High Expectations


What a difference three little letters can make: from Europhobic to Euphoric in little more than a week. For the life of me I can’t see merit in any of the reasons widely offered these days for this phenomenon, normally in a blasé manner implying they are so common knowledge that anybody is of course aware of them and bored to death just to listen at these tired old explanations.

And yet, it was only ten days ago that the markets were wringing their hands in angst over the imminent death of the Euro, an upcoming event so widely expected that anybody was of course be bored to death to… But wait! Are you sure this was ten days ago?

Then something big must have happened while I was on vacation (a familial not pretty affair, don’t waste any of your valuable envy here) to turn the tide around. Well, I switched the TV on, expecting to find it right there at the opening of the weekly news, but all they talked about was the new edition of American Idol. I went to the economic press but everything seemed business as usual; GS screwing its clients, this time á propos of Facebook capital placement, inflation this, deficit that… How about the Internet, then? Nope: something about one in a million dogs having sense of humour.

The best I could find, after much research, was:

– Talks about EFSF enlargement turned down by Germany, but possible enlargement of fund raising capacity to the 750 bn € initially announced, rather than the 440 bn € to which its limited government guarantee constrained it in reality.

– Talks about letting the EFSF buy euro sovereign bonds.

– Brave words of support by China and Japan, both verbally ready to buy highest grade sindicated Eurobonds and  other (presumably highly rated European debt)  to help peripheral countries.

– Opening public debt offerings of the year by PIIGS countries relatively easily placed.

And this is all. Never mind that the fundamental relations of debt to GDP and debt service to currency inflow in the debtor countries have not changed. Never remember that Greece’s default is increasingly considered inevitable by investors without the debt markets having fully discounted this possibility. Above all, never ponder the future of the financial sector in debtor countries, the size of their debt-loads, their foreign incomes or their refunding necessities for this year. Please remember to take talks at face value too.

Of course, it could always be part of new years’ resolutions (“remember to be less negative on poor old Euro”) Be it what it may, oblivion is the last craze of the markets and, as it happens with any successful trend, non followers risk social death.

Analysts are going wild about the Euro’s prospects, it is not difficult to find out there forecasts for anything from 140 to 160 and more. The sky is the limit.

And indeed, the Euro is a singular case. If it survives in its present exact form (no bailout funds, no common bond emissions, no fiscal transfers, etc.) the only way for the currency seems to be up. Anything, from the trade surplus of Germany to the fiscal austerity robustly enforced all over, points to further appreciation and deflation.

However, if it doesn’t, then any rescue packages would imply a higher probability of a laxer fiscal and monetary policy, some degree of fiscal expansion would not be unreasonable in the weaker economies, default might possibly trigger some capital flight, not to speak about the outright panic that secession of one sort or the other could create.

So, there you go, make your choice, buy or sell. Just remember to bet anything you have, since this is potentially the most rewarding (or else) investment opportunity out there.

You could as well flip an Euro to decide, although some investors seem to take a different approach: sell today, buy tomorrow.

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About Outis

Nobody is cooler than you
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