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« Weighing the Week Ahead: Any Help from Housing? | Main | Possible Endings for the Greek Drama »

May 15, 2012


Steven J

I really enjoyed this article on Europe. I don't really listen to or watch the mass media much so I didn't realize they were doing the hysteria thing on this.

I don't think this market downturn of the past few days really has anything to do with Europe or Greece though. I think it has something to do with the $2 billion trading loss at JP Morgan. The Greece/ Europe thing is not new, everything happening in the last few weeks has been obvious for months if not years.

So what is new? If JPM is admitting a $2B loss it means it is probably more like $20B to $200B and this is before any kind of default or crisis anywhere. Whatever is really going on there we can safely assume the public will be the last to know and it will only come out after all of the insiders have safely unloaded their stakes.

Having said that I totally agree with you that contrarian is the only way to go and if someone is not buying now, even for a bounce, then when?


Angel -- That is a good counterfactual question.

I have no opinion. My general sense is that the countries like the benefits but have not come to grips with the costs.

Germany has huge trade and economic benefits, so perhaps it has been a bit one-sided.

I am trying to stay focused on the global systemic effects -- the theme of these articles.

Thanks for your continuing interesting contributions.


Angel Martin

ok Jeff, now i think i understand. If the EU had done nothing last year, all these countries would be in way worse shape than they are now (agreed).

My point, the trend is still bad for all the periphery. At some point they need to actually reverse the deterioration, not just make it better than it would have been...

Here is my counterfactual. If they had admitted in 2010 that the single currency was a mistake and used the bailout money to fund the transition costs back to national currencies, would they be better or worse off than they are now ?



I should not have characterized your comments as arguing that things were "fixed" across the pond. I wasn't being careful and I apologize for that.

I continue to think that the verdict of the markets, in lower risk asset prices, is telling us something, and it might be more profound than the wrongheadedness of traders, pundits, and the masses. I guess that's what has had me bothered -- you don't really address it, other than to characterize the moment as irrational mis-pricing.

Things may be (I think you would argue ARE) better than the worst they could have been. I get what you're saying, and I agree with the point. It is unassailable, frankly.

I've flogged this beyond dead. Agreed, let's move on.


Angel -- You are not looking at the counterfactual. What would have happened without the actions of the last year?

The average person may not be able to think in these terms, but we should be able to.

Please read the line about Greece again.
Without the actions of the last year they would have been much worse off.
Furthermore, the current process may succeed in reducing austerity and getting more help to stimulate growth.


Angel Martin

Jeff, sorry i can't see how a citizen/investor in spain or italy would think they were better off than last May. They have major losses on both their stock and bond portfolios, both economies are in recession, higher unemployment, missing their deficit targets and facing higher interest rates.

All the incumbent politicians in these countries are being voted out, which suggests to me that the citizens are not feeling that things are improving.

Massive ECB/LTRO intervention in December prevented (postponed?) a catastrophic collapse, but did not change the underlying trends.

Note, i still expect complete disaster for the euro. That forecast is based on my assessment that the periphery won't have enough nominal gdp growth to service their debt COMBINED with the euro-elite political agenda to maintain the euro regardless of the economic consequences.


I did not say that problems were "fixed satisfactorily." I said that each party got more of what it wanted through delay. That as the result of the actions Europe was better prepared than a year ago. I have also made it clear that this is a work in progress which would eventually include more pieces and more players.

I'm sorry you don't like this article, but it seems like you are interpreting it to say that "Europe is fine" when that is clearly not the point.

As to whether or not I am right in my forecast, I agree that it is "so far."

I hope that some have been enlightened by our discussion, but I have explained the concepts as well as I can, and I'm moving on.




We will quickly muddy the waters by mixing trading and investing concepts, and you know that. In trading, the price is correct, and the "masses" (trend) are typically correct until an inflection point. There's more of an investment case to make that things are "on sale" for a longer-term investor.

With respect to the argument I think you're making, you are correct that Armageddon has not occured. So you're "right," which seems to be important to you. That fact that markets are down in the EZ from 2011 to present, and also YTD in the case of most countries, does not support your contention that the problems are fixed satisfactorily. As I noted yesterday, we're close to roundtripping the crisis lows from last Fall. That's not a trivial point.

To state thngs simply, I think (as do some others) that you're waving a victory flag during the halftime show.

You write a lot of great stuff. This piece isn't in that rank.

Account Deleted

Interesting take. Thanks for forcing me to think in a different direction. ;) We need more views like these to remind us how easily we can get carried away with the negative sentiment. And good time for picking bargains.
Having said that I am still skeptical, as I think kicking the can strategy is nearing its end. Who is going to pay ultimately for all the mess? Big picture view: deleveraging has just only started in the US, to a lesser degree in Europe... More pain ahead, no matter what the sentiment is and how many LTROs or QEs we will have down the road.


