5 Weekend Thoughts: Memorial Day, Low Rates, and EU Poker Games

Alex Salomon

By Alex Salomon
1. Thankful week, Memorial week… What a week for active traders: It was either a great week (for those positioned short or out of the market) or a really gut-wrenching week (for those positioned long). But much more important than the financial markets, it was a week to be thankful. A week filled with Memorial day; a day that offers each of us an opportunity to show thanks to those who are serving and those who have served: Thank you for your service and sacrifice!!

And that alone puts the trading world in perspective.

Yes the markets are in turmoil; yes it hurts in our wallets; yes Europe is facing another recession; yes job growth is too anemic… but all in all, I feel thankful to live in a safe part of the world, with men and women helping to keep that safety as intact as possible. So I’d say Memorial week was pretty darn good.

2. Riddle me this: I am not good enough in economics and I surely don’t understand as much as I’d like… but all I could hear and read about this week was how global interest rates were crashing (lowest in the States since 1946? Lowest in England since the 18th Century? Lowest in Germany since Germany exists?). So, this must mean commodities are cheaper (i.e. oil is costing less) and inflation contained.

Now I do understand that we “might not be there yet”, but there has to be a time when all this pain becomes a gain (…eventually, right)? Low rates should mean billions saved on debt servicing? Wouldn’t lower oil (maybe as low as the $60s) create a de facto tax cut (and help create an economic bounce back … until it becomes expensive again, which, in turn, would be a sign that global growth was back)?

As tweeted by Michael Gayed @pensionpartners “Low rates go from indicative of economy to stimulative to economy.”

All the pain should become gain… eventually. In the meantime, can we dispel a bit of the gloom?

3. A little bit more on Christine Lagarde… On the morning of June 1, some Bloomberg subscribers could access a test screen to see quotes on a potential post “Grexit” Drachma. It caused a bit of panic, a bit of outrage. I chuckled all along, wondering whether Bloomberg (the company and maybe even the Mayor?) would have to apologize to Greeks via Facebook like Christine Lagarde just had? Ok, that made me laugh, I was laughing out loud. Yet it disappointed me (again) that all the righteous, well-thinkers who grilled her for being honest and candid in her Guardian interview had not used their energy to say: how about the Greeks try to prove her wrong instead? Outrage is cheap, action is expensive.

We should demand candor from our leaders, not reward white lies and cuddling. Yes, this is a big enough deal that I thought about it two weeks in a row! For more, see last weekend’s “5 Thoughts.”

4. Poker game, part one… So last week, Francois Hollande and his team came blazing, demanding no less, Eurobonds and projects bonds. They also asked (well, tried to impose, really) for ECB debt monetization and a banking license for the ESM. I advocated that Hollande could have had much better results by bringing tough, solid French reforms in exchange for possible German softening on Eurobonds and the ECB. Instead, he went guns blazing, supposedly backed by other leaders. So here is the tough question: did he just unwillingly force Angela Merkel and Germany into shutting up and clamming down until he begs them to speak out again?

These are dangerous times to brutalize Germany’s leadership and it feels like he tried a “hold up,” failed, and now the police won’t release him until he apologizes and begs.

French arrogance vs. German pride. Or is it the other way around? In that poker game, we are collectively the turkey.

5. Poker game, part two… While the world is coming to terms with a potential “Grexit” and how we could be all right after all, the new buzz word was “Spexit”: Spain’s exit from the EU. And this one is a lot tougher. It would spell the implosion of the Eurozone, doom the Euro and wipe trillions off market caps… and probably close quite a few banks. Here’s where the poker game gets tougher, though: Spain could be more and more tempted into exiting the Eurozone! It would likely welcome a devaluation, it could back it with assets, with exports, with resources, with a renewed might and energy. The poker game between Spain asking for help from the ECB and the ESM is high-stakes. Maybe the highest stakes yet? Spain knows it can push the EU into a game of chicken and the EU realizes that it plays with its survival by strong-arming Spain.

Poison pills don’t come in stronger flavors. If Spain goes, so does Italy, France… the Euro, and parts of the European Union.

The ECB wants to be strong and tough… This time around, it might be the turkey, while we are the stuffing!!

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