You’re a smart kid and that's a great question

Mint – Bill Blain’s Morning Porridge October 29 2012

You’re a smart kid and that's a great question, but only you and I are clever enough to understand the answer... Next question?

We’ve got another entertaining week in prospect with US elections, weather, and banks at the forefront. The highlight will be Friday's make or break US employment number. Many pundits reckon the US election hangs by it. Politics, politics, politics.. you can’t get away from it.. Wishing US readers good luck with Frankenstorm – looks nasty.

There is a great story in the FT this morning looking at how US investment banks are providing clients with "ready-reckoners" to analyse winners and loser stocks under each potential election result scenario. But would someone just tell me clearly what is going to happen with the debt cliff? I was on a TV show Friday where a financial fundamentalist fulminated about how a massive fiscal shut-off and global recession would cure our ungodly fascination with debt and government spending. Hallelujah brother! and get a life!

In the market background there are a number of factors to think about. Italy might still prove a no-see-um with Berlusconi in an anti-Monti rage after he was found guilty of tax evasion. Now… why didn’t he expect that? Italy politics is something I must get round to writing about – ignore it at your peril. Greece rumbles on. Yawn. But wake up and smell the coffee if the ECB/EIB take losses on Greek bonds… don’t want to upset the Germans..

Back in London, empty train this morning with large slathes of the market out for second week of mid-term. I just don’t understand that? Beats me why teachers at the most expensive schools need a two-week break when our kids have only been back a couple of months? Someone please explain – and it certainly makes for a somnambulant market (I agree absolutely Bill; the only half-term I knew growing up in central Scotland was in the Enid Blyton and Billy Bunter books, but it does help explain why the average English person in the street is so poorly educated: the other BB).

Meanwhile.. what’s not to like about Europe? It goes on and on. I'm far less sceptical today than I've been for a long while in Europe. Smarter politics and the Draghi effect mean the chances of a catastrophic Euro collapse have receded, and the possible effects of financial contagion appear plugged. However, I've read too much European history to think we’ve got anything close to a permanent cure, and nothing in my limited economic experience suggests tried and tested economic treatments will work on a long-term solution. I suspect future generations will look on Europe’s current brimstone austerity as the equivalent of a course of leeches and daily bleeding.

But what’s the alternative? Something radical? Watch this space.

If there was a European of the year award – perhaps there is? – then my call would be a joint award to Draghi and Hollande. Mario’s done a great job wrapping up Europe's loose ends in a convoluted knot of understandings and commitments. Over the weekend he was placating German lawmakers with his support for EU debt Kommissars with powers over national budgets and telling them the ECB has been making money from its bond dealings! All the pundits are wondering just how he will sell this konzept of surrendering national budget sovereignty to the rest of Europe.

I don’t think he has much to worry about. The periphery are learning how to play at being “good Europeans.”

And then there is the man reviled as Europe's most disappointing man - French premier Hollande. He's managed to match Sarkozy's worst poll ratings in a matter of months, is mired in domestic girl-trouble, and has apparently surrendered France's European leadership to German hegemony. But, he is much much smarter than he looks. 

Hollande is making Merkel do all the heavy lifting. He knows Germany's last choice is to abandon the Euro. So rather than mimicking Sarkozy's pleading, cajoling and desperate need to be seen in close partnership with Merkel, Hollande has distanced himself. It's a blindingly smart play – if you want to woo a girl, feign disinterest! If Europe wobbles it’s because Germany won't support its’ fellow members. It’s not about the rest of Europe being unreasonable. Now the pressure is on Germany to support Europe, not on Europe to plead German support!

Hollande and Draghi have turned around the Euro axis: Hollande has made German responsible for the Euro, while Draghi is making it easy for them to support it. As I’ve quoted many times: “the greatest trick the devil pulled wash making us believe he didn't exist”.

Having just reread a history of the causes of WWI, I can't help but be reminded of the complex web of alliances, pledges, treaties and unfulfilled expectations that drove Europe to an earlier cataclysm.

So what’s the outlook for the Euro? This morning’s miserable Spanish retail numbers add to the pressure on Spain. We suspect there isn’t much more upside for Spain until it takes the OMT – that little game of trying to pretend it doesn’t need it is unsustainable. But when Spain does take the OMT does it trigger further tightening? Limited and may put pressure on Italy to take a similar level of support – why not we ask? The main risk will be a risk on Europe pushing up rates at the core – reversion to the mean….  means higher bund yields!

Who knows… (but I note the True Finns made electoral gains at the weekend… watch that space….)

Out of time..

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