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The shock and awe of Europe's $1T intervention is fading even faster than officials had feared,...

The shock and awe of Europe's $1T intervention is fading even faster than officials had feared, writes Mohamed El-Erian in a Financial Times guest post, and it's important to be aware that "the serial contamination of balance sheets is hitting the reality of scarcity."
Comments (9)
  • enigmaman
    , contributor
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    Yep "if you always do what you have always done you will always get what you have always gotten" simple but evasive logic, throwing good money after bad, thats the "ticket"!
    16 May 2010, 04:34 PM Reply Like
  • Northern Dancer
    , contributor
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    That's Einstein's view of what insanity is... doing the same thing over and over again and expecting a different result.
    16 May 2010, 05:50 PM Reply Like
  • waterfordcap
    , contributor
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    amen.
    16 May 2010, 05:12 PM Reply Like
  • Poor Texan
    , contributor
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    "Yes, it is not easy to change track, especially after last weekend’s protracted negotiations and compromises in Brussels and Frankfurt; and, yes, the risks of immediate disruptions are material. Yet it is the right thing to do for the longer-term heath of Europe and the global economy."

     

    But can we expect corrupt people to act on moral principles they have discarded? It's not only the balance sheets that are contaminated. A lack of moral courage to follow the fiscally responsible path means the only path is inflation and the savaging of savings and investments.
    16 May 2010, 06:59 PM Reply Like
  • Stone Fox Capital
    , contributor
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    or maybe its just pundits getting on TV and writing in financial magazines that is causing undue fear.
    16 May 2010, 08:09 PM Reply Like
  • TKO
    , contributor
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    The likely outcome for Eurozone weakness is not debt default but devaluation of the Euro and commencement of austerity measures aimed at cutting budget deficits in the Eurozone.

     

    Given the absolutely traumatic drop in European equity markets over the past few months (i.e. MIB is down something like 33% currency adjusted YTD), it seems that the earnings impact is more than priced in. Historically, forward P/Es are around 12-15 for the Eurozone; it is currently sitting at 7-8.

     

    I would expect above average volatility going forward for the next few weeks, but I also expect it to die down considerably as Government austerity measures are continuously announced and sovereign debt attacks are reduced.

     

    Although the debt notional is large, given the currency is backed by a printing press, I would not expect nor would it warrant the 2008 style crash. Risk aversion may be high, but this is most largely impacted by the recency effect (of 2008) -- not on underlying fundamentals.

     

    Short Term Bearish, Long Term Optimistic. I would akin this situation similar to Ford and GM; Europe being Ford and GM being the US. I would almost say, the Europe will come out stronger in the end while the US may feel the impacts of its debt issues much later on -- possibly too late.
    16 May 2010, 08:26 PM Reply Like
  • nobby73
    , contributor
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    Forward p/e ratios have not sufficiently priced in the likely impact of the austerity measures on e, but I agree that on the whole, Euro area stocks have more value that US. It may be they have even more value in a few month, so I wouldn't feel the need to rush into anything.

     

    One thing El-Erian does not address when he talks of the ECB balance sheet being contaminated by Greek bonds (and maybe other names) is how this compares to the trillion $ plus MBS and other toxic junk (Maiden Lane et al) sitting on the Fed's books. The markets got all jittery at the talk of the Fed reducing the size of its balance sheet, but I don't know who would buy it and at what price, so for me for now, it is just talk. For better or worse, governments have tax raising capacity whereas I am not sure whether the underlying claims on half of these MBS assets would even be enforceable.

     

    My greatest concern is not the situation in Europe, the future of the Euro or the ECB balance sheet, which the markets are giving full attention to, but rather the state of US public finances, the Fed's mysterious balance sheet and the overconfidence the market is showing in the ability of the US Dollar to remain a safe place to hide.
    17 May 2010, 12:15 AM Reply Like
  • Adam Stockmeister
    , contributor
    Comments (240) | Send Message
     
    In the long-run who wins? China? How do you measure, at this moment, which country has X percentage of the world wealth? Natural resources? Intelligence? Military strength?

     

    In my opinion, before that question can be definitively answered, then we know nothing.

     

    I actually don't fear the high debt loads of America and Europe because in the end we have already received the services and goods that can never be repaid. If everyone declares bankruptcy then what? This game of debts and credits is the only answer but it is far from perfected.
    16 May 2010, 11:38 PM Reply Like
  • vtorch
    , contributor
    Comments (313) | Send Message
     
    Given how much the world is interconnected, this is a global problem that requires a global solution. Over the past decade or so, the US and Europe have been spending money much more than they can afford i.e., spending on credit. China, on the other hand, has been making goods and selling to the over-leveraged American and European consumers. Consequently, you have the US and Europe in a dire situation of high debt loads, and China facing the problem of excess liquidity and asset bubbles. The key difference between Europe and the US is that Europe, except maybe for Germany, Switzerland and the UK, doesn't really have its own competitive industries (e.g., there no Microsoft, Intel or Google in Europe). I don't know how but this European problem needs to be resolved ASAP before the world suffers. Imagine if Europe is to go into a prolonged recession - this would also impact US and Chinese businesses that exports to Europe. As a result, more layoffs will ensue, and global economic growth will be impacted.
    17 May 2010, 03:55 AM Reply Like
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