The more I study stock/bond movements since January, the more I feel they were unjustified and that this is going to be a summer of real suffering barring further money-drops. Honestly, further easing doesn’t look politically viable, but any incumbent sitting on top of a bad economy is pretty much asking for automatic defeat so neither choice is good. The bond yields just keep getting lower and nobody seems to give a fuck: once we’re out of the woods shorting stuff like TLT is gonna be genius, but for now it’s not a bad addition to the portfolio.

Most traders are fucking politically illiterate and grab onto whatever crackerjack theory they want to believe, and the one that’s still floating around somewhere in between the Chinese stimulus and QE rumors is that the Europeans are gonna pull it together and the great helmswoman Merkel is going to cave into the French, the Spanish, and the Italians and do some kind of miracle eurobond consolidation assurance maneuver.

This will never fucking happen. Everyone else in Europe (and in the US, really)  is politically trapped and feeling the economic squeeze and a retribution oriented electorate. For instance, if I had to guess I would say Stirzia (however it’s spelled) and New Dawn and friends get approximately equal numbers in the election and that one or the other gets to form a totally unworkable coalition that will make a bunch of unpopular decisions, get propped up by the EU temporarily then have all the minor coalition partners flee the sinking ship and make them rule in agony as a minority-government until they finally have elections and the ruling party gets  their face smashed and return with 5% of the vote. Pretty specific, but that’s what I see as most likely.

The only person not trapped is Merkel, and she can stay in power despite overall economic weakness as the the idea is that she’s going to be tough on the laggard euro economies. The German economy is not doing that badly and they really have no appetite for further stimulus without structural reforms no non-German county (exception: Austria) would be able to carry out or even want to. We’re seeing some WW1 style Volksgemeinschaft Endseig shit, which basically means that all the other German parties are not going to break ranks with her on her foreign economic policies and the next German election may very well bring another SPD/CDU grand alliance.  Look for a quiet alliance of greater Germany made up of the BelNeLux countries,  Germany, Austria, and Denmark to form a counterweight or “Axis” if you will, all designed counter the fiscal suggestions of the Latin countries. Given enough time, that grouping may actually form the basis of a new Euro-lite currency but that’s neither here nor there right now.

The point of all this is:  Eurobonds will never fucking happen.  Merkel even said they were unconstitutional, and in Germany, those are fighting words. I’ll grant you there may be some faux version of Eurobonds that bears the name but there will not be any commonly guaranteed loans coming out of the Eurozone any time soon.

This all leads me to an unfortunate article  by Niall Fergeson:

http://www.thedailybeast.com/newsweek/2012/05/13/niall-ferguson-will-europe-act-to-avoid-an-economic-cataclysm.html

He correctly and amusingly outlines the overall situation, then comes up with completely incorrect solutions. The worst thing he  suggests Germans don’t want to back a special Eurozone bond because they’re “complacent.”

I think the better term might be “cautious” or even “not retarded.” With German 0% bonds gaining popularity, it’s not clear why anyone would think that a glass of carefully brewed German beer would be more marketable after being mixed with water from a half-dozen different sewers.

In fact, only someone with an explicitly political motive would suggest these could be anything other than a disaster. Ferguson is such an even-handed imperialist he considers anyone not eagerly trying to assemble or defend any empire anywhere at anytime to be “decadent” and even “irresponsible.” Europeans already want less political integration and less economic integration, and certainly in the ultra-undemocratic financial sector, so anything that smacks of federalism is a total non-starter unless you live in Romania or Cyprus or something.

People already feel helpless and barely able to regulate and control their national banks: making it some terrifying beast out of Brussels would create a crisis of political legitimacy even worse than the one the EU already has now. My idea before (that I was a bit early on and got just reamed on for messing up the timing) was that we’re seeing a perfect storm where each political entity acts in a way that’s rational to them and protects their interests  but causes the overall macroeconomic environment to deteriorate.

I consider the October 124 SPY puts to still be priced very reasonably and for the discerning gentleman, the January 124 puts may also tempt. European indices are absolutely insane right now and the huge amount of volatility has already been priced in to a pretty large degree, but our own markets still heavily underestimate the degree to which we are tied to Europe.  Much as the 1929 crash had nothing to do with Europe but still caused their economies to collapse, major problems in Europe that in principle we have nothing to do with can also rebound back on us. Throw in the fact that China is going to be battening down the hatches to avoid political fallout from an economic slowdowns,  the Middle-East is still a tenderbox and the US has a huge debt load, a post-industrial economy, and unemployment numbers that are probably going to see 10% before they reach 7%, it’s hard to justify current stock prices. Still a lot of great growth stocks out there and my over-bearishness has definitely cost me a lot of money these last few weeks but right now it’s better to trade with the idea that the trend is down and that this company should retain its value even if there’s a full-blown depression.

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