Saturday, December 10, 2011

EU summit agrees on fiscal union; Saturn guides Merkel to austerity

If at first you don't succeed, try, try, try again. European leaders came together last week and forged yet another agreement to solve the continent's ongoing debt crisis. Rather than raising bailout money for insolvent countries as they did in October, this time the emphasis was on fiscal responsibility. The new fiscal pact will therefore regulate government spending levels by member states in an effort to reduce debt levels and thereby reduce borrowing costs. The German-led plan will attempt to improve the balance sheet through collective austerity at the expense of national sovereignty. The UK was the only EU country that did not sign on to the fiscal union, much to the ire of its European partners.

Germany's focus on austerity and fiscal responsibility carried the day and suggests that there will be not be a quick fix for the Eurozone. Interestingly, on the previous day the European Central Bank (ECB) had ruled out any inflationary QE-style bond buy back program. Both of these developments seem to be an appropriate reflection of growing strength of Saturn. As the planetary symbol of restraint and responsibility, Saturn will tend to emphasize caution and reduce the appeal of free spending (liquidity) and excessive borrowing in order to solve economic difficulties. True, we have seen some modest attempts to inject money into the system recently as the ECB reduced its overnight rates to 1% shortly after the Fed opened up its wallet to European banks earlier in the month. As we know, planets are constantly in motion and their influences are subject to ebb and flow. Expansive Jupiter and risk-taking Uranus have recently come into close aspect and this is one reason why we have seen some efforts to keep the financial system afloat through inflationary means. But these efforts will probably be fairly limited given Saturn's proximity for the next two months.

World markets reacted favourably to the latest EU plan as the Dow rose 1% closing at 12,184 while the S&P 500 finished at 1255. Indian stocks were more negative in part due to political opposition to a proposal to allow FDI in the retail sector. The BSE lost almost 4% closing at 16,213 while the Nifty ended the week at 4866.

The global financial situation continues to be quite shaky at the moment as opposing economic philosophies do battle. Keynesian-inspired inflationistas seek to borrow more money to revive confidence and stimulate spending and thereby boost government revenues. Most market participants seem to favour this approach since the increased liquidity (free money from the Fed, ECB, RBI ,etc) means greater economic activity and the reduction of risk. We can see how dependent the stock market has become on this approach from Thursday's sharp decline. Stocks sold off after the new ECB Chair Mario Draghi announced there would be no Eurobonds and no QE-style buy back program. In others, we was not going to follow in the footsteps of Ben Bernanke. If the stock market tends to prefer the free spending largesse of most central bankers, the bond market tends to gravitate towards the stricter accounting procedures of the free market school of Austrian economics. If a country spends and borrows beyond its means, buyers of its debt demand a higher yield on their bonds since the risk of default is greater. This is where Europe is now and one of the main reasons why it has chosen to focus on reducing debt.

At this point, it is unknown if the financial markets will accept the current focus on austerity and debt reduction. Austerity will tend to lower bond yields which is very important to recovery, but austerity usually also entails a painful period of economic slowdown that the stock market does not like. This is the main reason why stocks will tend to decline during times of debt reduction. The astrological dimension here suggests that Saturn's preference for austerity, caution and accountability is more likely to be the driver's seat (alongside Angela Merkel) for several more weeks at least. While Jupiter-Uranus may generate some stimulative proposals, they are unlikely to be significant as the market will tend to focus on the pitfalls of spending (excessive debt) rather than its upside of more economic activity.

This week will feature a potentially nasty Mars-Rahu aspect in the first half of the week that suggests more downside. Saturday's lunar eclipse may serve to amplify the proceedings so there is a wild card element at work here. At the same time, Jupiter and Uranus will form their exact 30 degree aspect this week, so that may provide some support for buyers along the way. It may also serve as an accelerator of events and consciousness in a more generic way. The sidereal sign ingress of both Venus and the Sun in the late week period also would seem to boost the possibility for gains then.