France Disenchanted with the Euro

Yves sent me a fascinating poll from France, that the Euro is more unpopular than ever before:

Eight years after euro notes and coins hit the streets, 69 percent of French people said they regretted the passing of the French franc, the Ifop poll for Paris Match said.

That compared to just 39 percent a month after the arrival of the euro in February 2002, and 61 percent in 2005.

The Euro may implode faster than anyone thinks (although not presently). The rescue of Greece is not done, since they first must show some fiscal restraint. While this is unlikely to be ratcheting the stock market - the moves in and out of the Euro have a bigger impact - it will have an impact over the bond market. The moral hazard of rescuing the Greeks is pretty clear, as the rest of Club Med (Spain, Italy, Portugal) will wish to also be rescued. While Greece is affordable, is a bailout of Italy? Yet backing off the rescue risks the concept of the Euro. How to square the two needs?

The core problem is the uncompetitiveness (high relative wages) of Club Med: the Euro makes their relative wages high vs. their productivity. This can be masked by borrowing for a time. Fiscal restraint unveils it. Consider the three models of fiscal restraint:

1. Gold, where Greek gold would have fled a while ago .. yet nations learned how to cheat on this
2. Floating, where the Drachma would have dropped .. but that belies the concept of a Euro
3. Bonds, where the bond market is the governor against poor fiscal policies

Right now the purported benefits of the single currency regime are being tested. Under gold, wages would have to fall to compensate for uncompetitiveness. If you cannot do that politically, you have to get off gold, which is what happened in the '30s in Europe. Under floating rates, the currency would fall to realign. Under single currency, wages would have to fall, but bonds can used to mask the problem by continuing to borrow and spend to prop them up. If instead he borrowing were used to invest in increased productivity, bonds could be used to bridge to an equalization on competitiveness. Instead, Club Med just spent.

When Greece came in, they had a huge deficit and promised to do better, but didn't. Same with the other members of Club Med. They got a windfall: their citizens suddenly had a more valuable currency, could borrow at lower rates, and splurge. And splurge they did. Now the one-time benefit has run out, and the Greeks did little to invest in production. Instead, they ran up a huge bill for the Olympics. 

In contrast the Nordic economies have a culture of fiscal restraint, and have much stronger (floating) currencies, much less debt, and appear to be taking care of their social needs much better. You probably could not find a better comparison of Austrian vs Keynesian policies. If Keynesianism worked, Club Med would be the largest economies in the world, given their propensity for fiscal stimulus and chronic indebtedness. (Ok, I grant that the Nordic countries would not consider themselves Austrian, and the Keynesians would disown Club Med, but the larger point stands about fiscal profligacy vs fiscal conservativeness). 

The tension for the EU is Germany tends towards Nordic, remembering the hyperinflation of the Weimar Republic, and France is somewhat in the middle. Why should they bail out Greece, and assume the responsibility for Greece not living up the promises it made when it joined? 

They cannot simply back the Greek debt without letting all of Club Med off the hook. One way out is to spin Greece out of the EU. I do not see this happening. Another way is to let it default on its bonds, and not back them. Thus would be like a floating currency, or gold leaving the central bank: a rapid signal to get the house in order. I also do not see this happening, as it would lead to riots and huge turmoil inside the EU (across the rest of Club Med). A third way is a Euro Holiday: for Greece to leave the Euro but stay in the EU, like the UK. Their new Drachma would drop and they would get in alignment, and maybe come back later. I do not expect this, since it would be very difficult for Greece to borrow in Drachmas. 

Instead, I see an IMF-style workout plan. The interesting question for the future of the EU is whether they will truly take the steps to enforce it. This will play out in slow motion over the rest of the year. 

For FX investors, the implication is a devaluation of the Euro as the better countries assume the credit risk of the worst. Wages need to drop in Club Med, and this likely means the Euro "averages down" between the Germany/France and Club Med, and devalues faster. 

Comments

[Wave Rust]

Yelnick,

Was just reading this piece, furthering the "Beware of Greeks bearing grift."

What's a few swaps if they are just between you and your banker, if your banker is Goldman?
http://www.bloomberg.com/apps/news?pid=20601087&sid=asBNXSLtlN9E&pos=1

[trendlines]

Thanks Yelnick, in my view a union such as europe will always face trouble in a purely capitalistic model - members all have unequal shoes to begin with.

[Chabazite]

After three thousand years + of war in Europe, I wonder what on earth led our illustrious political leaders to think they could somehow engineer a peace in thirty? The squabbling remains.

[trendlines]

For the S&P500, expecting consolidation ahead due to very overbought conditions, although a test of 1105 may be on the cards. Also, i'd like to open up the Shanghai connection, for discussion again - first identified a few weeks ago.

http://trendlines618.blogspot.com/2010/02/s-short-term-consolidation-ahead.html

[upstart]

Told ya Futia was onto something. That's because a 5-month cycle bottomed. New highs on the way with a topping pattern pointing to April, then a pullback into a July low when the 5-month bottoms again simultaneously with two other monthly cycles. That will be a bit larger pullback, will also qualify as the 4-yr. cycle low. Then the big top will come 4th quarter where another topping pattern points. That's where the larger bear market will return. This also fits with Futia, because he believes the negativism was extreme enough to carry the rally through most of this year.

