Will Germany Walk Away from The European Union?

As I settle back into my turret after an eventful week away, I would like to highlight Ambrose Evans-Pritchard's article in The Telegraph, German Endgame for EMU Draws Ever Nearer.

While the entire column is a must-read, the quote below caught my attention:

"We will find out to what extent Germany’s constitutional court shares these fears when it rules this Wednesday on the legality of the EU rescue machinery, and delivers its verdict of life or death for monetary union."

I will also note the research report issued by UBS titled Euro Break Up- the Consequences, which speaks of fiscal considerations, economic costs (if either a weak or strong country drops from the EU), the political costs, and the ultimate social costs. And I quote, again:

"It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war."

As we've written about an unfortunate needle that points to war before -- and we got more than a few scrunched noses because of it -- I'm not going to belabor this evolution. I'll simply ask that you to respect the risks, as well as a potential catalyst tomorrow (the German vote).

This may be the "other side" to The Five-Step Guide to Contagion; taking a fire hose to the fuse, and drowning the region in the process.

Clearly this is not something one wishes for, but we must trade (and live in) the world we have, not the one we want until such time that we collectively change our forward path.

Some Random Thoughts

• Germany has now lost 30% -- almost one-third of the total market value -- since the beginning of August, and their stock market broke our all-important global line in the sand at DAX 5500.
  
  
• Why does that matter to YOU? Check the chart below, with the German DAX juxtaposed against the S&P 500. DAX 5500 = S&P 1100 in this analog, with support now serving as resistance in the former, and the latter matter our stateside level of lore.
  
  
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• Credit Default Swaps continue to widen, with Greece (blowing out) the most severe sovereign situation, and Goldman Sachs (GS), JP Morgan (JPM), Bank America (BAC), and UBS (UBS) the notable financial institutions.
  
  
• In a highly leveraged finance-based global economy, it would be myopic to discount the stateside ramifications of the dynamic overseas. That’s one thing that hasn’t changed since the first phase of the financial crisis -- the interconnectedness of our fate and fortunes.
  
  
• What’s the difference between a bullish basing and a bearish churn? The former occurs above support and works off an overbought condition as a function of time rather than price. The latter happens under resistance and works off the oversold condition in the same manner. Check the chart of the S&P below, and you tell me where we are.
  
  
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• As if there weren’t enough crosscurrents to digest, the IMF has called on the US and Europe to abandon fiscal austerity measures, warning that the global economy faces a “threatening downward spiral.”
  
  
• On the bright side -- and yes, there is one -- this “second side of the financial storm” was and is a necessary evil. In order to get through it, we needed to go through it and we’re going through it now.
  
  
• That, on the margin, is constructive and when we take our medicine (debt destruction and/or reorganization), there will finally be a light at the end of the tunnel that isn’t affixed to the front of a train. And no, that doesn’t preclude the notion of Euro Bonds as a first, let’s call it “anesthetic” step.
  
  
• I’ve got to high-tail it over to our real-time Buzz & Banter, where we’ll continue this interactive discussion all day. If you haven't already, take a free trial.  Hope to see you there and as always, I hope this finds you well.

R.P.

Twitter: @todd_harrison

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