“In the infinite regress of mutual expectations, we apply our intelligence to outwit the crowd—the epitome of witlessness. But instead of rising above the crowd, we have merely added to its number.”
Commentary & Analysis
The euro moved sharply higher today on comments flowing from ECB President Mario Draghi during the monthly ECB interest rate press conference.
From Reuters, this seems the key point: "Draghi's comments that the rate decision was unanimous certainly caught a few who were expecting the ECB to edge closer to a rate cut off-guard, leading to a sharply higher euro," said Richard Driver, currency strategist at Caxton FX.
Mr. Draghi also said he is seeing a good kind of contagion in the Eurozone. Periphery bond prices are also higher today…all good it seems from the central bank perspective. And maybe that is all that matters.
There is a growing political rift in the zone, especially from Italy and France (and Spain to a lesser degree). All seem to be viewing Germany as the bad guy in this ongoing saga as the politicos plow on with their single currency dreams.
And as you already know, German citizens’ are growing increasingly weary of committing their savings to back weaker countries in the union (84% of German citizens expect the Eurozone crisis to worsen). But, it seems the only thing that does matter is the European Central Bank’s commitment to keep all the balls in the air despite the growing risk to the ECB balance sheet and the bank’s lurching into territory well beyond its official mandate and Treaty restrictions.
To say we should simply follow bond prices in the periphery to get a sense of euro direction assumes we can forecast bond prices—we cannot. And often it is a coincident move, not a lead or lag situation.
I still am of the view growing political strife does and will matter. I am just not sure when. The idea this union was supposed to bring countries and cultures together is proving just the opposite in real world application.
Many politicos breaking bread and sipping fine wine in European capitals seem to believe the worst has past, or at least their PR machines want us to believe that. But for real people struggling on the ground in Spain, Greece, Italy, Portugal, and Ireland, austerity is making their lives worse by the day. And from a broader strategic perspective, for the periphery countries in the zone that grow less competitive by the day, as the most talented are forced to leave to find work elsewhere. At the end of the day a countries wealth is driven by its relative competitiveness. This in itself has always been the major structural flaw in the Eurozone idea. The more efficient states in the union divvy up the wealth, now that the era of free-credit is past. By crushing a state’s competitiveness, how can they compete? On the horns of a dilemma the zone rests.
But all is improving according to Mr Draghi today. He may be right. But I think we should stay tuned anyway.
Spain 10-yr Benchmark Yield:
Black Swan Capital