With most of Wall Street on vacation, those few traders manning their desks are taking advantage of the low volume to push the market sharply higher. This, combined with a large move up by the Euro has pulled the entire risk trade up forcing the US Dollar lower.
This move was to be expected on some levels. Since 2002, there has been a rally from just before Thanksgiving until the second week of December. This year is shaping up to replay this move. Stocks and other risk assets were certainly oversold from the preceding week and needed a breather.
However, from a larger perspective there is no shortage of truly horrible developments in the world. EU budget talks failed to accomplish anything. This comes on the heels of failed Greece debt talks from last week (there is another meeting next week on this).
Meanwhile, France has lost its AAA credit rating, Spain’s bad bank plan has been dropped due to lack of interest. And then there is Cyprus Portugal and soon to be Italy’s issues to deal with.
At the end of the day, the whole issue in the EU boils down to whether or not Germany will foot the bill for everything. The fact of the matter is that it won’t. If Germany were to agree to fund things as they are (assuming nothing worsens in the EU), it would amount of over 30% of its GDP.
Never in history has one country issued a transfer of that amount to another. The single largest transfer in history (on a GDP basis) was the German Marshall Plan, which represented only slightly over 6% of US GDP.
So forget about Germany writing the check. There will be political machinations and games played to maintain the house of cards that is the EU… but when push comes to shove, Germany will leave before it foots the bill for everything.
And then of course there is the fiscal cliff in the US: the single largest tax hike increase in US history (on a % of GDP basis). Ignore the media’s spin on this, no one has a clue how to fix the problem, largely because math is not partisan and we’ve been living beyond our means for far too long to fix this with one deal.
The reality is that what we are witness today is the collapse of the welfare states of the developed world. The real solutions (defaults both sovereign and on social spending plans) are completely unsavory from a political perspective, so politicians will do all they can to avoid what actually needs to happen.
In simple terms, the great debt implosion has begun. It will likely take several years to complete, but what’s coming will make the 2008 debacle will seem like a picnic.
This is why I’ve been warning that 2008 was just the warm-up. What is coming will be far far worse.
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