[DG]

Told ya Futia was onto something.

I said after the close on February 5th that a rally retracing 30-50% of the decline was probably on, so I was "on to something", too. I guess. Where we go from here is the issue and hasn't been decided at all.

I don't think bulls or bears have a right to lay claim to being right as of yet.

[Bird]

Per my prior post on Feb 15th, first time target on BKX is met right now and appears to be showing resistance. If the juncture holds, it should lead to new lows.

[DG]

I don't think bulls or bears have a right to lay claim to being right as of yet.

I do think that once again, the "super-bears" have been wrong. This has not been an Impulse wave down. Nor has it been an Impulse wave up. Any counts relying on either of those being true are wrong. We may continue to drift upward or head down from here, but not in Impulsive formations.

[DG]

Bird,

I didn't really get the mechanics of what you were saying in your recent post, but thanks for the real-time update.

I got a sell on the IWM, which is still in effect. If we make a new low for the day, then the stop will move to today's high.

[Webber]

Breakdown in S&P out of trip triangles and an expanded flat on the minute chart.

[Bird]

DG, It is my fault, as I haven't really explained the mechanics. Thanks for following it anyway. Both DJI and SPX show potential lock-ins of the highs today according to this approach, suggesting the next move is down starting with those highs. Doesn't mean it could not get blown through but I would not want to be long here either.

[DG]

Bird,

Then I am glad it wasn't that I missed something, but that it wasn't there. I think that methods which give you an exact price point at which you can determine if you are right or wrong, as yours seems to do, by saying that above today's high you're probably wrong, are always worth pursuing, especially when the price points are very precise and don't have a lot of time latency (ideally, zero time latency), like many crossover methods and indicators do, since time latency leads to potentially outsized price moves against your position while you wait for your indicator to trigger.

[Bird]

DG,

Yes.

But also to clarify, what happens with this particular approach is that the market can only turn at certain price/time junctures, determined by the prior swing. So "wrong" in this context means that if the first juncture gets blown, the market then will likely go to the next juncture. It would be nice to not hedge and just say "this is it". Sometimes that seems possible. But at least on the recent 60 minute charts of the major indexes the meandering waves leading into the January high give a little less to work with.

[DG]

It would be nice to not hedge and just say "this is it". Sometimes that seems possible.

Yes, I have done some regression analysis that has persuaded me that the market is sometimes much more linear, with respect to time, than at other times and that there is a fairly tight relationship between those times and specific Elliott Wave Progress Labels.

[Bird]

By the way DG, I checked out IWM following your above post. If we get a little traction to the downside, it might be interesting to follow it a little more closely. I am going to look for a wave 2 type entry point south off of the current high of today (if it holds), maybe using the 10 minute scale, and hold for the nearest potential 60-minute "lock-out" per the price-time approach I have been posting about.

[DG]

Bird,

Ideally, the rebound off the more recent lower low is a move which will fail to make another high, giving us a lower high from which to decline.

[Bird]

DG, Yes I see it. That would be a possible place to go in. (I think you are already in?) But I think I am going to wait for the next lower high, or one after that. I want to find resistance at a specific time/price point. I may miss it early on, but it would give me greater confidence.

[DG]

Bird,

No, I was in a short trade with the SPY yesterday, but got stopped out at the end of the day. It just so happened that the IWM gave a sell signal while I was in the SPY trade. I had initially hoped that the IWM showing weakness would spread to the other ETFs, but obviously it didn't. I'm now waiting for the SPY to give me another signal to re-enter. I'd also take a long trade if it signaled, but the market would have to be quite strong for that to occur.

[Steven_737]

The question is:

Has the ending diagonal completed already?

http://steven737.typepad.com/blog/2010/02/has-the-ending-diagonal-completed.html

[Michael]

The Bearish Sentiment numbers for newsletter writers just came out via Investor's Intelligence today and they now show another INCREASE in BEARISH SENTIMENT to 27.8%

http://www.schaeffersresearch.com/streetools/market_tools/investors_intelligence.aspx

[Steven_737]

Traders who capitalize on NR7, today have an NR21 !!
NDX and DOW30 have NR22, while SPX sports NR27...... :)

[Taz]

Thanks Bird,

Keep us up to date with your price/time junctures.

I am lookinh higher first so I guess your next time of Feb 22 would be my target?

TAZ

[Anonymous]

I wonder what Hochberg and the STU say today???
I guess they will be hanging their hat on the previous 1104 SPX high.

[yelnick]

Anon, I will post later, but suffice to say they see is in a wave 4 triangle of the final fifth wave (or a flat)