Greed And Fear’s Chris Wood On The Timing Of The Euro Endgame
by Tyler Durden
From CLSA’s Greed and Fear, by Chris Wood, December 23 edition.
The S&P500 remains at post-Lehman highs and GREED & fear remains nervous about a correction. But GREED & fear will also have to admit that the short-term technical indicators long followed here are not sending warning signals. Rather the message is bullish which is one reason why GREED & fear is not reducing the beta of the long-only portfolios.
It is also the case that the US continues to be cut relative slack because of the problems in Euroland. Here the ongoing noise from Brussels makes it clear that the final crescendo of this particular drama lies in the future. With Frau Merkel continuing to talk tough about the need for fiscal discipline, and rejecting euro bonds, it appears that there will have to be more market turmoil before the inevitable decisions are taken. GREED & fear says inevitable because it still seems likely that the end game will involve some form of German acceptance of collective fiscal responsibility and debt restructuring. This is partly because the German establishment is so committed to the euro and partly because of the practical fact that German banks have such big exposure to the debt of the European periphery countries.
The past week have seen further signals that the above will be the end game. Thus, an article in the pinko paper by Peer Steinbru?ck and Frank-Walter Steinmeier, the former minister of finance and former foreign minister in the last SPD government, proposed debt haircuts as well as the limited introduction of European-wide bonds (see Financial Times: “Germany must lead fightback”, 15 December 2010). Second, the ECB announced on 16 December that it decided to almost double its subscribed capital base from €5.76bn to €10.76bn, with effect from 29 December.
This suggests that there is an understanding, despite the official rhetoric, that there are losses that will need to be taken. Still it also seems clear that there needs to be more market panic for such decisions to be forced on the relevant authorities, most particularly Frau Merkel. All this suggests an opportunity for macro investors since it seems increasingly likely to GREED & fear that this drama is going to come to a head in the first half of 2011 and not in 2013 or later.