Germans Obsessed With Getting Their Fiscal House in Order

March of the Penguins

Markets have passed the St Kilda penguin colony and headed further south since last week. Next stop Tasmania, or perhaps even Antarctica. Check out the five day chart of the ASX 200 here. Markets around the world looked equally bad, if not worse. There is no shortage of reasons why markets should fall , but politicians continue to add to them.

The Germans have decided to ban naked short selling. In other words, they have stopped people from agreeing to sell now, while being under the obligation to buy back in the future. This means that buying pressure that would previously have existed in the future will no longer be there, which bodes ill for prices.

Short-covering rallies often mark the end of corrections or bear markets. But if there are no shorts in the market, you can’t have a short-covering rally. And value investor who goes bargain hunting at market bottoms may be locked out too since the ban on short-selling prevents the needed capitulation and correction.

Talk about a lose lose situation! Oh wait, political gain is all important, isn’t it?

Meanwhile, the quality of sovereign debt remains the same. But if you try and sell it, you’re a demon.

In the German media itself, furore over “speculators” continues. But isn’t every share purchaser a speculator? Obviously Initial Public Offerings (IPOs) provide capital, and dividend paying stocks provide cash flow, but beyond that, a market for shares simply allows you to cash in on gains when you find another sucker, right?

The answer is sort of. Having a primary market for shares (IPOs) is made possible by having a secondary market. If you can’t sell shares in a business easily, your risk is substantially higher, making investment out of reach for many people. By having a secondary market for shares, the risk is lower, creating more demand for shares, which in turn provides larger amounts of capital.

And don’t go thinking the secondary market is some kind of necessary evil – at least not necessarily. It allows diversification and participation in economic growth on an affordable level.

What the government cosy corporations have turned the financial markets into is another matter to the theory.

What it means to be German

It is rather odd that while other European states have their debt yields fluctuating all over the place, Germany’s are at a record low. Yet the Germans are obsessed with getting their fiscal house in order. At least they claim to be.

Anecdotal evidence from the German population suggests that whinging is on the agenda, without any obvious plan of action. “Germany works, while the rest of Europe parties” is the phrase on everyone’s lips. But mentioning “austerity measures” wipes the morbid smile off everyone’s faces quite quickly. And it’s a conversation killer if your aunt and uncle work for social welfare services.

The other matter on the agenda is to ensure that “the German culture of fiscal responsibility” is “exported” to other Eurozone nations. Best of all, however, was when your editor tuned into a German radio station to hear a song which consisted of a speech by former Chancellor Helmut Schmidt explaining how important it was to have a sound currency. The speech excerpt was an old one, but the application quite new.

Yes, you read correctly. Radio – song – speech about sound money. Only in Germany.

One blogger reported that the banks have already decided what will be happening to the Euro:

Big investment bank to clients: “they have it all planned: they are going to sink the ship (Greece). Merkel is now drafting law for orderly insolvencies, but they don’t want anyone to make money out of it, hence the [short selling] ban.”

The only problem with this is that the banks don’t usually warn their clients of imminent financial crises.

So will the Germans boot the Greeks out of the Euro? That would imply they will have to boot the US out of the reserve currency of the world (the US dollar) pretty soon too. More likely is that the Germans will abandon the Euro instead. Let Europe ruin itself. But if the Germans leave, who will hold up the Euro?

The currency exchange booth attendant didn’t appreciate being asked for Deutschmark when your editor arrived in Frankfurt on Sunday. She didn’t get the joke. Neither of us knew who was supposed to be laughing.

But the action isn’t just in the EU. Bloomberg follows up Paul Krugman’s investment advice (hide under the kitchen table) with these words of wisdom:

“Put your helmets on if you are long risk here,” Nicolas Lenoir, chief market strategist at ICAP Futures LLC in Jersey City, New Jersey, said in a note to clients before markets opened today. “A lot of stops have been triggered when the S&P future crossed 1,100 and anybody still long will probably have to bail out and head for cover.”

The key words there are “bail out”. If the Fed can print money covertly, and it is authorised to purchase securities, do you think it will sit idly by as its credibility falls with indices around the world? Nope.

The economies of the world, and their citizens, are dependent on the drug of government spending and central bank credit. That started to falter in 2007, so government stimulus was next. By 2008, the economy was so high on artificial spending, going back would have been a painful experience.

But stimulus can only last so long too. Now, the central banks of the world find themselves having to step in to support the surreal reality. They have to use their most powerful tool to maintain the status quo, which is of course their job.

We often discuss where money printing will leave us, but the point is that it is historically the final trump that governments have to pull. After money printing comes the hyperinflation and the official end of the preceding boom in pretend wealth. This is the final act of the welfare economy that has served you oh so well…

What comes next is one question. How long it will take for the “next” to arrive is another. In the meantime, the Markets and Money will continue to warn you of what may be coming, based on the many crises found throughout history.

But wait, we could be wrong:

“This is not a typical retracement,” El-Erian, 51, whose firm runs the world’s biggest bond fund, wrote in an e-mail. “We are in uncharted waters on account of several issues, including what is going on in Europe and other important structural regime changes. In economic terms, European developments are unambiguously bad for global growth.”

So, there you have it. This time is different…

Where do you go, my money?

The market rout’s intensity is having trouble reaching the small group of publishers we have gathered with in France. A near four percent fall in global markets doesn’t mean much when you’re stuck in the middle of Normandy with a moat around you.

But things take on a whole new perspective when you have time to actually think about them. The logical begins seeming illogical. Maybe it’s the food. One can’t be sure if you don’t know what it actually is.

One thing is sure; the old French chateau we’re staying at certainly isn’t a liquid investment. It can’t be sold at the push of a button. And yet it probably gives a lot more comfort than holding a US Treasury bond.

Still, market’s famous “flight to liquidity” continues. The fact that you can sell Treasuries quickly makes them a good investment when credit is freezing up again. Just ponder that for a moment… Something is a good investment because you can sell it quickly… Any logical five year old would tell you you’re barmy to think so.

But instead, it’s the world that’s barmy and the investor that’s rational. At least for now. Soon, both will be barmy. Treasuries have few places to go but down. When that happens, the consequences could outgrow your personal investment decisions anyway, but that’s no excuse to be imprudent.

Exit the Dragon, Enter Dan Denning

Perhaps the most important development in all this is that Dan’s prediction on China is playing out, largely under the radar. At least compared to Europe, it’s under the radar. While newspapers around the world were reporting on the “contained” European crisis, Dan discovered something that could really pull the carpet out from underneath the Australian economy.

More and more analysts are coming to agree with the claims in our recent Exit the Dragon promotion. Dan discussed some of their views on Thursday.

Considering how much hate mail we received as a result of Dan’s prediction, we knew we were on the right track. It was just a matter of time. But now it seems Dan’s long awaited return to an editorial role of a paid newsletter couldn’t have had a better timing.

Things are hotting up, or really cooling down, if you prefer. All across China, bubble popping symptoms are appearing like a skin disease. And considering we have just had the bubble of a lifetime pop with a bang, you would think the world could spot another one under its nose. But no, Europe is far more interesting right now. And it could just be the prelude to something even bigger…

Have a great weekend.

Nickolai Hubble.
Markets and Money Week in Review

Nick Hubble
Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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