Has the Die Been Cast in Europe?

Even though Eurozone countries (EZU) are in an uptrend, Ireland (EIRL) and Greece (GREK) slid this year. The rest of the PIIGS: Spain (EWP) has held up as well as EZU, but Italy (EWI) and Portugal (PGAL) did break down in May.

The best explanation is that Greece and Ireland sold off along with momentum stocks because if you plot GREK and EIRL against the Nasdaq, Russell 2000 and biotechnology, a similar chart pattern is clear. Italy and Portugal are tougher to explain.

It looks like a surprise win by the euroskeptics is priced into stocks and the euro. Nevertheless, I've always maintained this is political crisis, not an economic one. The main issue was never the debt levels or the economic imbalances Michael Pettis' cites in his post liked below (though these are very real), but whether the nations of Europe will find a way to solve them together. Social mood is not working in favor of the EU: nations increasingly want to assert sovereignty, best exemplified by secession movements in Scotland, Catalonia, Belgium and Northern Italy, but now most clearly evidenced by political victories for parties such as UKIP.

Most alarmingly for the pro-EU politicians is that nationalistic parties have won in the absence of crisis, during a period of relative calm. In reality, the political crisis has grown during this period of calm as social mood remained negative. Since this is a political crisis driving the markets, another crisis is more likely following the victory of euroskeptic parties. Even if pro-EU politicians want to ignore them, the rise of parties such as UKIP is now an existential threat to the domestic political order because voters have a legitimate option to express their anger. What happens in Brussels no longer stays in Brussels: national elections may turn on votes that parties take in the European parliament.

The odds of another financial crisis are higher if these euroskeptic parties win in this weekend's election, and another crisis will serve to increase the popularity of euroskeptic parties because it will force the pro-euro and pro-EU parties into more unpopular votes. The euroskeptics aren't causing this though, behind them are the voters who in a period of negative social mood, want to express national sovereignty and want to protect their own nation. Ultimately, since social mood swings from positive to negative, is that the European Union and euro are positive social mood projects that do not account for periods of negative mood. The trend is for increased centralization of power, which increases the instability of the entire system heading into a period of negative mood.

This weekend's vote will cast the die for the dissolution of either the eurozone, the EU, or both, and stopping it will require an extraordinary effort by pro-EU politicians because they are now running uphill— even if they don't realize it yet.

Related: here is Michael Pettis thinking about possible implications from the EU elections: Some things to consider if Spain leaves the euro

The May 26 votes might end up reminding us that the euro crisis isn’t over. The longer unemployment and hopelessness drag on, the greater the erosion of support for the establishment and the stronger the support for the radicals who want to abandon the euro.

......How much longer is the rest of Europe willing to maintain high unemployment in order to support the German economy? On May 26 we will discover, I suspect, that at least some parts of the rest of Europe have little interest in continuing to maintain the euro if that simply means that they must suffer unemployment in order to protect Germany from its unwillingness to pay workers more.

Dalrymple on Europe's crackup

The European Crack-Up

Reflection on the situation in tiny Belgium might introduce an element of doubt into the minds of the most fervent believers in the European Project. Belgium has existed ever since it was cobbled together in 1830; yet in all that time, it has not been able to create a durable national identity. One of its many prime ministers, Yves Leterme, once said that just three things held Belgium together: beer, soccer, and the king. As I write, Belgium has not had a central government for more than 500 days. While I must admit, as an occasional visitor to that country, that the difference between Belgium with and Belgium without a central government is not apparent on casual inspection, this interregnum may take the theory of limited government too far.

The reason that Belgium has lacked a government for so long is that the country is divided into two populations (actually three, but the third is too small to count) with incompatible politics: French-speaking Wallonia and Dutch-speaking Flanders. Belgium is officially bilingual, yet you see not a word of Dutch in Wallonia and not a word of French in Flanders. The division could not be starker if barbed wire separated the two provinces. Only in the capital, Brussels, does one find any concession to bilingualism.

