That didn’t take long! Yesterday’s rip was supposed to have turned the market back up. Its close at well above the “crucialâ€Â 2060 chart point on the S&P 500 cash index meant “supportâ€Â had held.
But then the euro resumed its free fall and in a few nanoseconds around 6 AM—-all bets were off. Still, this is no longer about the hourly charts on the EUR/USD or short-term movements in crude oil or end of the day robo slams on the VXX.
What’s happening is that the relentless central bank money blitz of recent years has finally pushed financial markets hard onto the shoals. Like in 2007-2008, the system is coming unhinged; there are coiled springs of price distortion everywhere and breakaway chips and shards are beginning to fly.
The absolutely preposterous yields on Eurozone 10-year government bonds (EGBs) provide today’s example of the mayhem lurking down the road. Specifically, the German bund is now trading at 0.221%, the Italian bond at 1.148% and the Spanish at 1.158%.
Yet you do not need to even think about traditional pricing metrics such as inflation and credit risk to see the lunacy of these yields. It is plainly evident that there are hundreds of basis points of risk in any of these EGB’s just on the issue of EMU break-up alone.
After all, is it really possible to believe that a currency union that has been reduced to the daily tantrums of Schaeuble and Varoufakis has a permanent future? Indeed, the best bet in all of Christendom at the moment is that the EMU—at least in its current configuration—is going to blow sky high. How well will 115 bps of Spanish yield work out in that event?
Besides that, where’s the evidence that sovereign risk and inflation have been abolished? If anything, there is a near certainty that the collapsing euro exchange rate will bring inflation——missing in action for about three months now—roaring back into the Eurozone’s HICP. Not only has it been reliably dwelling there since the euro’s inception, but Europe does import about $2 trillion of goods and services each year much of it—–including nearly all its energy—-priced in dollars.
