The Inevitable Has Finally Been Admitted In Europe: The Macro Experiment Has Ignited Inflation Without Commensurate Growth & Rates Will Spike

Tuesday, 22 February 2011 12:38

The Inevitable Has Finally Been Admitted In Europe: The Macro Experiment Has Ignited Inflation Without Commensurate Growth & Rates Will Spike

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Last week I posted a comprehensive piece, The Coming Interest Rate Volatility, Sovereign Contagion, Geo-political Unrest & Double-Dip Recessions: Here’s The Answer To Valuing Global Real Estate Through This Mess. The goal was to outline the literal mess that those who decided to drag us through this “Great Global Macro Experiment”have left us in. Since then, in merely one week's time, we have bore witness to:

The potentially imminent toppling of another multi-decade, long standing regime, the third in as many months. Gaddafi asserts control amid worldwide dissent - Libyan U.N. mission urges Gaddafi's downfall - Gaddafi son denies civilians bombed - Analysis: Libya could face chaos in post-Gaddafi era. Leading up to the Libyan affair, Tunisia and Egypt fell into the hands of virtually weaponless protesters (at least from a conventional weapons perspective) armed with simply laptops and cellphones (the new age computers and apparently the weapon of choice for those in uprise) to post messages on Twitter and Facebook, amassing solidarity with supporters to converge in certain areas to join the mass protests. Identifying, fearing, and failing to understand the true power of the Internet in toppling a regime, Libya has repeated the faux pas of Egypt in attempting cut the country off from cyberspace - attempting to halt the charge of an African bull elephant with an Acme Walmart (by way of China) fly swatter. It is apparent that Egypt's efforts to isolate its populace from the Internet, although failing to halt the toppling of its regime, did succeed in hiding the futility of such an effort from Quadafi, et. al. This not only forms another basis for contagion, but one that was actually foreseeable nearly a year in advance- see Egypt’s Social Unrest As A Pan-European Economic and Financial Contagion? It Can Happen!!! and First Tunisia, Then Egypt, Now Yemen: Will This Reach The Powder Keg That Is The EU & What Will Happen If It Does? Subscribers should reference Potential Spillover Effects from the Middle East to the EU.

What we set out to do was to adjust the pathways of apparent pure financial contagion with several, real world factors.

A second ratings agency threatens to take action in downgrading Japan's debt rating among rampant, utterly failed QE efforts - Moody's warns of Japan ratings cut if no reforms. I addressed this last month, Japanese Downgrade Illustrates Potential Paths To Contagion. Remain cognizant of the fact that most don't realize Why Japan at 200%+ Debt to GDP Is In Much Better Shape Than Much Of Indebted Europe. Regardless of this fact, I still query If Japan Lost Two Decades From Its Bubble Popping, How Many Decades Should The US Expect To Lose?

How likely is it that we can have 20 more years of housing price declines?

China attempts to put the breaks on inflation, yet again - China Orders Banks to Assign More Risk to Local-Government Loans. We have long asserted that many of these loans were chocked for of bogus collateral to begin with. The Cinderalla-ish China story is bound to face reality, and if China truly isn't the engine of growth to pull the world into glorious economic nirvana, then what??? See "Will China Hit That Inflation Deer In The Global Macroeconomic Headlights Anyway, Despite The Fact They Are Slamming On The Brakes?" and realize that you can't pack 25 years of growth into 3 years and not expect to pay the overheated piper!

If you think about it, that is a lot of activity for just one week. The ECB is thinking about it was well. From Bloomberg, Mersch Says ECB May Warn of Upside Inflation Risks Next Week

European Central Bank council member Yves Mersch said officials may toughen their language on inflation next week, indicating a readiness to raise interest rates in coming months.

“I would not be surprised at most colleagues concluding that we have upside risks to price stability,” Mersch said in an interview in Luxembourg yesterday. With the economy strengthening and inflation in breach of the ECB’s 2 percent limit, policy makers will “inevitably” have to “rebalance our monetary policy stance,” Mersch said, without giving a timeframe.

The ECB, which has kept its benchmark interest rate at a record low of 1 percent for almost two years, is growing more concerned that soaring energy and food prices will drive up wages and entrench faster inflation. At the same time, raising borrowing costs too soon could exacerbate Europe’s sovereign debt crisis by increasing pressure on stressed banking systems in countries such as Greece and Ireland.

The euro rose more than half a cent $1.3643 after Mersch’s comments were published. Euribor futures extended a decline, with the implied yield on the contract expiring in December increasing seven basis points to 1.97 percent, as traders added to bets on higher ECB rates. German two-year government notes fell, sending the yield up six basis points to 1.44 percent.

In the subscriber document, File Icon Potential Spillover Effects from the Middle East to the EU we detailed the transmission mechanism that is the high correlations in the FICC markets.

With most of the developed nations choking on NPAs and excess supply in their residential and commercial real estate markets, much of which served as a reflexive impetus for recession, the last thing anybody really needs is a spike in interest rates. Cap rate expansion, anybody???

The US residential...