Europe’s continental divide is market’s game of risk

Last week and last month and last year we were so close, minutes and moments away, from another Greek debt deal. Every newspaper on the Continent, and every politician quoted in them, told us so. They never said anything else.
Consequently, I pay little attention to when they open their collective mouths and repeat the eulogy once again. If we are “minutes and moments away,” one more time, then I am the Emperor and please observe my new clothes carefully. Ebenezer Scrooge said it best: bah humbug! “You cannot surprise an individual more than twice with the same marvel.” — Mark Twain, Life on the Mississippi.
Any deal is now highly unlikely. We have the American representatives of the International Monetary Fund reporting to Donald Trump and the bureaucrats of Brussels reporting to Berlin. No more American IMF money handed out to the European Charity Fund and no debt forgiveness handed out by the frivolous in Frankfurt. Loggerheads! All that for the preservation of a Grecian urn that carries $560 billion in public and private debt. You see, “can kicking” has a cost and, in this case, it is a substantial cost.
Greece, in my opinion, is one of the main three reasons that the American bond market is performing in a fashion that is understood by so few. We trivialize the size of the debt by the size of the country and this, in my opinion, is a capital mistake. Don’t you just hate making mistakes with your capital?
Next up is Frexit. The Folies Bergere may be coming to the American stage. The French polls say one thing, the betting parlors say another, and Emmanuel Macron, Francois Fillon and the mainstream French politicians may all get trumped by Marine Le Pen. Then it’s back to the franc, s’il vous plait. Ah, well: “We’ll always have Paris.” — Casablanca.
The third “Continental Divide” is the divinities in Rome. Not the one in the Vatican, but the ones running the Italian banks.
There may be a word for “solvent” in Italian but it has certainly lost its meaning. The European Central Bank just declared the Italian banks “solvent,” and they repeated their “hailing” thing once again, but I am afraid that the old Roman words are more appropriate: “Hail and Farewell.”
I expect a major banking crisis soon in Italy and it will spur the Five Star Movement, which will spur “Italgo.” Now you can agree or disagree with my cautioning words and hold what opinion you like. I am not asking you to agree with me, but I am asking that you take off your blinders and recognize the risk. The European Union is at risk. The recognition of risk is an imperative to manage money.
What is happening with the US Treasury market is that European money is flowing over here in massive amounts. They, of course, understand the risks long before we do, and even if they aren’t discussed, well, action is being taken. You may have noticed the European custom, I certainly have. The bigger the problem, the deeper the radio silence.
We have three distinct branches of the European Risk Factor now, where havoc could be created. If the line is breached, at any of these points, then US equity markets are in for a drubbing, the American Treasury market may rise in price, fall in yield, and create a very real “pain trade” for many institutional investors.
Any breach, also, would likely stop the Fed in its tracks and you could kiss the notion of any more rate hikes goodbye as our central bank hits the Maginot Line. We are engaged in a significant “Game of Risk” now.
— Bloomberg

Mark Grant is a managing director and chief
strategist at Hilltop Securities