Last week's Evil Plan 21.0 (Euro Trash) has indeed played out as advertised. Frankly, I was over due to get one right. Although I must admit, the fact that I faded my own plan really does sting. Once I saw the market hold firm Monday after a 2 big figure down move on EUR/USD, I reversed course. Talk about utter humiliation! I guess it's better than being wrong on the plan & the trade, who am I kidding, it really blows. Tesla, MS & Jesterx made me do it. I simply buckled under the constant harping of their "pragmatic probabilities". Just kidding, I take full responsibility for my screw up. Please bare with me, while I re-post the plan's conclusion below, as it does make me feel a little bit better about myself;-)
EP 21.0: It seems very clear that the Europeans need to re-think their grand EURO experiment, before it consumes their entire continent. They have two choices, either they quickly create a political / fiscal union to under pin their monetary union with a central bank set up as the lender of last resort, or on the other hand, they agree to dissolve or at least reduce the scope of the Eurozone. In other words, they need to either bailout the weaker less industrious economies with monetary support via central bank monetazition, or let these economies break away so that they can devalue themselves back to equilibrium.
If they choose the path of a federalized ECB with all the monetary & fiscal authority that comes with it, that will necessarily entail more QE via monetization of the excessive debt within the currency block, as well as lower interest rates to stimulate growth. The other path available to them, would be to break apart the Eurozone which will create a smaller overall economic zone with a less important currency, not to mention the ensuing chaos of such a large scale restructuring of their entire financial system. Either way, it is most assuredly EURO negative, in the short to intermediate term.
The USD will be the direct beneficiary of either path the Europeans choose. The inevitable EURO crack up or crack down will lead the U.S. equity market lower…….
Well, things have moved along even faster then I had imagined. The old profligate regimes have been promptly unceremoniously deposed, as EU imposed international banking technocrats have replaced the PMs of both Greece & Italy, formally ushering in the era of austerity, which coincidently is the same calling card of the newly elected Mariano Rajoy of Spain. We all know what this means of course, the people of Greece, Italy & Spain will now be made to pay for the mistakes of bankers, and corrupt governments, suffering higher taxes, unemployment, lower wages and pensions, and a deterioration of all public services, including essential healthcare, education, and infrastructure. Some here will argue that these good for nothing, lazy latin europeans got exactly what they deserved. I don't share that sentiment, as I place the majority of the blame squarely on the shoulders of the international lenders and inept politicians whom were so readily corrupted by them. Afterall, along with power comes the responsibility of leadership.
But I digress, the point here is that things are moving very swiftly, and even despite these lean mean belt tightening technocrats having been put in place, the bond vigilantes have shown no mercy, as they relentlessly, aggressively attack the Italian, Spanish, and even French bond markets. What has been incessantly warned about, and feared for nearly two years, may well be finally materializing. A full scale pan european sovereign credit panic seems to be actually developing. Italy, Greece, Spain, Ireland, Portugal, and yes even ma belle France hold hugh swath of public debt, which they categorically are unable to service, unless they get massive support from the European Central Bank and International Monetary Fund, as a prerequisite to refinancing by international banks.
The global equity markets have clearly been spooked. Naturally, the DAX & CAC continue taking their usual drubbing, but even more alarming, the FTSE, and DOW are now also being sucked into the under tow. The fear is palpable, it clearly feels like the moment of truth is suddenly upon us. The afflicted States, as well as many global equity market participants, are begging for the ECB to step in and save the day. The mere rumor early Friday, that the ECB would some how back door fund the PIIGS via the IMF instantly spiked the market right back up. Even Obama & Cameron have weighed in, pleading for the Europeans to finally get on the same page, imploring them to give the ECB the power to monetize before the Euro debacle becomes a systemic global financial calamity. Yet Merkel stays the course, holding her ground with the principled teutonic rigidity that only a German could display. The ECB will not, and can not be the lender of last resort she reiterated, its only mandate is price stability, and that is that. Sarkozy calls for ECB flexibility, but even Mario Draghi will not budge.
So now what? Will the Eurozone simply implode, unraveling into an uncontrollable sovereign debt death spiral, taking down its entire banking system via a liquidity freeze up, dragging the global economy with it into a depression? I for one, can not envisage such a dire scenario at this juncture. Don't get me wrong, I do think the entire western world is heading into the crapper, I am just not convinced it is here and right now. Afterall, there is still a sophisticated monetization scheme to be applied, right? One last rocket fueled booster boot kick of the can into a lunar orbit, so as to give us the necessary time to get out from under this mess on earth.
I mean really, do you think the TPTB, and the PPT, will simply stand idly by with the global equity markets so precariously perched on the edge of a cliff? We all know, that if 1190 is breached, it's hammer time, and look out below. Trust me, they too have prophet charts, and something will be done right here right now. Afterall, it is an election year, and keep in mind, they do have the cover of improving U.S. economic data on their side. All they need do at the moment, is sell USDs to support the EURO, grease the QE skids once again, and off we go on Santa's sleigh ride back up to the North pole, jingle bells all the way. The only real question left, is how this will be orchestrated, and telegraphed to the markets, not when, that we already know, as there is no more time to dilly dally, the debt vigilantes have made sure of that.
So what will they do? My take is that they will use this crisis, a la Rahm Emanuel, "never let a good crisis go to waste". We will promptly see a U.S. Treasury directed IMF/ECB orchestrated global funding of the EFSF (European Financial Stability Facility), the US, UK, Japan & China will all pony up serious money along with Germany, France and the other Northern European States, creating an effective global TARP, which will immediately inject massive liquidity directly into the TBTF european banks. This will be combined with the announcement on Wednesday by the European Commission, of new proposed rigid fiscal rules & regulations to boost oversight of national budgets and improve economic governance in the Eurozone. It will also lay out options for a common Eurozone bond that ultimately could be adopted once budget rules are changed.
This my friends will be nothing less than a stealth yet very powerful QE3 with IMF cover. The EURO will be stabilized, and the global equity markets will soar. Evil Plan 23.0 the good ship QE3 sets sail….