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As someone who has closely watched this European saga for two full years, I have seen a discernible pattern emerge …
At its core, the European crisis has been one of confidence. Europe has always had the means and ability to “fix” the problem. The questions that have concerned markets revolve around whether or not European leaders have the will to actually come together and fix it.
Since June 2010, when the Greek crisis first broke, we’ve seen European leaders let Europe reach the brink of disaster. Then only at the last minute agree to some significant measure that quells the crisis.
But invariably, European officials have been too quick to “declare victory.” And now for the third time, the crisis is re-emerging after the measures that temporarily arrested it are removed.
It again speaks to the market’s core concern — that the European officials are interested in averting a disaster, not fixing the problem.
The market realizes that. And as a result assumes (correctly so far) that just like a weak putt on the green that fails to get up over a ridge, once the ball makes one roll backwards you know it’s eventually going to come all the way down.
And it’s the same thing with the euro zone — once cracks begin to emerge, everyone assumes we’re on our way to another crisis.
Spanish Bonds Soaring!
ECB Chief Mario Draghi made what I think was a very dumb comment this week. He said that higher rates for Spain was the market’s way of exerting pressure on the Spanish authorities. That statement tells me he doesn’t really understand markets, because it’s something an academic would say.
Spanish bond yields spiking to close to 6 percent isn’t going to teach the Spanish government anything. That’s because it’s not going to make the unions more apt to negotiate, or make the populous suddenly realize that it’s in their best interests to have massive austerity unleashed upon them when they’ve sucked off the government tit their entire lives!
We know that European officials will act to avert a crisis. So to a point there is a “put” inherent in the market (what that means is that you’re protected on the downside because you know the officials will eventually save the day, so you can afford to be risky).
But we also know that European officials will let the crisis walk right up to the point of disaster. And that sort of a roller coaster ride is death for markets.
We’ve seen this act before — and as the SX7P breaks down, and Spanish yields approach 6 percent, I’m afraid we’re in for another dose of it.
Have a good day,
Tom
P.S. Do you like the idea of potentially profiting from events that the market sees as a crisis? Then click here to learn how to get your hands on the Contrarian Investment for 2012.
Tom Essaye oversees Weiss Group’s Million-Dollar Contrarian Portfolio, in which company founder Martin D. Weiss has staked $1 million of his own money.
Tom began his financial-services career at Merrill Lynch, where he worked on trading desks on the floor of the New York Stock Exchange. While on the floor, he managed multi-million dollar equity trades from some of the biggest hedge- and mutual-fund firms.
{ 3 comments }
Mr. Essaye, you say you are someone who has watched the European crises unfold over the last two years, and that it is merely a problem with confidence? Before trying to appear knowledgeable on a subject maybe you need to go back to school and gain an understanding of human nature. You are spouting the typical financial guru’s BS in dire hope that someone will buy into it and thus you make your profits.
When disparate countries are jammed together ignoring their cultural differences, it is bound to fail. Confidence has nothing to do with it.
Of course Germany is reluctant to bail out Greece, or Portugal, or Italy, OR SPAIN, OR IRELAND….. What you do not know, is that you cannot make a “Silk purse out of a sow’s ear” !!!
The banking industry thought they could tie all these countries into one neat package, so it would be easier to manage and thus give strength and higher profits when trading currencies with countries such as the USA. They gave little thought about how to integrate such disparate economies. And now, you wolves are preaching how to take advantage of their stupidity by teaching others how to feed on that European carcass. You are promulgating the same BS that is now about to break the bank in the European Union, “Make your profit before the system collapses”.
You and your ilk are not a part of the solution, but a part of the problem, as you run shrieking like some hysterical mommy who’s child was just hit by a truck, so instead of picking them up, you have decided to throw whats left of that carcass under the buss just for good measure !!!
James, you make some interesting points, but why the angry tone? In fact, I think Tom Essaye has written an interesting piece. Of course, I am not naive enough to believe his opinion is the definitive analysis on the subject. In fact, there are a huge number of opinions out there. The point is that his views are just as valid as yours. I treat these opinion pieces as one of the pieces in a sort of jigsaw puzzle to get a clearer picture of whats going on. No one person has the definitive answer to issues as complex as the Euro-crisis. But the “wisdom of the crowd” can paint a fairly realistic picture of what’s going on.
For example, I totally agree with what you say when you say,
“When disparate countries are jammed together ignoring their cultural differences, it is bound to fail.”
However, I disagree with your assertion that “Confidence has nothing to do with it. ”
Confidence has everything to do with a solution to the problem. That’s why Draghi said ” that higher rates for Spain was the market’s way of exerting pressure on the Spanish authorities.”
A spike in interest rates reflects fear in the market place. And yes, this mess could devolve into a another severe crisis that could spin out of control. And I also disagree with Tom that a spike in interest rates isn’t going to influence the Spanish.
I recently came back from Spain and had a chance to talk with some small business people. It is clear that the Spaniards, just like Americans and the Germans, have their issues. They need to completely restructure their labor laws for example. It would also help if that Spaniards realized that their national penchant for tax evasion was very destructive to their economy. And the fact is that in a democratic society it is often difficult to get politicians and the public to see common sense. It appears that the only way to effect meaningful change is when all parties are faced with an existential crisis. This happened last summer when the Tea Party pushed the United States to the brink of default.
Its a stupid way of doing business that’s for sure. One pundit likened the political process in Europe as “herding cats”. Its messy, and anything can go wrong. Lets hope it won’t for all of our sakes.
I think the markets are getting ready to roll over again to much love for a stock makes for dress rehearsal for desasters to come, DEBTS just don,t go away.