Exchange Invest Weekly - Beta Edition

• June 9th, 2019

A test edition for EI subscribers.

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Shock and D’Oh!

• May 21st, 2010

A Graeco-German Tragedy/Farce!

"As a German citizen, I wish to apologise for the stupidity of my government...The European market is likely to become utterly dysfunctional. Just as the market showed signs of stabilisation with real money starting to buy euros, the Germans have destroyed this glimmer of hope. The BaFin ban is a desperate political move by a government battling for survival. Angela Merkel needs the support of the Left so she has given in to a witch-hunt against banks and speculators."

- Hans Redeker, BNP Paribas.

The problem with governments is that no sooner do you get rid of truly incompetent political specimens than others rapidly fill the void. In this case a cross border swap has been effected. The British have got rid of 'Stockholm syndrome' Brown's NuLab and replaced it with a coalition of currently indeterminate governing ability. Meanwhile, the Trojan horse of bad government has been Angela Merkel (various other EU leaders have ruled themselves out by dint of being purely ridiculous). In the wake of making things worse through fiddling while Athens burns, she has now awoken with a panic attack to discover recent weeks weren't in fact a bad dream. They are, however, a very real world nightmare. Jeremy Warner in the London Daily Telegraph notes:

"The German financial regulator may not understand much about financial markets, but its head, Jochen Sanio, is surely smart enough to see that there is no practical way of banning short selling. Even if you succeed in blocking the most obvious way of doing it, there are a myriad of alternatives traders have to choose from that achieve the same result."

The problem with this prescription is that actually, having met Sanio, I am really not sure that behind a wall of elegantly defined hubris, he actually understood as much about financial markets as one might expect from a man in his position. Merkel has demonstrated the absolute worst of populist stupidity. When faced with a brilliant way to please the German electorate and demonstrate fiscal responsibility, she has instead succumbed to bailing out Greece, a fiscally dysfunctional state. Now, like other political folk bereft of any form of financial understanding, she has reverted to blaming the markets when the world's financiers have quite coherently sensed her incompetence as panic.

First there was Sarkozy's table banging "Shock and Awe!" (trickily not supported by the US Senate) and then Merkel came up with a second manoeuvre that could be best described as "Shock and D'oh!"

I define it as one of those, "Am I missing something here?" moments... The EU have (understandably) trumpeted the nascent successes of MifiD, an initiative which has transformed cross-border trading. Now the German Chancellor has panicked because she has lost control of her political agenda and so she starts attacking round the edges of the Mifid her government applauds! Quite reasonably the sharks are circling as her grasp on power is tenuous.

Ultimately, the history books may record that the leaders of France and Germany did more damage to the idea of European unity through their actions driven by hell-bent Euro-philia, bereft of pragmatism, perspective or practical understanding of finance. While I suspect the EU will survive, the ridiculous issue is that poor political actions have now added up to the point where the collapse of the Euro and even the EU itself are credibly on the agenda. They may still be somewhere along the 'long tail' of risk but on the agenda they are. The tragedy is that the politicians are behaving like an angry mob and their blanket criticism of pragmatic financiers is being used to try to shore up precarious government. Meanwhile pragmatic financiers are trying to protect their investors' funds against a background of dismal government and ironically the angry mob in Germany is merely requesting sensible measures of fiscal rectitude such as people taking responsibility for their own actions!

The tragedy is that the political classes have repeatedly rushed to discredit the markets' forewarning of the impending Euro-crunch that is now unravelling all around us. We are sitting on the brink of a truly major eruption, even before we get back to considering those largely forgotten Icelandic volcanoes.

Ultimately, markets do not lie. However, politicians do. Shamelessly.

Patrick L Young

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