Ideas and criticism on modern economy

As we already said several times, we haven’t seen real positive and contructive reaction from European and American governments sor far. This can be illustrated within the current French presidential campain : whatever the candidate, no one is brave enough to promote real concrete solutions. They all put forward the same old and useless promisses, solutions, but nothing that will really change the course of this crisis (raising minimal wages, taxing rich people, and so on). Such a useless energy spending, opening the path for gloomy outlook, instead of bright future.
As a result, we alreardy see the first consequences of uneficient policies in Spain and Italy, even if we must admit that Mr Monti’s governement is doing a much better job than its peers : those countries are unable to tackle the deficits, and the debt to gdp ratio… and they won’t until they realize that they need to reshape their whole economic model. This suppose a huge effort to restructure the way wages, social care, taxes, unemployment benefits, education, state spendings are currently implemented in order to build a competitive economy around a european concept. A business oriented environment, not leisure oriented. It must be fair for companies, and for workers. But this requires time, energy and above all… balls. And in this french campain, I haven’t seen a single tough and brave candidate…
And there is currently

We just closed our EZC FP position flat (15.50). The move we were expecting a few weeks ago is just starting right now. We stay ready for a new short round but at higher levels.

ITS2 IM sold at 81.50.

On Friday we were stopped on our call on VXX at 29 making substantial profit (late notice sorry). we will be back on it at 25. Other positions maintained.

Initiate short position on CAC40 (ie EZC FP 15.50 EUR) above 3660

Initiate short position on FTSE MIB (ie ITS2 IM at 80 EUR) above 16230.

Initiate long on VXX US at 26 USD

Liquidity : all equity rallies for more than two years have been initiated by QE programs. What is still worrying in this story is that those programs should have been implemented along with structural reforms in the US and in Europe. And it hasn’t been the case so far.

Under such conditions, it is hard to believe that those QE will have long lasting effects… but no problem, Central Banks have THE solution : just more QEs of course! All this to say that instead of managing this crisis, governments in Europe and in the USA are always lagging behind, just acting as dumbs each time financial markets start to cough.

in the US : depsite the fact that I wonder HOW this country managed to get better job creation and ISM numbers for the past 3 monthes in such global  gloomy environment ( I must be the dumb here), there is still a huge pending danger : a new wave of falling prices in Real Estate.

 In Europe, as long as there is no real strong reform aiming at rebuilding a competitive industrial network in Spain, France, Portugal, Italy, there will not be any good outlook. Those countries entered a very bad vicious circle of high deficit, higher debt, new austerity mesures, lower growth, lower tax income, higher deficit……………. and as long as those countries will rely on state spendings and not private investment to promote growth, this will be the case. Because of this Greece defaults, and as we already said last time, Portugal is on the same path now… soon we’ll see Spain, Italy and France. And all those QEs will not change this fate by themselves.

This crisis is here to last, and to get worse. I’m not happy about this, and somehow scared. But our policy makers are fully responsible for this and those cowards will not tackle the real problems.

I would like to wish you all the best for 2012 : health, wealth and happiness !

16… this is the number of useless meetings since the beginning of this Eurozone crisis. This also accounts for the failed attempts in setting up a true and sustainable solution for this crisis. Even if we accept the fact that building some kind of fiscal union might be a good point, how can our leaders think that we can achieve this goal without building an integrated and harmonized economic network : do you really think that the economic and financial structure of Italy is the same as the German one?

This means that we have now just a thin piece of (very) long term solution. But no answer for the short-to-mid term problem we are all facing : a sudden drop in investors confidence leading to the collapse of EURO. No one can think that even 20% of european countries will manage to get back to 3% deficit to GDP withing a couple of monthes. We already feel the impact of reduced spendings on european growth and this has still a long way to go.

If european leaders do not manage to find other ways to stimulate growth at zero cost for public finance, I can see only two outcomes : a vicious circle of cuts in state spendings leading to even weaker growth, and/or long term higher level of deficit. In both cases europe will be a looser and this is why Germany is so reluctant to move forward. In such situation what is the only solution then ? Quantitative Easing from ECB, with higher level of inflation… but with one ALL-IMPORTANT condition : europe MUST rebuild a competitive industrial network, based on highly innovative products… and then achieve fiscal union. But here too, we’ll face a German opposition.

So this is the point where Germany has to decide about its own future. I will have to do it because the financial market forces will puch for it. And once again, despite the short term huge costs, I am not sure that Germany will choose the EURO side…

It is a shock but the facts are here. The only collaspe I wasn’t betting might be on the verge to suddenly happend : a eurozone breakup. Despite the unsustainable rise in Italian and Spanish yields, despite the unexpected shock of the German missed 10Y bond auction, yesterday’s meeting between Monti, Sarkozy and Merkel was a complete mess… the same speach, the same positions and NOT A SINGLE SOLUTION.
As distressed countries will not be able to tackle budget deficits on their own. But Germany sent a clear message : Germans will NEVER pay for Italians, Spanish Greek and Portuguese people. All the more than they now know that France is also increasingly suffering from the same wounds.

The announcement made yesterday included talks about changes in the treaty. But was does that mean ? is this about fiscal consolidation ? Or will those changes include ways of exiting the EURO ? My new concern is that i now see german feel that the country is now strong enough to live its own story, far from countries that made not a single effort to set up important structural changes in their social and economical policies.

Germany has a strong history, where they have always been at the top in terms of economic power. Only the post 1st world war hyper-inflation period and the second WW hampered their walk toward successful and sustained economic power. Now that the Great Germany is back on track, i think that it strongly believe that they would do better outside EUROZONE. Of course, it knows that it will suffer from the aftershocks. But it also convinced that they can recover and growth much faster than if it stays in this current failing EUROZONE…

It is difficult to assess if Germans are right to think so. There are too many parameters at stake. But one thing emerges from the past statements : Germany is considering this possibility… This only hypothesis is scaring… this does not bode well for the markets and our way of life… even more if we consider that on the other side of the Atlantic…. you know what I’d say now.

Almost 1 year after our last comments (those proved to be accurate), where do we stand now ? For me, the problems are the same, and I can’t find any short term solution. Everybody is focusing on the European Debt Crisis, and seems to forget everything about the severe troubles for the 1st economy of the world.

The European crisis is a real problem, but only because the political leaders acted as cowards for months now and still behave te same way. They wanted to replicate the american loosing policies : just buying time. They know now how time can be costly. Everyone is focusing on the next G20 meeting and hope is growing that it can solve everything : those who think this are wrong. According to the mesures on which every “expert” is focusing, I can say with no problem that this is again a new step forward to buy some more time.

Once again this crisis is a structural crisis and the solutions found so far just correspond to pure cyclical crisis potential solutions. And for political reasons, heavily influenced by financial lobbyists, nobody wants to put forward the only good solution : a true, deep and long lasting reform of the financial system AND, in the mean time, a strong reshufle of the industry’s globalisation.

So my guess, once they achieve bank recapitalisation and Greece’s orderly default, they will face the danger of Portugal’s collapse, which will provoque a new wave of recapitalisation and default…then Italy or Spain…. and when we will reach this step, keep your seat belt fasten !!!
The other problem will come from this HUGE amount of money printed by the central banks, which will slash the real income of many households. So our “leader”, wanting to buy some time, are slowly preparing a pure collapse of the oldest economic powers on earth.

But, this is is nothing compared to the hurricane coming for the US. we will deal with this in the next Chapter.