, and that could be fatal, because you are facing the possibility of Greece leaving the euro a
nd perhaps the European Union and you need to strengthen the remaining euro structure to withstand that shock.”
On Angela Merkel:
- “Well actually Angela Merkel has emerged as a strong leader. Unfortunately she has been leading Europe in the wrong direction. I think she is acting in good faith and that is what makes the whole situation so tragic and that is a big problem that we have in financial markets generally – that you could have a false idea, a false ideology, a false interpretation which is reinforced by reality. In other words it works for a while until it stops working and that is what is called a financial bubble – which, you know, looks very good while it is being formed and everyone believes in it and then it turns out to be unsustainable…The European Union could turn out to have been a bubble of this kind unless we realize there is this problem and we solve it and the solution is there. I think everybody can see it, all we need to do is act on it, and put on a united front, and I think that if the rest of Europe is united, I think that Germany will actually recognize it and adjust to it.”
On whether yields there’s a risk of contagion continuing if a strong proposal doesn’t come out of the EU summit:
- “That is right, and there is then a serious threat of the euro breaking down and that is not to be neglected because it’s quite serious. But even if you manage to avoid, let’s say an ‘accident’ similar to what you had in 2008 with the bankruptcy of Lehman Brothers, the euro system that would emerge would actually perpetuate the divergence between creditors and debtors and would create a Europe which is very different from the Europe as an open society that fired people’s imaginations and led to the creation of the European Union. It would transform it into a hierarchical system where the division between creditors and debtors would become permanent…It would lead to Germany being in permanent domination. It would become like a German empire, and the periphery would become permanently depressed areas.”
On what Europe needs:
- “What you need is a European fiscal authority that will be composed of the finance ministers but would be in charge of the various rescue mechanisms, the European Stability Mechanism, and the one that preceded it and it would be empowered to issue treasury bills, to set up a debt reduction fund and actually buy up the excess stock of that that has accumulated in the hands of particularly Italy and Spain and finally combine issuing treasury bills. Those treasury bills would yield 1% or less and that would be the relief that those countries need in order to finance their debt.”
- “Euro bonds are not possible because Germany would not consider euro bonds until you have a political union, and I think it’s actually quite justified, it should come at the end of the process not at the beginning. This would be a temporary measure, limited both in time and in size, and thereby it could be authorized according to the German constitution as long as the Bundestag approves it, so it could be legal under the German constitution and under the existing treaties. What it means is the political will by Germany to put it into effect and that would create a level playing field so that Italy and Spain could actually refinance its debt on reasonable terms.”
On whether he believes Germany would be content with a smaller euro zone:
- “I think Greece leaving the euro zone or being pushed out is now a real expectation and this is what is necessary to strengthen the rest of the euro zone because the way the financial markets work they can actually push a country like Italy into default – see this is what the weakness of the euro as it is currently structured because a developed country has no reason to default because it can always print money. By printing money it can devalue the currency and people can lose money by buying debt but there is no danger of default, but the fact that the individual members don’t now control the right to print money – they have given that right over to the central bank you see, and that has created this situation with a European country that could actually default and that is the risk that the financial markets price into the market and that is why say ten-year bonds yield 6% whereas British 10-year bonds yield only 1.25%. That difference is due to the fact that these countries have abandoned the, surrendered their right to print their own money and they can be pushed into default by speculation in the financial markets.”
On the chances today of Greece leaving the euro:
- “It’s very hard to see how Greece can actually meet the conditions that have been set for Greece, and I think the Germans are determined not to modify those conditions seriously so I think one has to now calculate on Greece being forced out of the euro – that’s what we have to prepare for.”
On how the treasury bill would be priced:
- “It would be sold on a competitive basis but right now there are something like over 700 billion euros are kept on deposit at the European Central Bank earning a quarter of one percent because the interbank market has broken down so then right then you have got 700 billion that would be very happy to earn let’s say three-quarters of a percent instead of one-quarter, and the treasury bills by being truly riskless and guaranteed by the entire community would yield current conditions less than one percent.”
On whether he believes Greece will exit the euro forever:
- “No, actually it’s quite possible that it could actually, depending on how it is arranged and whether it’s orderly or disorderly, it’s possible that Greece could re-enter but what I am really afraid of and really most disturbed about is that the euro would hold together but it would create a Europe that actually nobody wanted. It would put Germany at the center of an empire which would actually be very beneficial in many ways to Germany but politically I think it would be unaccep
table and it’s not something that the majority of Germans want.”
On whether German bunds are in a bubble:
- “Yes…Certainly they have benefited and they are far too low-yielding if you had no world conditions, in other words the high price or low yield of the German bonds is a fever chart measuring the distress in the financial markets.”
On the chances of Spain, then Italy, needing a full-blown bailout:
- “If you have this thing, then the Spanish banks would be recapitalized which would add to the debt of the Spanish debt, but if the Spanish, the excess debt is financed at 1% then it’s no problem then this will help that also and if you resume growth then the decline in the housing market would not be as severe as it would be if you have a folding economy so Spain would be also in a position to come out of the recession.”
On Mario Monti:
- “Monti is a caretaker, he is a technocrat so he has no political base but I think that he would have to say that he cannot serve as a technocrat if there is no support from Germany and what would Europe do without Monti, so Monti can push Merkel but and this is in a strong position to do that because he has done his best in structural reforms and he could do more if actually this was something that didn’t come out in the discussion, that, Germany is worried that if you provide this kind of support then countries like Italy would stop pursuing structural reforms and that is not the case because by having a great benefit from it and losing the benefit if you abandon the structural reforms is I think a stronger guarantee that they will not abandon it than anything else.”