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July 2, 2012

A Perfect Crisis Brewing Beyond Europe

By Russ Winter 

The European situation has now morphed into a scene where rumor after rumor is flung out,  and then algos ramp up in response.  We have seen this time and time again, like clockwork, whenever the markets come under pressure.   One might actually begin to think that Europe’s mess is some how bullish.  What in the world would markets do without the rumors, and rumors of rumors? Thursday's 15 point reversal on work that Merkel “cancelled a press conference” took the cake.

Then overnight we hear Europe has some sort of “breakthrough”, the main item being not utilizing pari passu:
- EURO LEADERS RENOUNCE SENIORITY ON SPAIN LOANS -Bloomberg.  Translated this means the Troika will lose equally with the private holders.

- Agree to open funds (from an un-ratified ESM) without austerity.

- Agree to open funds (from a now underfunded EFSF) to govts “meeting conditions.”

- Recaping of banks directly with aid funds (from the un-ratified ESM and underfunded EFSF) , this is not new.  The big “unnoticed” news of the night, Monti said bailout funds will not be increased, which to me suggests Germany has indicated this is all you have to work with.

- Leaders agree to create a single supervisory body for banks by year’s end as a condition to allow them to be recapitalized directly. The seniority may help Spain and Italy at the expense of Germany, watch the yields. Apparently Merkel went home in a tizzy and without comment.

The whole notion of Germany (only 30% of Europe’s GDP) being willing to dilute its Bund market, without very strong fiscal controls (that Germany runs) over the insolvents, is really a non-starter.  The insolvents don’t seem to want to play along, and the Germans know it.  And Germany well knows it is too small to be the savior of Europe.  Polls in Germany show 79-14 opposition to eurobonds. This scene is being called a “deadlock”, but the odds are now high that everything breaks down.

Elsewhere, all the stresses around the world has resulted in a situation where USD reserves held at the Fed are being returned home. In the past that has always been a precursor to a major crisis in the world, Mexico 1982, Soviet Union 1990, Asia crisis 1998-99, and the tech bust 2001. Although Europe is the obvious source of this, I wonder about China as well.

Europe has gotten so absurd, that in some respects, other news has my attention. Nike (NKE) was down 12% after hours on an earnings short fall. When Nike was discussing China, the terms used vacillated between perfect storm and speed bump.  Ford also confirmed that costs in Asia were running higher than volumes.  Perfect storm seems more suited to just about everything going on globally.

Now that the very expensive disease care system is all ready to deliver a final blow to the Treasury,  the sistema primes more sick people via a food stamps program with no restrictions on what “food” one can buy [The Big Business of Food Stamps]. Totally ludicrous.

About The Author - Russ Winter is a veteran investor, financial writer, world traveler, and he blogs at Winter Watch.  (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters

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