In the 1983 movie “Mr. Mom,” Michael Keaton’s character, Jack, loses his job. His wife goes back to work and Jack struggles through the transition.
In a bid to make an impression on his wife’s new boss, he puts on bib overalls, fires up a chainsaw and tells the guy he’s using his free time to add a new wing onto the house… and he’s installing all the electrical wiring himself.
The boss asks, “Are you going to make it all 220?” Jack, totally ignorant of the fact that the guy’s referring to volts, the standard measure of electricity, replies, “220, 221. Whatever it takes.”
Ha! What a fraud.
When it comes to the European Union, the group of countries was in full swoon last summer. Greece was comatose, Portugal wasn’t far behind, and Italy and Spain were on the rocks. The chorus calling for an imminent breakup of the monetary union grew steadily.
Italy and Spain saw interest rates on their government bonds shoot above 6%, soaring light years higher than Germany’s 1.2%. It was at that point that Mario Draghi, the newly installed head of the European Central Bank (ECB), stated the bank would do “whatever it takes” to preserve the European Monetary Union (EMU). He added: “Believe me, it will be enough.”
From there he went on to announce the Outright Monetary Transaction (OMT) scheme, by which the ECB could buy unlimited amounts of short-term bonds from troubled countries. This would potentially provide countries like Spain, Italy, and Portugal much needed financing when the regular markets proved too expensive.
Some people were skeptical. Not only was such a move specifically prohibited by the Maastricht Treaty, the document that created the EMU in 1992, but also any purchase of such bonds would put the member countries on the hook for losses. Was Germany really going to let that happen?
Mr. Draghi was starting to look like Jack, making bold statements completely untethered to reality.
Betting on the industrial sector can be tough.
As it turns out, reality wasn’t much of an obstacle.
Since Mr. Draghi’s statements, the Spanish and Italian bond markets have been on fire. The two countries’ bond yields have dropped like rocks, as prices shot higher. At the same time, they are two of the best performing stock markets in the world, up 30% and 25% respectively since last summer.
Keep in mind that this has occurred even though the OMT has not purchased a single bond. In fact, the OMT has never been authorized to do anything. Nor does it have a term sheet or set of parameters for how it would operate.
Apparently, the European economy didn’t need any healing. All it needed was a few magic words from a European version of Mr. Mom.
Or maybe not.
Beyond interest rates and stock markets, there are people. And the people of the euro zone countries aren’t having such a good time.
Since Draghi’s famous statements last summer, the situation in the EMU has deteriorated. Unemployment for the zone was 11.2% last summer. Now it stands at 12.2%. This includes those horrific statistics of Greek youth unemployment and Spanish youth unemployment, both around 60%.
Over the last twelve months, the Union’s GDP posted a negative number every single month. Also, on a year-over-year basis, retail sales posted negative every single month as well. So the overall economy is shrinking, consumption is falling, and unemployment is marching higher.
What could be better than that?
Oh, that’s right…
Last week Draghi announced the ECB estimates a weak recovery for the EMU. At least this latest statement seems to be based in fact.
So we’re left with a banker who claims he’ll move heaven and earth, a program that has no process, markets that are on fire, and economies that are in the toilet. In short, citizens suffer while banksters make off with profits created by government officials.
So far, we are definitely the fools. But how long can it last? How long can bad loans creep higher while job losses mount? How long will the people of Greece, Italy, Spain, Portugal, and Ireland bear the brunt of austerity while their bailout funds are used to repay banks in Northern Europe?
We don’t know, but we don’t want to go long European stocks and then sit around, waiting for the eventual blowback. This is one area to avoid, no matter what Mr. Mom says.
Ahead of the Curve with Adam O’Dell
Gold prices sliced through $1,550 like a hot knife through butter in April, falling $350 an ounce in less than three months.