The 19th EU Summit came and went. Can somebody please tell me exactly what of any substance or consequence was accomplished?
In a world that's filled with optimists, pessimists, realists and pragmatists, where do you suppose that I fall out on the future of the global economy after this exercise in Brussels has come to an end?
An ending that was not one that roared, but more one that whimpered!
|Part of EU Summit Closing Statement|
It was at EU Summit's #1-#18 of course, so what would lead us to believe that the results of #19 will be any different or any more successful?
They say that the definition of insanity is to keep doing the same thing while expecting a different outcome. By that measure the EU leadership is absolutely certifiable!
Along with this dissertation I will provide credentials below that I believe somehow give me some amount of credibility to address global financial matters. Although truth be told we are all expert on the devastating events occurring around the world as it is all of us who are the ones living through the pain.
I suppose to be fair, however, when casting the wide net of criticism onto the worlds central bankers we need to realize that the angst facing the global economy is of a magnitude most likely not seen since the 1930's.
I am also willing to concede that those central bankers who are in charge around the world, including Ben Bernanke in the United States, are doing the best that they can to try and prevent a bad situation from turning into a catastrophic one.
Unfortunately these leaders have limited tools at their disposal and they have deployed them and then deployed them again pushing interest rates down to zero and in some countries into negative yields. The programs go by esoteric names like quantitative easing or QE and Operation Twist. And the results have been tepid improvement in the economies of some countries with no improvement or even decline in others.
The problem is that the excesses of the past years are difficult to overcome both from a financial and a social perspective.
Austerity is a tough pill to swallow particularly when economies are in such terrible shape while the measures required to achieve economic growth will increase already bloated sovereign debt levels.
Political movements with anti-austerity platforms, as seen in Greece with the far-right Golden Dawn gaining strength and power, have agendas that in the long-run would be bad for everyone involved.
Additionally the stability of the banking systems in key EU countries remains in serious question, sovereign bond yields in still others countries are at unsustainable levels and the credit ratings of some of these same EU countries are junk while other countries are on their way there.
Exogenous events around the world such as the Muslim Brotherhood assuming control of the government in Egypt, potential for Iranian nukes and the fallout from Syrian civil war to name just three have the serious potential to compound economic and political problems were they to escalate any further.
But, I digress. What gives me any credibility to discuss the worlds economic situation and financial markets? It's slim at best but then again, as I said before, those in positions of power who possess the sterling academic pedigrees and little practical experience haven't been doing so well so far.
I have an undergraduate degree in economics and an MBA in finance. In my professional career I have been a bond analyst, an institutional bond trader and institutional bond salesman, a proprietary equities trader, a correspondent lender for commercial mortgages until the collapse of Lehman Brothers and finally now the owner of a title insurance provider that at the very least places me on the pulse of the real estate market at the core of the U.S. economy.
This "real life" experience may actually place me on an equal playing field with those possessing "Ivory Tower" academic acumen. As a matter of fact their possessing book smarts with little else that's practical in nature may be a major part of the problem.
Try talking standard deviations, regression analysis and reversions to the norm to a family that's just trying to put gas in the car and food on the table. At the end of the day it's just words!
Now on to the markets!
The 19th EU Summit provided a relief rally on Friday of significant proportions!
Other than rallying due to relief and short covering was there anything of real substance implemented or promised at the EU Summit that will directly or indirectly or in the near or distant future significantly improve the economic situation in Spain, Italy, Greece, Portugal or Ireland (EU PIIGS)?
The language and rhetoric provided in the Summit Statement talks about fixes and solutions but can they ever really be accomplished and if so, according to what time frame?
And without agreement from Germany, the one real economic powerhouse in the EU, to backstop the entirety of the financial structure of the EU and soon, is the house of cards that existed on Thursday of last week really any different than the one that exists today!
And speaking for Angela Merkel in particular, any of these proposed changes could be extremely difficult to pursue as they would be akin to political suicide.
So on Friday the equity markets around Europe and in the US rallied sharply as did the bonds of some of the weaker EU sisters like Spain and Italy. But, even after the huge rally Friday the 10-year sovereign bond of Spain is still trading at the unsustainable level of a 6.32% yield down from over 6.90% Thursday and Italy's 10-year sovereign bond yield dropped to 5.82% from 6.20% Thursday.
Strong performances to be sure, but if the outcome from the Summit was truly believed to be solving any structural problems and thus ensuring that there would be no future shocks such as the unthinkable one of countries being forced to withdraw from the EU, these yields would have come down much further.
So what direction do I see the stock markets heading?
Down! Not in a straight-line but down with rallies to lower highs with new declines that go to lower lows.
Not because I am anti-American as some try and portray bets against the market as being, but because my common sense simply tells me that this is the direction we will be headed in. And after all, what is investing if not a bet?
Those betting that the equities markets will drop are treated in a similar fashion to those around the Craps table who bet on the Don't Come line. It's just not a popular or populist position. And truth be told over the course of history it is not the winning percentage bet either.
Without getting into great detail about all of the micro and macro factors leading me to conclude that the stock market, despite the strong gains on Friday is a short or going down from here, the economic issues both in the U.S. and abroad are daunting and it's coupled with zero political will to get anything done to stop the bleeding.
To the contrary, in the United States leaders of both political party's are far too concerned with reelection and destroying the other side that the economy and financial system comes in a distant third.
To provide one example of the huge hurdles down the road for the U.S. economy one need only look to the $15 trillion or so in U.S. treasury debt. This debt is currently being financed at rates so low they have not been seen before. Rates that are certainly destined to rise and rise substantially at some point in the future.
What do you suppose will happen to the federal deficit when they do head up to the 5 or 6% level for long-term debt? Imagine the amount of federal tax revenues that will be required simply to pay debt service.
This one of the corners that Ben Bernanke has painted himself into that's contributing to the zero interest rate policy for the foreseeable future that the Fed has. Of course the weak economy is one reason, but the other consequences of rising rates must come into play as well.
To use an extremely overused phrase, the time for making tough decisions instead of kicking the can down the road is upon us, but nobody in politically motivated Washington or in the capitals of the EU countries really seems to care.
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