Eurozone: Dead Man Walking

The S&P500 went on a wild roller coaster ride last week, closing on Friday with a 0.85% gain for the week.  Volume was very light. Volatility was virtually unchanged.

The big story of the week was Italy, as predicted here.  Essentially, the nation’s bond market blew up, and was rescued from a total collapse by the European Central Bank, which created money to buy up Italian bonds.

And by the end of the week, two governments had fallen.  Greece lost its prime minister and so had Italy.  In their place, two “technocratic” governments will assume power. And exactly what will change? Precisely nothing. The two replacement governments are blatant puppets of the financial elites; in fact one, the Greek leader, is a career central banker.  So they will actually accelerate the enactment of austerity policies, policies that will further punish the Greek and Italian societies, for the sole purpose of rescuing the banks that loaned money to Greece and Italy.

And as the beatings continue, the economies will further deteriorate, and the debt loads will further expand.

These two states are on a highway to hell, and nothing that just happened—politically—will prevent the impending disaster.

Meanwhile in macro-land, it was a light week.  While consumer credit jumped, all of the increase came from federal student and auto loans. Wholesale trade dropped, which is a bad sign for upcoming GDP growth reports.  International trade, while still abysmally subtracting from GDP, was slightly less bad than expected. Initial claims were just under 400,000, but as always will be revised higher next week. Import prices were much higher than forecast, which will also hurt upcoming GDP data.  And consumer sentiment improved slightly, but was still 25% below its 30+ year average level.

Technically, the S&P500 has still not broken the downtrend that began in early May.  The S&P has not jumped well above the 1,300 level needed to break this downtrend.

Interestingly, the S&P500 is essentially UNchanged for the entire year. Investors in virtually any other asset class—from Treasuries, to commodities, to high yield bonds, to investment grade bonds—have earned more year to date.  Even more interestingly, the S&P500 is today essentially where it was in the late 1990’s, almost 14 years ago. So the S&P has been dead money for many investors, for a very long time.

A few days ago, internationally renowned economist Nouriel Roubini published an essay in Reuters in which he argued that the eurozone’s disintegration is no longer a risk, but an event that can no longer be prevented.

Amazingly, Dr. Roubini published papers and gave speeches in 2006 arguing that the risks of a Eurozone disintegration were far higher than most experts understood.  But what’s most amazing is that the risks that Roubini warned about over 5 years ago are precisely the issues that are now leading to the eurozone’s death.

The heart of the argument is that—politically—the Eurozone will not do what is necessary to save itself.  Namely, it must integrate fiscally and politically (to boost growth and control debt) .

What is happening, instead, is recessionary deflation.

And the nation-state at the center of the impeding break-up (ie. the tipping point) is Italy.  Italy, according to Roubini, is “too big to fail, too big to save, and now at the point of no return”.  Therefore, “the endgame for the eurozone has begun.”

First, we’ll see defaults.

Then, we’ll see exits.

And finally, we’ll see the break-up of the monetary union.

So as the world breathes a sigh of relief that two of the PIIGS have changed governments, Roubini reminds us that it’s too late.

The eurozone is a dead man walking.

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