European Elections: At Full Speed Toward the Debt Iceberg

The beginning of Europe's austerity crusade dates back to Thanksgiving of last year, when Germany essentially failed an auction of its bonds. That was the “come to Jesus” moment that got the ball rolling on the notion that the Ponzi scheme known as “sovereign debt” financing had to come to an end or else. Coincidence or causality, it also marked the beginning of the equities run that saw the S&P 500 (^GSPC) rise 22% in about 4 months. Fast-forward to the first week of April, when Italy's “technical” government bowed to the unions on labor reforms, abandoned any kind of serious fiscal plan, and set in motion the suicidal idea (see Spain on the Brink as Italy Commits Fiscal Suicide) that austerity and tight deficit controls is no way to go through life. Spanish and Italian governments have since been leaning heavily toward resuming higher deficit spending, and Sunday's election of a socialist in France, and a strong showing in Greece by any group willing to backtrack on the terms of the recent bailout, have all but buried any notion of embracing fiscal sanity. Again, coincidence or causality, the first week of April marked what increasingly appears to have been a meaningful top in equities. I have regularly been updating the behavior of corporate bond buyers (orgy-like indulgence), and of course we all know that there is nothing better for stocks than enough bad news to get the Fed moving on the next wave of money printing. So purely from the standpoint of money-flows, whether from corporate buyers or government printers, all is not lost for risk assets. But let's not kid ourselves either: Printing money works only as long as the currency being created doesn't crater on the lap of those who claim to be printing prosperity. Once the currency tanks, “les jeux sont fait, rien ne va plus," a roulette game expression (how appropriate) that's evolved into meaning that the "game is up." So is the game up for the euro? Yes and “who knows.” Yes in the sense that the euro in its current form cannot exist. As I often argued, from day one the euro has been a figment of Brussels' arrogance, a chimera surviving on the siren song of “interest rates for nothing and deficits for free” (with my sincerest apologies to Dire Straits). “Who knows” in the sense that on the other side of its restructuring, the euro may well reemerge as a face-saving currency for the stronger European countries such as Germany, Holland, and Scandinavia. Furthermore, even if the EU were to give up on the euro ghost, unless Europe wants to plunge in a “Mad Max” world, the transition back to other currencies must occur gradually, with exchange rate trading bands widened over periods of years before returning to free-trading currency crosses (keep in mind also that many European countries, witness Italy, used to use “trading bands” on a regular basis during times of internal problems). Let this be something to chew on for all those planning to short the euro with impunity. In other less wonky news from earnings season: