Last Sunday night, Europe threw a trillion bucks at its bank and bond runs. The euro recovered to $1.30 from the $1.25 pit that triggered the "Flash Crash" here (for context, $1.50 last Christmas), and Club Med bond prices shot up, as did stocks here in a short-covering panic as big as the crash.
The market consensus: Europe might not have changed any fundamentals, but it had bought time. A lot of people learned in the winter of ’08-’09 that it’s silly to fight a motivated central bank that has a printing press on its side.
The consensus lasted clear to Wednesday. "Wait a minute …" popped into heads worldwide. The $1 trillion was mostly loan guarantees issued by governments already over-indebted and in terminal deficit.
Loan guarantees aside, the centerpiece of euro self-rescue was the European Central Bank promise to support "Club Med" nations’ bonds by buying them itself. No promise could have been more damaging.
The ECB became the bank robber holding a gun to his own head, saying, "Stop or I’ll shoot." Nevermind that the ECB "sterilized" the trash buys on Monday and Tuesday (you don’t want to know … a central bank can neutralize the inflationary/monetary effect of buying with printing-press money by selling something else that it owns).
Our Fed bought a ton of mortgage-backed securities last year, but all were U.S.-guaranteed. The Fed bought $30 billion of Bear Stearns wreckage in March ’08, but at deep discount, and took an immediate vow never to do so again (adios, Lehman).
The Fed analogy to the ECB this week: Imagine California about to default on its "la-la land" municipal bonds, and the Fed buying to support. If you did, whom would you tell "no"? How would you ever enforce discipline?
Mercifully, we have history here: We told New York City "no" in the ’70s.
From Germany’s Marshall Plan recovery in the 1950s to euro-rollout in 1999, the deutschemark was the hardest major currency on earth, second only to the Swiss franc. Germany had lost all of its savings in two monetary disasters — Weimar ’23, and Reichmarks ’45 — and lived most of another decade with occupation currency. D-marks constantly rose in value because Germans preferred recession to debasement.
Euros were hard as D-marks because of inertia, and faith in contract with had-our-fingers-crossed Club Med. In one week: destroyed. The euro today is a $1.23 anvil.
Last week we did bailouts, lifeboats and hot stoves. Now it’s damned if you do, damned if you don’t for Germany. Stay and lose control of your currency and budget, or break up and spend a decade rebuilding your banks, eating Club Med bonds.
One week ago the question was: Would the Euro-strong expel Greece? On Sunday, the Euro-middle (France) joined Club Med and the easy ECB way out. Question reversed: Will the Euro-strong try to escape? As the French saying goes, "Sauve qui peut!" Translation: "Save yourselves who can."
The effects to the U.S. will be beneficial either way. A stronger dollar hurts exports and stocks, and the global economy will slow, but the cash inflow buys time for our Treasury deficit, keeps rates and oil prices low, and the Fed on hold indefinitely.
Long-term rates have stayed down despite a good run of economic data. Europe is still the driver in all markets. The flight has pushed the 10-year T-note back down to 3.42 percent, but it is limited to Treasurys. Mortgages are relatively steady near 5 percent.
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The news here is distinctly better, but the improved levels are still weak, and sustainability is still in question. The May small-business survey at www.nfib.com found an index value above 90 for the first time in 21 months.
Although it’s legitimate improvement, the 90 value is poor. For comparison: In the awful ’79-’82 recession, the index fell below 90 for only one three-month period.
April retail sales gained 0.4 percent, up 9.2 percent from last year, but still 3.6 percent below 2007. Industrial production popped 0.8 percent, still 9 percent below 2007; capacity in use at 73.7 percent is up 7.9 percent from rock bottom, but at that has just crossed over the worst of ’79-’82.
Perhaps the best recovery indicator of all: tax revenue. When we’re truly healthier, we’ll pay more. Federal tax revenue this April was 7.9 percent below last year.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.
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