Rosenberg: the Europeans can fight nature for only so long
I liked David Rosenberg’s Breakfast With Dave piece this morning. He got into QE2, bonds, Europe and Germany in particular. Let me hit on a few highlights here.
First, Rosenberg says the recent uptick in bond yields might put Bernanke’s credibility to the test given he said yields would go down. As I said in October on Howard Green’s show at BNN, QE doesn’t work as prescribed. It’s not about interest rates but risk and animal spirits – which are on full display everywhere you look. This is a major reason bonds are selling off. They could sell off even more if they hit key technical levels. If you are a contrarian, the risk/reward of Treasuries would start looking pretty good then.
Then there’s Europe. I posted on the dithering and Germany’s political posturing earlier today. Here’s what Rosenberg has to say:
The U.S. dollar is consolidating but the euro remains vulnerable as the European Union (EU) seems divided on how to deal with the region’s debt contagion. Yields on Greek and Spanish bonds (very weak 10-year auction as another credit rating downgrade looms) are up sharply so far today; Irish bond yields are up a tad, to 8.4%, which, in real terms adjusted for core deflation, is over 10%. Something is going to have to give because that is not sustainable when real GDP growth is contracting at a 2% rate. In the old days, a debt restructuring and banking sector haircuts and capital raises would have already been in motion. What the Europeans will have to figure out is that you can fight nature for only so long.
Meanwhile, not even the German giant is immune, at least from a macro standpoint. The Ifo Institute just cut its growth outlook for Germany, the engine for the entire Euro area, to 2.3% next year and further to 1.3% in 2012 from the expected 3.7% advance this year. The consensus on global growth seems to be underestimating the power of the dramatic restraint engulfing the EU — all one really needs to do is have a look at page 2 of the FT (Portugal’s Reforms Aim to Calm Investors and Brussels Rivals Call Truce to Agree Compromise 2011 Budget). As an aside, the front page of the NYT paints a nice picture of what’s happening in Greece. Is the euro a currency you really want to be long?
The front page of the FT runs with Merkel Under Fire in Berlin Over Crisis and one of the bylines is “Chancellor accused of being un-European”. Dude… didn’t Angela Merkel get voted in by the German public? Is catering to the demands of other countries really her role? Who is she responsible for — the German tax payers or Spanish banks? The whole situation is surreal. Why bother blaming Merkel? Why not blame Moody’s? It’s the one that put Spain’s Aa1 credit on review for downgrade due to bloated funding needs and legitimate banking sector concerns.
Merkel is playing to her domestic constituencies as all politicians do. In fact, the junior coalition partner FDP is so weak now that there is a lot of buzz within the CDU and the CSU, the other two coalition parties, about how to prevent the FDP from dragging them down as well. All is not well in Merkel’s world. So there is great pressure on her to play to the people who actually vote for her and her allies. And that means pointing the finger at the Greeks and the Irish and the Spanish and saying, "that’s the bad guy." And you thought only Tony Montana and Paul Krugman were talking about pointing at bad guys. Well, when there’s a crisis on, everyone is pointing the finger – and it’s never at themselves.
On the economics front, I think the German export miracle will fade in 2011 due to weakness in the periphery. The cuts in the Ifo institute forecasts are telling us this. And Rosenberg notes the breakdown in the Baltic Dry Index as an indicator of this slowing in trade. It is not a foregone conclusion that Europe can muddle through this crisis all the way until 2013 when the EFSF runs out. Spain is quickly becoming the flashpoint here. If it can do some serious jujitsu on its banking sector, forcing losses onto creditors of the weakest cajas, things might improve. Until then, expect spreads in the European periphery to stay wide.