As the market complacently melted higher we continued to warn investors of the increasing three headed risks in the market. The combination of China tightening, financial regulation and Greek sovereign debt continued to weigh over foreign markets and U.S. investors just continued to live in their domestic bubble where nothing matters besides how many iPads Apple sells on any given day. Of course, that complacency is quickly catching up to investors. As a risk manager this is my primary goal here at the site – not always to highlight the next best opportunity, but to help you keep from getting your face ripped off. My first short positions in over two years were not implemented due to some crystal ball I have hidden away in my desk, but due to pure risk management. The environment of the last two months has been rife with complacency. Unfortunately, the situation is little improved across the globe as more government intervention proves to do little in helping matters.
The situation has deteriorated in Europe over the course of the last 24 hours as spreads in European sovereigns continued to blow out today. My guess is that Trichet is in Berlin today having his Hank Paulson moment – down on one knee in front of a powerful woman (Merkel) begging for her to accept his proposal of “going nuclear”, i.e., buying bonds. I can only imagine how the German heads of the Bundesbank must be feeling right now. Disgusted is the only way they can feel. Do they try to save the EMU or do they potentially inflate themselves into an even larger mess while imposing harsh fiscal austerity measures on member nations that almost guarantee depression? There truly are no good answers here.
The scariest part of this whole fiasco is that we might very well be seeing what I have predicted for years – the actual demise of the Euro. This is practically unprecedented. How would the nations even go about dissolving the EMU? Surely Germany must be considering the ways in which they could defect without causing collapse. For Greece, defection appears like a no-brainer though their no-brained leaders might not have realized this yet. From the German perspective, the rules have already been broken so all options must be laid on the table at this point. Saving the current currency format only destabilizes prices while saving a flawed system. There is no true “unity” here and I firmly believe each nation must do what is in its best interest. Natural selection is alive and well and must be respected.
The problems in Europe are potentially more frightening than the credit crisis and the failure of Lehman Brothers. This is a truly unprecedented set of events as we are now seeing the Euro for what it is – fatally flawed and unworkable going forward. The dissolution of the Euro has to be considered an option now and the complexity of such a move certainly has member nations shaking in their boots. Unfortunately, the alternatives do nothing to address the inherent flaws within the system. I think it’s time to impose some fiscal austerity on bondholders instead of forcing Main Street into depression. In other words, it’s best to take the medicine now as opposed to allowing this crisis to spread or pop up at a later date – which it will. It’s a true shame that we have become a world that values bankers more than Average Joes.
I still find it hard to believe that the member nations will find the wherewithal to shoot down the ECB’s pleas to buy bonds. This likely means we will drive Europe into recession, budget deficits will INCREASE and we will revisit these issues at some later date. This really is looking more and more like Bear Stearns all over again. Perhaps for once, those in power will do what is in the best long-term interest of all involved as opposed to ensuring that bankers meet their quarterly estimates. Thus far, the signs still point to a world by bankers for bankers. And that means painful fiscal austerity for all of Main Street Europe.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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