2011-10-01

Social mood and Europe in a nutshell

No, it isn't Ambrose Evans-Pritchard's latest piece. Although he's been accurate, I want to focus on the comments of a Nobel Prize winner towards the end of this article. NEIN, NEIN, NEIN, and the death of EU Fiscal Union
“All I heard was Germany, Germany, Germany. There was nothing about Europe. It was astonishing,” said Myron Scholes, the winner of the 1997 Nobel Prize. Indeed it was. Fellow laureate Joe Stiglitz said that if President Wulff’s views reflected the outlook of the German government, monetary union would have collapsed already.
The whole thing is worth reading, but this encapsulates the social mood. This is a political crisis! There are economic and sovereign debt problems, but at it's heart this crisis is driven by social mood and the desire to preserve the nation state. On to the euro. A number of people were looking for a bounce due to very negative sentiment. However, an even larger gap opened this week and despite a brief post EFSF-vote rally, the euro closed at a new low for the year. This is going to get resolved with a lot of shorts coming out of the market or a steep drop in the euro. If this wave down is larger than 2010, then we should expect the number of speculative shorts to exceed those in 2010, thus there's room for much more shorts to pile in here and open the trap door underneath the euro.

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