Up and Down Wall Street
TUESDAY, JULY 16, 2013
D-Day for Markets: Sept. 22, When Germans Go to the Polls
By RANDALL W. FORSYTH
Crises will be staved off until then, whatever it takes. After that, things could unravel despite Draghi's vow.
It's been almost a year since European Central Bank President Mario Draghi made his now-famous pledge to do "whatever it takes" to save the euro. And showing that, in central banking these days words speak louder than actions, Draghi has "saved" the euro by shrinking the ECB's balance sheet by more than 20% in the past 12 months.
Yet, despite this Draconian squeeze, euro zone government bond yields have retreated sharply, which has had the effect of loosening the noose that was tightening around the necks of the most distressed debtors a year ago, in particular Spain and Italy. Their 10-year bonds back then rose beyond 6% and threatened to climb above 7% -- a level that would put these heavily indebted governments into a death debt spiral.
Higher borrowing costs would only deepen their deficits, forcing interest rates even higher.
Mario's magic declaration reversed that potentially fatal decline by instilling confidence that ECB aid through OMT -- outright monetary transactions, the ECB's equivalent of the Federal Reserve's quantitative easing, or QE -- would be forthcoming if needed. With borrowing costs having receded to manageable levels of 4.7% and 4.5% for 10-year yields from Spain and Italy, respectively, Draghi has been able to keep his powder dry. At the same time, the euro has remained steady, at around $1.30.
How long can this stability be maintained? Mark Grant, the head of corporate syndicate for Southwest Securities and, more importantly, the earliest and loudest speaker of the truth about the euro zone debt crisis, pinpoints a date: Sept. 22, the date of Germany's election.
In a Sunday morning missive to his institutional clients and a few favored friends, Grant pointed out Portugal already is within a "nanosecond" of blowing up, with its 10-year yield on the verge of crossing that fatal 7% barrier and its political coalition on the verge of collapse. In Greece, trouble again lies ahead as the "troika" of the ECB, the European Union and the International Monetary Fund, are demanding still deeper cuts in government spending while the economy is in depression.
Away from the fringes of the euro zone, France lost its triple-A rating from Fitch Ratings Friday while its economy is in recession and getting worse. Spain is sinking further with unemployment over 20% and the government being accused of graft. "Things are not going well," Grant observes dryly.
"Having identified all of this it will not matter until the day after Sept. 22. Nothing is going to be allowed to upset the bratwurst cart and I mean nothing.
If more money is needed, it will be spent. If favors need to be called, the phone will be in use.
If Frau Merkel needs to give Mr. Draghi a new set of instructions, they will be issued. Whatever it takes. Whatever must be done. Nothing will get in the way of the Chancellor's re-election," he writes.
And, in his usual, understated style, Grant continues: "In the days following the election, however, the gates of Hell may open and the brimstone may spill out. Every problem, question and issue that was delayed, put off and tabled until the German election took place will rear their ugly heads for public inspection. Attitudes will change.
Money will not be easily forthcoming and the noose will tighten around the necks of the troublemakers. Portugal, Spain, Italy, Cyprus and Greece will be wailing once again."
Beyond the political prognostications, another aspect of Grant's forecast stands out -- the date, Sept.22. This is "Gann Day," named for the late market technician who took note of the extraordinary number of market reversals that coincided with that date. ("It's the First Day of Fall -- In More Ways Than One.")
In particular, major changes in currencies tend to cluster around that date. The British pound was sharply devalued and taken off the gold standard in 1931 and also suffered its ignominious withdrawal from the European Exchange Rate Mechanism in 1992.
In addition, the Plaza Accord, the plan among major industrialized nations to lower the dollar, was hatched in 1985 on the Sunday ahead of that date. Any number of market paroxysms began or culminated around that date, from 1929, 1978, 1979, 1998 to 2008, for reasons that defy conventional analysis.
The proximity to the vernal equinox in the Northern Hemisphere is an inexplicable constant, except to Paul Macrae Montgomery, the author of the Universal Economics newsletter, which has long examined the non-rational psychological aspects of markets.
