CURRENCIES & THINGS

The Euro closed 1.3577 to the dollar today for reasons which elude me.  I suppose that most people feel at this stage that the crisis is over and Saint Mario (his status has risen from "Super") has things well in hand.  However, the economic conditions have really shown little improvement, Spain's condition is very tenuous, Italy is facing elections that have all signs of being enormously disruptive and we are not yet finished with Greece...not by a long shot.  Most important, perhaps, is the fact that the long-discussed consolidation of various sectors within the Union, especially the financial sector appears no closer to becoming a reality than it was months ago and may well not occur in any meaningful sense especially if the UK opts out which it certainly will either just in financial regulations or for the Full Monty.  And yet, money seems to be returning to the region, driving up the exchange rate and in some people's minds making a gloomy forecast for 2013 even gloomier.

The Euro at these levels is a killer for the export biased economies of the Zone which must perform if there is to be any meaningful growth this year.  But even as we face the phenomena of the Incredibly Rising Euro, on the other side is the Yen and Dollar  sinking like rocks as a result of deliberate governmental actions, which exacerbates the problem even more.  Oddly, however, while one notes the passage out of dollar assets as the "Safe haven" play winds down, the U.S. 10 year has undergone a transformation, closing today at a yield of 1.99%.  Remember when it was around 1.35%?   That, sports fans, is a hell of a move.  Is QE whatever working?  Perhaps, but with the European investor more comfortable back home even in the face of these higher yields it looks as though the only buyer in town is the Fed and at $85 billion a month, does this rise in yield mean something else.  Is this the first sign of inflation?  Honestly, these are not rhetorical questions.  If anybody can help me out it would be greatly appreciated.

From our standpoint, a rise in interest rates will make a real mess of the fiscal plan given the increased carrying cost of the old debt and the new cost of debt which will have to be increased as we pay far higher servicing fees.  Another thing I don't understand: market sentiment.  With interest rates on the rise, there is this remarkable movement into the equity markets.  One would think that investors might sit back and see how this thing plays out but I have yet to hear a single talking head suggest this as a strategy.  Same thing with equity markets in Euroland, especially Spain where the outlook is anything but good.  Tomorrow's jobs report will be an important one from the standpoint of how markets react.  Deep down, I'm not sure anyone is convinced as to what the future might bring and are investing more on hope than conviction and with the idea that "while the music is playing you gotta dance."  It's an old line, last used in public by Charlie Prince, onetime CEO of Citigroup.  What were you doing back then, Charlie?  A Viennese waltz or the Green Apple Two-step?  I'm a little less certain.  When markets operate on emotion and sentiment, corrections tend to be violent and sudden.  I hope that's not the case this time.


We are going to be gone for about five days or so.  I'll check in from time to time with a few brief comments.  Thanks for being patient