Angel -- As one of my most astute readers, if I did not manage to communicate with you, then I failed in my mission.

Please pretend that you are a citizen of Greece, Italy, France -- or even Germany.

Now think back to a year ago -- where most observers (including you I think) expected a complete disaster.

What has happened? Take it party by party. Who is worse off than before?

This is the political process in action and it is something that very few grasp.


Angel Martin

Jeff, I don't understand how one would argue that things are better than a year ago for Spain and Italy, which are the eurozone's two biggest problems.

Italy and Spain are paying higher interest rates across the yield curve compared last year in May (exception, Spanish treasury bills).

Even their 2 year bonds are currently yielding 3.6 and 4.1 %, which for Italy is higher than trend nominal gdp growth prior to 2008.

The problem with the delay/bargaining strategy is that for countries which are eventually going to be forced to leave the euro, delay/bargaining means they end up with larger amounts of euro denominated debt to default on, which make the eventual costs of default higher for everyone...


You have obviously never read one of my weekly articles, which have swung from bullish to bearish frequently.

I am always surprised that merely pointing out the world is not ending is enough to bring out the followers of Chicken Little!


scm0330 -- You seem to think that market prices are "correct."

Mr. Buffett has mentioned that he would be on the street corner selling pencils from a tin cup if this were correct! For long-term investors a key skill is recognizing when the market pricing is inaccurate -- whether too bullish or too bearish.

The current market reaction, which you can see daily if watching the news flow, is linked to a concern about a systemic failure resulting from bank runs in multiple countries. That makes it an important topic to consider.

You can go with the masses if you want, but I have done very well with a contrarian style.


Octavio Richetta

U R a broken clock just like Gary Shilling on the Bear side. Perhaps, if one places you two on a blender something good may come out:-)



The market reaction has been the market has been neither excessive, as you declare, nor insufficient. It simply is what it is, and that is negative. The fact that there has been no Armageddon has not resulted in profits for a typical investor since the start of 2011, one not trading, and holding their requisite x-percent Developed International allocation.

As I look at the world, the choices are more nuanced than an either/or Armageddon, or whether I'm all-in or all-out to start May. Like you, I don't think Europe goes all Armageddon. That either-or setup isn't a catalyst to make money however. But I acknowledge that you're right, and no systemic meltdown has occured. That doesn't mean we're all-clear though. And cheap can get cheaper.

Dal Paull

I really needed the rational reality check the article provided. It's amazing how quickly my mind followed the herd into the black-and-white "Europe is bad" mindset.
I think I'm a regular cynic of what the media is pushing. Jeff, your article was a timely reminder - keep questioning.


scm0330 -- This is an article about Europe and the chance of a systemic collapse. My forecasts on this front have been very accurate so far.

In my weekly column I discuss postures for investors with differing time frames. This column has not been bullish for many weeks.

Meanwhile, the average investor with a long-term viewpoint should not attempt market timing, as I explained here:

At some point, the Europe story will be better understood. Meanwhile, the market reaction has been excessive.

So please, may we discuss Europe on this thread?




I believe Jeff's "objective" exuberance will prove to be premature. It just takes a long time for things to play out sometimes. Jeff has been blindsided by long-developing problems before. For example, the biggest one we have seen in decades:



You're better than celebrating via the rearview mirror. We need to trade/invest what is, not what should be, or what was. The markets have been sliding for weeks, since the 3/31 top, on deteriorating macro from Asia-Pacific, and the re-brewing crisis in Europe. The US is losing momentum, not gaining. And we're only about 6-7% from roundtripping to the fall lows reached on EFA, my proxy for non-US developed. Long has been wrong, and sell in May has been correct. You are appearing to suggest something different, despite the empirical facts.

Chris Tinker

Hi Jeff,
those of us in the UK/Europe expressing this view are thin on the ground so your support is welcome! I agree with your points here. One of the things you highlight - the emergence of trader advocacy via blogs and twitter is becoming a major issue given that the mainstream media fail to discriminate on any form of quality control or skill set. Those of us who do go on CNBC et al. who do have a background in political analysis, economics, portfolio construction etc. etc. are all too familiar with the soundbite simplicity of the 24 hour news channels. It is also very agenda driven - everyone in officialdom is a fool - everyone in the market is a genius - those that lose money are victims of the fools but those who make money are brilliant. Funny how they have all failed to pick up on the JPM trade as being a leveraged, illiquid punt on double dip US recession gone wrong...

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