No such appeal to unconventional forces is necessary to put Sept. 22 on the calendar as the key date for markets this year. An uneasy calm has descended on European markets, a calm belied by the increasingly desperate condition at street level. Draghi's pledge to do "whatever it takes" is backed by Germany's willingness to back it up. Grant suggests that willingness might be less than implied by the ECB head's vow -- once the elections are done.
Yet, despite this Draconian squeeze, euro zone government bond yields have retreated sharply, which has had the effect of loosening the noose that was tightening around the necks of the most distressed debtors a year ago, in particular Spain and Italy. Their 10-year bonds back then rose beyond 6% and threatened to climb above 7% -- a level that would put these heavily indebted governments into a death debt spiral.
Higher borrowing costs would only deepen their deficits, forcing interest rates even higher.
Mario's magic declaration reversed that potentially fatal decline by instilling confidence that ECB aid through OMT -- outright monetary transactions, the ECB's equivalent of the Federal Reserve's quantitative easing, or QE -- would be forthcoming if needed. With borrowing costs having receded to manageable levels of 4.7% and 4.5% for 10-year yields from Spain and Italy, respectively, Draghi has been able to keep his powder dry. At the same time, the euro has remained steady, at around $1.30.
How long can this stability be maintained? Mark Grant, the head of corporate syndicate for Southwest Securities and, more importantly, the earliest and loudest speaker of the truth about the euro zone debt crisis, pinpoints a date: Sept. 22, the date of Germany's election.
In a Sunday morning missive to his institutional clients and a few favored friends, Grant pointed out Portugal already is within a "nanosecond" of blowing up, with its 10-year yield on the verge of crossing that fatal 7% barrier and its political coalition on the verge of collapse. In Greece, trouble again lies ahead as the "troika" of the ECB, the European Union and the International Monetary Fund, are demanding still deeper cuts in government spending while the economy is in depression.
Away from the fringes of the euro zone, France lost its triple-A rating from Fitch Ratings Friday while its economy is in recession and getting worse. Spain is sinking further with unemployment over 20% and the government being accused of graft. "Things are not going well," Grant observes dryly.
"Having identified all of this it will not matter until the day after Sept. 22. Nothing is going to be allowed to upset the bratwurst cart and I mean nothing.
If more money is needed, it will be spent. If favors need to be called, the phone will be in use.
If Frau Merkel needs to give Mr. Draghi a new set of instructions, they will be issued. Whatever it takes. Whatever must be done. Nothing will get in the way of the Chancellor's re-election," he writes.
And, in his usual, understated style, Grant continues: "In the days following the election, however, the gates of Hell may open and the brimstone may spill out. Every problem, question and issue that was delayed, put off and tabled until the German election took place will rear their ugly heads for public inspection. Attitudes will change.
Money will not be easily forthcoming and the noose will tighten around the necks of the troublemakers. Portugal, Spain, Italy, Cyprus and Greece will be wailing once again."
Beyond the political prognostications, another aspect of Grant's forecast stands out -- the date, Sept.22. This is "Gann Day," named for the late market technician who took note of the extraordinary number of market reversals that coincided with that date. ("It's the First Day of Fall -- In More Ways Than One.")
In particular, major changes in currencies tend to cluster around that date. The British pound was sharply devalued and taken off the gold standard in 1931 and also suffered its ignominious withdrawal from the European Exchange Rate Mechanism in 1992.
In addition, the Plaza Accord, the plan among major industrialized nations to lower the dollar, was hatched in 1985 on the Sunday ahead of that date. Any number of market paroxysms began or culminated around that date, from 1929, 1978, 1979, 1998 to 2008, for reasons that defy conventional analysis.
The proximity to the vernal equinox in the Northern Hemisphere is an inexplicable constant, except to Paul Macrae Montgomery, the author of the Universal Economics newsletter, which has long examined the non-rational psychological aspects of markets.
No such appeal to unconventional forces is necessary to put Sept. 22 on the calendar as the key date for markets this year. An uneasy calm has descended on European markets, a calm belied by the increasingly desperate condition at street level. Draghi's pledge to do "whatever it takes" is backed by Germany's willingness to back it up. Grant suggests that willingness might be less than implied by the ECB head's vow -- once the elections are done.
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