Cliff Wachtel's  Instablog

We won't be fooled again

Within the past month, we've seen 2 false rallies based on false optimism based on false EU solutions, once after the Spain bank rescue, once after the EU Summit "break-through" last Friday.

There are more EU meetings scheduled this week, with more potential for upside "surprises" given the already low expectations.

Enough. Please.

Don't get fooled by another false rally based on optimism from another alleged EU crisis solution. The EU is in terminal decline unless the following conditions are fixed.

Last week there was yet another market rally following the EU summit. It has now faded, just like the rally mere weeks before on false euphoria on the Spain bank deal. Last week I wrote that the rally was based on unjustified optimism in depth in PRIOR WEEK: 17 REASONS TO FADE THE EU SUMMIT EUPHORIA RALLY.

Here's the very summarized version of what's holding back the EU that all investors need to burn into their brains to avoid being fooled by similar Euro-obfuscation.

HERE ARE THE BASIC PROBLEMS - PIN THESE TO YOUR WALL.

Unless something happens to change these, the EU crisis is only getting worse.

1. Germany & other funding nations not going to risk their credit ratings and economies for EU.

2. EU nations not ready to cede sovereignty needed to give funding nations assurance they'd be repaid and that the crisis won't reoccur.

This fundamental conflict is the reason the summits and agreements can never reach the level of detail on funding nor on how to achieve comprehensive solution that markets insist on seeing, one that guarantees banking system and prevents markets from moving on to another nation for speculative attack and new default/contagion risk.

This fundamental conflict between points 1 and 2 is what keeps EU agreements piecemeal, too little, too late, and doomed to failure.

3. Even if they somehow overcome 1 and 2 really fast (unlikely), they don't have the years needed to organize US of Europe before get hit with sovereign default and contagion risk from Spain or Italy, even if the first default is Greece.

That's it. All the rest is, in the words of Rabbi Hillel, just commentary.

At minimum, the EU needs to stabilize the situation for a number of years, possible a decade or more, just to organize the US of Europe. We see no sign of that happening.

That means our default positions remain the same:

Short the EURUSD and most other risk assets as rallies based on optimism about the EU crisis lose momentum.

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DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN'T BE TELLING YOU FOR FREE, NOW WOULD WE?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

IMF clarifies earlier story about SPAIN bailout-says talks strictly internal to the agency and a normal course of business. Who funds IMF rescue?

EU paralyzed until Greek elections: can't help anyone-needs try act tough-push Greece to vote for bailout

Capital outflow from Spain hit €66.2B in March, MOST since records kept -As in Greece, the big fear is that EUR deposits 2B converted into devalued local currency

Ultimately, the EU's choice is to print money or die-we bet ECB prints, Fed too (maybe via IMF)-risks USD, EUR devaluation, and devaluation of any assets denominated in these, see thesensibleguidetoforex.com for low risk, simple ways to get diversify currency exposure SEE About tab for description, Reviews tab for advanced reviews.

Your best defense against Bernanke stealing your money to fund debt payments, transfer $ from savers to spenders.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The euro falls to an almost two-year low as Spain's borrowing costs climb, ends day @1.2370

Spanish bond yields are under increased pressure after ratings firm Egan Jones downgraded the country's debt yesterday to B from BB- with a negative outlook, pushing Spanish debt further into junk status. Moody's, Fitch and S&P still rate Spanish debt as investment grade. 10-yr yield +7 bps to 6.483%

Yields on Italian 10-year bonds jump 23 bps and pass 6% after less than stellar bond auction. Spanish yields continue higher--are +21 bps at 6.65%, hitting pre-ECB LTRO levels. Meanwhile, German yields fall to fresh record low of 1.318%.

Italy sells €3.391B of 2017 bonds vs. a target of €3.5B, with the yield rising to 5.66% from 4.86% in April. The demand edges up to 1.35 from 1.34. Italy also sells €2.34B of 10-year bonds vs. target of €2.75B at 6.03% vs 5.84%, with demand 1.4 vs 1.48

Europe should be "realistic," devalue its currency and accept painful reforms so it can emerge from this crisis stronger, says Bank of Thailand Governor Prasarn Trairatvorakul. Thailand experienced this firsthand, shrinking 10.5% in '98 before undertaking radical changes, recovering to average growth of 4% from 2000-2009.

(paraphrased/summarized/quoted from seekingalpha.com global & fx market currents)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.