Look, this will sound silly, because I’m basically arguing that you should worry when European yields go up, and ignore them when they go down. But that is exactly what you should do, and here’s why:
The ECB is doing the buying.
Now, on that point alone, the ECB can make EU bonds look as low as they want. Markets and auctions are funny things. You could have 99% of trades say that Security A is worth $10. And then the final 1% of trade activity can go for $15 and suddenly the 99% of price discovery never mattered; except that it did matter, way more than a few dumbasses crowding in overpriced sales at the end of the day (and especially if those trades are designed to create suckers to buy much larger volumes of Security A tomorrow at inflated prices).
That’s what’s meant when people talk about markets “pricing on the margin.” It’s why econometrics rarely predicts anything. It’s why, in general, you can get massive bull rallies on little to no volume, or huge price collapses on the same.
The ECB could make Italian 10 years tomorrow read .01%, and it wouldn’t change the situation in the least. But if they did that, then the jig would be up, now wouldn’t it? They’d be called out. So instead, it’s steady drift downwards, and much talk of “renewed market confidence,” which these bastards are still convincing themselves is all that’s missing from the grand success they deserve.
There are two outcomes here which should concern you, given the magnitude of the debt that needs to be cycled. The first is, the ECB keeps buying their member’s bonds, while professing they aren’t/won’t/never, and receiving no help from private equity markets.
In this case, the euro goes to par against the dollar, and our (U.S.) exports go to zero.
The second is, the ECB, realizing they will not trick private market participation, throws in the towel and sends some very large nations into default.
In this case, European demand dries up, and…our (U.S.) exports go to zero.
Are you seeing a pattern here?
The case that avoids these outcomes is not contingent on printing/no-printing. It’s contingent on cooperation from private creditors willing to roll over the debt on their backs, and keeping the EU monetary supply in balance.
If that happens, I will be proven wrong and I will reluctantly cover my oil and energy shorts, hands in pocket, face to the ground.
But now, I ask you, are private markets falling for the “All is well! All is well!” sounding board? Bank participation in European debt is at an all-time low. Money is being held up in reserves. Corporate balance sheets have never been higher. Greece and Portugal are looking read to go over the edge.
But hey, Italian and Spanish yields are lower. Just this: who’s buying?
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