Here is his reasoning...
We think it is too early to return to “risk on” trades.
In the short run, European “fiscal integration” means “fiscal austerity”.
We think the current track of European policy is not credible in that austerity ultimately undermines the banks, increasing the need for recapitalization and asset liquidation, and threatening a vicious circle.
We view 2012 as a year of two distinct halves; the first of which is “risk off”, the second of which is “risk on”.
The transition from the first to the second will be marked by central bank (read: ECB), catch up.
We continue to expect 10y Treasuries to trade to 1.75% early in 2012, with the curve flattening, spreads widening, and LIBOR pressured higher.
In essence he is saying the market will or needs to Swan dive before the ECB can do what they have been saying they won't do, print and monetize EU debt.
Now, here comes the retort from the ECB's (European Central Bank) own Jens Nowotny,
- NOWOTNY FEARS MERKEL/SARKOZY PROGRAM WON'T BE ENOUGH
- NOWOTNY SAYS EUROPE CAN SOLVE CRISIS ITSELF (1)
- NOWOTNY SAYS NOT NECESSARY THAT USA `HELP OUT' EUROPE (1)
- NOWOTNY SAYS SMP CAN'T BE COMPARED TO FED, BOE PROGRAMS (1)
- NOWOTNY SAYS SMP HAS TIME LIMIT
- NOWOTNY: DEBT CRISIS MUST NOT BECOME BANKING CRISIS AGAIN
If my read on this is correct, the ECB is saying despite whatever sugar rush high may or may not come from Friday's EU summit in which this time they will have the "REAL GRAND FIX", unlike the seven or eight previous grand fixes, the last being the leveraged EFSF which has been a total failure and will become a foot note in the history books should any of the AAa rated countries that back it, especially France or Germany be downgraded as the S&P said they may as of just an hour ago. I digress, my read is that the ECB may be telegraphing that they may do more, now does this mean print and monetize debt? I don't know and he seems to try to make distinctions between the F_E_D's approach and the ECB's approach.
Now the red #1 footnote markers are EXACTLY what I said today. Last night Die Welt's story of the F_E_D financing the IMF to bailout Europe seems to me (although this didn't strike me until I was laying in bed, but mentioned it today) to be a rub or a slap by Timothy G. and the US administration which has been putting maximum pressure for the ECB to do exactly what the ECB says it doesn't want to do, print and monetize debt. It seems the gut feeling I had about this being more show and a way for the US to embarrass the ECB in to action by saying, "If your own central bank won't do what is needed, don't worry, ours will (ADD LOTS OF SARCASM)" From Jens' comments in red #1's, it seems that was his read on the rumor as well.
For instance, his response that the EU doesn't need US help would have to be highly coincidental to come 12 hours after the F_E_D rumor was floated. He also says the EU can solve the crisis itself, and that ECB programs shouldn't be compared to F_E_D programs.
It seems last night's rumor of the F_E_D financing the IMF to bailout Europe hit the very nerve the US was trying to stimulate.
In the meantime, if you take DB's analysis in to consideration as well, the ECB may need Europe to fail with the grand plan and for markets to fall apart before being able to justify doing something they said they wouldn't so, of course Bernacacide also testified to Congress that the F_E_D would NOT monetize the debt, that didn't matter.
Things are getting interesting and I suspect they are about to get a lot more volatile.
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