He goes on to discuss the different cultural reactions to the crisis in Ireland and Greece, among others. A good read.

The promotion that will not die: Buy a house, get a free car!

February 14, 2008. USA. Buy this House, Get this Car Free April 4, 2008. Ireland. Developer offers 'free' car with new home July 11, 2008. England. Estate agent gives away car with new homes in desperate attempt to shift seaside flats July 19, 2008. USA. Buy a house, get a car November 5, 2008. Canada. Realtor offers free car with home purchase May 6, 2009. France. Get A Free Car In France (With Purchase Of House) April 26, 2011. USA. Desperate sprawl developer gives away cars with houses December 1, 2011. China. Developers in China get creative as home prices dip

The downturn has forced developers to get creative. Buyers are flocking to one real estate company in Wenzhou that's giving away free BMWs with every purchase to its first 150 buyers. The promotion has already attracted 130 buyers in the past two weeks , the company said.

Down goes the euro

Nothing ever changed in Europe regarding sovereign debt problems. What changed was social mood, as it became slightly more positive. As was evident starting last week, things have changed and negativity is back. The turn in short term social mood is past and the euro is tumbling. Recent headlines out today:

Contagion hits Portugal as Ireland dithers on Rescue

Euro under siege as now Portugal hits panic button

Ireland told: Take EU bailout or trigger crisis

Greek deficit much bigger than estimate

The COTS data for last week finally was released today. Given the large move down in the euro, speculators are probably back in command.

Will the young pay?

A nice socionomic indicator from the Guardian. I want to look at the politics and economics first though.

Even before the financial crisis, the amount of government spending required to fulfill promises to retirees was expected to trigger political conflict. In the case of a small county such as Ireland, where there's a strong history of emigration, the question has become whether the young will even be there.

Ireland's young flee abroad as economic meltdown looms

Kelly, of University College Dublin, was laughed at, scorned and even threatened when he correctly predicted, as long ago as 2007, that Ireland's property bubble was heading for a spectacular explosion.

Now he is forecasting mass mortgage defaults and an ugly popular uprising. The first stirrings are already visible, he says, with "anxiety giving way to the first upwellings of an inchoate rage and despair that will transform Irish politics along the lines of the Tea Party in America", giving rise to a new "hard-right, anti-Europe, anti-traveller party".

To the Guardian, where the story comes from, this is tantamount to Armageddon. However, anti-Europe probably would mean anti-bailout, which means Ireland could follow the path to rapid recovery enjoyed by South Korea and Russia in the late 1990s.

Mark Ward, president of Tallaght's student union, says that 1,250 students are leaving Ireland every month. One in five graduates is seeking work outside the country. The Union of Students in Ireland believes that 150,000 students will emigrate in the next five years.

Ward, a 26-year-old marketing graduate, said: "The government's to blame for bankrolling the banks who were lending to their property developer friends. They all thought the party would never end.

"Students shouldn't have to pay for the mistakes of the government and their developer pals. It's going to take years to sort this mess out and it won't be just my generation which will be blighted big time."

Is the social fabric of Ireland beginning to unravel? The Kingdom, one of the country's much-loved local papers, recently reported that nearly 200 Gaelic footballers and hurlers have left Kerry to play in Britain, Australia and the US in the first seven months of this year. The true figure is probably double that.

The charity Barnardo's said that children were asking it for food because there was not enough for them to eat at home. "Some of our services are being asked by children if they can take food home for later because there just isn't enough," said Carmel O'Donovan, a project co-ordinator with Barnardo's.

Folks who say the U.S. will be a Third World country if the currency rapidly devalues are definitely speaking in hyperbole, but with a grain of truth.

"I hope I don't get sick in the coming months because there'll be nobody to tend to you in the hospitals. Of course, a lot of people would be heading across the Irish Sea or the Atlantic if only they could sell their houses, but we can't do that either. So basically we're stuck on the Titanic as it goes down."

