Saturday, November 26, 2011

Germany's bond auction undermines confidence; Eurozone faces tough choices

What if you held an auction and nobody came? Germany's failed bond auction sent markets lower across the board last week as the Eurozone debt crisis appeared to enter a new and more ominous stage. Now the loss of confidence in the Euro has made its way into the very heart of the EU as the debt contagion threatens to engulf the entire region. In New York, the Dow lost 4% closing at 11,231 while the S&P 500 finished at 1158. In Mumbai, the Sensex also lost around 4% closing near support at 15,695 while the Nifty ended the week at 4710. As expected, we did have some significant downside moves in the first half of the week around the deadline for the US Congressional Supercommittee on spending reduction. The declines coincided fairly closely with the Venus-Saturn aspect which normally constrains buying and reduces cooperation. The late week recovery was more spotty than expected, however, as Asia and Europe only saw small bounces while the US market tumbled in all four sessions of the holiday-shortened week. All in all, these declines seemed to be appropriate given the strong Saturn influence that has dominated the month of November.

World markets are growing more impatient with the EU as it attempts to solve its endless debt crisis. The trouble now is that a lasting solution requires Germany, the economic engine of the whole EU system, to accept some measure of pain. Most observers now believe that the only way to stabilize markets is for the ECB to either embark on a massive quantitative easing (QE) bond buyback scheme or become the lender of last resort and issue its own eurobonds which would effectively guarantee the bonds of all member countries. The problem is that such a move would inflict damage on Germany through higher inflation and rising debt service costs as its once-unassailable AAA+ rating would likely be downgraded. Germany is also reluctant to agree to backstop the bad debts of peripheral EU countries because this would reduce the incentive to commit to reforms and to cut spending. Too much carrot, not enough stick in other words.

So the dynamic between Germany, the other Eurozone members, and the financial markets now resembles a version of game theory where the interests of the self and the collective are nominally separate but intrinsically related. Germany wants Italy, Greece and Spain to cut spending. But with more investors now increasingly reluctant to buy any Eurozone debt, Germany now must accept that it may have to share the pain in the form of inflation and higher debt service costs due to rising bond yields. In seeking to protect German interests, Angela Merkel may attempt to fashion a compromise solution whereby the ECB undertakes a limited quantitative easing plan to resuscitate the forlorn EU bond market. Whether or not the bond market accepts such a lesser intervention remains to be seen, however. The choices available to policymakers appear to be narrowing as the market is demanding a bold move which reverses this loss of confidence. In crafting a solution to the impasse, Merkel and the ECB have to calculate where the most effective common interests of all EU members lie. Because the governing structure of the EU is interdependent, it may not be possible for Germany to protect its own narrow interests in the short term without suffering some negative consequence down the road. The difficult choice facing Germany now is that it can no longer escape the damage from the economic sins of its neighbours. A quick and painless exit from the Eurozone is not an option. While the EU member states may retain narrow self-interest, their collective interest may now take precedence.

From an astrological perspective, the current strength of Saturn is likely to make Germany and the ECB less amenable to some huge QE-style money printing scheme. Saturn is soon approaching its opposition aspect with Jupiter (closest aspect due in early January), so that would tend to suggest that inflating their way out of trouble would have less appeal or be less successful. Saturn demands responsibility and control over one's actions, so I think it is unlikely that Merkel would agree to any plan which creates moral hazard for the indebted nations of southern Europe. Merkel will likely continue to insist upon accountability for economic reforms in the periphery. While this may not preclude some important new measures by the ECB, I somehow doubt they will be a far-reaching as, say, the Fed's attempts at QE1 and QE2.

The planets this week seem tilted towards the negative as malefic Mars may rule the roost. Mars is now forming a difficult square aspect with the Sun, Rahu (NN) and Mercury over the next two weeks. This is a bad combination and the fact that these planets are clustering here makes it that much worse. The Mars-Sun aspect is closest at the end of the week so we could look for declines to be more likely and more pronounced at that time. The first half of the week lacks any close aspects so that opens up a range of possible outcomes. We are still in an unstable eclipse period (Nov 26-Dec 10), so that may reduce the chances for any lasting rebound. But eclipses are all about surprises and shocks so we cannot rule out the possibility of some pleasant surprises also. However, the Mars aspect stands out a like a bit of sore thumb this week so it seems that surprises will be on the downside.