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European markets rocket out of the gate as investors cheer progress on a tighter union and bank...
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Friday, June 29, 2012, 3:15 AM ETEuropean markets rocket out of the gate as investors cheer progress on a tighter union and bank recapitalization. London +1.7%. Paris +3.0%. Frankfurt +2.4%. Madrid +4%. Euro +1.2% to $1.2592. Sterling +1% to $1.5664.
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Europe just approved a $120B stimulus program, the recession that was picking up speed has just been stopped. Does it hurts, doomers? Does it hurts to see that a big recession was forming and now we would see a huge recovery....
I love it....
Scratching my head, thinking, how exactly is $120B in stimulus going to help? This is just another kick of the can down the road. IMHO
For instance. Let's say we measure your personal financial position based on what you spend every year. That is your personal GDP. Now of course you have a full set of financials, and the critical component is your equity.
There are two ways you personal GDP can go up. You can suddenly create lots of new income, which is of course hard to do, but the best way to created sustained expenses (GDP), or your income can stay the same and you can increase your expenses by burning down your equity (spend your savings).
If you only measure your expenses (GDP), then more income for more expenses and equity erosion both increase (GDP). The problem with the second method is that your personal balance sheet is shrinking or rather it is receding, and when you stop spending you find your balance sheet in recession.
So now, let's ask ourselves, "Where is the gov getting the $120 billion in stimulus to add to the economy?". Did they add new income? Well to do that they need to add new technology. If they could just conjure up new technology whenever they wanted, then you would just do that all time and eventually no one would ever have to work again.
So clearly they aren't creating new income via new technology they are magically adding to the economy. All they are doing is compelling the consumption of capital. Now there is the chance that that capital consumption could lead to a return, which would result in more capital creation, but investing is hard enough as it is. It relies on price sensitivity.
Gov has guns. So gov investing is price blind investing. The chances of getting a return that is better than price sensitive investing would be just dumb luck. Thus the odds of the stimulus (forced capital) erosion, will juice GDP (expenses) all the while it erodes capital.
The end result of this will be to debit capital and credit assets. In other words the balance sheet will shrink or rather recede. It will be yet another stimulus bubble.
Equities will rally, sovereign yields will tick up, and when the stimulus is over, equities will retreat and yields on safe haven assets will retreat.
The DOW up 270 pts......
And much more to come...