Next month the government will deliver its latest austerity budget with the aim of slashing a further €15bn from public spending on top of the €14.5bn it has already been forced to cut. But Kelly has argued that the public sector cuts are "an exercise in futility" when compared with the €70bn bill for Ireland's bad banks. "What is the point of rearranging the spending deckchairs, when the iceberg of bank losses is going to sink us anyway?" he asked in the Irish Times last week.

Put at its starkest, for the next six to seven years, every cent of income tax paid by Irish citizens will go to cover the banks' losses.

The article is a nice indicator of social mood as well. Nothing has changed for Ireland. The same crowd of economic forecasters who called the housing bubble and continue to warn about banks and government spending have never changed their tune. It was the rest of the world that followed the social mood towards greater optimism in the wake of bailouts from the European Central Bank.

Social mood is clearly on the decline and this article is one sign. Whereas Ambrose Evans-Pritchard and others will sound the same, having been bearish for some time, expect these stories to bleed from the business section into the culture and main sections of newspapers. Also, look for harsh and apocalyptic language as the media's favorite oxes are being gored.

Speculators go long on the euro

The picture says it all, speculators are now net long on the euro. This is the first time they've turned net long since then end of November 2009, just as the euro rally was coming to an end.


Here's a long-term chart of speculative positions going back a decade, from a ZeroHedge post in March.

Here's a look at CurrencyShares Euro (FXE) on a daily and weekly basis. In the daily chart, it certainly looks overbought in the short-run. The weekly chart portends far more bullishness, if the market wants to go there, with RSI just over 50 and MACD still in negative territory.



This was one of the best weeks for the euro in the past three years, and it was similarly one of the worst for the U.S. dollar and PowerShares DB U.S. Dollar Index Bullish Fund (UUP). The technicals for the greenback are worse, with RSI on the weekly chart already headed towards oversold levels, thanks to strength in currencies such as the franc and yen.
UUP needs to hold above the $22.25 level for the rally to remain in effect and that level is close, with only a repeat of this week's move necessary to break it. I expect it will firm up in the coming weeks, as headlines such as this are eventually going to break the euro again.

Ireland GDP slump sparks bailout calls

Ireland & China have banking problems

Irish Banks Need $43 Billion in New Capital as "Worst Fears Have Been Surpassed”

“Our worst fears have been surpassed,” Finance Minister Brian Lenihan said in the parliament in Dublin yesterday. “Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come.”

The agency aims to cleanse banks of toxic loans, the legacy of plunging real-estate prices and the country’s deepest ever recession. In all, it will buy loans with a book value of 80 billion euros ($107 billion), about half the size of the economy.

“The information that has emerged from the banks in the course of the NAMA process is truly shocking,” Lenihan said.

Dublin-based Allied Irish needs to raise 7.4 billion euros to meet the capital targets, while cross-town rival Bank of Ireland will need 2.66 billion euros. Anglo Irish Bank Corp., nationalized last year, may need as much 18.3 billion euros. Customer-owned lenders Irish Nationwide and EBS will need 2.6 billion euros and 875 million euros, respectively.

NPL Concerns and New Bank IPOs Drive 600 Billion Yuan Financing Rush

The piling up of bad loans is driving the state-owned banks' refinancing rush. So far the major state-owned banks' capital adequacy ratio is not bad: for ICBC it's 12.36%, China Construction Bank (CCB) 11.7%, and BoC 11.4%. Analysts say the banks are able to replenish capital with internal resources due to recent handsome profits.

...To avoid excessive draining of the A-share market, the bank refinancing push is scheduled to finish 3 to 6 months before ABC launches its gigantic IPO at the end of the year.

The possible busting of the A-share market by the 600 billion yuan in refinancing plans is a cause of great concern for investors. At present the Shanghai Stock Composite Index is lingering in the neighborhood of 3000. Many small banks lining up for IPOs have become pessimistic over selling shares in 2010.