2010-08-11

Socionomics and the Euro

What's happening today? The only news item I can find comes from zerohedge.
The ECB just announced that it allotted $430 million in its 7-Day USD operation to two banks, for whom the dollar shortage is once again all too real and coupled with the scarcity in EUR we have been discussing over the past month: one wonders just how positioned these banks are if they have allegedly neither USD nor EUR capital in hand.
Nothing changed in Europe. On Monday, the Spanish president even talked about restarting some infrastructure projects that were stopped during the spring crisis! It may well mark the peak in euro confidence this summer.

All that has happened in the past couple of months was that the bears who predicted the euro crisis took their profits and left the market, reversed positions and played the long side, or watched their positions erode if they held firm. People who did not expect the euro crisis became extremely pessimistic during the crisis and when the world did not end, they became more hopeful. Some people were even bargain hunting for euros and European assets. The rising market reinforced their position. The euro mood was happier and the currency rebounded versus the dollar.

Short covering in the euro pretty much exhausted itself a couple of weeks ago. The Federal Reserve didn't murder the U.S. dollar with QE2. European politicians became confident enough to start talking about reversing austerity, i.e. they reached near peak optimism, the only step left would be to actually undo austerity. There's was very little potential upside left.

The euro has likely turned here and Socionomics predicts that the mood leads events. Therefore, a banking or sovereign debt problem should emerge in the coming weeks, most probably from Spain.


Update: I missed this story earlier, it fits with a return to reality for investors.
German Debt Ratio May Rise To 90% Of GDP On Bank Bailout
The bailout of Germany's banking sector may swell the country's public debt rate to 90% of gross domestic product, Die Zeit weekly newspaper reports Wednesday.

The weekly based this estimate on a recent decision by Eurostat requiring Germany to include the balance sheets of public-owned bad banks--set up to help financial institutions offload toxic and non-strategic assets--into its overall debt ratio.
No new debt, just recognizing what exists. The 90% figure is important:
Economist Rogoff Breaks Down What Happens To Economies That Hit 90% Debt-To-GDP Ratio
First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below 90% of GDP.1 Above the threshold of 90%, median growth rates fall by 1%, and average growth falls considerably more.
Reinhart and Rogoff co-authored This Time Is Different: Eight Centuries of Financial Folly.

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