08 Jun

Germany In...or Germany Out?

Categories: Asian View

In Europe, we have seen suffering, but we haven’t had true austerity yet. True austerity would mean they take away social benefits, they cut pensions dramatically, and that’s not happening anywhere. People have been unhappy with the reductions so far, but that’s nothing compared to the cuts they are yet to experience. If we have a hot summer in Europe, I could see rioting starting very quickly and spreading from country to country. It is worrisome, but sadly, that’s where we are and it’s going to get worse. Quite frankly, investors need to be positioned for more chaos in the future. If investors have cash, they should buy physical gold and silver as well as the mining stocks because they will be a lot higher in the next few years.
-Egon von Greyerz, founder and managing partner at Matterhorn Asset Management

Global and US stocks rose on Thursday after China unexpectedly cut interest rates to shore up growth, but optimism was tempered by Federal Reserve Chairman Ben Bernanke, who disappointed investors looking for further stimulus for the US economy.

The benchmark one-year lending rate will drop to 6.31 percent from 6.56 percent effective today, the People’s Bank of China said on its website yesterday. The one-year deposit rate will fall to 3.25 percent from 3.5 percent. Banks can also offer a 20 percent discount to the benchmark lending rate, the PBOC said, widening from a previous 10 percent.

The announcement, two days before China is expected to report inflation, investment and output figures, may signal that the economy is weaker than the government expected. “This will be the beginning of a rate cut cycle and there will be at least one more reduction this year,” said Shen Jianguang, a Hong Kong-based economist with Mizuho Securities Asia Ltd. “The data to be released over the weekend must be very weak and inflation must have eased sharply.

Bernanke, in testimony to Congress, said the Fed was ready to shield the US economy if financial troubles mount, but offered few hints that further monetary stimulus was imminent. He said the central bank was closely monitoring “significant risks” to the US recovery from Europe’s debt and banking crisis, but struck a decidedly different tone from the central bank’s No. 2 official, who argued in favor of monetary support on Wednesday.

As a result, Asian stocks fell again this morning, paring their biggest weekly gain since February, as comments by Federal Reserve Chairman Ben S. Bernanke in the end overshadowed China’s first interest-rate cut since 2008. Commodities also took a hit with oil slumping towards $83 a barrel, and gold back below $1,600 an ounce.

These days everyone seems to have his or her own opinion about what should be done to keep the members of the euro zone together. Especially the role of Germany in the whole drama that is currently unfolding sometimes sparks lively discussions.

There are those who think that Germany would be better off if it left the euro zone, and there are others who claim that the opposite is nearer the truth.

Patrick Artus from Natixis for example says that “the euro-zone countries now have to understand that, in reality, Germany’s bargaining position is very weak. In the event of a break-up of the euro, Germany would suffer considerably:

not only because of the appreciation of its currency and the resulting loss of competitiveness, as in 1992-1993;

but above all because of the capital loss that would follow the depreciation of the exchange rate of the other euro-zone countries against Germany. For Germany, with its external surpluses has accumulated substantial external assets whose value in Germany’s currency would plummet in the event of a break-up of the euro.

It is impossible to imagine that Germany would seriously consider a loss of competitiveness of 30 or 40% and a wealth loss of EUR 1,800 to 2,400 billion.

Therefore, we believe that Germany will accept to participate in coordinated growth stimulus measures for the euro zone.

But Bill Bonner from The Daily Reckoning, who not so long ago had lunch with hedge fund manager John Prout, has a completely different story line:

John had analyzed the euro crisis and come to a startling conclusion.

If Greece tried to leave to euro, he believed, it would cause a god-awful mess. There is just no way for a country to hobble out of the euro without getting its cane knocked out from under it … and then being trampled by currency speculators, bank depositors and angry mobs. A cripple will die before he reaches the exit.

Unlike Argentina, which could seal its financial borders, and rob its own people blind, the whole point of the European project is that the borders are open. And the more the Greeks try to keep money in their country, the more people with money are eager to leave. As soon as they let it known that they are leaving the euro, the retreat will be like the French heading south after Dunkirk. Money and people would leak out of every mountain gap and river crossing

and the rest would start smashing windows and setting German cars on fire.

And then, what about Spain? Portugal? Italy? And even France? Who would want to hold euros in Europe?

The solution to this problem will have to be a radical one … or none at all.

John’s big wonder … as reported on CNN:

Could Germany save euro zone by leaving it?

Editor’s note: Clyde Prestowitz writes on globalization for ForeignPolicy.com and is president of the Economic Strategy Institute. John Prout is the former Paris-based treasurer of Credit Commercial de France.

By Clyde Prestowitz and John Prout, Special to CNN

With Greece probably heading for an exit from the euro, the European and global economies may be facing disaster. However, there is still time for European leaders to reverse this destructive dynamic with one simple, outside-the-box solution: Instead of pushing Greece out of the euro zone, Germany should voluntarily withdraw and reissue its beloved deutsche mark.

The analysis of the problems of the euro and the European Union has long been upside down, focused on the debt and competitive weaknesses of the so-called peripheral countries (Greece, Italy, Spain, Portugal and Ireland) and especially of Greece. But issues of debt and competitiveness existed and were dealt with rather easily long before the euro arrived, through periodic devaluation of the currencies of the less-competitive countries against those of the more competitive counties, and especially against the deutsche mark.

If Greece or Spain leave, it will be a disaster for everyone, says John. If Germany leaves, it will merely be a surprise. No riots. No revolutions. No currency debacles. The deutschemark will go up. The euro will go down. Problem solved.

I don’t know about you, but I think there’s a lot of sense in what he’s saying. Not many people are coming up with good ideas lately, so this sure sounds better than what I’ve heard and read lately.

And did you know that almost half of the global goods trade involves Europe? If not, then you should have a look at the figure below from the World Bank. As Tyler Durden at www.zerohedge.com reminded everyone who wants to listen, unless “Europe is fixed” and quite soon, the situation will first get worse before it gets much worse:

At the beginning of this week Larry Levin from www.tradingadvantage.com was wondering whether the first six months of 2012 actually happened. Furthermore he doubted QE or money printing would be effective in coping with the worsening market conditions:

“After Friday’s 2.5% drop in the S&P 500, its largest single down day in seven months, the market’s 2012 gains have all but been wiped out. The Dow is now down YTD. Accompanying the decline was a flight to quality as Gold’s 4% gain is the biggest day since January 2009 and Treasury yields plunged to new all-time record lows with the 30-year bond yields down at 2.5%.

The catalyst of course was the pathetic 69,000 new jobs created in April, which massively missed the 150,000 estimate and fell well below the 100,000 whisper estimate. Moreover, the prior month’s data was revised much, much lower than originally released.

This horrendous economic data and the accompanying market sell off means that the Fed will have a green light to proceed with new QE if it so chooses at the June 19-20 meeting.

So here we go! We’re on our way to 2008 and 2011 all over again. The European Central Banks have all but thrown up their hands and will shortly turn on the printing presses and now Helicopter-Ben has his reason for intervention.

But once again, nothing will be solved and the market will eventually be valued at true levels. On the horizon, it’s just temporary hopium for the crack pipe so we can continue to pretend that the global economic woes don’t exist.

The QE and money printing keep the addict going. But at some point, we’re going to hit rock bottom because central banks will have dug an inescapable hole. Isn’t doing the same thing and expecting a different result the very definition of insanity? Lather, rinse, repeat.

Posted by Nico Omer Jonckheere | VP Research and Analysis, PT. Valbury Asia Futures