Ad Hoc Commentary – Europe euphoria, Japanese jinx

Long time readers know that Spain is a decoy, while Italy is too big to fail. As we quoted J Paul Getty: “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” Italy is Germany’s problem. Even Germany’s opposition Social Democratic Party started backing the fiscal union late Monday – someone must have talked sense into them.

We maintain that the bulls will have a good time till somewhere around Aug 24 on the European euphoria. The next leg lower is likely a Japanese jinx. While Germany’s opposition party is moving into the fold; Japanese’s opposition party is warning PM Noda to dissolve the lower house for a general election by today. The purported reason is the consumption tax bill. But what is truth in politics?

In my mind, Europe is solved in principle. They just need to whip the misbehaving country, and save the rest. Please do not underestimate the Italian job by the Italian Super Marios. Let us not forget that it was Mario Draghi (the Italian at ECB) who introduced the LTROs that saved the day where EFSF failed. And Mario Monti (the Italian technocrat) who talked sense into the Germans. He is right in alleging Italian BTP yields are subsidizing German bund yields. The rationale is if you federalised the sovereign debt as the Americans did at unification, then all bonds prior to unification should bear the same interest rates. Thus, the alleged subsidy. Of course all debt post unification should be treated as state debt (which must not be acceptable for banking reserves) and would have their own yields.

As in the movie The Italian Job, the Italian Job of our times will involve gold. We noted before that if the ECB is forced to take losses on Greek bonds, the member countries would need to refalte the ECB. The simplest way, which is also noted by Michael Lewis of Liar’s Poker fame in his book Boomerang, is for the Europeans to sell the family gold. The superstar hedge fund manager who we nicknamed the New York whale would be in a quandary then. If he put in a sell order in gold, he risk being run over. You really do not want to be a whale in these markets.