Doubling Down in Europe
April 24th, 2012
Macro Factors and their impact on Monetary Policy
the Economy, and Financial Markets
MacroTides.newsletter@gmail.com
Investment letter – April 17, 2012
In last month’s letter we … noted that at some point in 2012, bond yields in Portugal, Spain, and Italy would rise as investors realized these countries would likely remain in recession in 2012. A prolonged recession will make it nearly impossible for them to lower their debt to GDP ratios and budget deficits. Furthermore, the austerity measures each country is adopting to comply with EU rules haven’t even been implemented, which virtually guarantees these countries will remain in recession during 2012. … We expect the situation in Spain to continue to deteriorate. …
We expect the ECB to announce another ‘plan’ to help bring Spain’s borrowing costs down. Although this might help a bit in the short run, and spur a rally in equity markets, it will not address the long term structural problems facing Spain. Much like Greece, Portugal, Italy, and Belgium, Spain simply has too much debt and too little economic growth to service its debt. Spain also cannot compete with Germany’s low cost of production, … as part of the Euro, it can’t lower its currency to gain competitiveness …
Between March 27 and April 10, the volatility index (VIX) jumped … almost 50%. In the process, the VIX has climbed above its short term moving average (green) for the longest period, since the December lows. A close above 21.25 on the VIX would represent a breakout, and carry the VIX above its long term average (red), likely signaling an extended period of volatility. …
(The rest of this excellent write-up includes assessments of China, the U.S., the dollar, Federal Reserve policy, stocks, bonds, and gold. Read more …)
Icliks Incoming 