From our friends over at www.wealthbuilder.ie
By Christopher Quigley
On the 26th of February, the Irish people went to the polls in a general election. Nearly three weeks later a government has not been formed because no dominant party won an outright majority. It looks like this instability will remain for at least another month or so. Spain went to the polls three months ago, and still no government has been voted in. Belgium was unable for 541 days to form a government, following its general election in 2010.
In his recent book “The End of Alchemy: Money, Banking and the Future of the Global Economy” Mervyn King, the former governor of the Bank of England, commented on the phenomenon of lack of political stability in Europe. In his opinion, the shift to the left away from mainstream political parties was due to one factor and one factor alone: the Euro. Here is what Cormac Lucy of the Sunday Times had to say concerning Mr. King’s thesis:
“By applying a common interest rate where diverse rates are required, the Euro alternately stokes national inflation and deflation in. This puts huge strain on the political systems of those countries affected. So we have seen political revolts in Greece, Spain, Italy and Portugal, where parties that have dominated national politics for decades have been serially humiliated.
Popular disillusionment with the EU economic policies is more likely to lead to the disintegration of the single currency than towards fiscal union, the goal beyond monetary union.
Ireland faces a profound choice between staying within the Euro and exiting it. Mervyn King says that the weakest eurozone members face little choice but to return to their national currencies as the only way to plot a route back to economic growth and full employment…
the long-term benefits far outweigh the short-term costs.
The most telling aspect of Ireland’s post-election aftermath has been the silence regarding the role of the Euro in Ireland’s political convulsions and the silence over what King is now publicly saying. Instead of grappling with the causes of the crisis, we focus resolutely on its symptoms and consequences, neither of which is in short supply.”
In my opinion as long as European leaders maintain a denial mentality regarding the Euro, Europe will continue to sleep-walk into economic catastrophe. As long as the real issue behind economic stagnation is ignored the greater will be the divergence between the world of the bureaucrats and reality of the main street. Failure to form governments is a manifestation that this de-coupling is growing in complexity and seriousness. History has shown that systemic political failure is the mother of social dysfunction, revolution and eventually civil war. The last thing the world needs now is a return to the failure of past European experience. We must hope that courageous leadership develops in Brussels which ends the spell of current mental sophistry. What is needed is an exact formula, an agreed plan, a consensus if you will, to formally allow members of the failed Eurogroup to revert to national currencies in an orderly manner. If it is left too late circumstance will dictate events and instead of management and control; strife, stress and social dislocation will be the order of the day, and we all know where that may lead.
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Bear Counter Rally Continues
The Bear counter, a rally which commenced on the 11th and 12th of February, continues as we speak though all eyes, as usual, are on the FED.
Both the Dow Industrials and the S & P 500 are on the cusp of breaking through their 200 DMA, with the NASDAQ not too far behind. So far so good. Should Janet Yellen keep interest rates on hold it is conceivable that markets will reach December highs.
However, I would advise caution. The counter rally is beginning to lose steam. The VIX is back down to the lower levels of its trading range which indicate that a pullback can occur at any time. In a bear configuration, such contractions can get ugly very quickly, wiping away short-term gains. Hard sell stops are advised.
Happy St. Patrick’s Day to everyone.
Charts Courtesy StockCharts.com
- “Economic Outlook”, Cormac Lucy, Sunday Times, 6th. March 2016.
- “The End of Alchemy: Money, Banking and the Future of the Global Economy”, Mr. Mervyn King.
© Christopher M. Quigley, 16th. March 2016.